IEH Corp - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-5278
IEH Corporation
(Exact name of registrant as specified in its charter)
| New York | 13-5549348 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
140 58th Street, Suite 8E, Brooklyn, NY | 11220 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (718) 492-4440
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
| Title of Each Class: | Trading Symbol(s) | Name of Each Exchange on Which Registered: | ||
| Shares of common stock, $0.01 par value | IEHC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 6, 2023, the registrant had 2,370,251 shares of its common stock, par value $0.01 per share, outstanding.
TABLE OF CONTENTS
i
CAUTIONARY NOTE FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “anticipates,” “plans,” “estimates,” “expects,” “believes,” “should,” “could,” “may,” “will” and similar expressions, we are identifying forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future financial events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Forward-looking statements involve risks and uncertainties described under “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report on Form 10-Q, and as set forth in Part I, Item 1A, Risk Factors, of our Form 10-K for the fiscal year ended March 31, 2022, filed on June 22, 2023, and may include statements related to, among other things: macroeconomic factors, including inflationary pressures, supply shortages and recessionary pressures; accounting estimates and assumptions; pricing pressures on our product caused by competition; the risk that our products will not gain market acceptance; our ability to obtain additional financing; our ability to successfully prevent our registration with the SEC from being suspended or revoked and to timely file our SEC reports; our ability to operate our accounting system and material weaknesses identified in connection with our migration to such accounting system; our ability to protect intellectual property; our ability to integrate our satellite facility into our operations, and our ability to attract and retain key employees. No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statements. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors beyond our 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 Securities and Exchange Commission (“SEC”) that attempt to advise interested parties of the risks, uncertainties and
other factors that may affect our business.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
| ● | changes in the market acceptance of our products and services; | |
| ● | increased levels of competition; | |
| ● | changes in political, economic or regulatory conditions generally and in the markets in which we operate; | |
| ● | our relationships with our key customers; | |
| ● | adverse conditions in the industries in which our customers operate; | |
| ● | our ability to retain and attract senior management and other key employees; | |
| ● | our ability to quickly and effectively respond to new technological developments; | |
| ● | our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on our proprietary rights; and | |
| ● | other risks, including those described in the “Risk Factors” section of this Quarterly Report. |
ii
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
IEH CORPORATION
CONDENSED BALANCE SHEETS
| As of | ||||||||
| June 30, 2022 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 11,462,890 | $ | 12,675,271 | ||||
| Accounts receivable | 2,393,735 | 3,039,468 | ||||||
| Inventories | 9,455,580 | 9,728,387 | ||||||
| Corporate income taxes receivable | 2,049,430 | 2,096,480 | ||||||
| Prepaid expenses and other current assets | 255,916 | 112,173 | ||||||
| Total current assets | 25,617,551 | 27,651,779 | ||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | 4,162,764 | 4,354,111 | ||||||
| Operating lease right-of-use assets | 2,902,637 | 2,980,820 | ||||||
| Deferred income tax assets, net | 806,380 | |||||||
| Security deposit | 75,756 | 75,756 | ||||||
| Total assets | $ | 32,758,708 | $ | 35,868,846 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 669,743 | $ | 808,631 | ||||
| Customer advance payments | 9,609 | 97,885 | ||||||
| Operating lease liabilities | 293,060 | 285,275 | ||||||
| Other current liabilities | 1,039,968 | 951,106 | ||||||
| Total current liabilities | 2,012,380 | 2,142,897 | ||||||
| Non-current liabilities: | ||||||||
| Operating lease liabilities, non-current | 2,830,610 | 2,906,455 | ||||||
| Total liabilities | 4,842,990 | 5,049,352 | ||||||
| Commitments and Contingencies (Note 10) | ||||||||
| Stockholders’ Equity | ||||||||
| Common Stock, $0.01 par value; 10,000,000 shares authorized; 2,370,251 shares issued and outstanding at June 30, 2022 and March 31, 2022 | 23,703 | 23,703 | ||||||
| Additional paid-in capital | 7,566,324 | 7,566,324 | ||||||
| Retained earnings | 20,325,691 | 23,229,467 | ||||||
| Total Stockholders’ Equity | 27,915,718 | 30,819,494 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 32,758,708 | $ | 35,868,846 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
1
IEH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 4,078,584 | $ | 6,510,577 | ||||
