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TAITRON COMPONENTS INC - Quarter Report: 2023 September (Form 10-Q)



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, 2023

or

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

For the transition period from                              to                            

 

Commission File Number: 0-25844

 

TAITRON COMPONENTS INCORPORATED

(Exact name of registrant as specified in its charter)

 

California

95-4249240

(State or other jurisdiction of incorporation or organization)

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

 

28040 West Harrison Parkway, Valencia, California

91355-4162

(Address 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 every Interactive Data File required to be submitted 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 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:

 

Classes of common stock

Outstanding on October 31, 2023

Class A

5,258,568

Class B

762,612

 

 

 

 

TAITRON COMPONENTS INCORPORATED

 

INDEX

 

   

Page

PART I - FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements (Unaudited)

 
 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Income

2

 

Condensed Consolidated Statements of Shareholders' Equity

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

8

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

11

Item 4.

Controls and Procedures

11

 

  

 

PART II - OTHER INFORMATION

 
     

Item 1.

Legal proceedings

12

Item 1A.

Risk Factors

12

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

12

Item 3.

Defaults Upon Senior Securities

12

Item 4.

Mine Safety Disclosures

12

Item 5.

Other Information

12

Item 6.

Exhibits

12

 

Signatures

13

 

 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

TAITRON COMPONENTS INCORPORATED

 

Condensed Consolidated Balance Sheets

 

   

September 30,

   

December 31,

 
   

2023

   

2022

 

Assets

 

(Unaudited)

         

Current assets:

               

Cash and cash equivalents

  $ 5,195,000     $ 5,217,000  

Accounts receivable, less allowances of $7,000

    1,125,000       683,000  

Short-term investments (Note 2)

    3,572,000       2,034,000  

Inventories, less reserves for obsolescence of $5,140,000, and $5,069,000, respectively (Note 3)

    2,787,000       3,900,000  

Prepaid expenses and other current assets

    187,000       148,000  

Total current assets

    12,866,000       11,982,000  

Property and equipment, net

    3,017,000       2,922,000  

Deferred taxes

    2,052,000       2,047,000  

Other assets (Note 4)

    186,000       186,000  

Total assets

  $ 18,121,000     $ 17,137,000  
                 

Liabilities and Equity

               

Current liabilities:

               

Accounts payable

  $ 232,000     $ 211,000  

Accrued liabilities

    887,000       790,000  

Total current liabilities

    1,119,000       1,001,000  
                 

Commitments and contingencies (Note 6)

   
 
     
 
 
                 

Equity:

               

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;

5,256,901 and 5,233,568 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

    11,467,000       11,407,000  

Accumulated other comprehensive income

    (55,000 )     (58,000 )

Retained earnings

    5,584,000       4,781,000  

Total equity

    17,002,000       16,136,000  

Total liabilities and equity

  $ 18,121,000     $ 17,137,000  

 

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

 

 

TAITRON COMPONENTS INCORPORATED

 

Condensed Consolidated Statements of Operations and Comprehensive Income

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2023

   

2022

   

2023

   

2022

 
   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 
                                 

Net product revenue

  $ 1,563,000     $ 2,300,000     $ 5,139,000     $ 6,642,000  

Cost of products sold

    645,000       1,073,000       2,222,000       3,122,000  

Gross profit

    918,000       1,227,000       2,917,000       3,520,000  
                                 

Selling, general and administrative expenses

    530,000       536,000       1,703,000       1,624,000  

Operating income

    388,000       691,000       1,214,000       1,896,000  
                                 

Interest income, net

    72,000       14,000       139,000       22,000  

Other income (expense), net

    13,000       (96,000 )     494,000       (489,000 )

