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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 DECEMBER 31, 2020

☐ | 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 class | Trading symbol(s) | Name of each exchange on which registered
Common Stock, par value $0.01 per share | MPAA | The 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 19,056,292 shares of Common Stock outstanding at February 2, 2021.

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 Income | 5
| Condensed Consolidated Statements of Comprehensive Income | 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 | 23
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 33
| Item 4. Controls and Procedures | 33
PART II — OTHER INFORMATION |
| Item 1. Legal Proceedings | 35
| Item 1A. Risk Factors | 35
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 35
| Item 5. Other Information | 35
| Item 6. Exhibits | 36
| SIGNATURES | 38

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. 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, 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

|  | December 31, 2020 |  |  | March 31, 2020 |
ASSETS |  | (Unaudited) |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 12,800,000 |  |  | $ | 49,616,000 |
Short-term investments |  |  | 1,508,000 |  |  |  | 850,000 |
Accounts receivable — net |  |  | 45,271,000 |  |  |  | 91,748,000 |
Inventory |  |  | 296,281,000 |  |  |  | 234,680,000 |
Contract assets |  |  | 25,382,000 |  |  |  | 20,332,000 |
Prepaid expenses and other current assets |  |  | 13,866,000 |  |  |  | 11,890,000 |
Total current assets |  |  | 395,108,000 |  |  |  | 409,116,000 |
Plant and equipment — net |  |  | 54,464,000 |  |  |  | 44,957,000 |
Operating lease assets |  |  | 74,685,000 |  |  |  | 53,029,000 |
Long-term deferred income taxes |  |  | 16,603,000 |  |  |  | 18,950,000 |
Long-term contract assets |  |  | 248,544,000 |  |  |  | 239,540,000 |
Goodwill and intangible assets — net |  |  | 8,876,000 |  |  |  | 9,598,000 |
Other assets |  |  | 956,000 |  |  |  | 1,839,000 |
TOTAL ASSETS |  | $ | 799,236,000 |  |  | $ | 777,029,000 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 146,073,000 |  |  | $ | 95,083,000 |
Customer finished goods returns accrual |  |  | 34,267,000 |  |  |  | 25,326,000 |
Contract liabilities |  |  | 44,778,000 |  |  |  | 27,911,000 |
Revolving loan |  |  | 59,000,000 |  |  |  | 152,000,000 |
Other current liabilities |  |  | 4,798,000 |  |  |  | 9,390,000 |
Operating lease liabilities |  |  | 6,232,000 |  |  |  | 5,104,000 |
Current portion of term loan |  |  | 3,678,000 |  |  |  | 3,678,000 |
Total current liabilities |  |  | 298,826,000 |  |  |  | 318,492,000 |
Term loan, less current portion |  |  | 17,705,000 |  |  |  | 20,462,000 |
Long-term contract liabilities |  |  | 104,583,000 |  |  |  | 92,101,000 |
Long-term deferred income taxes |  |  | 73,000 |  |  |  | 79,000 |
Long-term operating lease liabilities |  |  | 71,569,000 |  |  |  | 61,425,000 |
Other liabilities |  |  | 6,796,000 |  |  |  | 8,950,000 |
Total liabilities |  |  | 499,552,000 |  |  |  | 501,509,000 |
Commitments and contingencies |  |  |  |  |  |  |  |
Shareholders' equity: |  |  |  |  |  |  |  |
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; none issued |  |  | - |  |  |  | - |
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; none issued |  |  | - |  |  |  | - |
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,056,292 and 18,969,380 shares issued and outstanding at December 31, 2020 and March 31, 2020, respectively |  |  | 191,000 |  |  |  | 190,000 |
Additional paid-in capital |  |  | 222,193,000 |  |  |  | 218,581,000 |
Retained earnings |  |  | 84,758,000 |  |  |  | 64,117,000 |
Accumulated other comprehensive loss |  |  | (7,458,000 | ) |  |  | (7,368,000 | )
Total shareholders' equity |  |  | 299,684,000 |  |  |  | 275,520,000 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |  | $ | 799,236,000 |  |  | $ | 777,029,000 |

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 Income
(Unaudited)

|  | Three Months Ended December 31, |  |  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net sales |  | $ | 122,568,000 |  |  | $ | 125,574,000 |  |  | $ | 372,654,000 |  |  | $ | 385,096,000 |
Cost of goods sold |  |  | 98,327,000 |  |  |  | 97,913,000 |  |  |  | 295,300,000 |  |  |  | 303,279,000 |
Gross profit |  |  | 24,241,000 |  |  |  | 27,661,000 |  |  |  | 77,354,000 |  |  |  | 81,817,000 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
General and administrative |  |  | 14,005,000 |  |  |  | 14,390,000 |  |  |  | 38,210,000 |  |  |  | 39,410,000 |
Sales and marketing |  |  | 4,698,000 |  |  |  | 5,623,000 |  |  |  | 13,224,000 |  |  |  | 15,990,000 |
Research and development |  |  | 2,100,000 |  |  |  | 2,174,000 |  |  |  | 6,014,000 |  |  |  | 6,694,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | (12,455,000 | ) |  |  | (3,772,000 | ) |  |  | (21,257,000 | ) |  |  | (2,507,000 | )
Total operating expenses |  |  | 8,348,000 |  |  |  | 18,415,000 |  |  |  | 36,191,000 |  |  |  | 59,587,000 |
Operating income |  |  | 15,893,000 |  |  |  | 9,246,000 |  |  |  | 41,163,000 |  |  |  | 22,230,000 |
Interest expense, net |  |  | 4,051,000 |  |  |  | 6,879,000 |  |  |  | 12,074,000 |  |  |  | 19,575,000 |
Income before income tax expense |  |  | 11,842,000 |  |  |  | 2,367,000 |  |  |  | 29,089,000 |  |  |  | 2,655,000 |
Income tax expense |  |  | 3,373,000 |  |  |  | 1,502,000 |  |  |  | 8,448,000 |  |  |  | 1,752,000 |
Net income |  | $ | 8,469,000 |  |  | $ | 865,000 |  |  | $ | 20,641,000 |  |  | $ | 903,000 |
Basic net income per share |  | $ | 0.44 |  |  | $ | 0.05 |  |  | $ | 1.09 |  |  | $ | 0.05 |
Diluted net income per share |  | $ | 0.44 |  |  | $ | 0.04 |  |  | $ | 1.07 |  |  | $ | 0.05 |
Weighted average number of shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 19,053,232 |  |  |  | 18,961,517 |  |  |  | 19,016,302 |  |  |  | 18,895,893 |
Diluted |  |  | 19,436,793 |  |  |  | 19,305,805 |  |  |  | 19,333,758 |  |  |  | 19,263,114 |

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 Comprehensive Income
(Unaudited)

|  | Three Months Ended December 31, |  |  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net income |  | $ | 8,469,000 |  |  | $ | 865,000 |  |  | $ | 20,641,000 |  |  | $ | 903,000 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation gain (loss) |  |  | 1,614,000 |  |  |  | 1,015,000 |  |  |  | (90,000 | ) |  |  | 1,183,000 |
Total other comprehensive income (loss), net of tax |  |  | 1,614,000 |  |  |  | 1,015,000 |  |  |  | (90,000 | ) |  |  | 1,183,000 |
Comprehensive income |  | $ | 10,083,000 |  |  | $ | 1,880,000 |  |  | $ | 20,551,000 |  |  | $ | 2,086,000 |