| Costs and expenses: | ||||||||
| Cost of products sold | 4,918,939 | 4,739,742 | ||||||
| Selling, general and administrative | 1,009,007 | 1,284,106 | ||||||
| Depreciation and amortization | 248,483 | 175,916 | ||||||
| Total operating expenses | 6,176,429 | 6,199,764 | ||||||
| Operating (loss) income | (2,097,845 | ) | 310,813 | |||||
| Other income (expense): | ||||||||
| Other income (for three months ended June 31, 2021, consists principally of $2,103,885 debt forgiveness income from the forgiveness of the PPP Loan, see Note 4) | 76 | 2,130,606 | ||||||
| Interest income (expense), net | 373 | 73 | ||||||
| Total other income (expense), net | 449 | 2,130,679 | ||||||
| (Loss) income before provision for income taxes | (2,097,396 | ) | 2,441,492 | |||||
| Provision for income taxes | (806,380 | ) | (97,904 | ) | ||||
| Net (loss) income | $ | (2,903,776 | ) | $ | 2,343,588 | |||
| (Net loss) earnings per common share: | ||||||||
| Basic | $ | (1.23 | ) | $ | 0.99 | |||
| Diluted | $ | (1.23 | ) | $ | 0.95 | |||
| Weighted-average number of common and common equivalent shares (in thousands): | ||||||||
| Basic | 2,370 | 2,370 | ||||||
| Diluted | 2,370 | 2,472 | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
2
IEH CORPORATION
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock | Additional Paid-in | Retained | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance at March 31, 2021 | 2,370,251 | $ | 23,703 | $ | 7,183,241 | $ | 21,791,333 | $ | 28,998,277 | |||||||||||
| Stock-based compensation expense | - | 199,500 | 199,500 | |||||||||||||||||
| Net income | - | 2,343,588 | 2,343,588 | |||||||||||||||||
| Balances at June 30, 2021 | 2,370,251 | $ | 23,703 | $ | 7,382,741 | $ | 24,134,921 | $ | 31,541,365 | |||||||||||
| Balance at March 31, 2022 | 2,370,251 | $ | 23,703 | $ | 7,566,324 | $ | 23,229,467 | $ | 30,819,494 | |||||||||||
| Net loss | - | (2,903,776 | ) | (2,903,776 | ) | |||||||||||||||
| Balances at June 30, 2022 | 2,370,251 | $ | 23,703 | $ | 7,566,324 | $ | 20,325,691 | $ | 27,915,718 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
3
IEH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (2,903,776 | ) | $ | 2,343,588 | |||
| Adjustments to reconcile net (loss) income to | ||||||||
| Net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 248,483 | 175,916 | ||||||
| Stock-based compensation expense | 199,500 | |||||||
| Inventory obsolescence provision | 60,000 | (14,000 | ) | |||||
| Deferred income taxes, net | 806,380 | (512,272 | ) | |||||
| Operating lease right-of-use assets | 125,719 | 107,202 | ||||||
| Gain on forgiveness of PPP loan | (2,103,885 | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 645,733 | 1,960,450 | ||||||
| Inventories | 212,807 | (706,188 | ) | |||||
| Corporate income taxes receivable | 47,050 | (92,415 | ) | |||||
| Prepaid expenses and other current assets | (143,743 | ) | (80,315 | ) | ||||
| Accounts payable | (138,888 | ) | 172,023 | |||||
| Customer advance payments | (88,276 | ) | (26,389 | ) | ||||
| Operating lease liabilities | (115,596 | ) | (40,800 | ) | ||||
| Other current liabilities | 88,862 | (227,524 | ) | |||||
| Net cash (used in) provided by operating activities | (1,155,245 | ) | 1,154,891 | |||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property, plant and equipment | (57,136 | ) | (34,120 | ) | ||||
| Net cash used in investing activities | (57,136 | ) | (34,120 | ) | ||||
| Net (decrease) increase in cash | (1,212,381 | ) | 1,120,771 | |||||
| Cash - beginning of period | 12,675,271 | 13,907,542 | ||||||
| Cash - end of period | $ | 11,462,890 | $ | 15,028,313 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 7 | $ | 52 | ||||
| Income Taxes | $ | $ | 397,592 | |||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 1 | DESCRIPTION OF BUSINESS: |
Overview
IEH Corporation (hereinafter referred to as “IEH” or the “Company”) began in New York, New York in 1941. IEH was incorporated in March, 1943.
The Company designs and manufactures HYPERBOLOID connectors that not only accommodate, but exceed military and aerospace specification standards.
| Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
Basis of Presentation
The accompanying condensed financial statements and the related disclosures as of June 30, 2022 and for the three months ended June 30, 2022 and 2021 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and the rules and regulations of the SEC for interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim condensed financial statements should be read in conjunction with the March 31, 2022 audited financial statements and notes included in the Annual Report on Form 10-K filed on June 22, 2023. The March 31, 2022 balance sheet included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by U.S. GAAP for complete financial statements. In the opinion of management, the condensed financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position and results of operations for the three months ended June 30, 2022 and 2021. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the fiscal year ended March 31, 2023 or any other interim period or future period.
