U.S.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

March 31, 2020

or

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: 0-25844

TAITRON COMPONENTS INCORPORATED

(Exact name of registrant as specified in its charter)


California

95-4249240

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


28040 West Harrison Parkway, Valencia, California

91355-4162

      (Address

(Address of principal executive offices)

(Zip Code)


(661) 257-6060

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock

TAIT

NASDAQ Capital Market

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 the definitions 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   (Do not check if a smaller reporting company)

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


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:


Class

es of common stock

Outstanding on October 31, 2017

April 29, 2020

Class A common stock, $0.001 par value

4,808,235

5,035,235

Class B common stock, $0.001 par value

762,612

 

 

TAITRON COMPONENTS INCORPORATED

FORM 10-Q
September 30, 2017
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION

 
   
Item 1.INDEX

 
 

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016

1

 

2

 

3

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

3

4

 

4

5

Item 2.

6

9

Item 3.

8

11

Item 4.

8

11

 

 

PART II - OTHER INFORMATION

 
   

Item 1.

9

12

Item 1A.

Risk Factors

12

Item 2.

9

12

Item 3.

9

12

Item 4.

9

12

Item 5.

9

12

Item 6.

9

13

 

10

14




PART I - FINANCIAL INFORMATION


Item 1. Financial Statements (Unaudited)


TAITRON COMPONENTS INCORPORATED

Condensed Consolidated Balance Sheets


  September 30,  December 31, 
  2017  2016 
     Assets (Unaudited)    
Current Assets:      
Cash and cash equivalents $3,692,000  $4,018,000 
Accounts receivable, less allowances of  $46,000 and $49,000, respectively  581,000   233,000 
Inventories, less reserves for obsolescence of $8,676,000, and $8,537,000, respectively (Note 3)  5,513,000   5,055,000 
Prepaid expenses and other current assets  339,000   227,000 
Total current assets  10,125,000   9,533,000 
Property and equipment, net  3,910,000   4,032,000 
Other assets (Note 4)  459,000   471,000 
Total assets $14,494,000  $14,036,000 
         
Liabilities and Shareholders’ Equity        
Current Liabilities:        
Accounts payable $968,000  $857,000 
Accrued liabilities  569,000   492,000 
Current portion, long-term debt (Note 5)  500,000   - 
Total current liabilities  2,037,000   1,349,000 
Long-term debt from related party (Note 5)  500,000   1,000,000 
Total Liabilities  2,537,000   2,349,000 
         
Commitments and contingencies (Notes 6 and 8)        
         
Shareholders’ Equity:        
Preferred stock, $0.001 par value.  Authorized 5,000,000 shares;
None issued or outstanding
  -   - 
Class A common stock, $0.001 par value.  Authorized 20,000,000 shares;
4,808,235 and 4,768,235 shares issued and outstanding, respectively
  5,000   5,000 
Class B common stock, $0.001 par value.  Authorized, issued and outstanding 762,612 shares  1,000   1,000 
Additional paid-in capital  10,744,000   10,701,000 
Accumulated other comprehensive income  142,000   156,000 
Retained earnings  965,000   720,000 
Total Shareholders’ Equity - Taitron Components Inc  11,857,000   11,583,000 
Noncontrolling interest in subsidiary  100,000   104,000 
Total Shareholders’ Equity  11,957,000   11,687,000 
Total Liabilities and Shareholders’ Equity $14,494,000  $14,036,000 

  

March 31,

  

December 31,

 
  

2020

  

2019

 

     Assets

 

(Unaudited)

     

Current assets:

        

Cash and cash equivalents

 $5,564,000  $5,313,000 

Accounts receivable, less allowances of $19,000

  1,020,000   1,022,000 

Inventories, less reserves for obsolescence of $6,144,000, and $5,893,000, respectively (Note 2)

  3,411,000   3,588,000 

Prepaid expenses and other current assets

  148,000   85,000 

Total current assets

  10,143,000   10,008,000 

Property and equipment, net

  3,346,000   3,386,000 

Other assets (Note 3)

  205,000   205,000 

Total assets

 $13,694,000  $13,599,000 
         

Liabilities and Equity

        

Current liabilities:

        

Accounts payable

 $682,000  $462,000 

Accrued liabilities

  248,000   322,000 

Total current and total liabilities

  930,000   784,000 
         

Commitments and contingencies (Note 5 )

        
         

Equity:

        

Shareholders's equity:

        

Preferred stock, $0.001 par value. Authorized 5,000,000 shares;

    None issued or outstanding

  -   - 

Class A common stock, $0.001 par value. Authorized 20,000,000 shares;

   5,035,235 and 4,990,235 shares issued and outstanding, respectively

  5,000   5,000 

Class B common stock, $0.001 par value. Authorized, issued and

    outstanding 762,612 shares

  1,000   1,000 

Additional paid-in capital

  11,019,000   10,959,000 

Accumulated other comprehensive income

  38,000   38,000 

Retained earnings

  1,601,000   1,712,000 

Total shareholders’ equity - Taitron Components Inc

  12,664,000   12,715,000 

Noncontrolling interest in subsidiary

  100,000   100,000 

Total equity

  12,764,000   12,815,000 

Total liabilities and equity

 $13,694,000  $13,599,000 

See accompanying notes to condensed consolidated financial statements (unaudited).