Income before income taxes

    473,000       609,000       1,847,000       1,429,000  
                                 

Income tax (provision) benefit

    (62,000 )     (125,000 )     (143,000 )     1,710,000  
                                 

Net income

  $ 411,000     $ 484,000     $ 1,704,000     $ 3,139,000  
                                 

Net income per share: Basic

  $ 0.07     $ 0.08     $ 0.28     $ 0.53  

                                    Diluted

  $ 0.07     $ 0.08     $ 0.28     $ 0.53  
                                 

Weighted average shares outstanding: Basic

    6,007,847       5,996,180       6,000,069       5,936,180  

                                                             Diluted

    6,035,847       6,026,180       6,025,069       5,972,180  
                                 

Cash dividends declared per common share

  $ 0.050     $ 0.045     $ 0.150     $ 0.235  
                                 

Net income

  $ 411,000     $ 484,000     $ 1,704,000     $ 3,139,000  

Other comprehensive income:

                               

Foreign currency translation adjustment

    5,000       20,000       3,000       15,000  

Comprehensive income

    416,000       504,000       1,707,000       3,154,000  

 

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

 

 

TAITRON COMPONENTS INCORPORATED

 

Condensed Consolidated Statements of Shareholders’ Equity

 

                                           

Accumulated

                 
   

Common Stock

    Additional    

Other

                 
   

Class A

   

Class B

   

Paid-in

   

Comprehensive

   

Retained

   

Total

 
   

Shares

   

Amount

   

Shares

   

Amount

   

capital

   

Income (Loss)

   

Earnings

   

Equity

 
                                                                 

Three months ending March 31, 2023, June 30, 2023 and September 30, 2023 (unaudited)

                                                               

Balance at December 31, 2022

    5,233,568     $ 5,000       762,612     $ 1,000     $ 11,407,000     $ (58,000 )   $ 4,781,000     $ 16,136,000  

Consolidated net income

    -       -       -       -       -       -       762,000     $ 762,000  

Other comprehensive loss

    -       -       -       -       -       (1,000 )     -     $ (1,000 )

Amortization of stock based compensation

    -       -       -       -       2,000       -       -     $ 2,000  

Cash dividends

    -       -       -       -       -       -       (300,000 )   $ (300,000 )

Balance at March 31, 2023

    5,233,568     $ 5,000       762,612     $ 1,000     $ 11,409,000     $ (59,000 )   $ 5,243,000     $ 16,599,000  

Consolidated net income

    -       -       -       -       -       -       531,000     $ 531,000  

Other comprehensive loss

    -       -       -       -       -       (1,000 )     -     $ (1,000 )

Amortization of stock based compensation

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

Cash dividends

    -       -       -       -       -       -       (300,000 )   $ (300,000 )

Balance at June 30, 2023

    5,233,568     $ 5,000       762,612     $ 1,000     $ 11,413,000     $ (60,000 )   $ 5,474,000     $ 16,833,000  

Consolidated net income

    -       -       -       -       -       -       411,000     $ 411,000  

Other comprehensive loss

    -       -       -       -       -       5,000       -     $ 5,000  

Stock options exercised

    23,333       -       -       -       56,000       -       -     $ 56,000  

Amortization of stock based compensation

    -       -       -       -       (2,000 )     -       -     $ (2,000 )

Cash dividends

    -       -       -       -       -       -       (301,000 )   $ (301,000 )

Balance at September 30, 2023

    5,256,901     $ 5,000       762,612     $ 1,000     $ 11,467,000     $ (55,000 )   $ 5,584,000     $ 17,002,000  
                                                                 

Three months ending March 31, 2022, June 30, 2022 and September 30, 2022 (unaudited):

                                                               

Balance at December 31, 2021

    5,113,568     $ 5,000       762,612     $ 1,000     $ 11,176,000     $ (73,000 )   $ 3,276,000     $ 14,385,000  

Consolidated net income

    -       -       -       -       -       -       2,042,000     $ 2,042,000  

Other comprehensive loss

    -       -       -       -       -       (17,000 )     -     $ (17,000 )

Amortization of stock based compensation

    -       -       -       -       5,000       -       -     $ 5,000  

Cash dividends

    -       -       -       -       -       -       (264,000 )   $ (264,000 )

