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.
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)
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.
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.
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.
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)
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 six months ended September 28, 2018 and September 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.
Comparative Analysis-Six Months Ended September 28, 2018 and
September 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
|
|
September 28,
|
|
|
September 29,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating Revenues (in thousands)
|
|
$
|
15,641
|
|
|
$
|
11,051
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
(as a percentage of Operating Revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Products Sold
|
|
|
55.15%
|
|
|
|
63.14%
|
|
Selling, General and Administrative
|
|
|
13.28%
|
|
|
|
18.37%
|
|
Interest Expense
|
|
|
.10%
|
|
|
|
.15%
|
|
Depreciation and amortization
|
|
|
1.44%
|
|
|
|
1.92%
|
|
|
|
|
|
|
|
|
|
|
TOTAL COSTS AND EXPENSES
|
|
|
69.97%
|
|
|
|
83.58%
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
30.03%
|
|
|
|
16.42%
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
.02%
|
|
|
|
.01%
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
30.05%
|
|
|
|
16.43%
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(9.55%
|
)
|
|
|
(8.36%
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
20.50%
|
|
|
|
8.07%
|
|
|
|
|
|
|
|
|
|
|
IEH CORPORATION
PART I: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Comparative Analysis-Six Months Ended September 28, 2018 and
September 29, 2017
(continued)
Results of Operations
(continued)
Operating revenues for the six months ended September 28, 2018 amounted
to $15,641,182 reflecting an 41.53% increase versus $11,051,240 for the six months ended September 29, 2017. The increase in revenues
of $4,589,942 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 six month period ending September 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 $8,626,465 for the six months ended September
28, 2018 or 55.15% of operating revenues. This reflected an increase of $1,648,980 or 23.63% in the cost of products sold from
$6,977,485 or 63.14% of operating revenues for the six months ended September 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 $2,077,479 or
13.28% of operating revenues for the six months ended September 28, 2018 compared to $2,052,224 or 18.37% of operating revenues.
This comparative increase of $25,255 can be attributed to the Company’s efforts to better control expenses.
Interest expense was $15,552 for the six months ended September
28, 2018 or .10% of operating revenues. For the six months ended September 29, 2017, interest expense was $16,639 or .15% of operating
revenues. The decrease can be attributed to a reduction in borrowing from our commercial financial company during the current six-month
period.
Depreciation and amortization of $225,600 or 1.44% of operating
revenues was reported for the six months ended September 28, 2018 as compared to $212,600 or 1.92% of operating revenues for the
six months ended September 29, 2017.
The Company reported net income of $3,205,589 for the six months
ended September 28, 2018 as compared to net income of $870,282 for the six months ended September 29, 2017. The increase in net
income for the current six-month period can be attributed primarily to the increase in operating revenues for the current six-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 September 28, 2018 and
September 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
|
|
September 28,
|
|
|
September 29,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating Revenues (in thousands)
|
|
$
|
6,598
|
|
|
$
|
6,058
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
(as a percentage of Operating Revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Products Sold
|
|
|
61.25%
|
|
|
|
59.79%
|
|
Selling, General and Administrative
|
|
|
15.80%
|
|
|
|
18.33%
|
|
Interest Expense
|
|
|
0.08%
|
|
|
|
0.13%
|
|
Depreciation and amortization
|
|
|
1.27%
|
|
|
|
1.74%
|
|
|
|
|
|
|
|
|
|
|
TOTAL COSTS AND EXPENSES
|
|
|
78.40%
|
|
|
|
79.99%
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
21.60%
|
|
|
|
20.01%
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
0.03%
|
|
|
|
0.01%
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
21.63%
|
|
|
|
20.02%
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(7.28%
|
)
|
|
|
(10.65%
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
14.35%
|
|
|
|
9.37%
|
|
Operating revenues for the three months ended September 28, 2018
amounted to $6,597,876 reflecting an 8.91% increase versus $6,058,261 for the three months ended September 29, 2017. The increase
in revenues of $539,615 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 $4,041,230 for the three months ended
September 28, 2018 or 61.25% of operating revenues. This reflected an increase of $418,797 or 11.56% in the cost of products sold
from $3,622,433 or 59.79% of operating revenues for the three months ended September 29, 2017. The increase in cost of products
sold can be attributed to increased production costs necessary to support the increase in sales.
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 September 28, 2018 and
September 29, 2017
(continued)
Results of Operations
(continued)
Selling, general and administrative expenses were $1,042,532 or
15.80% of operating revenues for the three months ended September 28, 2018 compared to $1,113,213 or 18.33% of operating revenues.
This comparative decrease of $70,681 can be attributed to the Company’s efforts to better control expenses.
Interest expense was $5,304 for the three months ended September
28, 2018 or 0.08% of operating revenues. For the three months ended September 29, 2017, interest expense was $8,101 or 0.13% of
operating revenues. The decrease can be attributed to a reduction in borrowing from our commercial financial company during the
current three-month period.
Depreciation and amortization of $84,000 or 1.27% of operating revenues
was reported for the three months ended September 28, 2018 as compared to $105,300 or 1.74% of operating revenues for the three
months ended September 29, 2017.