1

1

TAITRON COMPONENTS INCORPORATED

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)


  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
             
Net sales $1,679,000  $1,621,000  $5,778,000  $5,223,000 
Cost of goods sold  911,000   1,036,000   3,450,000   3,382,000 
Gross profit  768,000   585,000   2,328,000   1,841,000 
                 
Selling, general and administrative expenses  534,000   511,000   1,618,000   1,596,000 
Operating income  234,000   74,000   710,000   245,000 
                 
Interest expense, net  (9,000)  (17,000)  (29,000)  (39,000)
Loss on investments  (34,000)  (62,000)  (107,000)  (196,000)
Other income, net  25,000   22,000   85,000   49,000 
Income before income taxes  216,000   17,000   659,000   59,000 
                 
Income tax provision  (2,000)  (4,000)  (3,000)  (10,000)
                 
Net income  214,000   13,000   656,000   49,000 
Net loss attributable to noncontrolling interest in subsidiary  (1,000)  (2,000)  (4,000)  (6,000)
Net income attributable to Taitron Components Inc. $215,000  $15,000  $660,000  $55,000 
                 
                 
Net income per share:  Basic $0.04  $0.01  $0.12  $0.01 
Net income per share:  Diluted $0.04  $0.01  $0.11  $0.01 
Cash dividends declared per common share $0.025  $0.025  $0.075  $0.050 
                 
Weighted average common shares outstanding:  Basic  5,540,847   5,530,847   5,550,847   5,530,847 
Weighted average common shares outstanding:  Diluted  5,845,747   5,902,847   5,907,847   5,940,847 
                 
Net income $214,000  $13,000  $656,000  $49,000 
Other comprehensive income :                
Foreign currency translation adjustment  11,000   23,000   (14,000)  (5,000)
Comprehensive income  225,000   36,000   642,000   44,000 
Comprehensive loss attributable  to noncontrolling interests  (5,000)  (1,000)  (4,000)  - 
Comprehensive income attributable to Taitron Components Inc. $230,000  $37,000  $646,000  $44,000 

  

Three Months Ended March 31,

 
  

2020

  

2019

 
  

(Unaudited)

  

(Unaudited)

 
         

Net product revenue

 $1,472,000  $1,384,000 

Cost of products sold

  801,000   701,000 

Gross profit

  671,000   683,000 
         

Selling, general and administrative expenses

  598,000   530,000 

Operating income

  73,000   153,000 
         

Interest income, net

  11,000   7,000 

Other income, net

  7,000   25,000 

Income before income taxes

  91,000   185,000 
         

Income tax provision

  (1,000)  (1,000)
         

Net income

  90,000   184,000 

Net loss attributable to noncontrolling interests

  -   (2,000)

Net income attributable to Taitron Components Inc.

 $90,000  $186,000 
         

Net income per share: Basic

 $0.02  $0.03 

Diluted

 $0.02  $0.03 
         

Weighted average common shares outstanding: Basic

  5,797,847   5,699,847 

Diluted

  5,877,847   5,801,847 
         

Cash dividends declared per common share

 $0.035  $0.030 
         

Net income

 $90,000  $184,000 

Other comprehensive income:

        

Foreign currency translation adjustment

  -   13,000 

Comprehensive income

  90,000   197,000 

Comprehensive loss attributable to noncontrolling interests

  -   (3,000)

Comprehensive income attributable to Taitron Components Inc.

 $90,000  $200,000 

See accompanying notes to condensed consolidated financial statements (unaudited).

.

2

2

TAITRON COMPONENTS INCORPORATED

Condensed Consolidated Statements of Cash Flows


  Nine Months Ended September 30, 
  2017  2016 
  (Unaudited)  (Unaudited) 
Operating activities:      
Net income $656,000  $49,000 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  157,000   138,000 
Provision for sales returns and doubtful accounts  154,000   74,000 
Stock based compensation  3,000   (1,000)
Loss on investments  107,000   196,000 
Changes in assets and liabilities:        
Trade accounts receivable  (502,000)  (451,000)
Inventories  (458,000)  891,000 
Prepaid expenses and other current assets  (112,000)  (49,000)
Trade accounts payable  111,000   (241,000)
Accrued liabilities  77,000   147,000 
Other assets and liabilities  (3,000)  6,000 
Total adjustments  (466,000)  710,000 
Net cash provided by operating activities  190,000   759,000 
         
