MOTORCAR PARTS OF AMERICA INC 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Management, with the participation of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,”) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO, CFO and CAO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our CEO, CFO and CAO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021. 43 Table of Contents Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2021 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on its assessment, our management, including our CEO and CFO, has concluded that our internal control over financial reporting was effective as of March 31, 2021. The effectiveness of our internal control over financial reporting as of March 31, 2021 has been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Their assessment is included in the accompanying Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting. Change in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control performed during the period covered by this report, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information None. 44 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to our Definitive Proxy Statement in connection with our next Annual Meeting of Stockholders (the “Proxy Statement”). Item 11. Executive Compensation The information required by this item is incorporated by reference to the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to the Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the Proxy Statement. Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to the Proxy Statement. 45 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules a. Documents filed as part of this report: (1) Index to Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm 53 Consolidated Balance Sheets F-1 Consolidated Statements of Operations F-2 Consolidated Statements of Comprehensive Income (Loss) F-3 Consolidated Statements of Shareholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 (2) Schedules. Schedule II — Valuation and Qualifying Accounts S-1 (3) 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 (the “1995 Registration Statement”). 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 the Company 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 the Company Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016. 46 Table of Contents Number Description of Exhibit Method of Filing 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. 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 Form of Indemnification Agreement for officers and directors Incorporated by reference to Exhibit 10.25 to the 1997 Registration Statement. 10.2 Amended and Restated Employment Agreement, dated as of December 31, 2008, by and between the Company and Selwyn Joffe Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 7, 2009. 10.3 Employment Agreement, dated as of May 18, 2012, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 24, 2012. 10.4 Form of Stock Option Notice for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 12, 2013. 10.5 Form of Stock Option Agreement for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 12, 2013. 47 Table of Contents Number Description of Exhibit Method of Filing 10.6* Revolving Credit, Term Loan and Security Agreement, dated as of June 3, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 8, 2015. 10.7 First Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of November 5, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on November 9, 2015. 10.8 Consent and Second Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of May 19, 2016, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 9, 2016. 10.9 Third Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of March 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K filed on June 14, 2017. 10.10 Fourth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of April 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 27, 2017. 10.11 Fifth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of July 18, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 24, 2017. 10.12* Amended and Restated Credit Facility, dated as of June 5, 2018, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on August 9, 2018. 48 Table of Contents Number Description of Exhibit Method of Filing 10.13 First Amendment to Amended and Restated Loan Agreement, dated as of November 14, 2018, among Motorcar Parts of America, Inc., D & V Electronics Ltd., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 20, 2018. 10.14 Amendment No. 2 to Employment Agreement, dated as of February 5, 2019, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on February 11, 2019. 10.15 Second Amendment to Amended and Restated Loan Agreement, dated as of June 4, 2019, among Motorcar Parts of America, Inc., D&V Electronics Ltd., Dixie Electric Ltd., Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 7, 2019. 10.16 Amendment No. 3 to Employment Agreement, dated as of March 30, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe Incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K filed on June 15, 2020. 10.17 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. 10.18 Third Amendment to Amended and Restated Loan Agreement, dated as of May 28, 2021, among Motorcar Parts of America, Inc., D&V Electronics Ltd., Dixie Electric Ltd., Dixie Electric Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 2, 2021. 21.1 List of Subsidiaries Filed herewith. 23.1 Consent of Independent Registered Public Accounting Firm Ernst & Young LLP Filed herewith. 49 Table of Contents Number Description of Exhibit Method of Filing 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 XBRL document) Filed herewith. 101.SCM Inline XBRL Taxonomy Extension Schema Document Filed herewith. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed herewith. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed herewith. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) Filed herewith. * Portions of this exhibit have been granted confidential treatment by the SEC. The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in those agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time. Item 16. Form 10-K Summary None. 50 Table of Contents SIGNATURES Pursuant to the requirements of Section 15(d) 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: June 14, 2021 By: /s/ David Lee David Lee Chief Financial Officer Dated: June 14, 2021 By: /s/ Kamlesh Shah Kamlesh Shah Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated: /s/ Selwyn Joffe Chief Executive Officer and Director June 14, 2021 Selwyn Joffe (Principal Executive Officer) /s/ David Lee Chief Financial Officer June 14, 2021 David Lee (Principal Financial Officer) /s/ Kamlesh Shah Chief Accounting Officer June 14, 2021 Kamlesh Shah (Principal Accounting Officer) /s/ Scott Adelson Director June 14, 2021 Scott Adelson /s/ Rudolph Borneo Director June 14, 2021 Rudolph Borneo /s/ Philip Gay Director June 14, 2021 Philip Gay /s/ Duane Miller Director June 14, 2021 Duane Miller /s/ Jeffrey Mirvis Director June 14, 2021 Jeffrey Mirvis /s/ David Bryan Director June 14, 2021 David Bryan /s/ Joseph Ferguson Director June 14, 2021 Joseph Ferguson /s/ Barbara Whittaker Director June 14, 2021 Barbara Whittaker /s/ Jamy Rankin Director June 14, 2021 Jamy Rankin 51 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES CONTENTS Page Reports of Independent Registered Public Accounting Firm 53 Consolidated Balance Sheets F-1 Consolidated Statements of Operations F-2 Consolidated Statements of Comprehensive Income (Loss) F-3 Consolidated Statements of Shareholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Schedule II — Valuation and Qualifying Accounts S-1 52 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc. Opinion on Internal Control over Financial Reporting We have audited Motorcar Parts of America, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Motorcar Parts of America, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes and financial statement schedule and our report dated June 14, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s 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 generally accepted accounting principles. A company’s 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. /s/ Ernst & Young LLP Los Angeles, California June 14, 2021 53 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Motorcar Parts of America, Inc. and subsidiaries (the Company) as of March 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June 14, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Contractual Agreements with Core Exchange Programs Description of the Matter As more fully described in Note 2 to the consolidated financial statements, the Company enters into contractual arrangements with customers (core exchange programs) which represent the majority of the Company’s sales for products that contain remanufactured cores. At March 31, 2021, contract assets and contract liabilities related to core exchange programs recorded on the consolidated balance sheet were $297,153,000 and $166,295,000, respectively. Auditing contract assets and contract liabilities related to the core exchange programs involved complex auditor judgment due to the unique terms of each customer arrangement which impact the completeness, existence, valuation and classification of contract assets and liabilities. 54 Table of Contents How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of contracts with customers, management’s assessment of the accounting for core exchange programs, including unique contractual terms, and management’s review of the related contract assets and liabilities including controls over the completeness and accuracy of data. Our audit procedures to test the contract assets and contract liabilities related to core exchange programs included, among others, (i) reviewing agreements and amendments for significant customers, (ii) testing the completeness of management’s identification of contractual terms, (iii) evaluating the consistency of the accounting treatment with the Company's policies; and (v) testing the completeness and accuracy of the underlying data used in management’s analyses. Marketing Allowances Description of the Matter As more fully described in Note 2 and Note 14 to the consolidated financial statements, revenue is recognized net of applicable marketing allowances. These marketing allowances vary by contract and can include (i) the issuance of a specified amount of credits against receivables, (ii) support for research or marketing efforts, (iii) discounts granted in connection with shipments of product, and (iv) other marketing, research, store expansion or product development support. At March 31, 2021, marketing allowances recorded on the Company’s consolidated balance sheet was $16,826,000, which is presented within contract liabilities. Auditing the completeness of marketing allowances was complex because marketing allowances vary by contract and could be impacted by unrecorded marketing allowances provided to customers. 