UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30,DECEMBER 31, 2021

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

New York 11-2153962
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

2929 California Street, Torrance, California 90503
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (310) 212-7910

Securities registered pursuant to Section 12(b) of the Act:
   
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareMPAAThe Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☐
 
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

There were 19,119,05919,101,751 shares of Common Stock outstanding at AugustFebruary 2, 2021.2022.




MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION 
 
Item 1. Financial Statements (unaudited)
4
 
Condensed Consolidated Balance Sheets
4
 
Condensed Consolidated Statements of OperationsIncome
5
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
6
 
Condensed Consolidated Statements of Shareholders’ Equity
7
 
Condensed Consolidated Statements of Cash Flows
8
 
Notes to Condensed Consolidated Financial Statements
9
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2224
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
2934
 
Item 4. Controls and Procedures
2934
PART II — OTHER INFORMATION 
 
Item 1. Legal Proceedings
3136
 
Item 1A. Risk Factors
3136
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
3136
 
Item 5. Other Information
3136
 
Item 6. Exhibits
3237
 
SIGNATURES
3439


2
Table of Contents
MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

The following terms are frequently used in the text of this report and have the meanings indicated below.

“Used Core” — An automobile part which has previously been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts, which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange program.programs. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores are not available from our customers, we purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program,programs, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. The Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them.

3
Table of Contents
.
PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

 June 30, 2021  March 31, 2021  December 31, 2021  March 31, 2021 
ASSETS (Unaudited)     (Unaudited)    
Current assets:            
Cash and cash equivalents $24,883,000  $15,523,000  $7,769,000  $15,523,000 
Short-term investments  1,823,000   1,652,000   2,212,000   1,652,000 
Accounts receivable — net  54,019,000   63,122,000   57,691,000   63,122,000 
Inventory  320,685,000   302,913,000   358,738,000   302,913,000 
Contract assets  26,264,000   26,940,000   26,609,000   26,940,000 
Prepaid expenses and other current assets  13,307,000   12,706,000   11,743,000   12,706,000 
Total current assets  440,981,000   422,856,000   464,762,000   422,856,000 
Plant and equipment — net  53,287,000   53,854,000   50,636,000   53,854,000 
Operating lease assets  87,924,000   71,513,000   82,029,000   71,513,000 
Long-term deferred income taxes  19,150,000   19,381,000   20,255,000   19,381,000 
Long-term contract assets  293,158,000   270,213,000   311,756,000   270,213,000 
Goodwill and intangible assets — net  8,194,000   8,534,000   7,341,000   8,534,000 
Other assets  1,246,000   1,531,000   1,501,000   1,531,000 
TOTAL ASSETS $903,940,000  $847,882,000  $938,280,000  $847,882,000 
LIABILITIES AND SHAREHOLDERS' EQUITY        
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:                
Accounts payable and accrued liabilities $141,451,000  $152,735,000  $149,314,000  $152,735,000 
Customer finished goods returns accrual  35,261,000   31,524,000   37,333,000   31,524,000 
Contract liabilities  40,988,000   41,072,000   40,190,000   41,072,000 
Revolving loan  103,000,000   84,000,000   113,000,000   84,000,000 
Other current liabilities  5,774,000   6,683,000   6,708,000   6,683,000 
Operating lease liabilities  5,434,000   6,439,000   6,444,000   6,439,000 
Current portion of term loan  3,670,000   3,678,000   3,670,000   3,678,000 
Total current liabilities  335,578,000   326,131,000   356,659,000   326,131,000 
Term loan, less current portion  15,804,000   16,786,000   13,951,000   16,786,000 
Long-term contract liabilities  153,504,000   125,223,000   165,599,000   125,223,000 
Long-term deferred income taxes  76,000   73,000   75,000   73,000 
Long-term operating lease liabilities  85,889,000   70,551,000   82,287,000   70,551,000 
Other liabilities  7,862,000   7,973,000   6,589,000   7,973,000 
Total liabilities  598,713,000   546,737,000   625,160,000   546,737,000 
Commitments and contingencies  0   0   0
   0
 
Shareholders' equity:        
Shareholders’ equity:        
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; NaN issued
  0   0   0   0 
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; NaN issued
  0   0   0   0 
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,101,092 and 19,045,386 shares issued and outstanding at June 30, 2021 and March 31, 2021, respectively
  191,000   190,000 
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,100,298 and 19,045,386 shares issued and outstanding at December 31, 2021 and March 31, 2021, respectively
  191,000   190,000 
Additional paid-in capital  224,445,000   223,058,000   225,319,000   223,058,000 
Retained earnings  86,454,000   85,593,000   93,276,000   85,593,000 
Accumulated other comprehensive loss  (5,863,000)  (7,696,000)  (5,666,000)  (7,696,000)
Total shareholders' equity  305,227,000   301,145,000 
Total shareholders’ equity  313,120,000   301,145,000 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $903,940,000  $847,882,000  $938,280,000  $847,882,000 

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

4
Table of Contents

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of OperationsIncome
(Unaudited)

 
Three Months Ended
June 30,
 
 2021  2020  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
       2021  2020  2021  2020 
                  
Net sales $149,034,000  $95,356,000  $161,810,000  $122,568,000  $486,392,000  $372,654,000 
Cost of goods sold  125,463,000   81,969,000   129,235,000   98,327,000   394,295,000
   295,300,000
 
Gross profit  23,571,000   13,387,000   32,575,000
   24,241,000
   92,097,000
   77,354,000
 
Operating expenses:                        
General and administrative  12,486,000   11,687,000   14,605,000   14,005,000   41,556,000
   38,210,000
 
Sales and marketing  5,368,000   4,200,000   6,274,000   4,698,000   17,162,000
   13,224,000
 
Research and development  2,501,000   1,942,000   2,635,000   2,100,000   7,631,000
   6,014,000
 
Foreign exchange impact of lease liabilities and forward contracts  (2,533,000)  (4,817,000)  385,000   (12,455,000)  1,769,000   (21,257,000)
Total operating expenses  17,822,000   13,012,000   23,899,000   8,348,000   68,118,000
   36,191,000
 
Operating income  5,749,000   375,000   8,676,000   15,893,000   23,979,000
   41,163,000
 
Interest expense, net  3,941,000   4,409,000   3,949,000   4,051,000   11,510,000
   12,074,000
 
Income (loss) before income tax expense (benefit)  1,808,000   (4,034,000)
Income tax expense (benefit)  947,000   (1,022,000)
Net income (loss) $861,000  $(3,012,000)
Basic net income (loss) per share $0.05  $(0.16)
Diluted net income (loss) per share $0.04  $(0.16)
Income before income tax expense  4,727,000   11,842,000   12,469,000
   29,089,000
 
Income tax expense  1,588,000   3,373,000   4,786,000
   8,448,000
 
Net income $3,139,000  $8,469,000  $7,683,000  $20,641,000 
Basic net income per share $0.16  $0.44  $0.40  $1.09 
Diluted net income per share $0.16  $0.44  $0.39  $1.07 
Weighted average number of shares outstanding:                        
Basic  19,054,481   18,976,178   19,184,339   19,053,232   19,124,824
   19,016,302
 
Diluted  19,659,057   18,976,178   19,544,174   19,436,793   19,604,780
   19,333,758
 

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

5
Table of Contents

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended
June 30,
 
  2021  2020 
       
Net income (loss) $861,000  $(3,012,000)
Other comprehensive income (loss), net of tax:        
Foreign currency translation gain (loss)  1,833,000   (1,263,000)
Total other comprehensive income (loss), net of tax  1,833,000   (1,263,000)
Comprehensive income (loss) $2,694,000  $(4,275,000)
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
 2021  2020  2021  2020 
             
Net income $3,139,000  $8,469,000  $7,683,000  $20,641,000 
Other comprehensive (loss) income, net of tax:                
Foreign currency translation (loss) gain
  (414,000)  1,614,000   2,030,000
   (90,000)
Total other comprehensive (loss) income, net of tax  (414,000)  1,614,000   2,030,000
   (90,000)
Comprehensive income $2,725,000  $10,083,000  $9,713,000  $20,551,000 

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

6
Table of Contents

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)

 Common Stock              Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total  Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
                                    
Balance at March 31, 2021
  19,045,386  $190,000  $223,058,000  $85,593,000  $(7,696,000) $301,145,000   19,045,386  $190,000  $223,058,000  $85,593,000  $(7,696,000) $301,145,000 
Compensation recognized under employee stock plans  -   0   1,576,000   0   0   1,576,000   -   0   1,576,000   0   0   1,576,000 
Exercise of stock options, net of shares withheld for employee taxes  19,837   0   354,000   0   0   354,000   19,837   0   354,000   0   0   354,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  35,869   1,000   (543,000)  0   0   (542,000)  35,869   1,000   (543,000)  0   0   (542,000)
Foreign currency translation  -   0   0   0   1,833,000   1,833,000   -   0   0   0   1,833,000   1,833,000 
Net income  -   0   0   861,000   0   861,000   -   0   0   861,000   0   861,000 
Balance at June 30, 2021
  19,101,092  $191,000  $224,445,000  $86,454,000  $(5,863,000) $305,227,000   19,101,092  $191,000  $224,445,000  $86,454,000  $(5,863,000) $305,227,000 
Compensation recognized under employee stock plans  -   0
   1,851,000
   0
   0
   1,851,000
 
Exercise of stock options, net of shares withheld for employee taxes  7,860
   0
   78,000
   0
   0
   78,000
 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  
63,803
   
1,000
   (1,204,000)  
0
   
0
   (1,203,000)
Foreign currency translation  -
   0
   0
   0
   611,000
   611,000
 
