~~Stock Payments~~. Stock payments are awards of fully vested shares of our common stock that may, but need not be, made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.

~~Dividend Equivalent Rights~~. Dividend equivalent rights represent the right to receive the equivalent value of dividends paid on shares of our common stock and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of dividend payments dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the plan administrator. Dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to the vesting of such award will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests.

~~Performance Awards~~. All awards may be granted as performance awards (in addition to those identified above as performance awards), meaning that any such award will be subject to vesting and/or payment based on the attainment of specified performance goals. The plan administrator will determine whether performance awards are intended to constitute “qualified performance-based compensation” (“QPBC”) within the meaning of Section 162(m) of the Code, in which case the applicable performance criteria will be selected from the list below in accordance with the requirements of Section 162(m) of the Code.

Section 162(m) of the Code imposes a $1,000,000 cap on the compensation deduction that we may take in respect of compensation paid to our “covered employees” (which should include our CEO and our next four most highly compensated employees other than our CFO), but excludes from the calculation of amounts subject to this limitation any amounts that constitute QPBC. In order to constitute QPBC under Section 162(m) of the Code, in addition to certain other requirements, the relevant amounts must be payable only upon the attainment of pre-established, objective performance goals set by our Compensation Committee during the first ninety days of the relevant performance period and linked to shareholder-approved performance criteria.

For purposes of the 2010 Plan, one or more of the following performance criteria will be used in setting performance goals applicable to QPBC, and may be used in setting performance goals applicable to other performance awards: (i) net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation and (D) amortization); (ii) gross or net sales or revenue; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit; (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets; (viii) return on capital; (ix) return on stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii) earnings per share; (xviii) adjusted earnings per share; (xix) price per share of Common Stock; (xx) regulatory body approval for commercialization of a product; (xxi) implementation or completion of critical projects; (xxii) market share; and (xxiii) economic value, any of which may be measured either in absolute terms or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices. The 2010 Plan also permits the plan administrator to provide for objectively determinable adjustments to the applicable performance criteria in setting performance goals for QPBC awards.

~~Certain Transactions~~. The plan administrator has broad discretion to equitably adjust the provisions of the 2010 Plan, as well as the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our shareholders known as “equity restructurings,” the plan administrator will make equitable adjustments to the 2010 Plan and outstanding awards. In the event of a change in control of the Company (as defined in the 2010 Plan), the surviving entity must assume outstanding awards or substitute economically equivalent awards for such outstanding awards; however, if the surviving entity refuses to assume or substitute for outstanding awards, then the administrator may cause all awards will vest in full immediately prior to the transaction. If the surviving entity assumes or substitutes for outstanding awards, and a participant undergoes a termination of employment by reason of “Involuntary Termination” or “Good Reason” (both as defined in the 2010 Plan) on or within two years following the change in control, then all of the participant’s awards assumed or substituted for will vest in full. Individual award agreements may provide for additional accelerated vesting and payment provisions.

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~~Foreign Participants; Transferability; Participant Payments~~. The plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2010 Plan are generally non-transferable prior to vesting and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2010 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions, a “market sell order” or such other consideration as it deems suitable.

~~Plan Amendment and Termination~~. The Board of Directors may amend or terminate the 2010 Plan at any time; however, except in connection with certain changes in capital structure, shareholder approval will be required for any amendment that increases the number of shares available under the 2010 Plan or “reprices” any stock option or SAR (including any grant of cash or another award in respect of any stock option or SAR when the option or SAR price per share exceeds the fair market value of the underlying shares). No award may be granted pursuant to the 2010 Plan after the tenth anniversary of the date on which we adopted the 2010 Plan.

~~Federal Income Tax Consequences~~. The following is a general summary under current law of the material federal income tax consequences to participants in the 2010 Plan. This summary deals with the general tax principles that apply and is provided only for general information. Some kinds of taxes, such as state, local and foreign income taxes, are not discussed.

~~Incentive Stock Options.~~ The grant of an ISO will not be a taxable event for the grantee or result in a business expense deduction for us. A grantee will not recognize taxable income upon exercise of an ISO (except that the alternative minimum tax may apply), and any gain realized upon a disposition of our common stock received pursuant to the exercise of an ISO will be taxed as long-term capital gain if the grantee holds the shares of common stock for at least two years after the date of grant and for one year after the date of exercise (the “holding period requirement”). We will not be entitled to any business expense deduction with respect to the exercise of an ISO, except as discussed below.

For the exercise of an option to qualify for the foregoing tax treatment, the grantee generally must be our employee or an employee of our subsidiary from the date the option is granted through a date within three months prior to the date of exercise of the option.

If all of the foregoing requirements are met except the holding period requirement mentioned above, the grantee will recognize ordinary income upon the disposition of the common stock in an amount generally equal to the excess of the fair market value of the common stock at the time the option was exercised over the option exercise price (but not in excess of the gain realized on the sale). The balance of the realized gain, if any, will be a capital gain. We will be allowed a business expense deduction to the extent the grantee recognizes ordinary income, subject to our compliance with Section 162(m) of the Code and to certain reporting requirements.

~~Non-Qualified Options.~~ The grant of a NSO will not be a taxable event for the grantee or result in a compensation expense deduction for us. Upon exercising a NSO, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. Upon a subsequent sale or exchange of shares acquired pursuant to the exercise of a NSO, the grantee will have taxable capital gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares of common stock (generally, the amount paid for the shares plus the amount treated as ordinary income at the time the option was exercised).

If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

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~~Restricted Stock.~~ A grantee who is awarded shares of restricted stock will not recognize any taxable income for federal income tax purposes in the year of the award, provided that the shares of common stock are subject to restrictions requiring the restricted stock to be nontransferable and subject to a substantial risk of forfeiture. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award, less the purchase price, if any, determined without regard to the restrictions. If the grantee does not make such a Section 83(b) election, the fair market value of the common stock on the date the restrictions lapse, less the purchase price, if any, will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Restricted Stock Units.~~ There are no immediate tax consequences of receiving an award of restricted stock units under the 2010 Plan. A grantee who is awarded restricted stock units will be required to recognize ordinary income in an amount equal to the fair market value of shares issued to such grantee at the end of the restriction period or, if later, the date on which shares are delivered in respect of the RSUs. If the delivery date of the shares is deferred more than a short period after vesting, employment taxes will be due in the year of vesting. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Dividend Equivalent Awards.~~ Grantees who receive dividend equivalent awards will be required to recognize ordinary income equal to the amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Stock Appreciation Rights.~~ There are no immediate tax consequences of receiving an award of SARs under the Incentive Award Plan. Upon exercising a SAR, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Performance Share Awards~~. Grantees who receive performance share awards generally will not realize taxable income at the time of the grant of the performance shares, and we will not be entitled to a deduction at that time. When the award is paid, whether in cash or common stock, the grantee will have ordinary income, and, if we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a corresponding deduction.

~~Stock Payment Awards~~. Grantees who receive a stock payment in lieu of a cash payment that would otherwise have been made will be taxed as if the cash payment has been received, and, if we comply with applicable reporting requirements and subject to the restrictions of Section 162(m) of the Code, we will have a deduction in the same amount.

~~Deferred Stock~~. A grantee receiving deferred stock generally will not have taxable income upon the issuance of the deferred stock and we will not then be entitled to a deduction. However, when shares underlying the deferred stock are issued to the grantee, he or she will realize ordinary income and, if we comply with applicable reporting requirements and subject to the restrictions of Section 162(m) of the Code, we will be entitled to a deduction in an amount equal to the difference between the fair market value of the shares at the date of issuance over the purchase price, if any, paid for the deferred stock. Employment taxes with respect to these awards will generally be due in the year of vesting.

~~Performance Awards.~~ The award of a performance or annual incentive award will have no federal income tax consequences for us or for the grantee. The payment of the award is taxable to a grantee as ordinary income. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

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~~Section 409A of the Code~~. Certain types of awards under the 2010 Plan, including, but not limited to RSUs and deferred stock, may constitute, or provide for, a deferral of compensation subject to Section 409A of the Code. Unless certain requirements set forth in Section 409A of the Code are complied with, holders of such awards may be taxed earlier than would otherwise be the case ( ~~e.g.~~ , at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest penalties). To the extent applicable, the 2010 Plan and awards granted under the 2010 Plan are intended to be structured and interpreted to comply with Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance that may be issued under Section 409A of the Code.

~~Section 162(m) of the Code~~. In general, under Section 162(m) of the Code, income tax deductions of publicly-held corporations may be limited to the extent total compensation for certain executive officers exceeds $1 million (less the amount of any “excess parachute payments” as defined in Section 280G of the Code) in any taxable year of the corporation. However, under Section 162(m) of the Code, the deduction limit does not apply to certain “performance-based” compensation. Stock options and SARs will satisfy the “performance-based” exception if (a) the awards are made by a qualifying compensation committee, (b) the plan sets the maximum number of shares that can be granted to any person within a specified period and (c) the compensation is based solely on an increase in the stock price after the grant date. The 2010 Plan has been designed to permit the plan administrator to grant stock options and SARs which will qualify as “performance-based compensation.” In addition, other performance-based awards under the 2010 Plan may be intended to constitute QPBC, as discussed above.

~~2003 Long-Term Incentive Plan~~. Upon the receipt of the approval of our shareholders of the Original 2010 Plan, the 2010 Plan replaced our 2003 Long-Term Incentive Plan on January 14, 2011 and no further grants of awards under can be made under the 2003 Long-Term Incentive Plan.

~~2004 Non-Employee Director Stock Option Plan~~. The purpose of our 2004 Non-Employee Director Stock Option Plan (the “Non-Employee Director Stock Option Plan”) is to foster and promote our long-term financial success and interests and to materially increase the value of the equity interests in the Company by: (a) increasing our ability to attract and retain talented men and women to serve on our Board of Directors, (b) increasing the incentives that these non-employee directors have to help us succeed and (c) providing our non-employee directors with an increased opportunity to share in our long-term growth and financial success.

Under the Non-Employee Director Stock Option Plan, each non-employee director was granted options to purchase 25,000 shares of our common stock upon their election to our Board of Directors. In addition, each non-employee director was awarded an option to purchase an additional 3,000 shares of our common stock for each full year of service on our Board of Directors. The exercise price for each of these options was equal to the fair market value of our common stock on the date the option was granted. The exercise price of an option was payable only in cash or an equivalent acceptable to our Compensation Committee. The Non-Employee Director Stock Option Plan also permitted the “cashless” exercise of options granted under the Non-Employee Director Stock Option Plan. Options awarded under the Non-Employee Director Stock Option Plan were not transferable other than as designated by the grantee by will or by the laws of descent and distribution unless otherwise provided in the option agreements pursuant to which such Options were awarded. Other than the options described in this paragraph, no non-employee director shall be eligible to receive any equity interest in the Company in consideration of such non-employee director’s service on our board.

Each of these options have a ten-year term. One-third of the options will be exercisable immediately upon grant, and one-half of the remaining portion of each option grant will vest and become exercisable on the first and second anniversary dates of the date of grant. Any options which remain unvested at the time a non-employee director’s service as a member of our board terminates shall terminate upon such termination of service unless such termination results from such non-employee director’s death or occurs upon a change of control, in which case all of such unvested options shall immediately vest upon such death or Change of Control (as defined in the Non-Employee Director Stock Option Plan). In the event of a Change of Control (as defined in the Non-Employee Director Stock Option Plan), we may, after notice to the grantee, require the grantee to “cash out” his rights by transferring them to the Company in exchange for their equivalent “cash value.”

A total of 275,000 shares of common stock were reserved for grants of stock options under the Non-Employee Director Stock Option Plan. In March 2014, the Non-Employee Director Stock Option Plan was replaced and the Company will not make any further grants under this plan.

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~~Tax Consequences~~. Under current tax laws, the grant of an option generally will not be a taxable event to the optionee, and we will not be entitled to a deduction with respect to such grant. Upon the exercise of an option, the non-employee director optionee will recognize ordinary income at the time of exercise equal to the excess of the then fair market value of the shares of common stock received over the exercise price. The taxable income recognized upon exercise of a nonqualified option will be treated as compensation income subject to withholding, and we will be entitled to deduct as a compensation expense an amount equal to the ordinary income an optionee recognizes with respect to such exercise. When common stock received upon the exercise of a nonqualified option subsequently is sold or exchanged in a taxable transaction, the holder thereof generally will recognize capital gain (or loss) equal to the difference between the total amount realized and the fair market value of the common stock on the date of exercise; the character of such gain or loss as long-term or short-term capital gain or loss will depend upon the holding period of the shares following exercise.

~~Amendment and Termination~~. Our Board of Directors may from time to time amend, and our Board of Directors may terminate, the Non-Employee Director Stock Option Plan, provided that no such action shall adversely affect any material vested benefits or rights under the Non-Employee Director Stock Option Plan without the consent of the non-employee director affected by such action. In addition, no amendment may be made without the approval of our shareholders if shareholder approval is necessary in order to comply with applicable law.

~~2014 Non-Employee Director Incentive Award Plan~~. On February 23, 2014, our Board of Directors approved our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”). On March 31, 2014, our shareholders approved the 2014 Plan. The purpose of the 2014 Plan is to enhance our value and promote our success by linking the individual interests of non-employee directors to the interests of our shareholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to our shareholders. The 2014 Plan is also intended to provide us with flexibility in our ability to motivate, attract, and retain the services of such individuals upon whose judgment, interest, and performance our success is largely dependent. The 2014 Plan does not provide for awards to employees or consultants of the Company. The 2014 Plan supersedes and replaces our 2004 Non-Employee Director Stock Option Plan in its entirety.

~~Director Equity Compensation Policy~~

As contemplated by the 2014 Plan, the Board adopted a director equity compensation policy (the “Policy”) upon effectiveness of the 2014 Plan. The Board may, at any time and from time to time, terminate, modify, amend or suspend the Policy; provided, however, that, without the prior consent of the Non-Employee Directors, no such action may adversely affect any rights or obligations with respect to any earned but unpaid Awards hereunder, whether or not the amounts of such Awards have been computed and whether or not such Awards are then payable. Each equity award described in the Policy shall be subject to the terms and conditions of the Plan and the applicable Award Agreement.

Under the 2014 Plan, upon a Non-Employee Director’s initial election or appointment (as applicable) to the Board on or after the effective date of the 2014 Plan, such Non-Employee Director shall automatically be granted, without further action by the Company, the Board, or the Company’s stockholders, an award of Restricted Stock Units (as defined in the 2014 Plan) to acquire a number of shares of Common Stock (rounded down to the nearest whole number) equal to the quotient obtained by dividing (i) $100,000 by (ii) the Fair Market Value (as defined in the 2014 Plan) of a share of Common Stock on the date of grant (rounded down to the nearest two decimal places) (each such grant, an “Initial RSU Award”). On the date of each annual meeting of the Company’s stockholders to occur on or after the effective date of the 2014 Plan, each Non-Employee Director shall automatically be granted, without further action by the Company, the Board, or the Company’s stockholders, an award of Restricted Stock Units to acquire a number of shares of Common Stock (rounded down to the nearest whole number) equal to the quotient obtained by dividing (i) $50,000 by (ii) the Fair Market Value (as defined in the 2014 Plan) of a share of Common Stock on the date of grant (rounded down to the nearest two decimal places) (each such grant, an “Annual RSU Award” and, together with the Initial RSU Awards, the “RSU Awards”).

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One-third (1/3rd) of each RSU Award will vest on each of the first (1st), second (2nd) and third (3rd) anniversaries of the date of grant, subject to the holder’s continued status as a Non-Employee Director through each applicable vesting date; provided, however, that each RSU Award will vest in full (to the extent then-unvested) upon the holder’s Termination of Service (as defined in the 2014 Plan) due to his or her death. In addition, each RSU Award will vest in full immediately prior to a Change in Control (as defined in the 2014 Plan), subject to the holder’s continued status as a Non-Employee Director through at least immediately prior to such Change in Control (as defined in the 2014 Plan).

~~On June 10, 2015, the Board amended and restated the Director~~ ~~Compensation~~ Corporate Policy. The only change effectuated by the amendment and restatement was the date of the Annual RSU Awards, which was changed to the date of the adoption of the amendment and restatement and each anniversary thereof.

~~Description of the 2014 Plan~~

~~Eligibility; Administration~~

A Director of the Company who is not an officer or other employee (as determined in accordance with Section 3401(c) of the Code and the Treasury Regulations thereunder) of the Company or of any Affiliate (each “Non-Employee Director”) will be eligible to receive awards under our 2014 Plan.trading symbol MPAA. As of March 31, 2017, nine Non-Employee Directors are eligible to participate in the 2014 Plan. Our 2014 Plan will be administered by our Board, which may delegate its duties and responsibilities to committees of our directors and/or officers, subject to certain limitations that may be imposed under applicable law or regulation, including Section 16 of the Exchange Act and/or stock exchange rules, as applicable. The plan administrator will have the authority to grant and set the terms of all awards under, make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, our 2014 Plan, subject to its express terms and conditions.

Under our 2014 Plan, an aggregate of 342,000 shares of our common stock are available for issuance under awards granted pursuant to our 2014 Plan, which shares may be treasury shares, authorized but unissued shares, or shares purchased in the open market. The number of authorized shares will be reduced by 1 share for each share issued pursuant to a stock option or SAR and by 1.7 shares for each share subject to a “full-value” equity award (which generally includes awards other than stock options and SARs, such as restricted stock and restricted stock units).

Our 2014 Plan provides for the grant of nonqualified stock options (“NSOs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights, stock payments, deferred stock, deferred stock units and SARs. Certain awards under our 2014 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms. Awards will generally be settled in shares of our common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.

~~Stock Options~~. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant, except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to stock options, may include continued service, performance and/or other conditions.

~~Stock Appreciation Rights~~. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction) and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs, and may include continued service, performance and/or other conditions.

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~~Restricted Stock; Deferred Stock; RSUs; Performance Awards~~. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. For shares of restricted stock with performance-based vesting, dividends which are paid prior to vesting will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the shares vest. Deferred stock and RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met. Delivery of the shares underlying these awards may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Performance awards are contractual rights to receive a range of shares of our common stock, cash, or a combination of cash and shares, in the future based on the attainment of specified performance goals, in addition to other conditions which may apply to these awards. Conditions applicable to restricted stock, deferred stock, RSUs and performance shares may be based on continuing service with us or our affiliates, the attainment of performance goals and/or such other conditions as the plan administrator may determine.

~~Performance Awards.~~ All awards may be granted as performance awards (in addition to those identified above as performance awards), meaning that any such award will be subject to vesting and/or payment based on the attainment of specified performance goals.