55 Table of Contents How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the marketing allowances processes. For example, we tested controls over management’s review of contracts with customers containing marketing allowances, management’s review of the completeness and accuracy of data used in the marketing accrual analysis at period end and management’s review of credits issued to customers subsequent to the balance sheet date. Our audit procedures to test marketing allowances included, among others, reviewing significant contracts with customers, obtaining confirmations of contractual terms and conditions from a sample of the Company’s customers, and testing credits issued or payments made to customers throughout the year. We tested the completeness and accuracy of data used in the calculation of the marketing allowance by agreeing contractual terms to the underlying agreements. In addition, we evaluated the relationship between revenue and marketing allowances and assessed subsequent events to determine whether there was any new information that would require adjustments to the amounts recorded. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2007. Los Angeles, California June 14, 2021 56 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2021 March 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 15,523,000 $ 49,616,000 Short-term investments 1,652,000 850,000 Accounts receivable — net 63,122,000 91,748,000 Inventory — net 288,361,000 225,659,000 Inventory unreturned 14,552,000 9,021,000 Contract assets 26,940,000 20,332,000 Income tax receivable 405,000 3,282,000 Prepaid expenses and other current assets 12,301,000 8,608,000 Total current assets 422,856,000 409,116,000 Plant and equipment — net 53,854,000 44,957,000 Operating lease assets 71,513,000 53,029,000 Deferred income taxes 19,381,000 18,950,000 Long-term contract assets 270,213,000 239,540,000 Goodwill 3,205,000 3,205,000 Intangible assets — net 5,329,000 6,393,000 Other assets 1,531,000 1,839,000 TOTAL ASSETS $ 847,882,000 $ 777,029,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 129,331,000 $ 78,664,000 Accrued liabilities 23,404,000 16,419,000 Customer finished goods returns accrual 31,524,000 25,326,000 Contract liabilities 41,072,000 27,911,000 Revolving loan 84,000,000 152,000,000 Other current liabilities 6,683,000 9,390,000 Operating lease liabilities 6,439,000 5,104,000 Current portion of term loan 3,678,000 3,678,000 Total current liabilities 326,131,000 318,492,000 Term loan, less current portion 16,786,000 20,462,000 Contract liabilities, less current portion 125,223,000 92,101,000 Deferred income taxes 73,000 79,000 Operating lease liabilities, less current portion 70,551,000 61,425,000 Other liabilities 7,973,000 8,950,000 Total liabilities 546,737,000 501,509,000 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; 19,045,386 and 18,969,380 shares issued and outstanding at March 31, 2021 and 2020, respectively 190,000 190,000 Additional paid-in capital 223,058,000 218,581,000 Retained earnings 85,593,000 64,117,000 Accumulated other comprehensive loss ( 7,696,000 ) ( 7,368,000 ) Total shareholders’ equity 301,145,000 275,520,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 847,882,000 $ 777,029,000 The accompanying notes to consolidated financial statements are an integral part hereof. F- 1 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended March 31, 2021 2020 2019 Net sales $ 540,782,000 $ 535,831,000 $ 472,797,000 Cost of goods sold 431,321,000 417,431,000 383,623,000 Gross profit 109,461,000 118,400,000 89,174,000 Operating expenses: General and administrative 53,847,000 53,224,000 45,000,000 Sales and marketing 18,024,000 21,037,000 19,542,000 Research and development 8,563,000 9,200,000 8,014,000 Foreign exchange impact of lease liabilities and forward contracts ( 17,606,000 ) 18,201,000 972,000 Total operating expenses 62,828,000 101,662,000 73,528,000 Operating income 46,633,000 16,738,000 15,646,000 Interest expense, net 15,770,000 25,039,000 23,227,000 Income (loss) before income tax expense (benefit) 30,863,000 ( 8,301,000 ) ( 7,581,000 ) Income tax expense(benefit) 9,387,000 ( 1,011,000 ) 268,000 Net income (loss) $ 21,476,000 $ ( 7,290,000 ) $ ( 7,849,000 ) Basic net income (loss) per share $ 1.13 $ ( 0.39 ) $ ( 0.42 ) Diluted net income (loss) per share $ 1.11 $ ( 0.39 ) $ ( 0.42 ) Weighted average number of shares outstanding: Basic 19,023,145 18,913,788 18,849,909 Diluted 19,387,555 18,913,788 18,849,909 The accompanying notes to consolidated financial statements are an integral part hereof. F- 2 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) Years Ended March 31, 2021 2020 2019 Net income (loss) $ 21,476,000 $ ( 7,290,000 ) $ ( 7,849,000 ) Other comprehensive loss, net of tax: Foreign currency translation loss ( 328,000 ) ( 481,000 ) ( 713,000 ) Total other comprehensive loss, net of tax ( 328,000 ) ( 481,000 ) ( 713,000 ) Comprehensive income (loss) $ 21,148,000 $ ( 7,771,000 ) $ ( 8,562,000 ) The accompanying notes to consolidated financial statements are an integral part hereof. F- 3 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Common Stock Shares Amount Additional Paid-in Capital Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Balance at March 31, 2018 18,893,102 $ 189,000 $ 213,609,000 $ 78,510,000 $ ( 5,428,000 ) $ 286,880,000 Cumulative-effect adjustment for the adoption of ASU 2016-01 - - - 746,000 ( 746,000 ) - Balance at April 1, 2018 18,893,102 $ 189,000 $ 213,609,000 $ 79,256,000 $ ( 6,174,000 ) $ 286,880,000 Compensation recognized under employee stock plans - - 5,564,000 - - 5,564,000 Exercise of stock options 42,032 1,000 256,000 - - 257,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 46,081 - ( 322,000 ) - - ( 322,000 ) Repurchase and cancellation of treasury stock, including fees ( 163,815 ) ( 2,000 ) ( 4,060,000 ) - - ( 4,062,000 ) Foreign currency translation - - - - ( 713,000 ) ( 713,000 ) Net loss - - - ( 7,849,000 ) - ( 7,849,000 ) 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 - - 4,141,000 - - 4,141,000 Exercise of stock options 59,600 1,000 456,000 - - 457,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 92,380 1,000 ( 1,063,000 ) - - ( 1,062,000 ) Foreign currency translation - - - - ( 481,000 ) ( 481,000 ) Net loss - - - ( 7,290,000 ) - ( 7,290,000 ) 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 - - 5,247,000 - - 5,247,000 Exercise of stock options 58,848 - 719,000 - - 719,000 Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes 72,118 1,000 ( 351,000 ) - - ( 350,000 ) Repurchase and cancellation of treasury stock, including fees ( 54,960 ) ( 1,000 ) ( 1,138,000 ) - - ( 1,139,000 ) Foreign currency translation - - - - ( 328,000 ) ( 328,000 ) Net income - - - 21,476,000 - 21,476,000 Balance at March 31, 2021 19,045,386 $ 190,000 $ 223,058,000 $ 85,593,000 $ ( 7,696,000 ) $ 301,145,000 The accompanying notes to consolidated financial statements are an integral part hereof. F- 4 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended March 31, 2021 2020 2019 Cash flows from operating activities: Net income (loss) $ 21,476,000 $ ( 7,290,000 ) $ ( 7,849,000 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 9,573,000 7,791,000 6,135,000 Amortization of intangible assets 1,571,000 1,770,000 1,194,000 Amortization and write-off of debt issuance costs 859,000 819,000 951,000 Amortization of interest on contract liabilities, net 924,000 713,000 909,000 Amortization of core premiums paid to customers 6,590,000 4,501,000 4,127,000 Amortization of finished goods premiums paid to customers 101,000 - - Non-cash lease expense 7,102,000 5,808,000 - Foreign exchange impact of lease liabilities and forward contracts ( 17,606,000 ) 18,201,000 972,000 Foreign currency remeasurement (gain) loss ( 1,500,000 ) 818,000 - Loss (gain) due to the change in the fair value of the contingent consideration 230,000 ( 98,000 ) 324,000 Gain on short-term investments ( 521,000 ) ( 96,000 ) ( 89,000 ) Net provision for inventory reserves 12,803,000 13,372,000 11,153,000 Net provision for customer payment discrepancies 694,000 1,626,000 731,000 Net provision for doubtful accounts ( 1,000 ) 610,000 224,000 Deferred income taxes ( 433,000 ) ( 10,337,000 ) ( 3,063,000 ) Share-based compensation expense 5,247,000 4,141,000 5,564,000 Loss on disposal of plant and equipment 29,000 15,000 41,000 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable 28,364,000 ( 38,078,000 ) 10,214,000 Inventory ( 73,564,000 ) ( 6,112,000 ) ( 76,213,000 ) Inventory unreturned ( 5,514,000 ) ( 552,000 ) ( 961,000 ) Income tax receivable 3,200,000 6,753,000 ( 2,039,000 ) Prepaid expenses and other current assets ( 2,763,000 ) ( 416,000 ) 234,000 Other assets 523,000 ( 1,109,000 ) ( 299,000 ) Accounts payable and accrued liabilities 55,958,000 ( 11,253,000 ) 16,572,000 Customer finished goods returns accrual 6,138,000 2,725,000 4,588,000 Contract assets, net ( 43,871,000 ) ( 15,835,000 ) ( 2,096,000 ) Contract liabilities, net 45,118,000 43,372,000 ( 11,894,000 ) Operating lease liabilities ( 6,376,000 ) ( 4,726,000 ) - Other liabilities 1,738,000 1,662,000 242,000 Net cash provided by (used in) operating activities 56,089,000 18,795,000 ( 40,328,000 ) Cash flows from investing activities: Purchase of plant and equipment ( 13,942,000 ) ( 14,156,000 ) ( 11,149,000 ) Purchase of business, net of cash acquired - - ( 11,106,000 ) Proceeds from sale of plant and equipment 8,000 43,000 - (Payments for) redemptions of short term investments ( 280,000 ) 2,519,000 ( 355,000 ) Net cash used in investing activities ( 14,214,000 ) ( 11,594,000 ) ( 22,610,000 ) Cash flows from financing activities: Borrowings under revolving loan 27,000,000 75,000,000 102,900,000 Repayments under revolving loan ( 95,000,000 ) ( 33,400,000 ) ( 46,500,000 ) Borrowings under term loan - - 13,594,000 Repayments of term loan ( 3,750,000 ) ( 3,750,000 ) ( 2,656,000 ) Payments for debt issuance costs - ( 973,000 ) ( 1,815,000 ) Payments on finance lease obligations ( 2,442,000 ) ( 2,164,000 ) ( 1,460,000 ) Payment of contingent consideration ( 1,605,000 ) ( 1,955,000 ) - Exercise of stock options 719,000 457,000 257,000 Cash used to net share settle equity awards ( 350,000 ) ( 1,062,000 ) ( 322,000 ) Repurchase of common stock, including fees ( 1,139,000 ) - ( 4,062,000 ) Net cash (used in) provided by financing activities ( 76,567,000 ) 32,153,000 59,936,000 Effect of exchange rate changes on cash and cash equivalents 599,000 351,000 ( 136,000 ) Net (decrease) increase in cash and cash equivalents ( 34,093,000 ) 39,705,000 ( 3,138,000 ) Cash and cash equivalents — Beginning of year 49,616,000 9,911,000 13,049,000 Cash and cash equivalents — End of year $ 15,523,000 $ 49,616,000 $ 9,911,000 Supplemental disclosures of cash flow information: Cash paid for interest, net $ 14,066,000 $ 23,558,000 $ 21,148,000 Cash paid for income taxes, net of refunds 3,027,000 1,500,000 3,588,000 Cash paid for operating leases 10,878,000 8,212,000 - Cash paid for finance leases 2,821,000 2,445,000 - Plant and equipment acquired under finance lease 4,102,000 3,144,000 902,000 Assets acquired under operating leases 16,484,000 18,528,000 - Contingent consideration - - 4,400,000 Non-cash capital expenditures 857,000 2,211,000 - The accompanying notes to consolidated financial statements are an integral part hereof. F- 5 Table of Contents MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Company Background and Organization Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of automotive aftermarket non-discretionary replacement parts and test solutions and diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, and brake master cylinders, and (iv) test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators, starters, belt starter generators and bench-top testers used by the automotive retail segment and turbochargers. The Company primarily ships its products from its facilities and various third-party warehouse distribution centers in North America, including the Company’s 410,000 square foot distribution center in Tijuana, Mexico. Impact of the Novel Coronavirus (“COVID-19”) The outbreak of the COVID-19 pandemic adversely impacted 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 occurrence and duration of 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, (v) the availability and acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business because of an economic recession or depression that has occurred or may occur in the future. 