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 Shareholders’ Equity
(Unaudited)

|  | Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |
|  | 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 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,043,000 |  |  |  | - |  |  |  | - |  |  |  | 1,043,000 |
Exercise of stock options |  |  | 3,000 |  |  |  | - |  |  |  | 20,000 |  |  |  | - |  |  |  | - |  |  |  | 20,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 29,953 |  |  |  | - |  |  |  | (207,000 | ) |  |  | - |  |  |  | - |  |  |  | (207,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,263,000 | ) |  |  | (1,263,000 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,012,000 | ) |  |  | - |  |  |  | (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 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,218,000 |  |  |  | - |  |  |  | - |  |  |  | 1,218,000 |
Exercise of stock options |  |  | 6,000 |  |  |  | - |  |  |  | 73,000 |  |  |  | - |  |  |  | - |  |  |  | 73,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 18,254 |  |  |  | - |  |  |  | (140,000 | ) |  |  | - |  |  |  | - |  |  |  | (140,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (441,000 | ) |  |  | (441,000 | )
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,184,000 |  |  |  | - |  |  |  | 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 |  |  | - |  |  |  | - |  |  |  | 1,498,000 |  |  |  | - |  |  |  | - |  |  |  | 1,498,000 |
Exercise of stock options |  |  | 5,794 |  |  |  | - |  |  |  | 112,000 |  |  |  | - |  |  |  | - |  |  |  | 112,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 23,911 |  |  |  | 1,000 |  |  |  | (5,000 | ) |  |  | - |  |  |  | - |  |  |  | (4,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,614,000 |  |  |  | 1,614,000 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8,469,000 |  |  |  | - |  |  |  | 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 |

|  | Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Additional Paid-in Capital Common Stock |  |  | Retained Earnings |  |  | Accumulated Other Comprehensive Income (Loss) |  |  | Total |
Balance at March 31,2019 |  |  | 18,817,400 |  |  | $ | 188,000 |  |  | $ | 215,047,000 |  |  | $ | 71,407,000 |  |  | $ | (6,887,000 | ) |  | $ | 279,755,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 988,000 |  |  |  | - |  |  |  | - |  |  |  | 988,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 36,872 |  |  |  | 1,000 |  |  |  | (363,000 | ) |  |  | - |  |  |  | - |  |  |  | (362,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 599,000 |  |  |  | 599,000 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (6,151,000 | ) |  |  | - |  |  |  | (6,151,000 | )
Balance at June 30, 2019 |  |  | 18,854,272 |  |  | $ | 189,000 |  |  | $ | 215,672,000 |  |  | $ | 65,256,000 |  |  | $ | (6,288,000 | ) |  | $ | 274,829,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,053,000 |  |  |  | - |  |  |  | - |  |  |  | 1,053,000 |
Exercise of stock options |  |  | 52,800 |  |  |  | - |  |  |  | 405,000 |  |  |  | - |  |  |  | - |  |  |  | 405,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 37,814 |  |  |  | - |  |  |  | (700,000 | ) |  |  | - |  |  |  | - |  |  |  | (700,000 | )
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (431,000 | ) |  |  | (431,000 | )
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6,189,000 |  |  |  | - |  |  |  | 6,189,000 |
Balance at September 30, 2019 |  |  | 18,944,886 |  |  | $ | 189,000 |  |  | $ | 216,430,000 |  |  | $ | 71,445,000 |  |  | $ | (6,719,000 | ) |  | $ | 281,345,000 |
Compensation recognized under employee stock plans |  |  | - |  |  |  | - |  |  |  | 1,071,000 |  |  |  | - |  |  |  | - |  |  |  | 1,071,000 |
Exercise of stock options |  |  | 3,600 |  |  |  | 1,000 |  |  |  | 29,000 |  |  |  | - |  |  |  | - |  |  |  | 30,000 |
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes |  |  | 16,544 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Foreign currency translation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,015,000 |  |  |  | 1,015,000 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 865,000 |  |  |  | - |  |  |  | 865,000 |
Balance at December 31, 2019 |  |  | 18,965,030 |  |  | $ | 190,000 |  |  | $ | 217,530,000 |  |  | $ | 72,310,000 |  |  | $ | (5,704,000 | ) |  | $ | 284,326,000 |

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)

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Cash flows from operating activities: |  |  |  |  |  |
Net income |  | $ | 20,641,000 |  |  | $ | 903,000 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 8,090,000 |  |  |  | 7,019,000 |
Amortization of interest |  |  | 1,059,000 |  |  |  | 1,207,000 |
Amortization of core premiums paid to customers |  |  | 4,269,000 |  |  |  | 3,543,000 |
Noncash lease expense |  |  | 5,239,000 |  |  |  | 3,977,000 |
(Gain) loss due to the change in the fair value of the contingent consideration |  |  | (45,000 | ) |  |  | 419,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | (21,257,000 | ) |  |  | (2,507,000 | )
Gain on short-term investments |  |  | (398,000 | ) |  |  | (264,000 | )
Net provision for inventory reserves |  |  | 8,937,000 |  |  |  | 10,104,000 |
Net provision for customer payment discrepancies and credit losses |  |  | 242,000 |  |  |  | 1,858,000 |
Deferred income taxes |  |  | 2,866,000 |  |  |  | 1,104,000 |
Share-based compensation expense |  |  | 3,759,000 |  |  |  | 3,112,000 |
Loss on disposal of plant and equipment |  |  | 9,000 |  |  |  | 1,000 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 47,066,000 |  |  |  | 1,353,000 |
Inventory |  |  | (68,723,000 | ) |  |  | (32,185,000 | )
Prepaid expenses and other current assets |  |  | 982,000 |  |  |  | (2,125,000 | )
Other assets |  |  | 1,067,000 |  |  |  | 399,000 |
Accounts payable and accrued liabilities |  |  | 46,198,000 |  |  |  | (11,405,000 | )
Customer finished goods returns accrual |  |  | 8,844,000 |  |  |  | 2,602,000 |
Contract assets, net |  |  | (18,126,000 | ) |  |  | (6,658,000 | )
Contract liabilities, net |  |  | 28,492,000 |  |  |  | 16,275,000 |
Operating lease liabilities |  |  | (4,710,000 | ) |  |  | (3,402,000 | )
Other liabilities |  |  | (2,017,000 | ) |  |  | 260,000 |
Net cash provided by (used in) operating activities |  |  | 72,484,000 |  |  |  | (4,410,000 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of plant and equipment |  |  | (12,043,000 | ) |  |  | (10,846,000 | )
Proceeds from sale of plant and equipment |  |  | 7,000 |  |  |  | 41,000 |
Change in short-term investments |  |  | (259,000 | ) |  |  | 1,155,000 |
Net cash used in investing activities |  |  | (12,295,000 | ) |  |  | (9,650,000 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Borrowings under revolving loan |  |  | - |  |  |  | 48,000,000 |
Repayments of revolving loan |  |  | (93,000,000 | ) |  |  | (28,400,000 | )
Repayments of term loan |  |  | (2,813,000 | ) |  |  | (2,813,000 | )
Payments for debt issuance costs |  |  | - |  |  |  | (973,000 | )
Payments on finance lease obligations |  |  | (1,775,000 | ) |  |  | (1,641,000 | )
Exercise of stock options |  |  | 205,000 |  |  |  | 435,000 |
Cash used to net share settle equity awards |  |  | (351,000 | ) |  |  | (1,062,000 | )
Net cash (used in) provided by financing activities |  |  | (97,734,000 | ) |  |  | 13,546,000 |
Effect of exchange rate changes on cash and cash equivalents |  |  | 729,000 |  |  |  | 61,000 |
Net decrease in cash and cash equivalents |  |  | (36,816,000 | ) |  |  | (453,000 | )
Cash and cash equivalents — Beginning of period |  |  | 49,616,000 |  |  |  | 9,911,000 |
Cash and cash equivalents — End of period |  | $ | 12,800,000 |  |  | $ | 9,458,000 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |
Cash paid for interest, net |  | $ | 11,222,000 |  |  | $ | 18,375,000 |
Cash paid for income taxes, net of refunds |  |  | 2,048,000 |  |  |  | - |
Cash paid for operating leases |  |  | 8,087,000 |  |  |  | 5,906,000 |
Cash paid for finance leases |  |  | 2,049,000 |  |  |  | 1,855,000 |
Plant and equipment acquired under finance leases |  |  | 3,334,000 |  |  |  | 2,385,000 |
Assets acquired under operating leases |  |  | 15,630,000 |  |  |  | 17,295,000 |
Non-cash capital expenditures |  |  | 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
December 31, 2020
(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 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 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, and brake master cylinders, and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.
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 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 the Company has combined its operating segments into one reportable segment.
Impact of the Novel Coronavirus (“COVID-19”)
The outbreak of the COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and created 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 duration of a “second wave” or additional spikes, (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, and (v) 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. At this time, the Company is unable to predict accurately the ultimate long-term impact the COVID-19 pandemic will have on its business and financial condition.
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 December 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2021. 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, 2020, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 15, 2020.
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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, 2020.
New Accounting Pronouncements Recently Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changed the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities are required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this guidance on April 1, 2020 increased the Company’s required disclosures for its expected credit losses but did not have a material effect on its condensed consolidated financial statements.
Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets. The Company maintains allowances for uncollectible accounts receivable for estimated losses resulting from the failure or inability of its customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented in the condensed consolidated balance sheets. The Company maintains allowances for credit losses resulting from the expected failure or inability of its customers to make required payments. The Company recognizes the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. The Company’s allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.
The Company records a provision for expected credit losses using a loss-rate method based on the ratio of its historical write-offs to its average trade accounts receivable. At each reporting period, the Company assesses whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, the Company may determine that it needs to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.
Fair Value Measurements
In August 2018, the FASB issued guidance, which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of the Company’s disclosures for its Level 3 fair value measurements but did not have an impact on its consolidated financial statements.
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Reference Rate Reform
In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on the Company’s condensed consolidated financial statements for the three and nine months ended December 31, 2020.
New Accounting Pronouncements Not Yet Adopted
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. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its 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 customer payment discrepancies, returned goods authorizations (“RGAs”) issued for in-transit unit returns, and allowances for credit losses. 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:

|  | December 31, 2020 |  |  | March 31, 2020 |
Accounts receivable — trade |  | $ | 56,568,000 |  |  | $ | 109,164,000 |
Allowance for credit losses |  |  | (328,000 | ) |  |  | (4,252,000 | )
Customer payment discrepancies |  |  | (531,000 | ) |  |  | (1,040,000 | )
Customer returns RGA issued |  |  | (10,438,000 | ) |  |  | (12,124,000 | )
Total accounts receivable — net |  | $ | 45,271,000 |  |  | $ | 91,748,000 |

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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 nine months ended December 31, 2020, the Company wrote off amounts previously fully reserved for in connection the bankruptcy filing of one of its customers.

|  | Nine Months Ended |
|  | December 31, 2020 |
Balance at beginning of period |  | $ | 4,252,000 |
Provision for expected credit losses |  |  | 74,000 |
Recoveries |  |  | (100,000 | )
Amounts written off charged against the allowance |  |  | (3,898,000 | )
Balance at end of period |  | $ | 328,000 |

4. Inventory
Inventory is comprised of the following:

|  | December 31, 2020 |  |  | March 31, 2020 |
Inventory |  |  |  |  |  |
Raw materials |  | $ | 123,423,000 |  |  | $ | 99,360,000 |
Work-in-process |  |  | 9,391,000 |  |  |  | 3,906,000 |
Finished goods |  |  | 164,020,000 |  |  |  | 135,601,000 |
|  |  | 296,834,000 |  |  |  | 238,867,000 |
Less allowance for excess and obsolete inventory |  |  | (13,303,000 | ) |  |  | (13,208,000 | )
Inventory — net |  |  | 283,531,000 |  |  |  | 225,659,000 |
Inventory unreturned |  |  | 12,750,000 |  |  |  | 9,021,000 |
Total inventory |  | $ | 296,281,000 |  |  | $ | 234,680,000 |

5. Contract Assets
During the three and nine months ended December 31, 2020, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $1,304,000 and $3,580,000, respectively.
Contract assets are comprised of the following:

|  | December 31, 2020 |  |  | March 31, 2020 |
Short-term contract assets |  |  |  |  |  |
Cores expected to be returned by customers |  | $ | 17,231,000 |  |  | $ | 12,579,000 |
Upfront payments to customers |  |  | 1,175,000 |  |  |  | 2,865,000 |
Core premiums paid to customers |  |  | 6,976,000 |  |  |  | 4,888,000 |
Total short-term contract assets |  | $ | 25,382,000 |  |  | $ | 20,332,000 |
Long-term contract assets |  |  |  |  |  |  |  |
Remanufactured cores held at customers' locations |  | $ | 216,108,000 |  |  | $ | 217,616,000 |
Upfront payments to customers |  |  | 334,000 |  |  |  | 589,000 |
Core premiums paid to customers |  |  | 26,533,000 |  |  |  | 15,766,000 |
Long-term core inventory deposits |  |  | 5,569,000 |  |  |  | 5,569,000 |
Total long-term contract assets |  | $ | 248,544,000 |  |  | $ | 239,540,000 |

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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 December 31, |  |  | Nine Months Ended December 31 |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net sales |  |  |  |  |  |  |  |  |  |  |  |
Customer A |  |  | 35 | % |  |  | 38 | % |  |  | 42 | % |  |  | 39 | %
Customer B |  |  | 26 | % |  |  | 22 | % |  |  | 24 | % |  |  | 21 | %
Customer C |  |  | 24 | % |  |  | 25 | % |  |  | 21 | % |  |  | 23 | %

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

|  | December 31, 2020 |  |  | March 31, 2020 |
Accounts receivable - trade |  |  |  |  |  |
Customer A |  |  | 39 | % |  |  | 28 | %
Customer B |  |  | 29 | % |  |  | 14 | %
Customer C |  |  | - | % |  |  | 33 | %

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 December 31, |  |  | Nine Months Ended December 31 |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Rotating electrical products |  |  | 72 | % |  |  | 75 | % |  |  | 76 | % |  |  | 76 | %
Wheel hub products |  |  | 14 | % |  |  | 14 | % |  |  | 14 | % |  |  | 15 | %
Brake related products |  |  | 12 | % |  |  | 9 | % |  |  | 9 | % |  |  | 7 | %
Other products |  |  | 2 | % |  |  | 2 | % |  |  | 1 | % |  |  | 2 | %
|  |  | 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 December 31, 2020 and 2019.
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 $30,000,000 of dividends and share repurchases for this fiscal year, 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.
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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 2.91% and 2.90%, respectively, at December 31, 2020, and 4.34% and 3.64%, respectively, at March 31, 2020.
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 December 31, 2020.
The Company had cash of $12,800,000 at December 31, 2020 and paid down its outstanding debt by $95,813,000 during the nine months ended December 31, 2020. However, the Credit Facility 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.
The following summarizes information about the Term Loans:

|  | December 31, 2020 |  |  | March 31, 2020 |
Principal amount of Term Loans |  | $ | 21,562,000 |  |  | $ | 24,375,000 |
Unamortized financing fees |  |  | (179,000 | ) |  |  | (235,000 | )
Net carrying amount of Term Loans |  |  | 21,383,000 |  |  |  | 24,140,000 |
Less current portion of Term Loans |  |  | (3,678,000 | ) |  |  | (3,678,000 | )
Long-term portion of Term Loans |  | $ | 17,705,000 |  |  | $ | 20,462,000 |

