Restatement of Previously Issued Financial Statements

9 Months Ended

Sep. 30, 2020

Accounting Changes and Error Corrections [Abstract]

Restatement of Previously Issued Financial Statements

Restatement of Previously Issued Financial Statements

During the quarter ended March 31, 2020, the Company discovered certain accounting irregularities at its Mexican subsidiaries. The Company’s Audit Review Committee commenced an internal investigation, with the assistance of outside counsel and other third party experts. As a result of this investigation, the Company, along with the Audit Review Committee and its third party experts, concluded that certain former employees of one of the Company’s Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries that resulted in expenditures being deferred on the balance sheet beyond the period for which the costs pertained. As a result, the Company recorded a non-cash write-off for certain amounts included in the Company’s historical consolidated financial statements in trade receivables and prepaid expenses and other current assets, among other corrections, related to these transactions, and restated its consolidated financial statements as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017 and each of the quarters during the years ended December 31, 2019 and 2018 on Form 10-K/A for the year ended December 31, 2019. During the course of the investigation, certain expenses at the Company's Mexican subsidiaries were found to be incorrectly classified within the consolidated statement of operations and have also been corrected in the restatement. These misstatements are described in restatement reference (a) through (d) below.

The restatement also includes corrections for other errors previously identified as immaterial, individually and in the aggregate, to our consolidated financial statements.

Description of Misstatements

(a) Write-off of Assets: Certain former employees of one of the Company's Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries and vendors in which the employees had an interest. In doing so, expenditures were deferred on the balance sheet beyond the period for which the costs pertained. The amounts were recorded as trade receivables, prepaid expenses and other current assets, and reductions in accrued liabilities. The amounts have been written off to selling, general and administrative expenses. Where these write-offs caused prepaid assets and other current assets balance to become a liability, the balance has been reclassed from prepaid expenses and other assets to other current liabilities.

(b) Reversal of Revenue: Certain former employees of one of our Mexican subsidiaries engaged in sales activities to customers in which the employees had an interest. The Company concluded that these unauthorized transactions did not meet the criteria for revenue recognition at the time of sale and the revenue has been reversed.

(c) Correction of misclassification of Selling and Marketing Expenses: Certain former employees of one of the Mexican subsidiaries engaged a third-party, in which the employees had an interest, to perform selling and marketing activities on behalf of the Mexican subsidiaries. Amounts paid for the selling and marketing activities had previously been treated as variable consideration and reflected as a reduction to revenue; however, the amounts should be reflected as selling, general and administrative expenses.

(d) Correction for the timing of recognition of customer price concessions: Customer price concessions at our Mexican subsidiaries were not accrued timely in order to obscure the increased expenses due to unauthorized transactions as described above.

(e) Tax adjustments for corrections: The tax impacts of the corrections have been recorded.

(f) Correction of other immaterial errors.

Restatement Tables

The restatement tables below present a reconciliation from the previously reported to the restated values as of and for the three and nine months ended September 30, 2019 and as of December 31, 2019. The values as previously reported were derived from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 filed on November 7, 2019 and from our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed on February 26, 2020.