2. Summary of Significant Accounting Policies Recently Adopted Accounting Pronouncements 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 disclosures for its expected credit losses but did not have a material effect on its 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 consolidated balance sheets. The Company maintained an allowance 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 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. F- 6 Table of Contents 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 are 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 statem ents. 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 consolidated financial statements for the year ended March 31, 2021. 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 adoption of this guidance on April 1, 2021 is not expected to have any material impact on the Company’s consolidated financial statements. Reclassifications Certain reclassifications have been made to the presentation of the prior year consolidated financial statements to conform to the current year presentation. F- 7 Table of Contents Principles of Consolidation The accompanying consolidated financial statements include the accounts of Motorcar Parts of America, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Segment Reporting 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. Cash and Cash Equivalents Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds. The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions. Accounts Receivable The Company’s 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 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 does not require collateral for accounts receivable. 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 has receivable discount programs that have been established with certain major customers and their respective banks. Under these programs, the Company has the option to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. Once the customer chooses which outstanding invoices are going to be made available for discounting, the Company can accept or decline the bundle of invoices provided. The receivable discount programs are non-recourse, and funds cannot be reclaimed by the customer or its bank after the related invoices have been discounted. Inventory Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, (iii) remanufactured finished goods and purchased finished goods. Used Core, component raw materials, and purchased finished goods are stated at the lower of average cost or net realizable value. F- 8 Table of Contents Work-in-process is in various stages of production and is valued at the average cost of Used Cores and component raw materials issued to work orders still open, including allocations of labor and overhead costs. Historically, work-in-process inventory has not been material compared to the total inventory balance. Remanufactured finished goods include: (i) the Used Core cost and (ii) the cost of component raw materials, and allocations of labor and variable and fixed overhead costs (the “Unit Cost”). The allocations of labor and variable and fixed overhead costs are based on the actual use of the production facilities over the prior 12 months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, the Company excludes certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated overhead as period costs. Purchased finished goods also include an allocation of fixed overhead costs. The estimate of net realizable value is subjective and based on management’s judgment and knowledge of current industry demand and management’s projections of industry demand. The estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment, impact its ability to sell or liquidate potentially excess or obsolete inventory. Net realizable value is determined at least quarterly as follows: • Net realizable value for finished goods by customer by product line are determined based on the agreed upon selling price with the customer for a product in the trailing 12 months. The Company compares the average selling price, including any discounts and allowances, to the finished goods cost of on-hand inventory less any reserve for excess and obsolete inventory. Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified. • Net realizable value for Used Cores are determined based on current core purchase prices from core brokers to the extent that core purchases in the trailing 12 months are significant. Remanufacturing consumes, on average, more than one Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the product and consumer specifications. The Company purchases Used Cores from core brokers to supplement its yield rates and Used Cores not returned under the core exchange programs. The Company also considers the net selling price its customers have agreed to pay for Used Cores that are not returned under its core exchange programs to assess whether Used Core cost exceeds Used Core net realizable value on a by customer by product line basis. Any reduction of core cost is recorded as cost of goods sold in the period in which the revaluation is identified. • The Company records an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. The Company periodically reviews inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon management’s judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100 % of cost if no liquidation market exists for the part. As a result of this process, the Company recorded reserves for excess and obsolete inventory of $ 13,246,000 and $ 13,208,000 at March 31, 2021 and 2020, respectively. The Company records vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Inventory Unreturned Inventory unreturned represents the Company’s estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that the Company expects to be returned under its general right of return policy, after the balance sheet date. Inventory unreturned includes only the Unit Cost of a finished good. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year . As such, the related amounts are classified in current assets. Inventory unreturned is valued in the same manner as the Company’s finished goods inventory. F- 9 Table of Contents Contract Assets Contract assets consists of: (i) the core portion of the finished goods shipped to customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, (iv) finished goods premiums paid to customers, and (v) long-term core inventory deposits. Remanufactured Cores held at customers’ locations as a part of the finished goods sold to the customer are classified as long-term contract assets. These assets are valued at the lower of cost or net realizable value of Used Cores on hand (See Inventory above). For these Remanufactured Cores, the Company expects the finished good containing the Remanufactured Core to be returned under the Company’s general right of return policy or a similar Used Core to be returned to the Company by the customer, under the Company’s core exchange programs in each case, for credit. The Remanufactured Cores and Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as “Cores expected to be returned by customers”, which are included in short-term contract assets until the Company physically receives them during its normal operating cycle, which is generally one year. Upfront payments to customers represent the marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided by the Company to its customers. These allowances are recognized as an asset and amortized over the appropriate period of time as a reduction of revenue if the Company expects to generate future revenues associated with the upfront payment. If the Company does not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during the Company’s normal operating cycle, which is generally one year, are classified as short-term contract assets. Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. The Company considers, among other things, the length of its largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. These core premiums are amortized over a period typically ranging from six to eight years , adjusted for specific circumstances associated with the arrangement. Core premiums are recorded as long-term contract assets. Core premiums expected to be amortized within the Company’s normal operating cycle, which is generally one year, are classified as short-term contract assets. Finished goods premiums paid to customers represent the difference between the finished good acquisition price paid to customers, generally in connection with new business, and the related finished good cost, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. The Company considers, among other things, the length of its largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. Finished goods premiums are amortized over a period typically ranging from six to eight years , adjusted for specific circumstances associated with the arrangement. Finished goods premiums are recorded as long-term contract assets. Finished goods premiums expected to be amortized within our normal operating cycle, which is generally one year, are classified as short-term contract assets. Long-term core inventory deposits represent the cost of Remanufactured Cores the Company has purchased from customers, which are held by the customers and remain on the customers’ premises. The costs of these Remanufactured Cores were established at the time of the transaction based on the then current cost. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. The Company expects to realize the selling value and the related cost of these Remanufactured Cores should its relationship with a customer end, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience. F- 10 Table of Contents Customer Finished Goods Returns Accrual The customer finished goods returns accrual represents the Company’s estimate of its exposure to customer returns, including warranty returns, under its general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers’ inventory of certain product lines exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the Unit Value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year. Income Taxes The Company accounts for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized. The primary components of the Company’s income tax expense were (i) federal income taxes, (ii) state income taxes, (iii) foreign income taxed at rates that are different from the federal statutory rate, (iv) change in realizable deferred tax items, (v) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), (vi) income taxes associated with uncertain tax positions, and (vii) the impact of net operating loss carry-backs in connection with the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020 . Realization of deferred tax assets 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. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with the Company’s Canadian operations have been offset completely by a valuation allowance 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. The Company has made an accounting policy election to recognize the U.S. tax effects of global intangible low-taxed income as a component of income tax expense in the period the tax arises. Plant and Equipment Plant and equipment are stated at cost, less accumulated depreciation. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation is provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Machinery and equipment are depreciated over a range from five to ten years . Office equipment and fixtures are depreciated over a range from three to ten years . Leasehold improvements are depreciated over the lives of the respective leases or the service lives of the leasehold improvements, whichever is shorter. Depreciation of assets recorded under finance leases is included in depreciation expense. The Company evaluates plant and equipment, including leasehold improvements, equipment, construction in progress, and right-of-use assets for impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. There were no indicators of impairment at March 31, 2021. F- 11 Table of Contents Leases The Company determines if an arrangement contains a lease at inception. Lease assets and lease liabilities are recorded based on the present value of lease payments over the lease term, which includes the minimum unconditional term of the lease. Certain of the Company’s leases include options to extend the leases for up to five years . When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that it will exercise the option, the option is considered in determining the classification and measurement of the lease. The lease assets are recorded net of any lease incentives received. The Company exempts leases with an initial term of 12 months or less from balance sheet recognition and, for all classes of assets, combines non-lease components with lease components. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. The Company uses its incremental borrowing rate for each of its leases in determining the present value of its expected lease payments based on the information available at the lease commencement date as the rate implicit for each of its leases is not readily detainable. The Company’s incremental borrowing rate is determined by analyzing and combining (i) an applicable risk-free rate, (ii) a financial spread adjustment, and (iii) any lease specific adjustment. Certain leases contain provisions for property-related costs that are variable in nature for which the Company is responsible, including common area maintenance and other property operating services, which are expensed as incurred and not included in the determination of lease assets and lease liabilities. These costs are calculated based on a variety of factors including property values, tax and utility rates, property services fees, and other factors. The Company records rent expense for operating leases, some of which have escalating rent payments, on a straight-line basis over the lease term. The Company has material non-functional currency leases. As required for other monetary liabilities, lessees shall remeasure a foreign currency-denominated lease liability using the exchange rate at each reporting date, but the lease assets are nonmonetary assets measured at historical rates, which are not affected by subsequent changes in the exchange rates. The Company recorded a gain of $ 9,893,000 and a loss of $ 11,710,000 during the years ended March 31, 2021 and 2020, respectively, which are included in “foreign exchange impact of lease liabilities and forward contracts” in the consolidated statements of operations. See Note 10 for additional information regarding the Company’s leases. Goodwill The Company evaluates goodwill for impairment at least annually during the fourth quarter of each fiscal year or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The goodwill impairment test is performed at the reporting unit level, which represents the Company’s operating segments. In testing for goodwill impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, it will proceed with performing the quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value of the reporting unit exceeds its fair value an impairment loss will be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The Company completed the required annual testing of goodwill impairment for each of the reporting units during the fourth quarter of the year ended March 31, 2021, and determined through the qualitative assessment that its goodwill of $ 3,205,000 was not impaired. Intangible Assets The Company’s intangible assets other than goodwill are finite–lived and amortized on a straight-line basis over their respective useful lives. The Company analyzes its finite-lived intangible assets for impairment when and if indicators of impairment exist. At March 31, 2021, the Company’s intangible assets were $ 5,329,000 , and there were no indicators of impairment. F- 12 Table of Contents Debt Issuance Costs Debt issuance costs include fees and costs incurred to obtain financing. Debt issuance costs related to the Company’s term loans are presented in the balance sheet as a direct deduction from the carrying amount of the term loans. Debt issuance costs related to the Company’s revolving loan are presented in prepaid expenses and other current assets in the accompanying consolidated balance sheets, regardless of whether or not there are any outstanding borrowings under the revolving loan. These fees and costs are amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the related loans and are included in interest expense in the Company’s consolidated statements of operations. Foreign Currency Translation For financial reporting purposes, the functional currency of the foreign subsidiaries is the local currency. The assets and liabilities of foreign operations for which the local currency is the functional currency are translated into the U.S. dollar at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average exchange rates during the year. The accumulated foreign currency translation adjustment is presented as a component of comprehensive income or loss in the consolidated statements of shareholders’ equity. During the years ended March 31, 2021 and 2020, aggregate foreign currency transaction gains of $ 1,144,000 and losses of $ 789,000 , respectively, were recorded in general and administrative expenses. Revenue Recognition Revenue is recognized when performance obligations under the terms of a contract with its customers are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration . Revenue is recognized either when products are shipped or when delivered, depending on the applicable contract terms. Bill and hold shipments are shipped out to the customer as ex-works; in which the customer makes arrangements and is responsible for their shipping cost. No freight or shipping costs are accrued for revenue under the terms of shipments made as ex-works. The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and the unit portion included in the product (“Unit Value”), for which revenue is recorded based on our then current price list, net of applicable discounts and allowances. The Remanufactured Core value is recorded as a net revenue based upon the estimate of Used Cores that will not be returned by the customer for credit. These estimates are subjective and based on management’s judgment and knowledge of historical, current, and projected return rates. As reconciliations are completed with the customers the actual rates at which Used Cores are not being returned may differ from the current estimates. This may result in periodic adjustments of the estimated contract asset and liability amounts recorded and may impact the projected revenue recognition rates used to record the estimated future revenue. These estimates may also be revised if there are changes in contractual arrangements with customers, or changes in business practices. A significant portion of the remanufactured automotive parts sold to customers are replaced by similar Used Cores sent back for credit by customers under the core exchange programs (as described in further detail below). The number of Used Cores sent back under the core exchange programs is generally limited to the number of similar Remanufactured Cores previously shipped to each customer. Revenue Recognition — Core Exchange Programs Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the product at the full Remanufactured Core sales price. For these Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. The remainder of the full price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as the Company expects these Remanufactured Cores to be returned for credit under its core exchange programs. Nominal price Remanufactured Cores: Certain other customers are invoiced for the Remanufactured Core value of the product shipped at a nominal (generally $ 0.01 or less) Remanufactured Core price. For these nominal Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange programs. Revenue amounts are calculated based on contractually agreed upon pricing for these Remanufactured Cores for which the customers are not returning similar Used Cores. The remainder of the nominal price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as the Company expects these Remanufactured Cores to be returned for credit under its core exchange programs. F- 13 Table of Contents Revenue Recognition; General Right of Return Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns, which are typically less than 5 % of units sold. In some instances, a higher level of returns is allowed in connection with significant restocking orders. The aggregate returns are generally limited to less than 20 % of unit sales. The allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales. The allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers. Stock adjustment returns do not occur at any specific time during the year. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year. The Unit Value of the warranty and stock adjustment returns are treated as reductions of revenue based on the estimations made at the time of the sale. The Remanufactured Core value of warranty and stock adjustment returns are provided for as indicated in the paragraph “Revenue Recognition – Core Exchange Programs”. As is standard in the industry, the Company only accepts returns from on-going customers. If a customer ceases doing business with the Company, it has no further obligation to accept additional product returns from that customer. Similarly, the Company accepts product returns and grants appropriate credits to new customers from the time the new customer relationship is established. Shipping Costs The Company includes shipping and handling charges in the gross invoice price to customers and classifies the total amount as revenue. All shipping and handling costs are expensed as cost of sales as inventory is sold. Contract Liability Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, (v) finished goods liabilities, and (vi) customer deposits. Customer allowances earned includes all marketing allowances provided to customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. See Note 14 for a description of all marketing allowances. Customer allowances to be provided to customers within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales price of these Remanufactured Cores will be realized when the Company’s relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. F- 14 Table of Contents Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to the Company’s customers. When the Company ships the product, it recognizes an obligation to accept a similar Used Core sent back under the core exchange programs based upon the Remanufactured Core price agreed upon by the Company and its customer. The Contract liability related to Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as short-term contract liabilities until the Company physically receives these Used Cores as they are expected to be returned during the Company’s normal operating cycle, which is generally one year and the remainder are recorded as long-term contract liabilities. The core bank liability represents the full Remanufactured Core sales price paid for cores returned under the core exchange programs. The payment for these cores are made over a contractual repayment period pursuant to the Company’s agreement with this customer. Payments to be made within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Finished goods liabilities represents the agreed upon price of finished goods purchased from customers, generally in connection with new business. The payment for these finished goods are made over a contractual repayment period pursuant to the Company’s agreement with the customer. Payments to be made within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term contract liabilities. Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. The Company classifies these customer deposits as short-term contract liabilities as the Company expects to satisfy these obligations within its normal operating cycle, which is generally one year. Advertising Costs The Company expenses all advertising costs as incurred. Advertising expenses for the years ended March 31, 2021, 2020 and 2019 were $ 507,000 , $ 773,000 and $ 819,000 , respectively. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, 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 (loss) per share. Years Ended March 31, 2021 2020 2019 Net income (loss) $ 21,476,000 $ ( 7,290,000 ) $ ( 7,849,000 ) Basic shares 19,023,145 18,913,788 18,849,909 Effect of dilutive stock options and warrants 364,410 - - Diluted shares 19,387,555 18,913,788 18,849,909 Net income (loss) per share: Basic net income (loss) per share $ 1.13 $ ( 0.39 ) $ ( 0.42 ) Diluted net income (loss) per share $ 1.11 $ ( 0.39 ) $ ( 0.42 ) F- 15 Table of Contents Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net income (loss) per share. For the years ended March 31, 2021, 2020 and 2019, there were 1,279,251 , 1,738,106 , and 1,580,299 , respectively, of potential common shares not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including allowances for credit losses, valuation of inventory, valuation of long-lived assets, goodwill and intangible assets, depreciation and amortization of long-lived assets, litigation matters, valuation of deferred tax assets, share-based compensation, sales returns and other customer marketing allowances, and the incremental borrowing rate used in determining the present value of lease liabilities. Although the Company does not believe that there is a reasonable likelihood that there will be a material change in the future estimate or in the assumptions used in calculating the estimate, unforeseen changes in the industry, or business could materially impact the estimate and may have a material adverse effect on its business, financial condition and results of operations. Financial Instruments The carrying amounts of cash, short-term investments, 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 current rates for instruments with similar characteristics. Share-Based Payments The Black-Scholes option-pricing 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. The following summarizes the Black-Scholes option-pricing model assumptions used to derive the weighted average fair value of the stock options granted during the periods noted. Years Ended March 31, 2021 2020 2019 Weighted average risk free interest rate 0.44 % 1.76 % 2.83 % Weighted average expected holding period (years) 5.96 5.70 5.94 Weighted average expected volatility 44.90 % 42.50 % 43.91 % Weighted average expected dividend yield - - - Weighted average fair value of options granted $ 6.43 $ 8.27 $ 8.75 Credit Risk The Company regularly reviews its accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality and age of the accounts receivable, and the current economic conditions that may affect a customer’s ability to pay. The majority of the Company’s sales are to leading automotive aftermarket parts suppliers. Management believes the credit risk with respect to trade accounts receivable is limited due to the Company’s credit evaluation process, the nature of its customers, and its accounts receivable discount programs. However, should the Company’s customers experience significant cash flow problems, its financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations. The Company maintains an allowance for credit losses that, in its opinion, provides for an adequate reserve to cover losses that may be incurred. F- 16 Table of Contents Deferred Compensation Plan The Company has a deferred compensation plan for certain members of management. The plan allows participants to defer salary and bonuses. The assets of the plan, which are held in a trust and are subject to the claims of the Company’s general creditors under federal and state laws in the event of insolvency, are recorded as short-term investments in the consolidated balance sheets. Consequently, the trust qualifies as a Rabbi trust for income tax purposes. The plan’s assets consist primarily of mutual funds and are recorded at market value with any unrealized gain or loss recorded as general and administrative expense. The carrying value of plan assets was $ 1,652,000 and $ 850,000 , and the deferred compensation liability, which is included in other current liabilities in the accompanying consolidated balance sheets, was $ 1,652,000 and $ 850,000 at March 31, 2021 and 2020, respectively. During the years ended March 31, 2021, 2020, and 2019, the Company made contributions of $ 96,000 , $ 79,000 and $ 113,000 , respectively. During the years ended March 31, 2021 and 2020, the Company redeemed $ 46,000 and $ 2,802,000 , respectively, of its short-term investments for the payment of deferred compensation liabilities. The following summarizes the gain (loss) on the Company’s equity investments: Years Ended March 31, 2021 2020 2019 Net gain recognized on equity securities $ 521,000 $ 96,000 $ 89,000 Less: net gain recognized on equity securities sold 10,000 193,000 - Unrealized gain (loss) recognized on equity securities still held $ 511,000 $ ( 97,000 ) $ 89,000 Comprehensive Income or Loss Comprehensive income or loss is defined as the change in equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive income or loss consists of net unrealized income or loss from foreign currency translation adjustments. 3. Goodwill and Intangible Assets Goodwill The Company had goodwill of $ 3,205,000 at March 31, 2021 and 2020. Intangible Assets The following is a summary of acquired intangible assets subject to amortization: March 31, 2021 March 31, 2020 Weighted Average Amortization Period Gross Carrying Value Accumulated Amortization Gross Carrying Value Accumulated Amortization Intangible assets subject to amortization 0 Trademarks 9 years $ 842,000 $ 551,000 $ 827,000 $ 435,000 Customer relationships 11 years 8,780,000 5,305,000 8,453,000 4,376,000 Developed technology 5 years 2,870,000 1,307,000 2,817,000 893,000 Total 9 years $ 12,492,000 $ 7,163,000 $ 12,097,000 $ 5,704,000 During the years ended March 31, 2021 and 2020, the Company retired $ 291,000 and $ 470,000 , respectively, of fully amortized intangible assets. F- 17 Table of Contents Amortization expense for acquired intangible assets is as follows: Years Ended March 31, 2021 2020 2019 Amortization expense $ 1,571,000 $ 1,770,000 $ 1,194,000 The estimated future amortization expense for acquired intangible assets subject to amortization is as follows: Year Ending March 31, 2022 $ 1,548,000 2023 1,514,000 2024 1,128,000 2025 512,000 2026 367,000 Thereafter 260,000 Total $ 5,329,000 4. 