MOTORCAR PARTS OF AMERICA INC

Previous wording

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Current wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Previous wording

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2024 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024.

Current wording

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2025 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 9, 2025.

Previous wording

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to“Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

Current wording

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to “Item 1A.Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 9, 2025, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

Previous wording

With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers. Our investments in global infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot facility in Mexico. In addition, during the nine months ended December 31, 2024, we ceased manufacturing at our Torrance, California facility, reduced our headcount, and incurred certain transition expenses in connection with our on-going strategy to utilize our global footprint to enhance operating efficiencies and expect to realize future benefit from these cost-saving measures.

Current wording

With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket hard parts business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by providing innovative and intuitive solutions to our customers. Our on-going investments in global infrastructure and human resources reflects the significant expansion of manufacturing capacity to support multiple product lines. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot facility in Mexico.

Previous wording

Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not required to be separately reported, and are included within the “all other” category. See Note 18 of the notes to condensed consolidated financial statements for more information.

Current wording

Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, and are not required to be separately reported. See Note 18 of the notes to condensed consolidated financial statements for more information.

Previous wording

Net Sales. Our consolidated net sales for the three months ended December 31, 2024 were $186,176,000, which represents an increase of $14,314,000, or 8.3%, from the three months ended December 31, 2023 of $171,862,000. Our sales for the three months ended December 31, 2024 compared with the three months ended December 31, 2023 reflect continued strong demand for rotating electrical and brake-related products.

Current wording

Net Sales. Our consolidated net sales for the three months ended June 30, 2025 were $188,364,000, which represents an increase of $18,477,000, or 10.9%, from the three months ended June 30, 2024 of $169,887,000. Our sales for the three months ended June 30, 2025 compared with the three months ended June 30, 2024 reflect continued strong demand for rotating electrical and brake-related products.

Previous wording

Gross Profit. Our consolidated gross profit was $44,882,000, or 24.1% of consolidated net sales, for the three months ended December 31, 2024 compared with $30,043,000, or 17.5% of consolidated net sales, for the three months ended December 31, 2023. The increase in our gross margin for the three months ended December 31, 2024 reflects the benefit of our on-going strategyto utilize our global footprint toenhance operating efficiencies and our cost-saving initiatives. We expect to continue to realize benefits from these initiatives.

Current wording

Gross Profit. Our consolidated gross profit was $33,917,000, or 18.0% of consolidated net sales, for the three months ended June 30, 2025 compared with $29,174,000, or 17.2% of consolidated net sales, for the three months ended June 30, 2024. The increase in our gross margin for the three months ended June 30, 2025 reflects (i) increased utilization of our facilities, (ii) the benefit from our strategies to enhance operating efficiencies and cost-saving initiatives, and (iii) changes in product mix. These increases were partially offset by $1,426,000 for net tariff costs paid for products sold before price increases were effective.

Previous wording

In addition, our gross margin for the three months ended December 31, 2024 compared with the three months ended December 31, 2023 was impacted by (i) amortization of core and finished goods premiums paid to customers related to new business of $2,664,000 and $2,838,000, respectively and (ii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $758,000 and $1,607,000, respectively.

Current wording

In addition, our gross margin for the three months ended June 30, 2025 compared with the three months ended June 30, 2024 was impacted by (i) continued amortization of core and finished goods premiums paid to customers of $2,847,000 and $2,728,000, respectively and (ii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down of $1,026,000 and $394,000, respectively.

Previous wording

General and Administrative. Our general and administrative expenses for the three months ended December 31, 2024 were $16,212,000, which represents an increase of $1,014,000, or 6.7%, from the three months ended December 31, 2023 of $15,198,000. This increase was primarily due to a loss of $1,272,000 during the three months ended December 31, 2024 compared with a gain of $528,000 during the three months ended December 31, 2023 resulting from foreign currency exchange rates partially offset by decreased employee-related expenses.