Net income  -
   0
   0
   3,683,000
   0
   3,683,000
 
Balance at September 30, 2021
  19,172,755
  $192,000  $225,170,000  $90,137,000  $(5,252,000) $310,247,000 
Compensation recognized under employee stock plans  -   0   2,030,000   0   0   2,030,000 
Exercise of stock options, net of shares withheld for employee taxes  1,846   0   32,000   0   0   32,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  32,183   0   0   0   0   0 
Repurchase and cancellation of treasury stock, including fees  (106,486)  (1,000)  (1,913,000)  0   0   (1,914,000)
Foreign currency translation  -   0   0   0   (414,000)  (414,000)
Net income  -   0   0   3,139,000   0   3,139,000 
Balance at December 31, 2021  19,100,298  $191,000  $225,319,000  $93,276,000  $(5,666,000) $313,120,000 

 Common Stock              Common Stock             
 Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income Loss
  Total  Shares  Amount  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
                                    
Balance at March 31,2020
  18,969,380  $190,000  $218,581,000  $64,117,000  $(7,368,000) $275,520,000   18,969,380  $190,000  $218,581,000  $64,117,000  $(7,368,000) $275,520,000 
Compensation recognized under employee stock plans  -   0   1,043,000   0   0   1,043,000   -   0   1,043,000   0   0   1,043,000 
Exercise of stock options  3,000   0   20,000   0   0   20,000   3,000   0   20,000   0   0   20,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  29,953   0   (207,000)  0   0   (207,000)  29,953   0   (207,000)  0   0   (207,000)
Foreign currency translation  -   0   0   0   (1,263,000)  (1,263,000)  -   0   0   0   (1,263,000)  (1,263,000)
Net loss  -   0   0   (3,012,000)  0   (3,012,000)  -   0   0   (3,012,000)  0   (3,012,000)
Balance at June 30, 2020
  19,002,333  $190,000  $219,437,000  $61,105,000  $(8,631,000) $272,101,000   19,002,333  $190,000  $219,437,000  $61,105,000  $(8,631,000) $272,101,000 
Compensation recognized under employee stock plans  -   0   1,218,000   0   0   1,218,000 
Exercise of stock options  6,000   0   73,000   0   0   73,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  18,254   0   (140,000)  0   0   (140,000)
Foreign currency translation  -   0   0   0   (441,000)  (441,000)
Net income  -
   0
   0
   15,184,000
   0
   15,184,000
 
Balance at September 30, 2020
  19,026,587
  $190,000  $220,588,000  $76,289,000  $(9,072,000) $287,995,000 
Compensation recognized under employee stock plans  -   0   1,498,000   0   0   1,498,000 
Exercise of stock options  5,794   0   112,000   0   0   112,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  23,911   1,000   (5,000)  0   0   (4,000)
Foreign currency translation  -   0   0   0   1,614,000   1,614,000 
Net income  -   0   0   8,469,000   0   8,469,000 
Balance at December 31, 2020  19,056,292  $191,000  $222,193,000  $84,758,000  $(7,458,000) $299,684,000 

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
Three Months Ended
June 30,
  
Nine Months Ended
December 31,
 
 2021  2020  2021  2020 
Cash flows from operating activities:            
Net income (loss) $861,000  $(3,012,000)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:        
Net income
 $7,683,000  $20,641,000 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Depreciation and amortization  3,145,000   2,551,000   9,591,000   8,090,000 
Amortization of interest  414,000   312,000   1,189,000   1,059,000 
Amortization of core premiums paid to customers  2,531,000   1,223,000   8,497,000   4,269,000 
Amortization of finished goods premiums paid to customers  146,000   0   516,000   0 
Noncash lease expense  1,791,000   1,686,000   5,533,000   5,239,000 
Gain due to the change in the fair value of the contingent consideration  (60,000)  (47,000)
Loss (gain) due to the change in the fair value of the contingent consideration  60,000   (45,000)
Foreign exchange impact of lease liabilities and forward contracts  (2,533,000)  (4,817,000)  1,769,000   (21,257,000)
Gain on short-term investments  (5,000)  (155,000)  (245,000)  (398,000)
Net provision for inventory reserves  3,141,000   2,074,000   9,293,000   8,937,000 
Net provision for customer payment discrepancies and credit losses  229,000   30,000   1,690,000   242,000 
Deferred income taxes  358,000   465,000   (877,000)  2,866,000 
Share-based compensation expense  1,576,000   1,043,000   5,457,000   3,759,000 
Loss on disposal of plant and equipment  33,000   0   33,000   9,000 
Changes in operating assets and liabilities:                
Accounts receivable  9,020,000   25,847,000   3,626,000   47,066,000 
Inventory  (20,625,000)  (8,034,000)  (65,303,000)  (68,723,000)
Prepaid expenses and other current assets  281,000   (2,898,000)  187,000   982,000 
Other assets  297,000   219,000   7,000   1,067,000 
Accounts payable and accrued liabilities  (10,183,000)  6,478,000   (877,000)  46,198,000 
Customer finished goods returns accrual  3,698,000   1,621,000   5,807,000   8,844,000 
Contract assets, net  (24,857,000)  (6,076,000)  (50,225,000)  (18,126,000)
Contract liabilities, net  27,880,000   4,620,000   38,828,000   28,492,000 
Operating lease liabilities  (1,259,000)  (1,416,000)  (4,219,000)  (4,710,000)
Other liabilities  (618,000)  674,000   (194,000)  (2,017,000)
Net cash (used in) provided by operating activities  (4,739,000)  22,388,000   (22,174,000)  72,484,000 
Cash flows from investing activities:                
Purchase of plant and equipment  (1,922,000)  (2,983,000)  (5,111,000)  (12,043,000)
Proceeds from sale of plant and equipment
  0
   7,000
 
Change in short-term investments  (167,000)  (55,000)  (315,000)  (259,000)
Net cash used in investing activities  (2,089,000)  (3,038,000)  (5,426,000)  (12,295,000)
Cash flows from financing activities:                
Borrowings under revolving loan  32,000,000   0   62,000,000   0 
Repayments of revolving loan  (13,000,000)  (40,000,000)  (33,000,000)  (93,000,000)
Repayments of term loan  (938,000)  (938,000)  (2,813,000)  (2,813,000)
Payments for debt issuance costs  (1,102,000)  0   (1,148,000)  0 
Payments on finance lease obligations  (678,000)  (549,000)  (2,074,000)  (1,775,000)
Exercise of stock options  354,000   20,000   464,000   205,000 
Cash used to net share settle equity awards  (542,000)  (207,000)  (1,745,000)  (351,000)
Repurchase of common stock, including fees
  (1,914,000)  0 
Net cash provided by (used in) financing activities  16,094,000   (41,674,000)  19,770,000   (97,734,000)
Effect of exchange rate changes on cash and cash equivalents  94,000   172,000   76,000   729,000 
Net increase (decrease) in cash and cash equivalents  9,360,000   (22,152,000)
Net decrease in cash and cash equivalents  (7,754,000)  (36,816,000)
Cash and cash equivalents — Beginning of period  15,523,000   49,616,000   15,523,000   49,616,000 
Cash and cash equivalents — End of period $24,883,000  $27,464,000  $7,769,000  $12,800,000 
Supplemental disclosures of cash flow information:                
Cash paid for interest, net $3,521,000  $4,234,000  $10,348,000  $11,222,000 
Cash paid for income taxes, net of refunds  1,550,000   447,000   5,987,000   2,048,000 
Cash paid for operating leases  2,472,000   2,574,000   7,969,000   8,087,000 
Cash paid for finance leases  775,000   632,000   2,343,000   2,049,000 
Plant and equipment acquired under finance leases  230,000   1,427,000   601,000   3,334,000 
Assets acquired under operating leases  15,718,000   15,564,000   16,141,000   15,630,000 
Non-cash capital expenditures  206,000   678,000   430,000   923,000 

The accompanying notes to condensed consolidated financial statements are an integral part hereof.

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30,December 31, 2021
(Unaudited)

1. Company Background and Organization

Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts, and test solutions and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, and brake master cylinders, and (iv) other products, which include turbochargers and test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used by the automotive retail segment.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, the Company has identified its chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that its business comprises 3 separate operating segments. Two of the operating segments meet all the aggregation criteria and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure and the Company has combined its operating segments into 1 reportable segment.

Impact of the Novel Coronavirus (“COVID-19”)

The outbreak of the COVID-19 pandemic continues to adversely impact the U.S. and global economies – creating uncertainty regarding the potential effects on the Company’s employees, supply chain, operations, and customer demand. The COVID-19 pandemic could impact the Company’s operations and the operations of its customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) the severity of the virus, (ii) the occurrence and duration of additional spikes in infections, (iii) the effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, (v) the availability and acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the future.

2. Basis of Presentation and New Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30,December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2022. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2021.

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The accompanying condensed consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to, except as noted below, the accounting policies described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021.

Recently Adopted Accounting Pronouncements

Income Taxes

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of this guidance on April 1, 2021 did not have any material impact on the Company’s consolidated financial statements.

3. Accounts Receivable — Net

The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns. The Company believes its credit risk with respect to trade accounts receivable is limited due to its credit evaluation process and the long-term nature of its relationships with its largest customers. The Company utilizes a historical loss rate method, adjusted for any changes in economic conditions or risk characteristics, to estimate its expected credit losses each period. When developing an estimate of expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions, and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The historical loss rate method considers past write-offs of trade accounts receivable over a period commensurate with the initial term of the Company’s contracts with its customers. The Company recognizes the allowance for credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The Company’s accounts receivable are short-term in nature and written off only when all collection attempts have failed. The Company uses receivable discount programs with certain customers and their respective banks (see Note 10).