Revenue Recognition
The core principle underlying Accounting Standards Codification ASC 606 “Revenue from Contracts with Customers” (“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 sets out the following steps for an entity to follow when applying the core principle to its revenue generating transactions:
| ● | Identify the contract with a customer | |
| ● | Identify the performance obligations in the contract | |
| ● | Determine the transaction price | |
| ● | Allocate the transaction price to the performance obligations | |
| ● | Recognize revenue when (or as) each performance obligation is satisfied |
The Company recognizes revenue and the related cost of products sold when the performance obligations are satisfied. The performance obligations are typically satisfied upon shipment of physical goods. In addition to the satisfaction of the performance obligations, the following conditions are required for revenue recognition: an arrangement exists, there is a fixed price, and collectability is reasonably assured.
The Company does not offer any discounts, credits or other sales incentives. Historically, the Company has not had an issue with uncollectible accounts receivable.
5
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): |
Revenue Recognition, continued
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 provide a replacement at its own cost.
The Company’s disaggregated revenue by geographical location is as follows:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Domestic | $ | 3,012,794 | $ | 4,571,993 | ||||
| International | 1,065,790 | 1,938,584 | ||||||
| Total | $ | 4,078,584 | $ | 6,510,577 | ||||
Approximately 54.7% and 79.4% of the international net sales for the three months ended June 30, 2022 and 2021, respectively represent sales to customers located in China.
The Company’s aggregated revenue by industry as a percentage of total revenue is provided below:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Industry | % | % | ||||||
| Defense | 55.9 | 56.0 | ||||||
| Commercial Aerospace | 20.4 | 14.7 | ||||||
| Space | 17.0 | 21.5 | ||||||
| Other | 6.7 | 7.8 | ||||||
Inventories
Inventories are comprised of raw materials, work-in-process and finished goods, and are stated at cost, on an average basis, which does not exceed net realizable value. The Company manufactures products pursuant to specific technical and contractual requirements.
The Company 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 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’s allowance for obsolete inventory was $271,000 and $211,000 as of June 30, 2022 and March 31, 2022, respectively, and was reflected as a reduction of inventory.
6
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): |
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
At times, the Company’s cash in banks was in excess of the Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any loss as a result of these deposits.
(Net Loss) 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 (net loss) earnings per common share are computed by dividing net (loss) income by the weighted average number of common shares outstanding for the reporting period. Diluted (net loss) earnings per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) for the reporting period.
Basic and diluted (net loss) earnings per share is calculated as follows:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net (loss) income | $ | (2,903,776 | ) | $ | 2,343,588 | |||
| (Net loss) earnings per common share: | ||||||||
| Basic | $ | (1.23 | ) | $ | 0.99 | |||
| Diluted | $ | (1.23 | ) | $ | 0.95 | |||
| Weighted average number of common shares outstanding-basic (in thousands) | 2,370 | 2,370 | ||||||
| Dilutive effect of options to the extent that such options are determined to be in the money for the period (in thousands) | 101 | |||||||
| Weighted average number of common shares outstanding-fully diluted (in thousands) | 2,370 | 2,472 | ||||||
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted (net loss) earnings per share because the effect of their inclusion would have been anti-dilutive.
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Potentially dilutive options to purchase common shares | 472,217 | 225,000 | ||||||
7
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): |
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, consisting of accounts receivable and accounts payable, approximate their fair value due to the relatively short maturity of these instruments. The Company is exposed to credit risk through its cash but mitigates this risk by keeping these deposits at major financial institutions.
ASC 820, “Fair Value Measurements and Disclosures”, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3- Significant unobservable inputs that cannot be corroborated by market data and inputs that are derived principally from or corroborated by observable market data or correlation by other means.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“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, an incremental borrowing rate for determining for its leases the present value of lease payments, the calculation of inventory obsolescence, as well as determining the amount of the valuation allowance for deferred income tax assets, net. Actual amounts could differ from those estimates.
Segment Information
The Company identifies its operating segments in accordance with ASC 280, Segment Reporting (“ASC 280”). Operating segments are defined as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a combined basis for the purposes of allocating resources. Accordingly, the Company has determined it operates and manages its business in a single reportable operating segment.
8
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): |
Depreciation
The Company provides for depreciation and amortization on a straight-line basis over the estimated useful lives (5-7 years) of the related assets. Depreciation expense for the three months ended June 30, 2022 and 2021 was $248,483 and $175,916 respectively.
Stock-Based Compensation
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 the 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
In June 2016, the FASB issued ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was subsequently revised by ASU 2018-19 and ASU 2020-02. The ASU introduces a new model for assessing impairment on most financial assets. Entities will be required to use a forward-looking expected loss model, which will replace the current incurred loss model, which will result in earlier recognition of allowance for losses. The ASU will be effective for the Company’s first interim period of the fiscal year ended March 31, 2024. The Company has evaluated the impact of the adoption of ASU 2016-13, and related updates, and has determined that the impact would not be material to its financial statements and disclosures.
The Company has evaluated other recently issued accounting pronouncements and has concluded that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.
Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were available to be issued. The Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statements.
9
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 3 | INVENTORIES: |
Inventories are stated at cost, on a moving average basis that does not exceed net realizable value.
