TRIO-TECH INTERNATIONAL - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended June 30, 2020

 

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: (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 if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. ☐Yes ☑ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No

 

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ☑Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition 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 (Do not check if a smaller reporting company) ☐ 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

 

The aggregate market value of voting stock held by non-affiliates of Registrant, based upon the closing price of $3.99 for shares of the registrant’s Common Stock on December 31, 2019, the last business day of the registrants most recently completed second fiscal quarter as reported by the NYSE American, was approximately $7,135,000. In calculating such aggregate market value, shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock (including shares with respect to which a holder has the right to acquire beneficial ownership within 60 days) were excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares of Common Stock outstanding as of September 1, 2020 was 3,673,055.

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference information from Registrant’s Proxy Statement for its 2020 Annual Meeting of Shareholders to be filed with the Commission under Regulation 14A within 120 days of the end of the fiscal year covered by this Form 10-K.

 

 

TRIO-TECH INTERNATIONAL

 

INDEX

 

		Page
	Part I
Item 1	Business	1
Item 1A	Risk factors	6
Item 1B	Unresolved staff comments	6
Item 2	Properties	7
Item 3	Legal proceedings	8
Item 4	Mine safety disclosures	8
	Part II
Item 5	Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities	9
Item 6	Selected financial data	9
Item 7	Management’s discussion and analysis of financial condition and results of operations	9
Item 7A	Quantitative and qualitative disclosures about market risk	25
Item 8	Financial statements and supplementary data	25
Item 9	Changes in and disagreements with accountants on accounting and financial disclosure	25
Item 9A	Controls and procedures	25
Item 9B	Other information	26
	Part III
Item 10	Directors, executive officers and corporate governance	27
Item 11	Executive compensation	27
Item 12	Security ownership of certain beneficial owners and management and related stockholder matters	27
Item 13	Certain relationships and related transactions, and director independence	27
Item 14	Principal accountant fees and services	27
	Part IV
Item 15	Exhibits and financial statement schedules	27
Item 16	Form 10-K summary	27
Signatures		28
Exhibits		29
	Report of independent registered public accounting firm
	Consolidated Balance Sheets as of June 30, 2020 and 2019	F-2
	Consolidated Statements of Operations and Comprehensive Income for the Years Ended June 30, 2020 and 2019	F-3
	Consolidated Statements of Shareholders’ Equity for the Years Ended June 30, 2020 and 2019	F-5
	Consolidated Statements of Cash Flows for the Years Ended June 30, 2020 and 2019	F-6
	Notes to Consolidated Financial Statements	F-8

 

 

 

TRIO-TECH INTERNATIONAL

 

PART I

 

ITEM 1 – BUSINESS (IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)

 

Cautionary Statement Regarding Forward-Looking Statements

 

The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-K 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’s 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; on-going public health issues related to the COVID-19 pandemic; credit risks in the Chinese real estate industry; changes in macroeconomic conditions and credit market conditions; and other economic, financial and regulatory factors beyond the Company’s control. 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.

 

Unless otherwise required by law, the Company undertakes 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.

 

General

 

Trio-Tech International was incorporated in 1958 under the laws of the State of California. As used herein, the term "Trio-Tech" or "Company” or “we” or “us” or “Registrant” includes Trio-Tech International and its subsidiaries unless the context otherwise indicates. The mailing address and executive offices are located at Block 1008 Toa Payoh North, Unit 03-09 Singapore 318996, Singapore, and the telephone number is (65) 6265-3300.

 

We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The SEC also maintains an internet site at www.sec.gov that contains such reports and statements filed electronically with the SEC by the Company. Additional information about Trio-Tech is available on our website at www. triotech.com.

 

During the fiscal year ended June 30, 2020, the Company operated its business in four segments: manufacturing, testing services, distribution and real estate. Geographically, the Company operates in the United States (“U.S.”), Singapore, Malaysia, Thailand and China. It operates six testing service facilities; one in the U.S. and five in Asia. It operates two manufacturing facilities: one in the U.S. and the other in Asia. Its real estate segment operates in Asia and its distribution segment operates primarily in Asia. Its major customers are concentrated in Asia and they are either semiconductor chip manufacturers or testing facilities that purchase testing equipment. For information relating to revenues, profit and loss and total assets for each of the segments, see Note 18 - Business Segments contained in the consolidated financial statements included in this Form 10-K.

 

 

Company History – Certain Highlights for the Five Fiscal Years Ended June 30, 2020

 

2016     2017	Trio-Tech (Tianjin) Co., Ltd., re-certified to ISO 14001:2004 standards. (July 2016) Trio-Tech (Tianjin) Co., Ltd., re-certified to OHSAS 18001:2007 standards. (July 2016)   Trio-Tech International Pte. Ltd., Singapore, re-certified to biz SAFE Level 3 Workplace Safety and Health standards.
2018	Trio-Tech (Tianjin) Co. Ltd. re-certified to ISO 9001:2015 standards. (Apr 2018).  Trio-Tech International Pte. Ltd. (Singapore) re-certified to ISO 9001:2015 standards. (Jun 2018) Trio-Tech (Malaysia) Sdn. Bhd. re-certified to ISO 9001:2015 standards. (Jun 2018) Trio-Tech (Bangkok) Co. Ltd. re-certified to ISO 9001:2015 standards. (Jun 2018) Trio-Tech International Pte. Ltd. (Singapore) re-certified to ISO 14001:2015 standards. (Jun 2018)
2019     2020	Trio-Tech (Tianjin) Co. Ltd. recertified to ISO 14001:2015 standards. (July 2019) Trio-Tech (Tianjin) Co. Ltd. recertified to OHSAS 18001:2007 standards. (July 2019)   Trio-Tech International certified to ISO 9001:2005 standards (March 2020)

 

Overall Business Strategies

Our core business is and historically has been in the semiconductor industry (testing services, manufacturing-assembly) manufacturing and distribution. Revenue from the semiconductor industry accounted for 99.8% of our total revenue for fiscal years 2020 and 2019. The semiconductor industry has experienced periods of rapid growth, but has also experienced downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. To reduce our risks associated with sole industry focus and customer concentration, the Company continues to put effort into expanding its line of businesses. The Real Estate segment contributed only 0.2% to the total revenue for fiscal 2020 and 2019 and has been an insignificant business operation since the property market in China has slowed down due to control measures in China. We are continuing the process of winding down our oil & gas equipment fabrication operations, which discontinued its operations in December 2012.

 

To achieve our strategic plan for our semiconductor business, we believe that we must pursue and win new business in the following areas:

 

 

 

 

 

 

Business Segments

 

Testing Services

 

Our testing services are rendered to manufacturers and purchasers of semiconductors and other entities who either lack testing capabilities or whose in-house screening facilities are insufficient for testing devices in order for them to make sure that these products meet certain commercial specifications. Customers outsource their test services either to accommodate fluctuations in output or to benefit from economies that can be offered by third party service providers.

 

Our laboratories perform a variety of tests, including stabilization bake, thermal shock, temperature cycling, mechanical shock, constant acceleration, gross and fine leak tests, electrical testing, microprocessor equipment contract cleaning services, static and dynamic burn-in tests, reliability lab services and vibration testing. We also perform qualification testing, consisting of intense tests conducted on small samples of output from manufacturers who require qualification of their processes and devices.

 

We use our own proprietary equipment for certain burn-in, centrifugal and leak tests, and commercially available equipment for various other environmental tests. We conduct the majority of our testing operations in Asia with facilities in Singapore, Malaysia, Thailand and China, which have been certified to the relevant ISO quality management standards.

 

Manufacturing

 

We manufacture both front-end and back-end semiconductor test equipment and related peripherals at our facilities in Singapore and the U.S.

 

Front-End Products

 

Artic Temperature Controlled Wafer Chucks

 

Artic Temperature Controlled Wafer Chucks are used for test, characterization and failure analysis of semiconductor wafers and such other components at accurately controlled cold and hot temperatures. These systems provide excellent performance to meet the most demanding customer applications. Several unique mechanical design features provide excellent mechanical stability under high probing forces and across temperature ranges.

 

Wet Process Stations

 

Wet Process Stations are used for cleaning, rinsing and drying semiconductor wafers, flat panel display magnetic disks, and other microelectronic substrates. After the etching or deposition of integrated circuits, wafers are typically sent through a series of 100 to 300 additional processing steps. At many of these processing steps, the wafer is washed and dried using Wet Process Stations.

 

Back-End Products

 

Autoclaves and HAST (Highly Accelerated Stress Test) Equipment

 

We manufacture autoclaves, HAST systems and specialized test fixtures. Autoclaves provide pressurized, saturated vapor (100% relative humidity) test environments for fast and easy monitoring of integrated circuit manufacturing processes. HAST systems provide a fast and cost-effective alternative to conventional non-pressurized temperature and humidity testing.

 

 

Burn-in Equipment and Boards

 

We manufacture burn-in systems, burn-in boards and burn-in board test systems. Burn-in equipment is used to subject semiconductor devices to elevate temperatures while testing them electrically to identify early product failures and to assure long-term reliability. Burn-in boards are used to mount devices during high temperature environmental stressing tests.

 

We provide integrated burn-in automation solutions to improve products’ yield, reduce processing downtime and improve efficiency. In addition, we develop a cooling solution, which is used to cool or maintain the temperature of high power heat dissipation semiconductor devices.

 

Component Centrifuges and Leak Detection Equipment

 

We manufacture centrifuges that perform high speed constant acceleration to test the mechanical integrity of ceramic and other hermetically sealed semiconductor devices and electronic parts for high reliability and aerospace applications. Leak detection equipment is designed to detect leaks in hermetic packaging. The bubble tester is used for gross leak detection. A visual bubble trail will indicate when a device is defective.