~~Certain Transactions.~~ The plan administrator has broad discretion to equitably adjust the provisions of our 2014 Plan, as well as the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our shareholders known as “equity restructurings,” the plan administrator will make equitable adjustments to our 2014 Plan and outstanding awards. In the event of a change in control of the Company (as defined in our 2014 Plan), the surviving entity must assume outstanding awards or substitute economically equivalent awards for such outstanding awards; however, if the surviving entity refuses to assume or substitute for outstanding awards, then the administrator may cause all awards will vest in full immediately prior to the transaction. If the surviving entity assumes or substitutes for outstanding awards, and a participant undergoes a termination of employment by reason of “Involuntary Termination” or “Good Reason” (both as defined in our 2014 Plan) on or within two years following the change in control, then all of the participant’s awards assumed or substituted for will vest in full. Individual award agreements may provide for additional accelerated vesting and payment provisions.

~~Foreign Participants; Transferability; Participant Payments.~~ The plan administrator may modify award terms, establish sub-plans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under our 2014 Plan are generally non-transferable prior to vesting and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under our 2014 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions, a “market sell order” or such other consideration as it deems suitable.

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~~Plan Amendment and Termination.~~ The Board may amend or terminate our 2014 Plan at any time; however, except in connection with certain changes in capital structure, shareholder approval will be required for any amendment that increases the number of shares available under our 2014 Plan or “reprices” any stock option or SAR (including any grant of cash or another award in respect of any stock option or SAR when the option or SAR price per share exceeds the fair market value of the underlying shares). No award may be granted pursuant to the 2010 Plan after the tenth anniversary of the date on which we adopt our 2014 Plan.

~~2014 Plan Federal Income Tax Consequences~~

The following is a general summary under current law of the material federal income tax consequences to participants in our 2014 Plan. This summary deals with the general tax principles that apply and is provided only for general information. Some kinds of taxes, such as state, local and foreign income taxes, are not discussed.

~~If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.~~

~~Restricted Stock.~~ A grantee who is awarded shares of restricted stock will not recognize any taxable income for federal income tax purposes in the year of the award, provided that the shares of common stock are subject to restrictions requiring the restricted stock to be nontransferable and subject to a substantial risk of forfeiture. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award, less the purchase price, if any, determined without regard to the restrictions. If the grantee does not make such a Section 83(b) election, the fair market value of the common stock on the date the restrictions lapse, less the purchase price, if any, will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Restricted Stock Units.~~ There are no immediate tax consequences of receiving an award of restricted stock units under our 2014 Plan. A grantee who is awarded restricted stock units will be required to recognize ordinary income in an amount equal to the fair market value of shares issued to such grantee at the end of the restriction period or, if later, the date on which shares are delivered in respect of the RSUs. If the delivery date of the shares is deferred more than a short period after vesting, employment taxes will be due in the year of vesting. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Dividend Equivalent Awards.~~ Grantees who receive dividend equivalent awards will be required to recognize ordinary income equal to the amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Stock Appreciation Rights.~~ There are no immediate tax consequences of receiving an award of SARs under the Incentive Award Plan. Upon exercising a SAR, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

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~~Performance Share Awards~~. Grantees who receive performance share awards generally will not realize taxable income at the time of the grant of the performance shares, and we will not be entitled to a deduction at that time. When the award is paid, whether in cash or common stock, the grantee will have ordinary income, and, if we comply with applicable reporting requirements, we will be entitled to a corresponding deduction.

~~Deferred Stock~~. A grantee receiving deferred stock generally will not have taxable income upon the issuance of the deferred stock and we will not then be entitled to a deduction. However, when shares underlying the deferred stock are issued to the grantee, he or she will realize ordinary income and, if we comply with applicable reporting requirements, we will be entitled to a deduction in an amount equal to the difference between the fair market value of the shares at the date of issuance over the purchase price, if any, paid for the deferred stock. Employment taxes with respect to these awards will generally be due in the year of vesting

~~Performance Awards.~~ The award of a performance or annual incentive award will have no federal income tax consequences for us or for the grantee. The payment of the award is taxable to a grantee as ordinary income. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

~~Section 409A of the Code~~. Certain types of awards under our 2014 Plan, including, but not limited to RSUs and deferred stock, may constitute, or provide for, a deferral of compensation subject to Section 409A of the Code. Unless certain requirements set forth in Section 409A of the Code are complied with, holders of such awards may be taxed earlier than would otherwise be the case (~~e.g.~~, at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest penalties). To the extent applicable, our 2014 Plan and awards granted under our 2014 Plan are intended to be structured and interpreted to comply with Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance that may be issued under Section 409A of the Code.

~~2017 Director Compensation~~

We use a combination of cash and equity incentives to compensate our non-employee directors. Directors who are also our employees received no compensation for their service on our Board of Directors in Fiscal 2017. To determine the appropriate level of compensation for our non-employee directors, we take into consideration the significant amount of time and dedication required by the directors to fulfill their duties on our Board of Directors and Board of Directors committees as well as the need to continue to attract highly qualified candidates to serve on our Board of Directors. The information provided in the following table reflects the compensation received by our directors for their service on our Board of Directors in Fiscal 2017.

Name
Fees Earned
or Paid in
Cash

Stock Awards
(1)

Option
Awards (1)

All Other
Compensation
Total

Scott J. Adelson $ 61,000 $ 50,000 $ - $ - $ 111,000
Rudolph Borneo $ 90,000 $ 50,000 $ - $ - $ 140,000
David Bryan $ 62,444 $ 150,000 $ - $ - $ 212,444
Joseph Ferguson $ 67,444 $ 150,000 $ - $ - $ 217,444
Philip Gay $ 106,000 $ 50,000 $ - $ - $ 156,000
Duane Miller $ 88,500 $ 50,000 $ - $ - $ 138,500
Jeffrey Mirvis $ 83,000 $ 50,000 $ - $ - $ 133,000
Timothy D. Vargo $ 7,762 $ 100,000 $ - $ - $ 107,762
Barbara L. Whittaker $ 7,762 $ 100,000 $ - $ - $ 107,762

~~(1)~~

~~Award amounts reflect the aggregate grant date fair value of the awards.~~

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Each of our non-employee directors receives annual compensation of $40,000 and is paid a fee of $3,000 for attending each Board of Directors meeting, $2,000 for attending each Audit Committee meeting and $1,000 for each Compensation Committee meeting. Each director is also reimbursed for reasonable out-of-pocket expenses incurred to attend Board of Directors or Board of Directors committee meetings. We pay Mr. Gay an additional $20,000 per year for assuming the responsibility for being Chairman of our Audit and Ethics Committees, we pay Mr. Borneo an additional $5,000 per year for assuming the responsibility for being Chairman of our Compensation Committee, and beginning August 2015 we pay Mr. Miller an additional $2,500 for being Chairman of our Nominating and Corporate Governance Committee.

Under our 2014 Non-Employee Director Incentive Award Plan, each non-employee director is granted an award of restricted stock units with a grant date fair value of $100,000 upon their election to our Board of Directors. In addition, each non-employee director is awarded restricted stock units with a grant date fair value of $50,000 for each full year of service on our Board of Directors.

~~Indemnification of Executive Officers and Directors~~

Article Seven of our Restated Certificate of Incorporation provides, in part, that to the extent required by New York Business Corporation Law, or NYBCL, no director shall have any personal liability to us or our shareholders for damage for any breach of duty as such director, provided that each such director shall be liable under the following circumstances: (a) in the event that a judgment or other final adjudication adverse to such director establishes that his acts or omissionsJune 8, 2020, there were in bad faith, involved intentional misconduct or a knowing violation of law or that such director personally gained in fact a financial profit or other advantage to which such director was not legally entitled or that such director’s acts violated Section 719 of the NYBCL or (b) for any act or omission prior to the adoption of Article Seven of our Restated Certificate of Incorporation.

Article Nine of our Amended and Restated Bylaws provide that we shall indemnify any person, by reason of the fact that such person is or was a director or officer of our Company or served any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise in any capacity at our request, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees incurred as a result of an action or proceeding, or any appeal therefrom, provided, however, that no indemnification shall be made to, or on behalf of, any director or officer if a judgment or other final adjudication adverse to such director or officer establishes that (a) his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (b) he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

We may purchase and maintain insurance for our own indemnification and for that of our directors and officers and other proper persons as described in Article Nine of our Amended and Restated Bylaws. We maintain and pay premiums for directors’ and officers’ liability insurance policies.

We are incorporated under the laws of the State of New York and Sections 721-726 of Article 7 of the NYBCL provide for the indemnification and advancement of expenses to directors and officers. Section 721 of the NYBCL provides that indemnification and advancement of expenses provisions contained in the NYBCL shall not be deemed exclusive of any rights which a director or officer seeking indemnification or advancement of expenses may be entitled, provided no indemnification may be made on behalf of any director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

Section 722 of the NYBCL permits, in general, a New York corporation to indemnify any person made, or threatened to be made, a party to an action or proceeding by reason of the fact that he or she was a director or officer of that corporation, or served another entity in any capacity at the request of that corporation, against any judgment, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such person acted in good faith, for a purpose he or she reasonably believed to be in, or, in the case of service of another entity, not opposed to, the best interests of that corporation and, in criminal actions or proceedings, who in addition had no reasonable cause to believe that his or her conduct was unlawful. However, no indemnification may be made to, or on behalf of, any director or officer in a derivative suit in respect of (a) a threatened action or a pending action that is settled or otherwise disposed of or (b) any claim, issue or matter for which the person has been adjudged to be liable to the corporation, unless and only to the extent that a court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that the person is fairly and reasonably entitled to indemnify for that portion of settlement and expenses as the court deems proper.

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Section 723 of the NYBCL permits a New York corporation to pay in advance of a final disposition of such action or proceeding the expenses incurred in defending such action or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount as, and to the extent, required by statute. Section 724 of the NYBCL permits a court to award the indemnification required by Section 722.

Section 725 provides for repayment of such expenses when the recipient is ultimately found not to be entitled to indemnification. Section 726 provides that a corporation may obtain indemnification insurance indemnifying itself and its directors and officers.

The foregoing is only a summary of the described sections of the NYBCL and our Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws and is qualified in its entirety by the reference to such sections and charter documents.

~~Compensation Committee Interlocks and Insider Participation~~

The Compensation Committee of our Board of Directors determines the compensation of our officers and directors. None of our executive officers currently serves on the compensation committee or board of directors of any other company of which any members of our Board of Directors or our Compensation Committee is an executive officer.

~~Item 12. Security Ownership of Certain Beneficial Owners And Management andRelated Stockholder Matters~~

The following table sets forth, as of July 20, 2017, certain information as to the common stock ownership of each of our named executive officers, directors, all executive officers and directors as a group and all persons known by us to be the beneficial owners of more than five percent of our common stock. The percentage of common stock beneficially owned is based on 18,635,09918,972,380 shares of common stock outstanding asheld by 11 holders of ~~July 20, 2017.~~record.

~~Beneficial ownership is determined in accordance with~~Purchases of Equity Securities by the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership held by that person, shares of common stock subject to options held by that person that are currently exercisable or will become exercisable within 60 days of July 20, 2017 are deemed outstanding, while these shares are not deemed outstanding for determining the percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise indicated in the footnotes below, the address of the stockholder is c/o Motorcar Parts of America, Inc. 2929 California Street, Torrance, CA 90503.

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Amount and Nature of Percent of
Name and address of Beneficial Shareholder Beneficial Ownership (1) Class
BlackRock Fund Advisors (2) 2,302,444 12.4 %
55 East 52nd Street, New York, NY 10055

Fine Capital Management, LLC (2) 1,812,773 9.7
590 Madison Avenue, 27th Floor, New York, New York 10022

Columbia Management Investment Advisers, LLC (2) 1,416,761 7.6
225 Franklin Street, Boston, MA 02110
Wellington Management Company (2) 1,177,095 6.3
280 Congress Street, Boston, MA 02210
River Road Asset Management Company (2) 1,038,723 5.6
462 South Fourth Street, Suite 2000, Louisville, KY 40202
The Vanguard Group Inc. (2) 993,275 5.3
P.O. Box 1110, Valley Forge, PA 19482-1110
Fidelity Investments Asset Management LLC (2) 981,349 5.3
900 Salem Street, Smithfield, RI 02917
Dimensional Fund Advisors, L.P. (U.S.) (2) 953,287 5.1
1299 Ocean Ave, Santa Monica, CA 90401
Selwyn Joffe (3) 492,234 2.6
Scott Adelson (4) 52,282 *
Rudolph Borneo (5) 40,282 *
Bryan David 1,853 *
Ferguson Joseph Edwin 2,196 *
Philip Gay (6) 20,282 *
Duane Miller (7) 12,282 *
Jeffrey Mirvis (8) 49,282 *
Doug Schooner (9) 19,648 *
Steven Kratz (10) 74,021 *
Michael Umansky (11) 43,788 *
David Lee (12) 79,680 *
Directors and executive officers as a group — 12 persons (13) 887,830 4.7 %

* Less than 1% of the outstanding common stock.Issuer

Share repurchase activity during the fourth quarter of fiscal 2020 was as follows:

Periods	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)

January 1 - January 31, 2020:
Open market and privately negotiated purchases		-	$	-		-	$	21,308,000
February 1 - February 29, 2020:
Open market and privately negotiated purchases		-	$	-		-		21,308,000
March 1 - March 31, 2020:
Open market and privately negotiated purchases		-	$	-		-		21,308,000

Total		0				0	$	21,308,000

(1)

~~The listed shareholders, unless otherwise indicated~~

As of March 31, 2020, $15,692,000 of the $37,000,000 had been utilized and $21,308,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in our Amended Credit Facility. We retired the ~~footnotes below, have direct ownership over the amount~~675,561 shares repurchased under this program through March 31, 2020. Our share repurchase program does not obligate us to acquire any specific number of shares ~~indicated~~and shares may be repurchased in ~~the table.~~

(3)	Consists of shares available for future issuance under our 2010 Plan and 2014 Plan.

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Stock Performance Graph

The following graph compares the cumulative return to holders of our common stock for the five years ending March 31, 2020 with the NASDAQ Composite Total Returns Index and the Zacks Retail and Wholesale Auto Parts Index. The comparison assumes $100 was invested at the close of business on March 31, 2015 in our common stock and in each of the comparison groups, and assumes reinvestment of dividends.

Table of Contents~~Item 13. Certain Relationships~~

Item 6.

Selected Financial Data

The following selected historical consolidated financial information for the periods indicated below has been derived from and ~~Related Transactions,~~should be read in conjunction with our consolidated financial statements and ~~Director~~related notes thereto.

Factors affecting the comparability of our Selected Financial Data as follows:

Upon adoption of ASC 842, Leases, on April 1, 2019, right-of-use operating assets and operating lease liabilities were recorded on the consolidated balance sheet at March 31, 2020.

Prior to the retrospective adoption of ASC 606, Revenue from Contract with Customers, on April 1, 2018, we reported our core inventory as a long-term asset in our consolidated balance sheets.

~~Independence~~We acquired certain assets and assumed certain liabilities of Mechanical Power Conversion, LLC in December 2018. We also completed the acquisitions of all of the equity interests of D&V Electronics Ltd. in July 2017 and Dixie Electric, Ltd. in January 2019.

	Fiscal Years Ended March 31,
Income Statement Data	2020				2019				2018			2017			2016

Net sales		$	535,831,000			$	472,797,000			$	427,548,000		$	422,058,000		$	369,670,000
Operating income			16,738,000				15,646,000				50,834,000			69,815,000			38,286,000
Net (loss) income			(7,290,000	)			(7,849,000	)			19,264,000			38,735,000			10,269,000
Basic net (loss) income per share		$	(0.39	)		$	(0.42	)		$	1.02		$	2.08		$	0.56
Diluted net (loss) income per share		$	(0.39	)		$	(0.42	)		$	0.99		$	1.99		$	0.54

	March 31,
Balance Sheet Data		2020		2019		2018		2017			2016

Total assets	$	777,029,000	$	632,362,000	$	552,427,000	$	445,090,000		$	425,647,000
Working capital (1)		90,624,000		73,528,000		90,287,000		(17,710,000	)		11,391,000
Revolving loan		152,000,000		110,400,000		54,000,000		11,000,000			7,000,000
Term loan		24,140,000		27,872,000		16,981,000		19,999,000			23,047,000
Finance lease liabilities		5,964,000		4,508,000		5,084,000		2,512,000			2,608,000
Operating lease liabilities		66,529,000		-		-		-			-
Other long term liabilities		97,225,000		44,558,000		49,282,000		25,986,000			35,066,000
Shareholders’ equity		275,520,000		279,755,000		286,880,000		257,333,000			218,257,000

(1)	Our working capital is calculated as current assets less current liabilities.

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.

Management Overview

We dohave been focused on implementing a multi-pronged platform for growth within the non-discretionary automotive aftermarket for the replacement parts and diagnostic testing industry, through organic growth and acquisitions. Our investments in infrastructure and human resources, including the consolidation of our distribution center in Mexico and the significant expansion of manufacturing capacity, are expected to be transformative and scalable. As a result, gross profit and net income have been impacted, and our future performance and opportunities should be considered with these factors in mind.

New products introduced through our growth strategies noted above include: (i) turbochargers through an acquisition in July 2016; (ii) brake power boosters in August 2016; (iii) the design and manufacture of diagnostics systems for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017; (iv) the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products for the automotive and aerospace industries through an acquisition in December 2018; (v) alternators and starters for medium and heavy duty trucks, industrial equipment, farm and agriculture, transit and emergency service vehicles, and marine applications through an acquisition in January 2019; and (vi) the addition of brake calipers in August 2019.

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

In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic, which has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries have implemented a variety of measures in response to the COVID-19 pandemic that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

Our business has continued to operate as we have been declared an essential business. We believe that the effects of the COVID-19 pandemic did not materially impact our financial results for the fourth quarter of fiscal 2020; however, the effects of the pandemic on our financial results for the first quarter of fiscal 2021 and other future periods could be significant and cannot currently be reasonably estimated due to the significant volatility, uncertainty and economic disruption caused by the pandemic. See Item 1A “Risk Factors” of this Form 10-K for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.

In response to the COVID-19 pandemic, we have established a ~~written policy applicable~~committee, comprised of our executive officers, to ~~any transaction, arrangement or relationship between us~~oversee our risk identification, management and ~~a related party. Our practice with regards~~mitigation strategies regarding the impact of the pandemic on our business and operations. Among other significant risks that are actively being managed by the committee, are those relating to ~~related party transactions has been~~the duration, severity and scope of the pandemic, the impact of governmental measures in response to the pandemic, potentially declining customer demand for our products, the deterioration of general economic conditions, potential disruptions in our supply chain, the management of inventories and production volumes, and cost reduction and cash preservation initiatives, including potential reductions in capital expenditures. The committee continues to meet on a regular basis, closely monitoring events related to the pandemic and any appropriate actions that may be taken, including monitoring of any temporary closures, measures to ensure our employees are safe, and ways to reduce the overall negative impact of the pandemic.

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Additionally, as part of the cost reduction measures implemented in response to the impact of the COVID-19 pandemic on our business, executive committee members have all agreed to at least a 25% reduction in base salary, until we believe it is fiscally responsible to reinstate the original base salaries. Our Board of Directors agreed to defer all board and committee fees and retainers, as well as waive any fees related to weekly board check in meetings, as long as the executive committee continues with a base salary reduction. We continue to analyze our cost structure and may implement additional cost reduction measures as may be necessary due to the on-going economic challenges resulting from the COVID-19 pandemic.