Inventories are comprised of the following:
| As of | ||||||||
June
30, | March
31, | |||||||
| Raw materials | $ | 8,180,369 | $ | 7,875,015 | ||||
| Work in progress | 1,053,555 | 1,505,614 | ||||||
| Finished goods | 492,656 | 588,758 | ||||||
| Allowance for obsolete inventory | (271,000 | ) | (211,000 | ) | ||||
| $ | 9,455,580 | $ | 9,728,387 | |||||
| Note 4 | PPP LOAN AND NOTE: |
On April 13, 2020, the Company entered into an unsecured note (the “PPP Note”) evidencing an unsecured loan (“PPP Loan”) in the principal amount of $2,103,885 pursuant to the Payment Protection Program (“PPP”) under the Coronavirus Aid Relief and Economic Security Act (“CARES Act”).
On April 21, 2021, the Company received notice that the PPP Loan was forgiven. The Company recorded the forgiveness of the principal balance of $2,103,885 as debt forgiveness income in the quarter ended June 30, 2021.
| Note 5 | OTHER CURRENT LIABILITIES: |
Other current liabilities are comprised of the following:
| As of | ||||||||
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Payroll and vacation accruals | $ | 954,322 | $ | 871,117 | ||||
| Sales commissions | 49,866 | 48,681 | ||||||
| Other current liabilities | 35,780 | 31,308 | ||||||
| $ | 1,039,968 | $ | 951,106 | |||||
| Note 6 | LEASES: |
Operating leases
Leases classified as operating leases are included in operating lease right-of use, or ROU, assets, operating lease liabilities and operating lease liabilities, non-current, in the Company’s condensed balance sheets.
10
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 6 | LEASES (continued): |
Condensed balance sheet information related to our leases is presented below:
| As of | ||||||||||
| Condensed Balance Sheet Location | June 30, 2022 | March 31, 2022 | ||||||||
| Operating leases: | ||||||||||
| Right-of-use assets | Operating lease right-of-use assets | $ | 2,902,637 | $ | 2,980,820 | |||||
| Right-of-use liability, current | Operating lease liabilities, current | $ | 293,060 | $ | 285,275 | |||||
| Right-of-use lease liability, long-term | Operating lease liabilities, non-current | $ | 2,830,610 | $ | 2,906,455 | |||||
The lease expense for the three months ended June 30, 2022 and 2021 was $138,722 and $131,004, which was included in selling, general and administrative expense on the Company’s condensed statement of operations, respectively. In addition to the base rent, the Company pays insurance premiums and utility charges relating to the use of the premises. The Company considers its present facilities to be adequate for its present and anticipated future needs.
The basic minimum annual rental remaining on these leases is $3,935,102 as of June 30, 2022.
The weighted-average remaining lease term and the weighted average discount rate for operating leases were:
| As of | ||||||||
| June 30, | March 31, | |||||||
| 2022 | 2022 | |||||||
| Other information: | ||||||||
| Weighted-average discount rate – operating leases | 6.00 | % | 6.00 | % | ||||
| Weighted-average remaining lease term – operating lease (in years) | 7.5 | 7.8 | ||||||
The total remaining operating lease payments included in the measurement of lease liabilities on the Company’s condensed balance sheet as of June 30, 2022 was as follows:
| For the years ended March 31,: | Operating | |||
| (Nine months ending) March 31, 2023 | $ | 353,514 | ||
| 2024 | 483,184 | |||
| 2025 | 497,684 | |||
| 2026 | 519,036 | |||
| 2027 | 547,460 | |||
| Thereafter | 1,534,224 | |||
| Total gross operating lease payments | 3,935,102 | |||
| Less: imputed interest | (811,432 | ) | ||
| Total lease liabilities, reflecting present value of future minimum lease payments | $ | 3,123,670 | ||
11
IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 7 | INCOME TAXES: |
The effective tax rates for the three months ended June 30, 2022 and 2021 were a provision of 38.4% on a loss before provision for income taxes of $2,097,396 and a provision of 4.01% on income before provision for income taxes of $2,441,492, respectively. The tax provision of $806,380 represents a charge to record a full valuation of the Company’s deferred income tax assets, net as of April 1, 2022. The lower effective income tax rate for the three months ended June 30, 2021 was due to the effect of the $2,103,885 gain on forgiveness of debt, which was not subject to income tax.
| Note 8 | EQUITY INCENTIVE PLANS: |
2011 Equity Incentive Plan
On August 31, 2011, the Company’s stockholders 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 Equity Incentive Plan expired on August 31, 2021 after which no further awards will be granted under such plan.
2020 Equity Incentive Plan
On November 18, 2020, the Board of Directors approved the Company’s 2020 Equity Incentive Plan (the “2020 Plan”) for submission to stockholders at the next annual meeting. On December 16, 2020, the Company’s stockholders approved the adoption of the 2020 Plan, which provides for options and restricted stock awards to purchase up to 750,000 shares of common stock to award in the future as employee incentive compensation to employees, management and directors of the Company.