Current wording

General and Administrative. Our general and administrative expenses for the three months ended June 30, 2025 were $12,680,000, which represents a decrease of $3,990,000, or 23.9%, from the three months ended June 30, 2024 of $16,670,000. This decrease was primarily due to (i) a headcount reduction in the prior year, which resulted in $2,940,000 of severance during the three months ended June 30, 2024 and (ii) the benefit of favorable fluctuations in foreign currency exchange rates on transactions denominated in foreign currencies during the current year compared with the prior year.

Previous wording

Sales and Marketing. Our sales and marketing expenses for the three months ended December 31, 2024 were $5,621,000, which represents a decrease of $310,000, or 5.2%, from the three months ended December 31, 2023 of $5,931,000. This decrease was due to lower trade shows and commissions expense.

Current wording

Sales and Marketing. Our sales and marketing expenses for the three months ended June 30, 2025 were $6,210,000, which represents an increase of $761,000, or 14.0%, from the three months ended June 30, 2024 of $5,449,000. This increase was primarily due to increased commissions expense and increased headcount.

Previous wording

Research and Development. Our research and development expenses for the three months ended December 31, 2024 were $3,008,000, which represents an increase of $469,000, or 18.5%, from the three months ended December 31, 2023 of $2,539,000. This increase was primarily due to increased headcount and outside consulting services.

Current wording

Research and Development. Our research and development expenses for the three months ended June 30, 2025 were $3,306,000, which represents an increase of $873,000, or 35.9%, from the three months ended June 30, 2024 of $2,433,000. This increase was primarily due to increased headcount, professional services, and supplies.

Previous wording

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts were a non-cash loss of $2,460,000 compared with a non-cash gain of $3,149,000 for the three months ended December 31, 2024 and 2023, respectively. This change during the three months ended December 31, 2024 compared with the three months ended December 31, 2023 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $1,875,000 compared with a non-cash gain of $2,608,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash loss of $585,000 compared with a non-cash gain of $541,000, respectively, due to the changes in their fair values.

Current wording

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts were a non-cash gain of $8,348,000 compared with a non-cash loss of $11,078,000 for the three months ended June 30, 2025 and 2024, respectively. This change during the three months ended June 30, 2025 compared with the three months ended June 30, 2024 was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash gain of $4,002,000 compared with a non-cash loss of $5,709,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a non-cash gain of $4,346,000 compared with a non-cash loss of $5,369,000, respectively, due to the changes in their fair values.

Previous wording

Consolidated Operating Income. Our consolidated operating income for the three months ended December 31, 2024 was $17,581,000 compared with $9,524,000 for the three months ended December 31, 2023. This increase was primarily due increased gross profit partially offset by our foreign exchange impact of lease liabilities and forward contracts, which were a non-cash loss of $2,460,000 compared with a non-cash gain of $3,149,000 for the three months ended December 31, 2024 and 2023, respectively and other items as discussed above.

Current wording

Consolidated Operating Income (Loss). Our consolidated operating income for the three months ended June 30, 2025 was $20,069,000 compared with a consolidated operating loss of $6,456,000 for the three months ended June 30, 2024. This increase was primarily due to (i) our foreign exchange impact of lease liabilities and forward contracts, which were a non-cash gain of $8,348,000 compared with a non-cash loss of $11,078,000, (ii) increased gross profit, (iii) decreased general and administrative expenses, and (iv) other items as discussed above.

Previous wording

Interest Expense, net. Our interest expense for the three months ended December 31, 2024 was $14,435,000, which represents a decrease of $3,862,000, or 21.1%, from interest expense for the three months ended December 31, 2023 of $18,297,000. This decrease was primarily due to (i) decreased utilization of accounts receivable discount programs and lower discount rates on those programs and (ii) lower average outstanding balances under our credit facility and lower interest rates.