Investing activities:        
Acquisition of property & equipment  (35,000)  (6,000)
Investment in securities  (93,000)  - 
Net cash used for investing activities  (128,000)  (6,000)
         
Financing activities:        
Repayment on notes payable  -   (500,000)
Dividend payments  (414,000)  (276,000)
Proceeds from stock options exercised  40,000   - 
Net cash used for financing activities  (374,000)  (776,000)
         
Impact of exchange rates on cash  (14,000)  (5,000)
         
Net decrease in cash and cash equivalents  (326,000)  (28,000)
Cash and cash equivalents, beginning of period  4,018,000   3,692,000 
Cash and cash equivalents, end of period $3,692,000  $3,664,000 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $32,000  $42,000 
Cash paid for income taxes, net $3,000  $1,000 

Shareholders’ Equity

  

Common Stock

  Additional  

Accumulated

Other

             
  

Class A

  

Class B

  

Paid-in

  Comprehensive  

Retained

  

Noncontrolling

  

Total

 
  

Shares

  

Amount

  

Shares

  

Amount

  

capital

  

Income (Loss)

  

Earnings

  

Interest in Sub

  

Equity

 
                                     

Three months ending March 31, 2020

                                    

Balance at December 31, 2019

  4,990,235  $5,000   762,612  $1,000  $10,959,000  $38,000  $1,712,000  $100,000  $12,815,000 

Consolidated net income

  -   -   -   -   -   -   90,000   -   90,000 

Exercise stock options

  45,000   -   -   -   54,000   -   -   -   54,000 

Amortization of stock based compensation

  -   -   -   -   6,000   -   -   -   6,000 

Cash dividends

  -   -   -   -   -   -   (201,000)  -   (201,000)

Balance at March 31, 2020

  5,035,235  $5,000   762,612  $1,000  $11,019,000  $38,000  $1,601,000  $100,000  $12,764,000 
                                     

Three months ending March 31, 2019

                                    

Balance at December 31, 2018

  4,867,235  $5,000   762,612  $1,000  $10,812,000  $128,000  $1,656,000  $96,000  $12,698,000 

Consolidated net income (loss)

  -   -   -   -   -   -   186,000   (3,000)  183,000 

Other comprehensive loss

  -   -   -   -   -   13,000   -   -   13,000 

Exercise stock options

  70,000   -   -   -   76,000   -   -   -   76,000 

Amortization of stock based compensation

  -   -   -   -   4,000   -   -   -   4,000 

Cash dividends

  -   -   -   -   -   -   (171,000)  -   (171,000)

Balance at March 31, 2019

  4,937,235  $5,000   762,612  $1,000  $10,892,000  $141,000  $1,671,000  $93,000  $12,803,000 

See accompanying notes to condensed consolidated financial statements (unaudited).

3

3

TAITRON COMPONENTS INCORPORATED

Condensed Consolidated Statements of Cash Flows

  

Three Months Ended March 31,

 
  

2020

  

2019

 
  

(Unaudited)

  

(Unaudited)

 

Operating activities:

        

Net income

 $90,000  $184,000 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  40,000   43,000 

Provision for sales returns and doubtful accounts

  4,000   3,000 

Stock based compensation

  6,000   4,000 

Changes in assets and liabilities:

        

Accounts receivable

  (2,000)  282,000 

Inventories

  177,000   (103,000)

Prepaid expenses and other current assets

  (63,000)  (99,000)

Accounts payable

  220,000   (6,000)

Accrued liabilities

  (74,000)  (47,000)

Other assets and liabilities

  -   (1,000)

Total adjustments

  308,000   76,000 

Net cash provided by operating activities

  398,000   260,000 
         

Investing activities:

        

Acquisition of property and equipment

  -   (5,000)

Payment for investment in convertible securities

  -   (186,000)

Net cash used for investing activities

  -   (191,000)
         

Financing activities:

        

Dividend payments

  (201,000)  (171,000)

Proceeds from stock options exercised

  54,000   76,000 

Net cash used for financing activities

  (147,000)  (95,000)
         

Impact of exchange rates on cash

  -   13,000 
         

Net increase in cash and cash equivalents

  251,000   (13,000)

Cash and cash equivalents, beginning of period

  5,313,000   4,494,000 

Cash and cash equivalents, end of period

 $5,564,000  $4,481,000 
         

Supplemental disclosures of cash flow information:

        

Cash paid for interest

 $-  $- 

Cash paid for income taxes, net

 $-  $- 

See accompanying notes to condensed consolidated financial statements (unaudited).

