TRIO-TECH INTERNATIONAL - Quarter Report: 2019 December (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 December 31, 2019

 

OR

 

 

For the Transition Period from ___ to ___

 

Commission File Number 1-14523

 

TRIO-TECH INTERNATIONAL

(Exact name of Registrant as specified in its Charter)

 

California		95-2086631
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
Block 1008 Toa Payoh North
Unit 03-09 Singapore		318996
(Address of principal executive offices)		(Zip Code)

 

           Registrant's Telephone Number, Including Area Code:  (65) 6265 3300

 

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange
Title of each class	Trading Symbol	On which registered
Common Stock, no par value	TRT	NYSE American

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non­accelerated 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 12b­2 of the Exchange Act. (Check one):

 

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 ☒

 

As of February 1, 2020, there were 3,673,055 shares of the issuer’s Common Stock, no par value, outstanding.

 

 

TRIO-TECH INTERNATIONAL

INDEX TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE

 

		Page
Part I.	Financial Information
Item 1.	Financial Statements
	(a) Condensed Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and June 30, 2019	1
	(b) Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended December 31, 2019 (Unaudited) and December 31, 2018 (Unaudited)	2
	(c) Condensed Consolidated Statements of Shareholders Equity for the Three and Six Months Ended December 31, 2019 (Unaudited) and the December 31, 2018 (Unaudited)	4
	(d) Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 (Unaudited) and December 31, 2018 (Unaudited)	5
	(e) Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51
Item 4.	Controls and Procedures	51
Part II.	Other Information
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52
Signatures		53

FORWARD-LOOKING STATEMENTS

 

The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and assumptions regarding future activities and results of operations of the Company.  In light of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among others, could cause actual results to differ materially from those reflected in any forward-looking statements made by or on behalf of the Company: market acceptance of Company products and services; changing business conditions or technologies and volatility in the semiconductor industry, which could affect demand for the Company’s products and services; the impact of competition; problems with technology; product development schedules; delivery schedules; changes in military or commercial testing specifications which could affect the market for the Company’s products and services; difficulties in profitably integrating acquired businesses, if any, into the Company; risks associated with conducting business internationally and especially in Asia, including currency fluctuations and devaluation, currency restrictions, local laws and restrictions and possible social, political and economic instability; changes in U.S. and global financial and equity markets, including market disruptions and significant interest rate fluctuations; the trade tension between U.S. and China;public healthy issue related to the 2019 Novel Corona virus;and other economic, financial and regulatory factors beyond the Company’s control. Other than statements of historical fact, all statements made in this Quarterly Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future financial results and condition. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology.  Forward-looking statements involve risks and uncertainties that are inherently difficult to predict, which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions.

 

Unless otherwise required by law, we undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events. You are cautioned not to place undue reliance on such forward-looking statements.

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES)

 

	December 31, 2019	June 30, 2019
ASSETS	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$4,743	$4,863
Short-term deposits	6,888	4,144
Trade accounts receivable, less allowance for doubtful accounts of $306 and $263,      respectively	6,937	7,113
Other receivables	752	817
Inventories, less provision for obsolete inventory of $680 and $673, respectively	2,182	2,427
Prepaid expenses and other current assets	330	287
Assets held for sale	-	89
Total current assets	21,832	19,740
NON-CURRENT ASSETS:
Deferred tax asset	421	390
Investment properties, net	734	782
Property, plant and equipment, net	11,651	12,159
Operating lease right-of-use assets	475	-
Other assets	1,626	1,750
Restricted term deposits	1,716	1,706
Total non-current assets	16,623	16,787
TOTAL ASSETS	$38,455	$36,527
LIABILITIES
CURRENT LIABILITIES:
Lines of credit	$810	$187
Accounts payable	3,565	3,272
Accrued expenses	3,176	3,486
Income taxes payable	395	417
Current portion of bank loans payable	422	488
Current portion of finance leases	286	283
Current portion of operating leases	343	-
Total current liabilities	8,997	8,133
NON-CURRENT LIABILITIES:
Bank loans payable, net of current portion	2,127	2,292
Finance leases, net of current portion	570	442
Operating leases, net of current portion	134	-
Deferred tax liabilities	315	327
Income taxes payable	430	439
Other non-current liabilities	37	33
Total non-current liabilities	3,613	3,533
TOTAL LIABILITIES	$12,610	$11,666
EQUITY
TRIO-TECH INTERNATIONAL’S SHAREHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares authorized; 3,673,055 shares issued      outstanding as at December 31 and June 30, 2019, respectively	$11,424	$11,424
Paid-in capital	3,319	3,305
Accumulated retained earnings	7,769	7,070
Accumulated other comprehensive gain-translation adjustments	1,818	1,867
Total Trio-Tech International shareholders' equity	24,330	23,666
Non-controlling interest	1,515	1,195
TOTAL EQUITY	$25,845	$24,861
TOTAL LIABILITIES AND EQUITY	$38,455	$36,527

 

See notes to condensed consolidated financial statements.