 

Distribution

 

In addition to marketing our proprietary products, we distribute complementary products made by manufacturers mainly from the U.S., Europe, Taiwan, and Japan. The products include environmental chambers, handlers, interface systems, vibration systems, shaker systems, solderability testers and other semiconductor equipment. Besides equipment, we also distribute a wide range of components such as connectors, sockets, LCD display panels and touch-screen panels. Furthermore, our range of products are mainly targeted for industrial products, the life cycle of which can last from 3 years to 7 years, rather than consumer products which have a shorter life cycle.

 

Real Estate

 

Beginning in 2007, TTI invested in real estate property in Chongqing, China, which has generated investment income from the rental revenue and investment returns from deemed loan receivables, which are classified as other income. The rental income is generated from the rental properties in MaoYe and FuLi in Chongqing, China. In the second quarter of fiscal 2015, the investment in JiaSheng, which was deemed as loans receivable, was transferred to down payment for purchase of investment property in China. 

Product Research and Development

 

We focus our research and development activities on improving and enhancing both product design and process technology. We conduct product and system research and development activities for our products in Singapore and the U.S. Research and development expenses were $355 and $345 in fiscal years 2020 and 2019, respectively.

 

Marketing, Distribution and Services

 

We market our products and services worldwide, directly and through independent sales representatives and our own marketing sales team. We have approximately five independent sales representatives operating in the U.S. and another twenty in various foreign countries. All sales representatives represented the testing services segment and the manufacturing segment for various products and services produced and provided from our facilities in different locations.

 

Dependence on Limited Number of Customers

 

In fiscal years 2020 and 2019, combined sales of equipment and services to our three largest customers accounted for approximately 60.3% and 58.3%, respectively, of our total net revenue. Of those sales, $13,229 (38.4%) and $16,421 (41.9%) of our total net revenue were from one major customer. Although the major customer is a U.S. company, the revenue generated from it was from facilities located outside of the U.S. The majority of our sales and services in fiscal years 2020 and 2019 were to customers outside of the U.S.

 

 

Backlog

 

The following table sets forth the Company's backlog at the dates indicated:	For the Year Ended June 30,
	2020	2019
Manufacturing backlog	$5,010	$4,210
Testing services backlog	2,915	4,292
Distribution backlog	1,409	1,494
Real estate backlog*	6	153
	$9,340	$10,149

 

*Real estate backlog is based on the rental income from a non-cancellable lease.

 

Based on our past experience, we do not anticipate any significant cancellations or re-negotiation of sales. The purchase orders for the manufacturing, testing services and distribution businesses generally require delivery within 12 months from the date of the purchase order and certain costs are incurred before delivery. In the event of a cancellation of a confirmed purchase order, we require our customers to reimburse us for all costs incurred. We do not anticipate any difficulties in meeting delivery schedules. For testing services, the backlog is based on estimates provided by our customers and is not based on a customer’s purchase order, as it is a practice that the purchase orders are provided only during the process of delivery.

 

Materials and Supplies

 

Our products are designed by our engineers and are assembled and tested at our facilities in the U.S., China and Singapore. We purchase all parts and certain components from outside vendors for assembly purposes. We have no written contracts with any of our key suppliers. As these parts and components are available from a variety of sources, we believe that the loss of any one of our suppliers would not have a material adverse effect on our results of operations taken as a whole.

 

Competition

 

Our ability to compete depends on our ability to develop, introduce and sell new products or enhanced versions of existing products on a timely basis and at competitive prices, while reducing our costs.

 

There are numerous testing laboratories in the areas where we operate that perform a range of testing services similar to those, we offer. However, due to severe competition in the Asia testing and burn-in services industry there has been a reduction in the total number of competitors. The existence of competing laboratories and the purchase of testing equipment by semiconductor manufacturers and users are potential threats to our future testing services revenue and earnings. Although these laboratories and new competitors may challenge us at any time, we believe that other factors, including reputation, long service history and strong customer relationships, are instrumental in determining our position in the market.

 

The distribution segment sells a wide range of equipment to be used for testing products. As the semiconductor equipment industry is highly competitive, we offer a one-stop service alternative to customers by complementing our products with design consultancy and other value-added services.

 

The principal competitive factors in the manufacturing industry include product performance, reliability, service and technical support, product improvements, price, established relationships with customers and product familiarity. We make every effort to compete favorably with respect to each of these factors. Although we have competitors for our various products, we believe that our products compete favorably with respect to each of the above factors. We have been in business for more than 60 years and have operation facilities mostly located in Asia. Those factors combined have helped us to establish and nurture long-term relationships with customers and will allow us to continue doing business with our existing customers upon their relocation to other regions where we have a local presence or are able to reach.

 

 

Patents

 

In fiscal years 2020 and 2019, we did not register any patents within the U.S.

 

It is typical in the semiconductor industry to receive notices from time to time alleging infringement of patents or other intellectual property rights of others. We do not believe that we infringe on the intellectual property rights of any others. However, should any claims be brought against us, the cost of litigating such claims and any damages could materially and adversely affect our business, financial condition, and results of operations.

 

Employees

 

As of June 30, 2020, we had approximately 535 full time employees and no part time employees. Geographically, approximately 8 full time employees were located in the U.S. and approximately 527 full time employees in Asia. None of our employees are represented by a labor union.

 

There were approximately 60 employees in the manufacturing segment, 440 employees in the testing services segment, 4 employees in the distribution segment, 3 employees in the real estate segment and 28 employees in general administration, logistics and others.

 

ITEM 1A – RISK FACTORS

 

As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.

 

ITEM 1B – UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

 

ITEM 2 – PROPERTIES

 

As of the date of filing of this Form 10-K, we believe that we are utilizing approximately 80% of our fixed property capacity. We also believe that our existing facilities are adequate and suitable to cover any sudden increase in our needs in the foreseeable future.

 

The following table presents the relevant information regarding the location and general character of our principal manufacturing and testing facilities:

 

Location	Segment	Approx. Sq. Ft. Occupied	Owned (O) or Leased (L) & Expiration Date
16139 Wyandotte Street, Van Nuys, CA 91406, United States of America	Corporate, Testing Services / Manufacturing	5,200	(L) Mar 2023
1004, Toa Payoh North, Singapore Unit No. HEX 07-01/07	Testing Services	6,864	(L) Sep 2025
Unit No. HEX 07-01/07, (ancillary site)	Testing Services	2,532	(L) Sep 2025
Unit No. HEX 03-01/02/03	Testing Services / Manufacturing	2,959	(L) Sep 2025
Unit No. HEX 01-08/15	Testing Services / Manufacturing / Logistics Store	6,864	(L) Jan 2023
Unit No. HEX 01-08/15, (ancillary site)	Testing Services / Manufacturing	449	(L) Jan 2023
Unit No. HEX 07-10/11	Testing Services / Manufacturing	1,953	(L) Dec 2021
1008, Toa Payoh North, Singapore Unit No. HEX 03-09/17	Manufacturing	6,099	(L) Jan 2023
Unit No. HEX 03-09/17, (ancillary site)	Manufacturing	70	(L) Jan 2023
Unit No. HEX 01-09/10/11	Manufacturing	2,202	(L) Nov 2023
Unit No. HEX 01-15/16	Manufacturing	1,400	(L) Sep 2023
Unit No. HEX 01-08	Manufacturing	603	(L) Sep 2023
Unit No. HEX 01-12/14	Manufacturing	1,664	(L) Jul 2022
Lot No. 11A, Jalan SS8/2, Sungai Way Free Industrial Zone, 47300 Petaling Jaya, Selangor Darul Ehsan, Malaysia	Testing Services	78,706	(O)
4809-3-35,CBD Perdana 2 Persiaran Flora Cyber 12 63000 Cyberjaya	Manufacturing	2000	(L) May 2022
327, Chalongkrung Road, Lamplathew, Lat Krabang, Bangkok 10520, Thailand	Testing Services	34,433	(O)
No. 5, Xing Han Street, Block A #04-15/16, Suzhou Industrial Park China 215021	Testing Services	6,200	(L) Jan 2021
27-05, Huang Jin Fu Pan. No. 26 Huang Jin Qiao Street Hechuan District Chongqing China 401520	Real Estate	969	(L) Aug 2021
B7-2, Xiqing Economic Development Area International Industrial Park Tianjin City, China 300385	Testing Services	45,940	(L) April 2021

 

 

ITEM 3 – LEGAL PROCEEDINGS

 

The Company is, from time to time, the subject of litigation claims and assessments arising out of matters occurring in its normal business operations. In the opinion of management, resolution of these matters will not have a material adverse effect on our financial statements.

 

There are no material proceedings to which any director, officer or affiliate of the Company, any beneficial owner of more than five percent of the Company’s Common Stock, or any associate of such person, is a party that is adverse to the Company or its properties.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our Common Stock is traded on the NYSE American exchange under the symbol “TRT.”

 

As of September 1, 2020, there were 3,673,055 shares of our Common Stock issued and outstanding, and the Company had approximately 57 record holders of Common Stock. The number of holders of record does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

 

Dividend Policy

We did not declare any cash dividends in either fiscal year 2020 or fiscal year 2019.

 

The determination as to whether to pay any future cash dividends will depend upon our earnings and financial position at that time and other factors as the Board of Directors may deem appropriate. In general, California law prohibits the payment of dividends unless the corporation’s retained earnings prior to the dividend equals or exceeds the dividend or, immediately after payment of the dividends, the corporation’s assets would equal or exceed its total liabilities. There is no assurance that dividends will be paid to holders of Common Stock in the foreseeable future.

 

ITEM 6 - SELECTED FINANCIAL DATA

 

As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.

ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)

 

The following discussion and analysis should be read in conjunction with our disclaimer on “Forward-Looking Statements,” “Item 1. Business,” and our Consolidated Financial Statements, the notes to those statements and other financial information contained elsewhere in this Annual Report on Form 10-K.