4

TAITRON COMPONENTS INCORPORATED

Notes to Condensed Consolidated Financial Statements (Unaudited)


1ORGANIZATION


In 1989, we were formedSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview of Business

We are primarily a supplier of original designed and manufactured (ODM) electronic components (“ODM Components”) with our product offerings ranging from discrete semiconductors through small electronic devices. Our products include value-added engineering and turn-key solutions, focusing on providing contract electronic manufacturers (CEMs) and original equipment manufacturers (OEMs) with ODM products for their multi-year turn-key projects (“ODM Projects”). We also distribute brand name electronic components with a vast inventory available on hand. We are incorporated in California.California and were originally formed in 1989. We maintain a majority-owned subsidiary in Mexico (since 1998)(our Mexico sales and two subsidiaries in each of Taiwan (since 1998) and China (since 2005).  Our Mexico locationdistribution operations closed all operations in May 2013 (finaland final Mexico entity closure is pending saleplanned for the second quarter of our local 15,000 sqft office2020) and warehouse facility) and ourdivisions in Taiwan and China locations are for supporting overseas customers, inventory sourcing, purchaseswhich were established in 1998, 1996 and coordinating the manufacture2005, respectively.

Basis of our products.  Our China location also serves as the engineering center responsible for designing circuits, arranging pre-production scheduling and mass production runs with joint venture partners for our projects, making component datasheets and test specifications, preparing samples, monitoring quality of shipments and performing failure analysis reports.


2 – BASIS OF PRESENTATION

Presentation

The unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned subsidiaries,divisions, including its 60% majority-owned subsidiary, Taitron Components Mexico, S.A. de C.V. All significant intercompany accounts and transactions have been eliminated in consolidation.


These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature and considered necessary for a fair presentation of its financial condition and results of operations for the interim periods presented in this Quarterly Report on Form 10-Q have been included. Operating results for the interim periods are not necessarily indicative of financial results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. In preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s condensed consolidated financial statements relate to the allowance for sales returns, doubtful accounts, inventory reserves, accrued liabilities and deferred income taxes.  Certain amounts

New Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”. The pronouncement also improves consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for us beginning in the prior year condensedfirst quarter of fiscal 2021, with early adoption permitted. We are still evaluating the impact this guidance will have on our consolidated financial statements have been reclassified to conformstatements.

Revenue recognition

Revenue is recognized at the point at which control of the underlying products are transferred to the current year presentation.customer. Satisfaction of our performance obligations occur upon the transfer of control of products, either from our facilities or directly from suppliers to customers. We consider customer purchase orders to be the contracts with a customer. All revenue is generated from contracts with customers.

In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to receive.

Taxes assessed by a governmental authority on revenue-producing transactions are excluded from revenue.

5

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of products sold.

Based upon the nature of our contracts with customers and our performance obligations within those contracts, we have no contract assets or liabilities as of March 31, 2020 and December 31, 2019.

Nature of products

We are primarily a supplier of original designed and manufactured (ODM) products that include value-added engineering and turn-key solutions. The following is a description of major products lines from which we generate our revenue:

ODM Projects- Our custom made small devices for original equipment manufacturers (OEMs) and contract electronic manufacturers (CEMs) in their multi-year turn-key projects and marketed in specific industries such as: wild animal feeders, timers for DC motors, public street light controllers, and battery chargers.

ODM Components - Our private labeled electronic components.

Distribution Components - Our name brand electronic components.

Disaggregation of revenue

In the following table, revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Primary geographical markets:

        

United States

 $1,320,000  $1,119,000 

Asia

  146,000   258,000 

Other

  6,000   7,000 
   1,472,000   1,384,000 

Major product lines:

        

ODM projects

 $789,000  $596,000 

ODM components

  638,000   745,000 

Distribution components

  45,000   43,000 
   1,472,000   1,384,000 

Timing of revenue recognition:

        

Products transferred at a point in time

 $1,472,000  $1,384,000 

2INVENTORY


Inventory – Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) or estimated marketand net realizable value. We had inventory balances in the amount of $5,513,000$3,411,000 and $5,055,000$3,588,000 at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, which is presented net of valuation allowances of $8,676,000$6,144,000 and $8,537,000,$5,893,000, respectively. We evaluate inventories to identify excess, high-cost, slow-moving or other factors rendering inventories as unmarketable at normal profit margins. Due to the large number of transactions and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the costcarrying values of inventories. Based on our assumptions about future demand and market conditions, inventories are carried at the lower of cost or estimated marketand net realizable value. If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories or valuation allowances may be required. In any case, actual amounts could be different from those estimated.


