Item 1. Financial Statements
IEH CORPORATION
BALANCE SHEETS
As of December 28, 2018 and March 30, 2018
|
|
December 28,
|
|
|
March 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,088,965
|
|
|
$
|
1,407,013
|
|
Accounts receivable, less allowances for doubtful accounts of $0 at December 28, 2018 and
$11,562 at March 30, 2018
(Note 13)
|
|
|
2,911,476
|
|
|
|
4,429,267
|
|
Inventories
(Note 3)
|
|
|
11,429,390
|
|
|
|
10,751,498
|
|
Excess payments to commercial finance company
(Note 6)
|
|
|
—
|
|
|
|
154,960
|
|
Prepaid expenses and other current assets
(Note 4)
|
|
|
115,884
|
|
|
|
489,594
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
21,545,715
|
|
|
|
17,232,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation and amortization of $9,686,961, at December 28, 2018 and
$9,377,361 at March 30, 2018
(Note 5)
|
|
|
2,284,643
|
|
|
|
2,066,155
|
|
|
|
|
2,284,643
|
|
|
|
2,066,155
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
54,489
|
|
|
|
54,489
|
|
|
|
|
54,489
|
|
|
|
54,489
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
23,884,847
|
|
|
$
|
19,352,976
|
|
The accompanying notes should be read in
conjunction with the financial statements.
IEH CORPORATION
BALANCE SHEETS
(Continued)
As of December 28, 2018 and March 30, 2018
|
|
December 28,
|
|
|
March 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
40,945
|
|
|
$
|
576,629
|
|
Due to commercial finance company
(Note 6)
|
|
|
228,757
|
|
|
|
—
|
|
Accrued corporate income taxes
|
|
|
1,422,092
|
|
|
|
935,762
|
|
Other current liabilities
(Note 7)
|
|
|
1,099,566
|
|
|
|
768,369
|
|
Total Current Liabilities
|
|
|
2,791,360
|
|
|
|
2,280,760
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,791,360
|
|
|
|
2,280,760
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 10,000,000 shares authorized;
2,323,468 shares issued and outstanding at December 28, 2018 and 2,303,468 issued
and outstanding at March 30, 2018
(Note 9)
|
|
|
23,235
|
|
|
|
23,035
|
|
Capital in excess of par value
|
|
|
3,794,210
|
|
|
|
3,767,608
|
|
Retained earnings (
Note 9
)
|
|
|
17,276,042
|
|
|
|
13,281,573
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity
|
|
|
21,093,487
|
|
|
|
17,072,216
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
23,884,847
|
|
|
$
|
19,352,976
|
|
The accompanying notes should be read in
conjunction with the financial statements.
IEH CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine and Three Months Ended December
28, 2018 and December 29, 2017
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
Dec. 28,
2018
|
|
|
Dec. 29,
2017
|
|
|
Dec. 28,
2018
|
|
|
Dec. 29,
2017
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE, net sales
|
|
$
|
21,619,017
|
|
|
$
|
16,283,973
|
|
|
$
|
5,977,835
|
|
|
$
|
5,232,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
12,415,830
|
|
|
|
10,481,129
|
|
|
|
3,790,188
|
|
|
|
3,503,644
|
|
Selling, general and administrative
|
|
|
3,063,345
|
|
|
|
2,961,572
|
|
|
|
985,043
|
|
|
|
909,348
|
|
Interest expense
|
|
|
56,456
|
|
|
|
25,095
|
|
|
|
40,904
|
|
|
|
8,457
|
|
Depreciation
|
|
|
309,600
|
|
|
|
317,900
|
|
|
|
84,000
|
|
|
|
105,300
|
|
|
|
|
15,845,231
|
|
|
|
13,785,696
|
|
|
|
4,900,135
|
|
|
|
4,526,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
5,773,786
|
|
|
|
2,498,277
|
|
|
|
1,077,700
|
|
|
|
705,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
|
|
|
8,579
|
|
|
|
2,092
|
|
|
|
5,417
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
5,782,365
|
|
|
|
2,500,369
|
|
|
|
1,083,117
|
|
|
|
706,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
1,787,896
|
|
|
|
1,155,178
|
|
|
|
294,237
|
|
|
|
231,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
3,994,469
|
|
|
$
|
1,345,191
|
|
|
$
|
788,880
|
|
|
$
|
474,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE
(Note 2)
|
|
$
|
1.72
|
|
|
$
|
.59
|
|
|
$
|
.34
|
|
|
$
|
.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FULLY DILUTED EARNINGS PER SHARE
(Noter2)
|
|
$
|
1.66
|
|
|
$
|
.59
|
|
|
$
|
.33
|
|
|
$
|
.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(in thousands)
|
|
|
2,321
|
|
|
|
2,303
|
|
|
|
2,323
|
|
|
|
2,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING –
FULLY DILUTED
(in thousands)
|
|
|
2,407
|
|
|
|
2,312
|
|
|
|
2,425
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes should be read in
conjunction with the financial statements.
IEH CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended December 28, 2018
and December 29, 2017
|
|
Nine Months Ended
|
|
|
|
December 28,
|
|
|
December 29,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,994,469
|
|
|
$
|
1,345,191
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
309,600
|
|
|
|
317,900
|
|
Recognition of stock compensation expense
|
|
|
26,802
|
|
|
|
25,182
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
1,517,791
|
|
|
|
(196,350
|
)
|
(Increase) in inventories
|
|
|
(677,892
|
)
|
|
|
(1,721,414
|
)
|
Decrease in excess payments to commercial finance company
|
|
|
154,960
|
|
|
|
191,430
|
|
Decrease in prepaid expenses and other current assets
|
|
|
373,711
|
|
|
|
890,205
|
|
Increase (decrease) in accounts payable
|
|
|
(535,684
|
)
|
|
|
86,462
|
|
Increase in other current liabilities
|
|
|
331,196
|
|
|
|
206,100
|
|
Increase (decrease) in accrued corporate taxes
|
|
|
486,330
|
|
|
|
(71,712
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
1,986,814
|
|
|
|
(272,197
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
5,981,283
|
|
|
|
1,072,994
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(528,088
|
)
|
|
|
(328,105
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH (USED) BY INVESTING ACTIVITIES
|
|
$
|
(528,088
|
)
|
|
$
|
(328,105
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes should be read in
conjunction with the financial statements.
IEH CORPORATION
STATEMENTS OF CASH FLOWS
(continued)
(Unaudited)
For the Nine Months Ended December 28, 2018
and December 29, 2017
|
|
Nine Months Ended
|
|
|
|
December 28,
|
|
|
December 29,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net activity from commercial financing company
|
|
$
|
228,757
|
|
|
$
|
479,250
|
|
Payment of special cash dividend
|
|
|
—
|
|
|
|
(575,867
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
|
|
$
|
228,757
|
|
|
|
(96,617
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH
|
|
|
5,681,952
|
|
|
|
648,272
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
1,407,013
|
|
|
|
1,210,761
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
7,088,965
|
|
|
|
1,859,033
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the nine months for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
54,956
|
|
|
|
19,638
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
$
|
694,040
|
|
|
|
326,182
|
|
|
|
|
|
|
|
|
|
|
Increase in issued and outstanding shares
|
|
$
|
200
|
|
|
$
|
—
|
|
The accompanying notes should be read in
conjunction with the financial statements.
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1-
|
INTERIM RESULTS AND BASIS OF PRESENTATION:
|
The accompanying unaudited financial statements as of December
28, 2018 and December 29, 2017 and for the nine months then ended 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. In the opinion
of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect
all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of December
28, 2018 and December 29, 2017 and the results of operations and cash flows for the nine months then ended. The financial data
and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The
results for the nine months ended December 28, 2018, are not necessarily indicative of the results to be expected for any subsequent
quarter or the entire fiscal year. The balance sheet at March 30, 2018 has been derived from the audited financial statements at
that date.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”). The Company believes, however, that the disclosures in this report
are adequate to make the information presented not misleading in any material respect. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto of IEH Corporation for the fiscal year ended March
30, 2018 included in the Company’s Annual Report on Form 10-K as filed with the SEC and the attached Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Note 2-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
Description of Business:
The Company designs, develops and manufactures printed circuit
connectors for high performance applications. We have also developed a high-performance plastic circular connector line. All of
our products utilize the HYPERBOLOID contact design, a rugged high-reliability contact system ideally suited for high-stress environments.