Accounts receivable — net is comprised of the following:

 June 30, 2021  March 31, 2021  December 31, 2021  March 31, 2021 
Accounts receivable — trade $67,212,000  $81,549,000  $71,124,000  $81,549,000 
Allowance for credit losses  (273,000)  (348,000)  (292,000)  (348,000)
Customer payment discrepancies  (797,000)  (752,000)  (1,185,000)  (752,000)
Customer returns RGA issued  (12,123,000)  (17,327,000)  (11,956,000)  (17,327,000)
Total accounts receivable — net $54,019,000  $63,122,000  $57,691,000  $63,122,000 

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The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected. During the threenine months ended June 30,December 31, 2020, the Company wrote off amounts previously fully reserved for in connection with the bankruptcy filing of one of its customers.

 
Three Months Ended
June 30,
 
  2021  2020 
Balance at beginning of period $348,000  $4,252,000 
Provision for expected credit losses  (36,000)  170,000 
Recoveries  0   (100,000)
Amounts written off charged against the allowance  (39,000)  (3,897,000)
Balance at end of period $273,000  $425,000 
 
Nine Months Ended
December 31,
 
  2021  2020 
Balance at beginning of period $348,000  $4,252,000 
Provision for expected credit losses  (17,000)  74,000 
Recoveries  0   (100,000)
Amounts written off charged against the allowance  (39,000)  (3,898,000)
Balance at end of period $292,000  $328,000 

4. Inventory

Inventory is comprised of the following:

  June 30, 2021  March 31, 2021 
Inventory      
Raw materials $140,109,000  $128,190,000 
Work-in-process  7,189,000   5,233,000 
Finished goods  173,725,000   168,184,000 
   321,023,000   301,607,000 
Less allowance for excess and obsolete inventory  (13,945,000)  (13,246,000)
Inventory — net  307,078,000   288,361,000 
Inventory unreturned  13,607,000   14,552,000 
Total inventory $320,685,000  $302,913,000 
  December 31, 2021  March 31, 2021 
Inventory      
Raw materials $159,001,000  $128,190,000 
Work-in-process  8,048,000   5,233,000 
Finished goods  191,040,000   168,184,000 
   358,089,000   301,607,000 
Less allowance for excess and obsolete inventory  (14,857,000)  (13,246,000)
Inventory — net  343,232,000   288,361,000 
Inventory unreturned  15,506,000   14,552,000 
Total inventory $358,738,000  $302,913,000 

5. Contract Assets

During the three months ended June 30,December 31, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $984,000846,000 and $1,384,0001,304,000, respectively. During the nine months ended December 31, 2021 and 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $3,517,000 and $3,580,000, respectively.

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Contract assets are comprised of the following:

  June 30, 2021  March 31, 2021 
Short-term contract assets      
Cores expected to be returned by customers $15,024,000  $17,657,000 
Upfront payments to customers  533,000   684,000 
Finished goods premiums paid to customers  644,000   405,000 
Core premiums paid to customers  10,063,000   8,194,000 
Total short-term contract assets $26,264,000  $26,940,000 
         
         
Remanufactured cores held at customers' locations $243,389,000  $229,918,000 
Upfront payments to customers  398,000   486,000 
Finished goods premiums paid to customers  3,191,000   2,731,000 
Core premiums paid to customers  40,611,000   31,509,000 
Long-term core inventory deposits  5,569,000   5,569,000 
 Total long-term contract assets $293,158,000  $270,213,000 
  December 31, 2021  March 31, 2021 
Short-term contract assets      
Cores expected to be returned by customers $14,172,000  $17,657,000 
Upfront payments to customers  540,000   684,000 
Finished goods premiums paid to customers  613,000   405,000 
Core premiums paid to customers  11,284,000   8,194,000 
Total short-term contract assets $26,609,000  $26,940,000 
         
Remanufactured cores held at customers’ locations $257,609,000  $229,918,000 
Upfront payments to customers  231,000   486,000 
Finished goods premiums paid to customers  2,926,000   2,731,000 
Core premiums paid to customers  45,421,000   31,509,000 
Long-term core inventory deposits  5,569,000   5,569,000 
 Total long-term contract assets $311,756,000  $270,213,000 

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6. Significant Customer and Other Information

Significant Customer Concentrations

The largest customers accounted for the following percentage of net sales:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
 2021  2020  2021  2020  2021  2020 
Net sales                  
Customer A  34%  45%  38%  35%  38%  42%
Customer B  20%  26%  15%  26%  17%  24%
Customer C  31%  17%  29%  24%  30%  21%

The largest customers accounted for the following percentage of accounts receivable – trade:

 June 30, 2021  March 31,2021 December 31, 2021 March 31, 2021 
Accounts receivable - trade          
Customer A  43%  50%  38%  50%
Customer B  24%  23%  21%  23%
Customer C  1%  0   1%
  0%

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Geographic and Product Information

The Company’s products are sold predominantly in the U.S. and accounted for the following percentages of net sales:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
 2021  2020  2021  2020  2021  2020 
Product line                      
Rotating electrical products  67%  72%  68%  72%  69%  76%
Wheel hub products  14%  18%  13%  14%  13%  14%
Brake related products  16%  9%  15%  12%  15%  9%
Other products  3%  1%  4%  2%  3%  1%
  100%  100%  100%  100%  100%  100%

Significant Supplier Concentrations

The Company had no suppliers that accounted for more than 10% of inventory purchases for the three and nine months ended June 30,December 31, 2021 and 2020.

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7. Debt

The Company is party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility currently permits the payment of up to $29,430,000 of dividends and share repurchases for fiscal year 2022, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of the assets of the Company.

In May 2021, the Company entered into a third amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extended the maturity date to May 28, 2026 from June 5, 2023, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”. The Company capitalized $1,102,0001,148,000 of new debt issuance costs in connection with the Third Amendment.

The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 2.60%2.85% and 2.59%,2.86% respectively, at June 30,December 31, 2021, and 2.62% at March 31, 2021.

The Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants at June 30,December 31, 2021.

The Company had cash of $24,883,000 at June 30, 2021, however, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio.In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem, or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem, or purchase subordinated debt, and amend or otherwise alter debt agreements.

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The following summarizes information about the Term Loans:

 June 30, 2021  March 31, 2021  December 31, 2021  March 31, 2021 
Principal amount of Term Loans $19,687,000  $20,625,000  $17,812,000  $20,625,000 
Unamortized financing fees  (213,000)  (161,000)  (191,000)  (161,000)
Net carrying amount of Term Loans  19,474,000   20,464,000   17,621,000   20,464,000 
Less current portion of Term Loans  (3,670,000)  (3,678,000)  (3,670,000)  (3,678,000)
Long-term portion of Term Loans $15,804,000  $16,786,000  $13,951,000  $16,786,000 

Future repayments of the Term Loans are as follows:

Year Ending March 31,      
2022 - remaining nine months
 $2,812,000 
2022 - remaining three months
 $937,000 
2023  3,750,000   3,750,000 
2024  3,750,000   3,750,000 
2025  3,750,000   3,750,000 
2026  3,750,000   3,750,000 
Thereafter  1,875,000   1,875,000 
Total payments $19,687,000  $17,812,000 

The Company had $103,000,000113,000,000 and $84,000,000$84,000,000 outstanding under the Revolving Facility at June 30,December 31, 2021 and March 31, 2021, respectively. In addition, $6,444,000$6,409,000 was outstanding for letters of credit at June 30,December 31, 2021. At June 30,December 31, 2021, after certain contractual adjustments, $95,323,00099,908,000 was available under the Revolving Facility.

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8. Contract Liabilities

Contract liabilities are comprised of the following:

 June 30, 2021  March 31, 2021  December 31, 2021  March 31, 2021 
Short-term contract liabilities            
Customer core returns accruals $12,350,000  $12,710,000  $13,089,000  $12,710,000 
Customer allowances earned  17,298,000   16,513,000   18,461,000   16,513,000 
Customer deposits  2,735,000   2,234,000   3,747,000   2,234,000 
Finished goods liabilities  2,424,000   1,883,000   1,609,000   1,883,000 
Core bank liability  1,597,000   1,585,000   1,622,000   1,585,000 
Accrued core payment, net  4,584,000   6,147,000 
Accrued core payment
  1,662,000   6,147,000 
Total short-term contract liabilities $40,988,000  $41,072,000  $40,190,000  $41,072,000 
                
Long-term contract liabilities                
Customer core returns accruals $132,469,000  $103,719,000  $146,837,000  $103,719,000 
Customer allowances earned  245,000   313,000   109,000   313,000 
Finished goods liabilities  2,668,000   2,678,000   1,972,000   2,678,000 
Core bank liability  16,499,000   16,903,000   15,682,000   16,903,000 
Accrued core payment, net  1,623,000   1,610,000 
Accrued core payment
  999,000   1,610,000 
Total long-term contract liabilities $153,504,000  $125,223,000  $165,599,000  $125,223,000 

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9. Leases

The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. The Company has material nonfunctional currency leases that could have a material impact on the Company’s condensed consolidated statements of operations.income. As required for other monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates and are not affected by subsequent changes in the exchange rates. In connection with the remeasurement of these leases, the Company recorded gainsa loss of $2,795,000985,000 and a gain of $1,985,0008,638,000 during the three months ended June 30,December 31, 2021 and 2020, respectively.respectively, and gains of $64,000 and $12,241,000 during the nine months ended December 31, 2021 and 2020, respectively. These gainsamounts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of operations.income.

