TRT Trio Tech International

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

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

During the years ended June 30, 2022 (“Fiscal 2022”) and June 30, 2021 (“Fiscal 2021”), Trio-Tech International operated in four segments: manufacturing, testing services, distribution, and real estate. During Fiscal 2022, revenue from the manufacturing, testing services, distribution and real estate segments represented 30.7%, 44.2%, 25.0% and 0.1% of our revenue, respectively, as compared to 40.5%, 42.7%, 16.7% and 0.1% respectively, during Fiscal 2021.

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

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

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

No other investment income was recorded as revenue by the real estate segment in either of Fiscal 2022 or Fiscal 2021.

Trio-Tech Chongqing Co., Ltd. (“TTCQ”) invested Chinese renminbi (“RMB”) 5,554 in rental properties in MaoYe during the year ended June 30, 2008. During fiscal year 2019, TTCQ completed the sale of thirteen of the fifteen units constituting the MaoYe property, which contributed a capital gain of $685. During the year ended June 30, 2010, TTCQ invested RMB 3,600 in rental properties from JiangHuai Property Development Co. Ltd. (“JiangHuai”) and RMB 4,025 in rental properties in Chongqing FuLi Real Estate Development Co. Ltd. (“FuLi”). The total investment in properties in China was RMB 9,649 in Fiscal 2022 and 2021, or approximately $1,440 and $1,493, respectively. The carrying value of these investment properties in China was RMB 3,919 and RMB 4,402, or approximately $585 and $681, as of June 30, 2022 and 2021, respectively. These properties generated a total rental income of $25 and $28 during Fiscal 2022 and 2021, respectively. TTCQ’s investment in properties that generated rental income is discussed elsewhere in this Annual Report, including Note 7 to the Financial Statements.

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

a) long-term loan receivable RMB 5,000, or approximately $746, as disclosed in Note 5, plus the interest receivable on the long-term loan receivable of RMB 1,250;

b) commercial units measuring 668 square meters and;

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

These considerations do not include the remaining outstanding amount of RMB 2,000, or approximately $298, which will be paid to TTCQ in cash.

The Shop Lots were to be delivered to TTCQ upon completion of the construction of the property in Singapore Themed Resort Project. The initial target date of completion was in 2017. However, completion of the project was delayed, and the developer is now undergoing an asset reorganization and re-negotiation with its creditors.

The Company recorded a one-time, non-cash impairment charge of $1,580 in the fourth quarter of Fiscal 2021 related to the doubtful recovery of the down payment on property in the Singapore Theme Resort Project in Chongqing, China. We elected to take this non-cash impairment charge due to the increased uncertainties regarding the project’s viability, given the developer’s weakening financial condition as well as uncertainties arising from the negative real-estate environment in China, implementation of control measures on real-estate lending in China and its relevant government policies, together with effects of the ongoing pandemic.

Fiscal 2022 Highlights

The highlights above are intended to identify certain of the Company’s significant events and transactions during Fiscal 2022. These highlights are not intended to be a full discussion of our results for the year, and should be read in conjunction with the discussion of these items in this Item 7 and with our consolidated financial statements and footnotes accompanying this Annual Report.

General Financial Information

Total assets as of June 30, 2022 were $43,421, an increase of $5,115, or 13.3%, compared to $38,306 as of June 30, 2021. The increase was primarily due to an increase in cash and cash equivalents, trade account receivables, other receivables, inventories, prepaid expense and other current assets, operating lease right-of-use assets and financed sales receivable. The increase was partially offset by a decrease in short term deposits, other assets, deferred tax assets, investment properties, property, plant and equipment and restricted term deposits.

Cash and cash equivalents as of June 30, 2022 were $7,698, an increase of $1,862, or 31.9%, compared to $5,836 at June 30, 2021, primarily due to the cash inflow generated from operating activities and proceeds from lines of credit.

Trade account receivables as of June 30, 2022 was $11,592, representing an increase of $$3,299 or 39.7%, compared to $8,293 at June 30, 2021. The increase was attributable to an increase in the overall sales for the fourth quarter of Fiscal 2022 compared to the same period in the prior fiscal year. The number of days’ sales outstanding in account receivables was 81 days and 79 days for the years ended June 30, 2022, and 2021 respectively.

As of June 30, 2022, other receivables were $998 an increase of $336, or 50.8%, compared to $662 at June 30, 2021. The increase was primarily due to an increase in advance payment to vendors in Singapore and China operations.

Inventories as of June 30, 2022 were $2,258, an increase of $178, or 8.6%, compared to $2,080 at June 30, 2021. The increase in inventories was mainly due to an increase in inventories in transit. The number of days’ inventory held was 58 days at the end of Fiscal 2022, compared to 73 days at the end of Fiscal 2021.

Investment properties in China as of June 30, 2022 were $585, a decrease of $96 from $681 at June 30, 2021. The decrease was attributable to the depreciation charged for the year.