Future repayments of the Term Loans are as follows:

Year Ending March 31, |  |  |
2021 - remaining three months |  | $ | 937,000 |
2022 |  |  | 3,750,000 |
2023 |  |  | 3,750,000 |
2024 |  |  | 13,125,000 |
Total payments |  | $ | 21,562,000 |

The Company had $59,000,000 and $152,000,000 outstanding under the Revolving Facility at December 31, 2020 and March 31, 2020, respectively. In addition, $5,937,000 was outstanding for letters of credit at December 31, 2020. At December 31, 2020, after certain contractual adjustments, $127,236,000 was available under the Revolving Facility.
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8. Contract Liabilities
Contract liabilities are comprised of the following:

|  | December 31, 2020 |  |  | March 31, 2020 |
Short-term contract liabilities |  |  |  |  |  |
Customer core returns accruals |  | $ | 18,212,000 |  |  | $ | 4,126,000 |
Customer allowances earned |  |  | 15,207,000 |  |  |  | 13,844,000 |
Customer deposits |  |  | 2,552,000 |  |  |  | 1,365,000 |
Core bank liability |  |  | 1,072,000 |  |  |  | 528,000 |
Accrued core payment, net |  |  | 7,735,000 |  |  |  | 8,048,000 |
Total short-term contract liabilities |  | $ | 44,778,000 |  |  | $ | 27,911,000 |
Long-term contract liabilities |  |  |  |  |  |  |  |
Customer core returns accruals |  | $ | 84,952,000 |  |  | $ | 77,927,000 |
Customer allowances earned |  |  | 381,000 |  |  |  | 542,000 |
Core bank liability |  |  | 17,303,000 |  |  |  | 7,556,000 |
Accrued core payment, net |  |  | 1,947,000 |  |  |  | 6,076,000 |
Total long-term contract liabilities |  | $ | 104,583,000 |  |  | $ | 92,101,000 |

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 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 gains of $8,638,000 and $2,128,000 during the three months ended December 31, 2020 and 2019, respectively, and $12,241,000 and $1,491,000 during the nine months ended December 31, 2020 and 2019, respectively. These gains are included in “foreign exchange impact of lease liabilities and forward contracts” in the condensed consolidated statements of income.
Balance sheet information for leases is as follows:

Leases | Classification |  | December 31, 2020 |  |  | March 31, 2020 |
Assets: |  |  |  |  |  |  |
Operating | Operating lease assets |  | $ | 74,685,000 |  |  | $ | 53,029,000 |
Finance | Plant and equipment |  |  | 8,559,000 |  |  |  | 6,922,000 |
Total leased assets |  |  | $ | 83,244,000 |  |  | $ | 59,951,000 |
Liabilities: |  |  |  |  |  |  |  |  |
Current |  |  |  |  |  |  |  |  |
Operating | Operating lease liabilities |  | $ | 6,232,000 |  |  | $ | 5,104,000 |
Finance | Other current liabilities |  |  | 2,555,000 |  |  |  | 2,059,000 |
Long-term |  |  |  |  |  |  |  |  |
Operating | Long-term operating lease liabilities |  |  | 71,569,000 |  |  |  | 61,425,000 |
Finance | Other liabilities |  |  | 4,981,000 |  |  |  | 3,905,000 |
Total lease liabilities |  |  | $ | 85,337,000 |  |  | $ | 72,493,000 |

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

|  | Three Months Ended |  |  | Nine Months Ended |
|  | December 31, |  |  | December 31, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Lease cost |  |  |  |  |  |  |  |  |  |  |  |
Operating lease cost |  | $ | 2,962,000 |  |  | $ | 2,402,000 |  |  | $ | 8,522,000 |  |  | $ | 6,287,000 |
Short-term lease cost |  |  | 373,000 |  |  |  | 278,000 |  |  |  | 1,027,000 |  |  |  | 976,000 |
Variable lease cost |  |  | 183,000 |  |  |  | 133,000 |  |  |  | 556,000 |  |  |  | 420,000 |
Finance lease cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amortization of finance lease assets |  |  | 458,000 |  |  |  | 448,000 |  |  |  | 1,299,000 |  |  |  | 1,178,000 |
Interest on finance lease liabilities |  |  | 98,000 |  |  |  | 73,000 |  |  |  | 274,000 |  |  |  | 214,000 |
Total lease cost |  | $ | 4,074,000 |  |  | $ | 3,334,000 |  |  | $ | 11,678,000 |  |  | $ | 9,075,000 |

Maturities of lease commitments at December 31, 2020 were as follows:

Maturity of lease liabilities |  | Operating Leases |  |  | Finance Leases |  |  | Total |
2021 - remaining three months |  | $ | 2,793,000 |  |  | $ | 743,000 |  |  | $ | 3,536,000 |
2022 |  |  | 10,444,000 |  |  |  | 2,790,000 |  |  |  | 13,234,000 |
2023 |  |  | 9,364,000 |  |  |  | 2,152,000 |  |  |  | 11,516,000 |
2024 |  |  | 8,129,000 |  |  |  | 1,358,000 |  |  |  | 9,487,000 |
2025 |  |  | 8,095,000 |  |  |  | 931,000 |  |  |  | 9,026,000 |
Thereafter |  |  | 69,261,000 |  |  |  | 300,000 |  |  |  | 69,561,000 |
Total lease payments |  |  | 108,086,000 |  |  |  | 8,274,000 |  |  |  | 116,360,000 |
Less amount representing interest |  |  | (30,285,000 | ) |  |  | (738,000 | ) |  |  | (31,023,000 | )
Present value of lease liabilities |  | $ | 77,801,000 |  |  | $ | 7,536,000 |  |  | $ | 85,337,000 |

Other information about leases is as follows:

|  | December 31, 2020 |
Lease term and discount rate |  |  |
Weighted-average remaining lease term (years): |  |  |
Finance leases |  |  | 3.4 |
Operating leases |  |  | 11.3 |
Weighted-average discount rate: |  |  |  |
Finance leases |  |  | 5.5 | %
Operating leases |  |  | 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:

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Receivables discounted |  | $ | 367,102,000 |  |  | $ | 341,339,000 |
Weighted average days |  |  | 333 |  |  |  | 347 |
Annualized weighted average discount rate |  |  | 2.1 | % |  |  | 3.5 | %
Amount of discount recognized as interest expense |  | $ | 7,277,000 |  |  | $ | 11,570,000 |

11. Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income 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.
The following presents a reconciliation of basic and diluted net income per share:

|  | Three Months Ended December 31, |  |  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net income |  | $ | 8,469,000 |  |  | $ | 865,000 |  |  | $ | 20,641,000 |  |  | $ | 903,000 |
Basic shares |  |  | 19,053,232 |  |  |  | 18,961,517 |  |  |  | 19,016,302 |  |  |  | 18,895,893 |
Effect of potentially dilutive securities |  |  | 383,561 |  |  |  | 344,288 |  |  |  | 317,456 |  |  |  | 367,221 |
Diluted shares |  |  | 19,436,793 |  |  |  | 19,305,805 |  |  |  | 19,333,758 |  |  |  | 19,263,114 |
Net income per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic net income per share |  | $ | 0.44 |  |  | $ | 0.05 |  |  | $ | 1.09 |  |  | $ | 0.05 |
Diluted net income per share |  | $ | 0.44 |  |  | $ | 0.04 |  |  | $ | 1.07 |  |  | $ | 0.05 |

