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
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 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 | 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 | Outstanding on |
Class A | 5,035,235 |
Class B | 762,612 |
TAITRON COMPONENTS INCORPORATED | ||
| INDEX | ||
Page | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. | ||
Condensed Consolidated Balance Sheets | 1 | |
2 | ||
3 | ||
4 | ||
5 | ||
Item 2. | 9 | |
Item 3. | 11 | |
Item 4. | 11 | |
PART II - OTHER INFORMATION | ||
Item 1. | 12 | |
Item 1A. | 12 | |
Item 2. | 12 | |
Item 3. | 12 | |
Item 4. | 12 | |
Item 5. | 12 | |
Item 6. | 13 | |
14 | ||
PART I - FINANCIAL INFORMATION
TAITRON COMPONENTS INCORPORATED
| 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).
TAITRON COMPONENTS INCORPORATED
| 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).
TAITRON COMPONENTS INCORPORATED
| 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 | ||||
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).
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).
TAITRON COMPONENTS INCORPORATED
Notes to Condensed Consolidated Financial Statements (Unaudited)
1 – ORGANIZATION
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.
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.
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 | ||||
2 – INVENTORY
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.
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 | ||||
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.
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.
5 – COMMITMENTS AND CONTINGENCIES
Inventory Purchasing
Outstanding commitments to purchase inventory from suppliers aggregated $1,100,000approximately $1,600,000 as of September 30, 2017.
6 – SUBSEQUENT 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.
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.
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.
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.
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.
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.
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.
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
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.
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.
Other income, net of other expense, in t
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.
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.
Liquidity and Capital Resources We historically have Cash flows provided by operating activities were Cash flows used Cash flows used We believe that funds generated from 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 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.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.$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.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.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.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.November 14, 2017,March 31, 2020, we had no off-balance sheet arrangements.
PART II - OTHER INFORMATION
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.
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.
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. |
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: | /s/ Stewart Wang Stewart Wang, Chief Executive Officer and President (Principal Executive Officer) / s/ David VanderhorstDavid Vanderhorst Chief Financial Officer and Secretary (Principal Financial Officer) |