UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___ to ___
Commission File Number 1-14523
TRIO-TECH INTERNATIONAL
(Exact name of Registrant as specified in its Charter)
California | 95-2086631 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
Block 1008 Toa Payoh North | ||
Unit 03-09 Singapore | 318996 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's Telephone Number, Including Area Code: (65) 6265 3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange | ||
Title of each class | Trading Symbol | On which registered |
Common Stock, no par value | TRT | NYSE American |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b2 of the Exchange Act. (Check one):
Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |
Non-Accelerated Filer | ☐ | Smaller reporting company | ☒ | |
Emerging growth company | ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 1, 2020, there were 3,673,055 shares of the issuer’s Common Stock, no par value, outstanding.
TRIO-TECH INTERNATIONAL
INDEX TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE
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FORWARD-LOOKING STATEMENTS
The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and assumptions regarding future activities and results of operations of the Company. In light of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among others, could cause actual results to differ materially from those reflected in any forward-looking statements made by or on behalf of the Company: market acceptance of Company products and services; changing business conditions or technologies and volatility in the semiconductor industry, which could affect demand for the Company’s products and services; the impact of competition; problems with technology; product development schedules; delivery schedules; changes in military or commercial testing specifications which could affect the market for the Company’s products and services; difficulties in profitably integrating acquired businesses, if any, into the Company; risks associated with conducting business internationally and especially in Asia, including currency fluctuations and devaluation, currency restrictions, local laws and restrictions and possible social, political and economic instability; changes in U.S. and global financial and equity markets, including market disruptions and significant interest rate fluctuations; the trade tension between U.S. and China;public healthy issue related to the 2019 Novel Corona virus;and other economic, financial and regulatory factors beyond the Company’s control. Other than statements of historical fact, all statements made in this Quarterly Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future financial results and condition. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology. Forward-looking statements involve risks and uncertainties that are inherently difficult to predict, which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions.
Unless otherwise required by law, we undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events. You are cautioned not to place undue reliance on such forward-looking statements.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
December 31, 2019 | June 30, 2019 | |
ASSETS | (Unaudited) | |
CURRENT ASSETS: | ||
Cash and cash equivalents | $4,743 | $4,863 |
Short-term deposits | 6,888 | 4,144 |
Trade accounts receivable, less allowance for doubtful accounts of $306 and $263, respectively | 6,937 | 7,113 |
Other receivables | 752 | 817 |
Inventories, less provision for obsolete inventory of $680 and $673, respectively | 2,182 | 2,427 |
Prepaid expenses and other current assets | 330 | 287 |
Assets held for sale | - | 89 |
Total current assets | 21,832 | 19,740 |
NON-CURRENT ASSETS: | ||
Deferred tax asset | 421 | 390 |
Investment properties, net | 734 | �� 782 |
Property, plant and equipment, net | 11,651 | 12,159 |
Operating lease right-of-use assets | 475 | - |
Other assets | 1,626 | 1,750 |
Restricted term deposits | 1,716 | 1,706 |
Total non-current assets | 16,623 | 16,787 |
TOTAL ASSETS | $38,455 | $36,527 |
LIABILITIES | ||
CURRENT LIABILITIES: | ||
Lines of credit | $810 | $187 |
Accounts payable | 3,565 | 3,272 |
Accrued expenses | 3,176 | 3,486 |
Income taxes payable | 395 | 417 |
Current portion of bank loans payable | 422 | 488 |
Current portion of finance leases | 286 | 283 |
Current portion of operating leases | 343 | - |
Total current liabilities | 8,997 | 8,133 |
NON-CURRENT LIABILITIES: | ||
Bank loans payable, net of current portion | 2,127 | 2,292 |
Finance leases, net of current portion | 570 | 442 |
Operating leases, net of current portion | 134 | - |
Deferred tax liabilities | 315 | 327 |
Income taxes payable | 430 | 439 |
Other non-current liabilities | 37 | 33 |
Total non-current liabilities | 3,613 | 3,533 |
TOTAL LIABILITIES | $12,610 | $11,666 |
EQUITY | ||
TRIO-TECH INTERNATIONAL’S SHAREHOLDERS' EQUITY: | ||
Common stock, no par value, 15,000,000 shares authorized; 3,673,055 shares issued outstanding as at December 31 and June 30, 2019, respectively | $11,424 | $11,424 |
Paid-in capital | 3,319 | 3,305 |
Accumulated retained earnings | 7,769 | 7,070 |
Accumulated other comprehensive gain-translation adjustments | 1,818 | 1,867 |
Total Trio-Tech International shareholders' equity | 24,330 | 23,666 |
Non-controlling interest | 1,515 | 1,195 |
TOTAL EQUITY | $25,845 | $24,861 |
TOTAL LIABILITIES AND EQUITY | $38,455 | $36,527 |
See notes to condensed consolidated financial statements.
-1-
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)
UNAUDITED (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended | Six Months Ended | |||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |
2019 | 2018 | 2019 | 2018 | |
Revenue | ||||
Manufacturing | $3,045 | $3,352 | $6,362 | $6,989 |
Testing services | 3,887 | 4,393 | 8,277 | 8,830 |
Distribution | 2,014 | 1,916 | 4,113 | 3,860 |
Real Estate | 16 | 29 | 33 | 56 |
8,962 | 9,690 | 18,785 | 19,735 | |
Cost of Sales | ||||
Cost of manufactured products sold | 2,383 | 2,646 | 4,938 | 5,503 |
Cost of testing services rendered | 2,918 | 3,106 | 6,109 | 6,489 |
Cost of distribution | 1,738 | 1,662 | 3,545 | 3,348 |
Cost of real estate | 18 | 18 | 36 | 36 |
7,057 | 7,432 | 14,628 | 15,376 | |
Gross Margin | 1,905 | 2,258 | 4,157 | 4,359 |
Operating Expenses: | ||||
General and administrative | 1,777 | 1,722 | 3,565 | 3,481 |
Selling | 176 | 187 | 366 | 334 |
Research and development | 125 | 122 | 201 | 194 |
Gain on disposal of property, plant and equipment | - | - | (24) | - |
Total operating expenses | 2,078 | 2,031 | 4,108 | 4,009 |
(Loss) / Income from Operations | (173) | 227 | 49 | 350 |
Other Income / (Expenses) | ||||
Interest expenses | (55) | (98) | (123) | (176) |
Gain on sale of asset held for sale | 1,172 | - | 1,172 | - |
Other income, net | 40 | 49 | 150 | 92 |
Total other income / (expenses) | 1,157 | (49) | 1,199 | (84) |
Income from Continuing Operations before Income Taxes | 984 | 178 | 1,248 | 266 |
Income Tax (Expenses) / Benefits | (120) | 124 | (120) | 50 |
Income from continuing operations before non-controlling interest, net of tax | 864 | 302 | 1,128 | 316 |
Discontinued Operations | ||||
Income / (Loss) from discontinued operations, net of tax | 1 | 4 | - | (4) |
NET INCOME | 865 | 306 | 1,128 | 312 |
Less: net income / (loss) attributable to non-controlling interest | 439 | (42) | 429 | (101) |
Net Income Attributable to Trio-Tech International Common Shareholders | $426 | $348 | $699 | $413 |
Amounts Attributable to Trio-Tech International Common Shareholders: | ||||
Income from continuing operations, net of tax | 425 | 346 | 699 | 415 |
Income / (Loss) from discontinued operations, net of tax | 1 | 2 | - | (2) |
Net Income Attributable to Trio-Tech International Common Shareholders | $426 | $348 | $699 | $413 |
Basic Earnings per Share: | ||||
Basic per share from continuing operations attributable to Trio-Tech International | $0.12 | $0.09 | $0.19 | $0.11 |
Basic earnings per share from discontinued operations attributable to Trio-Tech International | $- | $- | $- | $- |
Basic Earnings per Share from Net Income | ||||
Attributable to Trio-Tech International | $0.12 | $0.09 | $0.19 | $0.11 |
Diluted Earnings per Share: | ||||
Diluted earnings per share from continuing operations attributable to Trio-Tech International | $0.11 | $0.09 | $0.19 | $0.11 |
Diluted earnings per share from discontinued operations attributable to Trio-Tech International | $- | $- | $- | $- |
Diluted Earnings per Share from Net Income | ||||
Attributable to Trio-Tech International | $0.11 | $0.09 | $0.19 | $0.11 |
Weighted average number of common shares outstanding | ||||
Basic | 3,673 | 3,673 | 3,673 | 3,673 |
Dilutive effect of stock options | 52 | 108 | 33 | 142 |
Number of shares used to compute earnings per share diluted | 3,725 | 3,781 | 3,706 | 3,815 |
See notes to condensed consolidated financial statements.
-2-
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
Three Months Ended | Six Months Ended | |||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |
Comprehensive Income Attributable to Trio-Tech International Common Shareholders: | 2019 | 2018 | 2019 | 2018 |
Net income | $865 | $306 | $1,128 | $312 |
Foreign currency translation, net of tax | 525 | (51) | (38) | (590) |
Comprehensive Income / (Loss) | 1,390 | 255 | 1,090 | (278) |
Less: comprehensive income / (loss) attributable to non-controlling interest | 431 | (57) | 440 | (192) |
Comprehensive Income / (Loss) Attributable to Trio-Tech International Common Shareholders | $959 | $312 | $650 | $(86) |
See notes to condensed consolidated financial statements.
-3-
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Six Months ended December 31, 2019
Common Stock | Additional Paid-in | Accumulated Retained | Accumulated Other Comprehensive | Non- Controlling | |||
Shares | Amount | Capital | Earnings | Income | Interest | Total | |
$ | $ | $ | $ | $ | $ | ||
Balance at June 30, 2019 | 3,673 | 11,424 | 3,305 | 7,070 | 1,867 | 1,195 | 24,861 |
Stock option expenses | - | - | 14 | - | - | - | 14 |
Net income | - | - | - | 699 | - | 429 | 1,128 |
Dividend declared by subsidiary | - | - | - | - | - | (120) | (120) |
Exercise of stock option | - | - | - | - | - | - | - |
Translation adjustment | - | - | - | - | (49) | 11 | (38) |
Balance at Dec. 31, 2019 | 3,673 | 11,424 | 3,319 | 7,769 | 1,818 | 1,515 | 25,845 |
Six Months ended December 31, 2018
Common Stock | Additional Paid-in | Accumulated Retained | Accumulated Other Comprehensive | Non- Controlling | |||
Shares | Amount | Capital | Earnings | Income | Interest | Total | |
$ | $ | $ | $ | $ | $ | ||
Balance at June 30, 2018 | 3,553 | 11,023 | 3,249 | 5,525 | 2,182 | 1,522 | 23,501 |
Stock option expenses | - | - | 9 | - | - | - | 9 |
Net income / (loss) | - | - | - | 413 | - | (101) | 312 |
Dividend declared by subsidiary | - | - | - | - | - | (122) | (122) |
Exercise of stock option | 120 | 401 | - | - | - | - | 401 |
Translation adjustment | - | - | - | - | (499) | (91) | (590) |
Balance at Dec. 31, 2018 | 3,673 | 11,424 | 3,258 | 5,938 | 1,683 | 1,208 | 23,511 |
See notes to condensed consolidated financial statements.
-4-
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Six Months Ended | ||
Dec. 31, | Dec. 31, | |
2019 | 2018 | |
(Unaudited) | (Unaudited) | |
Cash Flow from Operating Activities | ||
Net income | $1,128 | $312 |
Adjustments to reconcile net income to net cash flow provided by operating activities | ||
Gain on sale of asset held for sale | (1,172) | - |
Gain on sale of property, plant and equipment | (24) | - |
Depreciation and amortization | 1,576 | 1,145 |
Stock compensation | 14 | 9 |
Reversal of provision for obsolete inventory | (5) | - |
Reversal of income tax provision | - | (145) |
Repayment of operating leases | (359) | - |
Repayment of interest portion of finance leases (Note 1b) | (24) | (24) |
Bad debt expenses (recovery) | 45 | (2) |
Accrued interest expense, net accrued interest income | (20) | 26 |
Warranty recovery, net | - | (22) |
Deferred tax (provision) / benefit | (47) | 29 |
Changes in operating assets and liabilities, net of acquisition effects | ||
Trade accounts receivable | 132 | 753 |
Other receivables | 65 | (110) |
Other assets | 97 | 428 |
Inventories | 247 | 294 |
Prepaid expenses and other current assets | (43) | (71) |
Accounts payable and accrued expenses | (6) | (287) |
Income taxes payable | (31) | (84) |
Net Cash Provided by Operating Activities | 1,573 | 2,251 |
Cash Flow from Investing Activities | ||
Proceeds from disposal of property, plant and equipment | 39 | 3 |
Proceeds from sale of asset held for sale | 1,261 | - |
Investments in unrestricted deposits | (2,672) | (1,461) |
Addition to property, plant and equipment | (744) | (2,297) |
Net Cash Used in Investing Activities | (2,116) | (3,755) |
Cash Flow from Financing Activities | ||
Repayment on lines of credit | (729) | (5,908) |
Repayment of bank loans | (245) | (265) |
Repayment of principal portion of finance leases | (127) | (121) |
Dividends paid on non-controlling interest | (120) | (122) |
Proceeds from exercising stock options | - | 401 |
Proceeds from lines of credit | 1,337 | 5,962 |
Proceeds from bank loans | - | 1,475 |
Proceeds from finance leases | 279 | |
Net Cash Generated from Financing Activities | 395 | 1,422 |
Effect of Changes in Exchange Rate | 38 | (272) |
Net decrease in cash, cash equivalents, and restricted cash | $(110) | $(354) |
Cash, cash equivalents, and restricted cash at beginning of period | 6,569 | 8,234 |
Cash, cash equivalents, and restricted cash at end of period | $6,459 | $7,880 |
Supplementary Information of Cash Flows | ||
Cash paid during the period for: | ||
Interest | 124 | 150 |
Income taxes | $109 | $104 |
Non-Cash Transactions | ||
Finance lease of property, plant and equipment | 279 | - |
Reconciliation of Cash, cash equivalents, and restricted cash (Note 1a) | ||
Cash | 4,743 | 6,192 |
Short-term deposits | 6,888 | 2,121 |
Restricted term-deposits in non-current assets | 1,716 | 1,688 |
Total Cash, cash equivalents, and restricted cash shown in statement of cash flows | $13,347 | $10,001 |
See notes to condensed consolidated financial statements. |
Note 1a-Amounts reflecting adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) beginning in the first quarter of 2019.
Note 1b-Reclassification of repayment on interest portion of finance lease from financing activities to operating accordance ASC 842-20-45-5.
