65 – 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 and 2018 Omnibus Incentive Plan (collectively referred to as “the Plans”). The Options activity during the nine months ended September 30, 20212022 is as follows:

At September 30, 2021,2022, the range of individual outstanding weighted average exercise prices was $1.02$0.96 to $4.44$3.95 and the unamortized compensation expense was approximately $42,000.$40,000. Stock based compensation recorded in the three and nine months ended September 30, 20212022 was $9,000$7,000 and $23,000,$18,000, respectively, and is included in selling, general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

76 – COMMITMENTS AND CONTINGENCIES

Inventory Purchasing

Outstanding commitments to purchase inventory from suppliers aggregated approximately $3,800,000$740,000 as of September 30, 2021.2022.

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

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Item 1 of Part 1 of 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, 2020.2021.

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with respect to the financial condition, results of operations and 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, including the risks described in our Annual Report on Form 10-K for the year ended December 31, 20202021 and other reports we file with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update forward-looking statements.

References to “Taitron,” the “Company,” “we,” “our” and “us” refer to Taitron Components Incorporated and its wholly owned and majority-owned subsidiaries or divisions, unless the context otherwise 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 accrued liabilities and deferred income taxes. Actual results could differ from these estimates.

Revenue Recognition – Revenue is recognized upon shipment of the products, which is when legal transfer of title 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, 2021 and 2020 were $1,000 and $0, respectively and for the nine months ended September 30, 2022 and 2021 and 2020 were $1,000 and $5,000, respectively.$0. The allowance for sales returns and doubtful accounts at September 30, 20212022 and December 31, 20202021 aggregated $7,000.

Inventory – Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) and net realizable value. We had inventory balances in the amount of $3,948,000$4,773,000 and $3,518,000$5,261,000 at September 30, 20212022 and December 31, 2020,2021, respectively, which is presented net of valuation allowances of $4,848,000$5,028,000 and $4,759,000,$4,892,000, 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. 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.

Deferred Taxes – If determined that it is more likely than not that we will not realize all or part of our net deferred tax assets in the future, we record a valuation allowance against the deferred tax assets, which allowance will be charged to income tax expense in the period of such determination. We also consider the scheduled reversal of deferred tax liabilities, tax planning strategies and future taxable income in assessing if deferred tax assets could be realized. We also consider the weight of both positive and negative evidence in determining whether a valuation allowance is needed. However, we have fully reduced by $1,915,000 the entire valuation allowance against our net deferred tax assets at September 30, 2022 primarily as a result of our recent history of net income.

Overview

We are primarily focused on supplying ODM products (custom made small devices) for our OEM and CEM customer’s multi-year turn-key projects. We also distribute ODMdiscrete semiconductors, commodity Integrated Circuits (ICs), optoelectronic devices and passive components (private labeledto other electronic components)distributors, CEMs and name brand electronic components.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, 2021,2022, condensed consolidated financial statements representing approximately 32%33% of current assets and 25%27% 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

Significant Risks and Uncertainties

See the Risk Factors included in our Annual report on Form 10-K for the year ended December 31, 20202021 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.

Third quarter of 20212022 versus 2020.2021.

Net sales in the third quarter of 20212022 totaled $2,485,000$2,300,000 versus $1,991,000$2,485,000 in the comparable period for 2020, an increase2021, a decrease of $494,000$185,000 or 24.8%(7.4%) over the same period last year. The increasedecrease was primarily driven by an increasea decrease of ODM project sales volume.

Gross profit for the third quarter of 20212022 was $1,178,000$1,227,000 versus $967,000$1,178,000 in the comparable period for 2020,2021, and gross margin percentage of net sales was 47.4%53.3% in the third quarter of 20212022 versus 48.6%47.4% in the comparable period for 2020.2021. The approximately 5.9% gross margin percentage increase was driven by selling higher margin products.

Selling, general and administrative expenses in the third quarter of 20212022 totaled $467,000$536,000 versus $542,000$467,000 in the comparable period for 2020. The $75,000 decrease was primarily driven by trade commissions and professional fees.2021.

Other (expense)income, net, of other expense, in the third quarter of 20212022 was ($38,000)96,000) versus $12,000($38,000) in the comparable period for 2020 and primarily derived from changes in our investments and income of excess office space at office in Shanghai, China. The $50,000 decrease2021. Other expense was primarily derived fromshort-term investment losses.losses in 2022.