During fiscal years 2020 and 2019, Trio-Tech International operated in four segments: manufacturing, testing services, distribution, and real estate. In fiscal year 2020, revenue from the manufacturing, testing services, distribution and real estate segments represented 33.7%, 43.0%, 23.1% and 0.2% of our revenue, respectively, as compared to 38.0%, 42.8%, 19.0% and 0.2%, respectively, in fiscal year 2019.

 

Semi-conductor testing and manufacturing (assembly) of test equipment is our core business. We provide third-party semiconductor testing and burn-in services primarily through our laboratories in Asia. At or from our facilities in the U.S. and Asia, we also design, manufacture and market equipment and systems to be used in the testing and production of semiconductors and distribute semiconductor processing and testing equipment manufactured by other vendors.

 

Our distribution segment operates primarily in Asia. This segment markets and supports distributing complementary products supplied by other manufacturers that are used by its customers and other semiconductor and electronics manufacturers. We believe this will help us to reduce our exposure to multiple risks arising from being a mere distributor of manufactured products from others.

 

The main revenue component for the real estate segment was rental income.

 

No other investment income was recorded as “revenue” by the real estate segment in either of fiscal years 2020 or 2019.

 

 

The rental income is generated from the rental properties acquired from MaoYe Property Ltd. (“MaoYe”) and Chongqing FuLi Real Estate Development Co. Ltd (“FuLi”) in Chongqing, China. In the second quarter of fiscal 2015, the investment made with JiaSheng Property Development Co. Ltd (“JiaSheng”), which was deemed as loans receivable, was transferred to down payment for purchase of investment property in China.

 

Trio-Tech Chongqing Co., Ltd. (“TTCQ”) invested RMB 5,554 in rental properties in MaoYe during fiscal year 2008, RMB 3,600 in rental properties from JiangHuai Property Development Co. Ltd. (“JiangHuai”) during fiscal year 2010 and RMB 4,025 in rental properties in FuLi during fiscal year 2010. During fiscal year 2019, TTCQ completed the sale of thirteen of the fifteen units constituting the MaoYe property, which contributed a capital gain of $685. The total investment in properties in China was RMB 9,649, in fiscal year 2020 and 2019, approximately $1,363 and $1,405 respectively. The carrying value of these investment properties in China was RMB 4,884 and RMB 5,367, or approximately $690 and $782, in fiscal years 2020 and 2019, respectively. These properties generated a total rental income of $62 and $98 for fiscal years 2020 and 2019, respectively. TTCQ’s investment in properties that generated rental income is discussed further in this Form 10-K.

 

TTCQ has yet to receive the title deed for properties purchased from JiangHuai. TTCQ was in the legal process of obtaining the title deed until the developer encountered cash flow difficulties in recent years. Since then, JinagHuai company is under liquidation and is now undergoing asset distribution. The JiangHuai property did not generate any income during fiscal 2020 or 2019.

 

On October 14, 2014, TTCQ and Jun Zhou Zhi Ye entered into a memorandum of understanding. Based on the memorandum of understanding, both parties agreed to register a sales and purchase agreement upon Jun Zhou Zhi Ye obtaining a license to sell the commercial property (the Singapore Themed Resort Project) located in Chongqing, China. The proposed agreement is for the sale of shop lots with a total area of 1,484.55 square meters as consideration for the outstanding amounts owed to TTCQ by Jun Zhou Zhi Ye as follows:

 

a) Long term loan receivable RMB 5,000, or approximately $814, as disclosed in Note 5, plus the interest receivable on the long-term loan receivable of RMB 1,250;

b) Commercial units measuring 668 square meters, as mentioned above; and

c) RMB 5,900 as part of the unrecognized cash consideration of RMB 8,000 relating to the disposal of the joint venture.

 

These considerations do not include the remaining outstanding amount of RMB 2,000, or approximately $326, which will be paid to TTCQ in cash.

 

The shop lots are to be delivered to TTCQ upon completion of the construction of the shop lots in the Singapore Themed Resort Project. The initial targeted date of completion was December 31, 2016. Based on discussions with the developer, the completion date is estimated to be December 31, 2022. The delay was primarily due to the time needed by the developers to work with various parties to inject sufficient funds into this project, especially during the COVID-19 pandemic. Based on the available information, management believes that the developer is capable of working with new investors to complete certain phases of this project.

 

Fiscal Year 2020 Highlights (in Thousands)

 

 

The highlights above are intended to identify some of our most significant events and transactions during our fiscal year 2020. However, these highlights are not intended to be a full discussion of our results for the year. These highlights should be read in conjunction with the discussion on these items in Item 7 and with our consolidated financial statements and footnotes accompanying this Annual Report.

 

 

General Financial Information

 

During the fiscal year ended June 30, 2020, total assets decreased by $867 from $36,527 in fiscal year 2019 to $35,660 in fiscal year 2020. The decrease was primarily due to a decrease in cash and cash equivalent, trade account receivables, inventories, assets held for sale, investment properties, property, plant and equipment, restricted term deposits, deferred tax assets and other assets. The decrease was partially offset by the increase in short term deposits, other receivables, prepaid expenses and other current assets, short-term advances and right-of-use assets.

 

Cash and cash equivalents at June 30, 2020 were $4,150, a decrease of $713, or 14.7%, compared to $4,863 at June 30, 2019, primarily due to the placement of term deposits in the Singapore and Malaysia operations.

 

Trade account receivables at June 30, 2020 was $5,951, representing a decrease of $1,162, or 16.3%, compared to $7,113 at June 30, 2019. The decrease was attributable to a decrease in sales in the Singapore, Malaysia and China operations. The number of days’ sales outstanding in account receivables was 68 days and 69 days for the fiscal years ended June 30, 2020 and 2019, respectively.

 

As at June 30, 2020, other receivables were $998, an increase of $181, or 22.2%, compared to $817 at June 30, 2019. The increase was primarily due to an increase in advance payment to vendors and government grant receivables in the Singapore operations.

 

Inventories at June 30, 2020 were $1,922, a decrease of $505, or 20.8%, compared to $2,427 at June 30, 2019. The decrease in inventories was mainly due to the decrease in customers’ orders amid of the global COVID-19 pandemic. The number of days’ inventory held was 88 days at the end of fiscal 2020, compared to 85 days at the end of fiscal year 2019.

 

 

Assets held for sale as at June 30, 2020 were $Nil, compared to $89 at June 30, 2019. Management entered into a Sales and Purchase Agreement with a potential buyer during fiscal year 2019 and the sale was completed in fiscal year 2020.

 

Investment properties in China as of June 30, 2020 were $690, a decrease of $92 from $782 at June 30, 2019. The decrease was attributable to the depreciation charged for the year.

 

Property, plant and equipment at June 30, 2020 were $10,310, a decrease of $1,849 compared to $12,159 at June 30, 2019. This was mainly due to depreciation charged for the period and the foreign currency exchange movement between fiscal year 2020 and 2019, coupled with an impairment loss of $139 recognized in the China operation in fiscal 2020. The decrease was partially offset by the new acquisition of plant and equipment in the Malaysia operation.

 

Other assets at June 30, 2020 were $1,609, a decrease of $141, or 8.1%, compared to $1,750 at June 30, 2019. The decrease in other assets was primarily due to the reclassification of down payments made for the purchase of equipment to property, plant and equipment in the Malaysia operation from other assets to property, plant and equipment.

 

Restricted term deposits at June 30, 2020 were $1,660, compared to $1,706 at June 30, 2019. The decrease was mainly due to the currency translation difference between functional currency and U.S. dollars from June 30, 2019 to June 30, 2020.

 

Total liabilities at June 30, 2020 were $10,514, a decrease of $1,152, or 9.9%, compared to $11,666 at June 30, 2019. The decrease in liabilities was primarily due to the decrease in lines of credit, accounts payable, accrued expenses, income taxes payable, bank loan payable and finance leases, but partially offset by the increase in in liabilities from the drawdown of loan amounting to $121 under the United States Paycheck Protection Program (“PPP”) and in our operating leases.

 

Account payables as of June 30, 2020 decreased by $682 to $2,590 from $3,272 as of June 30, 2019. The decrease was mainly due to the decrease in purchases, which was in line with the softer demand from the customers amid the COVID-19 pandemic.

 

Accrued expenses as at June 30, 2020 decreased by $481 to $3,005 from $3,486 as at June 30, 2019. The decrease was mainly due to a decrease in accrued payroll liability and customer deposits in the Singapore and China operations.

 

Income Tax Payable as at June 30, 2020 decreased by $82 to $774 from $856 as at June 30, 2019. The decrease was mainly due to the repayment made for the Repatriation Tax that arose from the introduction of the Tax Cuts & Jobs Act 2017 in fiscal year 2020.

 

 

As of June 30, 2020, the Company received $121 from the Paycheck Protection Program (PPP), which was created by the United States Coronavirus Aid, Relief, and Economic Security (CARES) Act.

 

Operating lease right of use assets and the corresponding leased liability were $944 and $944, respectively, as of June 30, 2020, after taking into effect the new accounting standard, ASC 842 Leases.

 

Impact of COVID-19 on our Business

 

In December 2019, a novel strain of coronavirus (“COVID-19”), was reported to have surfaced in China, resulting in shutdowns of manufacturing and commerce in the months that followed. Since then, the COVID-19 pandemic has spread to multiple countries worldwide and has resulted in authorities implementing numerous measures to try to contain the disease and slow its spread, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. These measures have created significant uncertainty and economic disruption, both short-term and potentially long-term.