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. Accounts receivable — net is comprised of the following: March 31, 2021 March 31, 2020 Accounts receivable — trade $ 81,549,000 $ 109,164,000 Allowance for credit losses ( 348,000 ) ( 4,252,000 ) Customer payment discrepancies ( 752,000 ) ( 1,040,000 ) Customer returns RGA issued ( 17,327,000 ) ( 12,124,000 ) Less: total accounts receivable offset accounts ( 18,427,000 ) ( 17,416,000 ) Total accounts receivable — net $ 63,122,000 $ 91,748,000 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 year ended March 31, 2021, the Company wrote off amounts previously fully reserved for in connection the bankruptcy filing of one of its customers. Year Ended March 31, 2021 Balance at beginning of period $ 4,252,000 Provision for expected credit losses 99,000 Recoveries ( 100,000 ) Amounts written off charged against the allowance ( 3,903,000 ) Balance at end of period $ 348,000 F- 18 Table of Contents 5. Inventory Inventory is comprised of the following: March 31, 2021 March 31, 2020 Raw materials $ 128,190,000 $ 99,360,000 Work in process 5,233,000 3,906,000 Finished goods 168,184,000 135,601,000 301,607,000 238,867,000 Less allowance for excess and obsolete inventory ( 13,246,000 ) ( 13,208,000 ) Total $ 288,361,000 $ 225,659,000 Inventory unreturned $ 14,552,000 $ 9,021,000 6. Contract Assets During the year ended March 31, 2021, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $ 4,600,000 . Contract assets are comprised of the following: March 31, 2021 March 31, 2020 Short-term contract assets Cores expected to be returned by customers $ 17,657,000 $ 12,579,000 Upfront payments to customers 684,000 2,865,000 Finished goods premiums paid to customers 405,000 - Core premiums paid to customers 8,194,000 4,888,000 Total short-term contract assets $ 26,940,000 $ 20,332,000 Remanufactured cores held at customers’ locations $ 229,918,000 $ 217,616,000 Upfront payments to customers 486,000 589,000 Finished goods premiums paid to customers 2,731,000 - Core premiums paid to customers 31,509,000 15,766,000 Long-term core inventory deposits 5,569,000 5,569,000 Total long-term contract assets $ 270,213,000 $ 239,540,000 7. Plant and Equipment Plant and equipment is comprised of the following: March 31, 2021 March 31, 2020 Machinery and equipment $ 58,957,000 $ 48,424,000 Office equipment and fixtures 28,758,000 25,541,000 Leasehold improvements 12,152,000 10,519,000 99,867,000 84,484,000 Less accumulated depreciation ( 46,013,000 ) ( 39,527,000 ) Total $ 53,854,000 $ 44,957,000 Plant and equipment located in the foreign countries where the Company has facilities, net of accumulated depreciation, totaled $ 45,831,000 and $ 35,410,000 , of which $ 42,215,000 and $ 31,845,000 is located in Mexico, at March 31, 2021 and 2020, respectively. F- 19 Table of Contents 8. 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 fiscal year 2021, 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. 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 2.62 % at March 31, 2021, 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 March 31, 2021. On May 28, 2021, the Company entered into a third amendment to the Amended Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extends the maturity date to May 28, 2026 from June 5, 2023 , (ii) modifies the fixed charge coverage ratio financial covenant, and (iii) modifies the definition of “Consolidated EBITDA”. The modifications to the financial covenants were effective as of March 31, 2021. The Company had cash of $ 15,523,000 at March 31, 2021 and paid down its outstanding debt by $ 71,750,000 during the year ended March 31, 2021. 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 Company’s Term Loans are comprised of the following: March 31, 2021 March 31, 2020 Principal amount of Term Loans $ 20,625,000 $ 24,375,000 Unamortized financing fees ( 161,000 ) ( 235,000 ) Net carrying amount of Term Loans 20,464,000 24,140,000 Less current portion of Term Loans ( 3,678,000 ) ( 3,678,000 ) Long-term portion of Term Loans $ 16,786,000 $ 20,462,000 F- 20 Table of Contents Future repayments of the Company’s Term Loans are as follows: Year Ending March 31, 2022 $ 3,750,000 2023 3,750,000 2024 13,125,000 Total payments $ 20,625,000 The Company had $ 84,000,000 and $ 152,000,000 outstanding under the Revolving Facility at March 31, 2021 and 2020, respectively. In addition, $ 6,193,000 was reserved for letters of credit at March 31, 2021. At March 31, 2021, after certain adjustments, $ 125,296,000 was available under the Revolving Facility. 9. Contract Liabilities Contract liabilities are comprised of the following: March 31, 2021 March 31, 2020 Short-term contract liabilities Customer core returns accruals $ 12,710,000 $ 4,126,000 Customer allowances earned 16,513,000 13,844,000 Customer deposits 2,234,000 1,365,000 Finished goods liabilities 1,883,000 - Core bank liability 1,585,000 528,000 Accrued core payment 6,147,000 8,048,000 Total short-term contract liabilities $ 41,072,000 $ 27,911,000 Long-term contract liabilities Customer core returns accruals $ 103,719,000 $ 77,927,000 Customer allowances earned 313,000 542,000 Finished goods liabilities 2,678,000 - Core bank liability 16,903,000 7,556,000 Accrued core payment 1,610,000 6,076,000 Total long-term contract liabilities $ 125,223,000 $ 92,101,000 10. Leases The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. During the year ended March 31, 2021, the following material operating leases commenced: (i) the lease of the Company’s 173,000 square foot core induction, warehouse, and office facility in Mexico, which resulted in an increase in the operating lease liability of $ 12,724,000 and (ii) the renewal of the Company’s 157,000 square foot remanufacturing, warehouse, and office facility in Canada, which resulted in an increase in the operating lease liability of $ 2,715,000 . During the first quarter of fiscal 2022, the Company renewed the lease for its corporate headquarters in Torrance, California, for an additional 10 -year period, and accordingly it is not included in the operating lease assets and operating lease liabilities as of March 31, 2021. Total commitments for this agreement, which expires in March 2032 , are $ 20,789,000 . The Company also has finance leases for certain office and manufacturing equipment, which generally range from three to five years . The Company has material non-functional currency leases, which resulted in a remeasurement gain of $ 9,893,000 compared with a loss of $ 11,710,000 during the years ended March 31, 2021 and 2020, respectively. These remeasurement gains and losses are included in “foreign exchange impact of lease liabilities and forward contracts” in the consolidated statements of operations. F- 21 Table of Contents Balance sheet information for leases is comprised of the following: March 31, 2021 March 31, 2020 Leases Classification Assets: Operating Operating lease assets $ 71,513,000 $ 53,029,000 Finance Plant and equipment 8,852,000 6,922,000 Total leased assets $ 80,365,000 $ 59,951,000 Liabilities: Current Operating Operating lease liabilities $ 6,439,000 $ 5,104,000 Finance Other current liabilities 2,640,000 2,059,000 Long-term Operating Long-term operating lease liabilities 70,551,000 61,425,000 Finance Other liabilities 4,995,000 3,905,000 Total lease liabilities $ 84,625,000 $ 72,493,000 Lease cost recognized in the consolidated statement of operations is comprised of the following: Years Ended March 31, 2021 2020 Lease cost Operating lease cost (1) $ 11,527,000 $ 8,733,000 Short-term lease cost 1,383,000 1,263,000 Variable lease cost 825,000 600,000 Finance lease cost: Amortization of finance lease assets 1,762,000 1,616,000 Interest on finance lease liabilities 379,000 281,000 Total lease cost $ 15,876,000 $ 12,493,000 (1) During the year ended March 31, 2019, the Company incurred total operating lease expenses of $ 6,188,000 . Maturities of lease commitments at March 31, 2021 were as follows: Maturity of lease liabilities Operating Leases Finance Leases Total 2022 $ 10,753,000 $ 2,962,000 $ 13,715,000 2023 9,666,000 2,324,000 11,990,000 2024 8,250,000 1,529,000 9,779,000 2025 8,161,000 1,098,000 9,259,000 2026 8,228,000 430,000 8,658,000 Thereafter 61,159,000 - 61,159,000 Total lease payments 106,217,000 8,343,000 114,560,000 Less amount representing interest ( 29,227,000 ) ( 708,000 ) ( 29,935,000 ) Present value of lease liabilities $ 76,990,000 $ 7,635,000 $ 84,625,000 F- 22 Table of Contents Other information about leases is as follows: March 31, 2021 March 31, 2020 Lease term and discount rate Weighted-average remaining lease term (years): Finance leases 3.4 3.2 Operating leases 11.1 12.0 Weighted-average discount rate: Finance leases 5.3 % 4.7 % Operating leases 5.9 % 5.6 % 11. 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. The following is a summary of the Company’s accounts receivable discount programs: Years Ended March 31, 2021 2020 Receivables discounted $ 491,285,000 $ 461,484,000 Weighted average days 334 346 Weighted average discount rate 2.1 % 3.3 % Amount of discount as interest expense $ 9,513,000 $ 14,780,000 12. 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 facilities overseas, 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 forward foreign currency exchange contracts are designated 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 $ 41,819,000 and $ 42,052,000 at March 31, 2021 and 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 consolidated statements of operations . F- 23 Table of Contents The following shows the effect of the Company’s derivative instruments on its consolidated statements of operations: Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward Contracts Derivatives Not Designated as Years Ended March 31, Hedging Instruments 2021 2020 2019 Forward foreign currency exchange contracts $ 7,713,000 $ ( 6,491,000 ) $ ( 972,000 ) The fair value of the forward foreign currency exchange contracts of $ 1,429,000 is included in prepaid and other current assets in the consolidated balance sheet at March 31, 2021. The fair value of the forward foreign currency exchange contracts of $ 6,284,000 is included other current liabilities in the accompanying 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 consolidated statements of cash flows for the years ended March 31, 2021, 2020, and 2019. 13. Fair Value Measurements The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs: • Level 1 — Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. • Level 3 — Valuation is based upon unobservable inputs that are significant to the fair value measurement. The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. F- 24 Table of Contents The following sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis according to the valuation techniques the Company used to determine their fair values at: March 31, 2021 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 $ 1,652,000 $ 1,652,000 $ - $ - $ 850,000 $ 850,000 $ - $ - Prepaid expenses and other current assets Forward foreign currency exchange contracts 1,429,000 - 1,429,000 - - - - - Liabilities Accrued liabilities Short-term contingent consideration 910,000 - - 910,000 2,190,000 - - 2,190,000 Other current liabilities Deferred compensation 1,652,000 1,652,000 - - 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 12). 