We are the only independent producer of HYPERBOLOID in the United States.
Our customers consist of OEM’s (Original Equipment
Manufacturers), companies manufacturing medical equipment, and distributors who resell our products to OEMs. We sell our products
directly and through regional representatives located in all regions of the United States, Canada, Israel, India, various Pacific
Rim countries, South Korea and the European Union (EU).
The customers we service are in the Military, Aerospace,
Space, Medical, Oil and Gas, Industrial, Test Equipment and Commercial Electronics markets. We appear on the Military Qualified
Product Listing “QPL” to MIL-DTL-55302 and supply customer requested modifications to this specification. Sales to
the Commercial Aerospace and Military markets were 35% and 45%, respectively, of the Company’s net sales for the year ended
March 30, 2018. Our offering of “QPL” items has recently been expanded to include additional products.
In order to remain competitive, the Company has an internal
program to upgrade, add and maintain machinery, review material costs and increase labor force productivity. During the fiscal
year ended March 30, 2018, the Company purchased several machines to increase the productivity of certain processes. This will
help the Company meet this goal.
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 2-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
|
Business New Product Development:
The Company is sought after by many of its customers to
design and manufacture custom connectors. This has created many new products that are innovative designs and employ new technologies.
The Company continues to be successful because of its ability to assist its customers and create a new design, including engineering
drawing packages, in a relatively short period of time. The Company will continue to support its customers to the best of its ability.
The circular product line of connectors introduced several
years ago for the medical industry continues to be very rewarding for the Company. The line has been expanded to include connector
cable assemblies utilizing the circular connectors.
A new product line featuring high density connectors is
being added to the Company’s product offering. This offering should be available within the next few months. The Company
expects the new product line to bring additional revenue.
The standard printed circuit board connectors we produce
are continually being expanded and utilized in many of the military programs being built today. We have recently received approval
for additional products that the Company can offer under the Military Qualified Product Listing “QPL.”
Accounting Period:
The Company maintains an accounting period based upon a
52-53 week year, which ends on the nearest Friday in business days to March 31. The year ended March 30, 2018 was comprised of
52 weeks. The current fiscal year, ending on March 29, 2019, will be comprised of 52 weeks.
Revenue Recognition:
Sales are recognized when revenue is realized or realizable
and has been earned. Revenue transactions represent sales of inventory. The Company has historically adopted shipping terms that
title to merchandise passes to the customer at the shipping point (FOB Shipping Point).
Revenue is realized or realizable and earned when all of
the following criteria are met:
|
·
|
Persuasive evidence of an arrangement exits
|
|
·
|
The Company’s selling price for its products are fixed and determinable
|
|
·
|
Collectability is reasonable assured
|
The Company does not offer any discounts, credits or other
sales incentives. Historically, the Company believes that it has no collection issues with its customer base.
The Company’s policy with respect to customer returns
and allowances as well as product warranty is as follows:
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 2-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
|
Revenue Recognition:
(continued)
The Company will accept a return of defective product within
one year from shipment for repair or replacement at the Company’s option. If the product is repairable, the Company at its
own cost, will repair and return it to the customer. If unrepairable, the Company will either offer an allowance against payment
or will reimburse the customer for the total cost of product. The cost of defective products is immaterial at this time.
The Company provides engineering services as part of the
relationship with its customers in developing the custom product. The Company is not obligated to provide such engineering service
to its customers. The Company does not invoice its customers separately for these services.
Inventories:
Inventories are stated at an average cost on a first-in,
first-out basis, which does not exceed market value.
The Company manufactures products pursuant to specific technical
and contractual requirements.
The Company historically purchases material in excess of
its requirements to avail itself of favorable pricing as well as the possibility of receiving additional orders from customers.
This excess may result in material not being used in subsequent periods, which may result in this material being deemed obsolete.
The Company annually reviews its purchase and usage activity
of its inventory of parts as well as work in process and finished goods to determine which items of inventory have become obsolete
within the framework of current and anticipated orders. The Company based upon historical experience has determined that if a part
has not been used and purchased or an item of finished goods has not been sold in nine years, it is deemed to be obsolete. The
Company estimates which materials may be obsolete and which products in work in process or finished goods may be sold at less than
cost. A periodic adjustment, based upon historical experience, is made to inventory in recognition of this impairment.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company
to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable.
Under the provisions of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, the Federal Deposit Insurance Corporation (FDIC) will permanently insure all accounts maintained with
each financial institution up to $250,000 in the aggregate.
As of December 28, 2018 and March 30, 2018, the Company
had funds on deposit in the amount of $7,299,734 and $1,887,682, in one financial institution comprised of the following:
|
|
December 28, 2018
|
|
|
March 30, 2018
|
|
|
|
|
|
|
|
|
Non-interest-bearing accounts
|
|
$
|
3,050,432
|
|
|
$
|
746,958
|
|
Interest bearing account
|
|
|
4,249,302
|
|
|
|
1,140,724
|
|
|
|
$
|
7,299,734
|
|
|
$
|
1,887,682
|
|
|
|
|
|
|
|
|
|
|
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 2-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (
continued
)
|
Concentration of Credit Risk (
continued
):
The Company has not experienced any losses in such
accounts and believes its cash balances are not exposed to any significant risk.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. The Company provides for depreciation and amortization using the Double Declining Balance method
over the estimated useful lives (5-7 years) of the related assets.
Maintenance and repair expenditures are charged to operations,
and renewals and betterments are capitalized. Items of property, plant and equipment, which are sold, retired or otherwise disposed
of, are removed from the asset and accumulated depreciation or amortization accounts. Any gain or loss thereon is either credited
or charged to operations.
Net Income Per Share:
The Company has adopted the provisions of Financial Accounting
Standards Board (“FASB”) ASC Topic 260,
Earnings per Share,
which includes the provisions of SFAS No. 128, “Earnings
Per Share,” which requires the disclosure of “basic” and “diluted” earnings (loss) per share. Basic
earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during each period.
Fully diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding
on a fully diluted basis during each period.
Under the requirements of ASC Topic 260, during this period
the Company is required to use the Treasury Stock method in computing fully diluted earnings per share and the weighted average
number of common shares outstanding on a fully diluted basis because the options previously granted by the Company are considered
to be “in the money” (i.e., when the option grant price is lower than the prevailing market price of the Company’s
common stock). The weighted average number of common shares outstanding has been increased to reflect the dilutive effect of potential
shares, such as those issuable upon the exercise of the stock options as if they had been issued.
Fair Value of Financial Instruments:
The carrying value of the Company’s financial instruments,
consisting of accounts receivable, accounts payable, and borrowings, approximate their fair value due to the relatively short maturity
(nine months) of these instruments.
Use of Estimates:
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts could
differ from those estimates.
Impairment of Long-Lived Assets:
There were no long-lived asset impairments recognized by
the Company for the nine months ended
December 28, 2018 and December 29, 2017, respectively, and
currently all assets are being utilized.
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 2-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (
continued
)
|
Stock-Based Compensation Plan:
Compensation expense for stock options granted to directors,
officers and key employees is based on the fair value of the award on the measurement date, which is the date of the grant. The
expense is recognized ratably over the service period of the award. The fair value of stock options is estimated using a Black-Scholes
valuation model. The fair value of any other non-vested stock awards is generally the market price of the Company’s common
stock on the date of the grant.
Recent Accounting Pronouncements:
FASB has issued certain accounting standards updates as
of December 28, 2018 that will become effective in subsequent periods. The Company believes that none of those updates would have
significantly affected the Company’s financial accounting measures or disclosures had they been in effect during the nine
months ended December 28, 2018 and December 29, 2017, respectively, and it does not believe that any of those pronouncements will
have a significant impact on the Company’s financial statements at the time that they become effective.
Inventories are stated at average cost, on a first in first
out basis, which does not exceed market value.
The Company manufactures products pursuant to specific technical
and contractual requirements. The Company historically purchases material in excess of its requirements to avail itself of favorable
pricing as well as the possibility of receiving additional orders from customers. This excess may result in material not being
used in subsequent periods, which may result in this material being deemed obsolete.
The Company annually reviews its purchase and usage activity
of its inventory of parts as well as work in process and finished goods to determine which items of inventory have become obsolete
within the framework of current and anticipated orders. The Company based upon historical experience has determined that if a part
has not been used and purchased or an item of finished goods has not been sold in nine years, it is deemed to be obsolete.