Amounts included in restricted deposits represent the amount of cash pledged to secure loans payable or trade financing granted by financial institutions and serve as collateral for public utility agreements such as electricity and water. Restricted deposits are classified as non-current assets, as they relate to long-term obligations and will become unrestricted only upon discharge of the obligations.
-5-
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AND NUMBER OF SHARES)
1. ORGANIZATION AND BASIS OF PRESENTATION
Trio-Tech International (“the Company” or “TTI” hereafter) was incorporated in fiscal year 1958 under the laws of the State of California. TTI provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. In addition, TTI operates testing facilities in the United States. The Company also designs, develops, manufactures and markets a broad range of equipment and systems used in the manufacturing and testing of semiconductor devices and electronic components. In the second quarter of fiscal year 2020, TTI conducted business in four business segments: Manufacturing, Testing Services, Distribution and Real Estate. TTI has subsidiaries in the U.S., Singapore, Malaysia, Thailand, Indonesia and China as follows:
Ownership | Location | |
Express Test Corporation (Dormant) | 100% | Van Nuys, California |
Trio-Tech Reliability Services (Dormant) | 100% | Van Nuys, California |
KTS Incorporated, dba Universal Systems (Dormant) | 100% | Van Nuys, California |
European Electronic Test Centre (Dormant) | 100% | Dublin, Ireland |
Trio-Tech International Pte. Ltd. | 100% | Singapore |
Universal (Far East) Pte. Ltd. * | 100% | Singapore |
Trio-Tech International (Thailand) Co. Ltd. * | 100% | Bangkok, Thailand |
Trio-Tech (Bangkok) Co. Ltd. * | 100% | Bangkok, Thailand |
Trio-Tech (Malaysia) Sdn. Bhd. (55% owned by Trio-Tech International Pte. Ltd.) | 55% | Penang and Selangor, Malaysia |
Trio-Tech (Kuala Lumpur) Sdn. Bhd. | 55% | Selangor, Malaysia |
(100% owned by Trio-Tech Malaysia Sdn. Bhd.) | ||
Prestal Enterprise Sdn. Bhd. | 76% | Selangor, Malaysia |
(76% owned by Trio-Tech International Pte. Ltd.) | ||
Trio-Tech (SIP) Co., Ltd. * | 100% | Suzhou, China |
Trio-Tech (Chongqing) Co. Ltd. * | 100% | Chongqing, China |
SHI International Pte. Ltd. (Dormant) (55% owned by Trio-Tech International Pte. Ltd) | 55% | Singapore |
PT SHI Indonesia (Dormant) (100% owned by SHI International Pte. Ltd.) | 55% | Batam, Indonesia |
Trio-Tech (Tianjin) Co., Ltd. * | 100% | Tianjin, China |
* 100% owned by Trio-Tech International Pte. Ltd.
The accompanying un-audited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant inter-company accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements are presented in U.S. dollars. The accompanying condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report for the fiscal year ended June 30, 2019.
Except as otherwise specifically noted in this form 10-Q, the Company’s operating results are presented based on the translation of foreign currencies using the respective quarter’s average exchange rate.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
-6-
Basis of Presentation and Summary of Significant Accounting Policies
Comparability
Effective on the first day of fiscal 2020, the company adopted Accounting Standards Update 2016-02, Leases (“ASC 842”). Prior periods were not retrospectively restated, and accordingly, the consolidated balance sheet as of June 30, 2019, and the condensed consolidated statements of operations for the six months ended December 31, 2018 were prepared using accounting standards that were different than those in effect for the six months ended December 31, 2019.
Leases-Company as Lessee
Accounting Standards Codification ("ASC") Topic 842 introduced new requirements to increase transparency and comparability among organizations for leasing transactions for both lessees and lessors. It requires a lessee to record a right-of-use asset and a lease liability for all leases with terms longer than 12 months. These leases will be either finance or operating, with classification affecting the pattern of expense recognition.
The standard provides an alternative modified retrospective transition method. Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized on the date of adoption (July 1, 2019). The Company adopted ASC 842 as of July 1, 2019, and applied the alternative modified retrospective transition method requiring application of the new guidance to all leases existing at, or entered into on or after, the date of adoption, i.e. July 1, 2019.
The Company applies the guidance in ASC 842 to its individual leases of assets. When the Company receives substantially all of the economic benefits from and directs the use of specified property, plant and equipment, the transactions give rise to leases. The Company’s classes of assets include real estate leases.
Operating leases are included in operating lease right-of-use ("ROU") assets under the non-current asset portion of our consolidated balance sheets and under this current portion and non-current liabilities portion of our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the related lease. Finance leases are included in property, plant and equipment under the non-current asset portion of our consolidated balance sheets and under the current portion and non-current liabilities portion of our consolidated balance sheets.
The Company has elected the practical expedient within ASC 842 to not separate lease and non-lease components within lease transactions for all classes of assets. Additionally, the Company has elected the short-term lease exception for all classes of assets, does not apply the recognition requirements for leases of 12 months or less, and recognizes lease payments for short-term leases as expense either straight-line over the lease term or as incurred depending on whether the lease payments are fixed or variable. These elections are applied consistently for all leases.
As part of applying the transition method, the Company has elected to apply the package of transition practical expedients within the new guidance. As required by the new standard, these expedients have been elected as a package and are consistently applied across the Company’s lease portfolio. Given this election, the Company need not reassess:
●
whether any expired or existing contracts are or contain leases
●
the lease classification for any expired or existing leases
●
treatment of initial direct costs relating to any existing leases
When discount rates implicit in leases cannot be readily determined, the Company uses the applicable incremental borrowing rate at lease commencement to perform lease classification tests on lease components and to measure lease liabilities and ROU assets. The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads commensurate with the Company’s secured borrowing rate, over a similar term. At each reporting period when there is a new lease initiated, the rates established for that quarter will be used.
In applying the alternative modified retrospective transition method, the Company measured lease liabilities at the present value of the sum of remaining minimum rental payments (as defined under ASC Topic 840). The present value of lease liabilities has been measured using the Company’s incremental borrowing rates as of July 1, 2019 (the date of initial application). Additionally, ROU assets for these operating leases have been measured as the initial measurement of application lease liabilities adjusted for reinstatement liabilities.
-7-
The adoption of this new standard at July 1, 2019, and the application of the modified retrospective transition approach resulted in the following changes in the Company’s financial report:
(1)
assets increased by $828, primarily representing the recognition of ROU assets for operating leases
(2)
liabilities increased by $828, primarily representing the recognition of lease liabilities for operating leases.
Leases- Company as Lessor
All of the leases under which the Company is the lessor will continue to be classified as operating leases under the new standard. The new standard did not have a material effect on our financial statements and will not have significant change in our leasing activities.
2. NEW ACCOUNTING PRONOUNCEMENTS
The amendments in ASU 2019-12 ASC Topic 740: Income Taxes: Simplifying Accounting for Income Taxes removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). The amendments eliminate the need for an organization to analyze whether the specific exceptions apply in a given period, improve financial statement preparers’ application of income tax-related guidance and simplify GAAP. The amendments are effective for all entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
The amendments in ASU 2018-18 ASC Topic 808: Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 provide more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The amendments allow organizations to only present units of account in collaborative arrangements that are within the scope of the revenue recognition standard together with revenue accounted for under the revenue recognition standard. The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard are to be presented separately from revenue accounted for under the revenue recognition standard. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
The amendments in ASU 2018-13 ASC Topic 820: Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
The amendments in ASU 2017-04 ASC Topic 350 — 'Intangibles - Goodwill and Other simplify the test for goodwill impairment. For public companies, these amendments are effective for annual periods beginning after December 15, 2019, including interim periods within those periods. While early application is permitted, including adoption in an interim period, the Company has not elected to early adopt. The effectiveness of this update is not expected to have a significant effect on the Company’s presentation of consolidated financial position or results of operations.
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In June 2016, FASB issued ASU 2016-13 ASC Topic 326: Financial Instruments — Credit losses (“ASC Topic 326”) for the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2019-10 defers the effective date of ASU 2016-13 as discussed below and it also distinguishes that smaller reporting companies as defined by the SECare considered for purposes of ASU No. 2016-13 only. In November 2018, the amendments in ASU 2018-19 ASC Topic 326: Codification Improvements was issued to clarify that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the lease’s standard. In May 2019, another ASU 2019-05 ASC Topic 326: Targeted Transition Relief was issued to provide an option to measure certain types of assets at fair value which allows companies to irrevocably elect, upon adoption of ASU 2016-13. In November 2019, ASU2019-11: Codification improvements was issue to clarify guidance around how to report expected recoveries and also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. For public companies that are SEC filers and categorized under smaller reporting companies, ASC Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. While early application will be permitted for all organizations for fiscal years and interim periods after November 26, 2019 as long as an entity has adopted ASU 2016-13. The Company is currently evaluating the potential impact of this accounting standard update on its consolidated financial statements.
Other new pronouncements issued but not yet effective until after December 31, 2019 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
3. TERM DEPOSITS
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Short-term deposits | $6,844 | $4,143 |
Currency translation effect on short-term deposits | 44 | 1 |
Total short-term deposits | 6,888 | 4,144 |
Restricted term deposits | 1,754 | 1,701 |
Currency translation effect on restricted term deposits | (38) | 5 |
Total restricted term deposits | 1,716 | 1,706 |
Total term deposits | $8,604 | $5,850 |
Restricted deposits represent the amount of cash pledged to secure loans payable to financial institutions and serve as collateral for public utility agreements such as electricity and water and performance bonds related to customs duty payable. Restricted deposits are classified as non-current assets, as they relate to long-term obligations and will become unrestricted only upon discharge of the obligations. Short-term deposits represent bank deposits, which do not qualify as cash equivalents.
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4. TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial conditions, and although management generally does not require collateral, letters of credit may be required from the customers in certain circumstances.
Senior management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Management includes any accounts receivable balances that are determined to be uncollectible in the allowance for doubtful accounts. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, management believed the allowance for doubtful accounts as of December 31, 2019, and June 30, 2019 was adequate.
The following table represents the changes in the allowance for doubtful accounts:
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Beginning | $263 | $259 |
Additions charged to expenses | 315 | 94 |
Recovered | (270) | (84) |
Currency translation effect | (2) | (6) |
Ending | $306 | $263 |
5. LOANS RECEIVABLE FROM PROPERTY DEVELOPMENT PROJECTS
The following table presents Trio-Tech (Chongqing) Co. Ltd (“TTCQ”)’s loan receivable from property development projects in China as of December 31, 2019. The exchange rate is based on the historical rate published by the Monetary Authority of Singapore as of March 31, 2015, since the net loan receivable was “nil” as of December 31, 2019.
Loan Expiry Date | Loan Amount (RMB) | Loan Amount (U.S. Dollars) | |
Short-term loan receivables | |||
JiangHuai (Project – Yu Jin Jiang An) | May 31, 2013 | 2,000 | 325 |
Less: allowance for doubtful receivables | (2,000) | (325) | |
Net loan receivables from property development projects | - | - | |
Long-term loan receivables | |||
Jun Zhou Zhi Ye | Oct 31, 2016 | 5,000 | 814 |
Less: transfer – down-payment for purchase of investment property | (5,000) | (814) | |
Net loan receivables from property development projects | - | - |
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The short-term loan receivables of Renminbi (“RMB”) 2,000, or approximately $325 based on the historical rate, arose from TTCQ entering into a Memorandum Agreement with JiangHuai Property Development Co. Ltd. (“JiangHuai”) to invest in their property development projects (Project - Yu Jin Jiang An) located in Chongqing City, China in fiscal 2011. Based on TTI’s financial policy, a provision for doubtful receivables of $325 on the investment in JiangHuai was recorded during fiscal 2014. TTCQ did not generate other income from JiangHuai for the quarter ended December 31, 2019 or for the fiscal year ended June 30, 2019. TTCQ is in the legal process of recovering the outstanding amount of $325.
The long-term loan receivable of RMB 5,000, or approximately $814 based on the historical rate, arose from TTCQ entering into a Memorandum Agreement with JiaSheng Property Development Co. Ltd. (“JiaSheng”) to invest in JiaSheng’s property development projects (Project B-48 Phase 2) located in Chongqing City, China in fiscal 2011. The loan receivable was unsecured and repayable at the end of the term. The book value of the loan receivable approximates its fair value. During fiscal year 2015, the loan receivable was transferred to down payment for purchase of investment property that is being developed in the Singapore Themed Resort Project (See Note 9).
6. INVENTORIES
Inventories consisted of the following:
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Raw materials | $1,326 | $1,190 |
Work in progress | 1,047 | 1,306 |
Finished goods | 486 | 591 |
Currency translation effect | 3 | 13 |
Less: provision for obsolete inventory | (680) | (673) |
$2,182 | $2,427 |
The following table represents the changes in provision for obsolete inventory:
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Beginning | $673 | $695 |
Additions charged to expenses | 9 | 17 |
Usage – disposition | (4) | (42) |
Currency translation effect | 2 | 3 |
Ending | $680 | $673 |
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7. ASSETS HELD FOR SALE
Penang Property
During the fourth quarter of the fiscal year 2015, the operations in Malaysia planned to sell its factory building in Penang, Malaysia. In accordance with ASC Topic 360, during the fiscal year 2015, the property was reclassified from investment property, which had a net book value of RM 371, or approximately $98 (based on the exchange rate as of June 30, 2015 as published by the Monetary Authority of Singapore), to assets held for sale, since there was anintention to sell the factory building. In May 2015, Trio-Tech Malaysia was approached by a potential buyer to purchase the factory building. On September 14, 2015, the application to sell the property was rejected by Penang Development Corporation (PDC).The rejection was because the business activity of the purchaser was not suitable for the industry that is being promoted on said property. PDC made an offer to purchase the property, which was not at the expected value and the offer expired on March 28, 2016. No further conversations with PDC have occurred since March 2016. Management entered into a Sales and Purchase Agreement with a potential buyer in the fourth quarter of fiscal year 2019. During the second quarter of the fiscal year 2020, the Company had obtained approval of the sale from PDC and the local government. The sale of the property was completed at the end of the second quarter of the fiscal year 2020. The sale price was RM5,600, or $1,340. In connection with the sale of the property located in Malaysia, the Company also incurred the direct expenses of RM330, or $79 which including professional fees, commissions, other selling related expenses and consent fee from local government. These expenses were directly offset against the proceeds from selling the property as these expenses were deemed as a cost of sales. The Company recognized a net gain of RM4,901 or $1,172 in the second quarter of fiscal year 2020 excluding capital gain tax. The tax on the capital gain in Malaysia from the sale of the property was approximately $94 computed after the taxable gain was determined.
The following table presents the Company’s assets held for sale in Malaysia as of December 31, 2019 and June 30, 2019.