Income tax provision(provision)benefit was $1,000($125,000) for the third quarter of 2021 and 2020, as we do not expect significant taxable income2022 versus ($1,000) in the comparable period for the year ending December 31, 2021.

Net income was $678,000$484,000 for the third quarter of 20212022 versus $443,000$678,000 in the comparable period for 2020, an increase2021, a decrease of $235,000($194,000) resulting from the reasons discussed above.

Nine Months Ended September 30, 20212022 versus Nine Months Ended September 30, 20202021.

Net sales in the nine months ended September 30, 20212022 was $6,374,000$6,642,000 versus $4,766,000$6,374,000 in the comparable period for 2020,2021, an increase of $1,608,000$268,000 or 33.7%4.2% over the same period last year. The increase was driven by an increase of ODM project sales volume.

Gross profit for the nine months ended September 30, 20212022 was $2,969,000$3,520,000 versus $2,257,000$2,969,000 in the comparable period for 2020,2021, and gross margin percentage of net sales was approximately 46.6%53% for the nine months ended September 30, 20212022 and 47.4%46.6% for 2020,2021, respectively.

Selling, general and administrative expenses in the nine months ended September 30, 20212022 totaled $1,527,000$1,624,000 versus $1,659,000$1,527,000 in the comparable period for 2020, a decrease2021, an increase of $132,000$97,000 over the same period last year. The $132,000 decrease$97,000 increase was primarily driven by lowerhigher salaries and personnel related costs, trade commissions and professional fees.

Other income, net of other expenses, in the nine months ended September 30, 2021 was $151,000 versus $29,000 in the comparable period for 2020. Other income was primarily from rental income of excess office space at our Shanghai, China office. The $122,000 increase was primarily derived from PPP loan forgiveness of $163,000.

Income tax provision was $3,000 for the nine months ended September 30, 2021 and 2020, as we do not expect significant taxable income for the year ending December 31, 2021.costs.

Net Other (expense)income, net, in the nine months ended September 30, 2022 was $1,605,000($489,000) versus $151,000 in the comparable period for 2021. Other expense was primarily short-term investment losses compared to other income primarily $163,000 from PPP loan forgiveness in 2021.

Income tax benefit(provision) was $1,710,000 for the nine months ended September 30, 20212022 versus $652,000($3,000) in the comparable period for 2020, a decrease2021. The increase was due to reducing by $1,915,000 our entire valuation allowance against our deferred tax assets.

Net income was $3,139,000 for the nine months ended September 30, 2022 versus $1,605,000 in the comparable period for 2021, an increase of $953,000$1,534,000 resulting from the reasons discussed above.

Liquidity and Capital Resources

We historically have satisfied our liquidity requirements through cash generated from operations, short-term commercial loans, subordinated related party promissory notes and issuance of equity securities.

Cash flows provided by operating activities were $1,423,000 versus $1,467,000$347,000 as opposed to $1,500,000 in the nine months ended September 30, 20212022 and 2020,2021, respectively. The decrease of $44,000($1,153,000) in cash flows provided by operations compared with the prior period resulted from changes in operating assets and liabilities, primarily from accounts receivable, inventoriespayable and accounts payable compared to the prior period.accrued liabilities and deferred income taxes.

Cash flows used for investing activities were $1,439,000 versus $13,000 provided by$1,000,000 and $1,516,000 for the nine months ended September 30, 20212022 and 2020,2021, respectively. The $516,000 increase of $1,426,000 in cash flows used for investing compared with the prior period resultedwas primarily from the purchaseadditional purchases of short-term investments (see Note 2).

Cash flows used for financing activities were $645,000$1,196,000 and $385,000$645,000 for the nine months ended September 30, 20212022 and 2020,2021, respectively. The increase of $260,000$551,000 compared with the prior period was primarily due to the loan proceeds (see Note 5) and increased cash dividend payments of $94,000.$703,000. The increase to our cash dividends was based upon our November 1, 2020April 29, 2022 announcement thatof our quarterlyone-time special cash dividends increased by 14.3% from $0.035 per share to $0.04dividend of $0.10 per share.

We believe that funds generated from operations, existing cash balances,and short-term investmentsinvestment 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 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 September 30, 2021,2022, inventory represented approximately 31.7%33% of current assets and 25.1%27% 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.