 

The health and safety of our employees and our customers are a top priority for us. In an effort to protect our employees, we took and continue to take proactive and aggressive actions, starting with the earliest signs of the outbreak, to adopt social distancing policies at our locations, including working from home and suspending employee travel. Our operations have been classified as part of the global supply chain and essential businesses in many jurisdictions, and employees who are working onsite are required to adhere to strict safety measures, including the use of masks and sanitizer, wellness screenings prior to accessing work sites, staggered break times to prevent congregation, prohibitions on physical contact with co-workers or customers, restrictions on access through only a single point of entry and exit, and utilizing video conferencing. We have also incorporated other rules such as restricting visitors to any of our facilities that remain open and proactively providing employees with hand sanitizer.

 

The COVID-19 pandemic situation primarily contributed to a decline in our customers’ volume of testing services in our Malaysia and China operations. It resulted in a decrease in our testing revenue in fiscal 2020. In certain cases, we accommodated customers who requested to delay the supply of their orders as a result of the travel restriction amid the pandemic, which resulted in a decrease of our manufacturing revenue in the Singapore operation in fiscal 2020.

 

The Company received the government assistance amounted to $718 in the Singapore, Malaysia and China operations to mitigate the adverse impact on the business from the pandemic.  The Company believes that, as with other business entities in Singapore, Malaysia and China, it will receive additional government assistance for a period to ease the financial impact caused by the pandemic.

 

Management is continuously examining our plans and reacting to the economic forces impacts on businesses generally. As we reported in our Form 10-Q in the third quarter of fiscal year 2020, in order to mitigate the negative impacts of the pandemic on our business, operating results and financial condition, we have reviewed the business plan and made certain adjustments in order to accommodate expectations that revenues will be impacted in the forthcoming fiscal year. These adjustments include the reduction of new hiring as well as the elimination of redundant positions. In addition, we have carefully scrutinized our capital spending and potential business opportunities. These measures are reviewed by Management regularly and, to date, remain in place.

 

As of June 30, 2020, the Company had cash and cash equivalents and short-term deposits totaling $10,847 and an unused line of credit of $5,343. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.

 

While we have implemented safeguards and procedures to counter the impact of the COVID-19 pandemic, the full extent to which the pandemic has and will directly or indirectly impact us, including our business, financial condition, and result of operations, will depend on future developments that are highly uncertain and cannot be accurately predicted. This may include further mitigation efforts taken to contain the virus or treat its impact and the economic impact on local, regional, national and international markets. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by the governments or that we determine are in the best interests of our employees, customers, suppliers and stockholders.

 

Critical Accounting Estimates & Policies

 

The discussion and analysis of the Company’s financial condition presented in this section are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. During the preparation of the consolidated financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to sales, returns, pricing concessions, bad debts, inventories, investments, fixed assets, intangible assets, income taxes and other contingencies. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. These estimates and assumptions may change as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions or conditions.

 

 

In response to the SEC’s Release No. 33-8040, Cautionary Advice Regarding Disclosure about Critical Accounting Policy, we have identified the most critical accounting policies upon which our financial status depends. We determined that those critical accounting policies are related to the inventory valuation, allowance for doubtful accounts, revenue recognition, impairment of property, plant and equipment, investment property and income tax. These accounting policies are discussed in the relevant sections in this management’s discussion and analysis, including the Recently Issued Accounting Pronouncements discussed below.

 

Account Receivables and Allowance for Doubtful Accounts

 

During the normal course of business, we extend unsecured credit to our customers in all segments. Typically, credit terms require payment to be made between 30 to 90 days from the date of the sale. We generally do not require collateral from customers. We maintain our cash accounts at credit-worthy financial institutions.

 

The Company’s management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. The Company includes any account balances that are determined to be uncollectible, along with a general reserve, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to management, the Company believed that its allowance for doubtful accounts was adequate as of June 30, 2020.

 

Inventory Valuation

 

Inventories of our manufacturing and distribution segments consisting principally of raw materials, works in progress, and finished goods are stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or market value. The semiconductor industry is characterized by rapid technological change, short-term customer commitments and swiftly changing demand. Provisions for estimated excess and obsolete inventory are based on regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. Inventories are written down for not saleable, excess or obsolete raw materials, works-in-process and finished goods by charging such write-downs to cost of sales. In addition to write-downs based on newly introduced parts, statistics and judgments are used for assessing provisions of the remaining inventory based on salability and obsolescence.

 

Property, Plant and Equipment & Investment Properties

 

Property, plant and equipment and investment properties are stated at cost, less accumulated depreciation and amortization. Depreciation is provided for over the estimated useful lives of the assets using the straight-line method. Amortization of leasehold improvements is provided for over the lease terms or the estimated useful lives of the assets, whichever is shorter, using the straight-line method.

 

Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and improvements to property and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in the consolidated statements of operations and comprehensive income or loss.

 

Foreign Currency Translation and Transactions

 

The United States dollar (“U.S. dollar”) is the functional currency of the U.S. parent company. The Singapore dollar, the national currency of Singapore, is the primary currency of the economic environment in which the operations in Singapore are conducted. We also have business entities in Malaysia, Thailand, China and Indonesia, of which the Malaysian ringgit (“RM”), Thai baht, Chinese renminbi (“RMB”) and Indonesian rupiah, are the national currencies. The Company uses the U.S. dollar for financial reporting purposes.

 

The Company translates assets and liabilities of its subsidiaries outside the U.S. into U.S. dollars using the rate of exchange prevailing at the balance sheet date, and the statement of operations is measured using average rates in effect for the reporting period. Adjustments resulting from the translation of the subsidiaries’ financial statements from foreign currencies into U.S. dollars are recorded in shareholders' equity as part of accumulated comprehensive income or loss - translation adjustment. Gains or losses resulting from transactions denominated in currencies other than functional currencies of the Company’s subsidiaries are reflected in income for the reporting period.

 

Revenue Recognition

 

On July 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted using the modified retrospective method applied to all contracts that were not completed contracts at the date of initial application (i.e. July 1, 2018). Results for reporting periods after July 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC Topic 605.

 

 

We apply a five-step approach as defined in ASC Topic 606 in determining the amount and timing of revenue to be recognized: (1) identifying the contract with customer; (2) identifying the performance obligations in the contracts; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the corresponding performance obligation is satisfied.

 

Revenue derived from testing services is recognized when testing services are rendered. Revenue generated from sale of products in the manufacturing and distribution segments are recognized when persuasive evidence of an arrangement exists, delivery of the products has occurred, customer acceptance has been obtained (which means the significant risks and rewards of ownership have been transferred to the customer), the price is fixed or determinable and collectability is reasonably assured. Certain customers can request for installation and training services to be performed for certain products sold in the manufacturing segment. These services are mainly for helping customers with the test runs of the machines sold and are considered a separate performance obligation. Such services can be provided by other entities as well, and these do not significantly modify the product. The Company recognizes the revenue at the point in time when the Company has satisfied its performance obligation.

 

In the real estate segment: (1) revenue from property development is earned and recognized on the earlier of the dates when the underlying property is sold or upon the maturity of the agreement; if this amount is uncollectible, the agreement empowers the repossession of the property, and (2) rental revenue is recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the tenant assumes possession of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.

 

Joint Venture

 

The Company analyzes its investments in joint ventures to determine if the joint venture is a variable interest entity (a “VIE”) and would require consolidation. The Company (a) evaluates the sufficiency of the total equity at risk, (b) reviews the voting rights and decision-making authority of the equity investment holders as a group, and whether there are any guaranteed returns, protection against losses, or capping of residual returns within the group and (c) establishes whether activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination. The Company would consolidate a venture that is determined to be a VIE if it was the primary beneficiary. Beginning January 1, 2010, a new accounting standard became effective and changed the method by which the primary beneficiary of a VIE is determined. Through a primarily qualitative approach, the variable interest holder, if any, who has the power to direct the VIE’s most significant activities is the primary beneficiary. To the extent that the joint venture does not qualify as VIE, the Company further assesses the existence of a controlling financial interest under a voting interest model to determine whether the venture should be consolidated.

 

Equity Method

 

The Company analyzes its investments in joint ventures to determine if the joint venture should be accounted for using the equity method. Management evaluates both Common Stock and in-substance Common Stock as to whether they give the Company the ability to exercise significant influence over operating and financial policies of the joint venture even though the Company holds less than 50% of the Common Stock and in-substance Common Stock. If so, the net income of the joint venture will be reported as “Equity in earnings of unconsolidated joint ventures, net of tax” in the Company’s consolidated statements of operations and comprehensive income or loss.

 

Cost Method

 

Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such investee companies is not included in the consolidated balance sheet or consolidated statements of operations and comprehensive income or loss. However, impairment charges are recognized in the consolidated statements of operations and comprehensive income or loss. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded.

 

Long-Lived Assets & Impairment

 

Our business requires heavy investment in manufacturing facilities and equipment that are technologically advanced but can quickly become significantly under-utilized or rendered obsolete by rapid changes in demand. We have recorded intangible assets with finite lives related to our acquisitions.

 

We evaluate our long-lived assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our business, significant negative industry or economic trends, and a significant decline in our stock price for a sustained period of time. Impairment is recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analysis, if there is significant adverse change.

 

 

During the third quarter of 2020, our operation in China provided impairment loss of $139 for seven pieces of equipment because one of our customer’s products came to the end of its product burn-in cycle earlier than expected. The cost of converting the seven pieces of equipment out-weighed the benefit of utilizing said equipment. Operations did not foresee any future usage of these assets. There will be no future economic cash inflow generated from these assets. Based on these events, we concluded that it was more likely than not that value-in-use of these assets was less than their carrying value. Full impairment of these assets had been recorded.

 

While we have not identified any changes in circumstances requiring further impairment test in fiscal year 2020, we will continue to monitor impairment indicators, such as disposition activity, stock price declines or changes in forecasted cash flows in future periods. If the fair value of our reporting unit declines below the carrying value in the future, we may incur additional impairment charges. There was no impairment in fiscal year 2019.

