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

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2018

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

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

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

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

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

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

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

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

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

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

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

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

There were 18,809,102 shares of Common Stock outstanding at February 4, 2019.

MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
  
 
4
 
4
 
5
 
6
 
7
 
8
 
36
  49
  49
     
PART II — OTHER INFORMATION
  
  50
  50
  50
 
51
 
52
  54

MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

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

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

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Upon adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contract with Customers, (“ASC 606”) on April 1, 2018, the Remanufactured Cores at our facilities, which were previously segregated from cores held at customers locations, were reclassified from long-term core inventory to our on-hand finished goods inventory. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. In addition, upon the adoption of ASC 606, the Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them.

PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

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

   
December 31, 2018
    
March 31, 2018
  
ASSETS
  
(Unaudited)
    
(As Adjusted)
  
Current assets:
        
(Note 4)
  
Cash and cash equivalents
  
$
8,591,000
    
$
13,049,000
  
Short-term investments
    
2,868,000
      
2,828,000
  
Accounts receivable — net
    
54,761,000
      
63,174,000
  
Inventory— net
    
205,075,000
      
161,210,000
  
Inventory unreturned
    
10,746,000
      
7,508,000
  
Contract assets (see Note 9)
    
26,965,000
      
23,206,000
  
Income tax receivable
    
12,887,000
      
7,972,000
  
Prepaid expenses and other current assets
    
7,946,000
      
8,608,000
  
Total current assets
    
329,839,000
      
287,555,000
  
Plant and equipment — net
    
32,349,000
      
28,322,000
  
Long-term deferred income taxes
    
7,607,000
      
6,698,000
  
Long-term contract assets (see Note 9)
    
222,999,000
      
222,731,000
  
Goodwill
    
3,402,000
      
2,551,000
  
Intangible assets — net
    
8,762,000
      
3,766,000
  
Other assets
    
891,000
      
804,000
  
TOTAL ASSETS
  
$
605,849,000
    
$
552,427,000
  
LIABILITIES AND SHAREHOLDERS’  EQUITY
                
Current liabilities:
                
Accounts payable
  
$
101,730,000
    
$
73,273,000
  
Accrued liabilities
     13,382,000      
12,048,000
  
Customer finished goods returns accrual
    
19,236,000
      
17,805,000
  
Contract liabilities (see Note 12)
   
29,239,000
      
32,603,000
  
Revolving loan
    
78,406,000
      
54,000,000
  
Other current liabilities
    
5,019,000
      
4,471,000
  
Current portion of term loan
    
3,685,000
      
3,068,000
  
Total current liabilities
     250,697,000      
197,268,000
  
Term loan, less current portion
    
25,109,000
      
13,913,000
  
Long-term contract liabilities (see Note 12)
   
42,527,000
      
48,183,000
  
Long-term deferred income taxes
    
234,000
      
226,000
  
Other liabilities
    
7,494,000
      
5,957,000
  
Total liabilities
     326,061,000      
265,547,000
  
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; 18,812,102 and 18,893,102 shares issued and outstanding at December 31, 2018 and March 31, 2018, respectively
    
188,000
      
189,000
  
Additional paid-in capital
    
212,621,000
      
213,609,000
  
Retained earnings
    
74,172,000
      
78,510,000
  
Accumulated other comprehensive loss
    
(7,193,000
)
    
(5,428,000
)
Total shareholders’ equity
    
279,788,000
      
286,880,000
  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
 605,849,000    
$
552,427,000
  

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

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

   
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  
   
2018
    
2017
    
2018
    
2017
  
                         
         
(As Adjusted)
          
(As Adjusted)
  
Net sales
  
$
124,113,000
    
$
102,878,000
    
$
343,720,000
    
$
307,834,000
  
Cost of goods sold
    
102,952,000
      
76,817,000
      
280,496,000
      
229,894,000
  
Gross profit
    
21,161,000
      
26,061,000
      
63,224,000
      
77,940,000
  
Operating expenses:
                                
General and administrative
    
12,331,000
      
11,915,000
      
33,419,000
      
26,418,000
  
Sales and marketing
    
5,149,000
      
4,048,000
      
14,078,000
      
10,899,000
  
Research and development
    
2,054,000
      
1,678,000
      
5,574,000
      
3,920,000
  
Total operating expenses
    
19,534,000
      
17,641,000
      
53,071,000
      
41,237,000
  
Operating income
    
1,627,000
      
8,420,000
      
10,153,000
      
36,703,000
  
Interest expense, net
    
5,764,000
      
3,953,000
      
16,538,000
      
10,789,000
  
(Loss) income before income tax (benefit) expense
    
(4,137,000
)
    
4,467,000
      
(6,385,000
)
    
25,914,000
  
Income tax (benefit) expense
    
(1,035,000
)
    
6,994,000
      
(1,301,000
)
    
15,026,000
  
Net (loss) income
  
$
(3,102,000
)
  
$
(2,527,000
)
  
$
(5,084,000
)
  
$
10,888,000
  
Basic net (loss) income per share
  
$
(0.16
)
  
$
(0.13
)
  
$
(0.27
)
  
$
0.58
  
Diluted net (loss) income per share
  
$
(0.16
)
  
$
(0.13
)
  
$
(0.27
)
  
$
0.56
  
Weighted average number of shares outstanding:
                                
Basic
    
18,810,702
      
19,069,152
      
18,861,617
      
18,814,967
  
Diluted
    
18,810,702
      
19,069,152
      
18,861,617
      
19,400,744
  

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

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

   
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  
   
2018
    
2017
    
2018
    
2017
  
                         
         
(As Adjusted)
          
(As Adjusted)
  