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |||
Reclassification Date / | Investment Amount | Investment Amount | Investment Amount | |
Sale Date | (RM) | (U.S. Dollars) | (U.S. Dollars) | |
Penang Property | ||||
Reclassification from investment property | June 30, 2015 | 681 | 181* | 181* |
Currency translation | - | - | (15) | |
Derecognition | Dec 19,2019 | (681) | (181) | - |
- | - | 166 | ||
Accumulated depreciation on rental property | June 30, 2015 | (310) | (83)* | (83)* |
Currency translation | - | - | 6 | |
Derecognition | Dec 19,2019 | 310 | (83) | - |
- | - | (77) | ||
Net investment in rental property - Malaysia | - | - | 89 |
*The exchange rate is based on the exchange rate as of June 30, 2015 published by the Monetary Authority of Singapore.
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8. INVESTMENT PROPERTIES
The following table presents the Company’s investment in properties in China as of December 31, 2019. The exchange rate is based on the market rate as of December 31, 2019.
Investment Date / Reclassification Date | Investment Amount (RMB) | Investment Amount (U.S. Dollars) | |
Purchase of rental property – Property I – MaoYe Property | Jan 04, 2008 | 5,554 | 894 |
Currency translation | - | (87) | |
Reclassification as “Assets held for sale” | July 01, 2018 | (5,554) | (807) |
Reclassification from “Assets held for sale” | Mar 31, 2019 | 2,024 | 301 |
2,024 | 301 | ||
Purchase of rental property – Property II - JiangHuai | Jan 06, 2010 | 3,600 | 580 |
Purchase of rental property – Property III - Fu Li | Apr 08, 2010 | 4,025 | 648 |
Currency translation | - | (148) | |
Gross investment in rental property | 9,649 | 1,381 | |
Accumulated depreciation on rental property | Dec 31, 2019 | (6,317) | (914) |
Reclassified as “Assets held for sale”-Mao Ye Property | July 01, 2018 | 2,822 | 410 |
Reclassification from “Assets held for sale”-Mao Ye Property | Mar 31, 2019 | (1,029) | (143) |
(4,524) | (647) | ||
Net investment in property – China | 5,125 | 734 |
The following table presents the Company’s investment in properties in China as of June 30, 2019. The exchange rate is based on the market rate as of June 30, 2019.
Investment Date / Reclassification Date | Investment Amount (RMB) | Investment Amount (U.S. Dollars) | |
Purchase of rental property – Property I – MaoYe Property | Jan 04, 2008 | 5,554 | 894 |
Currency translation | - | (87) | |
Reclassification as “Assets held for sale” | July 01, 2018 | (5,554) | (807) |
Reclassification from “Assets held for sale” | Mar 31, 2019 | 2,024 | 301 |
2,024 | 301 | ||
Purchase of rental property – Property II - JiangHuai | Jan 06, 2010 | 3,600 | 580 |
Purchase of rental property – Property III - Fu Li | Apr 08, 2010 | 4,025 | 648 |
Currency translation | - | (124) | |
Gross investment in rental property | 9,649 | 1,405 | |
Accumulated depreciation on rental property | June 30, 2019 | (6,075) | (890) |
Reclassified as “Assets held for sale”-Mao Ye Property | July 01, 2018 | 2,822 | 410 |
Reclassification from “Assets held for sale”-Mao Ye Property | Mar 31, 2019 | (1,029) | (143) |
(4,282) | (623) | ||
Net investment in property – China | 5,367 | 782 |
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Rental Property I - Mao Ye Property
In fiscal 2008, TTCQ purchased an office in Chongqing, China from MaoYe Property Ltd. (“MaoYe”), for a total cash purchase price of RMB 5,554, or approximately $894. TTCQ identified a new tenant and signed a new rental agreement (653 square meters at a monthly rent of RMB 39, or approximately $6) on August 1, 2015 which expires on July 31, 2020. On April 1, 2019, a supplementary agreement was signed to revise the monthly rent to RMB 20, or approximately $3 for 403 square meters for the remaining 2 unsold units. During the fiscal year 2019, the Company sold thirteen of the fifteen units constituting the Mao Ye Property. Management has decided not to sell the remaining two units of Mao Ye properties in near future, considering the market conditions in China.
Property purchased from MaoYe generated a rental income of $8 and $16 during the three and six months ended December 31, 2019, respectively as compared to $21 and $43 for the same period in last fiscal year.
Depreciation expense for Mao Ye was $4 and $8 for the three and six months ended December 31, 2019, respectively and $Nil for the same period in the last fiscal year.
Rental Property II - JiangHuai
In fiscal year 2010, TTCQ purchased eight units of commercial property in Chongqing, China from Chongqing JiangHuai Real Estate Development Co. Ltd. (“JiangHuai”) for a total purchase price of RMB 3,600, or approximately $580. Although these units were rented in the past, all eight units are currently vacant and TTCQ is working with the developer to find a suitable buyer to purchase all the commercial units. TTCQ has yet to receive the title deed for these properties. TTCQ is in the legal process to obtain the title deed, which is dependent on JiangHuai completing the entire project.
Property purchased from JiangHuai did not generate any rental income during the three and six months ended December 31, 2019 or during the same period in the prior fiscal year.
Depreciation expense for JiangHuai was $7 and $14 for the three and six months ended December 31, 2019 and $7 and $14 for the same period in the last fiscal year.
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Rental Property III – FuLi
In fiscal 2010, TTCQ entered into a Memorandum Agreement with Chongqing FuLi Real Estate Development Co. Ltd. (“FuLi”) to purchase two commercial properties totaling 311.99 square meters (“office space”) located in Jiang Bei District Chongqing. . The total purchase price committed and paid was RMB 4,025, or approximately $648. The development was completed and the property was handed over to TTCQ in April 2013 and the title deed was received during the third quarter of fiscal 2014.
The two commercial properties were leased to third parties under two separate rental agreements. One of such leases provides for a rent increase of 6% every year on May 1, commencing in 2019 until the rental agreement expired on April 30, 2021. For the other leased property (which lease expired on March 31, 2018), TTCQ signed on November 1, 2018 a rental agreement to rent out the 161 square meter space at a monthly rent of RMB 10, or approximately $2, which lease was to expire on October 31, 2019. In September 2019, TTCQ renewed the lease agreement at the same monthly rent of RMB 10 or approximately $2 for a period of one year from November 1,2019.
Properties purchased from Fu Li generated a rental income of $8 and $17 for the three and six months ended December 31, 2019, and $8 and $13 for the same period in the last fiscal year.
Depreciation expense for Fu Li was $6 and $12 for the three and six months ended December 31, 2019, respectively and $7 and $14 for the same period in the last fiscal year.
Summary
Total rental income for all investment properties in China was $16 and $33 for the three and six months ended December 31, 2019, respectively and $29 and $56 for the same period in the last fiscal year.
Depreciation expenses for all investment properties in China were $17 and $34 for the three and six months ended December 31, 2019, respectively and $14 and $28 for the same period in the last fiscal year.
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9. OTHER ASSETS
Other assets consisted of the following:
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Down payment for purchase of investment properties * | $1,645 | $1,645 |
Down payment for purchase of property, plant and equipment | - | 100 |
Deposits for rental and utilities | 169 | 169 |
Currency translation effect | (188) | (164) |
Total | $1,626 | $1,750 |
*
Down payment for purchase of investment properties included:
RMB | US Dollars | |
Original investment (10% if Junzhou equity) | $10,000 | $1,606 |
Less: Management Fee | (5,000) | (803) |
Net Investment | 5,000 | 803 |
Less: Share of loss on Joint Venture | (137) | (22) |
Net Investment as down payment(Note *a) | 4,863 | 781 |
Loans Receivable | 5,000 | 814 |
Interest Receivable | 1,250 | 200 |
Less:Impairment of Interest | (906) | (150) |
Transferred to down payment(Note *b) | 5,344 | 864 |
* Down payment for purchase of investment properties | 10,207 | 1,645 |
a)
On December 2, 2010, the Company signed a Joint Venture agreement (“agreement”) with Jia Sheng Property Development Co. Ltd. (“Developer”) to form a new company, Junzhou Co., Limited (“Joint Venture” or “Junzhou”) to joint develop the “Singapore Themed Park” project (the “project”), where the Company paid RMB10 million for the 10% investment in the joint venture. The Developer paid the Company a management fee of RMB 5 million in cash upon signing of the agreement with a remaining fee of RMB5 million payable upon fulfilment of certain conditions in accordance with the agreement. The Company further reduced its investment by RMB 137, or approximately $22, through the losses from operations incurred by the Joint Venture.
On October 2, 2013, the Company disposed of its entire 10% interest in the Joint Venture. The Company recognized that disposal based on the recorded net book value of RMB5 million or equivalent to US$803K, from net considerations paid, in accordance with GAAP under ASC Topic 845 Non-monetary Consideration, and its presented under “Other Assets” as non-current assets to defer the recognition of the gain on the disposal of the 10% interest in joint venture investment until such time that the consideration is paid, so that the gain can be ascertained.
b)
Amounts of RMB 5,000 or approximately $814 as disclosed in Note 5, plus the interest receivable on long term loan receivable of RMB 1,250 or approximately $200 and impairment on interest of RMB 906 or approximately $150.
The shop lots in the Singapore Themed Resort Project being developed by the Developer under the agreement are to be delivered to TTCQ upon completion thereof. The initial targeted date of completion was December 31, 2016. Based on discussion with the Developer, the completion date is currently estimated to be December 31, 2021. The delay was primarily due to the time needed by the developers to work with various parties to inject sufficient funds into this project. Based on the available information, management believes that the Developer is capable of working with new investors to complete certain phases of this project.
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10. LINES OF CREDIT
Carrying value of the Company’s lines of credit approximates its fair value because the interest rates associated with the lines of credit are adjustable in accordance with market situations when the Company borrowed funds with similar terms and remaining maturities.
The Company’s credit rating provides it with readily and adequate access to funds in global markets.
As of December 31, 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 1.83% to 5.5% and SIBOR rate +1.25% | - | $4,968 | $4,472 |
Trio-Tech (Tianjin) Co., Ltd. | Lines of Credit | 5.22% to 6.3% | - | $1,431 | $1,431 |
Universal (Far East) Pte. Ltd | Lines of Credit | Ranging from 1.85% to 5.5% | - | $371 | $57 |
Trio-Tech Malaysia Sdn. Bhd. | Revolving Credit | Cost of Funds Rate +2% | - | $365 | $365 |
On November 18, 2019, Trio-Tech International Pte. Ltd. signed an agreement with JECC Leasing (Singapore) Pte. Ltd. for an Accounts Receivable 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 needs for our operations in Singapore. The Company started to use this facility in the second quarter of the 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% | - | $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 |
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11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
Dec 31, 2019 (Unaudited) | June 30, 2019 | |
Payroll and related costs | $1,138 | $1,354 |
Commissions | 73 | 107 |
Customer deposits | 42 | 46 |
Legal and audit | 334 | 299 |
Sales tax | 10 | 9 |
Utilities | 106 | 120 |
Warranty | 39 | 39 |
Accrued purchase of materials and property, plant and equipment | 230 | 362 |
Provision for re-instatement | 300 | 302 |
Deferred income | 95 | 61 |
Contract liabilities | 733 | �� 501 |
Other accrued expenses | 81 | 293 |
Currency translation effect | (5) | (7) |
Total | $3,176 | $3,486 |
12. WARRANTY ACCRUAL
The Company provides for the estimated costs that may be incurred under its warranty program at the time the sale is recorded. The warranty period of the products manufactured by the Company is generally one year or the warranty period agreed with the customer. The Company estimates the warranty costs based on the historical rates of warranty returns. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Beginning | $39 | $82 |
Additions charged to cost and expenses | 1 | 15 |
Reversal | (1) | (58) |
Currency translation effect | - | - |
Ending | $39 | $39 |
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13. BANK LOANS PAYABLE
Bank loans payable consisted of the following:
Dec. 31, 2019 (Unaudited) | June 30, 2019 | |
Note payable denominated in RM for expansion plans in Malaysia, maturing in August 2028, bearing interest at the bank’s prime rate less 2.00% (4.85% and 5.00% at December 31, 2019 and June 30, 2019, respectively) per annum, with monthly payments of principal plus interest through August 2028, collateralized by the acquired building with a carrying value of $2,677 and $2,683, as at December 31, 2019 and June 30, 2019, respectively. | 2,483 | 2,638 |
Note payable denominated in U.S. dollars for expansion plans in Singapore and its subsidiaries, maturing in June 2020, bearing interest at the bank’s lending rate (3.96% for December 31, 2019 and June 30, 2019) with monthly payments of principal plus interest through June 2020. This note payable is secured by plant and equipment with a carrying value of $128 and $148, as at December 31, 2019 and June 30, 2019, respectively. | 66 | 142 |
Total bank loans payable | $2,549 | $2,780 |
Current portion of bank loan payable | 419 | 494 |
Currency translation effect on current portion of bank loan | 3 | (6) |
Current portion of bank loan payable | 422 | 488 |
Long term portion of bank loan payable | 2,116 | 2,344 |
Currency translation effect on long-term portion of bank loan | 11 | (52) |
Long term portion of bank loans payable | $2,127 | $2,292 |
Future minimum payments (excluding interest) as at December 31, 2019 were as follows:
Remainder of fiscal 2020 | $304 |
2021 | 368 |
2022 | 386 |
2023 | 405 |
2024 | 413 |
Thereafter | 673 |
Total obligations and commitments | $2,549 |
Future minimum payments (excluding interest) as at June 30, 2019 were as follows:
2020 | $488 |
2021 | 362 |
2022 | 380 |
2023 | 399 |
2024 | 407 |
Thereafter | 744 |
Total obligations and commitments | $2,780 |
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14. COMMITMENTS AND CONTINGENCIES
Trio-Tech (Malaysia) Sdn. Bhd. has capital commitments for the purchase of equipment and other related infrastructure costs amounting to RM 18, or approximately $4, as at December 31, 2019, as compared to the capital commitments as at June 30, 2019 amounting to RM 18, or approximately $4.
Trio-Tech (Tianjin) Co. Ltd. in China has capital commitments for the purchase of equipment and other related infrastructure costs amounting to RMB 87, or approximately $12, as at December 31, 2019, as compared to the capital commitments as at June 30, 2019 amounting to RMB 397, or approximately $58.
Trio-Tech (SIP) Co., Ltd. in China has capital commitments for the purchase of equipment and other related infrastructure costs amounting to RMB 117, or approximately $17, as at December 31, 2019, as compared to the capital commitments as at June 30, 2019 of RMB Nil.