 

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)

UNAUDITED (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

 

	Three Months Ended		Six Months Ended
	Dec. 31,	Dec. 31,	Dec. 31,	Dec. 31,
	2019	2018	2019	2018
Revenue
Manufacturing	$3,045	$3,352	$6,362	$6,989
Testing services	3,887	4,393	8,277	8,830
Distribution	2,014	1,916	4,113	3,860
Real Estate	16	29	33	56
	8,962	9,690	18,785	19,735
Cost of Sales
Cost of manufactured products sold	2,383	2,646	4,938	5,503
Cost of testing services rendered	2,918	3,106	6,109	6,489
Cost of distribution	1,738	1,662	3,545	3,348
Cost of real estate	18	18	36	36
	7,057	7,432	14,628	15,376
Gross Margin	1,905	2,258	4,157	4,359
Operating Expenses:
General and administrative	1,777	1,722	3,565	3,481
Selling	176	187	366	334
Research and development	125	122	201	194
Gain on disposal of property, plant and equipment	-	-	(24)	-
Total operating expenses	2,078	2,031	4,108	4,009
(Loss) / Income from Operations	(173)	227	49	350
Other Income / (Expenses)
Interest expenses	(55)	(98)	(123)	(176)
Gain on sale of asset held for sale	1,172	-	1,172	-
Other income, net	40	49	150	92
Total other income / (expenses)	1,157	(49)	1,199	(84)
Income from Continuing Operations before Income Taxes	984	178	1,248	266
Income Tax (Expenses) / Benefits	(120)	124	(120)	50
Income from continuing operations before non-controlling interest, net of tax	864	302	1,128	316
Discontinued Operations
Income / (Loss) from discontinued operations, net of tax	1	4	-	(4)
NET INCOME	865	306	1,128	312
Less: net income / (loss) attributable to non-controlling interest	439	(42)	429	(101)
Net Income Attributable to Trio-Tech International Common Shareholders	$426	$348	$699	$413
Amounts Attributable to Trio-Tech International Common Shareholders:
Income from continuing operations, net of tax	425	346	699	415
Income / (Loss) from discontinued operations, net of tax	1	2	-	(2)
Net Income Attributable to Trio-Tech International Common Shareholders	$426	$348	$699	$413

Basic Earnings per Share:
Basic per share from continuing operations attributable to Trio-Tech International	$0.12	$0.09	$0.19	$0.11
Basic earnings per share from discontinued operations attributable to Trio-Tech International	$-	$-	$-	$-
Basic Earnings per Share from Net Income
Attributable to Trio-Tech International	$0.12	$0.09	$0.19	$0.11
Diluted Earnings per Share:
Diluted earnings per share from continuing operations attributable to Trio-Tech International	$0.11	$0.09	$0.19	$0.11
Diluted earnings per share from discontinued operations attributable to Trio-Tech International	$-	$-	$-	$-
Diluted Earnings per Share from Net Income
Attributable to Trio-Tech International	$0.11	$0.09	$0.19	$0.11
Weighted average number of common shares outstanding
Basic	3,673	3,673	3,673	3,673
Dilutive effect of stock options	52	108	33	142
Number of shares used to compute earnings per share diluted	3,725	3,781	3,706	3,815

 

See notes to condensed consolidated financial statements.

 

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)

 

	Three Months Ended		Six Months Ended
	Dec. 31,	Dec. 31,	Dec. 31,	Dec. 31,
Comprehensive Income Attributable to Trio-Tech International Common Shareholders:	2019	2018	2019	2018
Net income	$865	$306	$1,128	$312
Foreign currency translation, net of tax	525	(51)	(38)	(590)
Comprehensive Income / (Loss)	1,390	255	1,090	(278)
Less: comprehensive income / (loss) attributable to non-controlling interest	431	(57)	440	(192)
Comprehensive Income / (Loss) Attributable to Trio-Tech International Common Shareholders	$959	$312	$650	$(86)

 

See notes to condensed consolidated financial statements.