Net (loss) income
  
$
(3,102,000
)
  
$
(2,527,000
)
  
$
(5,084,000
)
  
$
10,888,000
  
Other comprehensive (loss) income, net of tax:
                                
Unrealized gain on short-term investments (net of tax of $0, $55,000, $0 and $133,000)
   
-
      
83,000
      
-
      
199,000
  
Foreign currency translation (loss) gain
    
(302,000
)
    
247,000
      
(1,019,000
)
    
1,084,000
  
Total other comprehensive (loss) gain, net of tax
    
(302,000
)
    
330,000
      
(1,019,000
)
    
1,283,000
  
Comprehensive (loss) income
  
$
(3,404,000
)
  
$
(2,197,000
)
  
$
(6,103,000
)
  
$
12,171,000
  

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

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

   
Nine Months Ended
December 31,
  
   
2018
    
2017
  
Cash flows from operating activities:
        
(As Adjusted)
  
Net (loss) income
  
$
(5,084,000
)
  
$
10,888,000
  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
                
Depreciation
    
4,313,000
      
2,805,000
  
Amortization of intangible assets
    
620,000
      
517,000
  
Amortization and write-off of debt issuance costs
    
798,000
      
864,000
  
Amortization of interest on contract liabilities, net
    
725,000
      
378,000
  
Gain due to change in fair value of the warrant liability
    
-
      
(2,313,000
)
Loss on short-term investments
    
240,000
      
-
  
Net provision for inventory reserves
    
6,997,000
      
4,954,000
  
Net provision for customer payment discrepancies
    
602,000
      
1,194,000
  
Net provision for doubtful accounts
    
221,000
      
17,000
  
Deferred income taxes
    
(962,000
)
    
(2,430,000
)
Share-based compensation expense
    
3,151,000
      
2,658,000
  
Loss on disposal of plant and equipment
    
24,000
      
9,000
  
Changes in operating assets and liabilities, net of effects of acquisitions:
                
Accounts receivable
    
8,432,000
      
(4,240,000
)
Inventory
    
(49,431,000
)
    
(34,643,000
)
Inventory unreturned
    
(3,238,000
)
    
332,000
  
Income tax receivable
    
(4,921,000
)
    
(69,000
)
Prepaid expenses and other current assets
    
1,398,000
      
(33,000
)
Other assets
    
(129,000
)
    
(153,000
)
Accounts payable and accrued liabilities
    
27,968,000
      
(15,946,000
)
Customer finished goods returns accrual
    
1,431,000
      
(1,705,000
)
Contract assets, net
    
(4,027,000
)
    
(16,208,000
)
Contract liabilities, net
    
(10,794,000
)
    
41,175,000
  
Other liabilities
    
1,338,000
      
2,146,000
  
Net cash used in operating activities
    
(20,328,000
)
    
(9,803,000
)
Cash flows from investing activities:
                
Purchase of plant and equipment
    
(8,548,000
)
    
(4,765,000
)
Purchase of business, net of cash acquired
    
(4,417,000
)
    
(4,993,000
)
Change in short-term investments
    
(279,000
)
    
(287,000
)
Net cash used in investing activities
    
(13,244,000
)
    
(10,045,000
)
Cash flows from financing activities:
                
Borrowings under revolving loan
    
64,900,000
      
62,000,000
  
Repayments of revolving loan
    
(40,494,000
)
    
(37,000,000
)
Borrowings under term loan
    
13,594,000
      
-
  
Repayments of term loan
    
(1,719,000
)
    
(2,344,000
)
Payments for debt issuance costs
    
(1,780,000
)
    
(462,000
)
Payments on capital lease obligations
    
(1,071,000
)
    
(612,000
)
Exercise of stock options
    
244,000
      
295,000
  
Cash used to net share settle equity awards
    
(322,000
)
    
(596,000
)
Settlement of warrant
    
-
      
4,000,000
  
Repurchase of common stock, including fees
    
(4,062,000
)
    
(4,476,000
)
Net cash provided by financing activities
    
29,290,000
      
20,805,000
  
Effect of exchange rate changes on cash and cash equivalents
    
(176,000
)
    
46,000
  
Net (decrease) increase in cash and cash equivalents
    
(4,458,000
)
    
1,003,000
  
Cash and cash equivalents — Beginning of period
    
13,049,000
      
9,029,000
  
Cash and cash equivalents  — End of period
  
$
8,591,000
    
$
10,032,000
  
Supplemental disclosures of cash flow information:
                
Cash paid during the period for:
                
Interest, net
  
$
14,846,000
    
$
9,508,000
  
Income taxes, net of refunds
    
3,263,000
      
16,598,000
  
Non-cash investing and financing activities:
                
Plant and equipment acquired under capital lease
  
$
207,000
    
$
582,000
  
Contingent consideration
     3,560,000      
-
  

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

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
December 31, 2018
(Unaudited)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2018, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2018.

The accompanying consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to, except as noted below, the accounting policies described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

1.
Company Background and Organization

Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive and light truck applications. The Company also, to a lesser extent, is a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are 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 products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers, brake power boosters, and diagnostic equipment. As a result of the July 2017 acquisition of D&V Electronics Ltd. (“D&V”), the Company’s business also now includes developing and selling diagnostics systems for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles. In addition, the Company completed the acquisition of Mechanical Power Conversion, LLC, in December 2018, which includes the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products (see Note 5).

The Company obtains used automotive parts, commonly known as Used Cores, primarily from its customers under the Company’s core exchange program. It also purchases Used Cores from vendors (core brokers). The customers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the customers upon return to the Company. These Used Cores are an essential raw material needed for the remanufacturing operations.