 

Fair Value Measurements

 

Under the standard ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants in the market in which the reporting entity transacts its business. ASC Topic 820 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, ASC Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.

 

Income Tax

 

We account for income taxes using the liability method in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC Topic 740”), which requires an entity to recognize deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in future years. Further, the effects of enacted tax laws or rate changes are included as part of deferred tax expenses or benefits in the period that covers the enactment date. Management believed it was more likely than not that the future benefits from these timing differences would not be realized. Accordingly, a full allowance was provided as of June 30, 2020 and 2019.

 

The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

 

Stock Based Compensation

 

Under ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”), stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award using an option pricing model for stock options (Black-Scholes) and market price for restricted stock units, and is recognized as expense over the employee’s requisite service period.

 

Non-controlling Interests in Consolidated Financial Statements

 

We adopted ASC Topic 810, Consolidation (“ASC Topic 810”). This guidance establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires that non-controlling interests in subsidiaries be reported in the equity section of the controlling company’s balance sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement.

 

Loan Receivables

 

The loan receivables are classified as current assets carried at face value and are individually evaluated for impairment. The allowance for loan losses reflects management’s best estimate of probable losses determined principally on the basis of historical experience and specific allowances for known loan accounts. All loans or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for losses.

 

 

Interest Income

 

Interest income on loans is recognized on an accrual basis. Discounts and premiums on loans are amortized to income using the interest method over the remaining period to contractual maturity. The amortization of discounts into income is discontinued on loans that are contractually 90 days past due or when collection of interest appears doubtful.

 

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06: Debt – Debt with Conversion and Other options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces number of accounting models for convertible debt instruments and convertible preferred stock. As well as amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusion. In addition, this ASU improves and amends the related EPS guidance. This amendments are effective for the Company for fiscal years beginning after December 15, 2023, including interim period within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption is either a modified retrospective method or a fully retrospective method of transition. The Company is currently evaluating the impacts of the provisions of ASU 2020-06 on its consolidated financial statements and related disclosures.

 

In March 2020, FASB issued ASU 2020-04 ASC Topic 848: Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impacts of the provisions of ASU 2020-04 on its consolidated financial statements and related disclosures.

 

The amendments in ASU 2019-12 ASC Topic 740: Income Taxes: Simplifying Accounting for Income Taxes remove 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. The Company has completed its assessment and concluded that this update has no significant impact to the Company’s financial statements.

 

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. The Company has completed the assessment and concluded that this update has no significant impact to the Company’s consolidated statements of operations and comprehensive income.

  

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. The Company has completed its assessment and concluded that this update has no significant impact to 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. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. ASC Topic 326 is effective for the Company for annual periods beginning after December 15, 2022. 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 June 30, 2020 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

 

 

Comparison of Operating Results

 

The following table presents certain data from the consolidated statements of operating income as a percentage of net sales for the fiscal years ended June 30, 2020 and 2019:

 

	For the Year Ended June 30,
	2020	2019
Revenue	100.0%	100.0%
Cost of sales	78.9	77.0
Gross Margin	21.1%	23.0%
Operating expenses:
General and administrative	20.2%	18.0%
Selling	2.0	2.1
Research and development	1.0	0.9
Impairment loss on long-lived assets	0.4	-
Total operating expenses	23.6%	21.0%
(Loss)/Income from Operations	(2.5)%	2.0%

 

Overall Revenue

 

The overall revenue is composed of the revenues from the manufacturing, testing services, distribution and real estate segments. The following table presents the components of the overall revenue realized in fiscal years 2020 and 2019 in percentage format.

 

	For the Year Ended June 30,
	2020	2019
Manufacturing	33.7%	38.0%
Testing	43.0	42.8
Distribution	23.1	19.0
Real estate	0.2	0.2
Total	100.0%	100.0%

 

 

Revenue in fiscal year 2020 was $34,465, a decrease of $4,733, or 12.1%, compared to $39,198 in fiscal year 2019. The decrease in revenue was due to a decrease in sales across all segments amid the COVID-19 pandemic except the distribution segment.

 

As a percentage of total revenue, the revenue generated by the manufacturing segment in fiscal year 2020 accounted for 33.7%, a decrease of 4.3%, as compared to 38.0% in fiscal year 2019. In terms of dollar amount, the revenue generated by the manufacturing segment in fiscal year 2020 was $11,605, reflecting a decrease of $3,284, or 22.1%, compared to $14,889 in fiscal year 2019. The decrease in revenue generated by the manufacturing segment was due to a decrease in the manufacturing segment in the Singapore operation as a result of softer demand for capital expenditure by our customers amid the global pandemic. The decreases were partially offset by an increase in the manufacturing segment in the U.S. operation.

 

Backlog in the manufacturing segment was $5,010 as of June 30, 2020, representing an increase of $800 from $4,210 as of June 30, 2019. We expect the demand for our products to increase at a slower pace in fiscal year 2021 as compared to fiscal year 2020, depending on the recovery speed of the global market for testing equipment and systems from the pandemic.

 

As a percentage of total revenue, the revenue generated by the testing services segment in fiscal year 2020 accounted for 43.0% of total sales compared to 42.8% in fiscal year 2019. In terms of dollar amounts, the revenue generated by the testing services segment for fiscal year 2020 was $14,840, reflecting a decrease of $1,920, compared to $16,760 for fiscal year 2019. The decrease in revenue generated by the testing segment was primarily attributable to a decrease in revenue in the Malaysia and China operations. The decrease was attributable to a decrease in the volume of testing services requested by our customers in these operations amid of the global pandemic. These decreases were partially offset by the increase in revenue as a result of higher volume in the Singapore and Thailand operations during fiscal year 2020. Demand for testing services varies from country to country, depending on changes taking place in the market and our customers’ forecasts. Because it is difficult to accurately forecast fluctuations in the market, we believe that it is necessary to maintain testing facilities in close proximity to our customers in order to make it convenient for them to send us their newly manufactured parts for testing and to enable us to maintain a share of the market.

 

Backlog in the testing services segment as of June 30, 2020 was $2,915, a decrease of $1,377 as compared to $4,292 at June 30, 2019. The decrease in backlog was mainly from the Malaysia and China operations. The backlog depends on the estimates volume provided by customers, which are in turn dependent upon the customers’ inventory levels and demand.

 

As a percentage of total revenue, the revenue generated by the distribution segment in fiscal year 2020 accounted for 23.1% of total sales, an increase of 4.1% compared to 19.0% in fiscal year 2019. In terms of dollar amounts, revenue for fiscal year 2020 was $7,958, an increase of $507, or 6.8%, compared to $7,451 for fiscal year 2019. The increase in revenue in our distribution segment was due to the increase in orders for certain products from customers in our Singapore and China operations.

 

Backlog in the distribution segment as of June 30, 2020 was $1,409, reflecting a decrease of $85 compared to the backlog of $1,494 at June 30, 2019. The decrease in backlog was mainly due to a decrease in demands from customers as a result of the slowing economic environment. We believe that our competitive advantage in the distribution segment is our design and engineering capabilities in components and touch screen products, which allow customization to meet the specific requirement of our customers. Product volume for the distribution segment depends on sales activities such as placing orders and queries for products and backlog. Equipment and electronic component sales are very competitive, as the products are readily available in the market.

 

As a percentage of total revenue, the revenue generated by the real estate segment was 0.2% of total sales in fiscal year 2020 and 2019. In terms of dollar value, revenue generated by the real estate segment for fiscal years 2020 was $62, a decrease of $36, or 36.7%, compared to $98 for fiscal year 2019. Our real estate segment saw a decrease in rental income due to the sale of a majority of the MaoYe properties in fiscal year 2019, coupled with the tenant’s withdrawal from the tenancy agreement amid of the adverse impact of the pandemic.

 

Backlog in the real estate segment as of June 30, 2020 was $6, a decrease of $147 as compared to $153 at June 30, 2019.

 

Overall Gross Margin

 

Overall gross margin as a percentage of revenue was 21.1% in fiscal year 2020, a decrease of 1.9% compared to 23.0% in fiscal year 2019. The decrease in gross margin as a percentage of revenue was mainly attributable to the testing segments. In terms of dollar value, the overall gross profit for fiscal year 2020 was $7,266, a decrease of $1,735, or 19.3%, compared to $9,001 for fiscal year 2019. The decrease in the dollar value of the overall gross margin was mainly due to a decrease of sales in the manufacturing and testing segments, which was partially offset by an increase in sales in the distribution segment.

 

The gross margin as a percentage of revenue in the manufacturing segment was 23.1% in fiscal year 2020, comparable with 23.5% in fiscal year 2019. In terms of dollar amounts, the gross profit for the manufacturing segment in fiscal year 2020 was $2,678, a decrease of $818, or 23.4%, compared to $3,496 in fiscal year 2019. The decrease in the absolute dollar amount of gross margin was mainly due to a decrease in revenue in our Singapore operations amid the pandemic.

 

The gross margin as a percentage of revenue in the testing services segment was 23.5% in fiscal year 2020, a decrease of 3.7% compared to 27.2% in fiscal year 2019. In terms of dollar amounts, gross profit in the testing services segment in fiscal year 2020 was $3,487, a decrease of $1,071, or 23.5%, compared to $4,558 in fiscal year 2019. The decrease in gross profit margin was primarily due to the decrease in revenue brought about by a decrease in orders in the China and Malaysia operations. A significant portion of our cost of goods sold is fixed in the testing segment. Thus, as the demand for services and factory utilization decreases, the fixed costs are spread over the decreased output, which decreases the gross profit margin. The negative impact on gross profit margin was partially offset by the continuous effort of cost savings in the China and Malaysia operations.