The Company estimates which materials may be obsolete and
which products in work in process or finished goods may be sold at less than cost. A periodic adjustment, based upon historical
experience, is made to inventory in recognition of this impairment.
Inventories were comprised of the following:
|
|
December 28,
|
|
|
March 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
7,063,374
|
|
|
$
|
6,644,436
|
|
Work in progress
|
|
|
2,432,383
|
|
|
|
2,288,115
|
|
Finished goods
|
|
|
1,933,633
|
|
|
|
1,818,947
|
|
|
|
$
|
11,429,390
|
|
|
$
|
10,751,498
|
|
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 4-
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
|
Prepaid expenses and other current assets were comprised
of the following:
|
|
December 28,
|
|
|
March 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
19,988
|
|
|
$
|
16,256
|
|
Prepaid corporate taxes
|
|
|
—
|
|
|
|
467,606
|
|
Other current assets
|
|
|
95,896
|
|
|
|
5,732
|
|
|
|
$
|
115,884
|
|
|
$
|
489,594
|
|
Note 5-
|
PROPERTY, PLANT AND EQUIPMENT:
|
Property, plant and equipment were comprised of the following:
|
|
December 28,
|
|
|
March 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Computers
|
|
$
|
500,355
|
|
|
$
|
496,489
|
|
Leasehold improvements
|
|
|
917,498
|
|
|
|
888,488
|
|
Machinery and equipment
|
|
|
6,427,473
|
|
|
|
6,189,340
|
|
Tools and dies
|
|
|
3,937,421
|
|
|
|
3,681,077
|
|
Furniture and fixture
|
|
|
179,072
|
|
|
|
179,072
|
|
Website development cost
|
|
|
9,785
|
|
|
|
9,050
|
|
|
|
|
11,971,604
|
|
|
|
11,443,516
|
|
Less: accumulated depreciation and amortization
|
|
|
(9,686,961
|
)
|
|
|
(9,377,361
|
)
|
|
|
$
|
2,284,643
|
|
|
$
|
2,066,155
|
|
Note 6-
|
ACCOUNTS RECEIVABLE FINANCING:
|
The Company entered into an accounts receivable financing
agreement with a commercial finance company, whereby it can borrow up to 80 percent of its eligible receivables (as defined in
the financing agreement) at an interest rate of 2.5% above JP Morgan Chase’s publicly announced rate with a minimum rate
of 6% per annum.
The financing agreement has an initial term of one year
and will automatically renew for successive one-year terms, unless terminated by the Company or the commercial finance company
upon receiving 60 days’ prior notice. Funds advanced by the commercial finance company are secured by IEH’s accounts
receivable and inventories.
As of December 28, 2018, the Company reported a liability
to the commercial finance company of $228,757. As of March 30, 2018, the Company had reported excess payments to the commercial
finance company of $154,960. These excess payments are reported in the accompanying financial statements as of March 30, 2018 as
“Excess payments to commercial finance company.”
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 7-
|
OTHER CURRENT LIABILITIES:
|
Other current liabilities were comprised of the following:
|
|
December 28,
|
|
|
March 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Payroll and vacation accruals
|
|
$
|
734,012
|
|
|
$
|
569,043
|
|
Sales commissions
|
|
|
47,185
|
|
|
|
104,791
|
|
Insurance
|
|
|
—
|
|
|
|
52,648
|
|
Other
|
|
|
318,369
|
|
|
|
41,887
|
|
|
|
$
|
1,099,566
|
|
|
$
|
768,369
|
|
Note 8-
|
CORRECTION OF AN ERROR:
|
On July 1, 2015, the Company granted 245,000 options to
purchase shares of the Company’s common stock under the 2011 Equity Incentive Plan.
The Company did account for these grants as statutory stock
options but did not report these grants as additional compensation expense during the fiscal year ended March 25, 2016. Upon subsequent
review, it was determined that these grants should have been reported as compensation expense using a Black-Scholes Method of valuation
for the fiscal year ended March 25, 2016.
The Company is reporting additional stock option compensation
expense of $995,055 as an adjustment of the opening component balances of stockholders’ equity as of March 31, 2017.
The following table shows the effect
of this correction:
|
|
Capital in
|
|
|
|
|
|
|
Excess of
|
|
|
Retained
|
|
|
|
Par value
|
|
|
earnings
|
|
|
|
|
|
|
|
|
Balances at March 25, 2016
|
|
$
|
2,744,573
|
|
|
$
|
10,812,960
|
|
|
|
|
|
|
|
|
|
|
Correction of an error: recognition of stock option compensation expense
|
|
|
995,055
|
|
|
|
(995,055
|
)
|
|
|
|
|
|
|
|
|
|
Restated balances at March 26, 2016
|
|
|
3,739,628
|
|
|
|
9,817,905
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended March 31, 2017
|
|
|
—
|
|
|
|
1,473,976
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2017
|
|
$
|
3,739,628
|
|
|
$
|
11,291,881
|
|
|
|
|
|
|
|
|
|
|
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 8-
|
CORRECTION OF AN ERROR:
(continued)
|
|
|
Capital in
|
|
|
|
|
|
|
Excess of
|
|
|
Retained
|
|
|
|
Par value
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
Balances at March 31, 2017
(from page 16)
|
|
$
|
3,739,628
|
|
|
$
|
11,291,881
|
|
|
|
|
|
|
|
|
|
|
Stock compensation recognized for the year ended March 25, 2016
|
|
|
16,788
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Dividend distribution paid on June 17, 2017
|
|
|
—
|
|
|
|
(575,867
|
)
|
|
|
|
|
|
|
|
|
|
Stock compensation recognized for the quarter ended June 30, 2017
|
|
|
2,798
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Restated net income for the quarter ended June 30, 2017
|
|
|
—
|
|
|
|
305,622
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2017
|
|
|
3,759,214
|
|
|
|
11,021,636
|
|
|
|
|
|
|
|
|
|
|
Stock compensation recognized for the quarter ended September 29, 2017
|
|
|
2,798
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Restated net income for the quarter ended September 29, 2017
|
|
|
—
|
|
|
|
564,660
|
|
|
|
|
|
|
|
|
|
|
Balances at September 29, 2017
|
|
|
3,762,012
|
|
|
|
11,586,296
|
|
|
|
|
|
|
|
|
|
|
Stock compensation recognized for the quarter ended December 29, 2017
|
|
|
2,798
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Restated net income for the quarter ended December 29, 2017
|
|
|
—
|
|
|
|
474,908
|
|
|
|
|
|
|
|
|
|
|
Balances at December 29, 2017
|
|
$
|
3,764,810
|
|
|
$
|
12,061,204
|
|
|
|
|
|
|
|
|
|
|
The financial statements for the three and nine months periods
ended December 29, 2017 have been restated to include the recognition of quarterly stock compensation as follows:
|
|
Quarter ended
|
|
|
Nine months ended
|
|
|
|
Dec 29, 2017
|
|
|
Dec 29, 2017
|
|
|
|
(in thousands)
(restated)
|
|
|
(in thousands)
(restated)
|
|
IEH employees
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-employee directors
|
|
|
3
|
|
|
|
25
|
|
Total stock compensation expense
|
|
$
|
3
|
|
|
$
|
25
|
|
Note 9-
|
CHANGES IN SHAREHOLDERS’ EQUITY:
|
The accumulated retained earnings increased by $3,994,469,
which represents the net income for the nine months ended December 28, 2018.
On May 9, 2018, the Estate of Michael Offerman, the late
Chief Executive Officer of the Company, exercised all of the options (75,000) that had been awarded to him under the 2011 Equity
Incentive Plan. As a result of such exercise, the aggregate issued and outstanding shares of common stock of the Company increased
to 2,323,468 shares.
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 10-
|
2011 EQUITY INCENTIVE PLAN:
|
On August 31, 2011, the Company’s shareholders approved
the adoption of the Company’s 2011 Equity Incentive Plan (“2011 Plan”) to provide for the grant of stock options
and restricted stock awards to purchase up to 750,000 shares of the Company’s common stock to all employees, consultants
and other eligible participants including senior
management and members of the Board of Directors of the
Company. The 2011 Plan replaced the prior 2002 Employee Stock Option Plan which had expired in accordance with its terms.
Options granted to employees under the 2011 Plan may be
designated as options which qualify for incentive stock option treatment under Section 422A of the Internal Revenue Code, or options
which do not qualify (non-qualified stock options).