Deposits with banks in China are not insured by the local government or agency, and are consequently exposed to risk of loss. The Company believes the probability of a bank failure, causing loss to the Company, is remote.
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 the Company’s financial statements.
15. BUSINESS SEGMENTS
The Company generates revenue primarily from three different segments: Manufacturing, Testing and Distribution. The Company accounts for a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company’s revenues are measured based on consideration stipulated in the arrangement with each customer, net of any sales incentives and amounts collected on behalf of third parties, such as sales taxes. The revenues are recognized as separate performance obligations that are satisfied by transferring control of the product or service to the customer.
In fiscal year 2020, the Company operated in four segments; the testing service industry (which performs structural and electronic tests of semiconductor devices), the designing and manufacturing of equipment (which equipment tests the structural integrity of integrated circuits and other products), distribution of various products from other manufacturers in Singapore and Southeast Asia, and the real estate segment in China.
The revenue allocated to individual countries was based on where the customers were located. The allocation of the cost of equipment, the current year investment in new equipment and depreciation expense have been made on the basis of the primary purpose for which the equipment was acquired.
Significant Judgments
The Company’s arrangements with its customers include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. A product or service is considered distinct if it is separately identifiable from other deliverables in the arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
The Company allocates the transaction price to each performance obligation on a relative standalone selling price basis (“SSP”). Determining the SSP for each distinct performance obligation and allocation of consideration from an arrangement to the individual performance obligations and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements. The Company typically establishes the SSP based on observable prices of products or services sold separately in comparable circumstances to similar clients. The Company may estimate SSP by considering internal costs, profit objectives and pricing practices in certain circumstances.
Warranties, discounts and allowances are estimated using historical and recent data trends. The Company includes estimates in the transaction price only to the extent that a significant reversal of revenue is not probable in subsequent periods. The Company’s products and services are generally not sold with a right of return, nor has the Company experienced significant returns from or refunds to its customers.
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Manufacturing
The Company primarily derives revenue from the sale of both front-end and back-end semiconductor test equipment and related peripherals, maintenance and support of all these products, installation and training services and the sale of spare parts. The Company’s revenues are measured based on consideration stipulated in the arrangement with each customer, net of any sales incentives and amounts collected on behalf of third parties, such as sales taxes.
The Company recognizes revenue at a point in time when the Company has satisfied its performance obligation by transferring control of the product to the customer. The Company uses judgment to evaluate whether the control has transferred by considering several indicators, including:
●
whether the Company has a present right to payment;
●
the customer has legal title;
●
the customer has physical possession;
●
the customer has significant risk and rewards of ownership; and
●
the customer has accepted the product, or whether customer acceptance is considered a formality based on history of acceptance of similar products (for example, when the customer has previously accepted the same equipment, with the same specifications, and when we can objectively demonstrate that the tool meets all of the required acceptance criteria, and when the installation of the system is deemed perfunctory).
Not all of the indicators need to be met for the Company to conclude that control has transferred to the customer. In circumstances in which revenue is recognized prior to the product acceptance, the portion of revenue associated with its performance obligations of product installation and training services are deferred and recognized upon acceptance.
The majority of sales under the Manufacturing segment include a standard 12-month warranty. The Company has concluded that the warranty provided for standard products are assurance type warranties and are not separate performance obligations. Warranty provided for customized products are service warranties and are separate performance obligations. Transaction prices are allocated to this performance obligation using cost plus method. The portion of revenue associated with warranty service is deferred and recognized as revenue over the warranty period, as the customer simultaneously receives and consumes the benefits of warranty services provided by the Company.
Testing
The Company rendered testing services to manufacturers and purchasers of semiconductors and other entities who either lack testing capabilities or whose in-house screening facilities are insufficient. The Company primarily derives testing revenue from burn-in services, manpower supply and other associated services. SSP is directly observable from the sales orders. Revenue is allocated to performance obligations satisfied at a point in time depending upon terms of the sales order. Generally, there is no other performance obligation other than what has been stated inside the sales order for each of these sales.
Terms of contract that may indicate potential variable consideration included warranty, late delivery penalty and reimbursement to solve non-conformance issues for rejected products. Based on historical and recent data trends, it is concluded that these terms of the contract do not represent potential variable consideration. The transaction price is not contingent on the occurrence of any future event.
Distribution
The Company distributes complementary products particularly equipment, industrial products and components by manufacturers mainly from the U.S., Europe, Taiwan and Japan. The Company recognizes revenue from product sales at a point in time when the Company has satisfied its performance obligation by transferring control of the product to the customer. The Company uses judgment to evaluate whether the control has transferred by considering several indicators discussed above. The Company recognizes the revenue at a point in time, generally upon shipment or delivery of the products to the customer or distributors, depending upon terms of the sales order.
All inter-segment revenue was from the manufacturing segment to the testing and distribution segments. Total inter-segment revenue was $36 for the three months ended December 31, 2019, as compared to $116 for the same period in the last fiscal year. Corporate assets mainly consisted of cash and prepaid expenses. Corporate expenses mainly consisted of stock option expenses, salaries, insurance, professional expenses and directors' fees. Corporate expenses are allocated to the four segments. The following segment information table includes segment operating income or loss after including the corporate expenses allocated to the segments, which gets eliminated in the consolidation.
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The following segment information is un-audited for the six months ended December 31, 2019 and December 31, 2018:
Business Segment Information:
Six Months Ended Dec. 31, | Net Revenue | Operating Income / (Loss) | Total Assets | Depr. and Amort. | Capital Expenditures | |
Manufacturing | 2019 | $6,362 | (99) | 10,542 | 196 | 35 |
2018 | $6,989 | 183 | 8,835 | 58 | 1 | |
Testing Services | 2019 | 8,277 | (93) | 23,314 | 1,344 | 709 |
2018 | 8,830 | (117) | 23,750 | 1,059 | 2,296 | |
Distribution | 2019 | 4,113 | 392 | 802 | 2 | - |
2018 | 3,860 | 342 | 759 | - | - | |
Real Estate | 2019 | 33 | (52) | 3,650 | 34 | - |
2018 | 56 | (17) | 3,449 | 28 | - | |
Fabrication | 2019 | - | - | 27 | - | - |
Services * | 2018 | - | - | 26 | - | - |
Corporate & | 2019 | - | (99) | 120 | - | - |
Unallocated | 2018 | - | (41) | 76 | - | - |
Total Company | 2019 | $18,785 | 49 | 38,455 | 1,576 | 744 |
2018 | $19,735 | 350 | 36,895 | 1,145 | 2,297 |
* Fabrication services is a discontinued operation.
The following segment information is un-audited for the three month periods referenced below:
Business Segment Information:
Three Months Ended Dec. 31, | Net Revenue | Operating Income / (Loss) | Total Assets | Depr. and Amort. | Capital Expenditures | |
Manufacturing | 2019 | $3,045 | (87) | 10,542 | 110 | 16 |
2018 | $3,352 | 76 | 8,835 | 29 | - | |
Testing Services | 2019 | 3,887 | (161) | 23,314 | 663 | 189 |
2018 | 4,393 | 21 | 23,750 | 547 | 1,083 | |
Distribution | 2019 | 2,014 | 188 | 802 | 1 | - |
2018 | 1,916 | 170 | 759 | - | - | |
Real Estate | 2019 | 16 | (35) | 3,650 | 17 | - |
2018 | 29 | (5) | 3,449 | 14 | - | |
Fabrication | 2019 | - | - | 27 | - | - |
Services * | 2018 | - | - | 26 | - | - |
Corporate & | 2019 | - | (78) | 120 | - | - |
Unallocated | 2018 | - | (35) | 76 | - | - |
Total Company | 2019 | $8,962 | (173) | 38,455 | 791 | 205 |
2018 | $9,690 | 227 | 36,895 | 590 | 1,083 |
* Fabrication services is a discontinued operation.
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16. OTHER INCOME
Other income consisted of the following:
Three Months Ended | Six Months Ended | |||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |
2019 | 2018 | 2019 | 2018 | |
Unaudited | Unaudited | Unaudited | Unaudited | |
Interest income | 52 | 26 | 84 | 36 |
Other rental income | 30 | 29 | 60 | 56 |
Exchange loss | (66) | (28) | (61) | (67) |
Bad debt recovery | - | - | 11 | 2 |
Other miscellaneous income | 24 | 22 | 56 | 65 |
Total | $40 | $49 | $150 | $92 |
17. INCOME TAX
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. The statute of limitations, in general, is open for years 2014 to 2019 for tax authorities in those jurisdictions to audit or examine income tax returns. The Company is under annual review by the tax authorities of the respective jurisdiction to which the subsidiaries belong.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and reduces the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Act is a fundamental change to the taxation of multinational companies, including a shift from a system of worldwide taxation with some deferral elements to a territorial system, current taxation of certain foreign income, a minimum tax on low tax foreign earnings, and new measures to curtail base erosion and promote U.S. production.
Due to the enactment of Tax Act, the Company is subject to a tax on global intangible low-taxed income (“GILTI”). GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense amounting to $35 for the three and six months ended December 31, 2019, respectively.
The Company's income tax expense was $120 for the three months ended December 31, 2019 as compared to the income tax benefit of $124 for the same period of last fiscal year. Our effective tax rate (“ETR”) from continuing operations was 12% and (69%) for the quarter ended December 31, 2019 and December 31, 2018 respectively. The following items caused the quarterly ETR is significantly different:
1).
During the three months ended December 31, 2018 , the Company recording a tax reversal of $145 upon finalization of a one-time transition tax.
2).
During the three months ended December 31, 2019, there was a capital gain tax of $94 arising from the sale of an asset held for sale.
The Company accrues penalties and interest related to unrecognized tax benefits when necessary as a component of penalties and interest expenses, respectively. The Company had no unrecognized tax benefits or related accrued penalties or interest expenses at December 31, 2019.
In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on these criteria, management believes it is more likely than not the Company will not realize the benefits of the federal, state, and foreign deductible differences. Accordingly, a full valuation allowance has been established.
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18. CONTRACT BALANCES
The timing of revenue recognition, billings and collections may result in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). The Company’s payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component.
Contract assets were recorded under other receivable while contract liabilities were recorded under accrued expenses in the balance sheet.
The following table is the reconciliation of contract balances.
Dec. 31, 2019 (Unaudited) | Jun. 30, 2019 | |
Trade Accounts Receivable | 6,937 | 7,113 |
Accounts Payable | 3,565 | 3,272 |
Contract Assets | 431 | 419 |
Contract Liabilities | 733 | 501 |
Remaining Performance Obligation
As at December 31, 2019, the Company had $900 of remaining performance obligations, which represents our obligation to deliver products and services. Given the profile of contract terms, approximately 53.3 percent of this amount is expected to be recognized as revenue over the next two years, remaining of the amount is expected to be recognized between three and five years.
Refer to note 15 “Business Segments” of the Notes to Condensed Consolidated Financial Statements for information related to revenue.
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19. EARNINGS PER SHARE
The Company adopted ASC Topic 260, Earnings Per Share. Basic Earnings Per Share (“EPS”) is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during a period. In computing diluted EPS, the average price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.
Options to purchase 623,500 shares of Common Stock at exercise prices ranging from $2.69 to $5.98 per share were outstanding as of December 31, 2019. No outstanding options were excluded in the computation of diluted EPS for fiscal year 2020 since all options were dilutive.
Options to purchase 533,500 shares of Common Stock at exercise prices ranging from $2.69 to $5.98 per share were outstanding as of December 31, 2018. No outstanding options were excluded in the computation of diluted EPS for fiscal year 2019 since all options were dilutive.
The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted EPS for the period presented herein:
Three Months Ended | Six Months Ended | |||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |
2019 | 2018 | 2019 | 2018 | |
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |
Income attributable to Trio-Tech International common shareholders from continuing operations, net of tax | $425 | $346 | $699 | $415 |
Income / (loss) attributable to Trio-Tech International common shareholders from discontinued operations, net of tax | 1 | 2 | - | (2) |
Net Income Attributable to Trio-Tech International Common Shareholders | $426 | $348 | $699 | $413 |
Weighted average number of common shares outstanding - basic | 3,673 | 3,673 | 3,673 | 3,673 |
Dilutive effect of stock options | 52 | 108 | 33 | 142 |
Number of shares used to compute earnings per share - diluted | 3,725 | 3,781 | 3,706 | 3,815 |
Basic earnings per share from continuing operations attributable to Trio-Tech International | $0.12 | 0.09 | 0.19 | 0.11 |
Basic earnings per share from discontinued operations attributable to Trio-Tech International | - | - | - | - |
Basic earnings per share from net income attributable to Trio-Tech International | $0.12 | $0.09 | $0.19 | $0.11 |
Diluted earnings per share from continuing operations attributable to Trio-Tech International | $0.11 | 0.09 | 0.19 | 0.11 |
Diluted earnings per share from discontinued operations attributable to Trio-Tech International | - | - | - | - |
Diluted earnings per share from net income attributable to Trio-Tech International | $0.11 | $0.09 | $0.19 | $0.11 |
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20. STOCK OPTIONS
On September 24, 2007, the Company’s Board of Directors unanimously adopted the 2007 Employee Stock Option Plan (the “2007 Employee Plan”) and the 2007 Directors Equity Incentive Plan (the “2007 Directors Plan”) each of which was approved by the shareholders on December 3, 2007. Each of those plans was amended during the term of such plan to increase the number of shares covered thereby. As of the last amendment thereof, the 2007 Employee Plan covered an aggregate of 600,000 shares of the Company’s Common Stock and the 2007 Directors Plan covered an aggregate of 500,000 shares of the Company’s Common Stock. Each of those plans terminated by its respective terms on September 24, 2017. These two plans were administered by the Board, which also established the terms of the awards.
On September 14, 2017, the Company’s Board of Directors unanimously adopted the 2017 Employee Stock Option Plan (the “2017 Employee Plan”) and the 2017 Directors Equity Incentive Plan (the “2017 Directors Plan”) each of which was approved by the shareholders on December 4, 2017. Each of these plans is administered by the Board of Directors of the Company.
Assumptions
The fair value for the options granted were estimated using the Black-Scholes option pricing model with the following weighted average assumptions, assuming no expected dividends:
Six Months Ended December 31, | ||
2019 | 2018 | |
Expected volatility | 45.38%to 97.48% | 47.29% to 104.94 % |
Risk-free interest rate | 0.30% to 2.35% | 0.30% to 0.78 % |
Expected life (years) | 2.5 -3.25 | 2.50 |
The expected volatilities are based on the historical volatility of the Company’s stock. Due to higher volatility, the observation is made on a daily basis for the three months ended December 31, 2019. The observation period covered is consistent with the expected life of options. The expected life of the options granted to employees has been determined utilizing the “simplified” method as prescribed by ASC Topic 718 Stock Based Compensation, which, among other provisions, allows companies without access to adequate historical data about employee exercise behavior to use a simplified approach for estimating the expected life of a "plain vanilla" option grant. The simplified rule for estimating the expected life of such an option is the average of the time to vesting and the full term of the option. The risk-free rate is consistent with the expected life of the stock options and is based on the United States Treasury yield curve in effect at the time of grant.