Balance sheet information for leases is as follows:

LeasesClassification June 30, 2021  March 31, 2021  Classification December 31, 2021  March 31, 2021 
Assets:               
Operating
Operating lease assets
 $87,924,000  $71,513,000  
Operating lease assets
 $82,029,000  $71,513,000 
Finance
Plant and equipment
  8,592,000   8,852,000  
Plant and equipment
  7,745,000   8,852,000 
Total leased assets  $96,516,000  $80,365,000    $89,774,000  $80,365,000 
                   
Liabilities:                   
Current                   
Operating
Operating lease liabilities
 $5,434,000  $6,439,000  
Operating lease liabilities
 $6,444,000  $6,439,000 
Finance
Other current liabilities
  2,584,000   2,640,000  
Other current liabilities
  2,420,000   2,640,000 
Long-term                   
Operating
Long-term operating lease liabilities
  85,889,000   70,551,000  
Long-term operating lease liabilities
  82,287,000   70,551,000 
Finance
Other liabilities
  4,606,000   4,995,000  
Other liabilities
  3,741,000   4,995,000 
Total lease liabilities  $98,513,000  $84,625,000    $94,892,000  $84,625,000 

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Lease cost recognized in the condensed consolidated statements of operationsincome is as follows:

 Three Months Ended 
 June 30,  
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 2021  2020  2021  2020  2021
  2020
 
Lease cost                
Operating lease cost $3,042,000  $2,683,000  $3,134,000  $2,962,000 $9,325,000  $8,522,000 
Short-term lease cost  376,000   317,000   361,000   373,000 1,112,000 1,027,000 
Variable lease cost  281,000   143,000   225,000   183,000 716,000 556,000 
Finance lease cost:                    
Amortization of finance lease assets  499,000   413,000   515,000   458,000 1,579,000 1,299,000 
Interest on finance lease liabilities  97,000   83,000   83,000   98,000  269,000  274,000 
Total lease cost $4,295,000  $3,639,000  $4,318,000  $4,074,000  $13,001,000  $11,678,000 

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Maturities of lease commitments at June 30,December 31, 2021 by fiscal year were as follows:

Maturity of lease liabilities Operating Leases  Finance Leases  Total  Operating Leases  Finance Leases  Total 
2022 - remaining nine months
 $7,807,000  $2,246,000  $10,053,000 
2022 - remaining three months
 $2,449,000  $714,000  $3,163,000 
2023  11,351,000   2,404,000   13,755,000   11,460,000   2,490,000   13,950,000 
2024  9,968,000   1,610,000   11,578,000   10,014,000   1,688,000   11,702,000 
2025  10,041,000   1,118,000   11,159,000   10,078,000   1,194,000   11,272,000 
2026  10,320,000   432,000   10,752,000   10,347,000   507,000   10,854,000 
Thereafter  75,101,000   0   75,101,000   75,113,000   51,000   75,164,000 
Total lease payments  124,588,000   7,810,000   132,398,000   119,461,000   6,644,000   126,105,000 
Less amount representing interest  (33,265,000)  (620,000)  (33,885,000)  (30,730,000)  (483,000)  (31,213,000)
Present value of lease liabilities $91,323,000  $7,190,000  $98,513,000  $88,731,000  $6,161,000  $94,892,000 

Other information about leases is as follows:

  June 30, 2021  March 31, 2021 
Lease term and discount rate      
Weighted-average remaining lease term (years):      
Finance leases  3.2   3.4 
Operating leases  11.0   11.1 
Weighted-average discount rate:        
Finance leases  5.3%  5.3%
Operating leases  5.7%  5.9%
  December 31, 2021  March 31, 2021 
Lease term and discount rate      
Weighted-average remaining lease term (years):      
Finance leases  3.0   3.4 
Operating leases  10.6   11.1 
Weighted-average discount rate:        
Finance leases  5.2%  5.3%
Operating leases  5.7%  5.9%

10. Accounts Receivable Discount Programs

The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables.

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The following is a summary of accounts receivable discount programs:

  
Three Months Ended
June 30,
 
  2021  2020 
Receivables discounted $146,669,000  $111,360,000 
Weighted average days  329   345 
Annualized weighted average discount rate  1.8%  2.5%
Amount of discount recognized as interest expense $2,473,000  $2,686,000 
  
Nine Months Ended
December 31,
 
  2021  2020 
Receivables discounted $418,044,000  $367,102,000 
Weighted average days  335   333 
Annualized weighted average discount rate  1.7%  2.1%
Amount of discount recognized as interest expense $6,798,000  $7,277,000 


11. Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options, which would result in the issuance of incremental shares of common stock to the extent such impact is not anti-dilutive.

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The following presents a reconciliation of basic and diluted net income (loss) per share:

  
Three Months Ended
June 30,
 
  2021  2020 
Net income (loss) $861,000  $(3,012,000)
Basic shares  19,054,481   18,976,178 
Effect of potentially dilutive securities  604,576   0 
Diluted shares  19,659,057   18,976,178 
Net income (loss) per share:        
         
Basic net income (loss) per share $0.05  $(0.16)
         
Diluted net income (loss) per share $0.04  $(0.16)
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
  2021  2020  2021  2020 
Net income
 $3,139,000  $8,469,000 $7,683,000  $20,641,000 
Basic shares  19,184,339   19,053,232   19,124,824   19,016,302 
Effect of potentially dilutive securities  359,835   383,561   479,956   317,456 
Diluted shares  19,544,174   19,436,793   19,604,780   19,333,758 
Net income per share:
                
Basic net income per share
 $0.16  $0.44 $0.40  $1.09 
Diluted net income per share
 $0.16  $0.44 $0.39  $1.07 

Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net income (loss) per share. For the three months ended June 30,December 31, 2021 and 2020,, there were 634,8321,130,694 and 2,133,786,1,319,937, respectively, of potential common shares not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive. For the nine months ended December 31, 2021 and 2020, there were 720,756 and 1,328,437, respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive.

12. Income Taxes

The Company recorded income tax expense of $947,000,$1,588,000, or an effective tax rate of 52.4%33.6%, and an income tax benefit of $1,022,000,$3,373,000, or an effective tax rate of 25.3%28.5%, for the three months ended June 30,December 31, 2021 and 2020, respectively. The Company recorded income tax expense of $4,786,000, or an effective tax rate of 38.4%, and $8,448,000, or an effective tax rate of 29.0%, for the nine months ended December 31, 2021 and 2020, respectively. Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rates for the three and nine months ended June 30,December 31, 2021, waswere primarily impacted by (i) specific jurisdictions that the Company does not expect to recognize benefit of losses, (ii)non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) foreign income taxed at rates that are different from the federal statutory rate,  and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).specific jurisdictions that the Company does not expect to recognize benefit of losses.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At June 30,December 31, 2021, the Company is not under examination in any jurisdiction, and remain subject to examination from the years ended March 31, 2017. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

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13. Financial Risk Management and Derivatives

Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s overseas facilities, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currencies. The Company’s primary risk exposure is from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, the Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which forward foreign currency exchange contracts are used, is modified periodically in response to the Company’s estimate of market conditions and the terms and length of anticipated requirements.

The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates between the U.S. dollar and the foreign currencies. The Company does not hold or issue financial instruments for trading purposes. The Company designates forward foreign currency exchange contracts for forecasted expenditure requirements to fund foreign operations.

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The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $43,620,00044,815,000 and $41,819,000 at June 30, December 31,2021 and March 31,2021,, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of operations.income.

The following shows the effect of derivative instruments on the condensed consolidated statements of operations:income:

 Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts  Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts 
Derivatives Not Designated as
 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
Hedging Instruments 2021  2020  2021  2020  2021
  2020 
Forward foreign currency exchange contracts $(262,000) $2,832,000  $600,000 $3,817,000  $(1,833,000) $9,016,000 

The fair value of the forward foreign currency exchange contracts of $1,167,000404,000 andis included in other current liabilities in the condensed consolidated balance sheet at December 31, 2021. The fair value of the forward foreign currency exchange contracts of $1,429,000 is included in prepaid and other current assets in the condensed consolidated balance sheetssheet at June 30, 2021 and March 31, 2021, respectively.2021. The changes in the fair values of forward foreign currency exchange contracts are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of cash flows for the threenine months ended June 30,December 31, 2021 and 2020.

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14. Fair Value Measurements

The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy:

 June 30, 2021  March 31, 2021  December 31, 2021  March 31, 2021 
    
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
 
 Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3 
Assets                                                
Short-term investments                                                
Mutual funds $1,823,000  $1,823,000  $0  $0  $1,652,000  $1,652,000  $0  $0  $2,212,000  $2,212,000  $0  $0  $1,652,000  $1,652,000  $0  $0 
Prepaid expenses and other current assets                                                                
Forward foreign currency exchange contracts  1,167,000   0   1,167,000   0   1,429,000   0   1,429,000   0   0   0   0   0   1,429,000   0   1,429,000   0 
                                                                
Liabilities                                                                
Accrued liabilities                                                                
Short-term contingent consideration  850,000   0   0   850,000   910,000   0   0   910,000   970,000   0   0   970,000   910,000   0   0   910,000 
Other current liabilities                                                                
Deferred compensation  1,823,000   1,823,000   0   0   1,652,000   1,652,000   0   0   2,212,000   2,212,000   0   0   1,652,000   1,652,000   0   0 
Forward foreign currency exchange contracts  404,000
   0
   404,000
   0
   0
   0
   0
   0
 

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.

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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).