Balance at March 31, 2022

    5,113,568     $ 5,000       762,612     $ 1,000     $ 11,181,000     $ (90,000 )   $ 5,054,000     $ 16,151,000  

Consolidated net income

    -       -       -       -       -       -       613,000     $ 613,000  

Other comprehensive loss

    -       -       -       -       -       12,000       -     $ 12,000  

Stock options exercised

    120,000       -       -       -       208,000       -       -     $ 208,000  

Amortization of stock based compensation

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

Cash dividends

    -       -       -       -       -       -       (870,000 )   $ (870,000 )

Balance at June 30, 2022

    5,233,568     $ 5,000       762,612     $ 1,000     $ 11,395,000     $ (78,000 )   $ 4,797,000     $ 16,120,000  

Consolidated net income

    -       -       -       -       -       -       484,000     $ 484,000  

Other comprehensive income

    -       -       -       -       -       20,000       -     $ 20,000  

Amortization of stock based compensation

    -       -       -       -       7,000       -       -     $ 7,000  

Cash dividends

    -       -       -       -       -       -       (270,000 )   $ (270,000 )

Balance at September 30, 2022

    5,233,568     $ 5,000       762,612     $ 1,000     $ 11,402,000     $ (58,000 )   $ 5,011,000     $ 16,361,000  

 

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

 

 

TAITRON COMPONENTS INCORPORATED

 

Condensed Consolidated Statements of Cash Flows

 

   

Nine Months Ended September 30,

 
   

2023

   

2022

 
                 

Operating activities:

               

Net income

  $ 1,704,000     $ 3,139,000  

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

               

Depreciation and amortization

    109,000       81,000  

Stock based compensation

    4,000       18,000  

Deferred income taxes

    (5,000 )     (1,922,000 )

Changes in values of marketable securities

    (538,000 )     511,000  

Changes in assets and liabilities:

               

Accounts receivable

    (442,000 )     (274,000 )

Inventories

    1,113,000       488,000  

Prepaid expenses and other current assets

    (39,000 )     (69,000 )

Accounts payable

    21,000       (1,126,000 )

Accrued liabilities

    97,000       (508,000 )

Other assets and liabilities

    -       9,000  

Total adjustments

    320,000       (2,792,000 )

Net cash provided by operating activities

    2,024,000       347,000  
                 

Investing activities:

               

Acquisition of property and equipment

    (204,000 )     -  

Purchase of marketable securities

    (1,000,000 )     (1,000,000 )

Net cash used for investing activities

    (1,204,000 )     (1,000,000 )
                 

Financing activities:

               

Dividend payments

    (901,000 )     (1,404,000 )

Proceeds from stock options exercised

    56,000       208,000  

Net cash used for financing activities

    (845,000 )     (1,196,000 )
                 

Impact of exchange rates on cash

    3,000       15,000  
                 

Net decrease in cash and cash equivalents

    (22,000 )     (1,834,000 )

Cash and cash equivalents, beginning of period

    5,217,000       5,974,000  

Cash and cash equivalents, end of period

  $ 5,195,000     $ 4,140,000  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes, net

  $ 499,000     $ 664,000  

 

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 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 and were originally formed in 1989. We maintain divisions in Taiwan and China which were established in 1996 and 2005, respectively.

 

Basis of Presentation

 

The unaudited condensed consolidated interim financial statements include the accounts of the Company and all wholly owned divisions. 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, 2022. 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.

 

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 September 30, 2023 and December 31, 2022.

 

 

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

September 30,

   

Nine Months Ended

September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Primary geographical markets:

                               

United States

  $ 1,492,000     $ 2,285,000     $ 4,869,000     $ 6,339,000  

Asia

    69,000       10,000       251,000       281,000  

Other

    2,000       5,000       19,000       22,000  
      1,563,000       2,300,000       5,139,000       6,642,000  

Major product lines:

                               

ODM projects

  $ 998,000     $ 1,628,000     $ 3,212,000     $ 4,617,000  

ODM components

    564,000       619,000       1,872,000       1,905,000  

Distribution components

    1,000       53,000       55,000       120,000  
      1,563,000       2,300,000       5,139,000       6,642,000  

Timing of revenue recognition:

                               

Products transferred at a point in time

  $ 1,563,000     $ 2,300,000     $ 5,139,000     $ 6,642,000  

 

2 SHORT-TERM INVESTMENTS

 

Short-term investments, consisting principally of marketable U.S. equity securities, are classified as short-term based on the nature of the securities and their availability for use in current operations. Measurement is based on fair value with gains and losses recognized in other income/(expense), net.