2017 Employee Stock Option Plan
The Company’s 2017 Employee Plan permits the grant of stock options to its employees covering up to an aggregate of 300,000 shares of Common Stock. Under the 2017 Employee Plan, all options must be granted with an exercise price of not less than fair value as of the grant date and the options granted must be exercisable within a maximum of ten years after the date of grant, or such lesser period of time as is set forth in the stock option agreements. The options may be exercisable (a) immediately as of the effective date of the stock option agreement granting the option, or (b) in accordance with a schedule related to the date of the grant of the option, the date of first employment, or such other date as may be set by the Compensation Committee. Generally, options granted under the 2017 Employee Plan are exercisable within five years after the date of grant, and vest over the period as follows: 25% vesting on the grant date and the remaining balance vesting in equal installments on the next three succeeding anniversaries of the grant date. The share-based compensation will be recognized in terms of the grade method on a straight-line basis for each separately vesting portion of the award. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Employee Plan).
During the second quarter of fiscal year 2020, the Company did not grant any options pursuant to the 2017 Employee Plan. There were no stock options exercised during the six-month period ended December 31, 2019. The Company recognized $14 stock-based compensation expenses during the six months ended December 31, 2019.
During the second quarter of fiscal year 2019, the Company did not grant any options pursuant to the 2017 Employee Plan. There were no stock options exercised during the six-month period ended December 31, 2018. The Company recognized $8 stock-based compensation expenses during the three months ended December 31, 2018.
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As of December 31, 2019, there were vested stock options granted under the 2017 Employee Plan covering a total of 53,000 shares of Common Stock. The weighted-average exercise price was $4.88 and the weighted average remaining contractual term was 3.63 years.
As of December 31, 2018, there were vested stock options granted under the 2017 Employee Plan covering a total of 19,000 shares of Common Stock. The weighted-average exercise price was $5.51 and the weighted average remaining contractual term was 4.37 years.
A summary of option activities under the 2017 Employee Plan during the six months period ended December 31, 2019 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2019 | 136,000 | $4.53 | 4.28 | $- |
Granted | - | - | - | - |
Exercised | - | - | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at December 31, 2019 | 136,000 | $4.53 | 3.77 | $46.44 |
Exercisable at December 31, 2019 | 53,000 | $4.88 | 3.63 | $12.57 |
A summary of the status of the Company’s non-vested employee stock options granted under the 2017 Employee Plan during the six months ended December 31, 2019 is presented below:
Options | Weighted Average Grant-Date Fair Value | |
Non-vested at July 1, 2019 | 87,000 | $4.28 |
Granted | - | - |
Vested | (4,000) | - |
Forfeited | - | - |
Non-vested at December 31, 2019 | 83,000 | $4.30 |
A summary of option activities under the 2017 Employee Plan during the six months period ended December 31, 2018 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2018 | 60,000 | $5.98 | 4.73 | $- |
Granted | 16,000 | 3.75 | 4.93 | - |
Exercised | - | - | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at December 31, 2018 | 76,000 | $5.51 | 4.37 | $- |
Exercisable at December 31, 2018 | 19,000 | $5.51 | 4.37 | $- |
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A summary of the status of the Company’s non-vested employee stock options granted under the 2017 Employee Plan during the six months ended December 31, 2018 is presented below:
Options | Weighted Average Grant-Date Fair Value | |
Non-vested at July 1, 2018 | 45,000 | $5.98 |
Granted | 16,000 | 3.75 |
Vested | (4,000) | (5.51) |
Forfeited | - | - |
Non-vested at December 31, 2018 | 57,000 | $5.51 |
2007 Employee Stock Option Plan
The 2007 Employee Plan terminated by its terms on September 24, 2017 and no further options may be granted thereunder. However, the options outstanding thereunder continue to remain outstanding and in effect in accordance with their terms. The 2007 Employee Plan permitted the issuance of options to employees.
As the 2007 Plan has terminated, the Company did not grant any options pursuant to the 2007 Employee Plan during the six months ended December 31, 2019 and December 31, 2018 respectively.
There were no options exercised during the six months ended December 31, 2019. There were 50,000 of options exercised during the six months ended December 31, 2018. The Company did not recognize any stock-based compensation expenses during the six months ended December 31, 2019. The Company recognized stock-based compensation expenses of $1 in the six months ended December 31, 2018 under the Employee Plan.
As of December 31, 2019, there were vested stock options granted under the 2007 Employee Plan covering a total of 68,125 shares of Common Stock. The weighted-average exercise price was $3.62 and the weighted average remaining contractual term was 1.64 years.
As of December 31, 2018, there were vested employee stock options covering a total of 48,750 shares of Common Stock. The weighted-average exercise price was $3.59 and the weighted average contractual term was 2.61 years.
A summary of option activities under the 2007 Employee Plan during the six months ended December 31, 2019 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2019 | 77,500 | $3.69 | 2.22 | $- |
Granted | - | - | - | - |
Exercised | - | - | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at December 31, 2019 | 77,500 | 3.69 | 1.71 | 29.20 |
Exercisable at December 31, 2019 | 68,125 | $3.62 | 1.64 | $29.20 |
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A summary of the status of the Company’s non-vested employee stock options under the 2007 Employee Plan during the six months ended December 31, 2019 is presented below:
Options | Weighted Average Grant-Date Fair Value | |
Non-vested at July 1, 2019 | 9,375 | $4.14 |
Granted | - | - |
Vested | - | - |
Forfeited | - | - |
Non-vested at December 31, 2019 | 9,375 | $4.14 |
A summary of option activities under the 2007 Employee Plan during the six months ended December 31, 2018 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2018 | 127,500 | $3.52 | 2.10 | $121 |
Granted | - | - | - | - |
Exercised | (50,000) | 3.25 | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at December 31, 2018 | 77,500 | $3.68 | 2.71 | $- |
Exercisable at December 31, 2018 | 48,750 | $3.59 | 2.61 | $- |
A summary of the status of the Company’s non-vested employee stock options under the 2007 Employee Plan during the three months ended December 31, 2018 is presented below:
Options | Weighted Average Grant-Date Fair Value | |
Non-vested at July 1, 2018 | 28,750 | $3.83 |
Granted | - | - |
Vested | - | - |
Forfeited | - | - |
Non-vested at December 31, 2018 | 28,750 | $3.83 |
2017 Directors Equity Incentive Plan
The 2017 Directors Plan permits the grant of options covering up to an aggregate of 300,000 shares of Common Stock to its directors in the form of non-qualified options and restricted stock. The exercise price of the non-qualified options is 100% of the fair value of the underlying shares on the grant date. The options have five-year contractual terms and are exercisable immediately as of the grant date.
During the first two quarters of fiscal year 2020, the Company did not grant any options pursuant to the 2017 Directors Plan. There were no stock options exercised during the six months ended December 31, 2019. The Company did not recognize any stock-based compensation expenses during the six months ended December 31, 2019.
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During the first two quarters of fiscal year 2019, the Company did not grant any options pursuant to the 2017 Directors Plan. There were no stock options exercised during the six months ended December 31, 2018. The Company did not recognize any stock-based compensation expenses during the six months ended December 31, 2018.
As all of the stock options granted under the 2017 Directors Plan vest immediately on the date of grant, there were no unvested stock options granted under the 2017 Directors Plan as of December 31, 2019.
As of December 31, 2019, there were vested stock options granted under the 2017 Directors Plan covering a total of 160,000 shares of Common Stock. The weighted-average exercise price was $4.63 and the weighted average remaining contractual term was 3.75 years.
As of December 31, 2018, there were vested stock options granted under the 2017 Directors Plan covering a total of 80,000 shares of Common Stock. The weighted-average exercise price was $5.98 and the weighted average remaining contractual term was 4.22 years.
A summary of option activities under the 2017 Directors Plan during the six months ended December 31, 2019 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2019 | 160,000 | $4.63 | 4.25 | $- |
Granted | - | - | - | - |
Exercised | - | - | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at December 31, 2019 | 160,000 | $4.63 | 3.75 | $56.80 |
Exercisable at December 31, 2019 | 160,000 | $4.63 | 3.75 | $56.80 |
A summary of option activities under the 2017 Directors Plan during the six months ended December 31, 2018 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2018 | 80,000 | $5.98 | 4.73 | $- |
Granted | - | - | - | - |
Exercised | - | - | - | - |
Forfeited or expired | - | - | - | - |
Outstanding at December 31, 2018 | 80,000 | $5.98 | 4.22 | $- |
Exercisable at December 31, 2018 | 80,000 | $5.98 | 4.22 | $- |
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2007 Directors Equity Incentive Plan
The 2007 Directors Plan terminated by its terms on September 24, 2017 and no further options may be granted thereunder. However, the options outstanding thereunder continue to remain outstanding and in effect in accordance with their terms. The 2007 Employee Plan permitted the issuance of options to employees.
As the 2007 Plan has terminated, the Company did not grant any options pursuant to the 2007 Employee Plan during the six months ended December 31, 2019 and December 31, 2018.
There were no stock options exercised during the six months ended December 31, 2019. The Company did not recognize any stock-based compensation expenses during the six months ended December 31, 2019.
There were no stock options exercised during the six months ended December 31, 2018. The Company did not recognize any stock-based compensation expenses during the six months ended December 31, 2018.
As of December 31, 2019, there were vested stock options granted under the 2007 Directors Plan covering a total of 250,000 shares of Common Stock. The weighted-average exercise price was $3.32 and the weighted average remaining contractual term was 1.33 years.
As of December 31, 2018, there were vested stock options granted under the 2007 Directors Plan covering a total of 300,000 shares of Common Stock. The weighted-average exercise price was $3.40 and the weighted average remaining contractual term was 2.08 years.
A summary of option activities under the 2007 Directors Plan during the six months ended December 31, 2019 is presented as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2019 | 300,000 | $3.40 | 1.58 | $9 |
Granted | - | - | - | - |
Exercised | - | - | - | - |
Forfeited or expired | (50,000) | (3.81) | - | - |
Outstanding at December 31, 2019 | 250,000 | 3.32 | 1.33 | 174.50 |
Exercisable at December 31, 2019 | 250,000 | $3.32 | 1.33 | $174.50 |
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |
Outstanding at July 1, 2018 | 390,000 | $3.41 | 2.05 | $412 |
Granted | - | - | - | - |
Exercised | (70,000) | 3.39 | - | - |
Forfeited or expired | (20,000) | (3.62) | - | - |
Outstanding at December 31, 2018 | 300,000 | 3.40 | 2.08 | - |
Exercisable at December 31, 2018 | 300,000 | $3.40 | 2.08 | - |
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21. LEASES
Company As Lessor
Operating leases under which the Company is the lessor arise from the leasing of the Company’s commercial real estate investment property to third parties. Initial lease terms generally range from 12 to 60 months. Depreciation expense for assets subject to operating leases is taken into account primarily on the straight-line method over a period of twenty years in amounts necessary to reduce the carrying amount of the asset to its estimated residual value. Depreciation expenses relating to the property held as investments in operating leases were $17 and $34 for the three and six months ended December 31, 2019 and $14 and $28 for the same period in the last fiscal year.
Future minimum rental income in China to be received from fiscal year 2020 to fiscal year 2021 on non-cancellable operating leases is contractually due as follows as of December 31, 2019:
Remainder of fiscal 2020 | $34 |
2021 | $20 |
$54 |
Future minimum rental income in China to be received from fiscal year 2020 to fiscal year 2021 on non-cancellable operating leases is contractually due as follows as of June 30, 2019:
2020 | $72 |
2021 | $6 |
$78 |
Company As Lessee
The Company has operating leases for corporate offices and research and development facilities with remaining lease terms of 1 year to 3 years and finance leases for plant and equipment.
Supplemental balance sheet information related to leases is as follows (in thousands):
Dec. 31, | ||
2019 | ||
Components of Lease Balances | Classification | (Unaudited) |
Assets | ||
Operating Lease Assets | Right-of-use asset-operating, net | $475 |
Finance Lease Assets | Property, plant & equipment | 1,998 |
Accumulated Amortization ROU | 751 | |
Assets | Property, plant & equipment | $1,247 |
Total leased assets | $1,722 | |
Liabilities | ||
Operating Lease Liabilities | ||
Current Portion | Current portion of lease liability-operating | $343 |
Long-term portion | Lease liability- Operating, net of Current portion | 134 |
Total operating lease liabilities | $477 | |
Finance Lease Liabilities | ||
Current portion of finance leases | Current portion of lease liability-finance | $286 |
Net of current portion of finance leases | Lease liability- Finance, net of Current portion | 570 |
Total finance lease liabilities | $856 | |
Total lease liabilities | $1,333 |
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3 Months Ended | 6 Months Ended | |
Dec. 31, 2019 | ||
Lease Cost | ||
Finance Lease Cost: | ||
Interest on Lease Liability | 3 | $24 |
Amortisation of Right-of-use Asset | 69 | 136 |
Total Finance Lease Cost | 72 | 150 |
Operating Lease Costs $ | 184 | $359 |
Other information related to leases were as follows (in thousands except lease term and discount rate):
Dec. 31, | |
2019 | |
(Unaudited) | |
Cash Paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from finance leases | $24 |
Operating cash flows from operating leases | $359 |
Finance cash flows from finance leases | $127 |
Right-of-use assets obtained in exchange for new operating lease liabilities | |
Weighted-average remaining lease term: | |
Finance leases | 3.67 |
Operating leases | 0.97 |
Weighted-average Discount Rate: | |
Finance leases | 3.43% |
Operating leases | 3.25% |
As of December 31, 2019, the maturities of the Company's operating and finance lease liabilities are as follow:
Operating lease Liabilities | Finance Lease Liabilities | |
Fiscal Year | ||
Remainder of 2020 | $309 | $199 |
2021 | 155 | 276 |
2022 | 29 | 220 |
2023 | - | 139 |
2024 | - | 99 |
Thereafter | 22 | |
Total future minimum lease payments | $493 | $955 |
Less: amount representing interest | (16) | (99) |
Present value of net minimum lease payments | 477 | 856 |
Presentation on statement of financial position | ||
Current | $343 | $286 |
Non Current | $134 | $570 |
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As of Jun 30, 2019, future minimum lease payments under finance leases and non-cancelable operating leases were as follows:
Operating lease Liabilities | Finance Lease Liabilities | |
Fiscal Year | ||
2020 | $620 | $283 |
2021 | 216 | 187 |
2022 | 47 | 143 |
2023 | 1 | 68 |
2024 | - | 44 |
Total future minimum lease payments | $884 | $725 |
22. FAIR VALUE OF FINANCIAL INSTRUMENTS APPROXIMATE CARRYING VALUE
In accordance with ASC Topics 825 and 820, the following presents assets and liabilities measured and carried at fair value and classified by level of fair value measurement hierarchy:
There were no transfers between Levels 1 and 2 during the six months ended December 31, 2019 and 2018.