Options granted to employees under the 2020 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 2020 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 stockholder, 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 ten years from the day of the grant. The 2020 Plan also provide 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 not 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.
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IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
| Note 8 | EQUITY INCENTIVE PLANS (Continued): |
Stock-based compensation expense
Stock-based compensation expense is recorded in selling, general and administrative expenses included in the condensed statements of operations. For the three months ended June 30, 2022 and 2021, stock-based compensation expense was and $199,500, respectively.
As of June 30, 2022 there was no unrecognized compensation expense related to unamortized stock options. It is the Company’s policy that any unrecognized stock-based compensation cost would be adjusted for actual forfeitures as they occur.
There were no options granted during the three months ended June 30, 2022 or 2021.
The following table provides the stock option activity:
| Shares | Weighted Avg. Grant Date Fair Value | Weighted Avg. Exercise Price | Remaining Contractual | Aggregate Intrinsic | ||||||||||||||||
| Balance as of March 31, 2022 | 482,217 | $ | 7.91 | $ | 14.69 | 6.56 | $ | 865 | ||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Forfeited or Expired | ||||||||||||||||||||
| Balance as of June 30, 2022 | 482,217 | $ | 7.91 | $ | 14.69 | 6.31 | $ | 821 | ||||||||||||
| Exercisable as of June 30, 2022 | 482,217 | $ | 7.91 | $ | 14.69 | 6.31 | $ | 821 | ||||||||||||
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.
| Note 9 | CASH BONUS PLAN: |
In 1987, the Company adopted a cash bonus plan (the “Cash Bonus Plan”) for non-union, management and administration staff. Unless otherwise approved by the Company’s Board of Directors, contributions to the Cash Bonus Plan are made by the Company only when the Company is profitable for the fiscal year. As of June 30, 2022 and March 31, 2022, the Company’s accrued bonus was $381,642 and $408,000, respectively. Bonus expense recorded for each of the three months ended June 30, 2022 and 2021 was $100,500.
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IEH CORPORATION
Notes to Unaudited Condensed Financial Statements
Note 10 |
COMMITMENTS AND CONTINGENCIES: |
The Company maintains its operations in facilities located in both New York and Pennsylvania.
On December 1, 2020, the Company entered into a 120 month extension of its lease agreement for an industrial building in Brooklyn, NY, expiring December 1, 2030. Monthly rent at inception was $20,400, such monthly rent escalates annually to a monthly rent of $28,426 for the final year of the lease term. The Company maintains a security deposit of $40,800, which is included in other assets on the accompanying condensed balance sheet.
On January 29, 2021, the Company entered into an 87 month lease agreement for an industrial building in Allentown, Pennsylvania, expiring March 30, 2028. Monthly rent at inception was $18,046, such that the monthly rent escalates annually to a monthly rent of $20,920 for the final year of the lease term. The Company maintains a security deposit of $35,040, which is included in other assets on the accompanying condensed balance sheet.
The Company has a collective bargaining multi-employer pension plan (“Multi-Employer Plan”) with the United Auto Workers of America, Local 259 (ID No. 136115077). The Multi-Employer Plan is covered by a collective bargaining agreement with the Company, which expires on March 31, 2024. Contributions are made 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 Amendments 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 liabilities are contingent upon the termination, withdrawal, or partial withdrawal from the Multi-Employer Plan. The risks of participating in a multiemployer plan are different from single-employer plans, for example, assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, if a participating employer stops contributing to the multiemployer plan, the unfunded obligations of the plan may become the obligation of the remaining participating employers, and if a participating employer chooses to stop participating in these multiemployer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan.
The total contributions charged to operations under the provisions of the Multi-Employer Plan were $9,528 and $13,331 for the three months ended June 30, 2022 and 2021, respectively.
|
Note 11 |
CONCENTRATIONS: |
During the three months ended June 30, 2022, one customer accounted for 10.8% of the Company’s net sales.
During the three months ended June 30, 2021, three customers accounted for 44.6% of the Company’s net sales, each represented 16.6%, 16.6%, and 11.4%, respectively.
As of June 30, 2022 and March 31, 2022, one customer accounted for 10.4% and 15.0% of accounts receivable, respectively.
During the three months ended June 30, 2022, one vendor accounted for 15.4% of the Company’s purchases.
During the three months ended June 30, 2021, two vendors accounted for 21.7% of the Company’s purchases, each represented 11.6% and 10.1%, respectively.
As of June 30, 2022 and March 31, 2022, one vendor accounted for 14.6% and two vendors accounted for 21.4% of accounts payable, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements contained in this report, which are not 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 performance of the Company’s business, actions of competitors, changes in laws and regulations, including accounting standards, employee relations, customer demand, prices of purchased raw materials and parts, domestic economic conditions, and foreign economic conditions, including currency rate fluctuations.