 

3 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) and net realizable value. We had inventory balances in the amount of $2,787,000 and $3,900,000 at September 30, 2023 and December 31, 2022, respectively, which is presented net of valuation allowances of $5,140,000 and $5,069,000, 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 and net realizable value. If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories or valuation allowances may be required. In any case, actual amounts could be different from those estimated.

 

 

4 OTHER ASSETS

 

   

Investment in securities -

Zowie Technology

   

Other

   

Other Assets Total

 
                         

Balance at December 31, 2022

  $ 186,000     $ -     $ 186,000  

Other changes

    -       -       -  

Balance at September 30, 2023

  $ 186,000     $ -     $ 186,000  

 

Our $186,000 investment in securities as of September 30, 2023 relates to 317,428 shares of preferred convertible debt of Zowie Technology Corporation (Taipei Hsien, Taiwan), a supplier of electronic component products, with our option after three (3) years to convert into common stock or refundable bearing 7% annual interest rate. Our investment represents approximately 6% of their total outstanding shares, although we do not have significant influence or control. This investment is accounted for under the cost (plus impairment) basis of accounting, however when facts and circumstances indicate that the carrying value of this asset may not be recoverable, we recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount exceeds the estimated fair value.

 

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 (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, 2023 is as follows:

 

   

Number of Shares

   

Weighted Average

Exercise Price

   

Weighted Average

Years Remaining

Contractual Term

   

Aggregate

Intrinsic Value

 
                                 

Outstanding at December 31, 2022

    224,567     $ 3.10       5.8     $ 148,000  

Exercised

    (23,333 )     2.12                  

Forfeited

    (1,000 )     0.91                  

Outstanding at September 30, 2023

    200,234     $ 3.22       5.6     $ 119,000  

Exercisable at September 30, 2023

    101,395     $ 3.03       5.2     $ 101,000  

 

At September 30, 2023, the range of individual outstanding weighted average exercise prices was $0.98 to $3.96 and the unamortized compensation expense was approximately $14,000. Stock based compensation recorded in the three and nine months ended September 30, 2023 was ($2,000) and $4,000, respectively, and is included in selling, general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

 

6 COMMITMENTS AND CONTINGENCIES

 

Inventory Purchasing

Outstanding commitments to purchase inventory from suppliers aggregated approximately $510,000 as of September 30, 2023.

 

 

Item 2. Managements 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, 2022.

 

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, 2022 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 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 and nine months ended September 30, 2023 and 2022 were $0 and $0, respectively. The allowance for sales returns and doubtful accounts at September 30, 2023 and December 31, 2022 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 $2,787,000 and $3,900,000 at September 30, 2023 and December 31, 2022, respectively, which is presented net of valuation allowances of $5,140,000 and $5,069,000, 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 during the year ended December 31, 2022 primarily as a result of our recent history of net income.

 

 

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, 2023, condensed consolidated financial statements representing approximately 22% of current assets and 15% 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, 2022 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.

 

Third quarter of 2023 versus 2022.

 

Net sales in the third quarter of 2023 totaled $1,563,000 versus $2,300,000 in the comparable period for 2022, a decrease of $737,000 or 32% over the same period last year. The decrease was primarily driven by a decrease of ODM project sales volume.

 

Gross profit for the third quarter of 2023 was $918,000 versus $1,227,000 in the comparable period for 2022, and gross margin percentage of net sales was 58.7% in the third quarter of 2023 versus 53.3% in the comparable period for 2022. The approximately 5.4% gross margin percentage increase was driven by selling higher margin products.