Segment Reporting

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

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the notes to consolidated financial statements.

In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not currently aware of any specific event or circumstance that would require an update to our estimates or judgments or a ~~committee thereof,~~revision of the carrying value of our assets or liabilities as of March 31, 2020. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Our remanufacturing operations include a core exchange program for the core portion of the finished good. The Used Cores that we acquire and are returned to us from our customers are a necessary raw material for remanufacturing. We also offer our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to more complex accounting than many businesses our size or larger.

New Accounting Pronouncements Recently Adopted

Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a lease asset and lease liability by lessees for all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance required a modified retrospective approach with optional practical expedients. The FASB provided entities with an additional transition method, which allows an entity to apply this guidance as of the beginning of the period of adoption instead of the beginning of the earliest comparative period presented in the entity’s financial statements. We adopted this guidance on April 1, 2019 using the modified retrospective approach and the optional transition method permitted by the FASB. We also elected certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allowed us not to reassess lease classification for leases that commenced prior to the adoption date. In addition, we elected to exempt leases with an initial term of 12 months or less from balance sheet recognition and, for all classes of assets, combining non-lease components with lease components.

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Upon adoption, we recorded operating lease liabilities of $53,043,000 and corresponding operating lease assets of $50,773,000. The difference between the operating lease assets and liabilities recognized on our consolidated balance sheet primarily related to accrued rent on existing leases that were offset against the operating lease asset upon adoption. There was an immaterial reclassification of non-lease components to finance lease assets and finance lease liabilities upon adoption due to our election to combine non-lease components with lease components. The adoption of the new guidance did not have any impact on our rent expense and consolidated statement of cash flows. However, we have material nonfunctional currency leases that could have a material impact on our consolidated statements of operations. 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. We recorded a loss of $11,710,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2020. See Note 11 for additional discussion of the adoption of ASC 842 and the impact on our financial statements.

New Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent ASU issued to clarify certain provisions of the new guidance, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We will adopt this guidance on April 1, 2020 and the adoption is not expected to have a significant impact on our consolidated financial statements and related disclosures. Additionally, the adoption is not expected to have any significant impact on our business processes, systems and internal controls.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for financial statements issued for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We will adopt this guidance on April 1, 2020 and the adoption is not expected to have a significant impact on our consolidated financial statements and related disclosures.

Income Taxes

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and related disclosures.

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Reference Rate Reform

In March 2020, the FASB issued guidance that, for a limited time, eases the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the optional expedients provided by this guidance and the impact the new standard will have on our consolidated financial statements and related disclosures.

Inventory

Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, and (iii) remanufactured 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.

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 Value”). 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, we exclude 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 our 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 our products or market changes that in our judgment, impact our 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. We compare 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 customer specifications. We purchase Used Cores from core brokers to supplement our yield rates and Used Cores not returned under the core exchange program. We also consider the net selling price our customers have agreed to pay for Used Cores that are not returned under our core exchange program 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.

We record 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. We periodically review ~~approve and/~~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 our 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, we recorded reserves for excess and obsolete inventory of $13,208,000 and $11,899,000 at March 31, 2020 and 2019, respectively. The increase in the reserve for excess and obsolete inventory was primarily driven by our acquisition of Dixie.

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We record 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 our estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that we expect to be returned, under our general right of return policy, after the balance sheet date. Inventory unreturned includes only the Unit Value 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 our finished goods inventory.

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, and (iv) 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 ~~ratify such transactions as they arise. In making its determination~~net realizable value of Used Cores on hand (See Inventory above). For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to ~~approve or ratify a transaction,~~be returned under our ~~Board~~general right of ~~Directors,~~return policy or a ~~committee thereof, would consider~~similar Used Core to be returned to us by the customer, under our core exchange program in each case, for credit. Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as “Cores expected to be returned by customers”, which are included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year.

Upfront payments to customers represent the marketing allowances, such ~~factors~~ as ~~(i)~~sign-on bonuses, slotting fees, and promotional allowances provided to our customers. These allowances are recognized as an asset and amortized over the ~~extent~~appropriate period of time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment. If we do 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 our 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 ~~party’s interest~~revenue is recognized or the date at which the sales incentive is offered. We consider, among other things, the length of our 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 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 we have 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 ~~(ii) if applicable,~~based on the ~~availability~~then current cost. The selling value of ~~other sources~~these Remanufactured Cores was established based on agreed upon amounts with these customers. We expect to realize the selling value and the related cost of ~~comparable products or services, (iii) whether~~these Remanufactured Cores should our relationship with a customer end, a possibility that we consider remote based on existing long-term customer agreements and historical experience.

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Revenue Recognition

Revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the ~~related party transaction~~transfer of control of our manufactured, remanufactured, or distributed products. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, including Used Core returns under the core exchange program, marketing allowances, volume discounts, and other forms of variable consideration.

Revenue is recognized either when products are ~~no less favorable than~~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 ~~available~~comprised of separately invoiced amounts for the Remanufactured Core included in ~~unaffiliated transactions~~the product (“Remanufactured Core value”) and the Unit Value. The Unit Value is recorded as revenue 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 ~~like circumstances, (iv)~~ the ~~benefit~~core exchange program (as described in further detail below). The number of Used Cores sent back under the core exchange program is generally limited to ~~us, and (v)~~ the ~~aggregate~~number of similar Remanufactured Cores previously shipped to each customer.

Revenue Recognition — Core Exchange Program

Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the ~~transaction.~~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 program. 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 we expect these Remanufactured Cores to be returned for credit under our core exchange program.

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 program. 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 we expect these Remanufactured Cores to be returned for credit under our core exchange program.

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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 Program”.

As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer. Similarly, we accept product returns and grant appropriate credits to new customers from the time the new customer relationship is established.

Contract Liability

Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank, and (v) 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. Customer allowances to be provided to customers within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term.

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 our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term.

Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to our customers. When we ship product, we recognize an obligation to accept a similar Used Core sent back under the core exchange program based upon the Remanufactured Core price agreed upon by us and our customer. The contract liability related to Used Cores returned by consumers to our customers but not yet returned to us are classified as short-term contract liabilities until we physically receive these Used Cores as they are expected to be returned during our normal operating cycle, which is generally one year and the remainder are recorded as long-term.

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The core bank liability represents the full Remanufactured Core sales price for cores returned under our core exchange program. The payment for these returned cores will be made over a contractual repayment period pursuant to our agreement with this customer. Payments to be made within our normal operating cycle, which is generally one year, are considered short-term contract liabilities and the remainder are recorded as long-term.

Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. We classify these customer deposits as short-term contract liabilities as we expect to satisfy these obligations within our normal operating cycle, which generally one year and the remainder are recorded as long-term.

Customer Finished Goods Returns Accrual

The customer finished goods returns accrual represents our estimate of our exposure to customer returns, including warranty returns, under our 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. Our customer finished goods returns accrual was $25,326,000 and $22,615,000 at March 31, 2020 and 2019, respectively.

Income Taxes

We account 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.

Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. A valuation allowance is established when we believe it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise, we consider 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 our recent acquisitions have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from our estimate, the amount of our valuation allowance could be impacted.

We have 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.

Results of Operations

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

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The following summarizes certain key operating data for the periods indicated:

	Fiscal Years Ended March 31,
	2020			2019			2018

Gross profit percentage		22.1	%		18.9	%		25.0	%
Cash flows provided by (used in) operations	$	18,795,000		$	(40,328,000	)	$	(13,944,000	)
Finished goods turnover (1)		3.0			3.3			3.9

(1)	Finished goods turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending finished goods inventory values, for each fiscal year. We believe that this provides a useful measure of our ability to turn our inventory into revenues.

Fiscal 2020 Compared with Fiscal 2019

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

	Fiscal Years Ended March 31,
	2020			2019

Net sales	$	535,831,000		$	472,797,000
Cost of goods sold		417,431,000			383,623,000
Gross profit		118,400,000			89,174,000
Gross profit percentage		22.1	%		18.9	%

Net Sales. Our net sales for fiscal 2020 increased by $63,034,000, or 13.3%, to $535,831,000 compared with net sales for fiscal 2019 of $472,797,000, reflecting continued growth across all of our product lines. In addition, our net sales for fiscal 2020 were positively impacted by: (i) our expansion of automotive aftermarket brake product offerings with the introduction of brake calipers in August 2019, which contributed net sales of $28,118,000 and (ii) $19,663,000 due to the full-year impact of acquisitions completed during the latter part of fiscal 2019.

Sales mix for fiscal 2020 compared with 2019 for: (i) rotating electrical products represented 73.3% versus 78.9%, (ii) wheel hubs, 14.9% versus 15.7%; (iii) brake-related products, which include brake calipers, brake boosters, brake master cylinders, and brake rotors, represented 8.9% versus 3.1% ; and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers, represented 2.9% versus 2.3%.

Gross Profit. Our gross profit was $118,400,000, or 22.1% of net sales for fiscal 2020 compared with $89,174,000, or 18.9% of net sales for fiscal 2019.

The gross profit margin increase of 3.2% was primarily due to a lower non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves and lower customer allowances related to new business for fiscal 2020 as compared with fiscal 2019. The non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, resulted in a write-down of $10,799,000, which impacted gross margin by 2.0%, compared with $18,843,000, which impacted gross margin by 4.0%, for fiscal 2020 and 2019, respectively.

Our gross profit for fiscal 2020 and 2019 was further impacted by: (i) transition expenses in connection with the expansion of our operations in Mexico of $8,337,000 and $8,178,000, respectively, (ii) amortization of core premiums paid to customers related to new business of $4,501,000 and $4,127,000, respectively, (iii) customer allowances and return accruals related to new business of $1,065,000 and $6,042,000, respectively, and (iv) net tariff costs of $1,067,000 and $1,526,000, respectively, which were paid for products sold before price increases were effective. Gross profit for fiscal 2020 was further impacted by a cost of $133,000 incurred in connection with the cancellation of a customer contract. In addition, gross profit for fiscal 2019 was impacted by core sales of $7,753,000, less related cost of goods sold of $7,750,000, and a cost of $767,000 incurred in connection with the cancellation of a customer contract, and a cost of goods sold impact of $104,000 for inventory step-up in connection with our December 2018 acquisition.

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Operating Expenses

The following summarizes operating expenses:

	Fiscal Years Ended March 31,
	2020			2019

General and administrative	$	71,425,000		$	45,972,000
Sales and marketing		21,037,000			19,542,000
Research and development		9,200,000			8,014,000

Percent of net sales

General and administrative		13.3	%		9.7	%
Sales and marketing		3.9	%		4.1	%
Research and development		1.7	%		1.7	%

General and Administrative. Our general and administrative expenses for fiscal 2020 were $71,425,000, which represents an increase of $25,453,000, or 55.4%, from $45,972,000 for fiscal 2019. This increase was primarily due to: (i) a non-cash loss of $11,710,000 due to the remeasurement of foreign currency-denominated lease liabilities at our Mexican subsidiary, (ii) a non-cash loss of $6,491,000 recorded during fiscal 2020 due to the change in the fair value of the forward foreign currency exchange contracts compared to a non-cash loss of $972,000 recorded during fiscal 2019, (iii) $2,888,000 of increased bonus and other incentives, (iv) $1,485,000 of general and administrative expenses due to the full-year impact of our fiscal 2019 acquisitions, (v) $1,315,000 of expense in connection with our internal control remediation efforts, (vi) $1,206,000 for personnel to support our growth initiatives, (vii) $1,204,000 of increased professional services, (viii) $789,000 in aggregate foreign currency transaction losses, (ix) $571,000 of increased amortization of intangible assets in connection with our fiscal 2019 acquisitions, and (x) $544,000 of increased depreciation expense. These increases were partially offset by a decrease in share-based compensation expense of $1,423,000.

Sales and Marketing. Our sales and marketing expenses for fiscal 2020 increased $1,495,000, or 7.7%, to $21,037,000 from $19,542,000 for fiscal 2019. The increase was due primarily to: (i) $2,261,000 of increased sales and marketing expenses due to the full-year impact of our fiscal 2019 acquisitions and (ii) $722,000 for personnel to support our growth initiatives. These increases in sales and marketing expenses were partially offset by: (i) $701,000 of decreased marketing expenses related to product changeovers in connection with new business, (ii) $401,000 of decreased trade shows expenses, and (iii) $291,000 of decreased travel.

Research and Development. Our research and development expenses increased by $1,186,000, or 14.8%, to $9,200,000 for fiscal 2020 from $8,014,000 for fiscal 2019. The increase was primarily due to: (i) $866,000 of increased research and development expenses due to the full year impact of our fiscal 2019 acquisitions and (ii) $474,000 for personnel to support our growth initiatives. These increases were partially offset by $221,000 of decreased supplies.

Interest Expense

Interest Expense, net. Our interest expense, net for fiscal 2020 increased $1,812,000, or 7.8%, to $25,039,000 from $23,227,000 for fiscal 2019. The increase in interest expense was primarily due to increased average outstanding borrowings to support our growth initiatives, including our product line expansion and our inventory levels. The increased utilization of our accounts receivable discount programs was offset by a decrease in the weighted average discount rate from these programs.

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Provision for Income Taxes

Income Tax. We recorded an income tax benefit of $1,011,000, or an effective tax rate of 12.2%, compared to income tax expense $268,000, or an effective tax rate of (3.5%), for fiscal 2020 and 2019, respectively. The effective tax rate for fiscal 2020 was impacted by net operating loss carry-backs in connection with the CARES Act. In addition, the effective tax rate for each year was impacted by (i) valuation allowances, (ii) the impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) foreign income taxed at rates that are different from the federal statutory rate.

Fiscal 2019 Compared with Fiscal 2018

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

	Fiscal Years Ended March 31,
	2019			2018

Net sales	$	472,797,000		$	427,548,000
Cost of goods sold		383,623,000			320,515,000
Gross profit		89,174,000			107,033,000
Gross profit percentage		18.9	%		25.0	%

Net Sales. Our net sales for fiscal 2019 increased by $45,249,000, or 10.6%, to $472,797,000 compared with net sales for fiscal 2018 of $427,548,000, reflecting strong growth in market share for our rotating electrical products. In addition, our net sales were positively impacted by sales of diagnostic equipment, which benefitted from our acquisitions of D&V Electronics. We achieved record sales despite significant customer allowances related to new business and increased stock adjustment accruals, which were a reduction of our recognized sales (as discussed below in the Gross Profit paragraph).

Sales mix for fiscal 2019 compared with 2018 for (i) rotating electrical products represented 78.9% versus 78.2% (ii) wheel hubs, 15.7% versus 16.9%; (iii) brake-related products, which include brake calipers, brake boosters, brake master cylinders, and brake rotors, represents 3.1% versus 3.4% ; and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers, represents 2.3% versus 1.5%.

Gross Profit. Our gross profit percentage was 18.9% for fiscal 2019 compared with 25.0% for fiscal 2018. Gross profit for fiscal 2019 was impacted by (i) transition expenses of $8,178,000 in connection with the expansion of our operations in Mexico, which began in late fiscal 2018, (ii) $6,042,000 of customer allowances and stock adjustment costs related to new business and product line expansion, (iii) $4,127,000 of amortization of core premiums paid to customers related to new business, (iv) net tariff costs of $1,526,000 paid for products sold before these expenses were passed-through to customers, (v) core sales of $7,753,000, less related cost of goods sold of $7,750,000, and a fixed allowance cost of $767,000 in connection with the cancellation of a customer contract, and (vi) a cost of goods sold impact of $104,000 for inventory step-up in connection with our December 2018 acquisition of E&M. In addition, gross margins were impacted by several factors including higher freight and wage costs, higher costs related to development and testing of our new diagnostic equipment product line, overtime and other costs related to ramping up for new business, and other strategic initiatives for growth.

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Gross profit for fiscal 2018 was impacted by (i) $5,303,000 for customer allowances and initial return and stock adjustment accruals related to new business, (ii) $3,588,000 of amortization of core premiums paid to customers related to new business, and (iii) transition expenses of $1,831,000 in connection with the expansion of our operations in Mexico, and (iv) a cost of goods sold impact of $269,000 for inventory step-up in connection with our July 2017 acquisition of D&V.

In addition, our gross profit was further impacted by the non-cash quarterly revaluation write-down of $18,843,000 for fiscal 2019 and $9,091,000 for fiscal 2018 for remanufactured cores held at customers’ locations, which are included in contract assets. Core costs are dictated by supply and demand for cores in the core broker market.

Operating Expenses

The following summarizes operating expenses:

	Fiscal Years Ended March 31,
	2019			2018

General and administrative	$	45,972,000		$	35,477,000
Sales and marketing		19,542,000			15,030,000
Research and development		8,014,000			5,692,000

Percent of net sales

General and administrative		9.7	%		8.3	%
Sales and marketing		4.1	%		3.5	%
Research and development		1.7	%		1.3	%

General and Administrative. Our general and administrative expenses for fiscal 2019 were $45,972,000, which represents an increase of $10,495,000, or 29.6%, from general and administrative expenses for fiscal 2018 of $35,477,000. This increase was primarily due to (i) $1,798,000 of increased share-based compensation expense, (ii) a loss of $972,000 recorded during fiscal 2019 due to the change in the fair value of the forward foreign currency exchange contracts compared with a gain of $752,000 recorded during fiscal 2018, (iii) $1,493,000 of increased general and administrative expenses primarily at our Mexico location to support our growth initiatives, (iv) $1,324,000 of increased professional services primarily due to increased audit fees, costs incurred in connection with the revision of our previously issued financial statements, and for the adoption of ASC 842, (v) $989,000 of increased general and administrative expenses attributable to our July 2017 acquisition of D&V due to the full-year impact of the acquisition and increased amortization of intangible assets, (vi) $878,000 of increased depreciation, (vii) $931,000 of acquisition costs, (viii) $852,000 in general and administrative expenses for our fiscal 2019 acquisitions, and (ix) $739,000 of net increases in general and administrative expenses due primarily to fluctuations in Asian foreign currency exchange rates. During fiscal 2018, a gain of $2,313,000 was recorded in general and administrative expenses due to the change in the fair value of the warrant liability. The warrants were exercised on September 8, 2017. The increase in general and administrative expense was partially offset by a $2,581,000 decrease in bonus expense.

Sales and Marketing. Our sales and marketing expenses for fiscal 2019 increased $4,512,000, or 30.0%, to $19,542,000 from $15,030,000 for fiscal 2018. The increase was due primarily to (i) $1,143,000 of increased commissions due to increased sales, (ii) $833,000 of increased marketing expenses related to product changeovers in connection with new business, (iii) $815,000 of increased sales and marketing expenses attributable to our July 2017 acquisition of D&V due to the full-year impact of the acquisition and increased personnel, (iv) $514,000 of increased trade show expenses, (v) $448,000 for personnel to support our growth initiatives, (vi) $486,000 in sales and marketing expenses for our fiscal 2019 acquisitions, and (vii) $209,000 of increased advertising expense.