 

The gross margin as a percentage of revenue in the distribution segment was 14.0% in fiscal year 2020, an increase of 1.3% compared to 12.7% in fiscal year 2019. The increase in gross margin percentage was due to an increase in sales and a change in the product mix. The distribution segment had more sales of products with a higher profit margin compared to the same period of last fiscal year. In terms of dollar amounts, gross profit in the distribution segment was $1,111, an increase of $165, or 17.4%, compared to $946 in fiscal year 2019. The gross margin of the distribution segment was not only affected by the market price of our products, but also our product mix, which changed frequently as a result of the changes in market demand.

 

The gross margin as a percentage of revenue in the real estate segment was a negative of 16.1% in fiscal year 2020, a deterioration of 17.1% compared to a gross margin of 1.0% in fiscal year 2019. In absolute dollar amount, gross margin in the real estate segment was a loss of $10 in fiscal year 2020, a decrease of $11 as compared to a gross margin of $1 in fiscal year 2019. The increase in gross loss was due to lower rental income caused by the sales of properties in fiscal year 2019, coupled with the adverse impact of the pandemic to our tenants.

 

Operating Expenses

 

Operating expenses for the fiscal years ended June 30, 2020 and 2019 were as follows:

 

	For the Year Ended June 30,
	2020	2019
General and administrative	$6,976	$7,049
Selling	679	826
Research and development	355	345
Impairment loss on long-lived assets	139	-
Gain on disposal of property, plant and equipment	(24)	(13)
Total	$8,125	$8,207

 

General and administrative expenses decreased by $73, or 1.0%, from $7,049 in fiscal year 2019 to $6,976 in fiscal year 2020. The decrease was mainly attributable to a decrease in payroll-related expenses in the China operation, and a decrease in medical expenses in the Singapore operation. These decreases were partially offset by an increase in payroll expenses in the Singapore operations.

 

Selling expenses decreased by $147, or 17.8%, to $679 in fiscal year 2020, compared to $826 in fiscal year 2019. The decrease in selling expenses was primarily attributable to a decrease in commission expenses in the manufacturing segment of the Singapore operations as a result of fewer commissionable sales, coupled with lower traveling expenses due to the worldwide travel restrictions imposed to contain the spread of the pandemic.

 

There was an impairment loss on long-lived assets in the China operation as a result of the end of the product life for certain products. A detailed assessment was carried out by Management, and this assessment indicated that these assets would not generate future economic benefits to the Company.

 

During fiscal year 2020, there was a gain in disposal of property, plant and equipment of $24, as compared to a gain on disposal of $13 in fiscal year 2019.

 

 

(Loss) / Income from Operations

 

Loss from operations was $859 in fiscal year 2020, a deterioration of $1,653, as compared to an income from operations of $794 in fiscal year 2019. The decrease was mainly due to a decrease in revenue, resulting in a decrease in the gross margin, which was partially offset by the decrease in operating expenses, as discussed earlier.

 

Interest Expenses

 

The interest expenses for fiscal years 2020 and 2019 were as follows:

 

	For the Year Ended June 30,
	2020	2019
Interest expenses	$230	$319

 

Interest expenses decreased by $89, or 27.9%, to $230 in fiscal year 2020 from $319 in fiscal year 2019. The decrease in interest expenses was mainly due to lower utilization of short-term loans in the Singapore and China operations. Additionally, the bank loan payable decreased by $574 to $2,206 in fiscal year 2020, as compared to $2,780 in fiscal year 2019.

 

 Other Income, Net

 

Other income, net for fiscal years 2020 and 2019 was as follows:

 

	For the Year Ended June 30,
	2020	2019
Interest income	$177	$100
Other rental income	110	113
Exchange loss	(35)	(135)
Government grants	778	77
Bad debt recovery	59	2
Other miscellaneous income	23	92
Total	$1,112	$249

 

 

Other income increased by $863 to $1,112 for fiscal year 2020 as compared to $249 for fiscal year 2019. The increase in other income in fiscal year 2020 was mainly due to a decrease in exchange loss, which resulted from the favorable exchange movement in fiscal year 2020, coupled with an increase in interest income. Additionally, the Company received government grants of $718 from the local government in the Singapore, China, and Malaysia operations to mitigate the negative impact on the businesses amid the pandemic. The Company believes that, as with other business entities in Singapore, Malaysia and China, it will receive additional government assistance for a period to ease the financial impact caused by the pandemic.

 

Gain on Sale of Properties

 

During the fourth quarter of fiscal year 2019, Management entered into a Sales and Purchase Agreement with a potential buyer. During the second quarter of 2020, the Company obtained approval of the sale from Penang Development Corporation and the local government. The Company completed the sale and recognized a net gain of RM4,901 or $1,172 in the same period, excluding capital gain tax.

 

During the third quarter of 2019, TTCQ completed the sale of thirteen of the fifteen units constituting the MaoYe property, which resulted in a gain of $685.

 

Income Tax Benefits

 

Income tax benefits for fiscal year 2020 were $12, as compared to $42 for fiscal year 2019.

 

At June 30, 2020, the Company had no federal net operating loss carry-forwards, and a state net operating loss carry forward of $1,236, which expires in 2033. These carryovers may be subject to limitations under I.R.C. Section 382. Management of the Company is uncertain whether it is more likely than not that these future benefits will be realized. Accordingly, a full valuation allowance was established.

 

Loss from Discontinued Operations

 

Loss from discontinued operations was $3 in fiscal years 2020 and 2019. We discontinued our fabrication segment in fiscal year 2013.

 

Non-controlling Interest

 

As of June 30, 2020, we held an indirect 55% interest each in Trio-Tech (Malaysia) Sdn. Bhd. (“TTM”), Trio-Tech (Kuala Lumpur) Sdn. Bhd. (“TTKL”), SHI and PT SHI, and a 76% interest in Prestal Enterprise Sdn. Bhd. (“Prestal”). The non-controlling interest for fiscal year 2020, in the net income of subsidiaries, was $238, a change of $335 compared to a non-controlling interest in the net loss of $97 for the previous fiscal year. The change in the non-controlling interest was primarily attributable to the net income generated by the Malaysia operations from the sales of assets held for sale in fiscal year 2020, as compared to net loss generated by the Malaysia operation in the previous fiscal year.

 

Net Income Attributable to Trio-Tech International Common Shareholders

 

Net income for fiscal year 2020 was $966, a decrease of $579, as compared to $1,545 for fiscal year 2019. The decrease in net income during fiscal year 2020 was mainly due to the decrease in gross profit, as discussed earlier. This was partially offset by the gain on the sale of assets held for sale and the receipt of government grants in response to the adverse impact brought by the pandemic.

 

Earnings per Share

 

Basic earnings per share from continuing operations was $0.26 in fiscal year 2020, as compared to $0.42 in fiscal year 2019. Basic loss per share from discontinued operations was $nil for fiscal year 2020 and $nil for fiscal year 2019.

 

Diluted earnings per share from continuing operations was $0.26 in fiscal year 2020, as compared to $0.41 in fiscal year 2019. Diluted loss per share from discontinued operations was $nil for fiscal year 2020 and $nil for fiscal year 2019.

 

 

 

Segment Information

 

The revenue, gross margin and income or loss from each segment for fiscal years 2020 and 2019 are presented below. As the segment revenue and gross margin have been discussed in previous sections, only the comparison of income or loss from operations is discussed below.

 

Manufacturing Segment

 

The revenue, gross margin and (loss)/income from operations for the manufacturing segment for fiscal years 2020 and 2019 were as follows:

 

	For the Year Ended June 30,
	2020	2019
Revenue	$11,605	$14,889
Gross margin	23.1%	23.5%
Loss/Income from operations	$(326)	$575

 

Loss from operations in the manufacturing segment was $326 in fiscal year 2020, a deterioration of $901 as compared to an income from operations of $575 in fiscal year 2019. The net loss was attributable to a decrease in the absolute amount of gross margin amounting to $818 and an increase in operating expenses of $83. Operating expenses were $3,004 and $2,921 for fiscal years 2020 and 2019, respectively. The increase in operating expenses was mainly due to an increase in general and administrative expenses of $159, an increase in research and development of $10 and an increase in corporate overhead allocation of $10. The increase was partially offset by the decrease in selling expenses of $96.

 

The increase in general and administrative expenses was mainly attributable to an increase in payroll-related expenses and a provision of doubtful debts in the Singapore operation. The decrease in selling expenses was primarily due to fewer commission expenses incurred in fiscal year 2020 as a result of fewer commissionable sales, coupled with lower traveling expenses amid the pandemic.

 

Testing Services Segment

 

The revenue, gross margin and loss from operations for the testing services segment for fiscal years 2020 and 2019 were as follows:

 

	For the Year Ended June 30,
	2020	2019
Revenue	$14,840	$16,760
Gross margin	23.5%	27.2%
Loss from operations	$(1,040)	$(164)

 

Loss from operations in the testing services segment in fiscal year 2020 was $1,040, an increase of $876 compared to $164 in fiscal year 2019. The increase in operating loss was attributable to a decrease in gross margin of $1,071, partially offset by a decrease in operating expense of $195. Operating expenses were $4,527 and $4,722 for fiscal years 2020 and 2019, respectively. The decrease in operating expenses was mainly attributable to a decrease in selling expenses, general and administrative expenses and corporate overheads.

 

Selling expenses decreased due to fewer traveling expenses incurred in the Singapore operations amid the pandemic. The decrease in general and administrative expenses was primarily due to further cost-saving measures implemented in the China operation to mitigate a further drop in the customer’s estimated demands amid the pandemic. The decrease in corporate overhead expenses was due to a decrease in the corporate overhead allocation, which is allocated on a predetermined fixed charge basis. Impairment on the long-lived asset partially offset these decreases.