Under the 2011 Plan, the exercise price of an option designated
as an incentive stock option shall not be less than the fair market value of the Company’s common stock on the day the option
is granted. In the event an option designated as an incentive stock option is granted to a ten percent (10%) or greater shareholder,
such exercise price shall be at least 110 percent (110%) of the fair market value of the Company’s common stock and the option
must not be exercisable after the expiration of five years from the day of the grant. The 2011 Plan also provides that holders
of options that wish to pay for the exercise price of their options with shares of the Company’s common stock must have beneficially
owned such stock for at least nine months prior to the exercise date.
Exercise prices of non-incentive stock options may be less
than the fair market value of the Company’s common stock.
The aggregate fair market value of shares subject to options
granted to a participant(s) that are designated as incentive stock options, and which become exercisable in any calendar year,
shall not exceed $100,000.
On July 1, 2015, our Board of Directors granted 245,000
options to purchase shares of the Company’s common stock under the 2011 Plan as follows: (i) Michael Offerman, our then Chief
Executive Officer, was granted 75,000 options; (ii) Robert Knoth, our Chief Financial Officer, was granted 50,000 options; (iii)
four non-executive officer key employees were granted 110,000 options; and (iv) each of our non-management directors, Allen Gottlieb
and Gerald Chafetz, was granted 5,000 options. The stock options: (i) have a ten-year term; (ii) have an exercise price equal to
the value of the Company’s common stock on the date of grant; and (iii) were all immediately vested. The options granted
to Michael Offerman had an exercise price equal to 110% of such fair market value because he owned ten percent (10%) or greater
of the Company’s outstanding common stock. In the event of the termination of each recipient’s employment by, or association
with, the Company (as applicable), the options will remain exercisable in accordance with the terms of the 2011 Plan.
Effective July 15, 2016, the Board of Directors of the Company
unanimously voted to increase the number of directors from three to six directors and elected David Offerman as a Class II director
and Dr. Sonia Marciano and Eric C. Hugel as Class I Directors.
Effective August 15, 2016, the Board of Directors also approved
the granting of stock options to purchase shares of the Company’s common stock under the 2011 Plan to each of Dr. Marciano
and Mr. Hugel as follows: Each of the new non-management directors will receive a grant of options totalling 5,000 shares each
subject to the following vesting schedule: (i) 1,000 shares vested immediately (August 15, 2016); (ii) 2,000 shares vested on August
15, 2017; and (iii) 2,000 shares vested on August 15, 2018. The stock options: (i) have a ten-year term; and (ii) have an exercise
price equal to the value of the Company’s common stock on the date of grant. In the event of the termination of each recipient’s
association with the Company, the options will remain exercisable in accordance with the terms of the 2011 Plan.
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 10-
|
2011 EQUITY INCENTIVE PLAN:
(continued)
|
On September 7, 2018, the Board of Directors elected Michael
E. Rosenfeld to the Board of Directors to fill the vacancy of a Class I Director of the Company created by the death of the Company’s
then President and Chief Executive Officer, Michael Offerman. Such appointment became effective on October 26, 2018.
At the same time, the Board of Directors also approved the
granting of stock options to purchase shares of the Company’s common stock under the 2011 Plan to Mr. Rosenfeld as follows:
He will receive a grant of options totalling 5,000 shares each subject to the following vesting schedule: (i) 1,000 shares vested
on October 26, 2018; (ii) 2,000 shares will vest on October 26, 2019; and (iii) 2,000 shares will vest on October 26, 2020. The
stock options: (i) have a ten-year term; and (ii) have an exercise price equal to the value of the Company’s common stock
on the date of grant. In the event of the termination of each recipient’s association with the Company, the options will
remain exercisable in accordance with the terms of the 2011 Plan.
The table below summarizes the option awards for the named
executive officers and non-management directors:
Name
|
|
Stock Option Grants
|
|
David Offerman
|
|
|
50,000
|
|
Robert Knoth
|
|
|
50,000
|
|
Allen Gottlieb
|
|
|
5,000
|
|
Gerald Chafetz
|
|
|
5,000
|
|
Sonia Marciano
|
|
|
5,000
|
|
Eric Hugel
|
|
|
5,000
|
|
Michael E. Rosenfeld
|
|
|
5,000
|
*
|
|
|
|
|
|
*Options for 1,000 shares vested on October 26, 2018. 2,000
shares shall vest on October 26, 2019 and 2,000 shares shall vest on October 26, 2020.
The following table shows the option activity for the fiscal
year ended March 30, 2018 and the current nine months ended December 28, 2018.
Stock-based compensation expense, shown in the table below,
is recorded in general and administrative expenses included in our statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended
|
|
|
Nine months
Ended
|
|
|
Quarter ended
|
|
|
Quarter ended
Dec. 29, 2017
|
|
|
|
Ref
|
|
|
Dec. 28, 2018
(in thousands)
|
|
|
Dec. 29,2017
(in thousands)
|
|
|
Dec. 28, 2018
(in thousands)
|
|
|
(in thousands)
(restated)
|
|
IEH employees
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-employee directors
|
|
|
|
|
|
|
27
|
|
|
|
25
|
|
|
|
21
|
|
|
|
3
|
|
Total stock compensation expense
|
|
|
(a)
|
|
|
$
|
27
|
|
|
$
|
25
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
(a):
|
The Company reported compensation expense of $2,798 during
the quarter ended December 28, 2018 and $2,798 during the quarter ended December 29, 2017 resulting from stock options granted
on August 15, 2016.
The Company also reported compensation expense of $18,408
during the quarter ended December 28, 2018 resulting from stock options granted on October 26, 2018.
|
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 10-
|
2011 EQUITY INCENTIVE PLAN:
(continued)
|
Unrecognized stock-based compensation expense
:
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
As of
|
|
|
December 29, 2017
|
|
|
|
Ref
|
|
|
December 28, 2018
(in thousands)
|
|
|
(in thousands)
(restated)
|
|
Unrecognized expense for IEH employees
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Unrecognized expense for Non-employee directors
|
|
|
|
|
|
|
51
|
|
|
|
16
|
|
Total unrecognized expense
|
|
|
(b)
|
|
|
$
|
51
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b):
|
Unrecognized stock-based compensation expense related to prior years’ equity grants of stock options to non-employee directors, that had not vested as of the end of the applicable fiscal year.
|
Note
: Stock option grants to IEH officers, directors
and key employees in the fiscal years ended March 30, 2018 and March 31, 2017 were valued using a Black-Scholes model, under the
following criteria:
|
|
March 30, 2018
|
|
|
March 31, 2017
|
|
Risk free interest rate
|
|
|
2.09%
|
|
|
|
1.88%
|
|
Contractual term
|
|
|
10 years
|
|
|
|
10 years
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected lives
|
|
|
10 years
|
|
|
|
10 years
|
|
Expected volatility
|
|
|
64%
|
|
|
|
56%
|
|
Fair value per option
|
|
$
|
5.85
|
|
|
$
|
6.00
|
|
IEH CORPORATION
NOTES TO
FINANCIAL STATEMENTS
(Unaudited)
Note 10-
|
2011 EQUITY INCENTIVE PLAN:
(continued)
|
The following table shows the activity for the fiscal
years ended March 30, 2018 and March 31, 2017.