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 per share. For the three months ended December 31, 2020 and 2019, there were 1,319,937 and 1,047,224, respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive. For the nine months ended December 31, 2020 and 2019, there were 1,328,437 and 1,031,624, 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 $3,373,000, or an effective tax rate of 28.5%, and $1,502,000, or an effective tax rate of 63.5%, for the three months ended December 31, 2020 and 2019, respectively. The Company recorded income tax expense of $8,448,000, or an effective tax rate of 29.0%, and $1,752,000, or an effective tax rate of 66.0%, for the nine months ended December 31, 2020 and 2019, respectively. The effective tax rates for the three and nine months ended December 31, 2020, were primarily impacted by foreign income taxed at rates that are different from the federal statutory rate and non-deductible executive compensation under Internal Revenue Code Section 162(m).
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The Company continues to record a valuation allowance against its foreign deferred tax assets as a result of its non-U.S. net operating loss carry-forwards and non-U.S. research and development credits in connection with its acquisitions due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted. Realization of deferred tax assets from its U.S. operations is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence.
At December 31, 2020, the Company is not under examination in any jurisdiction and the years ended March 31, 2016 through 2020 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
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.
The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $37,601,000 and $42,052,000 at December 31, 2020 and March 31, 2020, 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 income.
The following shows the effect of derivative instruments on the condensed consolidated statements of income:

|  | Gain Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts |
Derivatives Not Designated as |  | Three Months Ended December 31, |  |  | Nine Months Ended December 31, |
Hedging Instruments |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Forward foreign currency exchange contracts |  | $ | 3,817,000 |  |  | $ | 1,644,000 |  |  | $ | 9,016,000 |  |  | $ | 1,016,000 |

The fair value of the forward foreign currency exchange contracts of $2,732,000 is included in prepaid and other current assets in the condensed consolidated balance sheet at December 31, 2020. The fair value of the forward foreign currency exchange contracts of $6,284,000 is included in other current liabilities in the condensed consolidated balance sheet at March 31, 2020. 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 nine months ended December 31, 2020 and 2019.
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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:

|  | December 31, 2020 |  |  | March 31, 2020 |
|  |  |  |  | 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 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mutual funds |  | $ | 1,508,000 |  |  | $ | 1,508,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 850,000 |  |  | $ | 850,000 |  |  | $ | - |  |  | $ | - |
Prepaid expenses and other current assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward foreign currency exchange contracts |  |  | 2,732,000 |  |  |  | - |  |  |  | 2,732,000 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term contingent consideration |  |  | 2,608,000 |  |  |  | - |  |  |  | - |  |  |  | 2,608,000 |  |  |  | 2,190,000 |  |  |  | - |  |  |  | - |  |  |  | 2,190,000 |
Other current liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation |  |  | 1,508,000 |  |  |  | 1,508,000 |  |  |  | - |  |  |  | - |  |  |  | 850,000 |  |  |  | 850,000 |  |  |  | - |  |  |  | - |
Forward foreign currency exchange contracts |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6,284,000 |  |  |  | - |  |  |  | 6,284,000 |  |  |  | - |
Other liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term contingent consideration |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 463,000 |  |  |  | - |  |  |  | - |  |  |  | 463,000 |

Short-term Investments and Deferred Compensation
The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.
Forward Foreign Currency Exchange Contracts
The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers (See Note 13).
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 is 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.
E&M Research and Development (“R&D”) Event Milestone
In connection with the Company’s E&M acquisition in December 2018, it had a two-year R&D event milestone based on technology development and transfer. At December 31, 2020, the milestone was achieved and, as a result, the Company will pay $1,250,000 to the former owners of E&M during the fourth fiscal quarter ending March 31, 2021.
E&M Gross Profit Earn-out Consideration
The fair value of the three-year gross profit earn-out consideration was $1,350,000 and $1,230,000 at December 31, 2020 and March 31, 2020, respectively, determined using a Monte Carlo Simulation Model. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.
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The assumptions used to determine the fair value is as follows:

|  | December 31, 2020 |
Risk free interest rate |  |  | 0.10 | %
Counter party rate |  |  | 5.50 | %
Expected volatility (1) |  |  | 47.00 | %
Weighted average cost of capital (1) |  |  | 15.30 | %

(1) | The range for expected volatility was 44% to 50% and the range for the weighted average cost of capital was 13.5% to 15.5%.

In January 2019, the Company completed the acquisition of all the equity interests of Dixie. In connection with this acquisition, the Company was contingently obligated to make additional payments to the former owners of Dixie up to $1,130,000 over a two-year period and will pay approximately $8,000 during the fourth fiscal quarter ending March 31, 2021, as settlement of this obligation.
The Company’s contingent consideration is recorded in accounts payable and accrued liabilities and other liabilities in its condensed consolidated balance sheets at December 31, 2020 and March 31, 2020, 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 December 31, |  |  | Nine Months Ended December 31, |
Contingent Consideration |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Beginning balance |  | $ | 2,588,000 |  |  | $ | 4,851,000 |  |  | $ | 2,653,000 |  |  | $ | 4,721,000 |
Changes in revaluations of contingent consideration included in earnings |  |  | 20,000 |  |  |  | 310,000 |  |  |  | (45,000 | ) |  |  | 440,000 |
Ending balance |  | $ | 2,608,000 |  |  | $ | 5,161,000 |  |  | $ | 2,608,000 |  |  | $ | 5,161,000 |

During the three and nine months ended December 31, 2020, 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
The Company granted options to purchase 345,423 and 302,539 shares of common stock during the nine months ended December 31, 2020 and 2019, respectively. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.
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The following assumptions were used to derive the weighted average fair value of the stock options granted:

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Weighted average risk free interest rate |  |  | 0.44 | % |  |  | 1.76 | %
Weighted average expected holding period (years) |  |  | 5.96 |  |  |  | 5.70 |
Weighted average expected volatility |  |  | 44.90 | % |  |  | 42.50 | %
Weighted average expected dividend yield |  |  | - |  |  |  | - |
Weighted average fair value of options granted |  | $ | 6.43 |  |  | $ | 8.27 |

The following is a summary of stock option transactions:

|  | Number of Shares |  |  | Weighted Average Exercise Price |
Outstanding at March 31, 2020 |  |  | 1,536,123 |  |  | $ | 18.18 |
Granted |  |  | 345,423 |  |  | $ | 15.16 |
Exercised |  |  | (14,794 | ) |  | $ | 13.84 |
Forfeited |  |  | (43,881 | ) |  | $ | 22.57 |
Outstanding at December 31, 2020 |  |  | 1,822,871 |  |  | $ | 17.53 |

At December 31, 2020, options to purchase 606,910 shares of common stock were unvested at a weighted average exercise price of $17.11.
At December 31, 2020, there was $3,293,000 of total unrecognized compensation expense related to unvested stock option awards. Compensation expense related to unvested stock option awards will be recognized over a weighted average vesting period of approximately 1.9 years.
Restricted Stock Units and Restricted Stock (collectively “RSUs”)
During the nine months ended December 31, 2020 and 2019, the Company granted 251,801 and 113,483 shares of RSUs, respectively, with an estimated grant date fair value of $4,150,000 and $2,112,000, 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 |
Outstanding at March 31, 2020 |  |  | 201,983 |  |  | $ | 20.06 |
Granted |  |  | 251,801 |  |  | $ | 16.48 |
Vested |  |  | (94,320 | ) |  | $ | 21.32 |
Forfeited |  |  | (4,980 | ) |  | $ | 17.65 |
Outstanding at December 31, 2020 |  |  | 354,484 |  |  | $ | 17.22 |