 

 

Distribution Segment

 

The revenue, gross margin and income from operations for the distribution segment for fiscal years 2020 and 2019 were as follows:

 

	For the Year Ended June 30,
	2020	2019
Revenue	$7,958	$7,451
Gross margin	14.0%	12.7%
Income from operations	$751	$598

 

Income from operations in the distribution segment was $751 in fiscal year 2020 as compared to $598 in fiscal year 2019. The increase was mainly due to the increase in gross margin of $165, as discussed earlier. These increases were partly offset by an increase in operating expenses. Operating expenses were $362 and $348 for fiscal years 2020 and 2019, respectively.

 

Real Estate

 

The revenue, gross margin and loss from operations for the real estate segment for fiscal years 2020 and 2019 were as follows:

 

	For the Year Ended June 30,
	2020	2019
Revenue	$62	$98
Gross margin	(16.1)%	1%
Loss from operations	$(97)	$(92)
Gain on sale of properties	-	685

 

Loss from operations in the real estate segment was $97 in fiscal year 2020 as compared to $92 in fiscal year 2019. The increase in operating loss was primarily due to the decrease in gross margin of $11, as discussed earlier. Operating expenses were $87 and $92 in fiscal years 2020 and 2019, respectively. There was other income arising from gain on sale of properties amounting to $685 in fiscal year 2019.

 

Corporate

 

The following table presents the loss from operations for Corporate for fiscal years 2020 and 2019, respectively:

 

	For the Year Ended June 30,
	2020	2019
Loss from operations	$(147)	$(123)

 

In fiscal year 2020, corporate operating loss was $147, an increase of $24 compared to an operating loss of $123 in fiscal year 2019.

 

Liquidity

 

The Company’s core businesses testing services, manufacturing and distribution, operate in a volatile industry, in which its average selling prices and product costs are influenced by competitive factors. These factors create pressures on sales, costs, earnings and cash flows, which impact liquidity.  

 

Net cash provided by operating activities decreased by $1,443 to $3,011 for the twelve months ended June 30, 2020 from $4,454 in the same period of last fiscal year. The decrease in net cash provided by operating activities was primarily due to a decrease in net income of $244, an increase of $727 in repayment of operating leases, and an increase in cash outflow of $900 from accounts payables and accrued expenses. The decrease was partially offset by an increase in depreciation and amortization of $650.

 

Net cash used in investing activities decreased by $2,723 to an outflow of $2,617 for the twelve months ended June 30, 2020 from an outflow of $5,340 for the same period of last fiscal year. The decrease in net cash used in investing activities was primarily due to a decrease of $780 for investments in restricted and unrestricted deposits and a decrease of $1,824 for the acquisition of plant and equipment.

 

Net cash used in financing activities for the twelve months ended June 30, 2020 was $732, representing an increase of $142 compared to $590 in net cash used in financing activities during the twelve months ended June 30, 2019. Cash outflow increased mainly due to a decrease in a cash inflow of $401, $1,475 and $5,900 from proceeds from exercising stock options, bank loans, and lines of credit, respectively. The increase in cash outflow was partially offset by a decrease in repayment on lines of credit by $7,700.

 

We believe that our projected cash flows from operations, borrowing availability under our revolving lines of credit, cash on hand, trade credit and the secured bank loans will provide the necessary financial resources to meet our projected cash requirements for at least the next 12 months. Should we find an attractive capital investment, we may seek additional debt or equity financing in order to fund the transaction, in the form of bank financing, convertible debt, or the issuance of Common Stock.

 

 

Capital Resources

 

Our working capital (defined as current assets minus current liabilities) has historically been generated primarily from the following sources: operating cash flow, availability under our revolving line of credit, and short-term loans. The working capital was $12,957 as of June 30, 2020, representing an increase of $1,350, or 11.6%, compared to working capital of $11,607 as of June 30, 2019. The increase in working capital was mainly due to increases in current assets such as short-term deposits, other receivable, prepaid expenses other current assets and short-term advances, and decreases in current liabilities such as lines of credit, accounts payable, accrued expenses, income taxes payable and finance leases. Such fluctuations were partially offset by decreases in current assets such as cash and cash equivalents, account receivables, inventories and assets held for sale, and increases in current liabilities such as operating lease payable, as discussed above.

 

The majority of our capital expenditures are based on demands from our customers, as we are operating in a capital-intensive industry. Our capital expenditures were $1,017 and $2,841 for fiscal year 2020 and fiscal year 2019, respectively. The capital expenditures in fiscal year 2020 were mainly in the Malaysia and Thailand operations, which provide testing services to our customers. We financed our capital expenditures and other operating expenses through operating cash flows, PPP loan and long-term debts.

 

Our credit rating provides us with ready and adequate access to funds in the global market. At June 30, 2020, the Company had certain lines of credit that are collateralized by restricted deposits.

 

Entity with	Type of	Interest	Expiration	Credit	Unused
Facility	Facility	Rate	Date	Limitation	Credit
Trio-Tech International Pte. Ltd., Singapore	Lines of Credit	Ranging from 1.85% to 5.5%, SIBOR rate +1.25% and LIBOR rate +1.30%	-	$4,806	$  4,806
Universal (Far East) Pte. Ltd.	Lines of Credit	Ranging from 1.85% to 5.5%	-	$359	$187
Trio-Tech Malaysia Sdn. Bhd.	Revolving Credit	Cost of Funds Rate +2%	-	$350	$350

 

On November 18, 2019, Trio-Tech International Pte. Ltd. signed an agreement with JECC Leasing (Singapore) Pte. Ltd. for an Account Receivables Financing facility for SGD 1,000, or approximately $742 based on the market exchange rate. Interest is charged at LIBOR rate +1.3% for USD financing and SIBOR rate +1.25% for SGD financing. The financing facility was set up to facilitate the working capital in our operations in Singapore. The Company started to use this facility in the second quarter of fiscal year 2020.

As of June 30, 2019, the Company had certain lines of credit that are collateralized by restricted deposits.

Entity with	Type of	Interest	Expiration	Credit	Unused
Facility	Facility	Rate	Date	Limitation	Credit
Trio-Tech International Pte. Ltd., Singapore	Lines of Credit	Ranging from 1.85% to 5.5%, SIBOR rate +1.25% and LIBOR rate +1.30%	-	$4,213	$  4,213
Trio-Tech (Tianjin) Co., Ltd.	Lines of Credit	5.22% to 6.3%	-	$ 1,492	$ 1,492
Universal (Far East) Pte. Ltd.	Lines of Credit	Ranging from 1.85% to 5.5%	-	$370	$183
Trio-Tech Malaysia Sdn. Bhd.	Revolving Credit	Cost of Funds Rate +2%	-	$363	$363

Off-Balance Sheet Arrangements

 

We do not consider the Company to have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The information called for by this item is included in the Company's consolidated financial statements beginning on page F-2 of this Annual Report on Form 10-K.

 

ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A – CONTROLS AND PROCEDURES

 

An evaluation was carried out by the Company’s Chief Executive Officer and Chief Financial Officer (the principal executive and principal financial officers, respectively, of the Company) of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2020, the end of the period covered by this Form 10-K. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.

 

Additionally, Management has the responsibility for establishing and maintaining adequate internal control over financial reporting for the Company, and thus also assessed the effectiveness of our internal controls over financial reporting as of June 30, 2020. Management used the framework set forth in the report entitled “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 to evaluate the effectiveness of the Company’s internal control over financial reporting.

 

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:

 

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.

 

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal controls over financial reporting were effective as of June 30, 2020.

Changes in Internal Control Over Financial Reporting

Except as discussed below, there have been no changes in the Company’s internal control over financial reporting during the fourth quarter of fiscal 2020 which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Enterprise Resource Planning (ERP) Implementation

We are in the process of implementing an ERP System as part of a multi-year plan to integrate and upgrade our systems and processes. The implementation of this ERP system was scheduled to occur in phases over a few years. The operational and financial systems in our Singapore and Malaysia operations were transitioned to the new system in fiscal 2018 and fiscal 2019, respectively.

The operational systems in our Tianjin and Suzhou operations were substantially transitioned to the new system during the third quarter of fiscal 2020. This implementation effort will continue until the financial systems of these two operations are fully transitioned to the new system, and until the Group's consolidation process is substantially automated using the new system.

As a phased implementation of this system occurs, we are experiencing certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. While we expect the new ERP system to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as processes and procedures in each of the affected areas evolve.

 

ITEM 9B – OTHER INFORMATION

 

None.

 

 

PART III

 

The information required by Items 10 through 14 of Part III of this Form 10-K (information regarding our directors and executive officers, executive compensation, security ownership of certain beneficial owners, management, related stockholder matters, and certain relationships and related transactions and principal accountant fees and services) is hereby incorporated by reference from the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal year 2020.

 

PART IV

 

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

The following financial statements, including notes thereto and the independent auditors' report with respect thereto, are filed as part of this Annual Report on Form 10-K, starting on page 34 hereof:

 

 

 

ITEM 16 – FORM 10-K SUMMARY

 

Not applicable.

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

TRIO-TECH INTERNATIONAL   By:  /s/ Victor H.M. Ting VICTOR H.M. TING Vice President and Chief Financial Officer September 23, 2020

 

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.