The following discussion and analysis should be read in conjunction with our audited financial statements and related footnotes included elsewhere in this report, which provide additional information concerning the Company’s financial activities and condition.
Overview
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. We believe we are the only independent producer of HYPERBOLOID printed circuit board connectors in the United States.
Our customers consist of OEMs (Original Equipment Manufacturers) and distributors who resell our products to OEMs. We sell our products directly and through 22 independent sales representatives and distributors located in all regions of the United States, Canada, the European Union, Southeast Asia, Central Asia and the Middle East.
The customers we service are in the Defense, Aerospace, Space, Medical, Oil and Gas, Industrial, Test Equipment and Commercial Electronics markets. We appear on the Military Qualified Product Listing (“QPL”) MIL-DTL-55302 and supply customer requested modifications to this specification. Our offering of “QPL” items has recently been expanded to include additional products.
The customers we service by industry as a percentage of total revenue is provided below:
| For the Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Industry | % | % | ||||||
| Defense | 55.9 | 56.0 | ||||||
| Commercial Aerospace | 20.4 | 14.7 | ||||||
| Space | 17.0 | 21.5 | ||||||
| Other | 6.7 | 7.8 | ||||||
Financial Overview
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, valuation of inventories, accounting for income taxes and stock-based compensation expense.
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Our financial position, results of operations and cash flows are impacted by the accounting policies we have adopted. In order to get a full understanding of our financial statements, one must have a clear understanding of the accounting policies employed. It is important that the discussion of our operating results that follow be read in conjunction with these critical accounting policies which have been disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022 filed with the SEC on June 22, 2023.
Results of Operations
Comparison of the Three Months Ended June 30, 2022 and 2021
The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021:
| For the Three-Months Ended June 30, | Period-to-Period | |||||||||||
| 2022 | 2021 | Change | ||||||||||
| Revenue | $ | 4,078,584 | $ | 6,510,577 | $ | (2,431,993 | ) | |||||
| Operating expenses: | ||||||||||||
| Cost of products sold | 4,918,939 | 4,739,742 | 179,197 | |||||||||
| Selling, general and administrative | 1,009,007 | 1,284,106 | (275,099 | ) | ||||||||
| Depreciation and amortization | 248,483 | 175,916 | 72,567 | |||||||||
| Total operating expenses | 6,176,429 | 6,199,764 | (23,335 | ) | ||||||||
| Operating (loss) income | (2,097,845 | ) | 310,813 | (2,408,658 | ) | |||||||
| Other income (expense): | ||||||||||||
| Other income (a) | 76 | 2,130,606 | (2,130,530 | ) | ||||||||
| Interest income (expense), net | 373 | 73 | 300 | |||||||||
| Total other income (expense), net | 449 | 2,130,679 | (2,130,230 | ) | ||||||||
| (Loss) income before provision for income taxes | (2,097,396 | ) | 2,441,492 | (4,538,888 | ) | |||||||
| Provision for income taxes | (806,380 | ) | (97,904 | ) | (708,476 | ) | ||||||
| Net (loss) income | $ | (2,903,776 | ) | $ | 2,343,588 | $ | (5,247,364 | ) | ||||
| (a) | For the three months ended June 30, 2021, other income consists of $2,103,885 of debt forgiveness income from the forgiveness of the PPP Loan (See Note 4 – PPP Loan and Note). |
Revenue for the three months ended June 30, 2022 was $4,078,584, reflecting a decrease of $2,431,993, or 37.4%, as compared to $6,510,577 for the three months ended June 30, 2021. The decline in revenue for the period was principally on account of softness in orders from our defense and space customers. Our revenues continue to be negatively impacted by reduced government spending in these sectors for programs in which we participate. Our commercial aerospace revenues declined less than our revenues from defense and space customers, as consumer aviation traffic has been returning to pre COVID-19 levels, and from the Boeing 737-Max program, in particular, as Boeing has resumed its production after having earlier grounded the production of this aerospace program.
Cost of products sold for the three months ended June 30, 2022 was $4,918,939, reflecting an increase of $179,197, or 3.8% as compared to $4,739,742 for the three months ended June 30, 2021. The increase in our cost of products sold, especially in light of declining revenues, reflects the additional costs we have incurred in staffing the Pennsylvania location, the costs of maintaining our highly trained labor force through periods of reduced production and the impacts of inflation.
Selling, general and administrative expenses for the three months ended June 30, 2022 was $1,009,007, reflecting a decrease of $275,099, or 21.4%, as compared to $1,284,106 for the three months ended June 30, 2021. The decrease was primarily due to a decrease in stock-based compensation of $199,500.
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Depreciation and amortization for the three months ended June 30, 2022 was $248,483, reflecting an increase of $72,567, or 41.3%, as compared to $175,916 for the three months ended June 30, 2021. The increase was principally attributable to capitalized leasehold improvements in our new Pennsylvania facility, as well as increases in capitalized molds and dies for new products.