Additionally, in the fourth quarter of 2019, KC met the requirements to be reported as a discontinued operation. The following consolidated financial tables present a reconciliation to reflect KC as a discontinued operation for all periods presented and are labeled "Recast". See Note 3, Discontinued Operations for more information.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2019
	As Previously Reported		Restatement Impacts		Restatement Reference	As Restated
	(In thousands)
Assets
Current assets
Cash and cash equivalents	$	2,142	$	—		$	2,142
Trade receivables, net	113,781		(5,400)		a,b,d	108,381
Inventory	109,621		185		f	109,806
Prepaid expenses and other current assets	23,102		(11,757)		a,b,f	11,345
Current assets of discontinued operations	5,383		—			5,383
Total current assets	254,029		(16,972)			237,057
Property, plant and equipment, net	22,324		—			22,324
Goodwill	6,253		—			6,253
Other intangible assets, net	3,141		—			3,141
Deferred income taxes	3,853		2,395		e	6,248
Deferred costs	10,941		—			10,941
Other non-current assets	2,085		—			2,085
Non-current assets of discontinued operations	614		—			614
Total assets	$	303,240	$	(14,577)		$	288,663
Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	111,117	$	231	f	$	111,348
Accounts payable to NACCO Industries, Inc.	496		—			496
Revolving credit agreements	23,497		—			23,497
Accrued compensation	14,277		750		f	15,027
Accrued product returns	8,697		—			8,697
Other current liabilities	12,873		(339)		a,e	12,534
Current liabilities of discontinued operations	29,723		—			29,723
Total current liabilities	200,680		642			201,322
Revolving credit agreements	35,000		—			35,000
Other long-term liabilities	12,501		3,574		e	16,075
Total liabilities	248,181		4,216			252,397
Stockholders’ equity
Preferred stock, par value $0.01 per share	—		—			—
Class A Common stock, par value $0.01 per share; 9,805 shares issued as of December 31, 2019	98		—			98
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis; 4,076 shares issued as of December 31, 2019	41		—			41
Capital in excess of par value	54,344		165		f	54,509
Treasury stock	(5,960)		—			(5,960)
Retained earnings	22,524		(18,814)		a,b,d,e,f	3,710
Accumulated other comprehensive loss	(15,988)		(144)		a,b,d,e	(16,132)
Total stockholders’ equity	55,059		(18,793)			36,266
Total liabilities and stockholders' equity	$	303,240	$	(14,577)		$	288,663

(a) Write-off of Assets: The correction of these misstatements resulted in a decrease to trade receivables of $2.5 million, a reduction to prepaid expenses and other current assets of $12.4 million, and an increase to other current liabilities of $0.9 million

(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to trade receivables of $1.3 million and an increase to prepaid expenses and other current assets of $0.2 million

(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in a decrease to trade receivables of $1.6 million

(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to deferred income taxes of $2.4 million, a decrease to other current liabilities of $1.2 million, and an increase to other long-term liabilities of $3.6 million

(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $0.5 million, an increase to inventory of $0.2 million, an increase to accounts payable of $0.2 million, an increase to accrued compensation of $0.7 million, and an increase to capital in excess of par of $0.2 million

CONDENSED CONSOLIDATED BALANCE SHEETS

`	September 30, 2019
	As Previously Reported		Restatement Impacts		Restatement Reference	As Restated		Recasting Impacts		As Restated and Recast
	(In thousands)
Assets
Current assets
Cash and cash equivalents	$	1,866	$	—		$	1,866	$	(307)	$	1,559
Trade receivables, net	106,135		(2,179)		a,b	103,956		(865)		103,091
Inventory	181,847		—			181,847		(20,804)		161,043
Prepaid expenses and other current assets	22,445		(7,505)		a,b	14,940		(854)		14,086
Current assets of discontinued operations	—		—			—		22,830		22,830
Total current assets	312,293		(9,684)			302,609		—		302,609
Property, plant and equipment, net	22,653		—			22,653		(460)		22,193
Goodwill	6,253		—			6,253		—		6,253
Other intangible assets, net	3,483		—			3,483		—		3,483
Deferred income taxes	6,161		634		e	6,795		(1,155)		5,640
Deferred costs	8,925		—			8,925		(121)		8,804
Other non-current assets	1,561		—			1,561		(8)		1,553
Non-current assets of discontinued operations	—		—			—		1,744		1,744
Total assets	$	361,329	$	(9,050)		$	352,279	$	—	$	352,279
Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	147,206	$	16		$	147,222	$	(7,211)	$	140,011
Accounts payable to NACCO Industries, Inc.	220		—			220		—		220
Revolving credit agreements	59,702		—			59,702		(9,550)		50,152
Accrued compensation	15,568		389		f	15,957		(1,307)		14,650
Accrued product returns	8,266		—			8,266		—		8,266
Other current liabilities	30,651		1,874		a,d,e	32,525		(6,645)		25,880
Current liabilities of discontinued operations	—		—			—		24,713		24,713
Total current liabilities	261,613		2,279			263,892		—		263,892
Revolving credit agreements	30,000		—			30,000		—		30,000
Other long-term liabilities	14,961		882		e	15,843		(1,585)		14,258
Non-current liabilities of discontinued operations	—		—			—		1,585		1,585
Total liabilities	306,574		3,161			309,735		—		309,735
Stockholders’ equity
Class A Common stock	95		—			95		—		95
Class B Common stock	44		—			44		—		44
Capital in excess of par value	54,143		—			54,143		—		54,143
Treasury stock	(5,960)		—			(5,960)		—		(5,960)
Retained earnings	24,955		(12,724)		a,b,c,d,e,f	12,231		—		12,231
Accumulated other comprehensive loss	(18,522)		513		a,b,d	(18,009)		—		(18,009)
Total stockholders’ equity	54,755		(12,211)			42,544		—		42,544
Total liabilities and stockholders' equity	$	361,329	$	(9,050)		$	352,279	$	—	$	352,279