 

/s/  A. Charles Wilson A. Charles Wilson, Director Chairman of the Board September 23, 2020   /s/  S.W.Yong S. W. Yong, Director President, Chief Executive Officer (Principal Executive Officer) September 23, 2020   /s/  Victor H. M. Ting Victor H.M. Ting, Director Vice President, and Chief Financial Officer Principal Financial Officer) September 23, 2020   /s/  Jason T. Adelman Jason T. Adelman, Director September 23, 2020   /s/  Richard M. Horowitz Richard M. Horowitz, Director September 23, 2020

 

 

 

EXHIBITS:

 

Number		Description
3.1		Articles of Incorporation, as currently in effect. [Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for June 30, 1988.]
3.2		Bylaws, as currently in effect. [Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for June 30, 1988.]
10.1		Amendment to 2007 Employee Stock Option Plan [Incorporated by reference to Exhibit A to the Registrant’s Proxy Statement for its Annual Meeting held December 14, 2010.]**
10.2		Amendment to 2007 Directors Equity Incentive Plan [Incorporated by reference to Exhibit B to the Registrant’s Proxy Statement for its Annual Meeting held December 14, 2010.]**
10.3		Amendment to 2007 Directors Equity Incentive Plan [Incorporated by reference to Appendix A to the Registrant’s Proxy Statement for its Annual Meeting held December 9, 2013.]**
10.4		2017 Employee Stock Option Plan [Incorporated by reference to Appendix 1 to the Registrant’s Proxy Statement for its Annual Meeting held December 4, 2017.]**
10.5		2017 Directors Equity Incentive Plan [Incorporated by reference to Appendix 2 to the Registrant’s Proxy Statement for its Annual Meeting held December 4, 2017.]**
21.1		Subsidiaries of the Registrant (100% owned by the Registrant except as otherwise stated)
		Express Test Corporation (Dormant), a California Corporation
		Trio-Tech Reliability Services (Dormant), a California Corporation
		KTS Incorporated, dba Universal Systems (Dormant), a California Corporation
		European Electronic Test Center. Ltd., a Cayman Islands Corporation (Operation ceased on November 1, 2005)
		Trio-Tech International Pte. Ltd., a Singapore Corporation
		Universal (Far East) Pte. Ltd., a Singapore Corporation
		Trio-Tech International (Thailand) Co., Ltd., a Thailand Corporation
		Trio-Tech (Bangkok) Co., Ltd., a Thailand Corporation
		Trio-Tech (Malaysia) Sdn Bhd., a Malaysia Corporation (55% owned by the subsidiary of Registrant)
		Trio-Tech (Kuala Lumpur) Sdn Bhd., a Malaysia Corporation (100% owned by Trio-Tech Malaysia)
		Prestal Enterprise Sdn. Bhd., a Malaysia Corporation (76% owned by Trio-Tech International Pte. Ltd., a Singapore Corporation)
		Trio-Tech (SIP) Co., Ltd., a China Corporation
		Trio-Tech (Shanghai) Co., Ltd., a China Corporation (Windup in March 30, 2017)
		Trio-Tech (Chongqing) Co. Ltd., (100% owned by Trio-Tech International Pte. Ltd., a Singapore Corporation)
		SHI International Pte. Ltd, a Singapore Corporation (55% owned Trio-Tech International Pte. Ltd., a Singapore Corporation)
		PT SHI Indonesia, an Indonesia Corporation (100% owned by SHI International Pte. Ltd., a Singapore Corporation)
		Trio-Tech (Tianjin) Co., Ltd., a China Corporation (100% owned by Trio-Tech International Pte. Ltd., a Singapore Corporation)
23.1		Consent of Independent Registered Public Accounting Firm*
31.1		Rule 13a-14(a) Certification of Principal Executive Officer of Registrant*
31.2		Rule 13a-14(a) Certification of Principal Financial Officer of Registrant*
32		Section 1350 Certification. *
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders

Trio-Tech International

Van Nuys, California

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Trio-Tech International and Subsidiaries (the “Company”) as of June 30, 2020 and 2019, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity and cash flows for each of the two years in the period ended June 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Change in Accounting Principle

 

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal year 2020.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Mazars LLP

PUBLIC ACCOUNTANTS AND

CHARTERED ACCOUNTANTS

We have served as the company’s auditors since 2009

 

/s/ Mazars LLP

 

Singapore

September 23, 2020

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

AUDITED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

 

	June 30, 2020	June 30, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$4,150	$4,863
Short-term deposits	6,697	4,144
Trade account receivables, less allowance for doubtful accounts of $314 and $263, respectively	5,951	7,113
Other receivables	998	817
Inventories, less provision for obsolete inventories of $678 and $673, respectively	1,922	2,427
Prepaid expenses and other current assets	341	287
Short-term advances	141	-
Assets held for sale	-	89
Total current assets	20,200	19,740
NON-CURRENT ASSETS:
Deferred tax assets	247	390
Investment properties, net	690	782
Property, plant and equipment, net	10,310	12,159
Operating lease right-of-use assets	944	-
Other assets	1,609	1,750
Restricted term deposits	1,660	1,706
Total non-current assets	15,460	16,787
TOTAL ASSETS	$35,660	$36,527
LIABILITIES
CURRENT LIABILITIES:
Lines of credit	$172	$187
Accounts payable	2,590	3,272
Accrued expenses	3,005	3,486
Income taxes payable	344	417
Current portion of bank loans payable	370	488
Current portion of finance leases	231	283
Current portion of operating leases	477	-
Current portion of PPP loan	54	-
Total current liabilities	7,243	8,133
NON-CURRENT LIABILITIES:
Bank loans payable, net of current portion	1,836	2,292
Finance leases, net of current portion	435	442
Operating leases, net of current portion	467	-
Deferred tax liabilities	-	327
Income taxes payable	430	439
PPP loan, net of current portion	67	-
Other non-current liabilities	36	33
Total non-current liabilities	3,271	3,533
TOTAL LIABILITIES	$10,514	$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 June 30, 2020 and June 30, 2019, respectively	$11,424	$11,424
Paid-in capital	3,363	3,305
Accumulated retained earnings	8,036	7,070
Accumulated other comprehensive gain-translation adjustments	1,143	1,867
Total Trio-Tech International shareholders' equity	23,966	23,666
Non-controlling interest	1,180	1,195
TOTAL EQUITY	$25,146	$24,861
TOTAL LIABILITIES AND EQUITY	$35,660	$36,527

 

 See notes to consolidated financial statements. 

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

AUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

 

	For the Year Ended
	June 30,	June 30,
	2020	2019
Revenue
Manufacturing	$11,605	$14,889
Testing services	14,840	16,760
Distribution	7,958	7,451
Real estate	62	98
	34,465	39,198
Cost of Sales
Cost of manufactured products sold	8,927	11,393
Cost of testing services rendered	11,353	12,202
Cost of distribution	6,847	6,505
Cost of real estate	72	97
	27,199	30,197
Gross Margin	7,266	9,001
Operating Expenses:
General and administrative	6,976	7,049
Selling	679	826
Research and development	355	345
Impairment loss on long-lived assets	139	-
Gain on disposal of property, plant and equipment	(24)	(13)
Total operating expenses	8,125	8,207
(Loss) / Income from Operations	(859)	794
Other Income
Interest expenses	(230)	(319)
Other income, net	1,112	249
Gain on sale of properties	1,172	685
Total other income	2,054	615
Income from Continuing Operations before Income Taxes	1,195	1,409
Income Tax Benefits	12	42
Income from continuing operations before non-controlling interests, net of tax	1,207	1,451
Discontinued Operations
Loss from discontinued operations, net of tax	(3)	(3)
NET INCOME	1,204	1,448
Less: net income/(loss) attributable to non-controlling interests	238	(97)
Net Income Attributable to Trio-Tech International Common Shareholders	$966	$1,545
Amounts Attributable to Trio-Tech International Common Shareholders:
Income from continuing operations, net of tax	967	1,548
Loss from discontinued operations, net of tax	(1)	(3)
Net Income Attributable to Trio-Tech International Common Shareholders	$966	$1,545
Basic Earnings per Share:
Basic earnings per share from continuing operations attributable to Trio-Tech International	$0.26	$0.42
Basic loss per share from discontinued operations attributable to Trio-Tech International	$-	$-
Basic Earnings per Share from Net Income
Attributable to Trio-Tech International	$0.26	$0.42
Diluted Earnings per Share:
Diluted earnings per share from continuing operations attributable to Trio-Tech International	$0.26	$0.41
Diluted loss per share from discontinued operations attributable to Trio-Tech International	-	-
Diluted Earnings per Share from Net Income
Attributable to Trio-Tech International	$0.26	$0.41
Weighted average number of common shares outstanding
Basic	3,673	3,673
Dilutive effect of stock options	49	89
Number of shares used to compute earnings per share diluted	3,722	3,762

 

See notes to consolidated financial statements.

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

	For the Year Ended
	June 30,	June 30,
	2020	2019
Comprehensive Income Attributable to Trio-Tech International Common Shareholders:
Net income	1,204	1,448
Foreign currency translation, net of tax	(742)	(420)
Comprehensive Income	462	1,028
Less: comprehensive income / (loss) attributable to the non-controlling interests	220	(202)
Comprehensive Income Attributable to Trio-Tech International Common Shareholders	$242	$1,230

 

See notes to consolidated financial statements.

 

 

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS)

 

	Common Stock		Paid-in	Accumulated Retained	Accumulated Other Comprehensive	Non- Controlling
	No. of Shares	Amount	Capital	Earnings	Income	Interests	Total
		$	$	$	$	$	$
Balance at June 30, 2018	3,553	11,023	3,249	5,525	2,182	1,522	23,501
Stock option expenses	-	-	56	-	-	-	56
Net income	-	-	-	1,545	-	(97)	1,448
Dividend declared by subsidiary	-	-	-	-	-	(125)	(125)
Exercise of options	120	401	-	-	-	-	401
Issue of restricted shares to consultant	-	-	-	-	-	-	-
Translation adjustment	-	-	-	-	(315)	(105)	(420)
Balance at June 30, 2019	3,673	11,424	3,305	7,070	1,867	1,195	24,861
Stock option expenses	-	-	58	-	-	-	58
Net income	-	-	-	966	-	238	1,204
Dividend declared by subsidiary	-	-	-	-	-	(235)	(235)
Exercise of options	-	-	-	-	-	-	-
Translation adjustment	-	-	-	-	(724)	(18)	(742)
Balance at June 30, 2020	3,673	11,424	3,363	8,036	1,143	1,180	25,146