Term deposits (Level 2) – The carrying amount approximates fair value because of the short maturity of these instruments.
Restricted term deposits (Level 2) – The carrying amount approximates fair value because of the short maturity of these instruments.
Lines of credit (Level 3) – The carrying value of the lines of credit approximates fair value due to the short-term nature of the obligations.
Bank loans payable (Level 3) – The carrying value of the Company’s bank loan payables approximates its fair value as the interest rates associated with long-term debt is adjustable in accordance with market situations when the Company borrowed funds with similar terms and remaining maturities.
23. SUBSEQUENT EVENTS
The Company’s operations in Tianjin, China which is a significant operation to the Company, encountered numerous limitations due to the outbreak of the Novel Coronavirus in China, named Covid-19 during early 2020. The Chinese government had taken emergency measures to combat the spread of the virus, including an extension of the Lunar New Year holidays. Management is currently assessing the impact of the outbreak on the Tianjin, China operation, which is likely to be material. Nonetheless, Management continues to explore various options to minimize the financial impact.
Numerous variables and uncertainties related to this outbreak has restricted the ability of the Management to calculate the impact on the Tianjin operations in the third quarter of fiscal year 2020. It is expected that the extended Lunar New Year Holidays and the shortage of manpower due to travel restrictions will limit ability of the Company to generate the same level of revenue under normal circumstances.
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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Overview
The following should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, the information under the headings “Risk Factors” and “Management’s discussion and analysis of financial condition and results of operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Trio-Tech International (“TTI”) 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. Our mailing address and executive offices are located at Block 1008 Toa Payoh North, Unit 03-09 Singapore 318996, and our telephone number is (65) 6265 3300.
The Company primarily is a provider of reliability test equipment and services to the semiconductor industry. Our customers rely on us to verify that their semiconductor components meet or exceed the rigorous reliability standards demanded for aerospace, communications and other electronics products.
TTI generated approximately 99.8% of its revenue from its three core business segments in the test and measurement industry, i.e. manufacturing of test equipment, testing services and distribution of test equipment during the three months ended December 31, 2019. The Real Estate segment contributed only 0.2% to the total revenue and was immaterial to the overall business.
Manufacturing
TTI develops and manufactures an extensive range of test equipment used in the "front end" and the "back end" manufacturing processes of semiconductors. Our equipment includes leak detectors, autoclaves, centrifuges, burn-in systems and boards, HAST testers, temperature controlled chucks, wet benches and more.
Testing
TTI provides comprehensive electrical, environmental, and burn-in testing services to semiconductor manufacturers in our testing laboratories in Asia and the U.S. Our customers include both manufacturers and end-users of semiconductor and electronic components, who look to us when they do not want to establish their own facilities. The independent tests are performed to industry and customer specific standards.
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 rather than consumer products whereby the life cycle of the industrial products can last from 3 years to 7 years.
Real Estate
Beginning in 2007, TTI has invested in real estate property in Chongqing, China, which has generated investment income from the rental revenue from real estate we purchased in Chongqing, China, 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.
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Second Quarter Fiscal Year 2020 Highlights
●
Total revenue decreased by $728 or 7.5%, to $8,962 in the second quarter of fiscal year 2020, compared to $9,690 for the same period in fiscal year 2019.
●
Manufacturing segment revenue decreased by $307, or 9.2%, to $3,045 for the second quarter of fiscal year 2020, compared to $3,352 for the same period in fiscal year 2019.
●
Testing segment revenue decreased by $506, or 11.5%, to $3,887 for the second quarter of fiscal year 2020, compared to $4,393 for the same period in fiscal year 2019.
●
Distribution segment revenue increased by $98, or 5.1%, to $2,014 for the second quarter of fiscal year 2020, compared to $1,916 for the same period in fiscal year 2019.
●
Real estate segment rental revenue decreased by $13 or 44.8% to $16 for the second quarter of fiscal year 2020 compared to $29 for the same period in fiscal year 2019.
●
The overall gross profit margin decreased by 2.0% to 21.3% for the second quarter of fiscal year 2020, from 23.3% for the same period in fiscal year 2019.
●
Loss from operations was $173 for the second quarter of fiscal year 2020, a decrease of $400, as compared to the income from operations of $227 for the same period in fiscal year 2019.
●
General and administrative expenses increased by $55, or 3.2%, to $1,777 for the second quarter of fiscal year 2020, from $1,722 for the same period in fiscal year 2019.
●
Selling expenses decreased by $11, or 5.9%, to $176 for the second quarter of fiscal year 2020, from $187 for the same period in fiscal year 2019.
●
Other income decreased by $9 to $40 in the second quarter of fiscal year 2020 compared to $49 in the same period in fiscal year 2019.
●
There was a gain of sale of asset held for sale amounted to $1,172 in the second quarter of fiscal year 2020.
●
Income tax expense was $120 in the second quarter of fiscal year 2020, a change of $244 as compared to the income tax benefits of $124 in the same period in fiscal year 2019.
●
During the second quarter of fiscal year 2020, income from continuing operations before non-controlling interest, net of tax was $864, as compared to $302 for the same period in fiscal year 2019.
●
Net profit attributable to non-controlling interest for the second quarter of fiscal year 2020 was $439, an increase of $481, as compared to net loss attributable to non-controlling interest of $42 in the same period in fiscal year 2019.
●
Basic Earnings per share for the second quarter of fiscal year 2020 were $0.12, as compared to earnings per share of $0.09 for the same period in fiscal year 2019.
●
Dilutive Earnings per share for the second quarter of fiscal year 2020 were $0.11, as compared to earnings per share of $0.09 for the same period in fiscal year 2019.
●
Total assets increased by $1,928, or 5.3% to $38,455 as of December 31, 2019 compared to $36,527 as of June 30, 2019.
●
Total liabilities increased by $944, or 8.1% to $12,610 as of December 31, 2019 compared to $11,666 as of June 30, 2019.
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Results of Operations and Business Outlook
The following table sets forth our revenue components for the three and six months ended December 31, 2019 and 2018, respectively.
Revenue Components | Three Months Ended | Six Months Ended | ||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |
2019 | 2018 | 2019 | 2018 | |
Manufacturing | 34.0% | 34.6% | 33.9% | 35.4% |
Testing Services | 43.4 | 45.3 | 44.1 | 44.7 |
Distribution | 22.4 | 19.8 | 21.8 | 19.6 |
Real Estate | 0.2 | 0.3 | 0.2 | 0.3 |
Total | 100.0% | 100.0% | 100.0% | 100.0% |
Revenue for the three and six months ended December 31, 2019 was $8,962 and $18,785, respectively, a decrease of $728 and $950, respectively, when compared to the revenue for the same period of the prior fiscal year. As a percentage, revenue decreased by 7.5% and 4.8% for the three and six months ended December 31, 2019, respectively, when compared to revenue for the same period of the prior year.
For the three months ended December 31, 2019, the $728 decrease in overall revenue was primarily due to
●
decrease in the manufacturing segment in the U.S. and Singapore operations; and
●
decrease in the testing segment in the Malaysia and China operations
These decreases were partially offset by the
●
an increase in the distribution segment in the Singapore operations; and
●
an increase in the testing segment in the Singapore and Thailand operations
For the six months ended December 31, 2019, the $950 decrease in overall revenue was primarily due to
●
decrease in the manufacturing segment in the Singapore operations; and
●
decrease in the testing segment in the Malaysia and China operations
These decreases were partially offset by the
●
an increase in the testing segment in the Singapore and Thailand operations; and
●
an increase in the distribution segment in the Singapore and China operations
Total revenue into and within China, the Southeast Asia regions and other countries (except revenue into and within the United States) decreased by $629 (or 6.7%), to $8,831 and by $1,017 (or 5.3%) to $18,018 for the three and six months ended December 31, 2019 respectively, as compared with $9,460 and $19,035, respectively, for the same period of last fiscal year.
Total revenue into and within the U.S. was $131 and $767 for the three and six months ended December 31, 2019, respectively, a decrease of $99 and an increase of $67 from $230 and $700 for the same period of the prior year.
Revenue within our four current segments for the three and six months ended December 31, 2019 is discussed below.
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Manufacturing Segment
Revenue in the manufacturing segment was 34.0% and 33.9% as a percentage of total revenue for the three and six months ended December 31, 2019, respectively, a decrease of 0.6% and 1.5% of total revenue, respectively, when compared to the same period of the last fiscal year. The absolute amount of revenue decreased by $307 to $3,045 from $3,352 and decreased by $627 to $6,362 from $6,989 for the three and six months ended December 31, 2019, respectively, compared to the same period of the last fiscal year.
Revenue in the manufacturing segment for the three months ended December 31, 2019 decreased primarily due to a decrease in orders by customers in the Singapore operations in the second quarter. The decrease was mainly due to our customers’ capital purchases were being affected by the uncertainty associated with the trade disputes between the U.S. and China. In addition, the customers’ requests to delay the delivery of the orders in the U.S. operation also contributed to the decrease.
Revenue in the manufacturing segment from one customer accounted for 39.7% and 39.0% of our total revenue in the manufacturing segment for the three and six months ended December 31, 2019 and 2018, respectively, and 39.5% and 39.4% of our total revenue in the manufacturing segment for the six months ended December 31, 2019, and 2018, respectively.
The future revenue in our manufacturing segment will be affected by the purchase and capital expenditure plans of this one customer if the customer base cannot be increased.
Testing Services Segment
Revenue in the testing segment was 43.4% and 44.1% as a percentage of total revenue for the three and six months ended December 31, 2019, respectively, a decrease of 1.9% and 0.6% of the total revenue when compared to the same period of the last fiscal year. The absolute amount of revenue decreased by $506 to $3,887 from $4,393 and decreased by $553 to $8,277 from $8,830 for the three and six months ended December 31, 2019, respectively, as compared to the same period of the last fiscal year.
The revenue in the testing segment from the one customer noted above accounted for 61.6% and 73.3% of our revenue in the testing segment for the three months ended December 31, 2019 and 2018, respectively, and 64.1% and 74.6% of our total revenue in the testing segment for the six months ended December 31, 2019 and 2018, respectively. The future revenue in the testing segment will be affected by the demands of this customer if the customer base cannot be increased. Demand for testing services varies from country to country, depending on any changes taking place in the market and our customers’ forecasts. As it is difficult to forecast fluctuations in the market accurately, management believes it is necessary to maintain testing facilities in close proximity to the 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.
Distribution Segment
Revenue in the distribution segment was 22.4% and 21.8% as a percentage of total revenue for the three and six months ended December 31, 2019, an increase of 2.6% and 2.2%, respectively, when compared to the same period of the last fiscal year. The absolute amount of revenue increased by $98 to $2,014 from $1,916 and increased by $253 to $4,113 from $3,860 for the three and six months ended December 31, 2019, respectively, compared to the same period of the last fiscal year.
Demand for the distribution segment varies depending on the demand for our customers’ products, the changes taking place in the market and our customers’ forecasts. Hence it is difficult to forecast fluctuations in the market accurately.
Real Estate Segment
The real estate segment accounted for 0.2% of total revenue for the three and six months ended December 31, 2019, respectively. The absolute amount of revenue in the real estate segment decreased by $13 to $16 from $29 and decreased by $23 to $33 from $56 for the three and six months ended December 31, 2019, respectively, compared to the same periods of the last fiscal year. This was due to the sales of properties in the real estate segment in the China operation after the third quarter of the last fiscal year, which resulted in a decrease in rental income.
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Uncertainties and Remedies
There are several influencing factors which create uncertainties when forecasting performance, such as the constantly changing nature of technology, specific requirements from the customer, decline in demand for certain types of burn-in devices or equipment, decline in demand for testing services and fabrication services, and other similar factors. One factor that influences uncertainty is the highly competitive nature of the semiconductor industry. Another is that some customers are unable to provide a forecast of the products required in the upcoming weeks; hence it is difficult to plan for the resources needed to meet these customers’ requirements due to short lead time and last minute order confirmation. This will normally result in a lower margin for these products, as it is more expensive to purchase materials in a short time frame. However, the Company has taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors. For example, in order to meet manufacturing customers’ demands upon short notice, the Company maintains higher inventories, but continues to work closely with its customers to avoid stock piling. We believe that we have improved customer service from staff through our efforts to keep our staff up to date on the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. Finally, the Company is exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology while at the same time searching for improved testing methods for higher technology chips.
We are in the process of implementing an Enterprise Resource Planning (“ERP”) system, as part of a multi-year plan to integrate and upgrade our systems and processes. The implementation of this ERP system is scheduled to occur in phases over next few years, and began with the migration of certain of our operational and financial systems in our Singapore operations to the new ERP system during the second quarter of fiscal 2017.
During the third quarter of fiscal 2018, the operational and financial systems in Singapore were substantially transitioned to the new system. The operational and financial systems in our Malaysia operation were substantially transitioned to the new system during the first quarter of fiscal 2019.
This implementation effort will continue in fiscal 2020, when the operational and financial system in our Tianjin and Suzhou operations will be substantially transitioned to 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.
The Company’s primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses in its subsidiaries. Strengthening of the U.S. dollar relative to foreign currencies adversely affects the U.S. dollar value of the Company’s foreign currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company’s products. Margins on sales of the Company’s products in foreign countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of the Company’s foreign currency-denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company’s foreign currency denominated sales and earnings could cause the Company to reduce international pricing, thereby limiting the benefit. Additionally, strengthening of foreign currencies may also increase the Company’s cost of product components denominated in those currencies, thus adversely affecting gross margins.
Our operation in Tianjin, China, encountered numerous limitations due to the outbreak of the Novel Coronavirus, named Covid-19 in China during early 2020. The Chinese government had taken emergency measures to combat the spread of the virus, including an extension of the Lunar New Year holidays. Management is currently assessing the impact of the outbreak on our Tianjin, China operation, and exploring various options to minimize the financial impact.
Numerous variables and uncertainties related to this outbreak has restricted our ability to calculate the impact on the Tianjin operation in the third quarter of fiscal year 2020. We expect that the extended Lunar New Year Holidays and the shortage of manpower due to travel restriction will limit our ability to generate the same level of revenue under normal circumstances.