Current wording

Interest Expense, net. Our interest expense for the three months ended June 30, 2025 was $12,812,000, which represents a decrease of $1,575,000, or 10.9%, from interest expense for the three months ended June 30, 2024 of $14,387,000. This decrease was primarily due to (i) lower average outstanding balances under our credit facility and (ii) lower interest rates on both our credit facility and accounts receivable discount programs.

Previous wording

Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability associated with the convertible notes issued on March 31, 2023 was a non-cash gain of $260,000 compared with a non-cash loss of $1,160,000 for the three months ended December 31, 2024 and 2023, respectively.

Current wording

Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability associated with the convertible notes issued on March 31, 2023 was a non-cash loss of $1,790,000 compared with a non-cash gain of $2,580,000 for the three months ended June 30, 2025 and 2024, respectively.

Previous wording

Income Tax. We recorded an income tax expense of $1,115,000, or an effective tax rate of 32.7%, and $37,281,000 or an effective tax rate of (375.3)%, for the three months ended December 31, 2024 and 2023, respectively. The effective tax rate for the three months ended December 31, 2024, was primarily impacted by (i) the change in valuation allowance, (ii) specific jurisdictions that we do not expect to recognize the benefit of losses, and (iii) foreign income taxed at rates that are different from the federal statutory rate. Our effective tax rate for the three months ended December 31, 2023 was primarily impacted by the establishment of a valuation allowance on deferred tax assets that were not expected to be realized.

Current wording

Income Tax. We recorded an income tax expense of $2,425,000, or an effective tax rate of 44.4%, and income tax benefit of $178,000 or an effective tax rate of 1.0%, for the three months ended June 30, 2025 and 2024, respectively. The effective tax rate for the three months ended June 30, 2025, was primarily impacted by the change in valuation allowance on certain jurisdictions' deferred tax assets resulting from current year activities and foreign income taxed at rates that are different from the federal statutory rate.

Previous wording

We had working capital (current assets minus current liabilities) of $155,693,000 and $156,034,000, a ratio of current assets to current liabilities of 1.4:1.0, at December 31, 2024 and March 31, 2024, respectively.

Current wording

We had working capital (current assets minus current liabilities) of $158,766,000 and $160,446,000, a ratio of current assets to current liabilities of 1.4:1.0 at June 30, 2025 and 1.5:1.0 at March 31, 2025.

Previous wording

Our primary source of liquidity was from cash generated from operations, the use of our receivable discount programs, and credit facility during the nine months ended December 31, 2024. We believe our cash and cash equivalents, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future liquidity needs, including lease and capital expenditure obligations over the next 12 months.

Current wording

Our primary source of liquidity was from cash generated from operations, the use of our receivable discount programs, and credit facility during the three months ended June 30, 2025. We believe our cash and cash equivalents, use of receivable discount programs, and amounts available under our credit facility are sufficient to satisfy our expected future liquidity needs, including lease and capital expenditure obligations over the next 12 months.

Previous wording

In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During the three and nine months ended December 31, 2024, we repurchased 268,130 shares of our common stock for $2,096,000. We did not repurchase any shares of our common stock during the three and nine months ended December 31, 2023. As of December 31, 2024, $20,841,000 has been utilized and $16,159,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 1,105,137 shares repurchased under this program through December 31, 2024. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

Current wording

In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. During the three months ended June 30, 2025, we repurchased 197,796 shares of our common stock for $1,996,000. As of June 30, 2025, $25,543,000 has been utilized and $11,457,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility and convertible notes. We retired the 1,576,937 shares repurchased under this program through June 30, 2025. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

Previous wording

Net cash provided by operating activities was $36,368,000 and $48,445,000 during the nine months ended December 31, 2024 and 2023, respectively. The changes in our operating activities were primarily impacted by (i) the pay down of our accounts payable balances, (ii) a less significant decrease in accounts receivable balances compared with the prior year, and (iii) an increase incores that are part of the finished goods on the customers’ shelves (which are included in contract assets)due to higher sales compared with the prior year. These decreases were partially offset by inventory reduction initiatives in the current year compared with the investment in inventory in the prior year and by increased operating results (net income plus the net add-back for non-cash transactions in earnings). We continue to manage our working capital to maximize our operating cash flow.

