Item 1. Financial Statements
(Unaudited)
TAITRON COMPONENTS INCORPORATED
Condensed Consolidated Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,481,000
|
|
|
$
|
4,494,000
|
|
Accounts receivable, less allowances of $39,000 and $38,000, respectively
|
|
|
616,000
|
|
|
|
901,000
|
|
Inventories, less reserves for obsolescence of $7,229,000, and $7,189,000, respectively (Note 2)
|
|
|
4,700,000
|
|
|
|
4,597,000
|
|
Prepaid expenses and other current assets
|
|
|
166,000
|
|
|
|
67,000
|
|
Total current assets
|
|
|
9,963,000
|
|
|
|
10,059,000
|
|
Property and equipment, net
|
|
|
3,672,000
|
|
|
|
3,710,000
|
|
Other assets (Note 3)
|
|
|
398,000
|
|
|
|
212,000
|
|
Total assets
|
|
$
|
14,033,000
|
|
|
$
|
13,981,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
966,000
|
|
|
$
|
972,000
|
|
Accrued liabilities
|
|
|
264,000
|
|
|
|
311,000
|
|
Total current & total liabilities
|
|
|
1,230,000
|
|
|
|
1,283,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6 )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
4,937,235 and 4,867,235 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
|
|
|
10,892,000
|
|
|
|
10,812,000
|
|
Accumulated other comprehensive income
|
|
|
141,000
|
|
|
|
128,000
|
|
Retained earnings
|
|
|
1,671,000
|
|
|
|
1,656,000
|
|
Total Shareholders’ Equity - Taitron Components Inc
|
|
|
12,710,000
|
|
|
|
12,602,000
|
|
Noncontrolling interest in subsidiary
|
|
|
93,000
|
|
|
|
96,000
|
|
Total Shareholders’ Equity
|
|
|
12,803,000
|
|
|
|
12,698,000
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
14,033,000
|
|
|
$
|
13,981,000
|
|
See accompanying notes to condensed consolidated financial statements (unaudited).
TAITRON COMPONENTS INCORPORATED
Condensed Consolidated Statements of Operations and Comprehensive Income
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Net product revenue
|
|
$
|
1,384,000
|
|
|
$
|
1,655,000
|
|
Cost of products sold
|
|
|
701,000
|
|
|
|
1,001,000
|
|
Gross profit
|
|
|
683,000
|
|
|
|
654,000
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
530,000
|
|
|
|
560,000
|
|
Operating income
|
|
|
153,000
|
|
|
|
94,000
|
|
|
|
|
|
|
|
|
|
|
Interest income(expense), net
|
|
|
7,000
|
|
|
|
(6,000
|
)
|
Loss on investments
|
|
|
-
|
|
|
|
(75,000
|
)
|
Other income, net
|
|
|
25,000
|
|
|
|
48,000
|
|
Income before income taxes
|
|
|
185,000
|
|
|
|
61,000
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(1,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
184,000
|
|
|
|
59,000
|
|
Net loss attributable to noncontrolling interest in subsidiary
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
Net income attributable to Taitron Components Inc.
|
|
$
|
186,000
|
|
|
$
|
61,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: Basic
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
Net income per share: Diluted
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
Cash dividends declared per common share
|
|
$
|
0.030
|
|
|
$
|
0.025
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: Basic
|
|
|
5,699,847
|
|
|
|
5,570,847
|
|
Weighted average common shares outstanding: Diluted
|
|
|
5,801,847
|
|
|
|
5,670,592
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
184,000
|
|
|
$
|
59,000
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
13,000
|
|
|
|
(7,000
|
)
|
Comprehensive income
|
|
|
197,000
|
|
|
|
52,000
|
|
Comprehensive loss attributable to noncontrolling interests
|
|
|
(3,000
|
)
|
|
|
(1,000
|
)
|
Comprehensive income attributable to Taitron Components Inc.
|
|
$
|
200,000
|
|
|
$
|
53,000
|
|
See accompanying notes to condensed consolidated financial statements (unaudited).
TAITRON COMPONENTS INCORPORATED
Condensed Consolidated Statements of Shareholders’ Equity
|
|
Class A common stock
|
|
|
Class B common stock
|
|
|
Additional
Paid-in capital
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Retained
Earnings
|
|
|
Noncontrolling
Interest in Sub
|
|
|
Total
Shareholders’
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Three months ending March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Taitron Components Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186,000
|
|
|
|
-
|
|
|
|
186,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ending March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2017
|
|
|
4,808,235
|
|
|
$
|
5,000
|
|
|
|
762,612
|
|
|
$
|
1,000
|
|
|
$
|
10,744,000
|
|
|
$
|
144,000
|
|
|
$
|
867,000
|
|
|
$
|
100,000
|
|
|
$
|
11,861,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Taitron Components Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,000
|
|
|
|
-
|
|
|
|
61,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(139,000
|
)
|
|
|
-
|
|
|
|
(139,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2018
|
|
|
4,808,235
|
|
|
$
|
5,000
|
|
|
|
762,612
|
|
|
$
|
1,000
|
|
|
$
|
10,745,000
|
|
|
$
|
137,000
|
|
|
$
|
789,000
|
|
|
$
|
99,000
|
|
|
$
|
11,776,000
|
|
See accompanying notes to condensed consolidated financial statements (unaudited).
