IEHC IEH Corporation (PK)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited financial statements as of September 27, 2019 and for the three and six 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 September 27, 2019 and the results of operations and cash flows for the three and six 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 three and six months ended September 27, 2019, are not necessarily indicative of the results to be expected for any subsequent quarter or the entire fiscal year. The balance sheet at March 29, 2019 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 29, 2019 included in the Company’s Annual Report on Form 10-K as filed with the SEC on July 12, 2019 and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 connectors utilize the HYPERBOLOID contact design, a rugged, high-reliability contact system ideally suited for high-stress environments. We believe we are the only independent producer of HYPERBOLOID printed circuit board connectors 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 and distributors located in all regions of the United States, Canada, Israel, India, various Pacific Rim countries, South Korea and the European Union.

The customers we service are in the Military, Aerospace, Space, Medical, Oil & 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 electronic (inclusive of aerospace, space, oil & gas, medical & miscellaneous) and military markets were 49.9% and 50.1%, respectively, of the Company’s net sales for the year ended March 29, 2019. 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 29, 2019, 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)

Business New Product Development:

The Company 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 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 29, 2019 was comprised of 52 weeks. The current fiscal year, ending on March 27, 2020, will be comprised of 52 weeks.

Revenue Recognition:

In May 2014, the Financial Accounting Standards Board issued ASC 606 “Revenue from Contracts with Customers” that, as amended on August 12, 2015, became effective for annual report periods beginning after December 15, 2017.

The core principle underlying ASC 606, is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASC 606-10-05-4 sets out the following steps for an entity to follow when applying the core principle to its revenue -generating transactions:

The Company designs, develops and manufactures printed circuit board connectors and custom interconnects for high performance applications. All of our connectors utilize the HYPERBOLOID contact design, a rugged, high-reliability contact system ideally suited for high-stress environments.

The customers we service are in the Military, Aerospace, Space, Medical, Oil and Gas, Industrial, Test Equipment and Commercial Electronics markets.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Revenue Recognition: (continued)

The Company’s disaggregated revenue, as of September 27, 2019 and September 28, 2018, respectively, by geographical location is as follows:

The Company does not offer any discounts, credits or other sales incentives. Historically, the Company has not had an issue with uncollectible accounts receivable.

The Company will accept a return of defective products 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 Company provides engineering services as part of the relationship with its customers in developing custom products. 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 net realizable 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 three 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. The Company recognized $108,000 for the six months ended September 27, 2019 and September 28, 2018, respectively, as a reduction of inventory due to obsolescence.

Concentration of Credit Risk:

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Concentration of Credit Risk: (continued)

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. The Company does maintain cash balances in excess of insured limits.

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.

 Earnings Per Share:

The Company accounts for earnings per share pursuant to ASC Topic 260, “Earnings per Share”, which requires disclosure on the Financial Statements of “basic” and “diluted” earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the year. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options for each year. As the Company reported net income for both the three months and six months ended September 27, 2019 and September 28, 2018, respectively, basic and diluted income per share are calculated separately as follows:

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited) 

Fair Value of Financial Instruments:

The carrying value of the Company’s financial instruments approximate their fair value due to the relatively short maturity 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. The Company utilizes estimates with respect to determining the useful lives of fixed assets as well as in the calculation of inventory obsolescence. Actual amounts could differ from those estimates.

Impairment of Long-Lived Assets:

The Company has adopted the provisions of ASC Topic 360, “Property, Plant and Equipment-Impairment or Disposal of Long Lived Assets,” and requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no long-lived asset impairments recognized by the Company for the six months ended September 27, 2019 and September 28, 2018, respectively, and currently all assets are being utilized.

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.

Leases:

ASC 2016-02 Leases (Topic 842) – In February 2016, the FASB issued ASC 2016-02, which requires lessees to recognize all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating leases or finance leases. The classification is based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Accordingly, we have adopted ASC 2016-2 as of March 30, 2019.