Current wording

Net cash provided by operating activities was $10,028,000 compared with net cash used in operating activities of $20,841,000 during the three months ended June 30, 2025 and 2024, respectively. The changes in our operating activities were primarily due to (i) an increase in our accounts payable during the three months ended June 30, 2025 to support the build-up of our inventory in anticipation of higher sales compared with a decrease in our accounts payable during the three months ended June 30, 2024 and (ii) increased operating results (net income plus the net add-back for non-cash transactions in earnings). We continue to manage our working capital to maximize our operating cash flow.

Previous wording

Net cash used in investing activities was $1,614,000 and $420,000 during the nine months ended December 31, 2024 and 2023, respectively. The change in our investing activities primarily resulted from increased capital expenditures.

Current wording

Net cash used in investing activities was $806,000 and $512,000 during the three months ended June 30, 2025 and 2024, respectively. The change in our investing activities primarily resulted from increased capital expenditures.

Previous wording

We have $268,620,000 in senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). The Term Loans were repaid during the year ended March 31, 2024. The Credit Facility matures on December 12, 2028. The lenders have a security interest in substantially all of our assets. In June 2024, we enrolled in a feature with our lenders, under which we sweep our cash collections to pay down our revolving facility and borrow on-demand to fund payments. This feature is expected to reduce interest expense on borrowings under the Credit Facility.

Current wording

We have $268,620,000 in senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). The Term Loans were repaid during the year ended March 31, 2024. The Credit Facility matures on December 12, 2028. The lenders have a security interest in substantially all of our assets.

Previous wording

We had $94,802,000 and $128,000,000 outstanding under the Revolving Facility at December 31, 2024 and March 31, 2024, respectively. In addition, $7,047,000 was outstanding for letters of credit at December 31, 2024. At December 31, 2024, after certain contractual adjustments, $127,962,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 7.66% and 8.43%, at December 31, 2024 and March 31, 2024, respectively.

Current wording

We had $86,856,000 and $90,787,000 outstanding under the Revolving Facility at June 30, 2025 and March 31, 2025, respectively. In addition, $11,888,000 was outstanding for letters of credit at June 30, 2025. At June 30, 2025, after certain contractual adjustments, $134,341,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 7.40% and 7.46%, at June 30, 2025 and March 31, 2025, respectively.

Previous wording

The Credit Facility requires us to maintain a minimum fixed charge coverage ratio if undrawn availability is less than 22.5% of the aggregate revolving commitments and a specified minimum undrawn availability. During the nine months ended December 31, 2024, undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested.

Current wording

The Credit Facility requires us to maintain a minimum fixed charge coverage ratio if undrawn availability is less than 22.5% of the aggregate revolving commitments and a specified minimum undrawn availability. During the three months ended June 30, 2025, undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested.

Previous wording

On March 31, 2023, we entered into a note purchase agreement, as amended, (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for general corporate purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in-kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. In April 2024, non-cash accrued interest on the Convertible Notes of $3,209,000 was paid in-kind and is included in the principal amount of Convertible Notes at December 31, 2024. The Convertible Notes have an initial conversion price of approximately $15.00 per share of common stock. (“Conversion Option”). Unless and until we deliver a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of our common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, we may not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, we may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price. The effective interest rate was 18.3% as of December 31, 2024 and March 31, 2024, respectively.

Current wording

On March 31, 2023, we entered into a note purchase agreement, as amended, (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for general corporate purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in-kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. In April 2025, non-cash accrued interest on the Convertible Notes of $3,521,000 was paid in-kind and is included in the principal amount of Convertible Notes at June 30, 2025. The Convertible Notes have an initial conversion price of $15.00 per share of the Company's common stock, subject to adjustment as provided in the Convertible Notes (“Conversion Option”). Unless and until we deliver a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible Notes will be settled in shares of our common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, we may not redeem the Convertible Notes prior to March 31, 2026. After March 31, 2026, we may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price. The effective interest rate was 18.3% as of June 30, 2025 and March 31, 2025, respectively.