 

 

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS) 

 

Six Months ended December 31, 2019

	Common Stock		Additional Paid-in	Accumulated Retained	Accumulated Other Comprehensive	Non- Controlling
	Shares	Amount	Capital	Earnings	Income	Interest	Total
		$	$	$	$	$	$
Balance at June 30, 2019	3,673	11,424	3,305	7,070	1,867	1,195	24,861
Stock option expenses	-	-	14	-	-	-	14
Net income	-	-	-	699	-	429	1,128
Dividend declared by subsidiary	-	-	-	-	-	(120)	(120)
Exercise of stock option	-	-	-	-	-	-	-
Translation adjustment	-	-	-	-	(49)	11	(38)
Balance at Dec. 31, 2019	3,673	11,424	3,319	7,769	1,818	1,515	25,845

 

Six Months ended December 31, 2018

	Common Stock		Additional Paid-in	Accumulated Retained	Accumulated Other Comprehensive	Non- Controlling
	Shares	Amount	Capital	Earnings	Income	Interest	Total
		$	$	$	$	$	$
Balance at June 30, 2018	3,553	11,023	3,249	5,525	2,182	1,522	23,501
Stock option expenses	-	-	9	-	-	-	9
Net income / (loss)	-	-	-	413	-	(101)	312
Dividend declared by subsidiary	-	-	-	-	-	(122)	(122)
Exercise of stock option	120	401	-	-	-	-	401
Translation adjustment	-	-	-	-	(499)	(91)	(590)
Balance at Dec. 31, 2018	3,673	11,424	3,258	5,938	1,683	1,208	23,511

 

See notes to condensed consolidated financial statements.

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

	Six Months Ended
	Dec. 31,	Dec. 31,
	2019	2018
	(Unaudited)	(Unaudited)
Cash Flow from Operating Activities
Net income	$1,128	$312
Adjustments to reconcile net income to net cash flow provided by operating activities
Gain on sale of asset held for sale	(1,172)	-
Gain on sale of property, plant and equipment	(24)	-
Depreciation and amortization	1,576	1,145
Stock compensation	14	9
Reversal of provision for obsolete inventory	(5)	-
Reversal of income tax provision	-	(145)
Repayment of operating leases	(359)	-
Repayment of interest portion of finance leases (Note 1b)	(24)	(24)
Bad debt expenses (recovery)	45	(2)
Accrued interest expense, net accrued interest income	(20)	26
Warranty recovery, net	-	(22)
Deferred tax (provision) / benefit	(47)	29
Changes in operating assets and liabilities, net of acquisition effects
Trade accounts receivable	132	753
Other receivables	65	(110)
Other assets	97	428
Inventories	247	294
Prepaid expenses and other current assets	(43)	(71)
Accounts payable and accrued expenses	(6)	(287)
Income taxes payable	(31)	(84)
Net Cash Provided by Operating Activities	1,573	2,251
Cash Flow from Investing Activities
Proceeds from disposal of property, plant and equipment	39	3
Proceeds from sale of asset held for sale	1,261	-
Investments in unrestricted deposits	(2,672)	(1,461)
Addition to property, plant and equipment	(744)	(2,297)
Net Cash Used in Investing Activities	(2,116)	(3,755)
Cash Flow from Financing Activities
Repayment on lines of credit	(729)	(5,908)
Repayment of bank loans	(245)	(265)
Repayment of principal portion of finance leases	(127)	(121)
Dividends paid on non-controlling interest	(120)	(122)
Proceeds from exercising stock options	-	401
Proceeds from lines of credit	1,337	5,962
Proceeds from bank loans	-	1,475
Proceeds from finance leases	279
Net Cash Generated from Financing Activities	395	1,422
Effect of Changes in Exchange Rate	38	(272)
Net decrease in cash, cash equivalents, and restricted cash	$(110)	$(354)
Cash, cash equivalents, and restricted cash at beginning of period	6,569	8,234
Cash, cash equivalents, and restricted cash at end of period	$6,459	$7,880
Supplementary Information of Cash Flows
Cash paid during the period for:
Interest	124	150
Income taxes	$109	$104
Non-Cash Transactions
Finance lease of property, plant and equipment	279	-

 

Reconciliation of Cash, cash equivalents, and restricted cash (Note 1a)
Cash	4,743	6,192
Short-term deposits	6,888	2,121
Restricted term-deposits in non-current assets	1,716	1,688
Total Cash, cash equivalents, and restricted cash shown in statement of cash flows	$13,347	$10,001
See notes to condensed consolidated financial statements.