The Company reported net income of $946,304 for the three months
ended September 28, 2018 as compared to net income of $564,660 for the three months ended September 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.
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 reported working capital of $18,062,463 as of September
28, 2018, compared to a working capital of $14,951,572 as of March 30, 2018. The increase in working capital of $3,110,891 was
attributable to the following items:
Net income
|
|
$
|
3,205,589
|
|
Depreciation and amortization
|
|
|
225,600
|
|
Capital expenditures
|
|
|
(325,894
|
)
|
Recognition of stock compensation expense
|
|
|
5,596
|
|
|
|
$
|
3,110,891
|
|
As a result of the above, the current ratio (current assets to current
liabilities) was 7.56 to 1 at September 28, 2018 as compared to 7.56 to 1 at March 30, 2018. Current liabilities at September 28,
2018 were $2,755,065 compared to $2,280,760 at March 30, 2018.
For the six months ended September 28, 2018, the Company reported
$325,894 in capital expenditures and depreciation and amortization of $225,600.
The net income of $3,205,589 for the six months ended September
28, 2018 resulted in an increase in total shareholders’ equity to $20,283,401.
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 September 28, 2018 and March 30, 2018, the Company had reported
excess payments to the commercial finance company of $448,930 and $154,960, respectively. These excess payments are reported in
the accompanying financial statements as of September 28, 2018 and 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 reserve
that was less than 2% of average gross accounts receivable was no longer considered necessary as the company has no uncollectible
account.
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)
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 the 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), the Plan
is fully funded. Based thereupon, the Company’s proportional share of the liability through December 31, 2016 is fully funded.
The Plan’s information and data for the year ending December 31, 2017 is not yet available. 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 $37,048 and $58,562 for the six months ended September 28, 2018 and September
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 six 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.
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)
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 will vest 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.
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 will become 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 will vest 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.
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)
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.
The following table shows the option activity for the
fiscal year ended March 30, 2018 and the current six months ended September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
ended
|
|
|
Six months
Ended
|
|
|
Quarter ended
|
|
|
Quarter ended
Sep 29, 2017
|
|
|
|
Ref
|
|
|
Sep 28, 2018
(in thousands)
|
|
|
Sep 29,2017
(in thousands)
|
|
|
Sep 28, 2018
(in thousands)
|
|
|
(in thousands)
(restated)
|
|
IEH employees
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-employee directors
|
|
|
|
|
|
|
6
|
|
|
|
22
|
|
|
|
3
|
|
|
|
3
|
|
Total stock compensation expense
|
|
|
(a)
|
|
|
$
|
6
|
|
|
$
|
22
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
(a):
|
The Company reported compensation expense of $2,798 during the quarter ended September 28, 2018 and $2,798 during the quarter ended September 29, 2017 resulting from stock options granted on August 15, 2016.
|
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)
Unrecognized stock-based compensation expense
:
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
|
|
|
|
Quarter ended
|
|
|
September 29, 2017
|
|
|
|
Ref
|
|
|
September 28, 2018
(in thousands)
|
|
|
(in thousands)
(restated)
|
|
Unrecognized expense for IEH employees
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Unrecognized expense for Non-employee directors
|
|
|
|
|
|
|
8
|
|
|
|
19
|
|
Total unrecognized expense
|
|
|
(b)
|
|
|
$
|
8
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 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
September 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
September 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)
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.
The Company intends to provide additional information regarding
the compensation awarded to the named executive officers and non-management directors in respect of and during the fiscal year
ended March 30, 2018, in the proxy statement for the Company’s 2018 annual meeting of shareholders.
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 $162,000 for the six months ended September 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/A. 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 not effective. They determined
that 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 has determined 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. Stock compensation was properly reported for the three and six month periods ended September 28, 2018.
Additionally, the Corporation did not report fully
diluted earnings per share for the year ended March 30, 2018. The Corporation commenced reporting fully diluted earnings per
share for the quarters ended September 28, 2018 and September 29, 2017 using the treasury method. Stock compensation was
properly reported for the three and six months periods ended September 28, 2018.
Management has undertaken steps to correct this past
deficiencies in its system of internal controls over financial reporting and has implemented procedures to closely monitor its
system of internal controls in the future. In addition, management is recommending 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 independent directors of the Company. Management believes that these changes are reasonably likely to affect materially
and positively our internal controls over financial reporting.
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 September 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 were not effective as of March 30, 2018 and September 28, 2018. Management has now
undertaken steps to correct these deficiencies in the internal controls over financial reporting.
This Quarterly Report on Form 10-Q/A 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.
IEH CORPORATION
PART I: FINANCIAL INFORMATION
|
Item 4.
|
Controls and Procedures
(continued)
|
Changes in Internal Control over Financial
Reporting
As stated above, management has now undertaken
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).
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 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
Historically,
the Company has relied upon the entire Board of Directors in appointing the Company’s independent auditors and reviewing
the financial condition and statements of the Company. However, in light of the aforementioned deficiencies in our internal controls
over financial reporting described above, management is recommending 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 independent directors of the Company.
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