Contingent Consideration

In December 2018, the Company completed the acquisition of certain assets and assumption of certain liabilities from Mechanical Power Conversion, LLC (“E&M”). In connection with this acquisition, the Company iswas contingently obligated to make additional payments to the former owners of E&M up to an aggregate of $5,200,000 over a three-year period.

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E&M Gross Profit Earn-out Consideration

The fair value of the three-year gross profit earn-out consideration was $850,000third and $910,000 at June 30, 2021 and March 31, 2021, respectively, determined using a Monte Carlo Simulation Model. Any subsequent changes in the fair valuefinal payment of the contingent consideration liabilityobligation of $970,000 will be recordedmade in current period earningsthe fourth fiscal quarter ending March 31, 2022, as a general and administrative expense.

The assumptions used to determine the fair value is as follows:

June 30, 2021
Risk free interest rate0.06%
Counter party rate3.00%
Expected volatility30-40%
Weighted average cost of capital13-15.5%


The Company’s contingent considerationsettlement of this obligation. This obligation is recorded in accounts payable and accrued liabilities in itsthe Company’s condensed consolidated balance sheets at June 30, 2021 and MarchDecember 31, 2021 and is a Level 3 liability measured at fair value..

The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
Contingent Consideration 2021  2020  2021  2020  2021  2020 
Beginning balance $910,000  $2,653,000  $980,000  $2,588,000  $910,000  $2,653,000 
Changes in revaluations of contingent consideration included in earnings  (60,000)  (47,000)  (10,000)  20,000   60,000   (45,000)
Ending balance $850,000  $2,606,000  $970,000  $2,608,000  $970,000  $2,608,000 

During the three and nine months ended June 30, December 31,2021,, the Company had no other 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, term 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.

15. Share-based Payments

Stock Options

During the threenine months ended June 30,December 31, 2021, 0 options to purchase shares of the Company’s common stock were granted. The Company granted options to purchase 341,825345,423 shares of common stock during the threenine months ended June 30,December 31, 2020.

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The following is a summary of stock option transactions:

 
Number of
Shares
  
Weighted Average
Exercise Price
  
Number of
Shares
  
Weighted Average
Exercise Price
 
Outstanding at March 31, 2021  1,744,885  $17.51   1,744,885  $17.51 
Granted  0  $0   0  $0 
Exercised  (21,270) $18.24   (30,976) $16.10 
Forfeited  (900) $17.90   (5,984) $19.81 
Outstanding at June 30, 2021  1,722,715  $17.50 
Outstanding at December 31, 2021  1,707,925  $17.52 

At June 30,December 31, 2021, options to purchase 420,746317,309 shares of common stock were unvested at a weighted average exercise price of $17.30.$16.53.

At June 30,December 31, 2021, there was $2,221,000$1,440,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over the weighted average remaining vesting period of approximately 1.61.2 years.

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Restricted Stock Units and Restricted Stock (collectively “RSUs”)

During the threenine months ended June 30,December 31, 2021 and 2020, the Company granted 218,673263,703 and 112,293251,801 shares of RSUs, respectively, based on the closing market price on the grant date.

The following is a summary of non-vested RSUs:

 
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2021  354,484  $17.22   354,484  $17.22 
Granted  218,673  $22.27   263,703  $21.90 
Vested  (59,483) $16.62   (216,617) $17.78 
Forfeited  0  $0   (1,832) $20.15 
Outstanding at June 30, 2021  513,674  $19.44 
Outstanding at December 31, 2021  399,738  $19.98 

At June 30,December 31, 2021, there was $6,738,000$5,402,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 2.01.6 years.

Performance Stock Units (“PSUs”)

In June 2021, the Company granted performance-based PSUs to its executives, which typically cliff vest after three-years subject to continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost is determined at the grant date and recognized on a straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0%% to 150% of the target number of PSUs granted. PSUs are not considered issued or outstanding ordinary shares of the Company.

Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the market condition is not met.

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The Company calculated the fair value of the PSUs for each component individually. The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to the market condition is determined using the Monte Carlo valuation model.

The following table summarizes the assumptions used in determining the fair value of the TSR awards:

 
Three Months Ended
June 30,
 
  2021 
Risk free interest rate  0.47%
Expected life in years  3 
Expected volatility of MPA common stock  53.70%
Expected average volatility of peer companies  59.30%
Average correlation coefficient of peer companies  26.70%
Expected dividend yield  0 
Grant date fair value $26.89 


 
Nine Months Ended
December 31,
 
  2021 
Risk free interest rate  0.47%
Expected life in years  3 
Expected volatility of MPA common stock  53.70%
Expected average volatility of peer companies  59.30%
Average correlation coefficient of peer companies  26.70%
Expected dividend yield  0 
Grant date fair value $26.89 

The following is a summary of non-vested PSUs:

 
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2021  0  $0   0  $0 
Granted  84,593  $23.19   84,593  $23.19 
Vested  0  $0   0  $0 
Forfeited  0  $0   0  $0 
Outstanding at June 30, 2021  84,593  $23.19 
Outstanding at December 31, 2021  84,593  $23.19 

At June 30,December 31, 2021, there was $1,939,0001,609,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting period of approximately 3.02.5 years.

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16. Commitments and Contingencies

Warranty Returns

The Company allows its customers to return goods that their consumers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales.

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The following summarizes the changes in the warranty return accrual:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
  
Nine Months Ended
December 31,
 
 2021  2020  2021  2020  2021  2020 
Balance at beginning of period $21,093,000  $18,300,000  $20,875,000  $22,499,000  $21,093,000  $18,300,000 
Charged to expense  27,261,000   23,089,000   30,282,000   26,194,000   88,380,000   80,155,000 
Amounts processed  (28,344,000)  (19,197,000)  (32,425,000)  (31,540,000)  (90,741,000)  (81,302,000)
Balance at end of period $20,010,000  $22,192,000  $18,732,000  $17,153,000  $18,732,000  $17,153,000 

Contingencies

The Company is 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 the Company’s business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that the Company owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that it imported from Mexico. The Company does not believe that this amount is correct and believes that it has numerous defenses and intends to dispute this amount vigorously. The Company cannot assure that the U.S. Customs and Border Protection will agree or that it will not need to accrue or pay additional amounts in the future.

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17. Share Repurchases



In August 2018, the Company’s board of directors approved an increase in its share repurchase program from $20,000,000 to $37,000,000 of its common stock. During the three and nine months ended December 31, 2021, the Company repurchased 106,486 shares of its common stock for $1,914,000. During the three and nine months ended December 31, 2020, the Company did 0t repurchase any shares of its common stock. As of December 31, 2021, $18,745,000 was utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s Credit Facility. The Company retired the 837,007 shares repurchased under this program through December 31, 2021. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
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23
Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2021 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 14, 2021.

Disclosure Regarding Private Securities Litigation Reform Act of 1995

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. Various factors could cause actual results to differ materially from those expressed or implied by such statements. These factors include, but are not limited to: the current and future impacts of the COVID-19 public health crisis; concentration of sales to a small number of customers; changes in the financial condition of or our relationship with any of our major customers; increases in the average accounts receivable collection period; the loss of sales to customers; delays in payments by customers; the increasing customer pressure for lower prices and more favorable payment and other terms; lower revenues than anticipated from new and existing contracts; the increasing demands on our working capital; the significant strain on working capital associated with large inventory purchases from customers; lower efficiency or production due to stay at home orders or other restrictions issued by governments due to COVID-19 concerns; any meaningful difference between expected production needs and ultimate sales to our customers; investments in operational changes or acquisitions; our ability to obtain any additional financing we may seek or require; our ability to maintain positive cash flows from operations; our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults; increases in interest rates; the impact of high gasoline prices; consumer preferences and general economic conditions; increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers; difficulty in obtaining Used Cores and component parts or increases in the costs of those parts; supply chain delays or stoppages due to shipping delays; political, criminal or economic instability in any of the foreign countries where we conduct operations; currency exchange fluctuations; potential tariffs, unforeseen increases in operating costs; risks associated with cyber-attacks; risks associated with conflict minerals; the impact of new tax laws and interpretations thereof; uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the Securities and Exchange Commission (the “SEC”). These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Management Overview

We have a multi-pronged platform for growth within the non-discretionary automotive aftermarket for thenon-discretionary replacement hard parts and test solutions andsolutions. In addition, we offer diagnostic equipment industry, through organic growth and acquisitions.applications focused on the fast evolving electric mobility markets. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable. These investments included (i) the opening of 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 initial 312,000 square foot facility in Mexico.

Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, and brake master cylinders, and (iv) other products, which include turbochargers and test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used by the automotive retail segment.

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24
Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, we have identified our chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that our business comprises three separate operating segments. Two of the operating segments meet all the aggregation criteria and are aggregated. The remaining operating segment does not meet the quantitative thresholds for individual disclosure and we have combined our operating segments into a single reportable segment.

Impact of the Novel Coronavirus (“COVID-19”)

The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries continue to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We continue to experience disruptions with worldwide supply chain and logistics services. We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outlook appears positive, any additional government shutdowns or additional spikes in infectionsthe emergence and spread of new variants of the virus, including the Delta or Omicron variant, the likelihood of a resurgence of positive cases, the development, availability and public acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, could negatively impact our business and financial condition.

There have been no serious outbreaks in any of our production facilities; however, a serious outbreak could affect our production capabilities. We experienced inefficiencies in operations due to the implementation of additional personnel safety measures throughout our facilities. These personnel safety measures include adding an additional shift in conjunction with reducing the number of hours in the existing shift, greater spacing (less personnel) in production areas and sanitizing procedures between shifts. High-risk employees at all of our facilities have been required to remain at home; however, they continue to receive their compensation. We also implemented safe work practices across all of our facilities, including work from home rules, staggered shifts, Plexiglas barriers, and many other safety precautions. Our employees have embraced the challenges of working remotely, continuing to operate through constant communication with team members.

Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home. Such efforts have included, additional board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.

We continue to incur costs as a result of COVID-19, including employee costs, such as expanded benefits and frontline incentives, and other operating costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. During the three months ended June 30, 2021 and 2020, theseThese expanded benefits, supply costs and other COVID-19 related costs resulted in $854,000 and $2,295,000, respectively, of total expense, included in cost of goods sold and operating expenses in the condensed consolidated statements of operations.  Duringincome, of $764,000 and $1,610,000 during the three months ended June 30,December 31, 2021 and 2020, ourrespectively, and $2,573,000 and $5,953,000 during the nine months ended December 31, 2021 and 2020, respectively. Our Asian subsidiaries received $23,000$0 and $93,000, respectively,$24,000 from their local assistance programs. Duringprograms during the three months ended June 30,December 31, 2021 and 2020, werespectively, and $71,000 and $161,000 during the nine months ended December 31, 2021 and 2020, respectively. We received $365,000, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program.program of $281,000 and $1,130,000 during the three and nine months ended December 31, 2020, respectively. These payments are recorded as a reduction of cost of goods sold and operating expenses in the condensed consolidated statements of operations.income.

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25
Results of Operations for the Three Months Ended June 30,December 31, 2021 and 2020

The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
 
 2021  2020  2021  2020 
Cash flow (used in) provided by operations $(4,739,000) $22,388,000 
Cash flow provided by operations
 
$
2,165,000
 
$
33,154,000
 
Finished goods turnover (annualized) (1)  4.5   3.4  
4.0
 
4.0
 


(1)
Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. Annualized finished goods turnover for the three months ended June 30,December 31, 2020 has been updated to conform to the current year presentation for non-core finished goods turnover. We believe this provides a useful measure of our ability to turn our inventory into revenues.

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
 
 2021  2020  2021  2020 
Net sales $149,034,000  $95,356,000  
$
161,810,000
 
$
122,568,000
 
Cost of goods sold  125,463,000   81,969,000  
129,235,000
 
98,327,000
 
Gross profit  23,571,000   13,387,000  
32,575,000
 
24,241,000
 
Gross profit percentage  15.8%  14.0% 
20.1
%
 
19.8
%

Net Sales. Our net sales for the three months ended June 30,December 31, 2021 were $149,034,000,$161,810,000, which represents an increase of $53,678,000,$39,242,000, or 56.3%32.0%, from the three months ended June 30,December 31, 2020 of $95,356,000. Net$122,568,000. While our net sales for the quarter increased across all product lines due to strong demand for our products. We continue to experienceproducts, we experienced a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services. Our prior year net sales were also impacted by the COVID-19 pandemic.services during both periods.

Gross Profit. Our gross profit was $23,571,000,$32,575,000, or 15.8%20.1% of net sales, for the three months ended June 30,December 31, 2021 compared with $13,387,000,$24,241,000, or 14.0%19.8% of net sales, for the three months ended June 30,December 31, 2020. OurThe increase in our gross profit was impacted byprimarily due to: (i) growth initiatives in connection with the expansion of our new product lines, in addition to the transition costs incurred in the prior year as discussed below and (ii) inflationary costs related to the global pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. HigherDuring the three months ended December 31, 2021 and 2020, higher freight costs, net of certain price increases that went into effect during the current year quarter, impacted gross profit by approximately $2,990,000, or 2.0%. We$1,338,000 and $323,000, respectively.  During the three months ended December 31, 2021, we also incurred additional expenses of $1,771,000 and $1,840,000$3,006,000 due to COVID-19 related costs for inefficienciesdisruptions in the supply chain, wagesincreased salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment. During the three months ended December 31, 2020, we incurred additional expenses of $1,052,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective equipment duringin connection with the three months ended June 30, 2021 and 2020, respectively.COVID-19 pandemic.

26
Our gross profit for the three months ended June 30,December 31, 2021 and 2020 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $1,947,000 and $3,301,000, respectively, and (ii)by amortization of core and finished good premiums paid to customers related to new business of $2,531,000$3,146,000 and $1,223,000,$1,528,000, respectively.  During the three months ended December 31, 2020, gross profit was impacted by $4,217,000 associated with transition and ramp-up expenses in connection with the expansion of our brake-related operations in Mexico.

24
Table of Contents
In addition, gross profit was impacted by (i) 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 $984,000 compared with $1,384,000, and (ii) customer allowances and return accruals related to new business of $146,000 and $307,000$846,000 for the three months ended June 30,December 31, 2021 compared with  $1,304,000 for the three months ended December 31, 2020, and 2020, respectively.(ii) a $688,000 benefit for revised tariff costs recorded during the three months ended December 31, 2020.

Operating Expenses

The following summarizes operating expenses:

 
Three Months Ended
June 30,
  
Three Months Ended
December 31,
 
 2021  2020  2021  2020 
General and administrative $12,486,000  $11,687,000  
$
14,605,000
 
$
14,005,000
 
Sales and marketing  5,368,000   4,200,000  
6,274,000
 
4,698,000
 
Research and development  2,501,000   1,942,000  
2,635,000
 
2,100,000
 
Foreign exchange impact of lease liabilities and forward contracts  (2,533,000)  (4,817,000) 
385,000
 
(12,455,000
)
             
Percent of net sales             
             
General and administrative  8.4%  12.3% 
9.0
%
 
11.4
%
Sales and marketing  3.6%  4.4% 
3.9
%
 
3.8
%
Research and development  1.7%  2.0% 
1.6
%
 
1.7
%
Foreign exchange impact of lease liabilities and forward contracts  (1.7)%  (5.1)% 
0.2
%
 
(10.2
)%

General and Administrative. Our general and administrative expenses for the three months ended June 30,December 31, 2021 were $12,486,000,$14,605,000, which represents an increase of $799,000,$600,000, or 6.8%4.3%, from the three months ended June 30,December 31, 2020 of $11,687,000. General$14,005,000. The increase in general and administrative expense was primarily due to (i) $532,000 of increased share-based compensation due to equity grants made to employees in fiscal 2022, (ii) $486,000 of decreased gain resulting from foreign currency transactions, and (iii) $303,000 of increased professional services. These increases were partially offset by $933,000 of decreased costs at our offshore locations resulting from our expansion in Mexico and other COVID-19 related costs, such as supply costs and expanded benefits to employees in the prior year.

Sales and Marketing. Our sales and marketing expenses decreasedfor the three months ended December 31, 2021 were $6,274,000, which represents an increase of $1,576,000, or 33.5%, from the three months ended December 31, 2020 of $4,698,000. These increases in sales and marketing expense during the three months ended December 31, 2021 were primarily due to 8.4%(i) $501,000 of increased commissions due to higher sales, (ii) $399,000 of increased marketing in connection with new business and advertising expense, (iii) $223,000 of increased employee-related expenses, primarily due to increased headcount, (iv) $192,000 of increased trade shows expense as normal business operations resume, and (v) $160,000 of increased travel as normal business operations resume.

Research and Development. Our research and development expenses for the three months ended December 31, 2021 were $2,635,000, which represents an increase of $535,000, or 25.5%, from the three months ended December 31, 2020 of $2,100,000. These increases in research and development expenses during the three months ended December 31, 2021 were primarily due to (i) $323,000 of increased employee-related expenses, primarily due to increased headcount for our diagnostic business and (ii) $115,000 of increased samples for our core library and other research and development supplies.

27
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the three months ended December 31, 2021 was a non-cash loss of $385,000, which represents an increase in expense of $12,840,000, or 103.1%, from the non-cash gain for three months ended December 31, 2020 of $12,455,000. This increase was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities, which resulted in a non-cash loss of $985,000 compared with a non-cash gain of $8,638,000 for the three months ended December 31, 2021 and 2020, respectively, due to fluctuations in the foreign exchange rates and (ii) the forward foreign currency exchange contracts, which resulted in non-cash gains of $600,000 and $3,817,000 for the three months ended December 31, 2021 and 2020, respectively, due to the changes in their fair values.

Interest Expense

Interest Expense, net. Our interest expense for the three months ended December 31, 2021 was $3,949,000, which represents a decrease of $102,000, or 2.5%, from interest expense for the three months ended December 31, 2020 of $4,051,000. This decrease was primarily due to lower interest rates on our accounts receivable discount programs.

Provision for Income Taxes

Income Tax. We recorded income tax expense of $1,588,000, or an effective tax rate of 33.6%, and $3,373,000, or an effective tax rate of 28.5%, for the three months ended December 31, 2021 and 2020, respectively. Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended December 31, 2021 was primarily impacted by (i) non-deductible executive compensation under Internal Revenue Code Section 162(m) and (ii) foreign income taxed at rates that are different from the federal statutory rate.

Results of Operations for the Nine Months Ended December 31, 2021 and 2020

The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

  
Nine Months Ended
December 31,
 
  2021  2020 
Cash flow (used in) provided by operations 
$
(22,174,000
)
 
$
72,484,000
 
Finished goods turnover (annualized) (1)  
4.2
   
3.8
 


(1)
Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 1.33 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal period. Annualized finished goods turnover for the nine months ended December 31, 2020 has been updated to conform to the current year presentation for non-core finished goods turnover. We believe this provides a useful measure of our ability to turn our inventory into revenues.