Property, plant and equipment as of June 30, 2022 was $8,481, a decrease of $1,050 compared to $9,531 at June 30, 2021. This was mainly due to depreciation charged for the year and the foreign currency exchange movement between Fiscal 2022 and Fiscal 2021. The decrease was partially offset by the new acquisition of property, plant and equipment in the Singapore, Malaysia, China and Thailand operations.

Other assets as of June 30, 2022 were $137, a decrease of $125, or 47.7%, compared to $262 at June 30, 2021. This was mainly due to the reclassification of down payments made for the purchase of equipment in the Malaysia operation.

Restricted term deposits as of June 30, 2022 were $1,678, compared to $1,741 at June 30, 2021. The decrease was mainly due to the currency translation difference between functional currency and U.S. dollars from June 30, 2021 to June 30, 2022.

Total liabilities as of June 30, 2022 were $15,419, an increase of $3,166, or 25.8%, compared to $12,253 at June 30, 2021. The increase in liabilities was primarily due to an increase in lines of credits, accrued expense, income tax payable and operating leases, partially offset by a decrease in accounts payable, bank loans payable and finance lease.

Accounts payable as of June 30, 2022 decreased by $1,301, or 35.1% to $2,401 from $3,702 as of June 30, 2021. The decrease was mainly due to prompt settlements to suppliers.

Accrued expense as of June 30, 2022 increased by $2,641, or 78.5% to $6,004 from $3,363 as at June 30, 2021. The increase was mainly due to an increase in accrued payroll liability in the Singapore and China operations and an increase in accrued purchases.

Income tax payable as of June 30, 2022 increased by $225 to $924 from $699 as at June 30, 2021. The increase was mainly due to higher taxable profit in Fiscal 2022.

Bank loans payable decreased by $316 to $1,744 as of June 30, 2022, as compared to $2,060 as at June 30, 2021. The decrease was due to the repayments made in the Malaysia operation.

Finance leases decreased by $213 to $237 as of June 30, 2022, as compared to $450 as at June 30, 2021. The decrease was due to the repayments made in the Singapore and Malaysia operations.

Operating lease right-of-use assets and the corresponding lease liabilities increased by $1,276 to $3,152 as of June 30, 2022, as compared to $1,876 as of June 30, 2021. This was due to the renewal of the lease agreements in the Singapore and China Operations and the new lease for Jiangsu operations. The increase was partially offset by the repayment made and the operating lease expense charged for the period.

Impact of COVID-19 on our Business

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

During the quarter ended March 31, 2022, Company temporarily closed its facility for twelve days in Tianjin, China to comply with China ZERO-COVID policy. The Company resumed 100% operating capacity in the Tianjin, China facility on January 21, 2022, and had lost revenue of approximately $260 during this temporary closure.

The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including but not limited to the duration and spread of the pandemic, its severity, the action to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience material adverse impacts on our business as a result of the global economic impact and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic on our operations and financial results is highly uncertain and subject to change.

As of June 30, 2022, the Company had cash and cash equivalents and short-term deposits totaling $13,118 and an unused line of credit of $4,575. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.

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

Critical Accounting Estimates & Policies

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

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

Account Receivables and Allowance for Doubtful Accounts

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

The Company’s management considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. The Company includes any account balances that are determined to be uncollectible, along with a general reserve, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to management, the Company believed that its allowance for doubtful accounts was adequate as of June 30, 2022.

Inventory Valuation

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

Property, Plant and Equipment & Investment Properties

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

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

Foreign Currency Translation and Transactions

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

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

Revenue Recognition

The Company follows Accounting Standards Update (“ASU”) No. 2014-09, Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.

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

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

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

Investment

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

Equity Method

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

Cost Method

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

Long-Lived Assets & Impairment

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

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

While we have not identified any changes in circumstances requiring further impairment test in Fiscal 2022, we will continue to monitor impairment indicators, such as disposition activity, stock price declines or changes in forecasted cash flows in future periods. If the fair value of our reporting unit declines below the carrying value in the future, we may incur additional impairment charges.

During the fourth quarter of 2021, the Company recorded a impairment charge of $1,580 related to the doubtful recovery of a down payment on property in the Singapore Theme Resort Project in Chongqing, China. The Company elected to take this non-cash impairment charge because of increased uncertainties regarding the project’s viability given the developers weakening financial condition as well as uncertainties arising from the negative real-estate environment in China, implementation of control measures on real-estate lending and its relevant government policies, together with effects of the ongoing pandemic.

Fair Value Measurements

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

Income Tax

We account for income taxes using the liability method in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC Topic 740”), which requires an entity to recognize deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in future years. Further, the effects of enacted tax laws or rate changes are included as part of deferred tax expense or benefits in the period that covers the enactment date. Management believed it was more likely than not that the future benefits from these timing differences would not be realized. Accordingly, a full allowance was provided as of June 30, 2022 and 2021.

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

Stock-Based Compensation

We calculate compensation expense related to stock option awards made to employees and directors based on the fair value of stock-based awards on the date of grant. We determine the grant date fair value of our stock option awards using the Black-Scholes option pricing model and for awards without performance condition the related stock-based compensation is recognized over the period in which a participant is required to provide service in exchange for the stock-based award, which is generally four years. We recognize stock-based compensation expense in the consolidated statements of shareholders' equity based on awards ultimately expected to vest. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.