4
6

3 – OTHER ASSETS


  September 30,  December 31, 
  2017  2016 
  (Unaudited)    
       
Investment in securities - Zowie Technology $193,000  $100,000 
Investment in joint venture - Grand Shine Mgmt  240,000   347,000 
Other  26,000   24,000 
  Other Assets $459,000  $471,000 


4

  

Investment in securities - Zowie Technology

  

Other

  

Other Assets Total

 
             

Balance at December 31, 2019

 $186,000  $19,000  $205,000 

Other changes

  -   -   - 

Balance at March 31, 2020

 $186,000  $19,000  $205,000 

Our $193,000$186,000 investment in securities as of September 30, 2017March 31, 2020 relates to our ownership317,428 shares of 1,322,552 common sharespreferred convertible debt of Zowie Technology Corporation (New Taipei City,(Taipei Hsien, Taiwan), a supplier of electronic component products.products, with our option after three (3) years to convert into common stock or refundable bearing 7% annual interest rate. Our investment relates torepresents approximately 8.9%7.9% of their total outstanding shares, although we do not have significant influence or control. This investment is accounted for under the cost method(plus impairment) basis of accounting.

Our $240,000 investment in joint venture asaccounting, however when facts and circumstances indicate that the carrying value of September 30, 2017, relates to our 49% ownership of Grand Shine Management Limited (Dong Guan, China),this asset may not be recoverable, we recognize an electronic device contract manufacturer, and joint venture with its 51% owner, Teamforce Company Limited.  This joint ventureimpairment loss. The impairment loss recognized is not considered to be a “Variable Interest Entity”, and as such, is accounted for under the equity method basis of accounting.  As of September 30, 2017 andamount by which the carrying amount exceeds the estimated fair value. In the fourth quarter ending December 31, 2016, we have recorded cumulative unrealized loss from the inception of our investment in Grand Shine Management of $936,000 and $829,000, respectively.
5 – LONG-TERM DEBT FROM RELATED PARTY

Secured credit facility - On April 21, 2008 we entered into a $3,000,000 credit facility, collateralized by real property, from K.S. Best International Co. Ltd., a company controlled by the brother of our Chief Executive Officer.  Credit is available in $500,000 advances, each advance payable in monthly interest only installments, at the rate of Prime + 0.25% per annum.  On August 11, 2016 we renewed and extended maturities to June 30, 2018 and beyond. As of September 30, 2017 and December 31, 2016, the aggregate outstanding balance on this credit facility was $1,000,000.

6 – RELATED PARTY TRANSACTIONS

We made payments to K.S. Best International Co. Ltd., a company controlled by the brother of our Chief Executive Officer of approximately $6,000 for both of the quarters ending September 30, 2017 and 2016.  These payments were for professional fees related to the operational management of our Taiwan office.  In addition, we also made payments of approximately $11,000 and $13,000 for the quarters ended September 30, 2017 and 2016, respectively, for interest expense2019, based on our credit facility from K.S. Best International Co. Ltd.  See Note 5.

We have a $3,000,000 credit facility, collateralized by real property, from K.S. Best International Co. Ltd., a company controlled by the brotherestimated valuation assessment, we recognized an impairment loss of our Chief Executive Officer.  See Note 5.

7$193,000.

4 – SHARE BASED COMPENSATION


Accounting for stock options issued to employees measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Outstanding options to purchase Class A common stock (“the Options”) vest in three equal annual installments beginning one (1) year from the date of grant and are subject to termination provisions as defined in our 2005 Stock Incentive Plan.  Plan and 2018 Omnibus Incentive Plan (collectively referred to as “the Plans”). The optionOptions activity during the ninethree months ended September 30, 2017March 31, 2020 is as follows:


  Number of Shares  Weighted Average Exercise Price  Weighted Average Years Remaining Contractual Term  Aggregate Intrinsic Value 
             
Outstanding at December 31, 2016  376,000  $1.07   4.1  $72,000 
  Grants  -   -   -   - 
  Exercised  (40,000)            
  Forfeited  (5,000)  -   -   - 
Outstanding at September 30, 2017  331,000   1.08   3.8  $170,000 
Exercisable at September 30, 2017  304,666  $1.08   3.7  $136,000 

  

Number of Shares

  

Weighted Average Exercise Price

  

Weighted Average Years Remaining Contractual Term

  

Aggregate Intrinsic Value

 
                 

Outstanding at December 31, 2019

  381,500  $1.65   5.6  $429,000 

Exercised

  (45,000)  1.01         

Outstanding at March 31, 2020

  336,500  $1.72   5.5  $198,000 

Exercisable at March 31, 2020

  141,000  $1.34   4.1  $98,000 

At September 30, 2017March 31, 2020, the range of individual outstanding weighted average exercise prices was $0.98$1.02 to $1.10.


8$2.68 and the unamortized compensation expense was approximately $46,000.

5COMMITMENTS AND CONTINGENCIES


Inventory Purchasing

Outstanding commitments to purchase inventory from suppliers aggregated $1,100,000approximately $1,600,000 as of September 30, 2017.


March 31, 2020.