TAITRON COMPONENTS INCORPORATED
Condensed Consolidated Statements of Cash Flows
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
184,000
|
|
|
$
|
59,000
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
43,000
|
|
|
|
53,000
|
|
Provision for sales returns and doubtful accounts
|
|
|
3,000
|
|
|
|
2,000
|
|
Stock based compensation
|
|
|
4,000
|
|
|
|
1,000
|
|
Loss on investments
|
|
|
-
|
|
|
|
75,000
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
282,000
|
|
|
|
255,000
|
|
Inventories
|
|
|
(103,000
|
)
|
|
|
581,000
|
|
Prepaid expenses and other current assets
|
|
|
(99,000
|
)
|
|
|
(45,000
|
)
|
Accounts payable
|
|
|
(6,000
|
)
|
|
|
(417,000
|
)
|
Accrued liabilities
|
|
|
(47,000
|
)
|
|
|
(80,000
|
)
|
Other assets and liabilities
|
|
|
(1,000
|
)
|
|
|
9,000
|
|
Total adjustments
|
|
|
76,000
|
|
|
|
434,000
|
|
Net cash provided by operating activities
|
|
|
260,000
|
|
|
|
493,000
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property & equipment
|
|
|
(5,000
|
)
|
|
|
(3,000
|
)
|
Payment for investment in convertible securities
|
|
|
(186,000
|
)
|
|
|
-
|
|
Net cash used for investing activities
|
|
|
(191,000
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Dividend payments
|
|
|
(171,000
|
)
|
|
|
(139,000
|
)
|
Proceeds from stock options exercised
|
|
|
76,000
|
|
|
|
-
|
|
Net cash used for financing activities
|
|
|
(95,000
|
)
|
|
|
(139,000
|
)
|
|
|
|
|
|
|
|
|
|
Impact of exchange rates on cash
|
|
|
13,000
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(13,000
|
)
|
|
|
344,000
|
|
Cash and cash equivalents, beginning of period
|
|
|
4,494,000
|
|
|
|
3,250,000
|
|
Cash and cash equivalents, end of period
|
|
$
|
4,481,000
|
|
|
$
|
3,594,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
6,000
|
|
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
–
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of
B
usiness
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 1997) 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 design 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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 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.
New Accounting Pronouncements
In February 2016, the 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 was effective in our first quarter of 2019. We have evaluated the impact of adopting this guidance and the adoption of these accounting changes have not impacted our assets and liabilities nor our net income or equity, as we currently do not lease any assets.
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 was effective in our first quarter of 2019. The adoption of this guidance has not had a material effect 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 was effective in our first quarter of 2019. The adoption of this guidance has not had a material effect on our consolidated financial statements.
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 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, 2019 and December 31, 2018.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,119,000
|
|
|
$
|
1,443,000
|
|
Asia
|
|
|
258,000
|
|
|
|
191,000
|
|
Other
|
|
|
7,000
|
|
|
|
21,000
|
|
|
|
|
1,384,000
|
|
|
|
1,655,000
|
|
Major product lines:
|
|
|
|
|
|
|
|
|
ODM projects
|
|
$
|
596,000
|
|
|
$
|
841,000
|
|
ODM components
|
|
|
745,000
|
|
|
|
716,000
|
|
Distribution components
|
|
|
43,000
|
|
|
|
98,000
|
|
|
|
|
1,384,000
|
|
|
|
1,655,000
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
1,384,000
|
|
|
$
|
1,655,000
|
|
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 net realizable value. We had inventory balances in the amount of $4,700,000 and $4,597,000 at March 31, 2019 and December 31, 2018, respectively, which is presented net of valuation allowances of $7,229,000 and $7,189,000, 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 carrying values 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 or valuation allowances may be required. In any case, actual amounts could be different from those estimated.
3
– OTHER ASSETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in securities - Zowie Technology
|
|
$
|
379,000
|
|
|
$
|
193,000
|
|
Other
|
|
|
19,000
|
|
|
|
19,000
|
|
Other Assets
|
|
$
|
398,000
|
|
|
$
|
212,000
|
|
Our $379,000 investment in securities as of March 31, 2019 relates to the following investments in Zowie Technology (“ZT”), a supplier of electronic component products located in Taipei City, Taiwan R.O.C.:
|
(a)
|
$193,000 relates to 1,322,552 common shares of ZT and represents approximately 9% of their total outstanding shares although we do not have significant influence or control.
|
|
(b)
|
$186,000 relates to 317,428 shares of preferred convertible shares of ZT with our option after 3 (three) years to convert the investment into common stock or refundable bearing 7% annual interest rate.
|
Both investments in ZT are accounted for under the cost (plus impairment) basis of accounting.