(a) Write-off of Assets: The correction of these misstatements resulted in a decrease to trade receivables of $1.6 million, a reduction to prepaid expenses and other current assets of $7.6 million, and an increase to other current liabilities of $2.1 million

(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to trade receivables of $0.6 million and an increase to prepaid expenses and other current assets of $0.1 million

(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in an increase to other current liabilities of $0.2 million

(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to deferred income taxes of $0.6 million, a decrease to other current liabilities of $0.4 million, and an increase to other long-term liabilities of $0.9 million

(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to accrued compensation of $0.4 million

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended September 30, 2019
	As Previously Reported		Restatement Impacts		Restatement References	As Restated		Recasting Impacts		As Restated and Recast
	(In thousands)
Revenue	$	169,778	$	18	b,c	$	169,796	$	(20,288)	$	149,508
Cost of sales	129,194		—			129,194		(10,632)		118,562
Gross profit	40,584		18			40,602		(9,656)		30,946
Selling, general and administrative expenses	36,182		2,570		a,c,f	38,752		(12,590)		26,162
Amortization of intangible assets	345		—			345		—		345
Operating profit (loss)	4,057		(2,552)			1,505		2,934		4,439
Interest expense, net	864		—			864		(108)		756
Other expense (income), net	688		—			688		(7)		681
Income (loss) from continuing operations before income taxes	2,505		(2,552)			(47)		3,049		3,002
Income tax expense (benefit)	2,108		45		e	2,153		296		2,449
Net income (loss) from continuing operations	397		(2,597)			(2,200)		2,753		553
Loss from discontinued operations, net of tax	—		—			—		(2,753)		(2,753)
Net income (loss)	$	397	$	(2,597)		$	(2,200)	$	—	$	(2,200)
Basic and diluted earnings (loss) per share:
Continuing operations	$	0.03	$	(0.19)		$	(0.16)	$	0.20	$	0.04
Discontinued operations	—		—			—		(0.20)		(0.20)
Basic and diluted earnings (loss) per share	$	0.03	$	(0.19)		$	(0.16)	$	—	$	(0.16)
Basic weighted average shares outstanding	13,579		—			13,579		—		13,579
Diluted weighted average shares outstanding	13,595		—			13,595		—		13,595

(a) Write-off of Assets: The correction of these misstatements resulted in an increase to selling, general and administrative ("SG&A") expense of $2.2 million

(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to revenue of $0.5 million

(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $0.5 million

(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to income tax expense

(f) Correction of other immaterial errors: The correction of these misstatements resulted in a decrease to SG&A expense of $0.1 million