At December 31, 2020, there was $4,589,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.7 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.
The following summarizes the changes in the warranty return accrual:

|  | Three Months Ended December 31, |  |  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Balance at beginning of period |  | $ | 22,499,000 |  |  | $ | 16,575,000 |  |  | $ | 18,300,000 |  |  | $ | 19,475,000 |
Charged to expense |  |  | 26,194,000 |  |  |  | 26,637,000 |  |  |  | 80,155,000 |  |  |  | 82,353,000 |
Amounts processed |  |  | (31,540,000 | ) |  |  | (28,226,000 | ) |  |  | (81,302,000 | ) |  |  | (86,842,000 | )
Balance at end of period |  | $ | 17,153,000 |  |  | $ | 14,986,000 |  |  | $ | 17,153,000 |  |  | $ | 14,986,000 |

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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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, 2020 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 15, 2020.
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; 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 been focused on implementing a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and diagnostic testing industry, through organic growth and acquisitions. Our investments in infrastructure and human resources, including the consolidation of our distribution center in Mexico and the significant expansion of manufacturing capacity, are expected to be transformative and scalable. As a result, gross profit and net income have been impacted, and our future performance and opportunities should be considered with these factors in mind.
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, and brake master cylinders, and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.
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.
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Impact of the Novel Coronavirus (“COVID-19”)
The outbreak of 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 have implemented a variety of measures in response to the COVID-19 pandemic that have the effect of restricting or limiting, among other activities, the operations of certain businesses.
We experienced a significant reduction in customer demand for our products during April 2020. Although the demand for our products has substantially recovered, 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 the duration of the “second wave” or additional spikes 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.
Our business has continued to operate as we have been declared an essential business; however, we experienced inefficiencies in our operations due to the implementation of additional personnel safety measures throughout our facilities, which negatively affects our operating efficiencies. These personnel safety measures included 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, board check-in meetings and executive committee meetings, as needed, and regular town hall style communications with all employees.
To date, we have incurred increased costs as a result of COVID-19, including increased employee costs, such as expanded benefits and frontline incentives, and other operating costs, such as costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. During the three and nine months ended December 31, 2020, these expanded benefits, supply costs and other COVID-19 related costs resulted in $1,610,000 and $5,953,000, respectively, of total expense included in cost of goods sold and operating expenses in the condensed consolidated statements of income. During the three and nine months ended December 31, 2020, we received $281,000 and $1,130,000, respectively, in payments from the Canadian Government under the Canadian Emergency Wage Subsidy program and our Asian subsidiaries received $24,000 and $161,000, respectively, from their local government assistance programs. These payments are recorded as a reduction of cost of goods sold and operating expenses in the condensed consolidated statements of income. In addition, we deferred the employer’s share of social security taxes of $1,170,000, of which $585,000 is included in accounts payable and accrued liabilities and $585,000 is included in other liabilities in the condensed consolidated balance sheet at December 31, 2020.
Due to the seriousness of the COVID-19 pandemic and the unknown future impact on our business, we conserved liquidity wherever practicable, implemented a worldwide travel ban, and put additional controls on all expenses. Initially, we implemented furloughs, layoffs, and salary reductions, which were reinstated as of September 30, 2020.
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Results of Operations for the Three Months Ended December 31, 2020 and 2019
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 December 31, |
|  | 2020 |  |  | 2019 |
Cash flow provided by operations |  | $ | 33,154,000 |  |  | $ | 22,326,000 |
Finished goods turnover (annualized) (1) |  |  | 2.7 |  |  |  | 2.4 |

(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 finished goods inventory values, which includes all on-hand core inventory, for the fiscal quarter. 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 December 31, |
|  | 2020 |  |  | 2019 |
Net sales |  | $ | 122,568,000 |  |  | $ | 125,574,000 |
Cost of goods sold |  |  | 98,327,000 |  |  |  | 97,913,000 |
Gross profit |  |  | 24,241,000 |  |  |  | 27,661,000 |
Gross profit percentage |  |  | 19.8 | % |  |  | 22.0 | %

Net Sales. Our net sales for the three months ended December 31, 2020 decreased by $3,006,000, or 2.4%, to $122,568,000 compared with net sales for the three months ended December 31, 2019 of $125,574,000. Sales for the quarter were impacted by a number of factors related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services— resulting in order delays of approximately $17,000,000, which are expected to be realized between the current fiscal fourth quarter and the first quarter of the new fiscal year.
Gross Profit. Our gross profit was $24,241,000, or 19.8% of net sales, for the three months ended December 31, 2020 compared with $27,661,000, or 22.0% of net sales, for the three months ended December 31, 2019. Our gross profit was impacted by the global COVID-19 pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. Additionally, our gross profit was further impacted by $1,052,000, or 0.9%, due to COVID-19 related costs for wages and personal protective equipment.
Our gross profit for the three months ended December 31, 2020 and 2019 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $4,217,000 and $2,148,000, respectively, and (ii) amortization of core premiums paid to customers related to new business of $1,528,000 and $1,326,000, respectively.
In addition, gross profit was positively impacted by (i) a 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 resulted in a write-down of $1,304,000 compared with $2,395,000 for the three months ended December 31, 2020 and 2019, respectively, and (ii) a $688,000 benefit for revised tariff costs during the three months ended December 31, 2020.
Our prior year gross profit was impacted by customer allowances related to new business of $777,000.
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Operating Expenses
The following summarizes operating expenses:

|  | Three Months Ended December 31, |
|  | 2020 |  |  | 2019 |
General and administrative |  | $ | 14,005,000 |  |  | $ | 14,390,000 |
Sales and marketing |  |  | 4,698,000 |  |  |  | 5,623,000 |
Research and development |  |  | 2,100,000 |  |  |  | 2,174,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | (12,455,000 | ) |  |  | (3,772,000 | )
Percent of net sales |  |  |  |  |  |  |  |
General and administrative |  |  | 11.4 | % |  |  | 11.5 | %
Sales and marketing |  |  | 3.8 | % |  |  | 4.5 | %
Research and development |  |  | 1.7 | % |  |  | 1.7 | %
Foreign exchange impact of lease liabilities and forward contracts |  |  | (10.2 | )% |  |  | (3.0 | )%

General and Administrative. Our general and administrative expenses for the three months ended December 31, 2020 were $14,005,000, which represents a decrease of $385,000, or 2.7%, from the three months ended December 31, 2019 of $14,390,000. The decrease in general and administrative expense was primarily due to (i) $1,070,000 of decreased professional services, (ii) $569,000 of increased gain resulting from foreign currency transactions, (iii) $290,000 of decreased expense due to changes in revaluations of contingent consideration, and (iv) $253,000 of decreased travel. These decreases in general and administrative expenses were partially offset by expenses resulting from our expansion in Mexico and other COVID-19 related costs, such as supply costs and expanded benefits to employees.
Sales and Marketing. Our sales and marketing expenses for the three months ended December 31, 2020 were $4,698,000, which represents a decrease of $925,000, or 16.5%, from the three months ended December 31, 2019 of $5,623,000. The decrease in sales and marketing expense was primarily due to our cost-cutting measures in response to COVID-19. These decreases in sales and marketing expense were primarily due to (i) $348,000 from decreased travel and (ii) $552,000 of decreased trade shows expense.
Research and Development. Our research and development expenses for the three months ended December 31, 2020 were $2,100,000, which represents a decrease of $74,000, or 3.4%, from the three months ended December 31, 2019 of $2,174,000. The decrease in research and development expense was primarily due to our cost-cutting measures in response to COVID-19.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency-denominated lease liabilities resulted in non-cash gains of $8,638,000 and $2,128,000 for the three months ended December 31, 2020 and 2019, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in non-cash gains of $3,817,000 and $1,644,000 for the three months ended December 31, 2020 and 2019, respectively, due to the changes in their fair values.
Interest Expense
Interest Expense, net. Our interest expense, net for the three months ended December 31, 2020 was $4,051,000, which represents a decrease of $2,828,000, or 41.1%, from the three months ended December 31, 2019 of $6,879,000. The decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility.
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Provision for Income Taxes
Income Tax. We recorded income tax expense of $3,373,000, or an effective tax rate of 28.5%, and $1,502,000, or an effective tax rate of 63.5%, for the three months ended December 31, 2020 and 2019, respectively. The effective tax rate for the three months ended December 31, 2020, was primarily impacted by foreign income taxed at rates that are different from the federal statutory rate and non-deductible executive compensation under Internal Revenue Code Section 162(m).
Results of Operations for the Nine Months Ended December 31, 2020 and 2019
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, |
|  | 2020 |  |  | 2019 |
Cash flow provided by (used in) operations |  | $ | 72,484,000 |  |  | $ | (4,410,000 | )
Finished goods turnover (annualized) (1 |  |  | 2.6 |  |  |  | 2.6 |