Research and Development. Our research and development expenses increased by $2,322,000, or 40.8%, to $8,014,000 for fiscal 2019 from $5,692,000 for fiscal 2018. The increase was due primarily to (i) $1,180,000 for personnel to support our new product growth initiatives, (ii) $550,000 of increased supplies, (iii) $207,000 of increased research and development expenses attributable to our July 2017 acquisition of D&V due to the full-year impact of the acquisition and increased personnel, (iv) $221,000 of research and development expenses for our fiscal 2019 acquisitions, (v) $81,000 of increased travel, and (vi) $58,000 of increased outside services.

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Interest Expense

Interest Expense, net. Our interest expense, net for fiscal 2019 increased $7,782,000, or 50.4%, to $23,227,000 from $15,445,000 for fiscal 2018. The increase in interest expense was due primarily to (i) an increase in the utilization of and higher interest rates on our accounts receivable discount programs, (ii) increased average outstanding borrowings as we build our inventory levels to support anticipated higher sales, (iii) the write-off of $303,000 of previously capitalized debt issuance costs in connection with the amendment to our credit facility, and (iv) higher interest rates on our average outstanding borrowings under our credit facility.

Provision for Income Taxes

Income Tax. We recorded an income tax expense of $268,000, or an effective tax rate of (3.5%), for fiscal 2019, which was impacted by the statute lapses for various uncertain tax positions and return to provision adjustments, and finalization of provisional estimates under Staff Accounting Bulletin (“SAB”) 118. We recorded income tax expense, as adjusted, for fiscal 2018 of $16,125,000, or an effective tax rate of 45.6%, which was significantly impacted by the enactment of the Act on December 22, 2017. In addition, the effective tax rate for each year was impacted by valuation allowances recorded in connection with our recent acquisitions.

The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. During the year ended March 31, 2018, we recorded provisional amounts by applying the guidance in SAB 118, as we had not yet completed the accounting for the tax effects of enactment of the Act. We recorded a one-time provisional non-cash tax charge of $2,709,000 due to the revaluation of deferred tax assets and liabilities. The one-time transition tax was estimated and recorded as a one-time provisional income tax expense of $530,000 at March 31, 2018.

As the measurement under SAB 118 ended during fiscal 2019, we completed our accounting analysis of the cumulative foreign earnings, transitional tax liability, and non-cash tax charge for deferred revaluation under the Act. Fiscal 2019 included a reduction of $50,000 to the provisional transition tax amount and a $102,000 increase to non-cash charge due to the revaluation of deferred tax assets and liabilities previously reported under SAB 118. Additionally, our U.S. tax return for the period ended March 31, 2018 was filed and any changes to the tax positions for temporary differences compared with the estimates used resulted in an adjustment of the estimated tax expense recorded as of March 31, 2018. Despite the completion of our accounting for the Act under SAB 118, many aspects of the law remain unclear and we expect ongoing guidance to be issued at both the federal and state levels. We will continue to monitor and assess the impact of any new developments.

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $90,624,000 and $73,528,000, a ratio of current assets to current liabilities of 1.3:1.0, at March 31, 2020 and 2019, respectively. The increase in working capital was due primarily to higher cash and accounts receivable balances partially offset by increased borrowing under our credit facility.

In June 2019, we entered into a second amendment to the credit facility, which, among other things, increased our revolving loan facility from $200,000,000 to $238,620,000.

We generated cash during the year ended March 31, 2020 from operations, the use of receivable discount programs, and from our credit facility. As we manage through the impacts of the COVID-19 pandemic, we have access to our existing cash, as well as our available credit facilities to meet short-term liquidity needs. We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

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Cash Flows

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

	Fiscal Years Ended March 31,
	2020			2019			2018
Cash provided by (used in):
Operating activities	$	18,795,000		$	(40,328,000	)	$	(13,944,000	)
Investing activities		(11,594,000	)		(22,610,000	)		(15,278,000	)
Financing activities		32,153,000			59,936,000			33,142,000
Effect of exchange rates on cash and cash equivalents		351,000			(136,000	)		100,000

Net increase (decrease) in cash and cash equivalents	$	39,705,000		$	(3,138,000	)	$	4,020,000

Additional selected cash flow data:
Depreciation and amortization	$	9,561,000		$	7,329,000		$	4,508,000
Capital expenditures		14,156,000			11,149,000			9,933,000

Fiscal 2020 Compared with Fiscal 2019

Net cash provided by operating activities was $18,795,000 during fiscal 2020 compared to net cash used in operating activities of $40,328,000 during fiscal 2019. Our operating activities were significantly impacted by our growth initiatives, including our product line expansion, and our inventory levels.

Net cash used in investing activities was $11,594,000 and $22,610,000 during fiscal 2020 and 2019, respectively.

This change was due primarily to no acquisition-related activities and redemptions of short-term investments partially offset by increased purchases of plant and equipment for our current operations and the expansion of our operations in Mexico during fiscal 2020.

Net cash provided by financing activities was $32,153,000 and $59,936,000 during fiscal 2020 and 2019, respectively. The significant change in our financing activities during fiscal 2020 as compared with fiscal 2019 was due mainly to lower net borrowings under our credit facility partially offset by the payment of $1,955,000 in contingent consideration liabilities during fiscal 2020. In addition, during fiscal 2019, we used $4,062,000 for share repurchases.

Fiscal 2019 Compared with Fiscal 2018

Net cash used in operating activities was $40,328,000 and $13,944,000 during fiscal 2019 and 2018, respectively. Our operating activities were significantly impacted by our growth initiatives, including our product line expansion. Fiscal 2019 operating activities include: (i) expenses incurred in connection with the expansion of our Mexico operations, (ii) the build-up of inventory to support anticipated higher sales, and (iii) payments made to customers of $28,270,000 during fiscal 2019 for core buy-backs made in connection with new business expansion.

Net cash used in investing activities was $22,610,000 and $15,278,000 during fiscal 2019 and 2018, respectively.

This change was due primarily to our increased acquisition-related activities and capital expenditures, which was primarily for the purchase of equipment for our current operations and the expansion of our operations in Mexico.

Net cash provided by financing activities was $59,936,000 and $33,142,000 during fiscal 2019 and 2018, respectively. The significant change in our financing activities during fiscal 2019 as compared with fiscal 2018 was due mainly to increased net borrowing under our credit facility.

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Capital Resources

Debt

We are party to a $230,000,000 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 $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 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 permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of our assets.

In June 2019, we entered into a second amendment to the Credit Facility (“Second Amendment”). The Second Amendment, among other things, (i) increased the total size of the Revolving Facility to $238,620,000, (ii) modified the fixed charge coverage ratio financial covenant, (iii) modified the definition of “Consolidated EBITDA”, (iv) modified the borrowing base definition to, among other things, include brake-related products as eligible inventory, (v) increased the letter of credit sublimit to $20,000,000, (vi) increased the Canadian revolving sublimit and swing line sublimit to $24,000,000, (vii) increased the swing line sublimit to $23,862,000, (viii) permitted up to $5,000,000 of sale and lease back transactions per fiscal year, (ix) increased the permitted amount of certain capital expenditures, (x) increased the permitted amount of operating lease obligations per fiscal year, and (xi) increased certain other covenant-related baskets. We capitalized $973,000 of new debt issuance costs in connection with the Second Amendment, which is included in prepaid and other current assets in the consolidated balance sheet at March 31, 2020.

The Term Loans require quarterly principal payments of $937,500. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 4.34% and 3.64%, at March 31, 2020, respectively, and 5.24% at March 31, 2019.

The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants at March 31, 2020. Our Consolidated EBITDA for the purposes of bank covenant calculations was $80,131,000 for fiscal 2020.

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

	Financial covenants required per the Credit Facility		Calculation as of March 31, 2020

Maximum senior leverage ratio		3.00		2.23
Minimum fixed charge coverage ratio		1.10		1.44

In light of COVID-19, we elected to not pay down our Revolving Facility and we accumulated cash of $49,616,000 as of March 31, 2020. Our credit arrangement only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. If we had paid down the Revolving Facility with cash on hand, our senior leverage ratio would have been 1.77. In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

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We had $152,000,000 and $110,400,000 outstanding under the Revolving Facility at March 31, 2020 and 2019, respectively. In addition, $3,579,000 was reserved for letters of credit at March 31, 2020. At March 31, 2020, after certain adjustments, $58,461,000 was available under the Revolving Facility.

Receivable Discount Programs

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

The following is a summary of the receivable discount programs:

	Years Ended March 31,
	2020			2019

Receivables discounted	$	461,484,000		$	396,650,000
Weighted average days		346			341
Weighted average discount rate		3.3	%		4.2	%
Amount of discount as interest expense	$	14,780,000		$	15,867,000

Off-Balance Sheet Arrangements

At March 31, 2020, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

Multi-year Customer Agreements

We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our 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 we meet ongoing performance standards. Our contracts with our customers expire at various dates through December 2024.

While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory also require the use of our working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.

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~~Director Independence~~

Share Repurchase Program

~~Information regarding the independence~~Our board of directors have approved a stock repurchase program of up to $37,000,000 of our ~~directors can~~common stock. As of March 31, 2020, $15,692,000 had been utilized and $21,308,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 675,561 shares repurchased under this program through March 31, 2020. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be ~~found~~repurchased in ~~Item 10 “Directors, Executive Officers~~privately negotiated and/or open market transactions.

Subsequent Event

In light of the COVID-19 pandemic, we have taken proactive steps to manage our costs and ~~Corporate Governance - Corporate Governance,~~bolster our liquidity, including increasing the level of receivables collected under our receivable discount programs. During April 2020, we collected $59,730,000 of receivables under these programs, with $1,552,000 in interest expense associated with these accounts receivable sales, which was higher than our average monthly utilization of these programs.

Additionally, as part of the cost reduction measures implemented by us in response to the impact of the COVID-19 pandemic on our business, executive committee members have all agreed to at least a 25% reduction in base salary, until we believe it is fiscally responsible to reinstate the original base salaries. Our Board of Directors agreed to defer all board and ~~Committees of~~committee fees and retainers, as well as waive any fees related to weekly board check in meetings, as long as the ~~Board of Directors.”~~executive committee continues with a base salary reduction. We continue to analyze our cost structure and may implement additional cost reduction measures as may be necessary due to the on-going economic challenges resulting from the COVID-19 pandemic.

~~Item 14. Principal Accountant Fees~~Capital Expenditures and ~~Services~~Commitments

Our total capital expenditures, including capital leases and non-cash capital expenditures, were $19,511,000 for fiscal 2020 and $12,051,000 for fiscal 2019. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to incur approximately $6,300,000 of capital expenditures for our current operations and approximately $11,000,000 for continued expansion of our operations in Mexico during fiscal 2021. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.

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Contractual Obligations

The following ~~table~~ summarizes our contractual obligations and other commitments as of March 31, 2020 and the ~~total fees~~effect such obligations could have on our cash flows in future periods:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		2 to 3 years		4 to 5 years		More than 5 years

Finance lease obligations (1)	$	6,425,000	$	2,292,000	$	3,280,000	$	853,000		-
Operating lease obligations (2)		117,097,000		11,427,000		21,002,000		16,745,000	$	67,923,000
Revolving loan (3)		152,000,000		-		-		152,000,000		-
Term loan (4)		26,893,000		4,720,000		8,944,000		13,229,000		-
Accrued core payment (5)		14,787,000		8,486,000		6,301,000		-		-
Core bank liability (6)		11,163,000		874,000		2,332,000		2,332,000		5,625,000
Unrecognized tax benefits (7)		-		-		-		-		-
Other long-term obligations (8)		44,013,000		25,896,000		10,539,000		4,911,000		2,667,000

Total	$	372,378,000	$	53,695,000	$	52,398,000	$	190,070,000	$	76,215,000

(1)	Finance lease obligations represent amounts due under finance leases for various types of equipment.

(2)	Operating lease obligations represent amounts due for rent under our leases for all our facilities (including one new building leases entered in connection with the expansion of our operations in Mexico and the renewal of one building lease in Canada), certain equipment, and our Company automobile.

(3)	Our revolving loan obligations are under our current Credit Facility that matures on June 5, 2023. This debt is classified as a short term liability on our balance sheet as we expect to use our working capital to repay the amounts outstanding under our revolving loan.

(4)	Term loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon the interest rate for our term loan using the LIBOR option at March 31, 2020, which was 4.34%.

(5)	Accrued core payment represents the amounts due for principal of $14,124,000 and interest payments of $663,000 to be made in connection with the purchases of Remanufactured Cores from our customers, which are held by these customers and remain on their premises.

(6)	The core bank liability represents the amounts due for principal of $8,084,000 and interest payments of $3,079,000 to be made in connection with the return of Used Cores from our customers.

(7)	We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2020; therefore, future tax payment accruals related to uncertain tax positions in the amount of $1,011,000 have been excluded from the table above.

(8)

Other long-term obligations represent commitments we have with certain customers to provide marketing allowances in consideration for multi-year customer agreements to provide products over a defined period. We are not obligated to provide these marketing allowances should our business relationships end with these customers.

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Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk relates to changes in interest rates, foreign currency exchange rates, and customer credit. We do not enter into derivatives or other financial instruments for trading or speculative purposes. As our overseas operations expand, our exposure to the risks associated with foreign currency fluctuations will continue to increase.

Interest rate risk

We are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Our credit facility bears interest at variable base rates, plus an applicable margin. At March 31, 2020, our net debt obligations totaled $176,140,000. If interest rates were to increase 1%, our net annual interest expense would have increased by approximately $1,761,000. In addition, for each $10,000,000 of accounts receivable we ~~paid~~discount over a period of 180 days, a 1% increase in interest rates would increase our interest expense by $50,000.

Foreign currency risk

We are exposed to foreign currency exchange risk inherent in our anticipated purchases and expenses denominated in currencies other than the U.S. dollar. We transact business in the following foreign currencies; Mexican pesos, Malaysian ringit, Singapore dollar, Chinese yuan, and the Canadian dollar. Our primary currency risks result from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, we enter into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which we use forward foreign currency exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates. These contracts generally expire in a year or less. Any changes in the fair values of our forward foreign currency exchange contracts are reflected in current period earnings. Based upon our forward foreign currency exchange contracts related to these currencies, an increase of 10% in exchange rates at March 31, 2020 would have increased our general and administrative expenses by approximately $3,252,000. During fiscal 2020 and 2019, losses of $6,491,000 and $972,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts. In addition, we recorded a loss of $11,710,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2020.

Credit Risk

We regularly review our accounts receivable and allowance for doubtful accounts 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 such amounts owed to us. We maintain an allowance for doubtful accounts that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.

Item 8.

Financial Statements and Supplementary Data

The information required by this item is set forth in the consolidated financial statements, commencing on page F-1 included herein.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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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, 2020.

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, 2020 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, 2020.

The effectiveness of our internal control over financial reporting as of March 31, 2020 has been audited by the Company’s independent ~~certified~~registered public ~~accountants,~~accounting firm, Ernst & Young ~~LLP,~~LLP. Their assessment is included in the accompanying Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.

Remediation of Material Weakness

Throughout the year ended March 31, 2020, the Company undertook remediation measures related to the previously reported material weaknesses in internal control over financial reporting. We completed these remediation measures in the quarter ended March 31, 2020, including testing of the design and concluding on the operating effectiveness of the related controls.

Specifically, we undertook the following remediation measures:

Management hired additional finance and accounting personnel with the requisite experience and skill levels, supplemented by third-party technical accounting resources to enable the proper and timely review of accounting analyses and memos in various technical areas.

Management formalized the assessment and documentation of the Company’s accounting and financial reporting policies and procedures and enhance controls over the monitoring of compliance with these accounting policies and procedures.

Management enhanced the accounting and internal control training program provided to new and existing subsidiaries. Management enhanced its internal control processes to continuously monitor the subsidiaries’ compliance with and documentation of the Company’s accounting and financial reporting policies and procedures, including internal control over financial reporting.

Management enhanced and will continue to enhance the risk assessment process and design of internal control over financial reporting at D&V Electronics Ltd. (D&V). This includes implementation of compensating controls, enhanced and revised design of existing transaction level and financial reporting controls at D&V, and enhancements in the documentation of transaction-level controls being performed at D&V.

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Based on these procedures, we believe that the previously reported material weaknesses have been remediated. However, completion of remediation procedures for ~~professional services provided~~these material weaknesses does not provide assurance that our modified controls will continue to operate properly or that our financial statements will be free from error.

Change in Internal Control Over Financial Reporting

Other than described above in this Item 9A, 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 ~~following fiscal years ended March 31:~~

2017 2016 2015
Audit Fees $ 1,640,000 $ 1,623,000 $ 1,676,000
Tax Fees 251,000 234,000 168,000
All Other Fees 39,000 - -

Total $ 1,930,000 $ 1,857,000 $ 1,844,000

~~Audit fees in Fiscal 2017, 2016 and 2015 consisted of (i) the audit of~~period covered by this report, that has materially affected, or is reasonably likely to materially affect, our ~~annual financial statements, (ii) the reviews of our quarterly financial statements, and (iii) audit of~~ internal control over financial reporting.

~~Tax fees in Fiscal 2017, 2016~~Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well conceived and ~~2015 related primarily to~~operated, can provide only reasonable, not absolute, assurance that the ~~preparation of federal and state tax returns, transfer pricing, and federal and state examinations.~~

~~Our Audit Committee must pre-approve all audit and non-audit services to be performed by our independent auditors and will not approve any services that are not permitted by SEC rules. All~~objectives of the ~~audit~~control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and ~~non-audit related fees~~the benefits of controls must be considered relative to their costs. Because of the inherent limitations in ~~Fiscal 2017, 2016~~all control systems, no evaluation of controls can provide absolute assurance that all control issues and ~~2015 were pre-approved~~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 ~~Audit Committee.~~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.

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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.

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PART IV

Item 15.

Exhibits, Financial Statement Schedules

~~Item 15 . Exhibits, Financial Statement~~

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 (Loss) Income	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

~~Exhibits.~~

(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.

~~The following exhibits are filed with this Amendment:~~

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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.

10.1	Amendment to Lease, dated October 3, 1996, by and between the Company and Golkar Enterprises, Ltd. relating to additional property in Torrance, California	Incorporated by reference to Exhibit 10.17 to the December 31, 1996 Form 10-Q.

10.2	Lease Agreement, dated September 19, 1995, by and between Golkar Enterprises, Ltd. and the Company relating to the Company’s facility located in Torrance, California	Incorporated by reference to Exhibit 10.18 to the 1995 Registration Statement.

10.3	Form of Indemnification Agreement for officers and directors	Incorporated by reference to Exhibit 10.25 to the 1997 Registration Statement.

10.4	Second Amendment to Lease, dated March 15, 2002, between Golkar Enterprises, Ltd. and the Company relating to property in Torrance, California	Incorporated by reference to Exhibit 10.44 to the 2003 10-K.