Previous wording

The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within convertible note, related party in the condensed consolidated balance sheets at December 31, 2024 and March 31, 2024. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $5,600,000 and $9,800,000, and an asset of $650,000 and $2,390,000 at December 31, 2024 and March 31, 2024, respectively. During the three months ended December 31, 2024 and 2023, we recorded a gain of $260,000 and a loss of $1,160,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statements of operations. During the nine months ended December 31, 2024 and 2023, we recorded a gain of $2,460,000 and a loss of $1,690,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statements of operations and condensed consolidated statements of cash flows.

Current wording

The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within convertible note, related party in the condensed consolidated balance sheets at June 30, 2025 and March 31, 2025. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation model was a liability of $12,900,000 and $9,000,000, and an asset of $3,640,000 and $1,530,000 at June 30, 2025 and March 31, 2025, respectively. During the three months ended June 30, 2025 and 2024, we recorded a loss of $1,790,000 and a gain of $2,580,000, respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statements of cash flows.

Previous wording

We utilize a supplier finance program, which allows certain of our suppliers to sell their receivables due from us to participating financial institutions at the sole discretion of both the supplier and the financial institutions. The program is administered by a third party. Commitments from participating financial institutions that are available to suppliers under this program increased to $27,000,000 from $15,000,000 during the three months ended December 31, 2024. We have no economic interest in the sale of these receivables and no direct relationship with the financial institution. Payments to the third-party administrator are based on services rendered and are not related to the volume or number of financing agreements between suppliers, financial institution, and the third-party administrator. We are not a party to agreements negotiated between participating suppliers and the financial institution. Our obligations to our suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in this program. We do not provide guarantees and there are no assets pledged to the financial institution or the third-party administrator for the committed payment in connection with this program. At December 31, 2024, we had $31,809,000 of outstanding supplier obligations confirmed as valid under this program, included in accounts payable in the condensed consolidated balance sheet.

Current wording

We utilize a supplier finance program, which allows certain of our suppliers to sell their receivables due from us to participating financial institutions at the sole discretion of both the supplier and the financial institutions. The program is administered by a third party. Commitments from participating financial institutions that are available to suppliers under this program were $30,000,000 at June 30, 2025 and March 31, 2025. We have no economic interest in the sale of these receivables and no direct relationship with the financial institution. Payments to the third-party administrator are based on services rendered and are not related to the volume or number of financing agreements between suppliers, financial institution, and the third-party administrator. We are not a party to agreements negotiated between participating suppliers and the financial institution. Our obligations to our suppliers, including amounts due and payment terms, are not affected by a supplier's decision to participate in this program. We do not provide guarantees and there are no assets pledged to the financial institution or the third-party administrator for the committed payment in connection with this program. At June 30, 2025 and March 31, 2025, we had $31,292,000 and $33,661,000, respectively, of outstanding supplier obligations confirmed as valid under this program, included in accounts payable in the condensed consolidated balance sheets.

Previous wording

Our total capital expenditures were $2,531,000 and $559,000 for nine months ended December 31, 2024 and 2023, respectively. These capital expenditures include (i) cash paid for the purchase of plant and equipment plant, (ii) equipment acquired under finance leases, and (iii) non-cash capital expenditures. Capital expenditures for fiscal 2025 primarily include the purchase of equipment for our current operations. We expect to incur approximately $5,000,000 of capital expenditures primarily to support our global growth initiatives and current operations during fiscal 2025. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.