4
–
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 $0 and $6,000 for the three months ended March 31, 2019 and 2018, respectively. These payments were for professional fees related to the operational management of our Taiwan office. In addition, we also made interest expense payments on our credit facility of approximately $0 and $6,000 for the three months ended March 31, 2019 and 2018, respectively.
5 – 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 and 2018 Omnibus Incentive Plan (collectively referred to as “the Plans”). The Options activity during the three months ended March 31, 2019 is as follows:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Years Remaining Contractual Term
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
453,000
|
|
|
$
|
1.35
|
|
|
|
5.0
|
|
|
$
|
182,400
|
|
Exercised
|
|
|
(70,000
|
)
|
|
|
1.08
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
383,000
|
|
|
$
|
1.40
|
|
|
|
5.5
|
|
|
$
|
453,000
|
|
Exercisable at March 31, 2019
|
|
|
168,000
|
|
|
$
|
1.02
|
|
|
|
3.4
|
|
|
$
|
257,000
|
|
At March 31, 2019, the range of individual outstanding weighted average exercise prices was $0.98 to $1.78.
6
–
COMMITMENTS AND CONTINGENCIES
Inventory Purchasing
Outstanding commitments to purchase inventory from suppliers aggregated $2,040,000 as of March 31, 2019.
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, 20
1
8
.
T
his document contain
s
forward-looking statements
as defined in the Private Securities Litigation Reform Act of 1995 which are subject to
risks and uncertainties. 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 undertake any duty 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 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 the three months ended March 31, 2019 and 2018 were $3,000 and $2,000, respectively. The allowance for sales returns and doubtful accounts at March 31, 2019 and December 31, 2018 aggregated $39,000 and $38,000, 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 net realizable value. We had inventory balances in the amount of $4,700,000 and $4,597,000 at March 31, 2019 and December 31, 2018, respectively, which is presented net of valuation allowances of $7,229,000 and $7,189,000, 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.
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 March 31, 2019, condensed consolidated financial statements representing approximately 47% of current assets and 34% 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
First
quarter of
201
9
versus
201
8
.
Net sales in the first quarter of 2019 totaled $1,384,000 versus $1,655,000 in the comparable period for 2018, a decrease of $271,000 or 16.4% over the same period last year. The decrease was primarily driven by a decrease of ODM project sales volume.
Gross profit for the first quarter of 2019 was $683,000 versus $654,000 in the comparable period for 2018, and gross margin percentage of net sales was 49.4% in the first quarter of 2019 versus 39.5% in the comparable period for 2018. The approximately 10% gross profit increase was driven by an increase of ODM project sales unit pricing contributing approximately 5% and shipments of new higher gross margin ODM products which contributed approximately 4% of the increase.
Selling, general and administrative expenses in the first quarter of 2019 totaled $530,000 versus $560,000 in the comparable period for 2018. The $30,000 decrease was primarily driven by the decreases of $15,000 in professional services and $9,000 in commissions paid to our independent sales representatives.
Other income, net of other expense, in the first quarter of 2019 was $25,000 versus $48,000 in the comparable period for 2018. Other income was primarily derived from the rental income of excess office space at our headquarters in Valencia, CA.
Income tax provision was $1,000 for the first quarter of 2019 versus $2,000 in 2018, as we do not expect significant taxable income for the year ending December 31, 2019.
Net income was $184,000 for the first quarter of 2019 versus $59,000 in the comparable period for 2018, an increase of $125,000 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 $260,000 as opposed to $493,000 in the three months ended March 31, 2019 and 2018, respectively. The decrease of $233,000 in cash flows provided by operations compared with the prior period resulted from changes in operating assets and liabilities, primarily from inventory and accounts payable compared to the prior period.
Cash flows used for investing activities were $191,000 and $3,000 for the three months ended March 31, 2019 and 2018, respectively. The increase of $188,000 compared with the prior period was primarily due to our $186,000 investment in convertible securities (see Note 3).
Cash flows used for financing activities were $95,000 and $139,000 for the three months ended March 31, 2019 and 2018, respectively. The decrease of $44,000 compared with the prior period was primarily due to $76,000 of stock options exercised and partially offset by $32,000 of increased cash dividend payments. The increase to our cash dividends was based upon our November 2, 2018 announcement that our quarterly cash dividends increased by 20% from $0.025 per share to $0.03 per share.
We believe that funds generated from operations, 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 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, 2019, inventory represented approximately 47% of current assets and 34% of total assets. However, it is likely to take over one year for the inventory to turn and therefore is likely not saleable within a one-year 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 March 31, 2019, we had no off-balance sheet arrangements.