Total other income (expense) for the three months ended June 30, 2022 was income of $449, reflecting a decrease of $2,130,230, as compared to income of $2,130,679 for the three months ended June 30, 2021. The decrease was primarily attributable to the gain on the forgiveness of the PPP loan of $2,103,885 recognized during the three months ended June 30, 2021.
Provision for income taxes for the three months ended June 30, 2022 was $806,380, reflecting an increase of $708,476 as compared to $97,904 for the three months ended June 30, 2021. The increase was primarily attributable to fully impairing the deferred income tax assets, net. During the three months ended June 30, 2022, we determined to record a full valuation allowance on our deferred income tax assets, net. As such, during the three months ended June 30, 2022, we recorded a full valuation allowance for the opening period deferred income tax asset, net and then beginning on June 30, 2022, recorded an adjustment to fully impair any increase in the deferred income tax asset, net. As such, the charge to provision for income taxes for the three months ended June 30, 2022 consisted solely of the write down of the existing deferred income tax asset, net, and that for the remaining quarterly periods within the fiscal year ended March 31, 2023, we are expecting a provision for income taxes of $0.
Liquidity and Capital Resources:
Our primary requirements for liquidity and capital are working capital, inventory, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we further develop and grow our business. For the three months ended June 30, 2022, our primary sources of liquidity came from existing cash. Based on our current plans and business conditions, we believe that existing cash, together with cash generated from operations will be sufficient to satisfy our anticipated cash requirements, and we are not aware of any trends or demands, commitments, events or uncertainties that are reasonably likely to result in a decrease in liquidity of our assets. We may require additional capital to respond to technological advancements, competitive dynamics or technologies, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, inflationary pressures and interest rates, and the conflict between Russia and Ukraine have resulted in, and may continue to result in, significant disruption and volatility in the global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
As of June 30, 2022 and March 31, 2022, the Company’s cash on hand was $11,462,890 and $12,675,271, respectively. The Company recorded a net (loss) income of $(2,903,776) and $2,343,588 for the three months ended June 30, 2022 and 2021, respectively. As of June 30, 2022 and March 31, 2022, the Company had working capital of $23,605,171 and $25,508,882 and stockholders’ equity of $27,915,718 and $30,819,494, respectively.
Our principal source of liquidity has been from cash flows generated by operating activities and our cash reserves.
17
Cash Flow Activities for the Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
The following table summarizes our sources and uses of cash for the three months ended June 30, 2022 and 2021:
| For the Three Months Ended June 30, | Period-to-Period | |||||||||||
| 2022 | 2021 | Change | ||||||||||
| Cash flow (used in) provided by | ||||||||||||
| Operating activities | $ | (1,155,245 | ) | $ | 1,154,891 | $ | (2,310,136 | ) | ||||
| Investing activities | (57,136 | ) | (34,120 | ) | (23,016 | ) | ||||||
| (Decrease) increase in cash and cash equivalents | $ | (1,212,381 | ) | $ | 1,120,771 | $ | (2,333,152 | ) | ||||
Net cash used in operating activities was $1,155,245 for the three months ended June 30, 2022, compared to net cash provided by operating activities of $1,154,891 for the three months ended June 30, 2021. The period over period decrease in cash from operating activities of $2,310,136, was primarily due to the decrease in net income (as adjusted for the non-cash gain on forgiveness of debt), offset principally by the non-cash charge to fully impair the deferred income tax assets, net.
Net cash used in investing activities was $57,136 for the three months ended June 30, 2022, an increase of $23,016, as compared to a use of $34,120 for the three months ended June 30, 2021. The increase in cash used in investing activities during the three months ended June 30, 2022 was principally due to an increase of purchases of molds and dies.
There were no financing activities during the three months ended June 30, 2022 or 2021.
PPP Loan and Note
On April 13, 2020, the Company entered into an unsecured note (the “PPP Note”) evidencing an unsecured loan (“PPP Loan”) in the principal amount of $2,103,885 pursuant to the Payment Protection Program (“PPP”) under the Coronavirus Aid Relief and Economic Security Act (“CARES Act”).
On April 21, 2021, the Company received notice that the PPP Loan was forgiven. The Company recorded the forgiveness of the principal balance of $2,103,885 as debt forgiveness income in the quarter ended June 30, 2021.
Backlog of Orders
The backlog of orders for the Company’s products amounted to approximately $9,537,000 at June 30, 2022 as compared to $7,909,000 at March 31, 2022. The orders in backlog at June 30, 2022 are expected to ship over the next twelve months depending on customer requirements and product availability.