Note 1a-Amounts reflecting adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) beginning in the first quarter of 2019.

 

Note 1b-Reclassification of repayment on interest portion of finance lease from financing activities to operating accordance ASC 842-20-45-5.

 

Amounts included in restricted deposits represent the amount of cash pledged to secure loans payable or trade financing granted by financial institutions and serve as collateral for public utility agreements such as electricity and water. Restricted deposits are classified as non-current assets, as they relate to long-term obligations and will become unrestricted only upon discharge of the obligations.

 

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AND NUMBER OF SHARES)

 

1. ORGANIZATION AND BASIS OF PRESENTATION

 

Trio-Tech International (“the Company” or “TTI” hereafter) was incorporated in fiscal year 1958 under the laws of the State of California. TTI provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. In addition, TTI operates testing facilities in the United States. The Company also designs, develops, manufactures and markets a broad range of equipment and systems used in the manufacturing and testing of semiconductor devices and electronic components. In the second quarter of fiscal year 2020, TTI conducted business in four business segments: Manufacturing, Testing Services, Distribution and Real Estate. TTI has subsidiaries in the U.S., Singapore, Malaysia, Thailand, Indonesia and China as follows:

 

	Ownership	Location
Express Test Corporation (Dormant)	100%	Van Nuys, California
Trio-Tech Reliability Services (Dormant)	100%	Van Nuys, California
KTS Incorporated, dba Universal Systems (Dormant)	100%	Van Nuys, California
European Electronic Test Centre (Dormant)	100%	Dublin, Ireland
Trio-Tech International Pte. Ltd.	100%	Singapore
Universal (Far East) Pte. Ltd.  *	100%	Singapore
Trio-Tech International (Thailand) Co. Ltd. *	100%	Bangkok, Thailand
Trio-Tech (Bangkok) Co. Ltd. *	100%	Bangkok, Thailand
Trio-Tech (Malaysia) Sdn. Bhd. (55% owned by Trio-Tech International Pte. Ltd.)	55%	Penang and Selangor, Malaysia
Trio-Tech (Kuala Lumpur) Sdn. Bhd.	55%	Selangor, Malaysia
(100% owned by Trio-Tech Malaysia Sdn. Bhd.)
Prestal Enterprise Sdn. Bhd.	76%	Selangor, Malaysia
(76% owned by Trio-Tech International Pte. Ltd.)
Trio-Tech (SIP) Co., Ltd. *	100%	Suzhou, China
Trio-Tech (Chongqing) Co. Ltd. *	100%	Chongqing, China
SHI International Pte. Ltd. (Dormant) (55% owned by Trio-Tech International Pte. Ltd)	55%	Singapore
PT SHI Indonesia (Dormant) (100% owned by SHI International Pte. Ltd.)	55%	Batam, Indonesia
Trio-Tech (Tianjin) Co., Ltd. *	100%	Tianjin, China

  * 100% owned by Trio-Tech International Pte. Ltd.

 

The accompanying un-audited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant inter-company accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements are presented in U.S. dollars. The accompanying condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report for the fiscal year ended June 30, 2019.

 

Except as otherwise specifically noted in this form 10-Q, the Company’s operating results are presented based on the translation of foreign currencies using the respective quarter’s average exchange rate.

 

Certain reclassifications have been made to prior period amounts to conform to the current presentation.

 

 

Basis of Presentation and Summary of Significant Accounting Policies

Comparability

Effective on the first day of fiscal 2020, the company adopted Accounting Standards Update 2016-02, Leases (“ASC 842”). Prior periods were not retrospectively restated, and accordingly, the consolidated balance sheet as of June 30, 2019, and the condensed consolidated statements of operations for the six months ended December 31, 2018 were prepared using accounting standards that were different than those in effect for the six months ended December 31, 2019.

Leases-Company as Lessee

 

Accounting Standards Codification ("ASC") Topic 842 introduced new requirements to increase transparency and comparability among organizations for leasing transactions for both lessees and lessors. It requires a lessee to record a right-of-use asset and a lease liability for all leases with terms longer than 12 months. These leases will be either finance or operating, with classification affecting the pattern of expense recognition.