Current wording

Our total capital expenditures were $2,708,000 and $493,000 for three months ended June 30, 2025 and 2024, respectively. These capital expenditures include (i) cash paid for the purchase of plant and equipment, (ii) plant and equipment acquired under finance leases, and (iii) non-cash capital expenditures. Capital expenditures for the three months ended June 30, 2025 primarily include the purchase of equipment for our current operations and our global growth initiatives. We expect to incur approximately $8,000,000 of capital expenditures primarily to support our global growth initiatives and maintenance of our facilities and equipment during fiscal 2026. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.

Previous wording

In December 2022, we entered into an operating lease for our 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. The lease, which commenced January 1, 2023, had an initial term of one year with a base rent of approximately $27,000 per month and included options to renew for up to four years. In November 2023, we exercised one of these options to renew for an additional one-year period. In February 2025, we exercised a second extension term for an additional three-year period with a base rent of approximately $30,000 per month, which took effect on January 1, 2025. The rent expense recorded for the related party lease was $81,000 and $243,000 for the three and nine months ended December 31, 2024 and 2023.

Current wording

We have an operating lease for our 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. We renewed this operating lease for an additional three-year period, effective January 1, 2025. The rent expense recorded for this related party lease was $93,000 and $81,000 for the three months ended June 30, 2025 and 2024, respectively.

Previous wording

In connection with the issuance and sale of our Convertible Notes on March 31, 2023, the Board appointed Douglas Trussler, a co-founder of Bison Capital, to the Board. Mr. Trussler’s compensation is consistent with our previously disclosed standard compensation practices for non-employee directors, which are described in our Definitive Proxy Statement, filed with the SEC on July 26, 2024.

Current wording

In connection with the issuance and sale of our Convertible Notes on March 31, 2023, the Board appointed Douglas Trussler, a co-founder of Bison Capital, to the Board. Mr. Trussler’s compensation is different from the compensation for other non-employee directors as described in our Definitive Proxy Statement, filed with the SEC on July 29, 2025.

Previous wording

We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business, and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such. We have an immaterial amount accrued related to these exposures to various lawsuits and claims.

Current wording

We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business, and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such. We have an immaterial amount accrued related to these exposures to various lawsuits, claims, examinations, and administrative proceedings.

Previous wording

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2024, which was filed on June 11, 2024, and the 10-K/A for the fiscal year ended March 31, 2024 as filed with the SEC on June 28, 2024.

Current wording

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2025, which was filed with the SEC on June 9, 2025.

Previous wording

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This standard was issued in response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected Topics unless otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. We are currently evaluating the impact this guidance will have on our financial statement disclosures.

Current wording

In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This standard was issued in response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected Topics unless otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. We are currently evaluating the impact this guidance will have on our financial statement disclosures.

Previous wording

In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (“DISE”) (Subtopic 220-40). This standard requires us to disclose, in the footnotes at each interim and annual reporting period, information about expenses by the nature of the expense in addition to certain disclosures about selling expenses. Entities are required to include the following relevant expense captions: (i) purchase of inventory, (ii) employee compensation, (iii) depreciation, (iv) intangible asset amortization, and (v) depreciation, depletion and amortization recognized as part of oil and gas producing activities. This guidance is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027 on a prospective basis with the option for retrospective application. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures.

Current wording

In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (“DISE”) (Subtopic 220-40). This standard requires us to disclose, in the footnotes at each interim and annual reporting period, information about expenses by the nature of the expense in addition to certain disclosures about selling expenses. Entities are required to include the following relevant expense captions: (i) purchase of inventory, (ii) employee compensation, (iii) depreciation, (iv) intangible asset amortization, and (v) depreciation, depletion and amortization recognized as part of oil and gas producing activities. In January 2025, the FASB issued ASU No. 2025-01, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) Clarifying the Effective Date, which is intended to clarify the effective date of ASU No. 2024-03. As clarified in ASU 2025-01, the new guidance is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures.

Previous wording

In November 2024, the FASB issued ASU 2024-04, Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, which seeks to clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. This guidance is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and disclosures.

Current wording

In November 2024, the FASB issued ASU 2024-04, Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, which seeks to clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. This guidance is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and disclosures.