10.5	Form of Standard Industrial/Commercial Multi-Tenant Lease, dated May 25, 2004, between the Company and Golkar Enterprises, Ltd for property located at 530 Maple Avenue, Torrance, California	Incorporated by reference to Exhibit 10.18 to the 2004 10-K.

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Number	Description of Exhibit	Method of Filing

10.6	Build to Suit Lease Agreement, dated October 28, 2004, among Motorcar Parts de Mexico, S.A. de CV, the Company and Beatrix Flourie Geoffroy	Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 2, 2004.

10.7	Lease Agreement Amendment, dated October 12, 2006, between the Company and Beatrix Flourie Geoffroy	Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on October 20, 2006.

10.8	Third Amendment to Lease Agreement, dated as of November 20, 2006, between Motorcar Parts of America, Inc. and Golkar Enterprises, Ltd.	Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 27, 2006.

10.9	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.

10.10	Fifth Amendment, dated as of November 17, 2011, to that certain Standard Industrial Commercial Single Tenant Lease-Gross, dated as of September 19, 1995, between Golkar Enterprises, Ltd and Motorcar Parts of America, Inc., as amended	Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on November 25, 2011.

10.11	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.

10.12	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.

10.13	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.

10.14*	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.

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Number	Description of Exhibit	Method of Filing

10.15	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.

10.16	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.

10.17	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.

10.18	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.

10.19	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.

10.20*	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.

10.21	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.

Table of Contents

Number	Description of Exhibit	Method of Filing

10.22	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.

10.23	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.

10.24	Amendment No. 3 to Employment Agreement, dated as of March 30, 2020, between Motorcar Parts of America, Inc., and Selwyn Joffe	Filed herewith.

14.1	Motorcar Parts of America, Inc., Code of Business Conduct and Ethics, as amended, effective January 15, 2015	Incorporated by reference to Exhibit 14.1 to Current Report on Form 8-K filed on January 20, 2015.

21.1	List of Subsidiaries	Filed herewith.

23.1	Consent of Independent Registered Public Accounting Firm Ernst & Young LLP	Filed herewith.

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	XBRL Instance Document	Filed herewith.
101.SCM	XBRL Taxonomy Extension Schema Document	Filed herewith.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

*	Portions of this exhibit have been granted confidential treatment by the SEC.

4049

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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.

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: ~~July 31, 2017~~June 15, 2020	By:	/s/ David Lee
		~~David Lee~~
		David Lee
		Chief Financial Officer

Dated: ~~July 31, 2017~~June 15, 2020	By:	/s/ ~~Kevin Daly~~
		~~Kevin Daly~~Kamlesh Shah
		Kamlesh Shah
		Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form ~~10-K/A~~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	~~July 31, 2017~~ June 15, 2020
Selwyn Joffe	(Principal Executive Officer)

/s/ David Lee	Chief Financial Officer	~~July 31, 2017~~
David Lee	~~(Principal~~ (Principal Financial Officer)	June 15, 2020

/s/ ~~Kevin Daly~~Kamlesh Shah	Chief Accounting Officer	~~July 31, 2017~~
~~Kevin Daly~~Kamlesh Shah	~~(Principal~~ (Principal Accounting Officer)	June 15, 2020

/s/ Scott Adelson	~~Director~~	~~July 31, 2017~~
Scott Adelson	Director	June 15, 2020

/s/ Rudolph Borneo	~~Director~~	~~July 31, 2017~~
Rudolph Borneo	Director	June 15, 2020

/s/ Philip Gay	~~Director~~	~~July 31, 2017~~
Philip Gay	Director	June 15, 2020

/s/ Duane Miller	~~Director~~	~~July 31, 2017~~
Duane Miller	Director	June 15, 2020

/s/ Jeffrey Mirvis	~~Director~~	~~July 31, 2017~~
Jeffrey Mirvis	Director	June 15, 2020

/s/ David Bryan	~~Director~~	~~July 31, 2017~~
David Bryan	Director	June 15, 2020

/s/ Joseph Ferguson	~~Director~~	~~July 31, 2017~~
Joseph Ferguson

~~/s/ Timothy D. Vargo~~	Director	~~July 31, 2017~~
~~Timothy D. Vargo~~		June 15, 2020

/s/ Barbara ~~L. Whittaker~~	~~Director~~	~~July 31, 2017~~
~~Barbara L.~~ Whittaker
Barbara Whittaker	Director	June 15, 2020

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 (Loss) Income	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

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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, 2020, 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, 2020, 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, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2020, and the related notes and financial statement schedule and our report dated June 15, 2020 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 15, 2020

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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, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2020, 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, 2020, 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 15, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No. 2016-02

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended March 31, 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.

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.

	/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2007.

Los Angeles, California
June 15, 2020

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	March 31, 2020			March 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	49,616,000		$	9,911,000
Short-term investments		850,000			3,273,000
Accounts receivable — net		91,748,000			56,015,000
Inventory — net		225,659,000			233,726,000
Inventory unreturned		9,021,000			8,469,000
Contract assets		20,332,000			22,183,000
Income tax receivable		3,282,000			10,009,000
Prepaid expenses and other current assets		8,608,000			9,296,000
Total current assets		409,116,000			352,882,000
Plant and equipment — net		44,957,000			35,151,000
Operating lease assets		53,029,000			-
Long-term deferred income taxes		18,950,000			9,746,000
Long-term contract assets		239,540,000			221,876,000
Goodwill		3,205,000			3,205,000
Intangible assets — net		6,393,000			8,431,000
Other assets		1,839,000			1,071,000
TOTAL ASSETS	$	777,029,000		$	632,362,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	78,664,000		$	92,461,000
Accrued liabilities		16,419,000			14,604,000
Customer finished goods returns accrual		25,326,000			22,615,000
Contract liabilities		27,911,000			30,599,000
Revolving loan		152,000,000			110,400,000
Other current liabilities		9,390,000			4,990,000
Operating lease liabilities		5,104,000			-
Current portion of term loan		3,678,000			3,685,000
Total current liabilities		318,492,000			279,354,000
Term loan, less current portion		20,462,000			24,187,000
Long-term contract liabilities		92,101,000			40,889,000
Long-term deferred income taxes		79,000			257,000
Long-term operating lease liabilities		61,425,000			-
Other liabilities		8,950,000			7,920,000
Total liabilities		501,509,000			352,607,000
Commitments and contingencies
Shareholders' equity:
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued		-			-
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued		-			-
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,969,380 and 18,817,400 shares issued and outstanding at March 31, 2020 and 2019, respectively		190,000			188,000
Additional paid-in capital		218,581,000			215,047,000
Retained earnings		64,117,000			71,407,000
Accumulated other comprehensive loss		(7,368,000	)		(6,887,000	)
Total shareholders' equity		275,520,000			279,755,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	777,029,000		$	632,362,000

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

F-1

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Years Ended March 31,
	2020			2019			2018

Net sales	$	535,831,000		$	472,797,000		$	427,548,000
Cost of goods sold		417,431,000			383,623,000			320,515,000
Gross profit		118,400,000			89,174,000			107,033,000
Operating expenses:
General and administrative		71,425,000			45,972,000			35,477,000
Sales and marketing		21,037,000			19,542,000			15,030,000
Research and development		9,200,000			8,014,000			5,692,000
Total operating expenses		101,662,000			73,528,000			56,199,000
Operating income		16,738,000			15,646,000			50,834,000
Interest expense, net		25,039,000			23,227,000			15,445,000
(Loss) income before income tax (benefit) expense		(8,301,000	)		(7,581,000	)		35,389,000
Income tax (benefit) expense		(1,011,000	)		268,000			16,125,000

Net (loss) income	$	(7,290,000	)	$	(7,849,000	)	$	19,264,000

Basic net (loss) income per share	$	(0.39	)	$	(0.42	)	$	1.02
Diluted net (loss) income per share	$	(0.39	)	$	(0.42	)	$	0.99

Weighted average number of shares outstanding:
Basic		18,913,788			18,849,909			18,854,993
Diluted		18,913,788			18,849,909			19,514,775

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

F-2

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

	Years Ended March 31,
	2020			2019			2018

Net (loss) income	$	(7,290,000	)	$	(7,849,000	)	$	19,264,000
Other comprehensive (loss) income, net of tax:
Unrealized gain on short-term investments (net of tax of $0, $0, and $118,000, respectively)		-			-			218,000
Foreign currency translation (loss) gain		(481,000	)		(713,000	)		1,795,000
Total other comprehensive (loss) income, net of tax		(481,000	)		(713,000	)		2,013,000

Comprehensive (loss) income	$	(7,771,000	)	$	(8,562,000	)	$	21,277,000

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

F-3

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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) Income			Total

Balance at March 31, 2017		18,648,854		$	186,000		$	205,646,000		$	59,246,000		$	(7,441,000	)	$	257,637,000

Compensation recognized under employee stock plans		-			-			3,766,000			-			-			3,766,000
Exercise of stock options		55,351			1,000			480,000			-			-			481,000
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes		47,508			1,000			(597,000	)		-			-			(596,000	)
Repurchase and cancellation of treasury stock, including fees		(374,740	)		(4,000	)		(9,247,000	)		-			-			(9,251,000	)
Exercise of warrant for shares of common stock		516,129			5,000			13,561,000			-			-			13,566,000
Unrealized gain on investments, net of tax		-			-			-			-			218,000			218,000
Foreign currency translation		-			-			-			-			1,795,000			1,795,000
Net income		-			-			-			19,264,000			-			19,264,000

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

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

F-4

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Years Ended March 31,
	2020			2019			2018
Cash flows from operating activities:
Net (loss) income	$	(7,290,000	)	$	(7,849,000	)	$	19,264,000
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		7,791,000			6,135,000			3,798,000
Amortization of intangible assets		1,770,000			1,194,000			710,000
Amortization and write-off of debt issuance costs		819,000			951,000			1,060,000
Amortization of interest on contract liabilities, net		713,000			909,000			670,000
Amortization of core premiums paid to customers		4,501,000			4,127,000			3,588,000
Non-cash lease expense		5,808,000			-			-
Loss due to the remeasurement of lease liabilities		11,710,000			-			-
Foreign currency remeasurement loss		818,000			-			-
(Gain) loss due to the change in the fair value of the contingent consideration		(98,000	)		324,000			-
Gain on short-term investments		(96,000	)		(89,000	)		-
Gain due to the change in the fair value of the warrant liability		-			-			(2,313,000	)
Net provision for inventory reserves		13,372,000			11,153,000			8,491,000
Net provision for customer payment discrepancies		1,626,000			731,000			998,000
Net provision for doubtful accounts		610,000			224,000			21,000
Deferred income taxes		(10,337,000	)		(3,063,000	)		1,548,000
Share-based compensation expense		4,141,000			5,564,000			3,766,000
Loss on disposal of plant and equipment		15,000			41,000			161,000
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(38,078,000	)		10,214,000			(3,298,000	)
Inventory		(6,112,000	)		(76,213,000	)		(33,655,000	)
Inventory unreturned		(552,000	)		(961,000	)		73,000
Income tax receivable		6,753,000			(2,039,000	)		(6,312,000	)
Prepaid expenses and other current assets		(416,000	)		234,000			(965,000	)
Other assets		(1,109,000	)		(299,000	)		(120,000	)
Accounts payable and accrued liabilities		(11,253,000	)		16,572,000			(11,671,000	)
Customer finished goods returns accrual		2,725,000			4,588,000			138,000
Contract assets, net		(15,835,000	)		(2,096,000	)		(25,028,000	)
Contract liabilities, net		43,372,000			(11,894,000	)		23,871,000
Operating lease liabilities		(4,726,000	)		-			-
Other liabilities		8,153,000			1,214,000			1,261,000
Net cash provided by (used in) operating activities		18,795,000			(40,328,000	)		(13,944,000	)
Cash flows from investing activities:
Purchase of plant and equipment		(14,156,000	)		(11,149,000	)		(9,933,000	)
Purchase of business, net of cash acquired		-			(11,106,000	)		(4,993,000	)
Proceeds from sale of plant and equipment		43,000			-			-
Redemptions of (payments for) short term investments		2,519,000			(355,000	)		(352,000	)
Net cash used in investing activities		(11,594,000	)		(22,610,000	)		(15,278,000	)
Cash flows from financing activities:
Borrowings under revolving loan		75,000,000			102,900,000			84,000,000
Repayments under revolving loan		(33,400,000	)		(46,500,000	)		(41,000,000	)
Borrowings under term loan		-			13,594,000			-
Repayments of term loan		(3,750,000	)		(2,656,000	)		(3,125,000	)
Payments for debt issuance costs		(973,000	)		(1,815,000	)		(462,000	)
Payments on finance lease obligations		(2,164,000	)		(1,460,000	)		(905,000	)
Payment of contingent consideration		(1,955,000	)		-			-
Exercise of stock options		457,000			257,000			481,000
Cash used to net share settle equity awards		(1,062,000	)		(322,000	)		(596,000	)
Repurchase of common stock, including fees		-			(4,062,000	)		(9,251,000	)
Exercise of warrant		-			-			4,000,000
Net cash provided by financing activities		32,153,000			59,936,000			33,142,000
Effect of exchange rate changes on cash and cash equivalents		351,000			(136,000	)		100,000
Net increase (decrease) in cash and cash equivalents		39,705,000			(3,138,000	)		4,020,000
Cash and cash equivalents — Beginning of period		9,911,000			13,049,000			9,029,000
Cash and cash equivalents — End of period	$	49,616,000		$	9,911,000		$	13,049,000
Supplemental disclosures of cash flow information:
Cash paid for Interest, net	$	23,558,000		$	21,148,000		$	13,623,000
Cash paid for Income taxes, net of refunds		1,500,000			3,588,000			19,657,000
Cash paid for operating leases		8,212,000			-			-
Cash paid for finance leases		2,445,000			-			-
Plant and equipment acquired under finance lease		3,144,000			902,000			3,478,000
Assets acquired under operating leases		18,528,000			-			-
Contingent consideration		-			4,400,000			-
Non-cash capital expenditures		2,211,000			-			-

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

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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 diagnostic equipment. These replacement parts are primarily sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s diagnostic equipment primarily serves the global automotive component and powertrain testing market. The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, and brake master cylinders, and (iv) diagnostics and other products, which include diagnostics systems, advanced power emulators used for the development of electric vehicles and aerospace applications, and custom power electronic products for quality control in the development and production of electric vehicles and turbochargers.

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.

The recent outbreak of the COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and created uncertainty regarding potential impacts to 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 as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on its customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local, state and federal governments, and to what extent 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 as a result of any economic recession or depression that has occurred or may occur in the future. Therefore, the Company cannot reasonably estimate the impact at this time.

2. Summary of Significant Accounting Policies

New Accounting Pronouncements Recently Adopted

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance that requires balance sheet recognition of a lease asset and lease liability by lessees for all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. The new guidance also required new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance requires a modified retrospective approach with optional practical expedients. The FASB provided entities with an additional transition method, which allows an entity to apply this guidance as of the beginning of the period of adoption instead of the beginning of the earliest comparative period presented in the entity’s financial statements. The Company adopted this guidance on April 1, 2019 using the modified retrospective approach and the optional transition method permitted by the FASB. The Company also elected certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allowed it not to reassess lease classification for leases that commenced prior to the adoption date. In addition, the Company elected to exempt leases with an initial term of 12 months or less from balance sheet recognition and, for all classes of assets, combining non-lease components with lease components.

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Upon adoption, the Company recorded operating lease liabilities of $53,043,000 and corresponding operating lease assets of $50,773,000. The difference between the operating lease assets and liabilities recognized on the Company’s consolidated balance sheets primarily related to accrued rent on existing leases that were offset against the operating lease asset upon adoption. There was an immaterial reclassification of non-lease components to finance lease assets and finance lease liabilities upon adoption due to the Company’s election to combine non-lease components with lease components. The adoption of the new guidance did not have any impact on the Company’s rent expense and consolidated statement of cash flows. However, the Company has material nonfunctional currency leases that could have a material impact on the Company’s consolidated statements of operations. 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 loss of $11,710,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during year ended March 31, 2020. See Note 11 for additional discussion of the adoption of ASC 842 and the impact on the Company’s financial statements.

New Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting pronouncement related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent Accounting Standards Updates (“ASU”) issued to clarify certain provisions of the new guidance, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company will adopt this guidance on April 1, 2020 and the adoption is not expected to have a significant impact on its consolidated financial statements and related disclosures. In addition, the adoption is not expected to have any significant impact on the Company’s business processes, systems and internal controls.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for financial statements issued for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company will adopt this guidance on April 1, 2020 and the adoption is not expected to have a significant impact on its consolidated financial statements and related disclosures.

Income Taxes

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

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 is currently evaluating its contracts and the optional expedients provided by this guidance and the impact the new standard will have on its consolidated financial statements and related disclosures.

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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 Statement 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 of 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 allowance for doubtful accounts is developed based upon several factors including customer credit quality, historical write-off experience and any known specific issues or disputes which exist as of the balance sheet date. Accounts receivable are written off only when all collection attempts have failed. The Company does not require collateral for accounts receivable.

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.

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 Value”). 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.

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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 resuable. 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 program. 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 program 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 $13,208,000 and $11,899,000 at March 31, 2020 and 2019, respectively. The increase in the reserve for excess and obsolete inventory was primarily driven by the Company’s January 2019 acquisition of Dixie Electric, Ltd. (see Note 3 below).

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 Value 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.

Contract Assets

Contract assets consists of: (i) the core portion of the finished goods shipped to the Company’s customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, and (iv) long-term core inventory deposits.

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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 program 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.

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.

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.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act: (i) removes certain net operating loss deduction and carry-back limitations originally imposed by the Tax Cuts and Jobs Act of 2017, (ii) increases IRC §163(j) business interest expense limitations, and (iii) technical correction on recovery period for qualified improvement property (QIP), allowing QIP to be eligible for bonus depreciation. Specifically, the Company may now carry back net operating losses originating in the year ended March 31, 2019 to the year ended March 31, 2017, resulting in an increase to its income tax receivable of $1,002,000 as of March 31, 2020.

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The primary components of income tax (benefit) expense were: (i) federal income taxes, (ii) the impact of net operating loss carry-backs in connection with the CARES Act, (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, (vii) the change in the blended state rate, and (viii) the excess tax benefit relating to share-based compensation.

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 recent acquisitions 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 and 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. The Company groups assets at the lowest level for which cash flows are separately identified in order to measure an impairment. Events or circumstances that would result in an impairment review include a significant change in the use of an asset, the planned sale or disposal of an asset, or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset group. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset group. If it is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds its fair value.

As a result of the effect of the COVID-19 pandemic on macroeconomic conditions and its potential impact to the Company’s sales and operating income for future periods, it was determined that certain impairment testing triggers had occurred for the Company’s long-lived assets. Assumptions and estimates used to determine cash flows in the evaluation of impairment are subject to a degree of judgment and complexity. Any future changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in impairment charges. Future events that may result in impairment charges include extended unfavorable economic impacts of COVID-19, or other factors which could decrease revenues and profitability of existing locations and changes in the cost structure of existing facilities. Based on the undiscounted cash flow analysis performed, the Company determined that estimated undiscounted future cash flows exceeded the net carrying values of its long-lived assets, and, therefore, as of March 31, 2020, the Company's long-lived assets were not impaired. Assumptions and estimates about future values and remaining useful lives of the Company’s long-lived assets are subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business strategy and its internal forecasts.

