MOTORCAR PARTS OF AMERICA INCMPAA
MOTORCAR PARTS OF AMERICA INC Fair Value Disclosure
14. Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs:
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Level 1 — Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.
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Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
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Level 3 — Valuation is based upon unobservable inputs that are significant to the fair value measurement.
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis according to the valuation techniques the Company used to determine their fair values at:
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||||||||||||
| Fair Value Measurements | Fair Value Measurements | ||||||||||||||||||||||||||||||||
| Using Inputs Considered as | Using Inputs Considered as | ||||||||||||||||||||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||
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Assets
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Short-term investments
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| Mutual funds | $ | 1,881,000 | $ | 1,881,000 | $ | - | $ | - | $ | 1,837,000 | $ | 1,837,000 | $ | - | $ | - | |||||||||||||||||
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Prepaid expenses and other current assets
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Forward foreign currency exchange contracts
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- | - | - | - | 2,516,000 | - | 2,516,000 | - | |||||||||||||||||||||||||
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Liabilities
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Other current liabilities
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Deferred compensation
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1,881,000 | 1,881,000 | - | - | 1,837,000 | 1,837,000 | - | - | |||||||||||||||||||||||||
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Forward foreign currency exchange contracts
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1,663,000 | - | 1,663,000 | - | - | - | - | - | |||||||||||||||||||||||||
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Convertible notes, related party
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Compound Net Derivative Liability
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7,470,000 | - | - | 7,470,000 | 7,410,000 | - | - | 7,410,000 | |||||||||||||||||||||||||
Short-term Investments and Deferred Compensation
The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.
Forward Foreign Currency Exchange Contracts
The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers (See Note 13).
Compound Net Derivative Liability
The Company estimates the fair value of the Compound Net Derivative Liability (see Note 8) using Level 3 inputs and the Monte Carlo simulation model at the balance sheet date. The Monte Carlo simulation model requires the input of assumptions including the expected volatility of the underlying stock. These assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value. This amount is recorded within convertible notes, related party in the consolidated balance sheets at March 31, 2025 and 2024. Any changes in the fair value of the Compound Net Derivative Liability are recorded in change in fair value of compound net derivative liability in the consolidated statements of operations and in the consolidated statements of cash flows.
The following assumptions were used to determine the fair value of the Compound Net Derivative Liability:
| March 31, 2025 | March 31, 2024 | |||||||
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Risk free interest rate
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3.91 | % | 4.36 | % | ||||
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Cost of equity
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21.30 | % | 23.20 | % | ||||
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Weighted average cost of capital
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14.90 | % | 14.90 | % | ||||
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Expected volatility of MPA common stock
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40.00 | % | 50.00 | % | ||||
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EBITDA volatility
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45.00 | % | 40.00 | % | ||||
The following summarizes the activity for Level 3 fair value measurements:
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Years Ended March 31, |
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2025
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2024
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2023
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Beginning balance
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$ | 7,410,000 | $ | 8,430,000 | $ | - | ||||||
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Newly issued
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- | - | 8,430,000 | |||||||||
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Changes in the fair value of the Compound Net Derivative Liability included in earnings
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60,000 | (1,020,000 | ) | - | ||||||||
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Ending balance
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$ | 7,470,000 | $ | 7,410,000 | $ | 8,430,000 | ||||||
During the years ended March 31, 2025 and 2024, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics. At March 31, 2025 and 2024, the net carrying amount of the Convertible Notes was $35,207,000 and $30,776,000, respectively, (see Note 8). The estimated fair value of the Company’s Convertible Notes was $42,398,000 and $38,276,000 using Level 3 inputs at March 31, 2025 and 2024, respectively.
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About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.