 

The standard provides an alternative modified retrospective transition method. Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized on the date of adoption (July 1, 2019). The Company adopted ASC 842 as of July 1, 2019, and applied the alternative modified retrospective transition method requiring application of the new guidance to all leases existing at, or entered into on or after, the date of adoption, i.e. July 1, 2019.

 

The Company applies the guidance in ASC 842 to its individual leases of assets. When the Company receives substantially all of the economic benefits from and directs the use of specified property, plant and equipment, the transactions give rise to leases. The Company’s classes of assets include real estate leases.

 

Operating leases are included in operating lease right-of-use ("ROU") assets under the non-current asset portion of our consolidated balance sheets and under this current portion and non-current liabilities portion of our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the related lease. Finance leases are included in property, plant and equipment under the non-current asset portion of our consolidated balance sheets and under the current portion and non-current liabilities portion of our consolidated balance sheets.

 

The Company has elected the practical expedient within ASC 842 to not separate lease and non-lease components within lease transactions for all classes of assets. Additionally, the Company has elected the short-term lease exception for all classes of assets, does not apply the recognition requirements for leases of 12 months or less, and recognizes lease payments for short-term leases as expense either straight-line over the lease term or as incurred depending on whether the lease payments are fixed or variable. These elections are applied consistently for all leases.

 

As part of applying the transition method, the Company has elected to apply the package of transition practical expedients within the new guidance. As required by the new standard, these expedients have been elected as a package and are consistently applied across the Company’s lease portfolio. Given this election, the Company need not reassess:

 

 

When discount rates implicit in leases cannot be readily determined, the Company uses the applicable incremental borrowing rate at lease commencement to perform lease classification tests on lease components and to measure lease liabilities and ROU assets. The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads commensurate with the Company’s secured borrowing rate, over a similar term. At each reporting period when there is a new lease initiated, the rates established for that quarter will be used.

 

In applying the alternative modified retrospective transition method, the Company measured lease liabilities at the present value of the sum of remaining minimum rental payments (as defined under ASC Topic 840). The present value of lease liabilities has been measured using the Company’s incremental borrowing rates as of July 1, 2019 (the date of initial application). Additionally, ROU assets for these operating leases have been measured as the initial measurement of application lease liabilities adjusted for reinstatement liabilities.

 

 

 

The adoption of this new standard at July 1, 2019, and the application of the modified retrospective transition approach resulted in the following changes in the Company’s financial report:

 

 

Leases- Company as Lessor

 

All of the leases under which the Company is the lessor will continue to be classified as operating leases under the new standard. The new standard did not have a material effect on our financial statements and will not have significant change in our leasing activities.

 

2.    NEW ACCOUNTING PRONOUNCEMENTS

 

The amendments in ASU 2019-12 ASC Topic 740: Income Taxes: Simplifying Accounting for Income Taxes removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). The amendments eliminate the need for an organization to analyze whether the specific exceptions apply in a given period, improve financial statement preparers’ application of income tax-related guidance and simplify GAAP. The amendments are effective for all entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

 

The amendments in ASU 2018-18 ASC Topic 808: Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 provide more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The amendments allow organizations to only present units of account in collaborative arrangements that are within the scope of the revenue recognition standard together with revenue accounted for under the revenue recognition standard. The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard are to be presented separately from revenue accounted for under the revenue recognition standard. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

 

The amendments in ASU 2018-13 ASC Topic 820: Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

The amendments in ASU 2017-04 ASC Topic 350 — 'Intangibles - Goodwill and Other simplify the test for goodwill impairment. For public companies, these amendments are effective for annual periods beginning after December 15, 2019, including interim periods within those periods. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s presentation of consolidated financial position or results of operations.

 

 

In June 2016, FASB issued ASU 2016-13 ASC Topic 326: Financial Instruments — Credit losses (“ASC Topic 326”) for the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2019-10 defers the effective date of ASU 2016-13 as discussed below and it also distinguishes that smaller reporting companies as defined by the SECare considered for purposes of ASU No. 2016-13 only. In November 2018, the amendments in ASU 2018-19 ASC Topic 326: Codification Improvements was issued to clarify that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the lease’s standard. In May 2019, another ASU 2019-05 ASC Topic 326: Targeted Transition Relief  was issued to provide an option to measure certain types of assets at fair value which allows companies to irrevocably elect, upon adoption of ASU 2016-13. In November 2019, ASU2019-11: Codification improvements was issue to clarify guidance around how to report expected recoveries and also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. For public companies that are SEC filers and categorized under smaller reporting companies, ASC Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. While early application will be permitted for all organizations for fiscal years and interim periods after November 26, 2019 as long as an entity has adopted ASU 2016-13. The Company is currently evaluating the potential impact of this accounting standard update on its consolidated financial statements.