Inflation
In the opinion of management, inflation has begun to impact the costs of our operations and depending upon the current duration and degree of higher inflation levels, is expected to have an impact upon our operations in the future. Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
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Item 3. Qualitative and Quantitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of as of the end of the period covered by this Quarterly Report on Form 10-Q. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive and principal financial officer have concluded based upon the evaluation described above that, as of June 30, 2022, our disclosure controls and procedures were not effective at the reasonable assurance level.
Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), known as COSO, to evaluate the effectiveness of our internal control over financial reporting. As of March 31, 2022, the following material weaknesses were identified. Management is working diligently on steps to remediate these weaknesses. However, until such time as management is able to fully document, implement, test, validate and repeat its steps for remediation, the Company has determined that the below material weaknesses continue to be in effect as of June 30, 2022:
| ● | Certain of the Company’s controls associated with reconciliations of inventory, cost of products sold and income taxes, as well as for the calculation of stock-based compensation awards, were not operating effectively. These deficiencies, combined with inadequate compensating review controls, resulted in material misstatements, individually in the financial statements and represented a material weakness in the Company’s internal control over financial reporting. |
| ● | The Company has not established an effective control environment due to the ineffective design and implementation of Information Technology General Controls (“ITGC”). The Company’s ITGC deficiencies included improperly designed controls pertaining to user access rights over systems that are critical to the Company’s system of financial reporting. The ITGC deficiencies, combined with a lack of properly designed management review controls to compensate for these deficiencies, represent a material weakness in the Company’s internal control over financial reporting. |
Management is actively engaged in the planning for and implementation of remediation efforts to address the identified material weaknesses. The remediation plan includes (i) the engaging of additional experienced financial resources, (ii) the development and implementation of enhanced controls designed to evaluate the appropriateness of policies and procedures, (iii) the implementation of review and monitoring of transactions to ensure compliance with the new policies and procedures, (iv) improvements in the design and implementation of enhanced monitoring of ITGC controls, and (v) the enhanced training of personnel.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls that occurred during the fiscal quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There are no legal proceedings that have occurred within the past year concerning our directors, or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one’s participation in the securities or banking industries, or a finding of securities or commodities law violations.
On August 17, 2022, the SEC issued an Order Instituting Administrative Proceedings and Notice of Hearing pursuant to Section 12(j) of the Exchange Act. The stated purpose of the administrative proceeding is for the Commission to determine whether it is necessary and appropriate for the protection of investors to suspend for a period not exceeding twelve months, or revoke the registration of each class of securities registered pursuant to Section 12 of the Exchange Act of the Company. The Company filed an Answer in the proceeding on October 3, 2022 and on October 13, 2022 we conducted a prehearing conference with SEC staff in the Division of Enforcement. On March 1, 2023 the SEC’s Division of Enforcement filed a Motion for Summary Disposition, on March 15, 2023, IEH filed an opposition brief to the SEC Division of Enforcement’s Motion for Summary Disposition, and on March 29, 2023, the SEC’s Division of Enforcement filed a Reply in Support of its Motion for Summary Disposition. The Commission will issue a decision on the basis of the record in the proceeding.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended March 30, 2022 which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. Except as set forth below, as of the date of this Quarterly Report, there have been no material changes to our risk factors previously disclosed in our Exchange Act Reports.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.
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EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit C-4 to Current Report on Form 8-K, dated February 27, 1991). | |
| 3.2 | By-Laws of the Company (filed as Exhibit 3.2 on Annual Report on Form 10-KSB for the fiscal year ended March 27, 1994). | |
| 4.1 | Form of Common Stock Certificate of the Company (filed as Exhibit 4.1 on Annual Report on Form 10-KSB for the fiscal year ended March 27, 1994). | |
| 4.2 | Description of Securities (filed as Exhibit 4.2 on Annual Report on Form 10-K for the fiscal year ended March 31, 2022 on June 22, 2023). | |
| 10.1(†) | 2020 Equity Stock Based Compensation Plan (filed as Annex A to definitive Proxy Statement dated November 23, 2020). | |
| 10.2(†) | Employment Agreement between the Company and David Offerman, dated as of July 31, 2019 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 31, 2019). | |
| 10.3(†) | Employment Agreement between the Company and William H. Craig dated as of September 21, 2022 and effective as of July 1, 2022 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2022). | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Principal Financial Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1** | Certifications by Chief Executive Officer and Principal Financial Officer, pursuant to 17 CFR 240.13a-14(b) or 17 CFR 240.15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.1* | The following information from IEH Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (Extensible Business Reporting language) and filed electronically herewith: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Stockholders’ Equity; (iv) the Statements of Cash Flow; and (v) the Notes to Financial Statements. | |
| 101.INS* | Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”) | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
| * | Exhibits filed herewith. |
| ** | Exhibits furnished herewith. |
| † | Indicates management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IEH CORPORATION | ||
| Dated: October 6, 2023 | By: | /s/ David Offerman |
| David Offerman | ||
| Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | ||
| /s/ Subrata Purkayastha | ||
| Subrata Purkayastha, Interim Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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