IEHC IEH Corporation (PK)

 NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 Original Equipment Manufacturers (“OEMs”), 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.

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.

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.

Basis of Presentation

The accompanying unaudited financial statements for the three and nine months ended December 31, 2019 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, these 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 31, 2019 and the results of operations and cash flows for the three and 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 three and nine months ended December 31, 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.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Accounting Period: 

On February 11, 2020, the Audit Committee of the Board of Directors of the Company adopted a resolution approving a change in the fiscal year end from a 52-53 week year ending on the last Friday of March to a calendar year ending on March 31. In addition, each applicable fiscal quarter, which previously ended on the last Friday of each of June, September, December and March would now, beginning with the third fiscal quarter ending on December 31, 2019, change to a calendar fiscal quarter ending on June 30, September 30, December and March 31, respectively. Accordingly, the Company’s current calendar year will end on March 31, 2020 and thereafter each March 31. The Company does not intend to adjust operating results for prior periods.

Correction of an Immaterial Misstatement in a Prior Period Financial Statement:

During the third quarter of 2019, the Company identified certain adjustments required to correct and disclose stock based compensation expense related to an option that was granted to its President and Chief Executive Officer on July 29, 2019. The Company had omitted the disclosure and expense related to this option. This omission resulted in an understatement of selling, general and administrative expense of $884,667 for the three and six months ended September 27, 2019, and overstatement of income tax expense by $396,911 for the three and six months ended September 27, 2019 and an overstatement of net income by $487,756 for the three and six months ended September 27, 2019.

Based on an analysis of Accounting Standards Codification (“ASC”) 250 – “Accounting Changes and Error Corrections” (“ASC 250”), Staff Accounting Bulletin 99 – “Materiality” (“SAB 99”) and Staff Accounting Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the Company determined that these errors were immaterial to the previously issued financial statements, and as such no restatement was necessary. Correcting prior period financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior period financial statements. Accordingly, the misstatements were corrected during the period ended December 31, 2019 in the accompanying balance sheet as of December 31, 2019 and statements of operations for the nine months ended December 31, 2019.

The effect of these revisions on the Company’s balance sheet as of September 27, 2019 is as follows:

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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’s disaggregated revenue, as of December 31, 2019 and December 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.

Concentration of Credit Risk:

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash 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. The Company does maintain cash balances in excess of insured limits.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 nine months ended December 31, 2019 and December 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, the fair value of stock based instruments as well as in the calculation of inventory obsolescence. Actual amounts could differ from those estimates.

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 generally recognized ratably over the vesting period of the award. The fair value of stock options is estimated using a Black-Scholes valuation model. The fair value of any other 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 2016-02 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.

The Company leases space for its corporate offices and its manufacturing facility located at 140 58^th Street, Suite 8 E, Brooklyn, New York. The lease commenced on December 1, 2010 and expires on November 30, 2020.

Presented below are the balances of the ROU asset and the corresponding deferred lease liability and resultant amortization as of December 31, 2019 and March 30, 2019. The present value of the ROU was calculated using an interest rate of six (6%) percent.

IEH CORPORATION

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(Unaudited)

Leases: (continued)

 Future lease commitments as of December 31, 2019 were as follows:

The Company recognized $162,000 for the nine months ended December 31, 2019 and December 28, 2018, respectively, as a reduction of inventory due to obsolescence. The Company recognized $54,000 for the three months ended December 31, 2019 and December 28, 2018, respectively, as a reduction of inventory due to obsolescence.

 IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Property, plant and equipment were comprised of the following as of:

Depreciation expense for the nine months ended December 31, 2019 and December 28, 2018 was $697,717 and $309,600, respectively. Depreciation expense for the three months ended December 31, 2019 and December 28, 2018 was $237,764 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 Financing Company are secured by IEH’s accounts receivable.

As of December 31, 2019, the Company reported a liability to its Financing Company of $381,871, and at March 29, 2019, the Company had reported a liability to its Financing Company of $334,306. 

 IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

The Company established a stock based compensation plan in 2011. As of December 31, 2019, the total authorized stock based instruments (including stock options) was 750,000 and 255,000 stock based instruments (including stock options) remain available for future issuance.

On July 29, 2019, the Board of Directors granted David Offerman, the Company’s President and Chief Executive Officer an option to purchase 225,000 shares of the Company’s common stock under the 2011 Equity Incentive Plan, in connection with his employment agreement dated as of July 29, 2019. (See Note 2 – Correction of an Immaterial Misstatement in a Prior Period Financial Statement). The option has an exercise price of $20.00 per share, expires ten years from the date of grant, and vests in three equal annual installments of 75,000 options each, with the first vesting installment occurring on the date of grant. The option had a fair value on the date of grant of $2,274,858.

The Company determined the fair value of the stock option grant based upon the assumptions as provided below:

The following table summarizes the option activity for the nine months ended December 31, 2019:

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock at December 31, 2019.

As of December 31, 2019 there was a total of $1,200,620 of unrecognized compensation expense related to unamortized stock options. This cost is expected to be recognized through 2021 over a weighted average period of 1.59 years.   

The Company’s stock based compensation expense was $260,491 and $1,159,284 during the three and nine months ended December 31, 2019 and $21,206 and $26,802 during the three and nine months ended December 28, 2018.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

During the quarter ended September 27, 2019, three individuals opted to exercise some of their options, including 3,783 of such options exercised by the Company’s Chief Executive Officer by means of a cashless exercise using 1,000 previously issued shares of the Company’s common stock. During the quarter ended December 31, 2019, five individuals opted to exercise some of their options. Consequently, the issued and outstanding number of shares of the Company’s common stock increased by 28,500 shares to 2,360,251 shares. During the quarter ended December 31, 2019, 10,000 options were granted to a senior employee of the Company. For the nine months ended December 31, 2019, a total of 235,000 options were granted including 225,000 options granted to the Company’s Chief Executive Officer.

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 December 31, 2019 and December 28, 2018. The Company accrued a contribution provision of $243,000 for the nine months ended December 31, 2019 and the nine months ended December 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 $9,497 and $13,105 for the three months ended December 31, 2019 and December 28, 2018, respectively, and $36,255 and $50,153 for the nine months ended December 31, 2019 and December 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.

During the three months ended December 31, 2019, two customers accounted for $2,548,988 constituting approximately 30% of the Company’s net sales. One of those customers accounted for approximately 17% of the Company’s net sales while the second customer accounted for approximately 13% of the Company’s net sales. During the three months ended December 28, 2018 one customer accounted for $1,002,255 constituting approximately 17% of the Company’s net sales. During the nine months ended December 31, 2019, three customers accounted for $9,189,430 or approximately 39% of the Company’s net sales. One of those customers accounted for approximately 15% of the Company’s net sales while the second and third customers accounted for approximately 13% and 11% of the Company’s net sales, respectively. During the nine months ended December 28, 2018, three customers accounted for $8,102,144 or approximately 38% of the Company’s net sales. One of the customers accounted for approximately 14% of the Company’s net sales while the second and third customers accounted for approximately 13% and 11% of the Company’s net sales, respectively.

IEH CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2019, two customers represented approximately 19% and 14%, respectively, of the Company’s account receivables. As of March 29, 2019, one customer represented approximately 24% of the Company’s account receivables. There was no concentration for purchases.