The Company has remanufacturing, warehousing and shipping/receiving operations for automotive parts in North America and Asia. In addition, the Company utilizes various third party warehouse distribution centers in North America.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) ASC for segment reporting, the Company has identified its chief executive officer as chief operating decision maker (“CODM”), has 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 it has one reportable segment for purposes of recording and reporting its financial results.

2.
Impact on Previously Issued Financial Statements for the Correction of an Error

Revision of Prior Period Financial Statements

During the quarter ended September 30, 2018, the Company identified and corrected immaterial errors that affected previously issued consolidated financial statements. These errors primarily related to historical misapplication of GAAP related to the timing of recognizing certain expenses incurred in connection with allowances paid for core inventory purchase obligations at the start of a new business relationship. The Company previously recorded the difference between the acquisition price of Remanufactured Cores purchased from customers generally in connection with new business, and the related inventory cost as a sales allowance reducing revenue when the purchases were made. These sales allowances are now recorded 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 (as further described under the caption “Contract Assets” in Note 4). The Company also corrected errors resulting from differences between the original cost estimate and the actual cost of the Remanufactured Cores held at customers’ locations.

The Company also corrected other immaterial errors, which primarily relate to bonus accruals and core inventory, and recorded certain adjustments to income taxes, including reflecting the tax effect of the aforementioned adjustments. In addition, the Company reclassified certain customer contract related prepayments from prepaid expenses and other current assets and other assets to contract assets related to the adoption of ASC 606 on April 1, 2018 (see Note 4).

In order to correctly present the errors noted above, previously issued comparative financial statements, which were revised during the quarter ended September 30, 2018, are presented as “As Revised” in the tables presented in the following footnotes. In addition, upon the adoption of ASC 606 on April 1, 2018, the Company adjusted its revised consolidated financial statements and related footnotes for the year ended March 31, 2018 and applicable interim periods within the fiscal year ended March 31, 2018. These consolidated financial statements and tables are presented as “As Adjusted”.

The effect of the above corrections on the consolidated statement of operations for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
  
Revised Consolidated Statement of Operations Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
  
                   
Net sales
  
$
428,072,000
    
$
(1,081,000
)
  
$
426,991,000
  
Cost of goods sold
    
322,199,000
      
(1,750,000
)
    
320,449,000
  
Gross profit
    
105,873,000
      
669,000
      
106,542,000
  
Operating expenses:
                        
General and administrative
    
35,527,000
      
(50,000
)
    
35,477,000
  
Sales and marketing
    
15,030,000
      
-
      
15,030,000
  
Research and development
    
5,692,000
      
-
      
5,692,000
  
Total operating expenses
    
56,249,000
      
(50,000
)
    
56,199,000
  
Operating income
    
49,624,000
      
719,000
      
50,343,000
  
Interest expense, net
    
15,445,000
      
-
      
15,445,000
  
Income before income tax expense (benefit)
    
34,179,000
      
719,000
      
34,898,000
  
Income tax expense (benefit)
    
17,863,000
      
(1,791,000
)
    
16,072,000
  
Net income
  
$
16,316,000
    
$
2,510,000
    
$
18,826,000
  
Basic net income per share
  
$
0.87
    
$
0.13
    
$
1.00
  
Diluted net income per share
  
$
0.84
    
$
0.13
    
$
0.96
  

The effect of the above corrections on the consolidated statement of comprehensive income for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
  
Revised Consolidated Statement of Comprehensive Income Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
  
                   
Net income
  
$
16,316,000
    
$
2,510,000
    
$
18,826,000
  
Comprehensive income
  
$
18,329,000
    
$
2,510,000
    
$
20,839,000
  

The effect of the above corrections on the consolidated balance sheet at March 31, 2018 is as follows:

   
March 31, 2018
  
Revised Consolidated Balance Sheet Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
  
ASSETS
                  
Income tax receivable
  
$
7,796,000
    
$
176,000
    
$
7,972,000
  
Prepaid expenses and other current assets
    
11,491,000
      
3,613,000
      
15,104,000
  
Long-term core inventory — net
    
301,656,000
      
(3,362,000
)
    
298,294,000
  
Long-term deferred income taxes
    
10,556,000
      
(3,619,000
)
    
6,937,000
  
Other assets
    
7,392,000
      
14,603,000
      
21,995,000
  
TOTAL ASSETS
  
$
494,497,000
    
$
11,411,000
    
$
505,908,000
  
LIABILITIES AND SHAREHOLDERS’  EQUITY
                        
Accrued liabilities
  
$
11,799,000
    
$
249,000
    
$
12,048,000
  
TOTAL LIABILITIES
  
$
219,521,000
    
$
249,000
    
$
219,770,000
  
Retained earnings
  
$
66,606,000
    
$
11,162,000
    
$
77,768,000
  
TOTAL SHAREHOLDERS’ EQUITY
  
$
274,976,000
    
$
11,162,000
    
$
286,138,000
  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
494,497,000
    
$
11,411,000
    
$
505,908,000
  

The effect of the above corrections on the consolidated statement of shareholders’ equity for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
  
Revised Consolidated Statement of Shareholders’ Equity Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
  
                   
Retained earnings at March 31, 2017
  
$
50,290,000
    
$
8,652,000
    
$
58,942,000
  
Net income
    
16,316,000
      
2,510,000
      
18,826,000
  
Retained earnings at March 31, 2018
  
$
66,606,000
    
$
11,162,000
    
$
77,768,000
  

The effect of the above corrections on the consolidated statement of cash flows for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
  
Revised Consolidated Statement of Cash Flow from Operating Activities Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
  