There are several influencing factors which create uncertainties when forecasting performance of our real estate segment, such as obtaining the rights by the joint venture to develop the real estate projects in China, inflation in China, currency fluctuations and devaluation, and changes in Chinese laws, regulations, or their interpretation.
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Comparison of the Three Months Ended December 31, 2019 and December 31, 2018
The following table sets forth certain consolidated statements of income data as a percentage of revenue for the three months ended December 31, 2019 and 2018 respectively:
Three Months Ended December 31, | ||
2019 | 2018 | |
Revenue | 100.0% | 100.0% |
Cost of sales | 78.7 | 76.7 |
Gross Margin | 21.3% | 23.3% |
Operating expenses | ||
General and administrative | 19.8% | 17.8% |
Selling | 2.0 | 1.9 |
Research and development | 1.4 | 1.3 |
Total operating expenses | 23.2% | 21.0% |
(Loss)/Income from Operations | (1.9)% | 2.3% |
Overall Gross Margin
Overall gross margin as a percentage of revenue decreased by 2.0% to 21.3% for the three months ended December 31, 2019, from 23.3% for the same period of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing segment increased by 0.6% to 21.7% for the three months ended December 31, 2019, as compared to 21.1% for the same period in the last fiscal year. In absolute dollar amounts, gross profits in the manufacturing segment decreased by $44 to $662 for the three months ended December 31, 2019, from $706 for the same period in the last fiscal year.
Gross profit margin as a percentage of revenue in the testing segment decreased by 4.4% to 24.9% for the three months ended December 31, 2019, from 29.3% in the same period of the last fiscal year. The further deterioration of the testing revenue in Malaysia and China operations resulted in a decrease in gross profit margin in the testing segment where significant portions of the cost of goods sold are 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. However, the negative impact was mitigated by the management’s effort in cost-saving measure. In absolute dollar amounts, gross profit in the testing segment decreased by $318 to $969 for the three months ended December 31, 2019 from $1,287 for the same period of the last fiscal year.
Gross profit margin of the distribution segment is not only affected by the market price of the products we distribute, but also the mix of products we distribute, which frequently changes as a result of changes in market demand. Gross profit margin as a percentage of revenue in the distribution segment increased by 0.4% to 13.7% for the three months ended December 31, 2019, from 13.3% in the same period of the last fiscal year. In terms of absolute dollar amounts, gross profit in the distribution segment for the three months ended December 31, 2019 was $276 as compared to $254 in the same period of the last fiscal year.
In absolute dollar amounts, for the three months ended December 31, 2019, gross loss in the real estate segment was $2, as compared to the gross profit margin of $11 for the same period of last fiscal year. The increase in gross loss was mainly due to the sales of properties in the real estate segment after the third quarter of the last fiscal year, which resulted in a decrease in rental income.
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Operating Expenses
Operating expenses for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
General and administrative | $1,777 | $1,722 |
Selling | 176 | 187 |
Research and development | 125 | 122 |
Total | $2,078 | $2,031 |
General and administrative expenses increased by $55, or 3.1%, from $1,722 to $1,777 for the three months ended December 31, 2019 compared to the same period of last fiscal year. The increase in general and administrative expenses was mainly attributable to the increase in payroll-related expenses and a provision of doubtful debt in the manufacturing segment of the Singapore operations.
Selling expenses decreased by $11, or 5.9%, from $187 to $176 for the three months ended December 31, 2019, compared to the same period of the last fiscal year. The decrease was mainly due to the lower of traveling and entertainment expenses incurred in the Singapore operations.
Loss/Income from Operations
Loss from operations was $173 for the three months ended December 31, 2019, a decrease of $400, as compared to income from operations of $227 for the three months ended December 31, 2018. The result was mainly due to the decrease in gross profit and the increase in operating expenses, as previously discussed.
Interest Expense
Interest expense for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
Interest expenses | $55 | $98 |
Interest expense was $55 for the three months ended December 31, 2019, a decrease of $43, or 44% as compared to $98 for the three months ended December 31, 2018. The decrease was due to a decrease in the utilization of short-term loans in the Singapore and China operations. As of December 31, 2019, the Company had an unused line of credit of $6,325 as compared to $6,251 at June 30, 2019.
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Other Income
Other income for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
2019 | 2018 | |
Interest income | 52 | 26 |
Other rental income | 30 | 29 |
Exchange loss | (66) | (28) |
Other miscellaneous income | 24 | 22 |
Total | $40 | $49 |
Other income decreased by $9 to $40 for the three months ended December 31, 2019 from $49 as compared to the same period of last fiscal year. The decrease was primarily due to an increase in exchange loss, which was resulted by the unfavorable foreign exchange movement for the three months ended December 31, 2019 as compared to same period in the last fiscal year. The decrease was partially offset by the increase from interest income, which resulted from the increase of fixed deposit placement.
Income Tax Expenses/Benefits
The Company's income tax expense was $120 for the three months ended December 31, 2019, a change of $224 as compared to income tax benefit of $124 for the same period in the last fiscal year. The change was mainly due to the reversal of $145 from provision of income tax, which was arising from the One-Time Mandatory Repatriation Tax in last fiscal year. In addition, there was provision for GILTI of $35 and a capital gain tax of $94 incurred from the sale of asset held for sale in the Malaysia operation for the three months ended December 31, 2019.
Non-controlling Interest
As of December 31, 2019, we held a 55% interest in Trio-Tech (Malaysia) Sdn. Bhd., Trio-Tech (Kuala Lumpur) Sdn. Bhd., SHI International Pte. Ltd., and PT. SHI Indonesia. We also held a 76% interest in Prestal Enterprise Sdn. Bhd. The share of net income from the subsidiaries by the non-controlling interest for the three months ended December 31, 2019 was $439, an increase of $481 compared to the net loss of $42 for the same period of the previous fiscal year. The increase in the net income of the non-controlling interest in the subsidiaries was attributable to the increase in net income generated by the Malaysia operation from the sale of the asset held for sale.
Net Income
Net income for the three months ended December 31, 2019 was $426, an increase of $78, as compared to a net income of $348 for the same period last fiscal year.
Earnings per Share
Basic earnings per share from continuing operations were $0.12 for the three months ended December 31, 2019 as compared to $0.09 for the same period in the last fiscal year. Basic earnings per share from discontinued operations were Nil for both the three months ended December 31, 2019 and 2018.
Diluted earnings per share from continuing operations were $0.11 for the three months ended December 31, 2019 as compared to $0.09 for the same period in the last fiscal year. Diluted earnings per share from discontinued operations were $Nil for both the three months ended December 31, 2019 and 2018.
Segment Information
The revenue, gross margin and income or loss from operations for each segment during the second quarter of fiscal year 2020 and fiscal year 2019 are presented below. As the revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income or loss from operations is discussed below.
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Manufacturing Segment
The revenue, gross margin and (loss)/income from operations for the manufacturing segment for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
Revenue | $3,045 | $3,352 |
Gross margin | 21.7% | 21.1% |
(Loss)/Income from operations | $(87) | $76 |
Loss from operations from the manufacturing segment was $87 as compared to income from operation of $76 in the same period of the last fiscal year, primarily due to a decrease in gross margin of $44 and an increase in operating expenses of $119. Operating expenses for the manufacturing segment were $749 and $630 for the three months ended December 31, 2019 and 2018, respectively. The increase in operating expenses was mainly due to an increase of $86 in general and administrative expenses and an increase of $27 in corporate overhead expenses. The increase in general and administrative expenses was mainly attributable to an increase in payroll-related expenses and a provision of doubtful debt in Singapore operations. The increase in corporate overhead expenses was due to a change in the corporate overhead allocation as compared to the same period last fiscal year. Corporate charges are allocated on a pre-determined fixed charge basis.
Testing Segment
The revenue, gross margin and (loss)/income from operations for the testing segment for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
Revenue | $3,887 | $4,393 |
Gross margin | 24.9% | 29.3% |
(Loss)/Income from operations | $(161) | $21 |
Loss from operations in the testing segment for the three months ended December 31, 2019 was $161, reflecting a net decrease of $182 compared to income from operations of $21 in the same period of the last fiscal year. The decrease in operating income were mainly attributable to a decrease in gross profit margin, as discussed earlier. The decreases in the operating income were partially offset with a decrease in operating expenses. Operating expenses were $1,130 and $1,266 for the three months ended December 31, 2019 and 2018, respectively. The decrease of $136 in operating expenses was mainly due to a decrease in general and administrative expenses, which was mainly due to lower payroll-related expenses incurred in the Malaysia and China operations as part of the cost-saving measures, as discussed earlier.
Distribution Segment
The revenue, gross margin and income from operations for the distribution segment for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
Revenue | $2,014 | $1,916 |
Gross margin | 13.7% | 13.3% |
Income from operations | $188 | $170 |
Income from operations in the distribution segment was $188, for the three months ended December 31, 2019, as compared to $170 for the same period of last fiscal year. The increase in income from operations of $18 was mainly due to an increase of $22 in the gross margin, as discussed earlier. Operating expenses were $88 and $84 for the three months ended December 31, 2019 and 2018, respectively.
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Real Estate Segment
The revenue, gross margin and loss from operations for the real estate segment for the three months ended December 31, 2019 and 2018 were as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
Revenue | $16 | $29 |
Gross (loss)/margin | (12.5)% | 37.9% |
Loss from operations | $(35) | $(5) |
Loss from operations in the real estate segment for the three months ended December 31, 2019 was $35 compared to a loss $5 for the same period of last fiscal year. The increase in operations loss of $30 was mainly due to the decrease in gross margin of $13 and the increase in operating expenses by $17. Operating expenses were $33 and $16 for the three months ended December 31, 2019 and 2018, respectively. The increase in operating expenses was mainly due to one-off payroll-related expenses made during the three months ended December 31, 2019.
Corporate
The loss from operations for Corporate for the three months ended December 31, 2019 and 2018 was as follows:
Three Months Ended December 31, | ||
(Unaudited) | 2019 | 2018 |
Loss from operations | $(78) | $(35) |
The increase in loss from operations of $43 was mainly due to a change in the corporate overhead allocation as compared to the same period last fiscal year. Corporate charges are allocated on a pre-determined fixed charge basis.
Comparison of the Six Months Ended December 31, 2019 and December 31, 2018
The following table sets forth certain consolidated statements of income data as a percentage of revenue for the six months ended December 31, 2019 and 2018, respectively:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
Revenue | 100.0% | 100.0% |
Cost of sales | 77.9 | 77.9 |
Gross Margin | 22.1% | 22.1% |
Operating expenses: | ||
General and administrative | 19.0% | 17.6% |
Selling | 1.9 | 1.7 |
Research and development | 1.0 | 1.0 |
Gain on disposal of plant and equipment | (0.1) | - |
Total operating expenses | 21.8% | 20.3% |
Income from Operations | 0.3% | 1.8% |
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Overall Gross Margin
Overall gross margin as a percentage of revenue remained consistent as 22.1% for the six months ended December 31, 2019, as compared to the same period of the last fiscal year. In terms of absolute dollar amounts, gross profits decreased by $202 to $4,157 for the six months ended December 31, 2019, from $4,359 for the same period of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing segment increased by 1.1% to 22.4% for the six months ended December 31, 2019, from 21.3% in the same period of the last fiscal year. In absolute dollar amounts, gross profit decreased by $62 to $1,424 for the six months ended December 31, 2019 as compared to $1,486 for the same period in last fiscal year. The decrease in absolute dollar amount of gross margin was primarily due to the decrease in orders in the Singapore operation. However, the orders in the second quarter of fiscal year had the higher margin as compared to the same period of the last fiscal year, which contributed to an increase in the gross margin as a percentage of revenue.
Gross profit margin as a percentage of revenue in the testing segment decreased by 0.3% to 26.2% for the six months ended December 31, 2019 from 26.5% in the same period of the last fiscal year. There was a further deterioration in testing revenue in Malaysia and Chinas operation where significant portions of our cost of goods sold are fixed. As the demand of services and factory utilization decrease, the fixed costs are spread over the decreased output, which decreases the gross profit margin. However, this negative impact was partially mitigated by the management’s effort in reducing the cost in Malaysia and China operations. In terms of absolute dollar amounts, gross profit in the testing segment decreased by $173 to $2,168 for the six months ended December 31, 2019, from $2,341 for the same period of the last fiscal year.
Gross profit margin as a percentage of revenue in the distribution segment increased by 0.5% to 13.8% for the six months ended December 31, 2019, from 13.3% in the same period of the last fiscal year. In terms of absolute dollar amounts, gross profit in the distribution segment for the six months ended December 31, 2019 was $568, an increase of $56 as compared to $512 in the same period of the last fiscal year. The increase in absolute dollar amount of gross margin was due to the increase of distribution revenue in Singapore Operation. The gross profit margin of the distribution segment was not only affected by the market price of our products, but also our product mix, which changes frequently as a result of changes in market demand.
Gross loss margin as a percentage of revenue in the real estate segment increased by 44.8% to 9.1% for the six months ended December 31, 2019, from the gross profit margin of 35.7% in the same period of the last fiscal year. In terms of absolute dollar amounts, gross loss increased by $23 to $3 for the six months ended December 31, 2019 as compared to gross profit of $20 for the same period of the last fiscal year. The increase in gross loss was mainly due to the sales of properties in the real estate segment in the China operation after the third quarter of the last fiscal year, which resulted in a decrease in rental income.
Operating Expenses
Operating expenses for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
General and administrative | $3,565 | $3,481 |
Selling | 366 | 334 |
Research and development | 201 | 194 |
Gain on disposal of plant and equipment | (24) | - |
Total | $4,108 | $4,009 |
General and administrative expenses increased by $84, or 2.4%, from $3,481 to $3,565 for the six months ended December 31, 2019 compared to the same period of the last fiscal year. The increase in general and administrative expenses was primarily due to the increase in payroll-related expenses in the U.S. and Singapore operations.
Selling expenses increased by $32, or 9.6%, for the six months ended December 31, 2019, from $334 to $366 compared to the same period of the last fiscal year. The increase was mainly due to an increase in commission expenses in the manufacturing segment of the Singapore operations.
Research and development expenses increased by $7, for the six months ended December 31, 2019, from $194 to $201, as compared to the same period of the last fiscal year.
During the six months ended December 31, 2019, there was a gain on disposal of plant and equipment of $24 as compared to $nil in the same period of last fiscal year.
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Income from Operations
Income from operations was $49 for the six months ended December 31, 2019 as compared to $350 for the same period of the last fiscal year. The decrease was mainly due to the decrease in gross profit margin and an increase in operating expenses, as discussed earlier.