On our balance sheet operating leases are reported as operating lease right-of-use (“ROU”) assets and deferred lease liabilities. ROU assets represent our right to use an underlying asset for the lease term and deferred lease liabilities represent our obligation to make lease payments over time arising from the lease. Operating lease ROU assets and deferred lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our contracted leases do not provide an implicit rate, we do use an incremental borrowing rate based on the information available at the transition date and commencement date in determining the present value of lease payments. This is the rate that we would have to pay if borrowing on a collateralized basis over a similar term to each lease. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Leases: (continued)

The Company leases space for its corporate offices and its manufacturing facility located at 140 58^th Street, Suite 8E, Brooklyn New York. The lease commenced on December 1, 2010 and expires on November 30, 2020. As of September 27, 2019, there remains 14 payments on this lease.

Presented below are the balances of ROU asset and the corresponding deferred lease liability and resultant amortization as of March 30, 2019 and September 27, 2019. The present value was calculated using an interest rate of six (6%) percent.

Future lease commitments to be paid by us as of September 27, 2019 were as follows:

(a) Represents the remainder of fiscal year 2020 which excludes the six months ended September 27, 2019.

 IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Depreciation expense for the six months ended September 27, 2019 and September 28, 2018 was $459,953 and $225,600, respectively. Depreciation expense for the three months ended September 27, 2019 and September 28, 2018 was $223,333 and $84,000, respectively.

The Company has an accounts receivable financing agreement with a non-bank lending institution (“Financing 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 its lender upon receiving 60 days’ prior notice. Funds advanced by the Finance Company are secured by IEH’s accounts receivable and inventories.

As of September 27, 2019, the Company reported excess payments to its Finance Company of $608,666. These excess payments are reported in the accompanying condensed Financial Statements as of September 27, 2019 as “Excess payments to commercial finance company.” As of March 29, 2019, the Company had reported a liability to its commercial finance company of $334,306. 

 IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Stock-based compensation expense:

The Company reported compensation expense of $5,664 and $14,126 during the three and six months ended September 27, 2019 and $2,398 and $5,596 during the three and six months ended September 28, 2018.

Unrecognized stock-based compensation expense:

The Company expects to recognize $25,454 in stock option compensation expense for the entire fiscal year ended March 2020 and $16,992 for the entire fiscal year ended March 2021.

The following table shows the activity for the fiscal years ended March 29, 2019 and March 30, 2018 and through September 27, 2019:

 IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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.

During the quarter ended September 27, 2019, three individuals opted to exercise some of their options, consequently, the issued and outstanding number of shares increased by 8,283 shares (9,283 shares exercised less 1,000 issued and outstanding shares surrendered) to 2,331,751 shares.

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 of $81,000 for each of the three months ended September 27, 2019 and September 28, 2018. The Company accrued a contribution provision of $162,000 for the six months ended September 27, 2019 and the six months ended September 28, 2018.

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.

Based upon such Plan’s information and data as of December 31, 2018 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, 2018 is fully funded. The total contributions charged to operations under the provisions of the Multi-Employer Plan were $13,329 and $24,837 for the three months ended September 29, 2019 and September 28, 2018, respectively and $26,759 and $37,042 for the six months ended September 27, 2019 and September 28, 2018, respectively. 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.

The income tax provision for three months ended September 27, 2019 and the three months ended September 28, 2018 reflect effective tax rates of 34.6% and 33.7% respectively. The Company’s effective tax rate for the six months ended September 27, 2019 and September 28, 2018 reflect effective tax rates of 34.6% and 31.8% respectively.

During the three months ended September 29, 2019, two customers accounted for $2,247,968 constituting 30% of the Company’s net sales. One of those customers accounted for 16% of the Company’s net sales while the second customer accounted for 14% of the Company’s net sales. During the three months ended September 28, 2018 one customer accounted for $1,065,411 constituting 16% of the Company’s net sales. During the six months ended September 27, 2019, three customers accounted for $5,729,924 or 38% of the Company’s net sales. One of those customers accounted for 16% of the Company’s net sales while the second and third customers accounted for 12% and 10% of the Company’s net sales respectively.

 IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

During the six months ended September 28, 2018, three customers accounted for $6,096,486 or 39% of the Company’s net sales. One of the customers accounted for 15% of the Company’s net sales while the other two accounted for 12% each of the Company’s net sales, respectively.