Net income
  
$
16,316,000
    
$
2,510,000
    
$
18,826,000
  
Deferred income taxes
    
3,055,000
      
(1,560,000
)
    
1,495,000
  
Income tax receivable
    
(6,081,000
)
    
(231,000
)
    
(6,312,000
)
Prepaid expenses and other current assets
    
(2,507,000
)
    
(318,000
)
    
(2,825,000
)
Other assets
    
(384,000
)
    
788,000
      
404,000
  
Accounts payable and accrued liabilities
    
(11,621,000
)
    
(50,000
)
    
(11,671,000
)
Long-term core inventory
    
(45,839,000
)
    
(1,139,000
)
    
(46,978,000
)
Net cash used in operating activities
  
$
(13,944,000
)
  
$
-
    
$
(13,944,000
)

The effect of the above corrections on the consolidated statements of operations for the three and nine months ended December 31, 2017 is as follows:

   
Three Months Ended December 31, 2017
    
Nine Months Ended December 31, 2017
  
Revised Consolidated Statement of Operations Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
    
As Previously
Reported
    
Adjustment
    
As Revised
  
                                     
Net sales
  
$
100,127,000
    
$
1,586,000
    
$
101,713,000
    
$
306,964,000
    
$
(159,000
)
  
$
306,805,000
  
Cost of goods sold
    
77,583,000
      
(1,750,000
)
    
75,833,000
      
231,419,000
      
(1,750,000
)
    
229,669,000
  
Gross profit
    
22,544,000
      
3,336,000
      
25,880,000
      
75,545,000
      
1,591,000
      
77,136,000
  
Operating expenses:
                                                
General and administrative
    
11,915,000
      
-
      
11,915,000
      
26,717,000
      
(299,000
)
    
26,418,000
  
Sales and marketing
    
4,048,000
      
-
      
4,048,000
      
10,899,000
      
-
      
10,899,000
  
Research and development
    
1,678,000
      
-
      
1,678,000
      
3,920,000
      
-
      
3,920,000
  
Total operating expenses
    
17,641,000
      
-
      
17,641,000
      
41,536,000
      
(299,000
)
    
41,237,000
  
Operating income
    
4,903,000
      
3,336,000
      
8,239,000
      
34,009,000
      
1,890,000
      
35,899,000
  
Interest expense, net
    
3,953,000
      
-
      
3,953,000
      
10,789,000
      
-
      
10,789,000
  
Income before income tax expense (benefit)
    
950,000
      
3,336,000
      
4,286,000
      
23,220,000
      
1,890,000
      
25,110,000
  
Income tax expense (benefit)
    
7,756,000
      
(820,000
)
    
6,936,000
      
16,099,000
      
(1,357,000
)
    
14,742,000
  
Net (loss) income
  
$
(6,806,000
)
  
$
4,156,000
    
$
(2,650,000
)
  
$
7,121,000
    
$
3,247,000
    
$
10,368,000
  
Basic net (loss) income per share
  
$
(0.36
)
  
$
0.22
    
$
(0.14
)
  
$
0.38
    
$
0.17
    
$
0.55
  
Diluted net (loss) income per share
  
$
(0.36
)
  
$
0.22
    
$
(0.14
)
  
$
0.37
    
$
0.17
    
$
0.53
  

The effect of the above corrections on the consolidated statements of comprehensive (loss) income for the three and nine months ended December 31, 2017 is as follows:

   
Three Months Ended December 31, 2017
    
Nine Months Ended December 31, 2017
  
Revised Consolidated Statement of Comprehensive (Loss) Income Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
    
As Previously
Reported
    
Adjustment
    
As Revised
  
                                     
Net (loss) income
  
$
(6,806,000
)
  
$
4,156,000
    
$
(2,650,000
)
  
$
7,121,000
    
$
3,247,000
    
$
10,368,000
  
Comprehensive (loss) income
  
$
(6,476,000
)
  
$
4,156,000
    
$
(2,320,000
)
  
$
8,404,000
    
$
3,247,000
    
$
11,651,000
  

The effect of the above corrections on the consolidated statements of cash flows for the nine months ended December 31, 2017 is as follows:

   
Nine Months Ended December 31, 2017
  
Revised Consolidated Statement of Cash Flow from Operating Activities Amounts:
  
As Previously
Reported
    
Adjustment
    
As Revised
  
Net income
  
$
7,121,000
    
$
3,247,000
    
$
10,368,000
  
Deferred income taxes
    
(909,000
)
    
(1,805,000
)
    
(2,714,000
)
Prepaid expenses and other current assets
    
(2,093,000
)
    
448,000
      
(1,645,000
)
Other assets
    
289,000
      
(452,000
)
    
(163,000
)
Accounts payable and accrued liabilities
    
(15,647,000
)
    
(299,000
)
    
(15,946,000
)
Long-term core inventory
    
(37,222,000
)
    
(1,139,000
)
    
(38,361,000
)
Net cash used in operating activities
  
$
(9,803,000
)
  
$
-
    
$
(9,803,000
)

3.
New Accounting Pronouncements

New Accounting Pronouncements Recently Adopted

Revenue Recognition

Effective April 1, 2018, the Company adopted ASC 606 using the full retrospective transition method. Under this method, the Company adjusted its revised consolidated financial statements (see Note 2) for the years ended March 31, 2018 and 2017, and applicable interim periods within the fiscal year ended March 31, 2018, as if ASC 606 had been effective for those periods. Periods prior to the fiscal year ended March 31, 2017 were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, Revenue Recognition. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are distinct performance obligations. See Note 4 for additional discussion of the adoption of ASC 606 and the impact on the Company’s financial statements.