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
(in thousands)
|
|
Outstanding at the Beginning of the Year
|
|
|
3/25/2016
|
|
|
|
245,000
|
|
|
$
|
6.18
|
|
|
|
9.27
|
|
|
$
|
—
|
|
Granted
|
|
|
8/15/2016
|
|
|
|
10,000
|
|
|
$
|
5.30
|
|
|
|
10.00
|
|
|
|
—
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Year
|
|
|
3/31/2017
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.82
|
|
|
$
|
87
|
|
Fully Vested
|
|
|
|
|
|
|
247,000
|
|
|
$
|
6.05
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 2017
|
|
|
|
|
|
|
247,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Year
|
|
|
3/31/2017
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.82
|
|
|
$
|
87
|
|
Granted
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Year
|
|
|
3/30/2018
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.07
|
|
|
$
|
702
|
|
Fully Vested
|
|
|
|
|
|
|
251,000
|
|
|
$
|
6.02
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Year
March 30, 2018
|
|
|
|
|
|
|
251,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Year
|
|
|
3/30/2018
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.07
|
|
|
$
|
702
|
|
Granted
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Quarter
|
|
|
6/29/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.57
|
|
|
$
|
666
|
|
Fully Vested
|
|
|
|
|
|
|
176,000
|
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Year
December 28, 2018
|
|
|
|
|
|
|
176,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Quarter
|
|
|
6/29/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.57
|
|
|
$
|
666
|
|
Granted
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Quarter
|
|
|
9/28/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.32
|
|
|
$
|
1,393
|
|
Fully Vested
|
|
|
|
|
|
|
180,000
|
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Quarter
December 28, 2018
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Quarter
|
|
|
9/28/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.57
|
|
|
$
|
1,393
|
|
Granted
|
|
|
10/26/2018
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Quarter
|
|
|
12/28/2018
|
|
|
|
185,000
|
|
|
$
|
6.02
|
|
|
|
7.99
|
|
|
$
|
1,518
|
|
Fully Vested
|
|
|
|
|
|
|
181,000
|
|
|
$
|
5.88
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Quarter
December 28, 2018
|
|
|
|
|
|
|
185,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 10-
|
2011 EQUITY INCENTIVE PLAN:
(continued)
|
The aggregate intrinsic value in the table above represents
the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day
of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option
holders exercised their in-the-money options on those dates. This amount will change based on the fair market value of the Company’s
common stock.
Note 11-
|
CASH BONUS PLAN:
|
In 1987, the Company adopted a cash bonus plan (“Cash
Bonus Plan”) for non-union, management and administrative staff. Contributions to the Cash Bonus Plan are made by the Company
only when the Company is profitable for the fiscal year. The Company accrued a contribution provision of $243,000 for the nine
months ended December 28, 2018. For the fiscal year ended March 30, 2018, the Company’s contribution was $324,000.
Note 12-
|
COMMITMENTS AND CONTINGENCIES:
|
The Company leases space for its corporate offices (including
its manufacturing facility) at 140 58
th
Street, Suite 8E, Brooklyn, New York. The lease term runs from December 1, 2010
through November 30, 2020. The basic minimum annual rentals are as follows:
Fiscal year ending March:
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
46,830
|
|
2020
|
|
|
189,200
|
|
2021
|
|
|
128,640
|
|
|
|
$
|
364,670
|
|
The rental expense for the nine months ended December 28,
2018 was $136,890 and $132,880 for the nine months ended December 29, 2017.
The Company has a collective bargaining multi-employer pension
plan (“Multi-Employer Plan”) with the United Auto Workers of America, Local 259 (“UAW”). Contributions
are made by the Company in accordance with a negotiated labor contract and are based on the number of covered employees employed
per month. With the passage of the Multi-Employer Pension Plan Amendment Act of 1990 (the “1990 Act”), the Company
may become subject to liabilities in excess of contributions made under the collective bargaining agreement. Generally, these are
contingent upon termination, withdrawal, or partial withdrawal from the Multi-Employer Plan.
The Company has not taken any action to terminate, withdraw
or partially withdraw from the Multi-Employer Plan, nor does it intend to do so in the future. Under the 1990 Act, liabilities
would be based upon the Company’s proportional share of the Multi-Employer Plan’s unfunded vested benefits, which
is currently not available. The Plan’s information and data for the year ending December 31, 2018 is not yet available.
As of the date hereof, the Company expects that its proportional share of the 2018 liability will also be fully funded. The amount
of accumulated benefits and net assets of such Plan is also not currently available to the Company. The total contributions charged
to operations under the provisions of the Multi-Employer Plan were $50,153 and $111,038 for the nine months ended December 28,
2018 and December 29, 2017, respectively.
IEH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 13-
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
|
The Company historically had maintained an allowance for
uncollectable accounts receivables. The Company did determine that over the past five years, no customer account balances were
determined to be uncollectable and charged off to operations. A review of accounts receivable at December 28, 2018 indicated that
none were either deemed to be delinquent or uncollectable. Accordingly, The Company has determined that collectability is not an
issue and it that there is no longer a need to maintain this allowance.
Note 14-
|
SUBSEQUENT EVENTS:
|
The Company has evaluated all subsequent events through
February 11, 2019, the date the financial statements were available to be issued. Based on this evaluation, except as set forth
below, the Company has determined that no subsequent events have occurred which require disclosure through the date that these
financial statements were available to be issued.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities
Act of 1933 (the “Securities Act”). Statements contained in this report which are not statements of historical facts
may be considered forward-looking information with respect to plans, projections, or future performance of the Company as defined
under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those projected. The words “anticipate”, “believe”,
“estimate”, “expect”, “objective”, and “think” or similar expressions used herein
are intended to identify forward-looking statements. The forward-looking statements are based on the Company’s current views
and assumptions and involve risks and uncertainties that include, among other things, the effects of the Company’s business,
actions of competitors, changes in laws and regulations, including accounting standards, employee relations, customer demand, prices
of purchased raw material and parts, domestic economic conditions, including housing starts and changes in consumer disposable
income, and foreign economic conditions, including currency rate fluctuations. Some or all of the facts are beyond the Company’s
control.
Except as may be required by applicable law, we do not undertake
or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements
contained in this report as a result of new information or future events or developments. Thus, you should not assume that our
silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should
carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt
to advise interested parties of the risks, uncertainties and other factors that may affect our business. The following discussion
and analysis should be read in conjunction with the financial statements and related footnotes included elsewhere in this quarterly
report which provide additional information concerning the Company’s financial activities and condition.
Critical Accounting Policies
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during
the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting
policies, which could have the most significant effect on the Company's reported results and require the most difficult, subjective
or complex judgments by management.
Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment
whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected
cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized
as the amount by which the carrying amount of the asset exceeds its fair value. The Company makes estimates of its future cash
flows related to assets subject to impairment review.
Inventory Valuation:
Raw materials and supplies are stated at average cost
on a first in first out basis, which does not exceed market value. Finished goods and work in process are valued at the lower of
actual cost, determined on a specific identification basis, or market. The Company estimates which materials may be obsolete and
which products in work in process or finished goods may be sold at less than cost, and adjusts their inventory value accordingly.
Future periods could include either income or expense items if estimates change and for differences between the estimated and actual
amount realized from the sale of inventory.
Income Taxes:
The Company records a liability for potential tax assessments
based on its estimate of the potential exposure. Due to the subjectivity and complex nature of the underlying issues, actual payments
or assessments may differ from estimates. Income tax expense in future periods could be adjusted for the difference between actual
payments and the Company's recorded liability based on its assessments and estimates.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Critical Accounting Policies
(continued)
Revenue Recognition:
Sales are recognized when revenue is realized or realizable
and has been earned. Revenue transactions represent sales of inventory. The Company has historically adopted shipping terms that
title to merchandise passes to the customer at the shipping point (FOB Shipping Point).
Revenue is realized or realizable and earned when all
of the following criteria are met:
|
·
|
Persuasive evidence of an arrangement exits
|
|
·
|
The Company’s selling price for its products are fixed and determinable
|
|
·
|
Collectability is reasonable assured
|
The Company does not offer any discounts, credits or other
sales incentives. Historically, the Company believes that it has no collection issues with its customer base.
The Company’s policy with respect to customer returns
and allowances as well as product warranty is as follows:
The Company will accept a return of defective product
within one year from shipment for repair or replacement at the Company’s option. If the product is repairable, the Company
at its own cost, will repair and return it to the customer. If unrepairable, the Company will either offer an allowance against
payment or will reimburse the customer for the total cost of product. The cost of defective products is immaterial at this time.
The Company provides engineering services as part of
the relationship with its customers in developing the custom product. The Company is not obligated to provide such engineering
service to its customers. The Company does not invoice its customers separately for these services.
The Company did not expend any funds on, nor receiving any revenues
related to, customer sponsored research and development activities, relating to the development of new designs, techniques and
the improvement of existing designs, for the nine months ended December 28, 2018 and December 29, 2017, respectively, relating
to the development of new designs, techniques and the improvement of existing designs.
