Motorcar Parts Of America (MPAA) Risk Analysis

Many leaders and consumers in the automotive industry are increasingly focused on the development of hybrid and electric vehicles and of advanced driver assistance technologies, with the goal of a commercially-viable, fully-automated driving experience. There has also been an increase in consumer preferences for mobility on demand services, such as car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the number of vehicles per capita. In addition, some industry participants are exploring transportation through alternatives to automobiles. These evolving areas have also attracted increased competition from entrants outside the traditional automotive industry. If we do not continue to innovate and develop, or acquire, new and compelling products that capitalize upon new technologies in response to consumer preferences, it could have a materially adverse impact on our business, results of operations, and financial condition. These changes may also reduce demand for our products for combustion engine vehicles.

A significant portion of automotive parts and components we use in our remanufacturing process are imported from suppliers located outside the U.S., including China and other countries in Asia. As a result, we are subject to various risks of doing business in foreign markets and importing products from abroad, such as the following, which we have experienced in the last fiscal year: - significant delays in the delivery of cargo due to port security and over-crowding considerations;- imposition of new and evolving duties, taxes, tariffs or other charges on imports;- financial or political instability in the countries in which our product is manufactured;- potential recalls or cancellations of orders for products that do not meet our quality standards;- disruption of imports by labor disputes or strikes and local business practices;- inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and - natural disasters, conflicts, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods. We also face the following risks related to doing business in foreign markets and importing products from abroad: - imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business;- political or military conflict involving foreign countries or the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs;- heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; and - our ability to enforce agreements with our foreign suppliers. Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to us and materially and adversely impact our business, financial condition, results of operations or liquidity. In addition, because we depend on independent third parties to manufacture a significant portion of our brake-related products, and other purchased finished goods, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs.

Merchandise manufactured offshore represents a significant portion of our total product purchases. Disruptions in the shipping or cost of such merchandise recently have and may continue to or may more significantly decrease our sales and profits. In addition, if imported merchandise continues to become more expensive or less available due to increased tariff rates, trade disputes or other unfavorable impacts, the transition to alternative sources may not occur in time to meet our demands. Merchandise from alternative sources may also be of lesser quality and more expensive than those we currently import. Risks associated with our reliance on imported merchandise include disruptions in the shipping and importation or increase in the costs of imported products. For example, common risks include: - increased sensitivity to changes in tariff rates;- raw material shortages;- problems with oceanic shipping, including shipping container shortages;- increased customs inspections of import shipments or other factors causing delays in shipments; and - increases in shipping rates, all of which we experienced. As well as the following common risks, which we may experience in the future: - work stoppages;- strikes and political unrest;- economic crises;- international disputes and wars;- loss of "most favored nation" trading status by the U. S. in relations to a particular foreign country;- import duties; and - import quotas and other trade sanctions. Products manufactured overseas and imported into the U.S. and other countries are subject to import restrictions and duties, which could delay their delivery or increase their cost. We are regularly in contact with customs officials from various countries and disagree from time to time on the amounts due. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business.

We have experienced significant variations in our annual and quarterly results of operations. These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including changes in prevailing interest rates, wage inflation and multiple minimum wage increases in Mexico in the past and likely in the future, and the introduction of new products. Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control. These factors include the timing and level of marketing allowances provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions. We also incur allowances, accruals, charges and other expenses that differ from period to period based on changes in our business, which causes our operating income to fluctuate.

As of March 31, 2025, we had $90,787,000 of debt outstanding under our credit facility, which is at variable interest rates. Fluctuations in those rates could impact our operating results and cash flows. The weighted average interest on our debt was 7.46% at March 31, 2025 compared to 8.43% at March 31, 2024. In addition, our credit facility has restrictions that could limit aspects of our operations. In addition, on March 31, 2023, we issued and sold $32,000,000 in aggregate principal amount of 10.0% convertible notes due in 2029 (the "Convertible Notes"). The issuance of shares of our common stock upon conversion of the Convertible Notes may dilute the ownership interests of existing stockholders and reduce our per share results of operations. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. We may also incur additional debt in the future, which could further increase our leverage, reduce our cash flow or further restrict our business.

We rely on computer and telecommunications systems to communicate with our customers and vendors and manage our business. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus or service provider failure, could disrupt our operations. In addition, our future growth may require additional investment in our systems to keep up with technological advances in our industry. If we are not able to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected.

In recent years, investors and other stakeholders have often focused on corporate activities related to environmental, social, and governance ("ESG") matters in public discourse. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities, and other members of the investing community. As they evaluate investment decisions, many investors and customers, look not only at company disclosures but also to ESG rating systems that have been developed by third parties to allow ESG comparisons among companies. Although we participate in a number of these ratings systems, we do not participate in all such systems. The criteria used in these ratings systems may conflict and change frequently, and we cannot predict how these third parties will score us, nor can we have any assurance that they score us accurately or other companies accurately or that other companies have provided them with accurate data. We supplement our participation in ratings systems with published disclosures of our ESG activities, but some investors and other stakeholders may desire other disclosures that we do not provide.  We also incur significant costs in complying with reporting obligations and could incur liability if a regulator or other third party disagrees with our statements. In addition, some of the domestic and foreign jurisdictions in which we operate could mandate additional ESG disclosure and impose additional requirements on us. For example, in October 2023, California passed two bills that require certain companies that do business in California to disclose their GHG emissions and climate-related financial risks starting in 2026. A failure to comply with investor or other stakeholder expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could also cause reputational harm to our business and could cause certain investors to be unwilling to invest in our stock, which could adversely impact our ability to raise capital and could have other material adverse effects on us.