Financial Instruments

In January 2016, the FASB issued guidance that amends the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the update clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company applied the amendments in the new guidance by means of a cumulative-effect adjustment of $746,000, net of tax, to the opening balance of retained earnings on April 1, 2018. Short-term investments are recorded at fair value with $420,000 and $240,000 of unrealized loss now recorded as a component of general and administrative expense for the three and nine months ended December 31, 2018, respectively.

Modifications to Share-Based Payment Awards

In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The adoption of this guidance on April 1, 2018 did not have any impact on the Company’s consolidated financial statements.

Business Combinations

In January 2017, the FASB issued guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. The adoption of this guidance on April 1, 2018 did not have any impact on the Company’s consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use 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. There have been further amendments, including practical expedients, issued in January 2018 and July 2018. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. 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 has elected to adopt this guidance under the additional transition method. The Company will adopt this guidance in the first quarter of fiscal 2020. The Company has developed and is executing on an implementation plan to adopt this new guidance. The Company has identified all of its material leases and is assessing those leases pursuant to ASC 842. The Company is currently developing its methodology for determining its incremental borrowing rate. The adoption is anticipated to have a significant increase to the Company’s long-term assets and liabilities on the consolidated balance sheets, as the Company will now be required to recognize the underlying right of use asset and corresponding lease liability, and an insignificant impact on the consolidated statements of operations.

Goodwill Impairment

In January 2017, the FASB issued guidance which simplifies the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the guidance allows for early adoption in any interim period after issuance of the update. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

Reporting Comprehensive Income

In February 2018, the FASB issued guidance that permits, but does not require, companies to reclassify the stranded tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

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 beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

4.
Revenue Recognition

Update to Significant Accounting Policies

Revenue Recognition

Upon the adoption of ASC 606 effective April 1, 2018, the Company revised its accounting policy on revenue recognition from the policy provided in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended March 31, 2018. The revised accounting policy for revenue recognition is provided below.

Through the Company’s agreements with customers, the Company now has a single performance obligation, to fulfill customer orders for automotive goods. Revenue is recognized when 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.

For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date of shipment. For products shipped FOB destination, revenues are recognized on the estimated or actual date of delivery. The Company includes shipping and handling charges in the gross invoice price to customers and classify the total amount as revenue. All shipping and handling costs are expensed as incurred and included in cost of sales.

The Company now has a single performance obligation; however, 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 judgement 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.

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

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. In addition, customers are allowed to return goods that their end-user consumers have returned to them. 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. Stock adjustment returns do not occur at any specific time during the year, and the expected level of these returns cannot be reasonably estimated based on a historical analysis. 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. 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”.

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.

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, based on the most recent purchases of inventory on hand. 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 Core portion of stock adjustment returns and the Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as 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 purchased from customers generally in connection with new business, and the related inventory cost of the core, 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.

Contract Liability

Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, and (iv) 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 earned are considered to be short-term contract liabilities.

Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales price of these Remanufactured Cores will be realized when the Company’s relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities.

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.

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.

Inventory

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

Inventory is stated at the lower of cost or net realizable value. The cost of inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to reflect current lower of cost or net realizable value levels. These adjustments are determined for individual items of inventory within each of the classifications of inventory as follows:


 •
Component raw materials are recorded at average cost, which is based on the actual purchase price of raw materials on hand. This average cost is used in the inventory costing process and is the basis for allocation of materials to finished goods during the production process.


•
Used Core raw materials are recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The purchase price for core buy-backs made from the Company’s customers are deemed the same as the purchase price of Used Cores for which sufficient recent purchases have occurred. The average purchase prices of Used Cores for more recent automobile models are retained as the cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to the core exchange program. The Company purchases Used Cores from core brokers to supplement its yield rates and the under return by consumers. In the absence of sufficient recent purchases, the Company uses the net selling price its customers have agreed to pay for Used Cores that are not returned to the Company under the Company’s core exchange program to assess whether Used Core cost exceeds Used Core net realizable value on a customer by customer basis.


•
Work-in-process is in various stages of production and is valued at the average cost of materials issued pursuant to open work orders. Historically, work-in-process inventory has not been material compared to the total inventory balance.


•
The cost of remanufactured finished goods includes the average cost of Used Core and component raw materials and allocations of labor and variable and fixed overhead costs. The allocations of labor and variable and fixed overhead costs are determined based on the average actual use of the production facilities over the prior twelve 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. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs.

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. The Company had recorded reserves for excess and obsolete inventory of $9,799,000 at December 31, 2018 and $6,682,000 at March 31, 2018. The quantity thresholds and reserve rates are subjective and based on management’s judgment and knowledge of current industry demand and management’s projections of industry demand. The reserve 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.

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 added 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.

Impact of the Adoption of the New Accounting Standard

As a result of the adoption of ASC 606 and the resultant changes in Company policy noted above, the effect of the adoption on the consolidated statements of operations was an increase to the Company’s revised retained earnings as of April 1, 2016 by approximately $345,000, net of tax. The effects of adoption were also a decrease to revised revenues for the year ended March 31, 2017 of $824,000 and an increase to revised revenues for the year ended March 31, 2018 of $557,000. The revenue changes were accompanied by related changes to cost of goods sold - a decrease to revised cost of goods sold for the year ended March 31, 2017 of $758,000, and an increase to revised cost of goods sold for the year ended March 31, 2018 of $66,000.

The primary result of the adoption effects upon the financial statement was due to an acceleration of revenue recognition for Remanufactured Cores not expected to be returned to the Company upon the initial recognition of revenue. Prior to adopting ASC 606, the Company had delayed recognizing revenue for sales of cores not expected to be replaced by a similar Used Core sent back under the core exchange program until it believed all of the following criteria were met:


 ·
The Company has a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program. This agreement must specify the number of Remanufactured Cores its customer will pay cash for in lieu of sending back a similar Used Core and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).