Stock-Based Compensation Plan:
Compensation expense for stock options granted to directors, officers
and key employees is based on the fair value of the award on the measurement date, which is the date of the grant. The expense
is recognized ratably over the service period of the award. The fair value of stock options is estimated using a Black-Scholes
valuation model. The fair value of any other non-vested stock awards is generally the market price of the Company’s common
stock on the date of the grant.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Comparative Analysis-Nine Months Ended December 28, 2018 and
December 29, 2017
Results of Operations
The following table sets forth for the periods indicated, percentages
for certain items reflected in the financial data as such items relate to the revenues of the Company:
|
|
|
|
Relationship to Total Revenues
|
|
December 28,
|
|
|
December 29,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Operating Revenues (in thousands)
|
|
$
|
21,619
|
|
|
$
|
16,284
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
(as a percentage of Operating Revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Products Sold
|
|
|
57.43%
|
|
|
|
64.36%
|
|
Selling, General and Administrative
|
|
|
14.17%
|
|
|
|
18.03%
|
|
Interest Expense
|
|
|
0.26%
|
|
|
|
0.15%
|
|
Depreciation and amortization
|
|
|
1.43%
|
|
|
|
1.95%
|
|
|
|
|
|
|
|
|
|
|
TOTAL COSTS AND EXPENSES
|
|
|
73.29%
|
|
|
|
84.49%
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
26.71%
|
|
|
|
15.51%
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
0.04%
|
|
|
|
0.01%
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
26.75%
|
|
|
|
15.52%
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(8.27%
|
)
|
|
|
(7.09%
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
18.48%
|
|
|
|
8.43%
|
|
|
|
|
|
|
|
|
|
|
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Comparative Analysis-Nine Months Ended December 28, 2018 and
December 29, 2017
(continued)
Results of Operations
(continued)
Operating revenues for the nine months ended December 28, 2018 amounted
to $21,619,017 reflecting an 32.76% increase versus $16,283,973 for the nine months ended December 29, 2017. The increase in revenues
of $5,335,044 can be attributed to increased marketing efforts and sales management support along with successful penetration into
new markets and continued cultivation of our existing customer base.
The results of this nine month period ending December 28, 2018 reflect
the completion of a large customer contract which was fulfilled by the end of the first fiscal quarter. Our reasonable expectation
at this time is that this customer’s business will not be repetitive and accordingly there can be no assurance that the operating
revenues in future fiscal quarters will equal or exceed the results of the first fiscal quarter.
Cost of products sold were $12,415,830 for the nine months ended
December 28, 2018 or 57.43% of operating revenues. This reflected an increase of $1,934,701 or 18.46% in the cost of products sold
from $10,481,129 or 64.36% of operating revenues for the nine months ended December 29, 2017. The increase in cost of products
sold can be attributed to increased production costs necessary to support the increase in sales.
Selling, general and administrative expenses were $3,063,345 or
14.17% of operating revenues for the nine months ended
December 28, 2018 compared to $2,961,572 or 18.03% of operating
revenues. This comparative increase of $101,773 can be attributed to the Company’s efforts to better control expenses.
Interest expense was $56,456 for the nine months ended December
28, 2018 or 0.26% of operating revenues. For the nine months ended December 29, 2017, interest expense was $25,095 or 0.15% of
operating revenues. The increase can be attributed to an increase in borrowing from our commercial financial company during the
current nine-month period.
Depreciation and amortization of $309,600 or 1.43% of operating
revenues was reported for the nine months ended December 28, 2018 as compared to $317,900 or 1.95% of operating revenues for the
nine months ended December 29, 2017.
The Company reported net income of $3,994,469 for the nine months
ended December 28, 2018 as compared to net income of $1,345,191as restated for the nine months ended December 29, 2017. The increase
in net income for the current nine-month period can be attributed primarily to the increase in operating revenues for the current
nine-month period.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Comparative Analysis-Three Months Ended December 28, 2018 and
December 29, 2017
Results of Operations
The following table sets forth for the periods indicated, percentages
for certain items reflected in the financial data as such items relate to the revenues of the Company:
|
|
|
|
Relationship to Total Revenues
|
|
December 28,
|
|
|
December 29,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Operating Revenues (in thousands)
|
|
$
|
5,978
|
|
|
$
|
5,233
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
(as a percentage of Operating Revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Products Sold
|
|
|
63.40%
|
|
|
|
66.96%
|
|
Selling, General and Administrative
|
|
|
16.48%
|
|
|
|
17.32%
|
|
Interest Expense
|
|
|
0.68%
|
|
|
|
0.16%
|
|
Depreciation and amortization
|
|
|
1.41%
|
|
|
|
2.01%
|
|
|
|
|
|
|
|
|
|
|
TOTAL COSTS AND EXPENSES
|
|
|
81.97%
|
|
|
|
86.45%
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
18.03%
|
|
|
|
13.55%
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
0.09%
|
|
|
|
0.01%
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
18.12%
|
|
|
|
13.56%
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(4.92%
|
)
|
|
|
(4.43%
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
13.20%
|
|
|
|
9.13%
|
|
Operating revenues for the three months ended December 28, 2018
amounted to $5,977,835 reflecting an 14.24% increase versus $5,232,733 for the three months ended December 29, 2017. The increase
in revenues of $745,102 can be attributed to increased marketing efforts and sales management support along with successful penetration
into new markets and continued cultivation of our existing customer base.
Cost of products sold were $3,790,188 for the three months ended
December 28, 2018 or 63.40% of operating revenues. This reflected an increase of $286,544 or 8.18% in the cost of products sold
from $3,503,644 or 66.96% of operating revenues for the three months ended December 29, 2017. The increase in cost of products
sold can be attributed to increased production costs necessary to support the increase in sales.
Selling, general and administrative expenses were $985,043 or 16.48%
of operating revenues for the three months ended
December 28, 2018 compared to $909,348 or 17.32% of operating revenues.
This minor comparative increase of $75,695 can be attributed to the Company’s efforts to better control expenses.
Interest expense was $40,904 for the three months ended December
28, 2018 or 1.41% of operating revenues. For the three months ended December 29, 2017, interest expense was $8,457 or 0.16% of
operating revenues. The increase can be attributed to an increase in borrowing from our commercial financial company during the
current three-month period.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Comparative Analysis-Three Months Ended December 28, 2018 and
December 29, 2017
(continued)
Results of Operations
(continued)
Depreciation and amortization of $84,000 or 1.41% of operating revenues
was reported for the three months ended
December 28, 2018 as compared to $105,300 or 2.01% of operating
revenues for the three months ended December 29, 2017.
The Company reported net income of $788,880 for the three months
ended December 28, 2018 as compared to net income of $474,908 for the three months ended December 29, 2017. The increase in net
income for the current three-month period can be attributed primarily to the increase in operating revenues for the current period.
Liquidity and Capital Resources
The Company reported working capital of $18,754,355 as of December
28, 2018, compared to a working capital of $14,951,572 as of March 30, 2018. The increase in working capital of $3,802,783 was
attributable to the following items:
Net income
|
|
$
|
3,994,469
|
|
Depreciation and amortization
|
|
|
309,600
|
|
Capital expenditures
|
|
|
(528,088
|
)
|
Recognition of stock compensation expense
|
|
|
26,802
|
|
|
|
$
|
3,802,783
|
|
As a result of the above, the current ratio (current assets to current
liabilities) was 7.72 to 1 at December 28, 2018 as compared to 7.56 to 1 at March 30, 2018. Current liabilities at December 28,
2018 were $2,791,360 compared to $2,280,760 at March 30, 2018.
For the nine months ended December 28, 2018, the Company reported
$528,088 in capital expenditures and depreciation and amortization of $309,600.
The net income of $3,994,469 for the nine months ended December
28, 2018 resulted in an increase in total shareholders’ equity to $21,093,487.
The Company has an accounts receivable financing agreement with
a commercial finance company whereby it can borrow up to 80 percent of its eligible receivables (as defined in the financing agreement)
at an interest rate of 2.5% above JP Morgan Chase’s publicly announced prime rate with a minimum rate of 6% per annum.
The financing agreement has an initial term of one year and will
automatically renew for successive one-year terms, unless terminated by the Company or its lender upon receiving 60 days’
prior notice.
As of December 28, 2018, the Company had reported a liability to
the commercial finance company of $228,757. As of March 30, 2018, the Company had reported excess payments to the commercial finance
company of $154,960. These excess payments are reported in the accompanying financial statements as of March 30, 2018 as “Excess
payments to commercial finance company.”