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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 performed a qualitative assessment of goodwill impairment indicators, considering macroeconomic conditions related to the COVID-19 pandemic and its potential impact to sales and operating income for future periods. The Company expects that the duration of the COVID-19 pandemic and the continued impact of global travel restrictions, government shutdowns of non-essential businesses and disruptions to its supply chain and distribution channels to result in lower revenue and operating income for future periods. As a result, the Company determined that there were indicators of impairment, and it proceeded with a quantitative assessment of goodwill for all reporting units at March 31, 2020.

To estimate the fair value of its reporting units, the Company uses a combination of the market approach and the income approach. Under the market approach, the Company estimates fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, the Company uses a discounted cash flow (“DCF”) model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate that is commensurate with the risk inherent within the reporting unit. In addition, the Company compares the aggregate of the reporting units’ fair values to its market capitalization as further corroboration of the fair values.

Estimates of fair value result from judgments about future events and uncertainties and rely on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair value may materially impact the Company’s results of operations. The valuations are based on information available as of the impairment testing date and are based on expectations and assumptions that have been deemed reasonable by management. Any material changes in key assumptions, including failure to meet business plans, deterioration in the U.S. and global financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge. Under the market approach, significant estimates and assumptions also include the selection of appropriate guideline companies and the determination of appropriate valuation multiples to apply to the reporting unit. Under the income approach, significant estimates and assumptions also includes the determination of discount rates. The discount rates represent the weighted average cost of capital measuring the reporting unit’s cost of debt and equity financing, which are weighted by the percentage of debt and percentage of equity in a company’s target capital structure. Included in the estimate of the weighted average cost of capital is the assumption of a risk premium to address incremental uncertainty related to the reporting units’ future cash flow projections. An increase in the risk premium increases the discount rate.

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, 2020, and determined through the quantitative assessment that its goodwill of $3,205,000 was not impaired.

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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. As discussed under the caption “Goodwill” above, as a result of the COVID-19 pandemic, the Company determined that there were indicators of impairment present at March 31, 2020. Accordingly, the Company analyzed undiscounted cash flows for finite lived intangible assets as of March 31, 2020. Based on that undiscounted cash flow analysis, the Company determined that estimated undiscounted future cash flows exceeded their net carrying values, and, therefore, as of March 31, 2020, the Company's net intangible assets were not impaired. Assumptions and estimates about future values and remaining useful lives of the Company’s intangible assets are subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business strategy and its internal forecasts.

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 year ended March 31, 2020, aggregate foreign currency transaction losses of $789,000 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 manufactured, remanufactured, or distributed 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, including Used Core returns under the core exchange program, 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 Value. The Unit Value is recorded as revenue based on the Company’s 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 program (as described in further detail below). The number of Used Cores sent back under the core exchange program is generally limited to the number of similar Remanufactured Cores previously shipped to each customer.

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Revenue Recognition — Core Exchange Program

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 program. 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 program.

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 program. 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 program.

Revenue Recognition; General Right of Return

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.

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Contract Liability

Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, (iv) core bank liability, and (v) 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 15 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.

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.

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 program 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.

The core bank liability represents the full Remanufactured Core sales price paid for cores returned under the core exchange program. The payment for these cores will be 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.

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 generally one year and the remainder are recorded as long-term.

Advertising Costs

The Company expenses all advertising costs as incurred. Advertising expenses for the years ended March 31, 2020, 2019 and 2018 were $773,000, $819,000 and $610,000, respectively.

Net (Loss) Income Per Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income 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.

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

	Years Ended March 31,
	2020			2019			2018
Net (loss) income	$	(7,290,000	)	$	(7,849,000	)	$	19,264,000
Basic shares		18,913,788			18,849,909			18,854,993
Effect of dilutive stock options and warrants		-			-			659,782
Diluted shares		18,913,788			18,849,909			19,514,775
Net (loss) income per share:
Basic net (loss) income per share	$	(0.39	)	$	(0.42	)	$	1.02
Diluted net (loss) income per share	$	(0.39	)	$	(0.42	)	$	0.99

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 (loss) income per share. For the years ended March 31, 2020, 2019 and 2018, there were 1,738,106, 1,580,299, and 448,039, respectively, of potential common shares not included in the calculation of diluted net (loss) income 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 doubtful accounts, 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.

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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,
	2020			2019			2018

Weighted average risk free interest rate		1.76	%		2.83	%		1.92	%
Weighted average expected holding period (years)		5.70			5.94			5.82
Weighted average expected volatility		42.50	%		43.91	%		47.28	%
Weighted average expected dividend yield		-			-			-
Weighted average fair value of options granted	$	8.27		$	8.75		$	12.63

Credit Risk

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 and the nature of its customers. However, should the Company’s customers experience significant cash flow problems, the Company’s 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.

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. During the year ended March 31, 2020 and 2019, the Company redeemed $2,802,000 and $0, respectively, of its short-term investments for the payment of deferred compensation liabilities. During the year ended March 31, 2020, the Company recognized $96,000 in net gains which consists of $193,000 in realized gains on investments sold during the year partially offset by $97,000 of unrealized losses recognized on investments still held at March 31, 2020. The carrying value of plan assets was $850,000 and $3,273,000, and deferred compensation liability, which is included in other current liabilities in the accompanying consolidated balance sheets, was $850,000 and $3,273,000 at March 31, 2020 and 2019, respectively. During the years ended March 31, 2020, 2019, and 2018, an expense of $79,000, $113,000 and $118,000 respectively, was recorded for each year related to the deferred compensation plan.

During the year ended March 31, 2020, one of the Company’s named executive officer who was a participant in the deferred compensation plan redeemed $1,432,000 and elected to be paid out over 24 months. At March 31, 2020, approximately $1,295,000 remained unpaid, of which $714,000 was recorded in accrued liabilities and $581,000 was recorded in other liabilities in the accompanying consolidated balance sheet.

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.

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3. Acquisitions

Mechanical Power Conversion, LLC

In December 2018, the Company completed the acquisition of certain assets and assumption of certain liabilities from Mechanical Power Conversion, LLC (“E&M”), a privately held company operating as E&M Power and engaged in the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products, based in Binghamton, New York. Future activity of this business will be recorded via D&V Electronics USA, operating as the Company’s registered DBA (Doing Business As) entity. The addition of new products from E&M increased the Company’s revenue potential and product portfolio. The acquisition was consummated pursuant to an asset purchase agreement for an initial cash purchase price of $4,417,000, plus an additional working capital adjustment of $42,000 paid to the former owners of E&M. In addition, 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 the next 2-3 years. The initial fair value of the contingent consideration as of the acquisition date was $3,560,000 determined using a probability weighted method and a Monte Carlo Simulation model.

Identified intangible assets acquired have the following useful lives: (i) five years for developed technology, (ii) eight years for customer relationships, and (iii) six months for order backlog. The goodwill recorded in connection with the acquisition of E&M is deductible for income tax purposes. The Company incurred $355,000 in acquisition costs during the year ended March 31, 2019, which were recorded in general and administrative expenses. The assets and results of operations of E&M were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.

Dixie Electric, Ltd.

In January 2019, the Company completed the acquisition of all the equity interests of Dixie Electric, Ltd (“Dixie”), a privately held manufacturer and remanufacturer of alternators and starters for automotive aftermarket non-discretionary replacement parts for heavy-duty truck, industrial, marine and agricultural applications, based in Ontario, Canada. The addition of Dixie is expected to expand the Company’s heavy duty product portfolio. The initial cash purchase price of $8,049,000, which was reduced by a working capital adjustment of $71,000, was paid to the former owners of Dixie. In addition, the Company is contingently obligated to make additional payments to the former owners of Dixie up to $1,130,000 over the next two years. The preliminary fair value of the contingent consideration as of the acquisition date was $840,000 determined using a Monte Carlo Simulation model.

Trademarks acquired will have useful life of three years. The Company incurred $576,000 in acquisition costs during the year ended March 31, 2019, which were recorded in general and administrative expenses. The assets and results of operations of Dixie, and in the aggregate with the E&M acquisition, were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.

During the year ended March 31, 2020, the Company finalized the purchase price allocation of Dixie with no material adjustments.

4. Goodwill and Intangible Assets

Goodwill

The following summarizes the change in the Company’s goodwill:

	Years Ended March 31,
	2020			2019
Balance at beginning of period		$	3,205,000		$	2,551,000
Goodwill acquired			-			654,000
Balance at end of period		$	3,205,000		$	3,205,000

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Intangible Assets

The following is a summary of acquired intangible assets subject to amortization:

		March 31, 2020				March 31, 2019
	Weighted Average Amortization Period	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Trademarks	9 years	$	827,000	$	435,000	$	1,007,000	$	464,000
Customer relationships	11 years		8,453,000		4,376,000		8,610,000		3,547,000
Order backlog	6 months		-		-		325,000		180,000
Developed technology	5 years		2,817,000		893,000		2,991,000		311,000
Total	9 years	$	12,097,000	$	5,704,000	$	12,933,000	$	4,502,000

During the year ended March 31, 2020, the Company retired $470,000 of fully amortized intangible assets.

Amortization expense for acquired intangible assets is as follows:

	Years Ended March 31,
	2020		2019		2018

Amortization expense	$	1,770,000	$	1,194,000	$	710,000

The estimated future amortization expense for acquired intangible assets subject to amortization is as follows:

Year Ending March 31,
2021	$	1,479,000
2022		1,438,000
2023		1,408,000
2024		1,040,000
2025		471,000
Thereafter		557,000
Total	$	6,393,000

415. Accounts Receivable — Net

Accounts receivable — net includes offset accounts related to customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, and potential bad debts.

Accounts receivable — net is comprised of the following:

	March 31, 2020			March 31, 2019

Accounts receivable — trade	$	109,164,000		$	75,847,000
Allowance for bad debts		(4,252,000	)		(4,100,000	)
Customer payment discrepancies		(1,040,000	)		(854,000	)
Customer returns RGA issued		(12,124,000	)		(14,878,000	)
Less: total accounts receivable offset accounts		(17,416,000	)		(19,832,000	)
Total accounts receivable — net	$	91,748,000		$	56,015,000

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6. Inventory

Inventory is comprised of the following:

	March 31, 2020			March 31, 2019

Raw materials	$	99,360,000		$	95,757,000
Work in process		3,906,000			3,502,000
Finished goods		135,601,000			146,366,000
		238,867,000			245,625,000
Less allowance for excess and obsolete inventory		(13,208,000	)		(11,899,000	)

Total	$	225,659,000		$	233,726,000

Inventory unreturned	$	9,021,000		$	8,469,000

7. Contract Assets

Contract assets are comprised of the following:

	March 31, 2020		March 31, 2019
Short-term contract assets
Cores expected to be returned by customers	$	12,579,000	$	14,671,000
Upfront payments to customers		2,865,000		3,101,000
Core premiums paid to customers		4,888,000		4,411,000
Total short-term contract assets	$	20,332,000	$	22,183,000

Long-term contract assets
Remanufactured cores held at customers' locations	$	217,616,000	$	196,914,000
Upfront payments to customers		589,000		2,775,000
Core premiums paid to customers		15,766,000		16,618,000
Long-term core inventory deposits		5,569,000		5,569,000
Total long-term contract assets	$	239,540,000	$	221,876,000

8. Plant and Equipment

Plant and equipment if comprised of the following:

	March 31, 2020			March 31, 2019

Machinery and equipment	$	48,424,000		$	39,953,000
Office equipment and fixtures		25,541,000			20,070,000
Leasehold improvements		10,519,000			9,451,000
		84,484,000			69,474,000
Less accumulated depreciation		(39,527,000	)		(34,323,000	)

Total	$	44,957,000		$	35,151,000

Plant and equipment located in the foreign countries where the Company has facilities, net of accumulated depreciation, totaled $35,410,000 and $25,608,000, of which $31,845,000 and $21,822,000 is located in Mexico, at March 31, 2020 and 2019, respectively. These assets constitute substantially all the long-lived assets of the Company located outside of the United States.

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9. Debt

The Company is party to a $230,000,000 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 $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 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 permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. In connection with the Credit Facility, the lenders have a security interest in substantially all of the assets of the Company.

In June 2019, the Company entered into a second amendment to the Credit Facility (the “Second Amendment”). The Second Amendment, among other things, (i) increased the total size of the Revolving Facility to $238,620,000, (ii) modified the fixed charge coverage ratio financial covenant, (iii) modified the definition of “Consolidated EBITDA”, (iv) modified the borrowing base definition to, among other things, include brake-related products as eligible inventory, (v) increased the letter of credit sublimit to $20,000,000, (vi) increased the Canadian revolving sublimit and swing line sublimit to $24,000,000, (vii) increased the swing line sublimit to $23,862,000, (viii) permitted up to $5,000,000 of sale and lease back transactions per fiscal year, (ix) increased the permitted amount of certain capital expenditures, (x) increased the permitted amount of operating lease obligations per fiscal year, and (xi) increased certain other covenant-related baskets. The Company capitalized $973,000 of new debt issuance costs in connection with the Second Amendment, which is included in prepaid and other current assets in the consolidated balance sheet at March 31, 2020.

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 4.34% and 3.64%, at March 31, 2020, respectively, and 5.24% at March 31, 2019.

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, 2020.

In light of COVID-19, the Company elected not to pay down its Revolving Facility and accumulated cash of $49,616,000 as of March 31, 2020. The Credit Facility only allows up to $6,000,000 of credit for cash when computing the senior leverage ratio. In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

The Company’s term loans are comprised of the following:

	March 31, 2020			March 31, 2019

Principal amount of term loan	$	24,375,000		$	28,125,000
Unamortized financing fees		(235,000	)		(253,000	)
Net carrying amount of term loan		24,140,000			27,872,000
Less current portion of term loan		(3,678,000	)		(3,685,000	)
Long-term portion of term loan	$	20,462,000		$	24,187,000

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Future repayments of the Company’s Term Loans are as follows:

Year Ending March 31,
2021		3,750,000
2022		3,750,000
2023		3,750,000
2024		13,125,000
Total payments	$	24,375,000

The Company had $152,000,000 and $110,400,000 outstanding under the Revolving Facility at March 31, 2020 and 2019, respectively. In addition, $3,579,000 was reserved for letters of credit at March 31, 2020. At March 31, 2020, after certain adjustments, $58,461,000 was available under the Revolving Facility.

10. Contract Liabilities

Contract liabilities are comprised of the following:

	March 31, 2020		March 31, 2019
Short-term contract liabilities
Customer core returns accruals	$	4,126,000	$	3,933,000
Customer allowances earned		13,844,000		12,755,000
Customer deposits		1,365,000		2,674,000
Core bank liability		528,000		-
Accrued core payment, net		8,048,000		11,237,000
Total short-term contract liabilities	$	27,911,000	$	30,599,000

Long-term contract liabilities
Customer core returns accruals	$	77,927,000	$	25,722,000
Customer allowances earned		542,000		-
Core bank liability		7,556,000		-
Accrued core payment, net		6,076,000		15,167,000
Total long-term contract liabilities	$	92,101,000	$	40,889,000

11. Leases

The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. During the year ended March 31, 2020, the lease of the Company’s 199,000 square foot remanufacturing facility in Mexico commenced, resulting in an increase in the operating lease liability of $16,245,000. The Company has one non-cancellable lease agreement for a building in Mexico, which was executed, but had not commenced as of March 31, 2020, and accordingly was not included in the operating lease assets and operating lease liabilities as of March 31, 2020. Total commitments for this agreement, which expires in December 2032, are $12,538,000. In addition, the Company has a non-cancellable lease agreement for the renewal of a building lease in Canada, which was executed, but had not yet commenced as of March 31, 2020, and accordingly was not included in the operating lease assets and operating lease liabilities as of March 31, 2020. Total commitments for this agreement, which expires in May 2023, are $4,299,000. Both of these operating leases are expected to commence early in the Company’s fiscal year ending March 31, 2021. The Company also has finance leases for certain office and manufacturing equipment, which generally range from three to five years.

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. Lease assets are tested for impairment in the same manner as long-lived assets used in operations.

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As the rate implicit for each of its leases is not readily determinable, the Company uses its incremental borrowing rate, based on the information available at the lease commencement date, for each of its leases in determining the present value of its expected lease payments. The Company’s incremental borrowing rate is determined by analyzing and combining an applicable risk-free rate, a financial spread adjustment and 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 nonfunctional currency leases that could have a material impact on the Company’s consolidated statements of operations. 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 loss of $11,710,000 in general and administrative expenses in connection with the remeasurement of foreign currency-denominated lease liabilities during year ended March 31, 2020.

Balance sheet information for leases is comprised of the following:

		March 31, 2020
Leases	Classification
Assets:
Operating	Operating lease assets	$	53,029,000
Finance (1)	Plant and equipment		6,922,000
Total leased assets		$	59,951,000

Liabilities:
Current
Operating	Operating lease liabilities	$	5,104,000
Finance	Other current liabilities		2,059,000
Long-term
Operating	Long-term operating lease liabilities		61,425,000
Finance	Other liabilities		3,905,000
Total lease liabilities		$	72,493,000

(1)	The Company had $5,403,000 in capital lease assets included in plant and equipment at March 31, 2019.

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Lease cost recognized in the consolidated statement of operations is comprised of the following:

	Year Ended March 31,
	2020
Lease cost
Operating lease cost (1)	$	8,733,000
Short-term lease cost		1,263,000
Variable lease cost		600,000
Finance lease cost:
Amortization of finance lease assets		1,616,000
Interest on finance lease liabilities		281,000

Total lease cost	$	12,493,000

(1)	During the years ended March 31, 2019 and 2018, the Company incurred total operating lease expenses of $6,188,000 and $4,362,000, respectively.

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

Maturity of lease liabilities	Operating Leases			Finance Leases			Total
2021	$	9,536,000		$	2,292,000		$	11,828,000
2022		8,755,000			1,955,000			10,710,000
2023		7,503,000			1,325,000			8,828,000
2024		7,261,000			610,000			7,871,000
2025		7,368,000			243,000			7,611,000
Thereafter		59,837,000			-			59,837,000
Total lease payments		100,260,000			6,425,000			106,685,000
Less amount representing interest		(33,731,000	)		(461,000	)		(34,192,000	)

Present value of lease liabilities	$	66,529,000		$	5,964,000		$	72,493,000

Maturities of lease commitments at March 31, 2019 were as follows:

Maturity of lease liabilities	Operating Leases		Capital Leases			Total
2020	$	7,405,000	$	1,755,000		$	9,160,000
2021		8,206,000		1,311,000			9,517,000
2022		7,862,000		1,040,000			8,902,000
2023		6,726,000		719,000			7,445,000
2024		6,696,000		89,000			6,785,000
Thereafter		65,321,000		-			65,321,000
Total lease payments	$	102,216,000		4,914,000			107,130,000
Less amount representing interest				(406,000	)		(406,000	)

Present value of lease liabilities			$	4,508,000		$	106,724,000

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Other information about leases is as follows:

	Year Ended March 31,
	2020
Lease term and discount rate
Weighted-average remaining lease term (years):
Finance leases		3.2
Operating leases		12.0
Weighted-average discount rate:
Finance leases		4.7	%
Operating leases		5.6	%

12. 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,
	2020			2019

Receivables discounted	$	461,484,000		$	396,650,000
Weighted average days		346			341
Weighted average discount rate		3.3	%		4.2	%
Amount of discount as interest expense	$	14,780,000		$	15,867,000

13. Financial Risk Management and Derivatives

Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s 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 $42,052,000 and $32,524,000 at March 31, 2020 and 2019, 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 reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.