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Net Sales and Gross Profit

The following summarizes net sales and gross profit:

  
Nine Months Ended
December 31,
 
  2021  2020 
Net sales
 
$
486,392,000
  
$
372,654,000
 
Cost of goods sold
  
394,295,000
   
295,300,000
 
Gross profit
  
92,097,000
   
77,354,000
 
Gross profit percentage
  
18.9
%
  
20.8
%

Net Sales. Our net sales for the nine months ended December 31, 2021 were $486,392,000, which represents an increase of $113,738,000, or 30.5%, from the nine months ended December 31, 2020 of $372,654,000. While our net sales increased across all product lines due to strong demand for our products, we continued to experience a number of challenges related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services during both periods. Net sales for the nine months ended December 31, 2021 and 2020 include $13,327,000 and $12,779,000, respectively, in core revenue due to a realignment of inventory at certain customer distribution centers. We expect this realignment will benefit our future sales as product mix changes.

Gross Profit. Our gross profit was $92,097,000, or 18.9% of net sales, for the threenine months ended June 30,December 31, 2021 compared with 12.3%$77,354,000, or 20.8% of net sales, for the nine months ended December 31, 2020. The decrease in our gross profit was primarily due to: (i) growth initiatives in connection with the expansion of our new product lines, in addition to the transition costs discussed below and (ii) inflationary costs related to the global pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. During the nine months ended December 31, 2021 and 2020, higher freight costs, net of certain price increases that went into effect during the current year period, impacted gross profit by approximately $7,413,000, and $323,000, respectively.  During the nine months ended December 31, 2021, we also incurred additional expenses of $7,144,000 due to COVID-19 related costs for disruptions in the supply chain, increased salaries associated with COVID-19 vulnerable employee pay, and personal protective equipment. During the nine months ended December 31, 2020, we incurred additional expenses of $4,425,000 due to increased salaries associated with COVID-19 bonuses, vulnerable employee pay, and personal protective equipment in connection with the COVID-19 pandemic.

Our gross profit for the nine months ended December 31, 2021 and 2020 was also impacted by (i) transition expenses in connection with the expansion of our brake-related operations in Mexico of $2,744,000 and $11,572,000, respectively, and (ii) amortization of core and finished goods premiums paid to customers related to new business of $9,013,000and $4,269,000, respectively.

In addition, gross profit was impacted by (i) 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 and gain due to realignment of inventory at customer distribution centers, which resulted in a net gains of $1,229,000 and $811,000 for the nine months ended December 31, 2021 and 2020, respectively, (ii) customer allowances and return accruals related to new business of $307,000 recorded during the nine months ended December 31, 2020, and (iii) a $3,535,000 benefit for revised tariff costs recorded during the nine months ended December 31, 2020.

29
Operating Expenses

The following summarizes operating expenses:

  
Nine Months Ended
December 31,
 
  2021  2020 
       
General and administrative 
$
41,556,000
  
$
38,210,000
 
Sales and marketing  
17,162,000
   
13,224,000
 
Research and development  
7,631,000
   
6,014,000
 
Foreign exchange impact of lease liabilities and forward contracts  
1,769,000
   
(21,257,000
)
         
Percent of net sales        
         
General and administrative  
8.5
%
  
10.3
%
Sales and marketing  
3.5
%
  
3.5
%
Research and development  
1.6
%
  
1.6
%
Foreign exchange impact of lease liabilities and forward contracts
  
0.4
%
  
(5.7
)%

General and Administrative. Our general and administrative expenses for the nine months ended December 31, 2021 were $41,556,000, which represents an increase of $3,346,000, or 8.8%, from the nine months ended December 31, 2020 of $38,210,000, however, general and administrative expenses as a percentage of net sales decreased to 8.5% for the nine months ended December 31, 2021 from 10.3% for the prior year. The increase in general and administrative expense was primarily due to (i) $997,000 of increased costs at our offshore locations, primarily resulting from our expansion in Mexico, (ii) $533,000$1,698,000 of increased share-based compensation due to equity grants made to employees in June 2021, and (iii) $468,000fiscal 2022, (ii) $1,323,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic. These increases in general and administrative expenses were partially offset by $1,396,000 decreased professional services.

Sales and Marketing. Our sales and marketing expenses for the three months ended June 30, 2021 were $5,368,000, which represents an increasereinstatement of $1,168,000, or 27.8%, from the three months ended June 30, 2020 of $4,200,000. The increase in sales and marketing expense was primarily due to our cost-cutting measures in the prior year in response to COVID-19. These increases in sales and marketing expense during the three months ended June 30, 2021 were primarily due to (i) $407,000 of increased employee-related expenses, primarily due to salary reductions in the prior year in response to the COVID-19 pandemic, (ii) $338,000(iii) $878,000 of decreased gain resulting from foreign currency transactions, and (iv) $454,000 of increased advertising expense, (iii) $258,000costs at our offshore locations. These increases in general and administrative expenses were partially offset by $1,662,000 of increased commissions, and (iv) $136,000 of increased travel.decreased professional services.

ResearchSales and DevelopmentMarketing. Our researchsales and developmentmarketing expenses for the threenine months ended June 30,December 31, 2021 were $2,501,000,$17,162,000, which represents an increase of $559,000,$3,938,000, or 28.8%29.8%, from the threenine months ended June 30,December 31, 2020 of $1,942,000. The$13,224,000. This increase in researchsales and developmentmarketing expense during the nine months ended December 31, 2021 was primarily due to our cost-cutting measures in the prior year in response to COVID-19. These increases in research and development expenses during the three months ended June 30, 2021 were primarily(i) $1,132,000 of increased commissions due to (i) $319,000higher sales, (ii) $1,063,000 of increased marketing in connection with new business and advertising expense, (iii)  $971,000 of increased employee-related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and increased headcount in the current year, (iv) $382,000 of increased travel as normal business operations resume, and (v) $193,000 of increased trade shows expense as normal business operations resume.

Research and Development. Our research and development expenses for the nine months ended December 31, 2021 were $7,631,000, which represents an increase of $1,617,000, or 26.9%, from the nine months ended December 31, 2020 of $6,014,000. This increase in research and development expenses during the nine months ended December 31, 2021 was primarily due to (i) $1,104,000 of increased employee-related expenses, primarily due to the reinstatement of salary reductions in the prior year in response to the COVID-19 pandemic and increased headcount during the current year, (ii) $145,000$300,000 of increased samples for our core library and other research and development supplies, and (iii) $78,000$159,000 of increased outside services.

Foreign Exchange Impact of Lease Liabilities and Forward Contracts. TheOur foreign exchange impact of lease liabilities and forward contracts for the nine months ended December 31, 2021 was a non-cash loss of $1,769,000, which represents an increase in expense of $23,026,000, or 108.3%, from the non-cash gain for nine months ended December 31, 2020 of $21,257,000. This increase was primarily due to (i) the remeasurement of our foreign currency-denominated lease liabilities which resulted in non-cash gains of $2,795,000 and $1,985,000$64,000 compared with $12,241,000 for the threenine months ended June 30,December 31, 2021 and 2020, respectively, due to movements in foreign exchange rates. In addition,rates and (ii) the forward foreign currency exchange contracts which resulted in a non-cash loss of $262,000 and$1,833,000 compared with a non-cash gain of $2,832,000$9,016,000 for the threenine months ended June 30,December 31, 2021 and 2020, respectively, due to the changes in their fair values.

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30
Interest Expense

Interest Expense, net. Our interest expense, net, for the threenine months ended June 30,December 31, 2021 was $3,941,000,$11,510,000, which represents a decrease of $468,000,$564,000, or 10.6%4.7%, from the threenine months ended June 30,December 31, 2020 of $4,409,000.$12,074,000. The decrease in interest expense was primarily due to lower interest rates on both our accounts receivable discount programs and lower average outstanding balances under our credit facility.

Provision for Income Taxes

Income Tax. We recorded income tax expense of $947,000,$4,786,000, or an effective tax rate of 52.4%38.4%, and an income tax benefit of $1,022,000,$8,448,000, or an effective tax rate of 25.3%29.0%, for the threenine months ended June 30,December 31, 2021 and 2020, respectively. Effective tax rates are based on current projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the threenine months ended June 30,December 31, 2021 was primarily impacted by (i) specific jurisdictions that we do not expect to recognize the benefit of losses,non-deductible executive compensation under Internal Revenue Code Section 162(m), (ii) foreign income taxed at rates that are different from the federal statutory rate, and (iii) non-deductible executive compensation under Internal Revenue Code Section 162(m).specific jurisdictions that we do not expect to recognize the benefit of losses.

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $105,403,000 and$108,103,000 compared with $96,725,000, a ratio of current assets to current liabilities of 1.3:1.0, at June 30,December 31, 2021 and March 31, 2021, respectively. The increase in working capital was due primarily to the buildup of our inventory to meet anticipated future demand.

We generated cash during the threenine months ended June 30,December 31, 2021 from the use of our receivable discount programs and credit facility. As we manage through the impacts of the COVID-19 pandemic, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs. We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

Share Repurchase Program

OurIn August 2018, our board of directors approved a stockan increase in our share repurchase program of upfrom $20,000,000 to $37,000,000 of our common stock. As of June 30,December 31, 2021, $16,831,000$18,745,000 was utilized and $20,169,000$18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility.credit facility. We retired the 730,521837,007 shares repurchased under this program through June 30,December 31, 2021. 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.