7

5

6SUBSEQUENT EVENTS

We have evaluated subsequent events through May 15, 2020, the date on which the accompanying condensed consolidated financial statements were available to be issued. Based upon its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying condensed consolidated financial statements or disclosures in the notes thereto, except as follows:

During the first quarter of 2020, we experienced increased costs associated with our logistics operations, and shipping delays. Our suppliers and customers were also negatively impacted, including delays in the production and export of products. The impact to our customers may also result in an increase in past due accounts receivable. To mitigate the impact of COVID-19, we have taken measures to promote the safety and security of our employees while complying with various government mandates, including work-from-home arrangements and social-distancing initiatives to reduce the transmission of COVID-19.

The COVID-19 pandemic has had a negative impact on our results of operations and financial performance for the first quarter of 2020, and we expect it will continue to have a negative impact on our revenue, earnings and cash flows in the second quarter of 2020 and possibly into 2021. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.

On April 27, 2020 we received $163,200 from the Small Business Administration Paycheck Protection Program loan program.

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


The following discussion should be read in conjunction with thecondensed consolidated financial statements, including the related notes, appearing in Item 1 of Part 1of1of this quarterly report on Form 10-Q, as well as our most recent annual report on Form 10-K for the year ended December 31, 2016.


2019.

This document contains forward-looking statements as defined inwithin the Privatemeaning of Section 27A of the Securities Litigation Reform Act of 1995 which are subject1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with respect to risksthe financial condition, results of operations and uncertainties.business of the Company. Forward-looking statements usually are denoted by words or phrases such as “believes,” “expects,” “projects,” “estimates,” “anticipates,” “will likely result” or similar expressions. We wish to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on forward-looking statements, which speak only as of the date made, and to advise readers that actual results could vary due to a variety of risks and uncertainties.  We do not uncertainties, including the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 and other reports we file with the Securities and Exchange Commission. Except as required by law, we undertake any duty no obligation to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.


statements.

References to “Taitron,” the “Company,” “we,” “our” and “us” refer to Taitron Components Incorporated and its wholly owned and majority-owned subsidiaries, unless the context otherwise specifically defines.


requires.

Critical Accounting Policies and Estimates


Use of Estimates - Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. These estimates have a significant impact on our valuation and reserve accounts relating to the allowance for sales returns, doubtful accounts, inventory reserves and deferred income taxes. Actual results could differ from these estimates.


Revenue Recognition – Revenue is recognized upon shipment of the merchandise,products, which is when legal transfer of title occurs.occurs and control of the product is transferred to the customer. Reserves for sales allowances and customer returns are established based upon historical experience and our estimates of future returns. Sales returns for each of the three months ended September 30, 2017March 31, 2020 and 20162019 were $6,000 and $3,000, respectively and for the nine months ended September 30, 2017 and 2016 were $154,000 and $69,000, respectively.$3,000. The allowance for sales returns and doubtful accounts at September 30, 2017March 31, 2020 and December 31, 20162019 aggregated $46,000 and $49,000, respectively.


$19,000.

Inventory – Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) or estimated marketand net realizable value. We had inventory balances in the amount of $5,513,000$3,411,000 and $5,055,000$3,588,000 at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, which is presented net of valuation allowances of $8,676,000$6,144,000 and $8,537,000,$5,893,000, respectively. We evaluate inventories to identify excess, high-cost, slow-moving or other factors rendering inventories as unmarketable at normal profit margins. Due to the large number of transactions and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. Based on our assumptions about future demand and market conditions, inventories are carried at the lower of cost or estimated market value.  If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.


Overview


We are primarily focused on supplying ODM products for our OEM customer’s multi-year turn-key projects. We also distribute discrete semiconductors, commodity Integrated Circuits (ICs), optoelectronic devices and passive components to other electronic distributors, CEMs and OEMs, who incorporate them in their products.


Our core strategy has shifted to primarily focus on higher margin ODM Projects that require custom products designed for specific applications to OEM customers, and away from actively marketing our superstore strategy of maintaining a vast quantity of electronic components to fill customer orders immediately from available stock held in inventory. As a result, we expect our components inventory will be more passively marketed and distributed online for clearance through our internet sales portal, however at potentially lower rates due to the pricing pressures normally attributed with online shopping.


9

6

In accordance with generally accepted accounting principles, we have classified inventory as a current asset in our September 30, 2017,March 31, 2020, condensed consolidated financial statements representing approximately 54%33.6% of current assets and 38%24.9% of total assets. However, if all or a substantial portion of the inventory was required to be immediately liquidated, the inventory would not be as readily marketable or liquid as other items included or classified as a current asset, such as cash. We cannot assure you that demand in the discrete semiconductor market will increase and that market conditions will improve. Therefore, it is possible that further declines in our carrying values of inventory may result.


Our gross profit margins are subject to a number of factors, including product demand, the relative strength of the U.S. dollar, provisions for inventory reserves, our ability to purchase inventory at favorable prices and our sales product mix.