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. The milestone was achieved and, as a result, the Company paid $ 1,250,000 to the former owners of E&M during the year ended March 31, 2021. The fair value of the two-year R&D event milestone was $ 1,130,000 at March 31, 2020, determined using a probability weighted method with commensurate with the term of the contingent consideration. E&M Gross Profit Earn-out Consideration The fair value of the three-year gross profit earn-out consideration was $ 910,000 and $ 1,230,000 at March 31, 2021 and 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. The second year milestone was achieved and, as a result, the Company paid $ 723,000 to the former owners of E&M during the year ended March 31, 2021. F- 25 Table of Contents The assumptions used to determine the fair value is as follows: March 31, 2021 March 31, 2020 Risk free interest rate 0.12 % 0.22 % Counter party rate 4.30 % 12.22 % Expected volatility 30 - 40 % 31.00 % Weighted average cost of capital 13.0 - 15.5 % 13.75 % Dixie Revenue Earn-out Consideration 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. The fair value of the two-year revenue earn-out consideration was $ 0 and $ 293,000 at March 31, 2021 and 2020, determined using a Monte Carlo Simulation Model. The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements: Years Ended March 31, 2021 2020 Contingent Consideration Contingent Consideration Beginning balance $ 2,653,000 $ 4,721,000 Newly issued - - Changes in revaluation of contingent consideration included in earnings 230,000 ( 113,000 ) Exercises/settlements ( 1,973,000 ) ( 1,955,000 ) Ending balance $ 910,000 $ 2,653,000 During the years ended March 31, 2021 and 2020, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, 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. 14. 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 total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. F- 26 Table of Contents The following summarizes the changes in the warranty return accrual: Years Ended March 31, 2021 2020 2019 Balance at beginning of year $ 18,300,000 $ 19,475,000 $ 16,646,000 Acquisition (1) - - 221,000 Charged to expense 111,025,000 112,590,000 111,321,000 Amounts processed ( 108,232,000 ) ( 113,765,000 ) ( 108,713,000 ) Balance at end of year $ 21,093,000 $ 18,300,000 $ 19,475,000 (1) Warranty reserve established in the opening balance sheet in connection with the Company's Dixie acquisition. Commitments to Provide Marketing Allowances under Long-Term Customer Contracts The Company has or is renegotiating long-term agreements with many of its major customers. Under these agreements, which in most cases have initial terms of at least four years , the Company is designated as the exclusive or primary supplier for specified categories of the Company’s products. Because of the very competitive nature of the market and the limited number of customers for these products, the Company’s customers have sought and obtained price concessions, significant marketing allowances, and more favorable delivery and payment terms in consideration for the Company’s designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that the Company meet ongoing performance standards. The Company’s contracts with its customers expire at various dates through December 2024. While these longer-term agreements strengthen the Company’s customer relationships, the increased demand for the Company’s products often requires that the Company increase its inventories and personnel. Customer demands that the Company purchase their Remanufactured Core inventory also require the use of the Company’s working capital. The marketing and other allowances the Company typically grants its customers in connection with its new or expanded customer relationships adversely impact the near-term revenues, profitability, and associated cash flows from these arrangements. Such allowances include sales incentives and concessions and typically consist of: (i) allowances which may only be applied against future purchases and are recorded as a reduction to revenues in accordance with a schedule set forth in the long-term contract, (ii) allowances related to a single exchange of product that are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered, and (iii) amortization of core premiums paid to customers generally in connection with new business. F- 27 Table of Contents The following summarizes the breakout of allowances discussed above, recorded as a reduction to revenues: Years Ended March 31, 2021 2020 2019 Allowances incurred under long-term customer contracts $ 29,238,000 $ 26,733,000 $ 29,612,000 Allowances related to a single exchange of product 99,768,000 97,408,000 92,588,000 Amortization of core premiums paid to customers 6,590,000 4,501,000 4,127,000 Total customer allowances recorded as a reduction of revenues $ 135,596,000 $ 128,642,000 $ 126,327,000 The following presents the Company’s commitments to incur allowances, excluding allowances related to a single exchange of product, which will be recognized as a reduction to revenue when the related revenue is recognized: Year Ending March 31, 2022 $ 23,612,000 2023 9,503,000 2024 6,039,000 2025 5,009,000 2026 4,647,000 Thereafter 12,953,000 Total marketing allowances $ 61,763,000 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 is disputing 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. 15. Significant Customer and Other Information Significant Customer Concentrations The Company’s largest customers accounted for the following total percentage of net sales: Years Ended March 31, 2021 2020 2019 Customer A 42 % 38 % 38 % Customer B 22 % 20 % 22 % Customer C 23 % 26 % 23 % F- 28 Table of Contents The Company’s largest customers accounted for the following total percentage of accounts receivable — trade: March 31, 2021 March 31, 2020 Customer A 50 % 28 % Customer B 23 % 14 % Customer C - 33 % Geographic and Product Information The Company’s products are predominantly sold in the U.S. and accounted for the following total percentage of net sales: Years Ended March 31, 2021 2020 2019 Rotating electrical products 73 % 73 % 79 % Wheel hub products 15 % 15 % 15 % Brake-related products 10 % 9 % 3 % Other products 2 % 3 % 3 % 100 % 100 % 100 % Significant Supplier Concentrations No suppliers accounted for more than 10% of the Company’s inventory purchases for the years ended March 31, 2021, 2020, and 2019. 16. Income Taxes The income tax expense (benefit) is as follows: Years Ended March 31, 2021 2020 2019 Current tax expense Federal $ 5,734,000 $ 5,313,000 $ 680,000 State 722,000 1,454,000 647,000 Foreign 3,364,000 1,566,000 1,723,000 Total current tax expense 9,820,000 8,333,000 3,050,000 Deferred tax (benefit) expense Federal ( 1,909,000 ) ( 4,516,000 ) ( 2,087,000 ) State 118,000 ( 1,567,000 ) ( 295,000 ) Foreign 1,358,000 ( 3,261,000 ) ( 400,000 ) Total deferred tax benefit ( 433,000 ) ( 9,344,000 ) ( 2,782,000 ) Total income tax expense (benefit) $ 9,387,000 $ ( 1,011,000 ) $ 268,000 F- 29 Table of Contents Deferred income taxes consist of the following: March 31, 2021 March 31, 2020 Assets Allowance for bad debts $ 85,000 $ 1,037,000 Customer allowances earned 4,135,000 3,549,000 Allowance for stock adjustment returns 3,086,000 1,743,000 Inventory adjustments 4,323,000 5,567,000 Stock options 2,562,000 2,427,000 Operating lease liabilities 21,595,000 19,396,000 Estimate for returns 16,479,000 10,839,000 Accrued compensation 2,362,000 1,964,000 Net operating losses 4,210,000 4,091,000 Tax credits 1,828,000 1,343,000 Other 3,003,000 1,620,000 Total deferred tax assets $ 63,668,000 $ 53,576,000 Liabilities Plant and equipment, net ( 2,083,000 ) ( 5,175,000 ) Intangibles, net ( 9,840,000 ) ( 4,700,000 ) Operating lease ( 20,950,000 ) ( 15,371,000 ) Other ( 5,324,000 ) ( 3,966,000 ) Total deferred tax liabilities $ ( 38,197,000 ) $ ( 29,212,000 ) Less valuation allowance $ ( 6,163,000 ) $ ( 5,493,000 ) Total $ 19,308,000 $ 18,871,000 As of March 31, 2021, the Company had federal net operating loss carryforwards of $ 828,000 related to its January 2019 acquisition, state net operating loss carryforwards of $ 1,130,000 and foreign net operating loss carryforwards of $ 14,931,000 . The federal net operating loss carryforwards expire beginning fiscal year 2033 , the state net operating loss carryforwards expire beginning fiscal year 2033 , and the foreign net operating loss carryforwards expire beginning fiscal year 2038 . As of March 31, 2021, the Company also had non-US tax credit carryforwards of $ 1,828,000 , which will expire beginning fiscal year 2034 . A full valuation allowance was established on the federal and foreign net operating loss and tax credits carryforward as the Company believes it is more likely than not these tax attributes would not be realizable in the future. The net increase in the valuation allowance was $ 670,000 during the year ended March 31, 2021. Realization of deferred tax assets 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. Deferred tax assets arising primarily as a result of non-US net operating loss carry-forwards and non-US research and development credits in connection with the Company’s Canadian operations have been offset completely by a valuation allowance 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. For the years ended March 31, 2021, 2020, and 2019, the primary components of the Company’s income tax expense were (i) federal income taxes, (ii) state income taxes, (iii) foreign income taxed at rates that are different from the federal statutory rate, (iv) change in realizable deferred tax items, (v) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), (vi) income taxes associated with uncertain tax positions, and (vii) the impact of net operating loss carry-backs in connection with the CARES Act. F- 30 Table of Contents The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate is as follows: Years Ended March 31, 2021 2020 2019 Statutory federal income tax rate 21.0 % 21.0 % 21.0 % State income tax rate, net of federal benefit 2.2 % ( 3.7 )% ( 3.7 )% Excess tax benefit from stock compensation 0.5 % ( 1.3 )% 0.7 % Foreign income taxed at different rates 1.9 % 13.8 % - % Return to provision adjustments 0.4 % ( 1.5 )% - % Non-deductible executive compensation 1.9 % ( 4.0 )% ( 7.3 )% Change in valuation allowance 2.2 % ( 18.7 )% ( 15.3 )% Net operating loss carryback - % 4.8 % - % Uncertain tax positions 0.3 % 2.1 % 1.8 % Research and development credit ( 0.3 )% 1.1 % 1.3 % Non-deductible transaction costs - % - % ( 2.1 )% Other income tax 0.3 % ( 1.4 )% 0.1 % 30.4 % 12.2 % ( 3.5 )% The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2021, the Company is not under examination in any jurisdiction and the years ended March 31, 2017 through 2020 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years Ended March 31, 2021 2020 2019 Balance at beginning of period $ 1,011,000 $ 1,083,000 $ 1,219,000 Additions based on tax positions related to the current year 249,000 362,000 91,000 Additions for tax positions of prior year 67,000 - - Reductions for tax positions of prior year ( 223,000 ) ( 434,000 ) ( 227,000 ) Balance at end of period $ 1,104,000 $ 1,011,000 $ 1,083,000 At March 31, 2021, 2020 and 2019, there are $ 923,000 , $ 823,000 and $ 938,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2021, 2020, and 2019, the Company recognized approximately $( 16,000 ), $( 50,000 ), and $( 23,000 ) in interest and penalties, respectively. The Company had approximately $ 58,000 and $ 74,000 for the payment of interest and penalties accrued at March 31, 2021 and 2020, respectively. The Company intends to indefinitely reinvest its undistributed earnings from foreign subsidiaries in foreign operations and no incremental U.S. tax or withholding taxes have been provided for these earnings. F- 31 Table of Contents 17. Defined Contribution Plans The Company has a 401(k) plan covering all employees who are 21 years of age with at least six months of service. The plan permits eligible employees to make contributions up to certain limitations, with the Company matching 50 % of each participating employee’s contribution up to the first 6 % of employee compensation. Employees are immediately vested in their voluntary employee contributions and vest in the Company’s matching contributions ratably over five years . The Company’s matching contribution to the 401(k) plan was $ 507,000 , $ 496,000 , and $ 445,000 for the years ended March 31, 2021, 2020, and 2019, respectively. 