Interest Expense
Interest expense for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Interest expense | $123 | $176 |
Interest expense decreased by $53 to $123 from $176 for the six months ended December 31, 2019 as compared to the same period of the last fiscal year. The decrease was mainly due to lower utilization of short-term loans in the Singapore and China Operations. Additionally, the bank loan payable decreased by $231 to $2,549 as of December 31, 2019 as compared to $2,780 as at June 30, 2019.
Other Income
Other income for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Interest income | $84 | $36 |
Other rental income | 60 | 56 |
Exchange loss | (61) | (67) |
Bad debt recovery | 11 | 2 |
Other miscellaneous income | 56 | 65 |
Total | $150 | $92 |
Other income for the six months ended December 31, 2019 was $150, an increase of $58 as compared to $92 for the same period of last fiscal year. This increase mainly due to the higher interest income earned from the placement of fixed deposits during the six months ended December 31, 2019.
Income Tax Expenses
Income tax expenses for the six months ended December 31, 2019 was $120, a change of $170 as compared to income tax benefits of $50 for the same period last fiscal year. This change was mainly due to the reversal from provision of One-Time Mandatory Repatriation Tax for the six months ended December 31, 2018. The provisions for the six months ended December 31, 2019 was primarily due to provision for GILTI and the capital gain tax incurred from the sale of asset held for sale in the Malaysia operation, offset by the tax refund in the China operation.
Non-controlling Interest
As of December 31, 2019, we held a 55% interest in Trio-Tech Malaysia, Trio-Tech (Kuala Lumpur) Sdn. Bhd., SHI International Pte. Ltd. and PTSHI Indonesia, and a 76% interest in Prestal Enterprise Sdn. Bhd. The net income attributable to the non-controlling interest in these subsidiaries for the six months ended December 31, 2019 was $429, a change of $530, as compared to net loss of $101 for the same period of last fiscal year. The increase was attributable to the increase in net income generated by the Malaysia operation from the sale of asset held for sale.
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Net Income
Net income was $699 for the six months ended December 31, 2019, an increase of $286, as compared to $413 for the same period of the last fiscal year. The increase was mainly due to the gain on sale of asset held for sale in the Malaysia operation. However, the increase was partially offset by a decrease in revenue, gross margin and increase in operating expenses, as discussed earlier.
Earnings per Share
Basic earnings per share from continuing operations was $0.19 for the six months ended December 31, 2019 as compared to $0.11 for the same period of the last fiscal year. Basic earnings per share from discontinued operations were nil for both the six months ended December 31, 2019 and 2018.
Diluted earnings per share from continuing operations was $0.19 for the six months ended December 31, 2019 as compared to $0.11 for the same period of the last fiscal year. Diluted earnings per share from discontinued operations were nil for both the six months ended December 31, 2019 and 2018.
Segment Information
The revenue, gross profit margin, and income or loss from operations in each segment for the six months ended December 31, 2019 and 2018, respectively, are presented below. As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.
Manufacturing Segment
The revenue, gross margin and (loss)/income from operations for the manufacturing segment for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Revenue | $6,362 | $6,989 |
Gross margin | 22.4% | 21.3% |
(Loss)/Income from operations | $(99) | $183 |
Loss from operations from the manufacturing segment was $99 for the six months ended December 31, 2019, a change of $282 as compared to income from operations $183 in the same period of the last fiscal year, due to a decrease in gross margin and an increase in operating expenses. Operating expenses for the manufacturing segment were $1,523 and $1,303 for the six months ended December 31, 2019 and 2018, respectively. The increase in operating expenses of $220 was mainly due to an increase in general and administrative expenses by $146, increased in selling expenses by $58, increase in corporate overhead by $8 and increase in research and development expenses by $8 as compared to the same period of last fiscal year. The increase in general and administrative expenses was mainly attributable to an increase in payroll-related expenses and a provision of doubtful debt in Singapore operations. The increase in selling expenses was primarily due to higher commission expenses incurred for the six months ended December 31, 2019.
Testing Segment
The revenue, gross margin and loss from operations for the testing segment for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Revenue | $8,277 | $8,830 |
Gross margin | 26.2% | 26.5% |
Loss from operations | $93 | $117 |
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Loss from operations in the testing segment for the six months ended December 31, 2019 was $93, an improvement of $24 compared to loss from operation of $117 in the same period of the last fiscal year. The improvement was attributable to management’s efforts in cost savings although there was deterioration of the revenue. The decrease in gross margin of $173 offset with a further decrease in operating expenses of $197, also contributable to the decrease in operating loss. Operating expenses were $2,261 and $2,458 for the six months ended December 31, 2019 and 2018, respectively. The lower operating expenses were mainly attributable to a decrease in general and administrative expenses by $96 and a decrease in corporate overheads by $55. The decrease in general and administrative expenses was due to decrease in payroll-related expenses in the Malaysia and China operations as part of the cost savings measures, as discussed earlier. The decrease in corporate overhead expenses was due to a change in the corporate overhead allocation as compared to the same period last fiscal year. Corporate charges are allocated on a pre-determined fixed charge basis.
Distribution Segment
The revenue, gross margin and income from operations for the distribution segment for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Revenue | $4,113 | $3,860 |
Gross margin | 13.8% | 13.3% |
Income from operations | $392 | $342 |
Income from operations in the distribution segment for the six months ended December 31, 2019 was $392, an increase by $50 as compared to $342 in the same period of the last fiscal year. The increase in operating income was primarily due to an increase in gross margin as discussed earlier which was partially offset by the increase of operating expenses of $6. Operating expenses were $176 and $170 for the six months ended December 31, 2019 and 2018, respectively.
Real Estate Segment
The revenue, gross margin and loss from operations for the real estate segment for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Revenue | $33 | $56 |
Gross margin | (9.1)% | 35.7% |
Loss from operations | $(52) | $(17) |
Loss from operations in the real estate segment for the six months ended December 31, 2019 was $52, a further deterioration of $35 as compared to a loss from operations of $17 for the same period of the last fiscal year. The increase in operating loss was mainly due to a decrease in gross margin, as discussed earlier. Operating expenses were $49 and $37 for the six months ended December 31, 2019 and 2018, respectively. The increase in operating expenses was mainly due to one-off payroll-related expenses made during the six months ended December 31, 2019.
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Corporate
The loss from operations for corporate for the six months ended December 31, 2019 and 2018 were as follows:
Six Months Ended | ||
Dec. 31, 2019 | Dec. 31, 2018 | |
(Unaudited) | ||
Loss from operations | $(99) | $(41) |
The increase of $58 was mainly due to a change in the corporate overhead allocation as compared to the same period of last fiscal year. Corporate charges are allocated on a pre-determined fixed charge basis.
Financial Condition
During the six months ended December 31, 2019 total assets increased by $1,928 from $36,527 as at June 30, 2019 to $38,455. The increase in total assets was due to an increase in short term deposits, prepaid expenses and other current assets, deferred tax assets, operating lease right-of-use assets and restricted term deposits, which was partially offset by a decrease in cash and cash equivalents, trade account receivable, other receivables, inventory, asset held for sale, investment properties, property, plant and equipment and other assets.
Cash and cash equivalents were $4,743 as at December 31, 2019, reflecting a decrease of $120 from $4,863 as at June 30, 2019, primarily due to further placement made into fixed deposits in the Singapore and China operations.
Short term deposits were $6,888 as at December 31, 2019, reflecting an increase of $2,744 from $4,144 as at June 30, 2019, primarily due to an increase in deposits in the Singapore and China operations. The short term deposits include proceeds received from the sale of assets held for sale.
As at December 31, 2019, the trade accounts receivable balance decreased by $176 to $6,937, from $7,113 as at June 30, 2019, primarily due to the decrease in revenue for the six months ended December 31, 2019 in the Singapore, Malaysia and U.S. operations. The number of days’ sales outstanding in accounts receivables for the Group was 67 and 74 days at the end of the second quarter of fiscal year 2020 and for the end of fiscal year of 2019, respectively.
As at December 31, 2019, other receivables were $752, reflecting a decrease of $65 from $817 as at June 30, 2019. The decrease was primarily due to a decrease in advance payments made to suppliers in the Singapore operation and a decrease in contract asset, recognized in accordance to the ASC 606 Revenue from contracts with customers in the China entity.
Inventories as at December 31, 2019 were $2,182, a decrease of $245, as compared to $2,427 as at June 30, 2019. The decrease in inventories was in line with a decrease in orders by customers in the manufacturing segment of Singapore operations
Prepaid expenses were $330 as at December 31, 2019 compared to $287 as at June 30, 2019. The increase of $43 was primarily due to the prepaid insurance and accounting software expenses in the Singapore operation.
Investment properties, net in China were $734 as at December 31, 2019 and $782 as at June 30, 2019. The decrease was primarily due to the depreciation charged for the period and the foreign currency exchange movement between June 30, 2019 and December 31, 2019.
Assets held for sales were $nil as at December 31, 2019 and $89 as 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 during the second quarter of fiscal 2020.
Property, plant and equipment decreased by $508 from $12,159 as at June 30, 2019, to $11,651 as at December 31, 2019, mainly due to depreciation charged for the period and the foreign currency exchange movement between June 30, 2019 to December 31, 2019. The decrease was partially offset by the new acquisition of plant and equipment in the Malaysia operation.
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Other assets decreased by $124 to $1,626 as at December 31, 2019, as compared to $1,750 as at June 30, 2019. This was mainly due to the reclassification of down payments made for the purchase of equipment to property, plant and equipment in the Malaysia operation.
Accounts payable increased by $293 to $3,565 as at December 31, 2019, as compared to $3,272 as at June 30, 2019. This was due to less payments made in the second quarter of the fiscal year 2020.
Accrued expenses decreased by $310 to $3,176 as at December 31, 2019, as compared to $3,486 as at June 30, 2019. The decrease in accrued expenses was mainly due to a decrease in the accrued purchase in the Singapore operation and a decrease in accrued payroll liability in the Singapore and China operations during the six months ended December 31, 2019.
Bank loans payable decreased by $231 to $2,549 as at December 31, 2019, as compared to $2,780 as at June 30, 2019. This was due to the repayments made in the Singapore and Malaysia operations during the six months ended December 31, 2019.
Finance leases increased by $131 to $856 as at December 31, 2019, as compared to $725 as at June 30, 2019. This was due to the increase of finance leases in the Singapore and Malaysia operation.
Operating lease right of use assets and the corresponding leased liability were $475 and $477 as of December 31, 2019 and June 30, 2019 respectively, after taking into effect the new accounting standard, ASC 842 leases.
Liquidity Comparison
Net cash provided by operating activities decreased by $678 to an inflow of $1,573 for the six months ended December 31, 2019 from an inflow of $2,251 for the same period of the last fiscal year. The decrease in net cash inflow provided by operating activities was primarily due to a decrease in cash inflow of $621 from account receivable, a decrease in cash inflow of $331 from other assets and increase of cash outflow of $ 359 from repayment of operating leases. These were partially offset by an increase in depreciation and amortization of $431, an increase in cash inflow of $175 from other receivable and also absent of reversal of income tax provision of $145.
Net cash used in investing activities decreased by $1,639 to an outflow of $2,116 for the six months ended December 31, 2019 from an outflow of $3,755 for the same period of the last fiscal year. The decrease in cash outflow was primarily due to an increase in proceeds from sale of asset held for sale of $1,261 and also decrease in capital expenditure of $1,553. These were partially offset by a increase of $1,211 from the investment in unrestricted deposits.
Net cash generated in financing activities for the six months ended December 31, 2019 was $395, representing a decrease of $1,027, as compared to net cash generated in financing activities of $1,422 during the six months ended December 31, 2018. The decrease in cash inflow was mainly attributable to a decrease in cash inflow by $4,625 from proceeds of lines of credit and a decrease of $1,475 from bank loans. These were partially offset by a decrease in cash outflow of $5,179 from repayment of lines of credit.
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 loan will provide the necessary financial resources to meet our projected cash requirements for at least the next 12 months.
Critical Accounting Estimates & Policies
Effective as of July 1, 2019, the Company has adopted ASU 2016-02, Leases (Topic 842), and its related amendments using modified retrospective transition method. We have completed our adoption and implemented policies, processes and controls to support the standard’s measurement and disclosure requirements as described in note 1 to the financial statements included in item 1 of this Form 10-Q.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out by the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2019, the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at a reasonable level.
Changes in Internal Control Over Financial Reporting
Except as discussed below, there has been no change in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2019, 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 is scheduled to occur in phases over a few years, and began with the migration of certain of our operational and financial systems in our Singapore operations to the new ERP system during the second quarter of fiscal 2017.
During the third quarter of fiscal 2018, the operational and financial systems in Singapore were substantially transitioned to the new system. The operational and financial systems in our Malaysia operation were substantially transitioned to the new system during the first quarter of fiscal 2019.
This implementation effort will continue in fiscal 2020, when the operational and financial systems in our Tianjin and Suzhou operations will be substantially transitioned to 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.
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TRIO-TECH INTERNATIONAL
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Malaysia and Singapore regulations prohibit the payment of dividends if the Company does not have sufficient retained earnings and tax credit. In addition, the payment of dividends can only be made after making deductions for income tax pursuant to the regulations. Furthermore, the cash movements from the Company’s 55% owned Malaysian subsidiary to overseas are restricted and must be authorized by the Central Bank of Malaysia. California law also prohibits the payment of dividends if the Company does not have sufficient retained earnings or cannot meet certain asset to liability ratios.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On June 12, 2019, Trio-Tech Malaysia Sdn. Bhd., a subsidiary of the Company (“TTM”), and Cortex Robotics Sdn. Bhd, entered into a sales and purchase agreement for the sale of for TTM’s Penang Property. The agreement provided for, among other things, a purchase price for the Penang Property of RM5,600,000, approximately $1,340,000. The sale was subject to certain conditions. The conditions to the consummation of the transaction were satisfied and the sale was completed on December 20, 2019. The foregoing description of the sale and purchase agreement is a summary and is qualified in its entirety by reference to the complete text of the sales and purchase agreement attached as Exhibit 10.1 hereto and incorporated by reference into this Form 10-Q.
Item 6. Exhibits
10.1 | The Sale and Purchase agreement between Trio-tech Malaysia Sdn Bhd and Cortex Robotics Sdn Bhd | |
Rule 13a-14(a) Certification of Principal Executive Officer of Registrant | ||
Rule 13a-14(a) Certification of Principal Financial Officer of Registrant | ||
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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRIO-TECH INTERNATIONAL | ||
By: | /s/ Victor H.M. Ting VICTOR H.M. TING Vice President and Chief Financial Officer (Principal Financial Officer) Dated: February 13, 2020 |
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