Results of Operations


ThirdSignificant Risks and Uncertainties

On January 30, 2020, the World Health Organization declared the novel coronavirus 2019 (“COVID-19”) outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain.

During the first quarter of 2017fiscal 2020, we experienced increased costs associated with our logistics operations, and shipping delays. Our suppliers and customers were also negatively impacted, including delays in the production and export of products. The impact to our customers may also result in an increase in past due accounts receivable. To mitigate the impact of COVID-19, we have taken measures to promote the safety and security of our employees while complying with various government mandates, including work-from-home arrangements and social-distancing initiatives to reduce the transmission of COVID-19.

The COVID-19 pandemic has had a negative impact on our results of operations and financial performance for the first quarter of 2020, and we expect it will continue to have a negative impact on our revenue, earnings and cash flows in the second quarter of 2020 and possibly into 2021. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. See the Risk Factors included in our Annual report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission as well as the additional Risk Factor included in Part II—Item 1A of this quarterly report regarding the impacts of the COVID-19 outbreak.

First quarter of 2020 versus 2016.


2019.

Net sales in the thirdfirst quarter of 20172020 totaled $1,679,000$1,472,000 versus $1,621,000$1,384,000 in the comparable period for 2016,2019, an increase of $58,000$88,000 or 3.6%6.4% over the same period last year.


year. The increase was primarily driven by an increase of ODM project sales volume.

Gross profit for the thirdfirst quarter of 20172020 was $768,000$671,000 versus $585,000$683,000 in the comparable period for 2017,2019, and gross margin percentage of net sales was 45.7%45.6% in the thirdfirst quarter of 20172020 versus 36.1%49.3% in the comparable period for 2016.


2019. The approximately 3.7% gross profit decrease was driven by higher freight and tariff costs.

Selling, general and administrative expenses in the thirdfirst quarter of 20172020 totaled $534,000$598,000 versus $511,000$530,000 in the comparable period for 2016.


Interest expense, net of interest income,2019. The $68,000 increase was $9,000 for the third quarter of 2017primarily driven by higher salaries and $17,000 in the comparable period for 2016.

personnel related costs.

Other income, net of other expense, in the thirdthe first quarter of 20172020 was $25,000$7,000 versus $22,000$25,000 in the comparable period for 2016.2019. Other income was primarily derived from the rental income of excess office space at our headquarters’ facilityheadquarters in Valencia, CA.


California and our Shanghai, China office.

Income tax provision was $2,000$1,000 for the thirdboth the first quarter of 20172020 and $4,000 in 2016,2019, as we do not expect significant taxable income.


income for the year ending December 31, 2020.

Net income was $215,000$90,000 for the thirdfirst quarter of 20172020 versus $15,000$184,000 in the comparable period for 2016, an increase2019, a decrease of $200,000$94,000 resulting from the reasons discussed above.


Nine Months Ended September 30, 2017 versus Nine Months Ended September 30, 2016.

Net sales in the nine months ended September 30, 2017 was $5,778,000 versus $5,223,000 in the comparable period for 2016, an increase of $555,000 or 10.6% over the same period last year.

Gross profit for the nine months ended September 30, 2017 was $2,328,000 versus $1,841,000 in the comparable period for 2016, and gross margin percentage of net sales was approximately 40.3% for the nine months ended September 30, 2017 and 35.3% for 2016, respectively.

Selling, general and administrative (“SG&A”) expenses in the nine months ended September 30, 2017 totaled $1,618,000 versus $1,596,000 in the comparable period for 2016.

Interest expense, net of interest income, was $29,000 for the nine months ended September 30, 2017 versus $39,000 in the comparable period for 2016.

Other income, net of other losses, in the nine months ended September 30, 2017 was $85,000 versus $49,000 in the comparable period for 2016.

Income tax provision was $3,000 for the nine months ended September 30, 2017 versus $10,000 in 2016.

Net income was $660,000 for the nine months ended September 30, 2017 versus $55,000 in the comparable period for 2016, an increase of $605,000 resulting from the reasons discussed above.

10

7

Liquidity and Capital Resources


We historically have financedsatisfied our operations with fundsliquidity requirements through cash generated from operating activitiesoperations, short-term commercial loans, subordinated related party promissory notes and borrowings under our revolving credit facility.


issuance of equity securities.

Cash flows provided by operating activities were $190,000$398,000 as opposed to $759,000$260,000 in the ninethree months ending September 30, 2017ended March 31, 2020 and 2016,2019, respectively. The decreaseincrease of $569,000$138,000 in cash flows used inprovided by operations compared with the prior period resulted from changes in operating assets and liabilities, primarily from net incomeinventory and reductions of accounts payablespayable compared to the prior period.


Cash flows used infor investing activities were $128,000$0 and $6,000$191,000 for the ninethree months ending September 30, 2017ended March 31, 2020 and 2016,2019, respectively.