Other new pronouncements issued but not yet effective until after December 31, 2019 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

3.   TERM DEPOSITS

	Dec. 31,  2019 (Unaudited)	June 30,  2019
Short-term deposits	$6,844	$4,143
Currency translation effect on short-term deposits	44	1
Total short-term deposits	6,888	4,144
Restricted term deposits	1,754	1,701
Currency translation effect on restricted term deposits	(38)	5
Total restricted term deposits	1,716	1,706
Total term deposits	$8,604	$5,850

 

Restricted deposits represent the amount of cash pledged to secure loans payable to financial institutions and serve as collateral for public utility agreements such as electricity and water and performance bonds related to customs duty payable. Restricted deposits are classified as non-current assets, as they relate to long-term obligations and will become unrestricted only upon discharge of the obligations. Short-term deposits represent bank deposits, which do not qualify as cash equivalents.

 

 

4.   TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial conditions, and although management generally does not require collateral, letters of credit may be required from the customers in certain circumstances.

 

Senior management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Management includes any accounts receivable balances that are determined to be uncollectible in the allowance for doubtful accounts. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance.  Based on the information available, management believed the allowance for doubtful accounts as of December 31, 2019, and June 30, 2019 was adequate.  

 

The following table represents the changes in the allowance for doubtful accounts: 

	Dec. 31,  2019 (Unaudited)	June 30,  2019
Beginning	$263	$259
Additions charged to expenses	315	94
Recovered	(270)	(84)
Currency translation effect	(2)	(6)
Ending	$306	$263

 

5.   LOANS RECEIVABLE FROM PROPERTY DEVELOPMENT PROJECTS

The following table presents Trio-Tech (Chongqing) Co. Ltd (“TTCQ”)’s loan receivable from property development projects in China as of December 31, 2019. The exchange rate is based on the historical rate published by the Monetary Authority of Singapore as of March 31, 2015, since the net loan receivable was “nil” as of December 31, 2019.

 

	Loan Expiry Date	Loan Amount (RMB)	Loan Amount (U.S. Dollars)
Short-term loan receivables
JiangHuai (Project – Yu Jin Jiang An)	May 31, 2013	2,000	325
Less: allowance for doubtful receivables		(2,000)	(325)
Net loan receivables from property development projects		-	-
Long-term loan receivables
Jun Zhou Zhi Ye	Oct 31, 2016	5,000	814
Less: transfer – down-payment for  purchase of investment property		(5,000)	(814)
Net loan receivables from property development projects		-	-

 

 

 

 

The short-term loan receivables of Renminbi (“RMB”) 2,000, or approximately $325 based on the historical rate, arose from TTCQ entering into a Memorandum Agreement with JiangHuai Property Development Co. Ltd. (“JiangHuai”) to invest in their property development projects (Project - Yu Jin Jiang An) located in Chongqing City, China in fiscal 2011. Based on TTI’s financial policy, a provision for doubtful receivables of $325 on the investment in JiangHuai was recorded during fiscal 2014. TTCQ did not generate other income from JiangHuai for the quarter ended December 31, 2019 or for the fiscal year ended June 30, 2019. TTCQ is in the legal process of recovering the outstanding amount of $325.

 

The long-term loan receivable of RMB 5,000, or approximately $814 based on the historical rate, arose from TTCQ entering into a Memorandum Agreement with JiaSheng Property Development Co. Ltd. (“JiaSheng”) to invest in JiaSheng’s property development projects (Project B-48 Phase 2) located in Chongqing City, China in fiscal 2011. The loan receivable was unsecured and repayable at the end of the term. The book value of the loan receivable approximates its fair value. During fiscal year 2015, the loan receivable was transferred to down payment for purchase of investment property that is being developed in the Singapore Themed Resort Project (See Note 9).