·
The contractual date for reconciling the Company’s records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program must be in the current or a prior period.


·
The reconciliation of the nominally priced Remanufactured Cores must be completed and agreed to by the customer.


·
The amount must be billed to the customer.

In order to properly determine the transaction price related to the Company’s sales contracts, the Company has also analyzed its various forms of consideration paid to its customers, including upfront payments for future contracts. Based on the analysis performed, the Company identified no changes to its legacy accounting practices as a result of the adoption of ASC 606 to account for upfront payments to the Company’s customers. Accordingly, if the Company expects to generate future revenues associated with an upfront payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. 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.

Similarly, the Company has analyzed discounts and promotions offered to customers. In reviewing these discounts, the Company assessed whether any discounts were offered incremental to the range of discounts typically given for its goods to specific customer classes. In performing this analysis, the Company determined that there are no incremental discounts offered to customers and as such, its discounts do not represent a material right to the Company’s customers. As such, the Company will account for these discounts as variable consideration, as a reduction of revenue in the consolidated statements of operations when the product the discount is applicable to is sold.

The adoption of the new revenue recognition standard impacted the revised consolidated statements of operations for the three and nine months ended December 31, 2017 as follows:

   
Three Months Ended December 31, 2017
    
Nine Months Ended December 31, 2017
  
   
As Revised
    
Adoption of
ASC 606
    
As Adjusted
    
As Revised
    
Adoption of
ASC 606
    
As Adjusted
  
                                     
Net sales
  
$
101,713,000
    
$
1,165,000
    
$
102,878,000
    
$
306,805,000
    
$
1,029,000
    
$
307,834,000
  
Cost of goods sold
    
75,833,000
      
984,000
      
76,817,000
      
229,669,000
      
225,000
      
229,894,000
  
Gross profit
    
25,880,000
      
181,000
      
26,061,000
      
77,136,000
      
804,000
      
77,940,000
  
Operating expenses:
                                                
General and administrative
    
11,915,000
      
-
      
11,915,000
      
26,418,000
      
-
      
26,418,000
  
Sales and marketing
    
4,048,000
      
-
      
4,048,000
      
10,899,000
      
-
      
10,899,000
  
Research and development
    
1,678,000
      
-
      
1,678,000
      
3,920,000
      
-
      
3,920,000
  
Total operating expenses
    
17,641,000
      
-
      
17,641,000
      
41,237,000
      
-
      
41,237,000
  
Operating income
    
8,239,000
      
181,000
      
8,420,000
      
35,899,000
      
804,000
      
36,703,000
  
Interest expense, net
    
3,953,000
      
-
      
3,953,000
      
10,789,000
      
-
      
10,789,000
  
Income before income tax expense
    
4,286,000
      
181,000
      
4,467,000
      
25,110,000
      
804,000
      
25,914,000
  
Income tax expense
    
6,936,000
      
58,000
      
6,994,000
      
14,742,000
      
284,000
      
15,026,000
  
Net (loss) income
  
$
(2,650,000
)
  
$
123,000
    
$
(2,527,000
)
  
$
10,368,000
    
$
520,000
    
$
10,888,000
  
Basic net (loss) income per share
  
$
(0.14
)
  
$
0.01
    
$
(0.13
)
  
$
0.55
    
$
0.03
    
$
0.58
  
Diluted net (loss) income per share
  
$
(0.14
)
  
$
0.01
    
$
(0.13
)
  
$
0.53
    
$
0.03
    
$
0.56
  
Weighted average number of shares outstanding:
                                                
Basic
    
19,069,152
      
19,069,152
      
19,069,152
      
18,814,967
      
18,814,967
      
18,814,967
  
Diluted
    
19,069,152
      
19,069,152
      
19,069,152
      
19,400,744
      
19,400,744
      
19,400,744
  

Also, as a result of the adoption of ASC 606 and the resultant changes in Company policy noted above, the effect of the adoption on the consolidated balance sheets was to create contract asset and contract liability accounts to reflect those balance sheet items being impacted by the new revenue recognition requirements. The main drivers of the reclassifications were (i) the need to accommodate the aggregation of Remanufactured Core and Unit portion of the product sales under one single performance obligation and (ii) the creation of contract asset and contract liability accounts to appropriately segregate those balance sheet items related to the ongoing transactions under the Company’s customer contracts.

Detailed impacts on specific consolidated balance sheet account can be found in the individual footnotes covering the separate line items on the face of the consolidated balance sheet.

The adoption of the new revenue recognition standard impacted the revised consolidated balance sheet at March 31, 2018 as follows:

   
March 31, 2018
  
   
As Revised
    
Adoption of
ASC 606
    
As Adjusted
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
  
$
13,049,000
    
$
-
    
$
13,049,000
  
Short-term investments
    
2,828,000
      
-
      
2,828,000
  
Accounts receivable — net
    
15,738,000
      
47,436,000
      
63,174,000
  
Inventory— net
    
76,275,000
      
84,935,000
      
161,210,000
  
Inventory unreturned
    
7,508,000
      
-
      
7,508,000
  
Contract assets
    
-
      
23,206,000
      
23,206,000
  
Income tax receivable
    
7,972,000
      
-
      
7,972,000
  
Prepaid expenses and other current assets
    
15,104,000
      
(6,496,000
)
    
8,608,000
  
Total current assets
    
138,474,000
      
149,081,000
      
287,555,000
  
Plant and equipment — net
    
28,322,000
      
-
      
28,322,000
  
Long-term core inventory — net
    
298,294,000
      
(298,294,000
)
    