18. Share-based Payments At March 31, 2021 , there were 342,000 shares of the Company’s common stock reserved for grants to the Company’s non-employee directors under the 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”). Under the 2014 Plan, (i) 69,732 and 53,784 of restricted stock units were outstanding and (ii) 76,746 and 143,909 shares of common stock were available for grant under this plan at March 31, 2021 and 2020, respectively. At March 31, 2021, there were 5,150,000 shares of common stock reserved for grant to all employees of the Company under the 2010 Incentive Award Plan (the “2010 Plan”). Under the 2010 Plan, (i) 184,752 and 148,199 shares of restricted stock units were outstanding, (ii) options to purchase 1,714,885 and 1,485,123 shares of common stock were outstanding, (iii) 100,000 and no restricted shares were outstanding, and (iv) 1,267,802 and 629,823 shares of common stock were available for grant at March 31, 2021 and 2020, respectively. In addition, at March 31, 2021 and 2020, options to purchase 30,000 and 51,000 shares of common stock, respectively, were outstanding under the 2004 Non-Employee Director Stock Option Plan. No options remain available for grant under this plan. The shares of common stock issued upon exercise of a previously granted stock option are considered new issuances from shares reserved for issuance upon adoption of the various plans. Stock Options 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 ( 58,848 ) $ 12.24 Forfeited ( 77,813 ) $ 24.32 Outstanding at March 31, 2021 1,744,885 $ 17.51 At March 31, 2021, options to purchase 603,256 shares of common stock were unvested at the weighted average exercise price of $ 17.10 . Based on the market value of the Company’s common stock at March 31, 2021, 2020, and 2019, the pre-tax intrinsic value of options exercised was $ 546,000 , $ 508,000 , and $ 788,000 , respectively. The total fair value of stock options vested during the years ended March 31, 2021, 2020, and 2019 was $ 2,184,000 , $ 2,189,000 , and $ 1,973,000 , respectively. F- 32 Table of Contents The following summarizes information about the options outstanding at March 31, 2021: Options Outstanding Options Exercisable Range of Exercise price Shares Weighted Average Exercise Price Weighted Average Remaining Life In Years Aggregate Intrinsic Value Shares Weighted Average Exercise Price Weighted Average Remaining Life In Years Aggregate Intrinsic Value $ 5.20 to $ 6.47 301,234 $ 6.46 1.74 301,234 $ 6.46 1.74 $ 6.48 to $ 18.20 526,990 13.32 6.93 177,333 9.57 2.50 $ 18.21 to $ 22.83 488,171 19.58 7.79 234,772 19.46 7.61 $ 22.84 to $ 28.04 197,066 26.22 5.47 196,866 26.22 5.46 $ 28.05 to $ 34.17 231,424 29.62 4.94 231,424 29.62 4.94 1,744,885 $ 17.51 5.85 $ 11,097,000 1,141,629 $ 17.72 4.36 $ 7,839,000 The aggregate intrinsic values in the above table represent the pre-tax value of all in-the-money options if all such options had been exercised on March 31, 2021 based on the Company’s closing stock price of $ 22.50 as of that date. At March 31, 2021, there was $ 2,745,000 of total unrecognized compensation expense from stock-based compensation granted under the plans, which is related to non-vested shares. The compensation expense is expected to be recognized over a weighted average vesting period of 1.8 years. Restricted Stock Units and Restricted Stock (collectively “RSUs”) During the years ended March 31, 2021 and 2020 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, which was based on the closing market price on the date of grant. The fair value related to these awards is recognized as compensation expense over the vesting period. These awards generally vest in three equal installments beginning each anniversary from the grant date, subject to continued employment. Upon vesting, these awards may be net share settled to cover the required withholding tax with the remaining amount converted into an equivalent number of shares of common stock. Total shares withheld during the years ended March 31, 2021 and 2020 were 22,202 and 58,802 , respectively, based on the value of these awards as determined by the Company’s closing stock price on the vesting date. The following is a summary of non-vested RSUs: Number of Shares Weighted Average Grant Date Fair Value Non-vested at March 31, 2020 201,983 $ 20.06 Granted 251,801 $ 16.48 Vested ( 94,320 ) $ 21.32 Forfeited ( 4,980 ) $ 17.65 Non-vested at March 31, 2021 354,484 $ 17.22 As of March 31, 2021, there was $ 3,637,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.6 years. 19. Share Repurchase Program The Company’s board of directors approved a stock repurchase program of up to $ 37,000,000 of its common stock. During the years ended March 31, 2021 and 2019, the Company repurchased 54,960 and 163,815 shares of its common stock, respectively, for $ 1,139,000 and $ 4,062,000 , respectively. During the year ended March 31, 2020 the Company did no t repurchase any shares of its common stock. As of March 31, 2021, $ 16,831,000 was utilized and $ 20,169,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s Credit Facility. The Company retired the 730,521 shares repurchased under this program through March 31, 2021. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions. F- 33 Table of Contents 20. Subsequent Event Credit Facility On May 28, 2021, the Company entered into a third amendment to the Amended Credit Facility (the “Third Amendment”). The Third Amendment, among other things, (i) extends the maturity date to May 28, 2026 from June 5, 2023 , (ii) modifies the fixed charge coverage ratio financial covenant, and (iii) modifies the definition of “Consolidated EBITDA”. The modifications to the financial covenants were effective as of March 31, 2021. 21. Unaudited Quarterly Financial Data The following summarizes selected quarterly financial data for the year ended March 31, 2021 : First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $ 95,356,000 $ 154,730,000 $ 122,568,000 $ 168,128,000 Cost of goods sold 81,969,000 115,004,000 98,327,000 136,021,000 Gross profit 13,387,000 39,726,000 24,241,000 32,107,000 Operating expenses: General and administrative 11,687,000 12,518,000 14,005,000 15,637,000 Sales and marketing 4,200,000 4,326,000 4,698,000 4,800,000 Research and development 1,942,000 1,972,000 2,100,000 2,549,000 Foreign exchange impact of lease liabilities and forward contracts ( 4,817,000 ) ( 3,985,000 ) ( 12,455,000 ) 3,651,000 Total operating expenses 13,012,000 14,831,000 8,348,000 26,637,000 Operating income 375,000 24,895,000 15,893,000 5,470,000 Other expense: Interest expense, net 4,409,000 3,614,000 4,051,000 3,696,000 Income (loss) before income tax expense (benefit) ( 4,034,000 ) 21,281,000 11,842,000 1,774,000 Income tax expense (benefit) ( 1,022,000 ) 6,097,000 3,373,000 939,000 Net income (loss) $ ( 3,012,000 ) $ 15,184,000 $ 8,469,000 $ 835,000 Basic net income (loss) per share $ ( 0.16 ) $ 0.80 $ 0.44 $ 0.04 Diluted net income (loss) per share $ ( 0.16 ) $ 0.78 $ 0.44 $ 0.04 F- 34 Table of Contents The following summarizes selected quarterly financial data for the year ended March 31, 2020: First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $ 109,148,000 $ 150,374,000 $ 125,574,000 $ 150,735,000 Cost of goods sold 91,565,000 113,801,000 97,913,000 114,152,000 Gross profit 17,583,000 36,573,000 27,661,000 36,583,000 Operating expenses: General and administrative 12,537,000 12,483,000 14,390,000 13,814,000 Sales and marketing 4,919,000 5,448,000 5,623,000 5,047,000 Research and development 2,372,000 2,148,000 2,174,000 2,506,000 Foreign exchange impact of lease liabilities and forward contracts ( 537,000 ) 1,802,000 ( 3,772,000 ) 20,708,000 Total operating expenses 19,291,000 21,881,000 18,415,000 42,075,000 Operating income ( 1,708,000 ) 14,692,000 9,246,000 ( 5,492,000 ) Other expense: Interest expense, net 6,173,000 6,523,000 6,879,000 5,464,000 Income (loss) before income tax expense (benefit) ( 7,881,000 ) 8,169,000 2,367,000 ( 10,956,000 ) Income tax expense (benefit) ( 1,730,000 ) 1,980,000 1,502,000 ( 2,763,000 ) Net income (loss) $ ( 6,151,000 ) $ 6,189,000 $ 865,000 $ ( 8,193,000 ) Basic net income (loss) per share $ ( 0.33 ) $ 0.33 $ 0.05 $ ( 0.43 ) Diluted net income (loss) per share $ ( 0.33 ) $ 0.32 $ 0.04 $ ( 0.43 ) Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year shown elsewhere in the Annual Report on Form 10-K. F- 35 Table of Contents Schedule II — Valuation and Qualifying Accounts Accounts Receivable — Allowance for credit losses Years Ended March 31, Description Balance at beginning of year Charge to (recovery of) bad debts expense Acquisition Amounts written off Balance at end of year 2021 Allowance for credit losses $ 4,252,000 $ ( 1,000 ) $ - $ 3,903,000 $ 348,000 2020 Allowance for credit losses $ 4,100,000 $ 610,000 $ - $ 458,000 $ 4,252,000 2019 Allowance for credit losses $ 4,142,000 $ 224,000 $ 63,000 (1) $ 329,000 $ 4,100,000 (1) Allowance for credit losses established in the opening balance sheet in connection with the Company’s January 2019 acquisition. Accounts Receivable — Allowance for customer-payment discrepancies Years Ended March 31, Description Balance at beginning of year Charge to discrepancies expense Acquisition Amounts Processed Balance at end of year 2021 Allowance for customer-payment discrepancies $ 1,040,000 $ 694,000 $ - $ 982,000 $ 752,000 2020 Allowance for customer-payment discrepancies $ 854,000 $ 1,626,000 $ - $ 1,440,000 $ 1,040,000 2019 Allowance for customer-payment discrepancies $ 1,110,000 $ 731,000 $ - $ 987,000 $ 854,000 Inventory — Allowance for excess and obsolete inventory Years Ended March 31, Description Balance at beginning of year Provision for excess and obsolete inventory Acquisition Amounts written off Balance at end of year 2021 0 Allowance for excess and obsolete inventory $ 13,208,000 $ 12,803,000 $ - $ 12,765,000 $ 13,246,000 2020 Allowance for excess and obsolete inventory $ 11,899,000 $ 13,372,000 $ - $ 12,063,000 $ 13,208,000 2019 Allowance for excess and obsolete inventory $ 6,682,000 $ 11,153,000 $ - $ 5,936,000 $ 11,899,000 S- 1