 

Selling, general and administrative expenses in the third quarter of 2023 totaled $530,000 versus $536,000 in the comparable period for 2022. The $6,000 decrease was primarily driven by lower salaries and personnel related costs.

 

Other income(expense), net, in the third quarter of 2023 was $13,000 versus ($96,000) in the comparable period for 2022. Other income(expense) was primarily from short-term investments.

 

Income tax provision was $62,000 for the third quarter of 2023 versus $125,000 in the comparable period for 2022.

 

Net income was $411,000 for the third quarter of 2023 versus $484,000 in the comparable period for 2022, a decrease of $73,000 resulting from the reasons discussed above.

 

 

Nine Months Ended September 30, 2023 versus Nine Months Ended September 30, 2022.

 

Net sales in the nine months ended September 30, 2023 was $5,139,000 versus $6,642,000 in the comparable period for 2022, a decrease of $1,503,000 or 22.6% over the same period last year. The decrease was driven by a decrease of ODM project sales volume.

 

Gross profit for the nine months ended September 30, 2023 was $2,917,000 versus $3,520,000 in the comparable period for 2022, and gross margin percentage of net sales was approximately 56.8% for the nine months ended September 30, 2023 and 53% for 2022, respectively.

 

Selling, general and administrative expenses in the nine months ended September 30, 2023 totaled $1,703,000 versus $1,624,000 in the comparable period for 2022, an increase of $79,000 over the same period last year. The $79,000 increase was primarily driven by higher salaries and personnel related costs.

 

Other income(expense), net, in the nine months ended September 30, 2023 was $494,000 versus ($489,000) in the comparable period for 2022. Other income(expense) was primarily from short-term investments.

 

Income tax provision(benefit) was $143,000 for the nine months ended September 30, 2023 versus ($1,710,000) in the comparable period for 2022. The decrease was due to reducing by ($1,915,000) our entire valuation allowance against our deferred tax assets in 2022.

 

Net income was $1,704,000 for the nine months ended September 30, 2023 versus $3,139,000 in the comparable period for 2022, a decrease of $1,435,000 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 $2,024,000 as opposed to $347,000 in the nine months ended September 30, 2023 and 2022, respectively. The increase of $1,677,000 in cash flows provided by operations compared with the prior period resulted from changes in operating assets and liabilities, primarily from accounts payable and inventory and a decrease in net income.

 

Cash flows used for investing activities were $1,204,000 and $1,000,000 for the nine months ended September 30, 2023 and 2022, respectively.

 

Cash flows used for financing activities were $845,000 and $1,196,000 for the nine months ended September 30, 2023 and 2022, respectively. The decrease of $351,000 compared with the prior period was based upon our 2022 special cash dividend of $0.10 per share announced on April 29, 2022.

 

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 September 30, 2023, inventory represented approximately 22% of current assets and 15% 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 September 30, 2023, we had no off-balance sheet arrangements.

 

 

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

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

The discussion of our business and operations should be read together with the risk factor set forth below and the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, 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. As of November 14, 2023, 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, 2022.

 

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

 

Item 3. Defaults Upon Senior Securities. None.

 

Item 4. Mine Safety Disclosures. Not Applicable.

 

Item 5. Other Information. None.

 

Item 6. Exhibits.

 

Exhibit

Number

 

Description of Document

31.1 *

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 *

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 **

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC. Section 1350).

101.INS*

 

Inline XBRL Instance Document

101.SCH*

 

Inline XBRL Taxonomy Extension Schema

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*

 

Filed herewith.

**

 

Furnished herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

TAITRON COMPONENTS INCORPORATED

 

 

 

Date: November 14, 2023

 

/s/ Stewart Wang                                         

Stewart Wang

Chief Executive Officer and President

(Principal Executive Officer)

 

 

 

 

 

/s/ David Vanderhorst                                  

David Vanderhorst

Chief Financial Officer and Secretary

(Principal Financial Officer)

 

13