-
  
Long-term core inventory deposits
    
5,569,000
      
(5,569,000
)
    
-
  
Long-term deferred income taxes
    
6,937,000
      
(239,000
)
    
6,698,000
  
Long-term contract assets
    
-
      
222,731,000
      
222,731,000
  
Goodwill
    
2,551,000
      
-
      
2,551,000
  
Intangible assets — net
    
3,766,000
      
-
      
3,766,000
  
Other assets
    
21,995,000
      
(21,191,000
)
    
804,000
  
TOTAL ASSETS
  
$
505,908,000
    
$
46,519,000
    
$
552,427,000
  
LIABILITIES AND SHAREHOLDERS’  EQUITY
                        
Current liabilities:
                        
Accounts payable
  
$
73,273,000
    
$
-
    
$
73,273,000
  
Accrued liabilities
    
12,048,000
      
-
      
12,048,000
  
Customer finished goods returns accrual
    
17,805,000
      
-
      
17,805,000
  
Accrued core payment
    
16,536,000
      
(16,536,000
)
    
-
  
Contract liabilities
    
-
      
32,603,000
      
32,603,000
  
Revolving loan
    
54,000,000
      
-
      
54,000,000
  
Other current liabilities
    
4,471,000
      
-
      
4,471,000
  
Current portion of term loan
    
3,068,000
      
-
      
3,068,000
  
Total current liabilities
    
181,201,000
      
16,067,000
      
197,268,000
  
Term loan, less current portion
    
13,913,000
      
-
      
13,913,000
  
Long-term accrued core payment
    
18,473,000
      
(18,473,000
)
    
-
  
Long-term deferred income taxes
    
226,000
      
-
      
226,000
  
Long-term contract liabilities
    
-
      
48,183,000
      
48,183,000
  
Other liabilities
    
5,957,000
      
-
      
5,957,000
  
Total liabilities
    
219,770,000
      
45,777,000
      
265,547,000
  
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; 18,893,102 shares issued and outstanding at March 31, 2018
    
189,000
      
-
      
189,000
  
Additional paid-in capital
    
213,609,000
      
-
      
213,609,000
  
Retained earnings
    
77,768,000
      
742,000
      
78,510,000
  
Accumulated other comprehensive loss
    
(5,428,000
)
    
-
      
(5,428,000
)
Total shareholders’ equity
    
286,138,000
      
742,000
      
286,880,000
  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
505,908,000
    
$
46,519,000
    
$
552,427,000
  

The adoption of the new revenue recognition standard impacted the revised statement of cash flows for the nine months ended December 31, 2017 as follows:

   
Nine Months Ended December 31, 2017
  
Cash flows from operating activities:
  
As Revised
    
Adoption of
ASC 606
    
As Adjusted
  
Net income
  
$
10,368,000
    
$
520,000
    
$
10,888,000
  
Deferred income taxes
    
(2,714,000
)
    
284,000
      
(2,430,000
)
Accounts receivable
    
23,127,000
      
(27,367,000
)
    
(4,240,000
)
Inventory
    
(11,162,000
)
    
(23,481,000
)
    
(34,643,000
)
Prepaid expenses and other current assets
    
(1,576,000
)
    
1,543,000
      
(33,000
)
Other assets
    
(163,000
)
    
10,000
      
(153,000
)
Long-term core inventory
    
(38,361,000
)
    
38,361,000
      
-
  
Contract assets, net
    
-
      
(16,208,000
)
    
(16,208,000
)
Contract liabilities, net
    
-
      
41,175,000
      
41,175,000
  
Accrued core payments
    
14,837,000
      
(14,837,000
)
    
-
  
Net cash used in operating activities
  
$
(9,803,000
)
  
$
-
    
$
(9,803,000
)

5.
Acquisition

On December 21, 2018, the Company completed the acquisition of 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. The addition of new products from E&M will drive the Company’s revenue potential and increase its product portfolio. The acquisition was consummated pursuant to an asset purchase agreement dated December 21, 2018 for an initial cash purchase price of $4,417,000, including $360,000, which is being held in escrow to be paid to the former owners of E&M, subject to certain working capital adjustments. 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 preliminary fair value of the contingent consideration obligations as of the acquisition date was $3,560,000 determined using a probability weighted method and a Monte Carlo Simulation model.

The Company preliminarily allocated the initial purchase consideration to identified finite-lived intangible assets as follows: $2,660,000 for developed technology with an estimated useful life of 5 years, $2,630,000 for customer relationships with an estimated useful life of 8 years, and $370,000 to order backlog with an estimated useful life of 6 months. In addition, $1,683,000 was allocated to inventory and $217,000 to other net liabilities. The remaining excess purchase price over identifiable tangible and intangible assets acquired of $851,000 was recorded as goodwill, which is not deductible for income tax purposes. Initial accounting for the acquisition is preliminary as the Company has not finalized the valuation of intangible assets and goodwill. The Company incurred $287,000 in acquisition costs during the nine months ended December 31, 2018, 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.