In the past two fiscal years, management has been reviewing
its collection practices and policies for outstanding receivables and has revised its collection procedures to a more
aggressive collection policy. As a consequence of this new policy the Company’s experience is that its customers
have been remitting payments on a more consistent and timely basis. The Company reviews the collectability of all accounts
receivable on a monthly basis. The allowance for doubtful accounts that was less than 2% of average gross
accounts receivable was no longer considered necessary as the company has no uncollectible accounts.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Liquidity and Capital Resources
The Company has the Multi-Employer Plan with the UAW. Contributions
are made by the Company in accordance with a negotiated labor contract and are based on the number of covered employees employed
per month. Generally, these liabilities are contingent upon the termination, withdrawal, or partial withdrawal from the Multi-Employer
Plan. The Company has not taken any action to terminate, withdraw or partially withdraw from the Multi-Employer Plan, nor does
it intend to do so in the future. Under the 1990 Act, liabilities would be based upon the Company’s proportional share of
the Multi-Employer Plan’s unfunded vested benefits. Based upon such Plan’s information and data as of December 31,
2016 furnished to the Company (including, without limitation, unfunded vested benefits, accumulated benefits and net assets), such
Plan is fully funded. Based thereupon, the Company’s proportional share of the liability through December 31, 2016 is fully
funded. The Multi-Employer Plan’s information and data for such Plan’s years ending December 31, 2017 and December
31, 2018 are not yet available to the Company. As of the date hereof, the Company expects that its proportional share of the 2017
liability will also be fully funded. The total contributions charged to operations under the provisions of the Multi-Employer Plan
were $50,153 and $111,038 for the nine months ended December 28, 2018 and December 29, 2017, respectively.
Stock Option Plan
On August 31, 2011, the Company’s shareholders approved the
adoption of the Company’s 2011 Equity Incentive Plan (“2011 Plan”) to provide for the grant of stock options
and restricted stock awards to purchase up to 750,000 shares of the Company’s common stock to all employees, consultants
and other eligible participants including senior management and members of the Board of Directors of the Company. The 2011 Plan
replaced the prior 2002 Employee Stock Option Plan which had expired on its terms.
Options granted to employees under the 2011 Plan may be designated
as options which qualify for incentive stock option treatment under Section 422A of the Internal Revenue Code, or options which
do not qualify (non-qualified stock options).
Under the 2011 Plan, the exercise price of an option designated
as an incentive stock option shall not be less than the fair market value of the Company’s common stock on the day the option
is granted. In the event an option designated as an incentive stock option is granted to a ten percent (10%) or greater shareholder,
such exercise price shall be at least 110 percent (110%) of the fair market value of the Company’s common stock and the option
must not be exercisable after the expiration of five years from the day of the grant. The 2011 Plan also provides that holders
of options that wish to pay for the exercise price of their options with shares of the Company’s common stock must have beneficially
owned such stock for at least nine months prior to the exercise date.
Exercise prices of non-incentive stock options may be less than
the fair market value of the Company’s common stock. The aggregate fair market value of shares subject to options granted
to a participant(s), which are designated as incentive stock options, and which become exercisable in any calendar year, shall
not exceed $100,000.
On July 1, 2015, our Board of Directors granted 245,000 options
to purchase shares of the Company’s common stock under the 2011 Plan as follows: (i) Michael Offerman, our then Chief Executive
Officer, was granted 75,000 options; (ii) Robert Knoth, our Chief Financial Officer, was granted 50,000 options; (iii) four non-executive
officer key employees were granted 110,000 options; and (iv) each of our non-management directors, Allen Gottlieb and Gerald Chafetz,
were granted 5,000 options. The stock options: (i) have a ten-year term; (ii) have an exercise price equal to the value of the
Company’s common stock on the date of grant; and (iii) were all immediately vested. The options granted to Michael Offerman
has an exercise price equal to 110% of such value because he owned ten percent (10%) or greater of the Company’s outstanding
common stock. In the event of the termination of each recipient’s employment by, or association with, the Company (as applicable),
the options will remain exercisable in accordance with the terms of the 2011 Plan.
Effective July 15, 2016, the Board of Directors of the Company unanimously
voted to increase the number of directors from three to six directors and elected David Offerman as a Class II director and Dr.
Sonia Marciano and Eric C. Hugel as Class I Directors.
Effective August 15, 2016, the Board of Directors also approved
the granting of stock options to purchase shares of the Company’s common stock under the 2011 Plan to each of Dr. Marciano
and Mr. Hugel as follows: Each of the new non-management directors will receive a grant of options totalling 5,000 shares each
subject to the following vesting schedule: (i) 1,000 shares vested immediately (August 15, 2016); (ii) 2,000 shares vested on August
15, 2017; and (iii) 2,000 shares vested on August 15, 2018.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Liquidity and Capital Resources
(continued)
Stock Option Plan
(continued)
The stock options (i) have a ten-year term; and (ii) have an
exercise price equal to the value of the Company’s common stock on the date of grant. In the event of the termination
of each recipient’s association with the Company, the options will remain exercisable in accordance with the terms of
the 2011 Plan.
On September 7, 2018, the Board of Directors elected Michael E.
Rosenfeld to the Board of Directors to fill the vacancy of a Class I Director of the Company created by the death of the Company’s
then President and Chief Executive Officer, Michael Offerman. Such appointment became effective on October 26, 2018.
At the same time, the Board of Directors also approved the granting
of stock options to purchase shares of the Company’s common stock under the 2011 Plan to Mr. Rosenfeld as follows: He will
receive a grant of options totalling 5,000 shares each subject to the following vesting schedule: (i) 1,000 shares vested on October
26, 2018; (ii) 2,000 shares will vest on October 26, 2019; and (iii) 2,000 shares will vest on October 26, 2020. The stock options:
(i) have a ten-year term; and (ii) have an exercise price equal to the value of the Company’s common stock on the date of
grant. In the event of the termination of each recipient’s association with the Company, the options will remain exercisable
in accordance with the terms of the 2011 Plan.
Stock Option Plan
(continued)
Name
|
|
Stock Option Grants*
|
|
David Offerman
|
|
|
50,000
|
|
Robert Knoth
|
|
|
50,000
|
|
Allen Gottlieb
|
|
|
5,000
|
|
Gerald Chafetz
|
|
|
5,000
|
|
Sonia Marciano
|
|
|
5,000
|
|
Eric Hugel
|
|
|
5,000
|
|
Michael E. Rosenfeld
|
|
|
5,000
|
*
|
*Options for 1,000 shares were vested on October 26,
2018 and options for 4,000 shares have not yet vested. 2,000 shares shall vest on October 26, 2019 and 2,000 shares shall vest
on October 26, 2020.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Liquidity and Capital Resources
(continued)
Stock Option Plan
(continued)
The following table shows the option activity for the
fiscal year ended March 30, 2018 and the current nine months ended December 28, 2018.
Stock-based compensation expense
:
Stock-based compensation expense, shown in the table below,
is recorded in general and administrative expenses included in our statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended
|
|
|
Nine months
ended
|
|
|
Quarter ended
|
|
|
Quarter ended
Dec 29, 2017
|
|
|
|
Ref
|
|
|
Dec 28, 2018
(in thousands)
|
|
|
Dec 29,2017
(in thousands)
|
|
|
Dec 28, 2018
(in thousands)
|
|
|
(in thousands)
(restated)
|
|
IEH employees
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-employee directors
|
|
|
|
|
|
|
27
|
|
|
|
25
|
|
|
|
21
|
|
|
|
3
|
|
Total stock compensation expense
|
|
|
(a)
|
|
|
$
|
27
|
|
|
$
|
25
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
(a):
|
The Company reported compensation expense of $2,798 during the quarter
ended December 28, 2018 and $2,798 during the quarter ended December 29, 2017 resulting from stock options granted on August 15,
2016.