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Nine Months Ended September 30, 2019
	As Previously Reported		Restatement Impacts		Restatement References	As Restated		Recasting Impacts		As Restated and Recast
	(In thousands)
Revenue	$	463,582	$	1,458	b,c,f	$	465,040	$	(57,824)	$	407,216
Cost of sales	352,618		(64)		f	352,554		(31,493)		321,061
Gross profit	110,964		1,522			112,486		(26,331)		86,155
Selling, general and administrative expenses	108,306		5,137		a,c,f	113,443		(36,058)		77,385
Amortization of intangible assets	1,036		—			1,036		—		1,036
Operating profit (loss)	1,622		(3,615)			(1,993)		9,727		7,734
Interest expense, net	2,514		—			2,514		(306)		2,208
Other expense (income), net	230		144		f	374		(22)		352
Income (loss) from continuing operations before income taxes	(1,122)		(3,759)			(4,881)		10,055		5,174
Income tax expense (benefit)	1,186		136		e	1,322		2,063		3,385
Net income (loss) from continuing operations	(2,308)		(3,895)			(6,203)		7,992		1,789
Loss from discontinued operations, net of tax	—		—			—		(7,992)		(7,992)
Net income (loss)	$	(2,308)	$	(3,895)		$	(6,203)	$	—	$	(6,203)
Basic and diluted earnings (loss) per share:
Continuing operations	$	(0.17)	$	(0.28)		$	(0.45)	$	0.58	$	0.13
Discontinued operations	—		—			—		(0.58)		(0.58)
Basic and diluted earnings (loss) per share	$	(0.17)	$	(0.28)		$	(0.45)	$	—	$	(0.45)
Basic weighted average shares outstanding	13,726		—			13,726		—		13,726
Diluted weighted average shares outstanding	13,726		—			13,726		5		13,731

(a) Write-off of Assets: The correction of these misstatements resulted in an increase to selling, general and administrative ("SG&A") expense of $3.3 million

(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to revenue of $0.5 million

(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $1.8 million

(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to income tax expense of $0.1 million

(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to revenue of $0.2 million, a decrease to cost of sales of $0.1 million, and an increase to other expense of $0.1 million.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	For the Three Months Ended September 30, 2019
	As Previously Reported		Restatement Impacts		As Restated
	(In thousands)
Net income (loss)	$	397	$	(2,597)	$	(2,200)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(312)		294		(18)
(Loss) gain on long-term intra-entity foreign currency transactions	(509)		—		(509)
Cash flow hedging activity	(127)		—		(127)
Reclassification of hedging activities into earnings	122		—		122
Pension plan adjustment	—		—		—
Reclassification of pension adjustments into earnings	127		—		127
Total other comprehensive loss, net of tax	(699)		294		(405)
Comprehensive income (loss)	$	(302)	$	(2,303)	$	(2,605)

See description of the net income (loss) impacts in the consolidated statement of operations for the three months ended September 30, 2019 section above.

The increase to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets, reversal of revenue and timing of recognition of customer pricing concessions categories.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	For the Nine Months Ended September 30, 2019
	As Previously Reported		Restatement Impacts		As Restated
	(In thousands)
Net income (loss)	$	(2,308)	$	(3,895)	$	(6,203)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	244		65		309
(Loss) gain on long-term intra-entity foreign currency transactions	(373)		—		(373)
Cash flow hedging activity	(1,570)		144		(1,426)
Reclassification of hedging activities into earnings	268		—		268
Pension plan adjustment	—		—		—
Reclassification of pension adjustments into earnings	219		94		313
Total other comprehensive loss, net of tax	(1,212)		303		(909)
Comprehensive income (loss)	$	(3,520)	$	(3,592)	$	(7,112)

See description of the net income (loss) impacts in the consolidated statement of operations for the nine months ended September 30, 2019 section above.

The increase to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets, reversal of revenue and timing of recognition of customer pricing concessions categories.