6.
Goodwill and Intangible Assets

Goodwill

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

   
Nine Months Ended
December 31,
  
   
2018
    
2017
  
Balance at beginning of period
  
$
2,551,000
    
$
2,551,000
  
Goodwill acquired
     851,000      
-
  
Translation adjustment
    
-
      
-
  
Impairment
    
-
      
-
  
Balance at end of period
  
$
 3,402,000    
$
2,551,000
  

Intangible Assets

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


  
Weighted
Average
Amortization
Period
  
December 31, 2018
    
March 31, 2018
  
 
Gross Carrying
Value
    
Accumulated
Amortization
    
Gross Carrying
Value
    
Accumulated
Amortization
  
Intangible assets subject to amortization
                                    
Trademarks
  
9 years
  
$
876,000
    
$
424,000
    
$
885,000
    
$
316,000
  
Customer relationships
  
11 years
    
8,515,000
      
3,333,000
      
5,900,000
      
2,937,000
  
Order backlog
  
6 months
    
368,000
      
20,000
      
-
      
-
  
Developed technology
  
5 years
    
2,929,000
      
149,000
      
301,000
      
67,000
  
Total
      
$
12,688,000
    
$
3,926,000
    
$
7,086,000
    
$
3,320,000
  

Amortization expense for acquired intangible assets is as follows:

   
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  
   
2018
    
2017
    
2018
    
2017
  
                         
Amortization expense
  
$
236,000
    
$
192,000
    
$
620,000
    
$
517,000
  

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

Year Ending March 31,
      
2019 - remaining three months
  
$
588,000
  
2020
    
1,723,000
  
2021
    
1,468,000
  
2022
    
1,436,000
  
2023
    
1,436,000
  
Thereafter
    
2,111,000
  
Total
  
$
8,762,000
  

7.
Accounts Receivable — Net

The adoption of the new revenue recognition standard (see Note 4) impacted the previously reported accounts receivable—net, at March 31, 2018 as follows:

   
March 31, 2018
  
   
As Previously
Reported
    
Adoption of
ASC 606

 
As Adjusted
  
Accounts receivable — trade
  
$
83,700,000
    
$
-
    
$
83,700,000
  
Allowance for bad debts
    
(4,142,000
)
    
-
      
(4,142,000
)
Customer allowances earned
    
(11,370,000
)
    
11,370,000
 (1)
 
-
  
Customer payment discrepancies
    
(1,110,000
)
    
-
      
(1,110,000
)
Customer returns RGA issued
    
(15,274,000
)
    
-
      
(15,274,000
)
Customer core returns accruals
    
(36,066,000
)
    
36,066,000
(2)
 
-
  
Less: total accounts receivable offset accounts
    
(67,962,000
)
    
47,436,000
      
(20,526,000
)
Total accounts receivable — net
  
$
15,738,000
    
$
47,436,000
    
$
63,174,000
  


(1)
Customer allowances earned have been reclassified to contract liabilities in the consolidated balance sheet at March 31, 2018.

(2)
Customer core returns accruals of $4,697,000 have been reclassified to contract liabilities and customer core returns accruals of $31,369,000 have been reclassified to long-term contract liabilities in the consolidated balance sheet at March 31, 2018.

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:

   
December 31, 2018
    
March 31, 2018
  
Accounts receivable — trade
  
$
82,208,000
    
$
83,700,000
  
Allowance for bad debts
    
(4,363,000
)
    
(4,142,000
)
Customer payment discrepancies
    
(811,000
)
    
(1,110,000
)
Customer returns RGA issued
    
(22,273,000
)
    
(15,274,000
)
Less: total accounts receivable offset accounts
    
(27,447,000
)
    
(20,526,000
)
Total accounts receivable — net
  
$
54,761,000
    
$
63,174,000
  

Warranty Returns

The Company allows its customers to return goods that their customers 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. At December 31, 2018 and March 31, 2018, the Company’s total warranty return accrual was $19,152,000 and $16,646,000, respectively, of which $7,738,000 and $7,204,000, respectively, was included in the customer returns RGA issued balance in the above table for expected credits to be issued against accounts receivable and $11,414,000 and $9,442,000, respectively, was included in the customer finished goods returns accrual in the consolidated balance sheets for estimated future warranty returns.

The following summarizes the changes in the Company’s warranty return accrual:

   
Three Months Ended
December 31,
    
Nine Months Ended
December 31,
  

 
2018
    
2017
    
2018
    
2017
  
Balance at beginning of period
  
$
16,410,000
    
$
14,799,000
    
$
16,646,000
    
$
14,286,000
  
Charged to expense/additions
    
29,655,000
      
38,269,000
      
84,408,000
      
89,834,000
  
Amounts processed
    
(26,913,000
)
    
(24,048,000
)
    
(81,902,000
)
    
(75,100,000
)
Balance at end of period
  
$
19,152,000
    
$
29,020,000
    
$
19,152,000
    
$
29,020,000
  

8.
Inventory

The adoption of the new revenue recognition standard (see Note 4) impacted the revised inventory at March 31, 2018 as follows:

   
March 31, 2018
  
   
As Revised
    
Adoption of
ASC 606
      
As Adjusted
  
Inventory
                    
Raw materials
  
$
25,805,000
    
$
51,330,000
  
(1
)
$
77,135,000
  
Work-in-process
    
635,000
      
1,948,000
  
(1
)
  
2,583,000
  
Finished goods
    
53,973,000
      
34,201,000
  
(2
)
  
88,174,000
  
     
80,413,000
      
87,479,000
        
167,892,000
  
Less allowance for excess and obsolete inventory
    
(4,138,000
)
    
(2,544,000
)
(3
)
  
(6,682,000
)
Total
  
$
76,275,000
    
$
84,935,000
      
$
161,210,000
  
                           
Inventory unreturned
$
7,508,000

$
-

  $
7,508,000

Long-term core inventory
                          
Used cores held at the Company’s facilities
  
$
53,278,000
    
$
(53,278,000
)
(1
)
$
-
  
Used cores expected to be returned by customers
    
12,970,000
      
(12,970,000
)
(4
)
  
-
  
Remanufactured cores held in finished goods