See accompanying notes to condensed consolidated financial statements (unaudited).
See accompanying notes to condensed consolidated financial statements (unaudited).
See accompanying notes to condensed consolidated financial statements (unaudited).
Notes to Condensed Consolidated Financial Statements (Unaudited)
1 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of business
In 1989, we were formed and incorporated in California. We maintain a majority-owned subsidiary in Mexico (since 1998) and two divisions in each of Taiwan (since 1998) and China (since 2005). Our Mexico location closed all operations in May 2013 (final closure is pending sale of our local 15,000 sq. ft. office and warehouse facility) and our Taiwan and China locations are for supporting overseas customers, inventory sourcing, purchases and coordinating the manufacture of our products. Our China location also serves as the engineering designs support center responsible for 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.
Basis of Presentation
The unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned 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, 2017. 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 in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard on leasing. The new standard will require companies to record most leased assets and liabilities on the balance sheet, and also proposes a dual model for recognizing expense. This guidance will be effective in the first quarter of 2019 with early adoption permitted. We have evaluated the impact of adopting this guidance and we are preparing for the changes to be made to our consolidated financial statements. We expect the adoption of these accounting changes will not impact our assets and liabilities nor our net income or equity, as we currently do not lease any assets.
In March 2016, the FASB issued new accounting standard which simplified certain aspects of the accounting for stock-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. This guidance was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures.
In January 2017, the FASB issued a new accounting standard which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance will be effective for the Company for the year ending December 31, 2019 and interim reporting periods within that year. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made
available for issuance. We are currently evaluating the effect of the adoption of this guidance on our consolidated financial statements.
In May 2017, the FASB issued a new accounting standard which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance will be effective for the year ending December 31, 2019 and interim reporting periods within that year. Early adoption is permitted. We expect the adoption of this guidance will not have a material effect on our consolidated financial statements.
Impact of Recently Issued Accounting Standards
On January 1, 2018, we adopted Topic 606 (
ASU 2014-09)
applying the modified retrospective method. The primary impact of adoption relates to additional disclosures and presentation of revenue by primary geographical market, major product line and the timing of revenue recognition.
Revenue recognition
Revenue is recognized at the point at which control of the underlying products are transferred to the 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 a 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, 2018 and December 31, 2017.
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.
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Three Months Ended March 31,
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2018
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2017
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Primary geographical markets:
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United States
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$
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1,443,000
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$
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1,980,000
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Asia
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191,000
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136,000
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Other
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21,000
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51,000
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1,655,000
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2,167,000
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Major product lines:
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ODM projects
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$
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841,000
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$
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1,274,000
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ODM components
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716,000
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700,000
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Distribution components
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98,000
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193,000
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1,655,000
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2,167,000
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Timing of revenue recognition:
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Products transferred at a point in time
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$
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1,655,000
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$
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2,167,000
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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 net realizable value. We had inventory balances in the amount of $4,409,000 and $4,990,000 at March 31, 2018 and December 31, 2017, respectively, which is presented net of valuation allowances of $7,910,000 and $7,848,000, respectively. We evaluate inventories to identify excess, high-cost, slow-moving or other factors rendering inventories as unmarketable at normal profit margins. Due to the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. Based on our assumptions about future demand and market conditions, inventories are carried at the lower of cost or net realizable value. If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.
3 – OTHER ASSETS
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March 31,
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December 31,
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2018
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2017
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(Unaudited)
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Investment in securities - Zowie Technology
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$
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193,000
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$
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193,000
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Investment in joint venture - Grand Shine Mgmt
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110,000
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185,000
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Other
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16,000
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25,000
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Other Assets
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$
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319,000
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$
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403,000
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Our $193,000 investment in securities as of March 31, 2018 relates to our ownership of 1,322,552 common shares of Zowie Technology Corporation (New Taipei City, Taiwan), a supplier of electronic component products. Our investment relates to approximately 8.9% of their total outstanding shares although we do not have significant influence or control. This investment is accounted for under the cost method basis of accounting.
Our $110,000 investment in joint venture as of March 31, 2018, relates to our 49% ownership of Grand Shine Management Limited (Dong Guan, China), an electronic device contract manufacturer, and joint venture with its 51% owner, Teamforce Company Limited. Our investment is accounted for under the equity method basis of accounting. As of March 31, 2018 and December 31, 2017, we have recorded cumulative unrealized losses from the inception of our investment in Grand Shine Management of $1,066,000 and $991,000, respectively.
4 – LONG-TERM DEBT FROM RELATED PARTY
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 is payable in monthly interest only installments, at the rate of Prime + 0.25% per annum. As of March 31, 2018 and December 31, 2017, the aggregate outstanding balance on this credit facility was $500,000. See Note 8.
5 – 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 ended March 31, 2018 and 2017. These payments were for professional fees related to the operational management of our Taiwan office. In addition, we also made payments of approximately $6,000 and $14,000 for the quarters ended March 31, 2018 and 2017, respectively, for interest expense on our credit facility from K.S. Best International Co. Ltd. See Note 4.
We have a $3,000,000 credit facility, collateralized by real property, from K.S. Best International Co. Ltd., a company controlled by the brother of our Chief Executive Officer. See Note 4 and 8.
6 – SHARE BASED COMPENSATION
Accounting for stock options issued to employees measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Outstanding options to purchase Class A common stock (“the Options”) vest in three equal annual installments beginning one year from the date of grant and are subject to termination provisions as defined in our 2005 Stock Incentive Plan.
The Options activity during the three months ended March 31, 2018 is as follows:
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Number of
Shares
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Weighted Average
Exercise Price
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Weighted Average Years Remaining Contractual Term
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Aggregate
Intrinsic Value
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Outstanding at December 31, 2017
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331,000
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$
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1.08
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3.5
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$
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204,000
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Forfeited
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(29,000
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)
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-
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-
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-
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Outstanding at March 31, 2018
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302,000
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1.03
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3.6
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$
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160,000
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Exercisable at March 31, 2018
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275,666
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$
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1.03
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3.7
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$
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136,000
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At March 31, 2018, the range of individual outstanding weighted average exercise prices was $0.98 to $1.08.
7 – COMMITMENTS AND CONTINGENCIES
Inventory Purchasing
Outstanding commitments to purchase inventory from suppliers aggregated $1,250,000 as of
March 31, 2018
.
8 – SUBSEQUENT EVENTS
On April 11, 2018, we paid $500,000 to K.S. Best International Co. Ltd. for principal repayment of our outstanding balance on our credit facility. See Note 4.