The increases to cash flow hedging and the reclassification of pension adjustments are from the correction of other immaterial errors.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	September 30, 2019
	As Previously Reported		Restatement Impacts		As Restated		Recasting Impacts		As Restated and Recast
Operating activities
Net income (loss) from continuing operations	$	(2,308)	$	(3,895)	$	(6,203)	$	7,992	$	1,789
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization	3,279		—		3,279		(466)		2,813
Deferred income taxes	2,969		32		3,001		17		3,018
Stock compensation expense	2,430		—		2,430		—		2,430
Other	1,117		(24)		1,093		(995)		98
Net changes in operating assets and liabilities:
Affiliate payable	(2,199)		—		(2,199)		3		(2,196)
Trade receivables	(4,897)		(294)		(5,191)		(906)		(6,097)
Inventory	(37,641)		169		(37,472)		(1,190)		(38,662)
Other assets	(231)		430		199		(1,349)		(1,150)
Accounts payable	14,927		10		14,937		6,493		21,430
Other liabilities	(12,577)		3,604		(8,973)		1,360		(7,613)
Net cash provided by (used for) operating activities from continuing operations	(35,131)		32		(35,099)		10,959		(24,140)
Investing activities
Expenditures for property, plant and equipment	(3,305)		—		(3,305)		149		(3,156)
Other	37		—		37		(37)		—
Net cash used for investing activities from continuing operations	(3,268)		—		(3,268)		112		(3,156)
Financing activities
Net additions (reductions) to revolving credit agreements	43,074		—		43,074		(9,550)		33,524
Purchase of treasury stock	(5,960)		—		(5,960)		—		(5,960)
Cash dividends paid	(3,634)		—		(3,634)		—		(3,634)
Net cash provided by (used for) financing activities from continuing operations	33,480		—		33,480		(9,550)		23,930
Cash flows from discontinued operations
Net cash used for operating activities from discontinued operations	—		—		—		(10,959)		(10,959)
Net cash used for investing activities from discontinued operations	—		—		—		(112)		(112)
Net cash used for financing activities from discontinued operations	—		—		—		9,550		9,550
Cash provided by (used for) discontinued operations	—		—		—		(1,521)		(1,521)
Effect of exchange rate changes on cash	433		(32)		401		—		401
Cash and Cash Equivalents
(Decrease) increase for the year from continuing operations	(4,486)		—		(4,486)		1,521		(2,965)
Increase (decrease) for the year from discontinued operations	—		—		—		(1,521)		(1,521)
Balance at the beginning of the year	6,352		—		6,352		—		6,352
Balance at the end of the period	$	1,866	$	—	$	1,866	$	—	$	1,866

See description of the net income (loss) impacts in the consolidated statement of operations for the nine months ended September 30, 2019 section above.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Class A common stock		Class B common stock		Capital in excess of par value		Treasury stock		Retained earnings		Accumulated other comprehensive income (loss)		Total stockholders' equity
As Previously Reported
Balance, January 1, 2019	$	93	$	44	$	51,714	$	—	$	30,897	$	(17,310)	$	65,438
Net loss					—		—		(2,308)		—		(2,308)
Issuance of common stock, net of conversions	2		—		(1)		—		—		—		1
Purchase of treasury stock					—		(5,960)		—		—		(5,960)
Share-based compensation expense					2,430		—		—		—		2,430
Cash dividends, $0.085 per share					—		—		(3,634)		—		(3,634)
Other comprehensive loss					—		—		—		(1,699)		(1,699)
Reclassification adjustment to net loss					—		—		—		487		487
Balance, September 30, 2019	$	95	$	44	$	54,143	$	(5,960)	$	24,955	$	(18,522)	$	54,755
Restatement Impacts
Balance, January 1, 2019	$	—	$	—	$	—	$	—	$	(8,829)	$	209	$	(8,620)
Net loss					—		—		(3,895)		—		(3,895)
Issuance of common stock, net of conversions	—		—		—		—		—		—		—
Purchase of treasury stock					—		—		—		—		—
Share-based compensation expense					—		—		—		—		—
Cash dividends, $0.085 per share					—		—		—		—		—
Other comprehensive loss					—		—		—		210		210
Reclassification adjustment to net loss					—		—		—		94		94
Balance, September 30, 2019	$	—	$	—	$	—	$	—	$	(12,724)	$	513	$	(12,211)
As Restated
Balance, January 1, 2019	$	93	$	44	$	51,714	$	—	$	22,068	$	(17,101)	$	56,818
Net loss	—		—		—		—		(6,203)		—		(6,203)
Issuance of common stock, net of conversions	2		—		(1)		—		—		—		1
Purchase of treasury stock	—		—		—		(5,960)		—		—		(5,960)
Share-based compensation expense	—		—		2,430		—		—		—		2,430
Cash dividends, $0.085 per share	—		—		—		—		(3,634)		—		(3,634)
Other comprehensive loss	—		—		—		—		—		(1,489)		(1,489)
Reclassification adjustment to net loss	—		—		—		—		—		581		581
Balance, September 30, 2019	$	95	$	44	$	54,143	$	(5,960)	$	12,231	$	(18,009)	$	42,544

See description of the net income and other comprehensive income (loss) impacts in the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2019 sections above.