The Company also reported compensation expense of $18,408
during the quarter ended December 28, 2018 resulting from stock options granted on October 26, 2018.
|
Unrecognized stock-based compensation expense
:
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
As of
|
|
|
December 29, 2017
|
|
|
|
Ref
|
|
|
December 28, 2018
(in thousands)
|
|
|
(in thousands)
(restated)
|
|
Unrecognized expense for IEH employees
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Unrecognized expense for Non-employee directors
|
|
|
|
|
|
|
51
|
|
|
|
16
|
|
Total unrecognized expense
|
|
|
(b)
|
|
|
$
|
51
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b):
|
Unrecognized stock-based compensation expense related to prior years’ equity grants of stock options to non-employee directors, that had not vested as of the end of the applicable fiscal year.
|
Note
: Stock option grants to IEH officers, directors
and key employees in the fiscal years ended March 30, 2018 and March 31, 2017 were valued using a Black-Scholes model, under the
following criteria:
|
|
March 30, 2018
|
|
|
March 31, 2017
|
|
Risk free interest rate
|
|
|
2.09%
|
|
|
|
1.88%
|
|
Contractual term
|
|
|
10 years
|
|
|
|
10 years
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected lives
|
|
|
10 years
|
|
|
|
10 years
|
|
Expected volatility
|
|
|
64%
|
|
|
|
56%
|
|
Fair value per option
|
|
$
|
5.85
|
|
|
$
|
6.00
|
|
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Liquidity and Capital Resources
(continued)
Stock Option Plan
(continued)
The following table shows the activity for the fiscal years ended
March 30, 2018 and March 31, 2017 and through December 28, 2018.
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
(in thousands)
|
|
Outstanding at the Beginning of the Year
|
|
|
3/25/2016
|
|
|
|
245,000
|
|
|
$
|
6.18
|
|
|
|
9.27
|
|
|
$
|
—
|
|
Granted
|
|
|
8/15/2016
|
|
|
|
10,000
|
|
|
$
|
5.30
|
|
|
|
10.00
|
|
|
|
—
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Year
|
|
|
3/31/2017
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.82
|
|
|
$
|
87
|
|
Fully Vested
|
|
|
|
|
|
|
247,000
|
|
|
$
|
6.05
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 2017
|
|
|
|
|
|
|
247,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Year
|
|
|
3/31/2017
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.82
|
|
|
$
|
87
|
|
Granted
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Year
|
|
|
3/30/2018
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.07
|
|
|
$
|
702
|
|
Fully Vested
|
|
|
|
|
|
|
251,000
|
|
|
$
|
6.02
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Year
March 30, 2018
|
|
|
|
|
|
|
251,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Year
|
|
|
3/30/2018
|
|
|
|
255,000
|
|
|
$
|
6.15
|
|
|
|
8.07
|
|
|
$
|
702
|
|
Granted
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Quarter
|
|
|
6/29/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.57
|
|
|
$
|
666
|
|
Fully Vested
|
|
|
|
|
|
|
176,000
|
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Year
December 28, 2018
|
|
|
|
|
|
|
176,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Quarter
|
|
|
6/29/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.57
|
|
|
$
|
666
|
|
Granted
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Quarter
|
|
|
9/28/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.32
|
|
|
$
|
1,393
|
|
Fully Vested
|
|
|
|
|
|
|
180,000
|
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Quarter
December 28, 2018
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Liquidity and Capital Resources
(continued)
Stock Option Plan
(continued)
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)))
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the Beginning of the Quarter
|
|
|
9/28/2018
|
|
|
|
180,000
|
|
|
$
|
6.04
|
|
|
|
7.57
|
|
|
$
|
1,393
|
|
Granted
|
|
|
10/26/2018
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the End of the Quarter
|
|
|
12/28/2018
|
|
|
|
185,000
|
|
|
$
|
6.02
|
|
|
|
7.99
|
|
|
$
|
1,518
|
|
Fully Vested
|
|
|
|
|
|
|
181,000
|
|
|
$
|
5.88
|
|
|
|
|
|
|
|
|
|
Exercisable at the End of the Quarter
December 28, 2018
|
|
|
|
|
|
|
185,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the
period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders
exercised their in-the-money options on those dates. This amount will change based on the fair market value of the Company’s
common stock.
Cash Bonus Plan
In 1987, the Company adopted the Cash Bonus Plan for non-union,
management and administrative staff. Contributions to the Cash Bonus Plan are made by the Company only when the Company is profitable
for the fiscal year. The Company accrued a contribution provision of $243,000 for the nine months ended December 28, 2018. For
the fiscal year ended March 30, 2018, the Company’s contribution was $324,000.
|
Item 4.
|
Controls and Procedures
|
Evaluations of Disclosure Controls and Procedures
Under the supervision and with the participation of
our management including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rule 13a-15e and 15d-15e) under the Exchange
Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures throughout the period
covered by this report were effective. As described below, they determined that deficiencies that were previously identified
with respect to prior periods were corrected. These deficiencies included how the information required to be disclosed by us
in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms; and (ii) accumulated and communicated to our management to allow for timely
decisions regarding disclosure. The deficiencies in our internal controls over financial reporting and disclosure controls
related to the expertise of recording complex accounting issues with respect to stock-based compensation expense.
A controls system cannot provide absolute assurance, however, that
the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
Management previously determined following the filing of the Company’s
Annual Report on Form 10-K for the fiscal year ended March 30, 2018 that as of March 30, 2018, there were material weaknesses in
both the design and effectiveness of our internal controls over financial reporting. A material weakness is a deficiency, or a
combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, these
weaknesses related to the analysis and reporting of stock-based compensation expense. Additionally, the Company did not report
fully diluted earnings per share for the year ended March 30, 2018.
Following the filing of the Company’s Annual Report on Form
10-K, the Company filed Amendment No. 1 to Form 10-K to report properly stock-based compensation and fully diluted earnings per
share for the year ended March 30, 2018.
Management immediately thereafter undertook steps to
correct these past deficiencies in its system of internal controls over financial reporting and implemented procedures to
closely monitor its system of internal controls in the future. Specifically, management implemented protocols to report
properly in all future quarterly and annual reports stock-based compensation and fully diluted earnings per share. The
Company started properly reporting stock-based compensation in the Company’s Annual Report on Form 10-K for the fiscal
year ended March 30, 2018 and in the Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2018 properly
reported stock-based compensation and fully diluted earnings per share.
In addition, management recommended to the Board of Directors
to form an audit committee of the Board which will be responsible to review: (i) all financial reports of the Company
including, without limitation, the audited and unaudited financial statements of the Company, as applicable; and (ii)
periodically review our disclosure controls and internal controls over financial reporting. The audit committee will also be
authorized to investigate and make recommendations to the Board to implement any necessary system of internal controls over
financial reporting to prevent any future deficiency in the internal controls over financial reporting. The audit committee
will be comprised of at least three (3) independent directors of the Company.
In making this recommendation management
believed that these changes were reasonably likely to affect materially and positively the Company’s internal controls
over financial reporting. At its meeting on November 27, 2018, the Board of the Directors approved formation of the audit
committee and appointed the following directors to the audit committee: Eric Hugel, Michael Rosenfeld and Allen Gottlieb.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
|
Item 4.
|
Controls and Procedures
(continued
)
|
Management’s Report on Internal Control over Financial
Reporting
Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal controls over financial reporting is a process
designed by, or under the supervision of our principal executive officer and principal financial officer, or persons performing
similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal controls over financial reporting includes those policies and procedures
that:
(i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; and
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the Company; and
(iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect
on the financial statements.
Management, including our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 28, 2018.
In making this evaluation, management used the framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). As stated above, based on our evaluation under the framework in
Internal Control—Integrated Framework, our management has concluded that our internal controls over financial reporting,
as amended, are effective as of March 30, 2018 and December 28, 2018.
This Quarterly Report on Form 10-Q does not include an attestation
report of our independent registered public accounting firm regarding our internal control over financial reporting. Management’s
report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit
us to provide only management’s report in this Annual Report.
Because of its inherent limitations, internal controls
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
As stated above, management previously undertook steps
to correct the deficiencies in our system of internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)
under the Exchange Act) which have now been in effect for the Company’s first three quarters of the Company’s current
fiscal year. As described above, the Board of Directors approved the formation of an audit committee and appointed three (3) independent
directors to the audit committee.
Inherent Limitations on Effectiveness of Controls
We do not expect that internal controls over financial
reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs.
Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within its company
have been detected. These inherent limitations include the realities that
IEH CORPORATION
PART I: FINANCIAL INFORMATION
|
Item 4.
|
Controls and Procedures
(continued
)
|
Inherent Limitations on Effectiveness of Controls
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the controls.
The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Other Information Related to Internal
Controls
Additionally, in response to the passage of the Sarbanes-Oxley Act
of 2002, our Board of Directors and management have adopted a Code of Ethics and have instituted a periodic review by members of
our management team to assist and guide the disclosure process. The Board has also determined to periodically review and develop
policies and procedures to enhance our disclosure controls and procedures as well as with reviewing our periodic reports and other
public disclosures
.
IEH CORPORATION