 

6.  INVENTORIES

 Inventories consisted of the following:

 

	Dec. 31,  2019  (Unaudited)	June 30,  2019
Raw materials	$1,326	$1,190
Work in progress	1,047	1,306
Finished goods	486	591
Currency translation effect	3	13
Less: provision for obsolete inventory	(680)	(673)
	$2,182	$2,427

 

The following table represents the changes in provision for obsolete inventory:

	Dec. 31,  2019 (Unaudited)	June 30,  2019
Beginning	$673	$695
Additions charged to expenses	9	17
Usage – disposition	(4)	(42)
Currency translation effect	2	3
Ending	$680	$673

 

 

 

7. ASSETS HELD FOR SALE

Penang Property

 

During the fourth quarter of the fiscal year 2015, the operations in Malaysia planned to sell its factory building in Penang, Malaysia. In accordance with ASC Topic 360, during the fiscal year 2015, the property was reclassified from investment property, which had a net book value of RM 371, or approximately $98 (based on the exchange rate as of June 30, 2015 as published by the Monetary Authority of Singapore), to assets held for sale, since there was anintention to sell the factory building. In May 2015, Trio-Tech Malaysia was approached by a potential buyer to purchase the factory building. On September 14, 2015, the application to sell the property was rejected by Penang Development Corporation (PDC).The rejection was because the business activity of the purchaser was not suitable for the industry that is being promoted on said property. PDC made an offer to purchase the property, which was not at the expected value and the offer expired on March 28, 2016. No further conversations with PDC have occurred since March 2016. Management entered into a Sales and Purchase Agreement with a potential buyer in the fourth quarter of fiscal year 2019. During the second quarter of the fiscal year 2020, the Company had obtained approval of the sale from PDC and the local government. The sale of the property was completed at the end of the second quarter of the fiscal year 2020. The sale price was RM5,600, or $1,340. In connection with the sale of the property located in Malaysia, the Company also incurred the direct expenses of RM330, or $79 which including professional fees, commissions, other selling related expenses and  consent fee from local government. These expenses were directly offset against the proceeds from selling the property as these expenses were deemed as a cost of sales. The Company recognized a net gain of RM4,901 or  $1,172 in the second quarter of fiscal year 2020 excluding capital gain tax. The tax on the capital gain in Malaysia from the sale of the property was approximately $94 computed after the taxable gain was determined.

 

The following table presents the Company’s assets held for sale in Malaysia as of December 31, 2019 and June 30, 2019.

 

			Dec. 31, 2019 (Unaudited)	June 30, 2019
	Reclassification Date /	Investment Amount	Investment Amount	Investment Amount
	Sale Date	(RM)	(U.S. Dollars)	(U.S. Dollars)
Penang Property
Reclassification from investment property	June 30, 2015	681	181*	181*
Currency translation		-	-	(15)
Derecognition	Dec 19,2019	(681)	(181)	-
		-	-	166
Accumulated depreciation on rental property	June 30, 2015	(310)	(83)*	(83)*
Currency translation		-	-	6
Derecognition	Dec 19,2019	310	(83)	-
		-	-	(77)
Net investment in rental property - Malaysia		-	-	89

 

*The exchange rate is based on the exchange rate as of June 30, 2015 published by the Monetary Authority of Singapore.

  

 

 

8.   INVESTMENT PROPERTIES

The following table presents the Company’s investment in properties in China as of December 31, 2019. The exchange rate is based on the market rate as of December 31, 2019.

 

	Investment Date / Reclassification Date	Investment Amount  (RMB)	Investment Amount (U.S. Dollars)
Purchase of rental property – Property I – MaoYe Property	Jan 04, 2008	5,554	894
Currency translation		-	(87)
Reclassification as “Assets held for sale”	July 01, 2018	(5,554)	(807)
Reclassification from “Assets held for sale”	Mar 31, 2019	2,024	301
		2,024	301
Purchase of rental property – Property II - JiangHuai	Jan 06, 2010	3,600	580
Purchase of rental property – Property III - Fu Li	Apr 08, 2010	4,025	648
Currency translation		-	(148)
Gross investment in rental property		9,649	1,381
Accumulated depreciation on rental property	Dec 31, 2019	(6,317)	(914)
Reclassified as “Assets held for sale”-Mao Ye Property	July 01, 2018	2,822	410
Reclassification from “Assets held for sale”-Mao Ye Property	Mar 31, 2019	(1,029)	(143)
		(4,524)	(647)
Net investment in property – China		5,125	734