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The following shows the effect of the Company’s derivative instruments on its consolidated statements of operations:

	Gain (Loss) Recognized within General and Administrative Expenses
Derivatives Not Designated as	Years Ended March 31,
Hedging Instruments	2020			2019			2018

Forward foreign currency exchange contracts	$	(6,491,000	)	$	(972,000	)	$	752,000

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 fair value of the forward foreign currency exchange contracts of $207,000 is included in prepaid and other current assets in the accompanying consolidated balance sheet at March 31, 2019. The changes in the fair values of forward foreign currency exchange contracts are included in other liabilities in the consolidated statements of cash flows for the years ended March 31, 2020, 2019, and 2018.

14. Fair Value Measurements

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs:

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.

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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, 2020								March 31, 2019
			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	$	850,000	$	850,000	$	-	$	-	$	3,273,000	$	3,273,000	$	-	$	-
Prepaid expenses and other current assets
Forward foreign currency exchange contracts		-		-		-		-		207,000		-		207,000		-

Liabilities
Accrued liabilities
Short-term contingent consideration		2,190,000		-		-		2,190,000		2,816,000		-		-		2,816,000
Other current liabilities
Deferred compensation		850,000		850,000		-		-		3,273,000		3,273,000		-		-
Forward foreign currency exchange contracts		6,284,000		-		6,284,000		-		-		-		-		-
Other liabilities
Long-term contingent consideration		463,000		-		-		463,000		1,905,000		-		-		1,905,000

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. During the years ended March 31, 2020 and 2019, losses of $6,491,000 and $972,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts.

Contingent Consideration

In December 2018, the Company completed the acquisition of certain assets and assumption of certain liabilities from 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 the next three years.

In January 2019, the Company completed the acquisition of all the equity interests of Dixie. In connection with this acquisition, the Company is contingently obligated to make additional payments to the former owners of Dixie up to $1,130,000 over the next two years.

The Company’s contingent consideration is recorded in accrued expenses and other liabilities in its consolidated balance sheets at March 31, 2020 and 2019, and is a Level 3 liability measured at fair value.

E&M Research and Development (“R&D”) Event Milestone

The fair value of the two-year R&D event milestone based on technology development and transfer was $1,130,000 and $2,190,000 at March 31, 2020 and 2019, respectively, determined using a probability weighted method with commensurate with the term of the contingent consideration.

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

	March 31, 2020
Risk free interest rate		0.16	%
Counter party rate		12.16	%
Probability		100.00	%

The assumptions used to determine fair value of the two-year R&D event milestone at March 31, 2019 is as follows: (i) a risk-free interest rate ranging from 2.30% to 2.41%, (ii) counter party risk discount rate ranging from 6.30% to 6.41%, and (iii) total probability of 90% to 100%. 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.

E&M Gross Profit Earn-out Consideration

The fair value of the three-year gross profit earn-out consideration was $1,230,000 and $1,660,000 at March 31, 2020 and 2019, respectively, determined using a Monte Carlo Simulation Model.

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

	March 31, 2020			March 31, 2019
Risk free interest rate		0.22	%		2.23	%
Counter party rate		12.22	%		6.23	%
Expected volatility		31.00	%		29.00	%
Weighted average cost of capital		13.75	%		16.00	%

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.

Dixie Revenue Earn-out Consideration

The fair value of the two-year revenue earn-out consideration was $293,000 and $871,000 at March 31, 2020 and 2019, respectively, determined using a Monte Carlo Simulation Model.

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

	March 31, 2020			March 31, 2019
Risk free interest rate		0.16	%		2.58	%
Counter party rate		15.16	%		5.03	%
Revenue discount rate		2.50	%		6.50	%
Expected volatility		33.50	%		29.00	%
Revenue volatility		6.50	%		8.50	%

Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

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

	Years Ended March 31,
	2020			2019
	Contingent Consideration			Contingent Consideration
Beginning balance	$	4,721,000		$	-
Newly issued		-			4,400,000
Changes in revaluation of contingent consideration included in earnings		(113,000	)		321,000
Exercises/settlements (1)		(1,955,000	)		-
Ending balance	$	2,653,000		$	4,721,000

During the years ended March 31, 2020 and 2019, 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.

Goodwill

Fair value assessments of the reporting unit and the reporting unit's net assets, which are performed for goodwill impairment tests, are considered Level 3 measurements due to the significance of unobservable inputs developed using company specific information. The Company considered a market approach as well as an income approach (a DCF model) to determine the fair value of the reporting unit.

Refer to Financial Note 2, “Significant Accounting Policies for more information regarding goodwill impairment assumptions.

Long-lived Assets and Intangible Assets

The Company utilizes multiple approaches including the DCF model and market approaches for estimating the fair value of long-lived assets and intangible assets. The future cash flows used in the analysis are based on internal cash flow projections from its long-range plans and include significant assumptions by management. Accordingly, the fair value assessment of the long-lived assets and intangible assets are considered Level 3 fair value measurements.

The Company measures certain long-lived and intangible assets at fair value on a nonrecurring basis when events occur that indicate an asset group may not be recoverable. If the carrying amount of an asset group is not recoverable, an impairment charge is recorded to reduce the carrying amount by the excess over its fair value.

15. 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.

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The following summarizes the changes in the warranty return accrual:

	Years Ended March 31,
	2020			2019			2018

Balance at beginning of year	$	19,475,000		$	16,646,000		$	14,286,000
Acquisition (1)		-			221,000			-
Charged to expense		112,590,000			111,321,000			105,156,000
Amounts processed		(113,765,000	)		(108,713,000	)		(102,796,000	)

Balance at end of year	$	18,300,000		$	19,475,000		$	16,646,000

(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.

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The following summarizes the breakout of allowances discussed above, recorded as a reduction to revenues:

	Years Ended March 31,
	2020			2019			2018

Allowances incurred under long-term customer contracts		$	26,733,000		$	29,612,000		$	24,829,000
Allowances related to a single exchange of product			97,408,000			92,588,000			79,851,000
Amortization of core premiums paid to customers			4,501,000			4,127,000			3,588,000
Total customer allowances recorded as a reduction of revenues		$	128,642,000		$	126,327,000		$	108,268,000

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,
2021	$	25,896,000
2022		5,838,000
2023		4,701,000
2024		2,859,000
2025		2,052,000
Thereafter		2,667,000

Total marketing allowances	$	44,013,000

Contingencies

The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding the Company’s business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that the Company owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that it imported from Mexico. The Company does not believe that this amount is correct and believes that it has numerous defenses and intends to dispute this amount vigorously. The Company cannot assure that the U.S. Customs and Border Protection will agree or that it will not need to accrue or pay additional amounts in the future.

16. 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,
	2020			2019			2018

Customer A		38	%		38	%		41	%
Customer B		20	%		22	%		25	%
Customer C		26	%		23	%		19	%

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The Company’s largest customers accounted for the following total percentage of accounts receivable — trade:

	March 31, 2020			March 31, 2019

Customer A		28	%		34	%
Customer B		14	%		18	%
Customer C		33	%		16	%

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,
	2020			2019			2018

Rotating electrical products		73	%		79	%		78	%
Wheel hub products		15	%		15	%		17	%
Brake-related products		9	%		3	%		3	%
Other products		3	%		3	%		2	%
		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, 2020, 2019, and 2018.

17. Income Taxes

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act: (i) removes certain net operating loss deduction and carry-back limitations originally imposed by the Tax Cuts and Jobs Act of 2017, (ii) increases IRC §163(j) business interest expense limitations, and (iii) technical correction on recovery period for qualified improvement property (QIP), allowing QIP to be eligible for bonus depreciation. Specifically, the Company may now carry back net operating losses originating in the year ended March 31, 2019 to the year ended March 31, 2017, resulting in an increase to its income tax receivable of $1,002,000 as of March 31, 2020.

On December 22, 2017, comprehensive tax reform legislation known as the Act was signed into law. The Act amended the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses.

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The income tax expense is as follows:

	Years Ended March 31,
	2020			2019			2018
Current tax expense
Federal	$	5,313,000		$	680,000		$	12,187,000
State		1,454,000			647,000			1,425,000
Foreign		1,566,000			1,723,000			1,194,000
Total current tax expense		8,333,000			3,050,000			14,806,000
Deferred tax (benefit) expense
Federal		(4,516,000	)		(2,087,000	)		949,000
State		(1,567,000	)		(295,000	)		393,000
Foreign		(3,261,000	)		(400,000	)		(23,000	)
Total deferred tax (benefit) expense		(9,344,000	)		(2,782,000	)		1,319,000
Total income tax (benefit) expense	$	(1,011,000	)	$	268,000		$	16,125,000

Deferred income taxes consist of the following:

	March 31, 2020			March 31, 2019
Assets
Allowance for bad debts	$	1,037,000		$	1,005,000
Customer allowances earned		3,549,000			3,177,000
Allowance for stock adjustment returns		1,743,000			2,073,000
Inventory adjustments		5,567,000			3,701,000
Stock options		2,427,000			2,221,000
Operating lease liabilities (1)		19,396,000			-
Estimate for returns		10,839,000			2,107,000
Accrued compensation		1,964,000			1,578,000
Net operating losses		4,091,000			2,088,000
Tax credits		1,343,000			1,495,000
Other		1,620,000			5,776,000
Total deferred tax assets	$	53,576,000		$	25,221,000
Liabilities
Plant and equipment, net		(5,175,000	)		(3,316,000	)
Intangibles, net		(4,700,000	)		(5,390,000	)
Operating lease (1)		(15,371,000	)		-
Other		(3,966,000	)		(3,278,000	)
Total deferred tax liabilities	$	(29,212,000	)	$	(11,984,000	)
Less valuation allowance	$	(5,493,000	)	$	(3,748,000	)
Total	$	18,871,000		$	9,489,000

(1)

Adoption of the new lease standard as of April 1, 2019 (see Note 2) resulted in the recognition of a deferred tax asset for operating lease liabilities and a deferred tax liability for operating lease assets. These temporary differences will reverse over the estimated term of the relevant operating leases. As of March 31, 2019, the deferred tax assets associated with operating leases were reported as other deferred tax assets under legacy US GAAP.

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As of March 31, 2020, the Company had state net operating loss carryforwards of $1,689,000 and foreign net operating loss carryforwards of $14,953,000. The state net operating loss carryforwards expire beginning fiscal year 2034, and the foreign net operating loss carryforwards expire beginning fiscal year 2038. As of March 31, 2020, the Company also had investment tax credits carryforward of $1,343,000, which will expire beginning fiscal year 2032. A full valuation allowance was established on the 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.

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 acquisitions 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, 2020, 2019, and 2018, the primary components of the Company’s income tax expense were: (i) federal income taxes, (ii) the impact of net operating loss carry-backs in connection with the CARES Act, (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, (vii) the change in the blended state rate, and (viii) the excess tax benefit relating to share-based compensation.

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,
	2020			2019			2018

Statutory federal income tax rate		21.0	%		21.0	%		31.5	%
State income tax rate, net of federal benefit		(3.7	)%		(3.7	)%		3.6	%
Excess tax benefit from stock compensation		(1.3	)%		0.7	%		(0.7	)%
Foreign income taxed at different rates		13.8	%		-	%		(2.6	)%
Return to provision adjustments		(1.5	)%		-	%		-	%
Warrants		-	%		-	%		(2.1	)%
Non-deductible executive compensation		(4.0	)%		(7.3	)%		1.0	%
Change in valuation allowance		(18.7	)%		(15.3	)%		4.8	%
Net operating loss carryback		4.8	%		-	%		-	%
Effects of mandatory redeemed repatriation		-	%		-	%		1.5	%
Effects of U.S. tax rate changes		-	%		0.3	%		8.0	%
Uncertain tax positions		2.1	%		1.8	%		0.6	%
Research and development credit		1.1	%		1.3	%		(0.2	)%
Non-deductible transaction costs		-	%		(2.1	)%		-	%
Other income tax		(1.4	)%		(0.2	)%		0.2	%
		12.2	%		(3.5	)%		45.6	%

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, 2020, the Company is not under examination in any jurisdiction and the years ended March 31, 2019, 2018, 2017, and 2016 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Years Ended March 31,
	2020			2019			2018

Balance at beginning of period	$	1,083,000		$	1,219,000		$	1,092,000
Additions based on tax positions related to the current year		362,000			91,000			234,000
Reductions for tax positions of prior year		(434,000	)		(227,000	)		(107,000	)
Balance at end of period	$	1,011,000		$	1,083,000		$	1,219,000

At March 31, 2020, 2019 and 2018, there are $823,000, $938,000 and $1,054,000 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, 2020, 2019, and 2018, the Company recognized approximately $(50,000), $(23,000), and $5,000 in interest and penalties, respectively. The Company had approximately $74,000 and $124,000 for the payment of interest and penalties accrued at March 31, 2020 and 2019, respectively.

18. 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 $496,000, $445,000, and $389,000 for the years ended March 31, 2020, 2019, and 2018, respectively.

19. Share-based Payments

At March 31, 2020, 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) 53,784 and 40,238 of restricted stock units were issued and (ii) 143,909 and 201,084 shares of common stock were available for grant under this plan at March 31, 2020 and 2019, respectively.

At March 31, 2020, there were 3,950,000 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) 148,199 and 127,896 shares of restricted stock units were outstanding, (ii) options to purchase 1,485,123 and 1,274,165 shares of common stock were outstanding, (iii) none and 75,000 restricted shares were outstanding, and (iv) 629,823 and 1,040,728 shares of common stock were available for grant at March 31, 2020 and 2019, respectively.

In addition, at March 31, 2020 and 2019, options to purchase 51,000 and 63,000 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.

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Stock Options

The following is a summary of stock option transactions:

	Number of Shares			Weighted Average Exercise Price

Outstanding at March 31, 2019		1,337,165		$	17.58
Granted		302,539		$	19.72
Exercised		(59,600	)	$	7.65
Forfeited		(43,981	)	$	24.98
Outstanding at March 31, 2020		1,536,123		$	18.18

At March 31, 2020, options to purchase 513,198 shares of common stock were unvested at the weighted average exercise price of $20.32.

Based on the market value of the Company’s common stock at March 31, 2020, 2019, and 2018, the pre-tax intrinsic value of options exercised was $508,000, $788,000, and $913,000, respectively. The total fair value of stock options vested during the years ended March 31, 2020, 2019, and 2018 was $2,189,000, $1,973,000, and $1,572,000, respectively.

The following summarizes information about the options outstanding at March 31, 2020:

	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		311,634	$	6.46		2.75				311,634	$	6.46		2.75
$6.48 to $18.20		223,600		10.19		3.61				204,300		9.58		3.06
$18.21 to $22.83		524,251		19.56		8.77				83,183		19.17		8.23
$22.84 to $28.04		216,499		26.19		6.44				163,669		25.82		6.18
$28.05 to $34.17		260,139		29.61		5.94				260,139		29.61		5.94
		1,536,123	$	18.18		5.99	$	2,567,000		1,022,925	$	17.10		4.62	$	2,567,000

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, 2020 based on the Company’s closing stock price of $12.58 as of that date.

At March 31, 2020, there was $2,883,000 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, 2020 and 2019 the Company granted 113,483 and 179,725 shares of RSUs, respectively, with an estimated grant date fair value of $2,112,000 and $3,490,000, 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, 2020 and 2019 were 58,802 and 14,959, respectively, based on the value of these awards as determined by the Company’s closing stock price on the vesting date.

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The following is a summary of non-vested RSUs:

	Number of Shares			Weighted Average Grant Date Fair Value

Non-vested at March 31, 2019		243,134		$	21.75
Granted		113,483		$	18.61
Vested		(151,182	)	$	21.66
Forfeited		(3,452	)	$	21.10
Non-vested at March 31, 2020		201,983		$	20.06

As of March 31, 2020, there was $2,643,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.9 years.

20. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss are as follows:

	March 31, 2020						March 31, 2019
	Foreign Currency Translation			Total			Unrealized Gain on Short-Term Investments			Foreign Currency Translation			Total
Balance at March 31, 2019 and 2018	$	(6,887,000	)	$	(6,887,000	)	$	746,000		$	(6,174,000	)	$	(5,428,000	)
Cumulative-effect adjustment		-			-			(746,000	)		-			(746,000	)
Balance at April 1, 2019 and 2018	$	(6,887,000	)	$	(6,887,000	)	$	-		$	(6,174,000	)	$	(6,174,000	)
Other comprehensive loss, net of tax		(481,000	)		(481,000	)		-			(713,000	)		(713,000	)
Balance at March 31, 2020 and 2019	$	(7,368,000	)	$	(7,368,000	)	$	-		$	(6,887,000	)	$	(6,887,000	)

21. Subsequent Event

In light of the COVID-19 pandemic, the Company has taken proactive steps to manage its costs and bolster its liquidity, including increasing the level of receivables collected under its receivable discount programs. During April 2020, the Company collected $59,730,000 of receivables under these programs, with $1,552,000 in interest expense associated with these accounts receivable sales, which was higher than its average monthly utilization of these programs.

Additionally, as part of the cost reduction measures implemented by the Company in response to the impact of the COVID-19 pandemic on its business, executive committee members have all agreed to at least a 25% reduction in base salary, until the Company believes it is fiscally responsible to reinstate the original base salaries. The Company’s Board of Directors agreed to defer all board and committee fees and retainers, as well as waive any fees related to weekly board check in meetings, as long as the executive committee continues with a base salary reduction. The Company continues to analyze its cost structure and may implement additional cost reduction measures as may be necessary due to the on-going economic challenges resulting from the COVID-19 pandemic.