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31
Cash Flows

The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:

 
Three Months Ended
June 30,
  
Nine Months Ended
December 31,
 
 2021  2020  2021 2020 
Cash flows provided by (used in):      
Cash flows (used in) provided by:     
Operating activities $(4,739,000) $22,388,000  
$
(22,174,000
)
 
$
72,484,000
 
Investing activities  (2,089,000)  (3,038,000) 
(5,426,000
)
 
(12,295,000
)
Financing activities  16,094,000   (41,674,000) 
19,770,000
 
(97,734,000
)
Effect of exchange rates on cash and cash equivalents  94,000   172,000   
76,000
  
729,000
 
Net increase (decrease) in cash and cash equivalents $9,360,000  $(22,152,000)
        
Net decrease in cash and cash equivalents 
$
(7,754,000
)
 
$
(36,816,000
)
Additional selected cash flow data:              
Depreciation and amortization $3,145,000  $2,551,000  
$
9,591,000
 
$
8,090,000
 
Capital expenditures  1,922,000   2,983,000  
5,111,000
 
12,043,000
 

Net cash used in operating activities was $4,739,000$22,174,000 during the threenine months ended June 30,December 31, 2021 compared with net cash provided by operating activities of $22,388,000$72,484,000 during the threenine months ended June 30,December 31, 2020. The significant change in our operating activities was due primarily to (i) the buildup of our continued investments in inventory to meetsupport anticipated future demand for our products, (ii) the paydowntiming of our accounts payable balances,supplier payments compared with the prior year, and (iii) an increase in our contract assets and contract liabilities resulting from higher sales. These decreases were partially offset by increased operating results (net income plus the net add-back for non-cash transactions in earnings). In addition, our operating activities continue to be impacted, to a lesser extent, by our growth initiatives, including our expanded footprint and product lines.

Net cash used in investing activities was $2,089,000$5,426,000 and $3,038,000$12,295,000 during the threenine months ended June 30,December 31, 2021 and 2020, respectively. The significant change in our investing activities was due primarily to decreased capital expenditures as we nearin connection with the completion of our expansion of our brake-related operations in Mexico.

Net cash provided by financing activities was $16,094,000$19,770,000 during the threenine months ended June 30,December 31, 2021 compared with net cash used in financing activities $41,674,000$97,734,000 during the threenine months ended June 30,December 31, 2020. The significant change in our financing activities was due mainly to additional net borrowings under our credit facility during the threenine months ended June 30,December 31, 2021 to support the investment in our inventory and growth initiatives compared with repayments under our credit facility during the threenine months ended June 30,December 31, 2020. In addition, we repurchased 106,486 shares of our common stock for $1,914,000 during the nine months ended December 31, 2021 compared with no share repurchases during the nine months ended December 31, 2020.

Capital Resources

Credit Facility

We are party to a $268,620,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $238,620,000 revolving loan facility, subject to borrowing base restrictions, a $24,000,000 sublimit for borrowings by Canadian borrowers, and a $20,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 5, 2023. The Credit Facility currently permits the payment of up to $29,430,000 of dividends and share repurchases for fiscal year 2022, subject to pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.

In May 2021, we entered into a third amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extended the maturity date to May 28, 2026 from June 5, 2023, (ii) modified the fixed charge coverage ratio financial covenant, and (iii) modified the definition of “Consolidated EBITDA”. We capitalized $1,102,000$1,148,000 of new debt issuance costs in connection with the Third Amendment.

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32
The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 2.60%2.85% and 2.59%2.86%, respectively, at June 30,December 31, 2021, and 2.62% at March 31, 2021.

The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of June 30,December 31, 2021.

The following summarizes the financial covenants required under the Credit Facility:

 
Financial covenants
 required under the
 Credit Facility
 
Calculation as of
June 30, 2021
 
Financial covenants
required under the
Credit Facility
 
Calculation as of
December 31, 2021		 
Maximum senior leverage ratio                                  3.00                                  1.57 
3.00
 
1.72
 
Minimum fixed charge coverage ratio                                  1.10                                  1.34 
1.10
 
1.52
 

We had cash of $24,883,000 at June 30, 2021, however, the Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. Our senior leverage ratio would have been 1.51 had we paid down the Revolving Facility with cash on hand. In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem, or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem, or purchase subordinated debt, and amend or otherwise alter debt agreements.

We had $103,000,000$113,000,000 and $84,000,000 outstanding under the Revolving Facility at June 30,December 31, 2021 and March 31, 2021, respectively. In addition, $6,444,000$6,409,000 was outstanding for letters of credit at June 30,December 31, 2021. At June 30,December 31, 2021, after certain contractual adjustments, $95,323,000$99,908,000 was available under the Revolving Facility.

Receivable Discount Programs

We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers.

The following is a summary of the receivable discount programs:

 
Three Months Ended
June 30,
  
Nine Months Ended
December 31,
 
 2021  2020  2021 2020 
Receivables discounted $146,669,000  $111,360,000  
$
418,044,000
 
$
367,102,000
 
Weighted average days  329   345  
335
 
333
 
Annualized weighted average discount rate  1.8%  2.5% 
1.7
%
 
2.1
%
Amount of discount recognized as interest expense $2,473,000  $2,686,000  
$
6,798,000
 
$
7,277,000
 

Off-Balance Sheet Arrangements

At June 30,December 31, 2021, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

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33
Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including finance leases and non-cash capital expenditures were $1,622,000$5,248,000 and $5,088,000$14,223,000 for the threenine months ended June 30,December 31, 2021 and 2020, respectively. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to incur approximately $12,300,000$4,500,000 of capital expenditures for our current operationsnew business initiatives, production equipment, and approximately $4,000,000 for continued expansion of our operations in Mexicomaintenance for the fullremainder of our fiscal year 2022. We have used and expect to continue using our working capital and other available capital resources to fund these capital expenditures.

Litigation

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2021, which was filed on June 14, 2021.

Critical Accounting Policies

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, 2021, which was filed on June 14, 2021, except as discussed below.

Recently Adopted Accounting Pronouncements

Income Taxes

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of this guidance on April 1, 2021 did not have any material impact on our consolidated financial statements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2021, which was filed with the SEC on June 14, 2021.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of June 30,December 31, 2021.

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Inherent Limitations on Effectiveness of Controls
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
 
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.
 
Internal control over financial reporting includes those policies and procedures that:
 
1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30,December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2021, which was filed on June 14, 2021.

Item 1A.Risk Factors

There have been no material changes in the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed on June 14, 2021.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Limitation on Payment of Dividends and Share Repurchases

The Credit Facility currently permits the payment of up to $29,430,000 of dividends and share repurchases for fiscal year 2022, subject to pro forma compliance with financial covenants.

Purchases of Equity Securities by the Issuer

Shares repurchased during the three months ended June 30,December 31, 2021 were as follows:

Periods 
Total Number of
Shares Purchased
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs (1)
  
Total Number of
Shares Purchased
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs (1)
 
                     
April 1 - April 30, 2021:            
October 1 - October 31, 2021:         
Open market and privately negotiated purchases  -  $-   -  $20,169,000  - $- - $20,169,000 
May 1 - May 31, 2021:                
November 1 - November 30, 2021:         
Open market and privately negotiated purchases  -  $-   -   20,169,000  - $- - 20,169,000 
June 1 - June 30, 2021:                
December 1 - December 31, 2021:         
Open market and privately negotiated purchases  -  $-   -   20,169,000   106,486 $17.97  1,914,000  18,255,000 
         
Total  0       0  $20,169,000   106,486    1,914,000 $18,255,000 


(1)
As of June 30,December 31, 2021, $16,831,000$18,745,000 was utilized and $20,169,000$18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 730,521837,007 shares repurchased under this program through June 30,December 31, 2021. 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.

Item 5.Other Information

None.

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Item 6.Exhibits

(a)
Exhibits:

Number
 Description of Exhibit 
Method of Filing
3.1
3.1
Certificate of Incorporation of the Company
Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the “1994 Registration Statement”).
     
3.2
Amendment to Certificate of Incorporation of the Company
Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995.
     
3.3
Amendment to Certificate of Incorporation of the Company
Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
     
3.4
Amendment to Certificate of Incorporation of the Company
Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”).
     
3.5
Amendment to Certificate of Incorporation of the Company
Incorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003.
     
3.6
Amended and Restated By-Laws of Motorcar Parts of America, Inc.
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010.
     
3.7
Certificate of Amendment of the Certificate of Incorporation of the Company
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014.
     
3.8
Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on June 9, 2016
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016.
     
3.9
Amendment to the Amended and Restated By-Laws of the Company
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017.
     
4.1
3.10
Third Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on January 26, 2022
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 1, 2022.
4.1
2004 Non-Employee Director Stock Option Plan
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting.
     
4.2
2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.
     
4.3
Amended and Restated 2010 Incentive Award Plan
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013.

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Number

Description of Exhibit
 Description of Exhibit
Method of Filing
     
4.4
Second Amended and Restated 2010 Incentive Award Plan
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014.
     
4.5
2014 Non-Employee Director Incentive Award Plan
Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014.
     
4.6
Third Amended and Restated 2010 Incentive Award Plan
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017.
     
4.7
Fourth Amended and Restated 2010 Incentive Award Plan
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on July 24, 2020.
     
10.1
Amendment No. 5 to Employment Agreement, dated as of June 18, 2021, between Motorcar Parts of America, Inc., and Selwyn Joffe
Filed herewith.
Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 9, 2021.
     
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Filed herewith.
     
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Filed herewith.
     
31.3
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Filed herewith.
     
32.1
Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Filed herewith.
     
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document).
     
101.SCM
Inline XBRL Taxonomy Extension Schema Document
     
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 MOTORCAR PARTS OF AMERICA, INC.
   
Dated: AugustFebruary 9, 20212022By:/s/ David Lee
 
David Lee
 
Chief Financial Officer
   
Dated: AugustFebruary 9, 20212022
By:
/s/ Kamlesh Shah
 
Kamlesh Shah
 
Chief Accounting Officer



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