The decrease of $191,000 compared with the prior period was primarily due to our $186,000 investment in convertible securities (see Note 3).

Cash flows used infor financing activities were $374,000$147,000 and $776,000$95,000 for the ninethree months ending September 30, 2017ended March 31, 2020 and 2016,2019, respectively.


Inventory is included in current assets; however, it will take over one year for The increase of $52,000 compared with the inventoryprior period was primarily due to turn.  Hence, inventory would not be as readily marketable or liquid as other items included in current assets, such as cash.

lower stock options exercised and increased cash dividend payments of $30,000. The increase to our cash dividends was based upon our November 1, 2019 announcement that our quarterly cash dividends increased by 16.7% from $0.03 per share to $0.035 per share.

We believe that funds generated from or used in operations, in addition to existing cash balances and, if necessary, related party short-term loans, are likely to be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future. If these funds are not sufficient, we may secure new sources of short-term commercial loans, asset-based lending on accounts receivables or issue debt or equity securities.


Otherwise, we may need to liquidate assets to generate the necessary working capital.

Inventory is included and classified as a current asset. As of March 31, 2020, inventory represented approximately 33.6% of current assets and 24.9% of total assets. However, it is likely to take over one (1) year for the inventory to turn and therefore is likely not saleable within this time frame. Hence, inventory would not be as readily marketable or liquid as other items included in current assets, such as cash.

Off-Balance Sheet Arrangements


As of November 14, 2017,March 31, 2020, we had no off-balance sheet arrangements.


Item 3. Quantitative and Qualitative Disclosures About Market Risk. - Not applicable.


Item 4.4. Controls and Procedures.


Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our principal executive and principal financial officers concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.


Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

11

8

PART II - OTHER INFORMATION


Item 1. Legal Proceedings. - None


In the ordinary course of business, we may become involved in legal proceedings from time to time. As of the date of this report, we are not aware of any material pending legal proceedings.

Item 1A. Risk Factors.

The discussion of our business and operations should be read together with the risk factor set forth below and the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. Other than the additional risk factor set forth below, as of May 15, 2020, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, impacted the operations of our business partners and negatively impacted our operations and financial results.

The COVID-19 outbreak has negatively impacted the global economy, disrupted global supply chains, constrained workforce participation due to travel restrictions and quarantine orders, disrupted logistics and distribution systems, and created significant volatility and disruption of financial markets. As a result, this pandemic has negatively impacted our operations and those of our customers and suppliers, and heightened the risks of customer bankruptcies, customer delayed payments, restrictions on access to financial markets and other risk factors described in our Annual Report. While we have not yet experienced any material disruption to our supply chain and our headquarters and main distribution warehouse remains operational under business continuity plans, we have experienced increased logistics costs, lower product demand, longer lead times, and shipping delays. To mitigate the impact of COVID-19, we have implemented business continuity plans, with a focus on employee safety and mitigation of business disruptions. As the scope and duration of the COVID-19 outbreak is unknown and the extent of its economic impact continues to evolve globally, there is significant uncertainty related to the ultimate impact that it will have on our business, our employees, results of operations and financial condition.

Tariffs may result in increased prices and could adversely affect the company's business and results of operations.

Recently, the U.S. government imposed tariffs on certain products imported into the U.S. and the Chinese government imposed tariffs on certain products imported into China, which have increased the prices of many of the products that the company purchases from its suppliers. The tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S., China or other countries, could result in further increased prices. While the company intends to pass price increases on to its customers, the effect of tariffs on prices may impact sales and results of operations. Retaliatory tariffs imposed by other countries on U.S. goods have not yet had a significant impact, but the company cannot predict further developments. The tariffs and the additional operational costs incurred in minimizing the number of products subject to the tariffs could adversely affect the operating profits of the company and customer demand for certain products which could have an adverse effect on the company’s business and results of operations.

Item 2. Unregistered SalesUnregistered Sales of Equity Securities and Use of Proceeds. - None


None.

Item 3. Defaults Upon Senior Securities.- None


None.

Item 4. [Removed and Reserved]


Mine Safety Disclosures.Not Applicable.

Item 5. Other Information. – None None.

12

Item 6. Exhibits.


Exhibit

Number

 

Description of Document

31.1 *

31.2 *

 

32 ***

   

101.INS*

 

XBRL Instance Document

101.SCH*

 

XBRL Taxonomy Extension Schema

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase

   

*

 

Filed herewith.

**

Furnished herewith.




13

9

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.

TAITRON COMPONENTS INCORPORATED
  
Date: November 14, 2017May 15, 2020 

/s/ Stewart Wang

Stewart Wang,

Chief Executive Officer and President

(Principal Executive Officer)

/s/ David Vanderhorst

David Vanderhorst

Chief Financial Officer and Secretary

(Principal Financial Officer)


14



 
10