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22. Unaudited Quarterly Financial Data

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		12,000,000			14,285,000		10,618,000		34,522,000
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
Total operating expenses		19,291,000			21,881,000		18,415,000		42,075,000
Operating (loss) 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
(Loss) income before income tax (benefit) expense		(7,881,000	)		8,169,000		2,367,000		(10,956,000	)
Income tax (benefit) expense		(1,730,000	)		1,980,000		1,502,000		(2,763,000	)
Net (loss) income	$	(6,151,000	)	$	6,189,000	$	865,000	$	(8,193,000	)

Basic net (loss) income per share	$	(0.33	)	$	0.33	$	0.05	$	(0.43	)
Diluted net (loss) income per share	$	(0.33	)	$	0.32	$	0.04	$	(0.43	)

The following summarizes selected quarterly financial data for the year ended March 31, 2019:

	First Quarter			Second Quarter		Third Quarter			Fourth Quarter

Net sales	$	91,668,000		$	127,939,000	$	124,113,000		$	129,077,000
Cost of goods sold		75,316,000			102,228,000		102,952,000			103,127,000
Gross profit		16,352,000			25,711,000		21,161,000			25,950,000
Operating expenses:
General and administrative		12,091,000			8,997,000		12,331,000			12,553,000
Sales and marketing		4,392,000			4,537,000		5,149,000			5,464,000
Research and development		1,736,000			1,784,000		2,054,000			2,440,000
Total operating expenses		18,219,000			15,318,000		19,534,000			20,457,000
Operating (loss) income		(1,867,000	)		10,393,000		1,627,000			5,493,000
Other expense:
Interest expense, net		5,075,000			5,699,000		5,764,000			6,689,000
(Loss) income before income tax (benefit) expense		(6,942,000	)		4,694,000		(4,137,000	)		(1,196,000	)
Income tax (benefit) expense		(1,447,000	)		1,181,000		(1,035,000	)		1,569,000
Net (loss) income	$	(5,495,000	)	$	3,513,000	$	(3,102,000	)	$	(2,765,000	)

Basic net (loss) income per share	$	(0.29	)	$	0.19	$	(0.16	)	$	(0.15	)
Diluted net (loss) income per share	$	(0.29	)	$	0.18	$	(0.16	)	$	(0.15	)

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.

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Table of Contents

Schedule II — Valuation and Qualifying Accounts

Accounts Receivable — Allowance for doubtful accounts

Years Ended March 31,	Description	Balance at beginning of year		Charge to bad debts expense		Acquisition			Amounts written off		Balance at end of year
2020	Allowance for doubtful accounts	$	4,100,000	$	610,000	$	-		$	458,000	$	4,252,000
2019	Allowance for doubtful accounts	$	4,142,000	$	224,000	$	63,000	(1)	$	329,000	$	4,100,000
2018	Allowance for doubtful accounts	$	4,140,000	$	21,000	$	-		$	19,000	$	4,142,000

(1)

Allowance for doubtful accounts 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 yearyear		Charge to discrepancies expense		Acquisition		Amounts Processed		Balance at end of year
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
2018	Allowance for customer-payment discrepancies	$	751,000	$	998,000	$	-	$	639,000	$	1,110,000

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
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
2018	Allowance for excess and obsolete inventory	$	4,125,000	$	8,491,000	$	77,000	(2)	$	6,011,000	$	6,682,000

(2)

Allowance for excess and obsolete inventory established in the opening balance sheet in connection with the Company’s July 2017 acquisition.

S-1

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

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	MPAA	The Nasdaq Global Select Market

Large accelerated filer £☐		Accelerated filer R☑
Non-accelerated filer £☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company £☐
		Emerging growth company £☐

Location	~~Age~~Type of Facility	~~Position with the Company~~ Approx. Square Feet	Leased or Owned	Expiration

~~Selwyn Joffe~~	59	~~Chairman of the Board of Directors, President and Chief Executive Officer~~

~~Scott J. Adelson~~Torrance, CA	56Remanufacturing, Warehouse, Administrative, and Office	231,000	~~Lead Independent Director~~Leased	March 2022
Tijuana, Mexico	Remanufacturing, Warehouse, and Office	312,000	Leased	August 2033
Tijuana, Mexico	Distribution Center and Office
~~Rudolph J. Borneo~~410,000	76Leased	~~Director, Chairman of the Compensation Committee and member of the Audit and Nominating and Corporate Governance Committees~~December 2032
Tijuana, Mexico	Remanufacturing	199,000	Leased	December 2032
Tijuana, Mexico	Core Induction and Warehouse
~~Dr. David Bryan~~173,000	65Leased	~~Director, member of the Compensation and Nominating and Corporate Governance Committees~~December 2032
Tijuana, Mexico	Warehouse	72,000	Leased	July 2021
Ontario, Canada	Remanufacturing, Warehouse, and Office
~~Joseph Ferguson~~157,000	50Leased	~~Director, member of the Audit Committee~~May 2023
Ontario, Canada	Manufacturing, Warehouse, and Office	35,000	Leased	December 2022
Singapore & Malaysia	Remanufacturing, Warehouse, and Office
~~Philip Gay~~90,000	59Leased	~~Director, Chairman of the Audit Committee, and member of the Compensation and Nominating and Corporate Governance Committees~~Various through December 2022
Shanghai, China	Warehouse and Office	27,000
~~Duane Miller~~Leased	70March 2021

Item 3.	~~Director, Chairman of the Nominating and Corporate Governance Committee and member of the Audit and Compensation Committees~~

~~Jeffrey Mirvis~~	53	~~Director, member of the Audit, Compensation and Nominating and Corporate Governance Committees~~

~~Timothy D. Vargo~~	66	~~Director~~

~~Barbara L. Whittaker~~	66	~~Director~~Legal Proceedings

~~EXPLANATORY NOTE~~		3PART I

Item 1. Business	5
Item 1A. Risk Factors	11
Item 1B. Unresolved Staff Comments	19
Item 2. Properties	19
Item 3. Legal Proceedings	19
Item 4. Mine Safety Disclosures	19
PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6. Selected Financial Data	22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	41
Item 8. Financial Statements and Supplementary Data	41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	41
Item 9A. Controls and Procedures	41
Item 9B. Other Information	43
PART III

Item 10. Directors, Executive Officers and Corporate Governance	444
Item 11. Executive Compensation	1044
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	3644
Item 13. Certain Relationships and Related Transactions, and Director Independence	3844
Item 14. Principal ~~Accounting~~Accountant Fees and Services	39
	44
PART IV

Item 15. Exhibits, Financial Statement Schedules	4045
Item 16. Form 10-K Summary	50
SIGNATURES	4151

~~Name~~Item 5.	~~Age~~	~~Position with the Company~~

~~Steve Kratz~~	62	~~Chief Operating Officer~~

~~David Lee~~	47	~~Chief Financial Officer~~

~~Doug Schooner~~	48	~~Chief Manufacturing Officer~~

~~Michael Umansky~~	76	~~Vice President, Secretary~~Market for Registrant’s Common Equity, Related Stockholder Matters and ~~General Counsel~~Issuer Purchases of Equity Securities

	~~What We Do~~		~~What We Don’t Do~~
	~~Align pay with performance~~		~~No “single-trigger” equity acceleration in connection with a change in control~~
	~~Formulaic cash-based incentive program, with 70% of total bonus opportunity tied to objective financial performance goals~~		~~Do not provide above-market interest rates on deferred compensation~~
	~~Maintain rigorous stock ownership requirements: 3x base salary (CEO), 2x base salary (other named executive officers) and 3x annual cash retainer for non-employee directors~~		~~Do not re-price or exchange stock options without stockholder approval~~
	~~Maintain a clawback policy~~		~~Do not allow directors or officers to hedge or pledge our equity securities~~
	~~Annual say-on-pay vote~~
	~~Independent compensation consultant~~

Named Executive Officers	Base Salary
Selwyn Joffe	$	700,000
David Lee	$	290,000
Michael Umansky	$	506,000
Doug Schooner	$	294,000
Steve Kratz	$	180,000

Named Executive Officers	Target Incentive Payment		Targeted Incentive Payment for Achieving Company Performance Goal (70% of Total)		Targeted Incentive Payment for Achieving Individual Goals (30%)
Selwyn Joffe	$	760,200	$	532,140	$	228,060
David Lee	$	159,500	$	111,650	$	47,850
Michael Umansky	$	101,200	$	70,840	$	30,360
Doug Schooner	$	102,900	$	72,030	$	30,870
Steve Kratz	$	30,750	$	21,525	$	9,225

Named Executive Officers	Target Incentive Payment		Company Performance Related Incentive Payment		Individual Goal Incentive Payment		Total Actual Incentive Payment
Selwyn Joffe	$	760,200	$	623,000	$	228,000	$	851,000
David Lee	$	159,500	$	131,000	$	48,000	$	179,000
Michael Umansky	$	101,200	$	83,000	$	41,000	$	124,000
Doug Schooner	$	102,900	$	84,000	$	31,000	$	115,000
Steve Kratz	$	30,750	$	25,000	$	9,000	$	34,000

Named Executive Officers	Stock Options		Restricted Stock
Selwyn Joffe		51,200		11,300
David Lee		10,800		2,800
Michael Umansky		11,000		2,000
Doug Schooner		9,000		2,400
Steve Kratz		10,600		3,000

Name & Principal Position	Fiscal Year	Salary			Bonus (1)		Stock Awards (2)		Options Awards(2)		Non-Equity Incentive Plan Compensation		All Other Compensation (3)		Total

Selwyn Joffe	2017	$	700,000		$	228,100	$	324,084	$	674,719	$	623,000	$	169,200	$	2,719,103
Chairman of the Board,	2016		700,000			47,900		389,125		374,663		652,200		327,520		2,491,408
President and CEO	2015		674,616			1,778,834		1,350,893		-		-		223,056		4,027,399

David Lee	2017	$	290,000		$	48,100	$	80,304	$	142,323	$	131,000	$	88,030	$	779,757
Chief Financial Officer	2016		262,192			600		96,503		92,951		100,500		70,200		622,946
	2015		220,000			324,260		84,841		89,510		-		61,990		780,601

Steve Kratz	2017		310,769	(4)	$	9,100	$	86,040	$	139,688	$	25,000	$	29,895	$	289,723
Chief Operating Officer	2016		350,000			100		105,842		101,531		91,000		25,630		674,103
	2015		350,000			374,646		91,720		96,247		-		22,696		935,309

Doug Schooner	2017	$	294,000		$	31,100	$	68,832	$	118,603	$	84,000	$	88,147	$	684,681
Chief Manufacturing Officer	2016		294,000			1,800		84,051		80,081		99,300		71,246		630,478
	2015		286,385			265,089		59,618		61,598		-		62,767		735,457

Michael Umansky	2017	$	506,000		$	41,100	$	57,360	$	144,959	$	83,000	$	86,746	$	919,165
Vice President, Secretary	2016		506,000			10,000		68,486		67,211		114,000		85,551		851,248
and General Counsel	2015		506,000			316,343		59,618		63,523		-		56,414		1,001,898

Name	Automobile Expenses		Health Insurance Premiums		401K Employer’s Contribution		Deferred Compensation Plan Employer’s Contribution		Total

Selwyn Joffe	$	18,000	$	103,327	$	5,151	$	42,722	$	169,200
David Lee	$	-	$	79,327	$	8,703	$	-	$	88,030
Steve Kratz	$	-	$	27,886	$	2,009	$	-	$	29,895
Doug Schooner	$	-	$	79,327	$	8,820	$	-	$	88,147
Michael Umansky	$	376	$	55,469	$	12,000	$	18,900	$	86,746

Name	Grant Date	All Other Stock Awards: Number of Shares of Stock or Units (1)		All Other Option Awards: Number of Securities Underlying Options (1)		Exercise or Base Price of Option Awards		Grant Date Fair Value of Stock and Option Awards

Selwyn Joffe	6/24/2016		-		51,200	$	28.68	$	674,719
Selwyn Joffe	6/24/2016		11,300		-	$	28.68	$	324,084
David Lee	6/24/2016		-		10,800	$	28.68	$	142,323
David Lee	6/24/2016		2,800		-	$	28.68	$	80,304
Steve Kratz	6/24/2016		-		10,600	$	28.68	$	139,688
Steve Kratz	6/24/2016		3,000		-	$	28.68	$	86,040
Doug Schooner	6/24/2016		-		9,000	$	28.68	$	118,603
Doug Schooner	6/24/2016		2,400		-	$	28.68	$	68,832
Michael Umansky	6/24/2016		-		11,000	$	28.68	$	144,959
Michael Umansky	6/24/2016		2,000		-	$	28.68	$	57,360

	Option Awards								Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable Vested		Number of Securities Underlying Unexercised Options (#) Unexercisable Unvested			Option Exercise Price ($)		Option Expiration Date	Number of Shares or Units of Stock Unvested (#)			Market Value of Shares or Units of Stock Unvested ($)

Selwyn Joffe
		109,100		-		$	6.46	12/27/2022
		124,100		-		$	6.46	12/27/2022
		83,700		-		$	9.32	9/2/2023
		8,733		17,467	(1)	$	31.13	9/3/2025
		-		51,200	(4)	$	28.68	6/23/2026
										17,197	(2)	$	528,464
										8,333	(1)	$	256,073
										11,300	(4)	$	347,249
David Lee
		30,900		-		$	6.46	12/27/2022
		20,900		-		$	9.32	9/2/2023
		6,200		3,100	(3)	$	22.93	6/21/2024
		2,167		4,333	(1)	$	31.13	9/3/2025
		-		10,800	(4)	$	28.68	6/23/2026
										1,234	(3)	$	37,921
										2,067	(1)	$	63,519
										2,800	(4)	$	86,044
Steve Kratz
		21,900		-		$	6.46	12/27/2022
		24,900		-		$	9.32	9/2/2023
		6,667		3,333	(3)	$	22.93	6/21/2024
		2,367		4,733	(1)	$	31.13	9/3/2025
		-		10,600	(4)	$	28.68	6/23/2026
										1,334	(3)	$	40,994
										2,267	(1)	$	69,665
										3,000	(4)	$	92,190
Doug Schooner
		4,834		-		$	9.32	9/2/2023
		4,267		2,133	(3)	$	22.93	6/21/2024
		1,867		3,733	(1)	$	31.13	9/3/2025
		-		9,000	(4)	$	28.68	6/23/2026
										866	(3)	$	26,612
										1,800	(1)	$	55,314
										2,400	(4)	$	73,752
Michael Umansky
		7,400		-		$	6.46	12/27/2022
		15,000		-		$	9.32	9/2/2023
		4,400		2,200	(3)	$	22.93	6/21/2024
		1,567		3,133	(1)	$	31.13	9/3/2025
		-		11,000	(4)	$	28.68	6/23/2026
										866	(3)	$	26,612
										1,467	(1)	$	45,081
										2,000	(4)	$	61,460

Name	Executive Contributions in Last FY(1)		Company Contribution in Last FY(2)		Aggregate Earnings in Last FY (3)		Aggregate Withdrawals/ Distributions		Aggregate Balance at Last FY (4)

Selwyn Joffe	$	42,722	$	42,722	$	129,089	$	-	$	885,063
David Lee	$	-	$	-	$	-	$	-	$	-
Steve Kratz	$	-	$	-	$	-	$	-	$	-
Doug Schooner	$	-	$	-	$	-	$	-	$	-
Michael Umansky	$	50,400	$	18,900	$	110,527	$	-	$	872,772

Name	Contribution		Interest (a)		Total

Selwyn Joffe	$	42,722	$	-	$	42,722
David Lee	$	-	$	-	$	-
Steve Kratz	$	-	$	-	$	-
Doug Schooner	$	-	$	-	$	-
Michael Umansky	$	18,900	$	-	$	18,900

Benefit	Termination by Company for Cause (1)		Death (2)		Disability (3)		Voluntary Termination by Mr. Joffe for Good Reason or Termination by Company w/o Cause (4)		After Change in Control: Voluntary Termination by Mr. Joffe (5)

Salary Contribution	$	-	$	-	$	-	$	1,400,000	$	1,400,000
Bonus	$	851,000	$	851,000	$	851,000	$	1,551,200	$	1,551,200
Executive Awards (6)	$	-	$	1,396,951	$	1,396,951	$	1,396,951	$	1,396,951
Healthcare	$	-	$	-	$	24,000	$	206,653	$	-
Automobile Allowance (7)	$	-	$	-	$	-	$	36,000	$	-
Accrued Vacation Payments	$	121,890	$	121,890	$	121,890	$	229,582	$	121,890

Name	Fees Earned or Paid in Cash		Stock Awards (1)		Option Awards (1)		All Other Compensation		Total

Scott J. Adelson	$	61,000	$	50,000	$	-	$	-	$	111,000
Rudolph Borneo	$	90,000	$	50,000	$	-	$	-	$	140,000
David Bryan	$	62,444	$	150,000	$	-	$	-	$	212,444
Joseph Ferguson	$	67,444	$	150,000	$	-	$	-	$	217,444
Philip Gay	$	106,000	$	50,000	$	-	$	-	$	156,000
Duane Miller	$	88,500	$	50,000	$	-	$	-	$	138,500
Jeffrey Mirvis	$	83,000	$	50,000	$	-	$	-	$	133,000
Timothy D. Vargo	$	7,762	$	100,000	$	-	$	-	$	107,762
Barbara L. Whittaker	$	7,762	$	100,000	$	-	$	-	$	107,762

		Amount and Nature of		Percent of
Name and address of Beneficial Shareholder		Beneficial Ownership (1)		Class
BlackRock Fund Advisors	(2)		2,302,444		12.4	%
55 East 52nd Street, New York, NY 10055
Fine Capital Management, LLC	(2)		1,812,773		9.7
590 Madison Avenue, 27th Floor, New York, New York 10022
Columbia Management Investment Advisers, LLC	(2)		1,416,761		7.6
225 Franklin Street, Boston, MA 02110
Wellington Management Company	(2)		1,177,095		6.3
280 Congress Street, Boston, MA 02210
River Road Asset Management Company	(2)		1,038,723		5.6
462 South Fourth Street, Suite 2000, Louisville, KY 40202
The Vanguard Group Inc.	(2)		993,275		5.3
P.O. Box 1110, Valley Forge, PA 19482-1110
Fidelity Investments Asset Management LLC	(2)		981,349		5.3
900 Salem Street, Smithfield, RI 02917
Dimensional Fund Advisors, L.P. (U.S.)	(2)		953,287		5.1
1299 Ocean Ave, Santa Monica, CA 90401
Selwyn Joffe	(3)		492,234		2.6
Scott Adelson	(4)		52,282		*
Rudolph Borneo	(5)		40,282		*
Bryan David			1,853		*
Ferguson Joseph Edwin			2,196		*
Philip Gay	(6)		20,282		*
Duane Miller	(7)		12,282		*
Jeffrey Mirvis	(8)		49,282		*
Doug Schooner	(9)		19,648		*
Steven Kratz	(10)		74,021		*
Michael Umansky	(11)		43,788		*
David Lee	(12)		79,680		*
Directors and executive officers as a group — 12 persons	(13)		887,830		4.7	%

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c )			Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c )
Equity compensation plans approved by securities holders		1,162,636	(1)	$	14.92	(2)		951,843	(3)

Equity compensation plans approved by security holders											1,738,106(1	)	$	18.18(2	)		773,732(3	)
Equity compensation plans not approved by security holders		N/A			N/A			N/A			N/A			N/A			N/A

Total		1,162,636		$	14.92			951,843			1,738,106		$	18.18			773,732