(1) | Annualized finished goods turnover for the period is calculated by multiplying cost of goods sold for the period by 1.3 and dividing the result by the average between beginning and ending finished goods inventory values, which includes all on-hand core inventory, for the period. 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:

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Net sales |  | $ | 372,654,000 |  |  | $ | 385,096,000 |
Cost of goods sold |  |  | 295,300,000 |  |  |  | 303,279,000 |
Gross profit |  |  | 77,354,000 |  |  |  | 81,817,000 |
Gross profit percentage |  |  | 20.8 | % |  |  | 21.2 | %

Net Sales. Our net sales for the nine months ended December 31, 2020 decreased by $12,442,000, or 3.2%, to $372,654,000 compared with net sales for the nine months ended December 31, 2019 of $385,096,000. Sales for the period were impacted by a number of factors related to the global COVID-19 pandemic, including disruptions with worldwide supply chain and logistics services— resulting in order delays of approximately $17,000,000, which are expected to be realized between the current fiscal fourth quarter and the first quarter of the new fiscal year. In addition, our sales for the nine months ended December 31, 2020 included $12,779,000 in core revenue due to a realignment of inventory at two customer distribution centers with expected future sales benefits as product mix changes.
Gross Profit. Our gross profit was $77,354,000, or 20.8% of net sales, for the nine months ended December 31, 2020 compared with $81,817,000, or 21.2% of net sales, for the nine months ended December 31, 2019. Our gross profit was impacted by the global COVID-19 pandemic, including disruptions with worldwide supply chain, logistics services, and related higher freight costs. Additionally, our gross profit was further impacted by $4,425,000, or 1.2%, due to COVID-19 related costs for wages and personal protective equipment.
Our gross profit for the nine months ended December 31, 2020 and 2019 was also impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $11,572,000 and $5,829,000, respectively and (ii) amortization of core premiums paid to customers related to new business of $4,269,000 and $3,543,000.
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In addition, gross profit was impacted by (i) a $3,535,000 benefit for revised tariff costs for the nine months ended December 31, 2020, (ii) 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 two customer distribution centers, which resulted in a net gain of $811,000 during the nine months ended December 31, 2020 compared with a write-down of $9,867,000 for the nine months ended December 31, 2019, and (iii) customer allowances and return accruals related to new business of $307,000 and $1,119,000 for the nine months ended December 31, 2020 and 2019, respectively.
Our prior year gross profit was impacted by net tariff costs of $1,067,000 not passed through to customers, and cost of $133,000 in connection with the cancellation of a customer contract.
Operating Expenses
The following summarizes operating expenses:

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
General and administrative |  | $ | 38,210,000 |  |  | $ | 39,410,000 |
Sales and marketing |  |  | 13,224,000 |  |  |  | 15,990,000 |
Research and development |  |  | 6,014,000 |  |  |  | 6,694,000 |
Foreign exchange impact of lease liabilities and forward contracts |  |  | (21,257,000 | ) |  |  | (2,507,000 | )
Percent of net sales |  |  |  |  |  |  |  |
General and administrative |  |  | 10.3 | % |  |  | 10.2 | %
Sales and marketing |  |  | 3.5 | % |  |  | 4.2 | %
Research and development |  |  | 1.6 | % |  |  | 1.7 | %
Foreign exchange impact of lease liabilities and forward contracts |  |  | (5.7 | )% |  |  | (0.7 | )%

General and Administrative. Our general and administrative expenses for the nine months ended December 31, 2020 were $38,210,000, which represents a decrease of $1,200,000, or 3.0%, from the nine months ended December 31, 2019 of $39,410,000. The decrease in general and administrative expense was primarily due to (i) $2,303,000 of decreased professional services, (ii) $841,000 of increased gain resulting from foreign currency transactions, (iii) $625,000 of decreased travel, and (iv) $485,000 of decreased expense due to changes in revaluations of contingent consideration. These decreases in general and administrative expenses were partially offset by expenses resulting from our expansion in Mexico and other COVID-19 related costs, such as supply costs and expanded benefits to employees.
Sales and Marketing. Our sales and marketing expenses for the nine months ended December 31, 2020 were $13,224,000, which represents a decrease of $2,766,000, or 17.3%, from the nine months ended December 31, 2019 of $15,990,000. The decrease in sales and marketing expense was primarily due to our cost-cutting measures in response to COVID-19. These decreases in sales and marketing expense were primarily due to (i) $1,146,000 from decreased travel, (ii) $722,000 of decreased trade shows expense, (iii) $616,000 from decreased advertising and marketing expense, and (iv) $415,000 from decreased employee-related expenses.
Research and Development. Our research and development expenses for the nine months ended December 31, 2020 were $6,014,000, which represents a decrease of $680,000, or 10.2%, from the nine months ended December 31, 2019 of $6,694,000. The decrease in research and development expense was primarily due to our cost-cutting measures in response to COVID-19. These decreases in research and development were primarily due to (i) $441,000 of decreased employee-related expenses, (ii) $101,000 of decreased travel, and (iii) $81,000 of decreased outside services.
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Foreign Exchange Impact of Lease Liabilities and Forward Contracts. The remeasurement of our foreign currency denominated lease liabilities resulted in non-cash gains of $12,241,000 and $1,491,000 for the nine months ended December 31, 2020 and 2019, respectively, due to movements in foreign exchange rates. In addition, the forward foreign currency exchange contracts resulted in non-cash gains of $9,016,000 and $1,016,000 for the nine months ended December 31, 2020 and 2019, respectively, due primarily to the changes in their fair values.
Interest Expense
Interest Expense, net. Our interest expense, net for the nine months ended December 31, 2020 was $12,074,000, which represents a decrease of $7,501,000, or 38.3%, from the nine months ended December 31, 2019 of $19,575,000. This decrease in interest expense was primarily due to lower interest rates and lower average outstanding balances under our credit facility.
Provision for Income Taxes
Income Tax. We recorded income tax expense of $8,448,000, or an effective tax rate of 29.0%, and $1,752,000, or an effective tax rate of 66.0%, for the nine months ended December 31, 2020 and 2019, respectively. The effective tax rate for the nine months ended December 31, 2020, was primarily impacted by foreign income taxed at rates that are different from the federal statutory rate and non-deductible executive compensation under Internal Revenue Code Section 162(m).
Liquidity and Capital Resources
Overview
We had working capital (current assets minus current liabilities) of $96,282,000 and $90,624,000, a ratio of current assets to current liabilities of 1.3:1.0 at December 31, 2020 and March 31, 2020, respectively.
We generated cash during the nine months ended December 31, 2020 from operations and the use of receivable discount programs. 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
As of December 31, 2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our credit facility. Our credit facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for this fiscal year, subject to pro forma compliance with financial covenants. We retired the 675,561 shares repurchased under this program through December 31, 2020. 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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Cash Flows
The following summarizes cash flows as reflected in the condensed consolidated statements of cash flows:

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Cash flows provided by (used in): |  |  |  |  |  |
Operating activities |  | $ | 72,484,000 |  |  | $ | (4,410,000 | )
Investing activities |  |  | (12,295,000 | ) |  |  | (9,650,000 | )
Financing activities |  |  | (97,734,000 | ) |  |  | 13,546,000 |
Effect of exchange rates on cash and cash equivalents |  |  | 729,000 |  |  |  | 61,000 |
Net decrease in cash and cash equivalents |  | $ | (36,816,000 | ) |  | $ | (453,000 | )
Additional selected cash flow data: |  |  |  |  |  |  |  |
Depreciation and amortization |  | $ | 8,090,000 |  |  | $ | 7,019,000 |
Capital expenditures |  |  | 12,043,000 |  |  |  | 10,846,000 |

Net cash provided by operating activities was $72,484,000 during the nine months ended December 31, 2020 compared with net cash used in operating activities of $4,410,000 during the nine months ended December 31, 2019. The significant change in our operating activities for the current year was due to (i) increased collections of accounts receivable, (ii) the buildup of our inventory to meet anticipated future demand and associated increase in our accounts payable balances, and (iii) increased operating results (net income plus the net add-back for non-cash transactions in earnings). In addition, our prior year operating activities were significantly impacted by our growth initiatives, including our new expanded footprint and product lines.
Net cash used in investing activities was $12,295,000 and $9,650,000 during the nine months ended December 31, 2020 and 2019, respectively, due to the redemption of short-term investments during the prior year and increased capital expenditures.
Net cash used in financing activities was $97,734,000 during the nine months ended December 31, 2020 compared with net cash provided by financing activities $13,546,000 during the nine months ended December 31, 2019. The significant change in our financing activities resulted from the pay down of our debt by $95,813,000 during the nine months ended December 31, 2020 compared with borrowing to support our growth initiatives, including the expansion of our operations in Mexico and our product line expansion during the nine months ended December 31, 2019.
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 $30,000,000 of dividends and share repurchases for this fiscal year, 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.
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 2.91% and 2.90%, respectively at December 31, 2020, and 4.34% and 3.64%, respectively at March 31, 2020.
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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 December 31, 2020.
The following summarizes the financial covenants required under the Credit Facility:

|  | Financial covenants required under the Credit Facility |  |  | Calculation as of December 31, 2020 |
Maximum senior leverage ratio |  |  | 3.00 |  |  |  | 1.18 |
Minimum fixed charge coverage ratio |  |  | 1.10 |  |  |  | 1.24 |

We had cash of $12,800,000 at December 31, 2020 and paid down our outstanding debt by $95,813,000 during the nine months ended December 31, 2020. However, the Credit Facility allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. Our senior leverage ratio would have been 1.12 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 $59,000,000 and $152,000,000 outstanding under the Revolving Facility at December 31, 2020 and March 31, 2020, respectively. In addition, $5,937,000 was outstanding for letters of credit at December 31, 2020. At December 31, 2020, after certain contractual adjustments, $127,236,000 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:

|  | Nine Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Receivables discounted |  | $ | 367,102,000 |  |  | $ | 341,339,000 |
Weighted average days |  |  | 333 |  |  |  | 347 |
Annualized weighted average discount rate |  |  | 2.1 | % |  |  | 3.5 | %
Amount of discount recognized as interest expense |  | $ | 7,277,000 |  |  | $ | 11,570,000 |

Off-Balance Sheet Arrangements
At December 31, 2020, 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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Capital Expenditures and Commitments
Capital Expenditures
Our total capital expenditures, including finance leases and non-cash capital expenditures were $14,223,000 and $13,231,000 for the nine months ended December 31, 2020 and 2019, 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 $4,900,000 of capital expenditures for our current operations and approximately $12,400,000 for continued expansion of our operations in Mexico for the full fiscal year 2021. 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, 2020, which was filed on June 15, 2020.
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, 2020, which was filed on June 15, 2020, except as discussed below.
New Accounting Pronouncements Recently Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changed the impairment model for most financial assets and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of this guidance on April 1, 2020 increased our required disclosures for our expected credit losses but did not have a material effect on our condensed consolidated financial statements.
Prior to April 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The net amount of accounts receivable and corresponding allowance for doubtful accounts were presented in the condensed consolidated balance sheets. We maintain an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of our customers to make required payments. Furthermore, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The net amount of accounts receivable and corresponding allowance for credit losses are presented in the condensed consolidated balance sheets. We maintain an allowance for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for credit losses at inception and reassess quarterly based on the asset’s expected collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as COVID-19, as well as expectations of conditions in the future, if applicable. Our allowance for credit losses is based on the assessment of the collectability of assets pooled together with similar risk characteristics.
We record a provision for expected credit losses using a loss-rate method based on the ratio of our historical write-offs to our average trade accounts receivable. At each reporting period, we will assess whether financial assets in a pool continue to display similar risk characteristics. If particular receivables no longer display risk characteristics that are similar to those of the receivables in the pool, we may determine that we need to move those receivables to a different pool or perform an individual assessment of expected credit losses for those specific receivables.
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Fair Value Measurements
In August 2018, the FASB issued guidance, which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, and the narrative description of measurement uncertainty should be applied prospectively only for the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively applied to all periods presented upon their effective date. The adoption of this guidance on April 1, 2020 modified certain of our disclosures for our Level 3 fair value measurements but did not have an impact on our consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We will apply these amendments prospectively. The adoption of this guidance on April 1, 2020 did not have an impact on our condensed consolidated financial statements for the three and nine months ended December 31, 2020.
New Accounting Pronouncements Not Yet Adopted
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. Early adoption is permitted. We are currently evaluating the impact this guidance will have 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, 2020, which was filed with the SEC on June 15, 2020.

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 December 31, 2020.
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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 December 31, 2020 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, 2020, which was filed on June 15, 2020.

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, 2020, filed on June 15, 2020.

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 $30,000,000 of dividends and share repurchases for this fiscal year, subject to pro forma compliance with financial covenants.
Purchases of Equity Securities by the Issuer
Shares repurchased during the three months ended December 31, 2020 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) |
October 1 - October 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |
Open market and privately negotiated purchases |  |  | - |  |  | $ | - |  |  |  | - |  |  | $ | 21,308,000 |
November 1 - November 30, 2020: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Open market and privately negotiated purchases |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 21,308,000 |
December 1 - December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Open market and privately negotiated purchases |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 21,308,000 |
Total |  |  | 0 |  |  |  |  |  |  |  | 0 |  |  | $ | 21,308,000 |

(1) | As of December 31, 2020, $15,692,000 of the $37,000,000 authorized share repurchase program had been utilized and $21,308,000 remained available to repurchase shares, subject to the limit in our Credit Facility. We retired the 675,561 shares repurchased under this program through December 31, 2020. 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 |  | 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 |  | 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 |  | 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. 4 to Employment Agreement, dated as of May 21, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe |  | Incorporated by reference to exhibit 10.1 to the Quarterly Report filed on August 10, 2020.
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: February 9, 2021 | By: | /s/ David Lee
|  | David Lee
|  | Chief Financial Officer
Dated: February 9, 2021 | By: | /s/ Kamlesh Shah
|  | Kamlesh Shah
|  | Chief Accounting Officer

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