Determining the fair value of stock-based awards at the grant date requires significant judgment. The determination of the grant date fair value of stock-based awards using the Black-Scholes option-pricing model is affected by our estimated common stock fair value as well as other subjective assumptions including the expected term of the awards, the expected volatility over the expected term of the awards, expected dividend yield and risk-free interest rates. The assumptions used in our option-pricing model represent management’s best estimates and are as follows:

•         Fair Value of Common Stock. We determined the fair value of each share of underlying common stock based on the closing price of our common stock on the date of grant.

•         Expected Term. The expected term of employee stock options reflects the period for which we believe the option will remain outstanding based on historical experience and future expectations.

•         Expected Volatility. We base expected volatility on our historical information over a similar expected term.

Noncontrolling Interests in Consolidated Financial Statements

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

Loan Receivables

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

Interest Income

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

Recent Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) ) (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, as well as amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, ASU 2020-06 improves and amends the related EPS guidance. The amendments in ASU 2020-06 were effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption is either a modified retrospective method or a fully retrospective method of transition. The Company has completed its assessment and concluded that ASU 2020-06 update has no significant impact to the Company’s consolidated financial statements.

In March 2020, FASB issued ASU 2020-04 ASC Topic 848: Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments were effective for all entities as of March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company has completed its assessment and concluded that this update has no significant impact to the Company’s consolidated financial statements.

In June 2016, FASB issued ASU 2016-13 ASC Topic 326: Financial Instruments — Credit Losses (“ASC Topic 326”) for the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. ASC Topic 326 is effective for the Company for annual periods beginning after December 15, 2022. The Company has completed its assessment and concluded that ASC Topic 326 has no significant impact to the Company’s consolidated financial statements.

Other new pronouncements issued but not yet effective until after June 30, 2022 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

Overall revenue

Overall revenue is composed of the revenue from the manufacturing, testing services, distribution and real estate segments. The following table presents the components of the overall revenue realized for the years ended June 30, 2022, and 2021.

Overall revenue during Fiscal 2022 was $44,065, an increase of $11,603, or 35.7%, compared to $32,462 during Fiscal 2021. The increase in revenue was due to an increase in sales in the manufacturing, testing and distribution segments as the economy started to recover from the pandemic.

Manufacturing Segment Revenue

The manufacturing segment accounted for 30.7% of revenue during Fiscal 2022, a decrease of 9.8%, compared to 40.5% during the year ended June 30, 2021. Revenue generated by the manufacturing segment during Fiscal 2022 was $13,526, reflecting an increase of $375, or 2.9%, compared to $13,151 during Fiscal 2021. The increase in revenue generated by the manufacturing segment was due to increased business in the segment in Singapore operations, which is a result of stronger demand for our equipment when compared to the prior period as the economy rebounds from Covid-19.

Backlog in the manufacturing segment was $6,977 as of June 30, 2022, representing an increase of $1,937 from $5,040 as of June 30, 2021. We expect the demand for our products to increase in the year ended June 30, 2023 as compared to the year ended June 30, 2022, as global market demand for testing equipment and systems gradually recover to pre-pandemic levels.

Testing Segment Revenue

Revenue generated by the testing services segment accounted for 44.2% of total revenue during Fiscal 2022, as compared to 42.7% during Fiscal 2021. Revenue generated by the testing services segment for Fiscal 2022 was $19,477, reflecting an increase of $5,631, or 40.7%, compared to $13,846 for Fiscal 2021. The increase in revenue generated by the testing segment was primarily attributable to an increase in revenue in the Malaysia, Thailand and China operations, which was attributable to an increase in the volume of testing services requested by our customers in these operations as global demand for chips grew stronger. The Company had increased its average selling price for testing services starting from Fiscal 2022 which aimed increase testing segment revenue. Demand for testing services varies from country to country, depending on changes taking place in the market and our customers’ forecasts. Because it is difficult to accurately forecast fluctuations in the market, we believe that it is necessary to maintain testing facilities in close proximity to our customers in order to make it convenient for them to send us their newly manufactured parts for testing, and to enable us to maintain that share of the market.

Backlog in the testing services segment as of June 30, 2022 was $5,698, an increase of $1,923, compared to $3,775 at June 30, 2021. The increase in backlog was mainly from the China operations. Backlog is dependent on the estimated volume provided by customers, which volume is dependent on the customers’ inventory levels and demand.

Distribution Segment Revenue

Revenue generated by the distribution segment during Fiscal 2022 accounted for 25% of total revenue, an increase of 8.3% compared to 16.7% for Fiscal 2021. Revenue for Fiscal 2022 was $11,037, an increase of $5,600, or 103%, compared to $5,437 for Fiscal 2021. The increase in revenue in our distribution segment was due to an increase in orders from the major customers in our Singapore operations, which reflects the continued strong growth of the semiconductor industry both locally and globally.

Backlog in the distribution segment as of June 30, 2022 was $4,687, reflecting an increase of $39 compared to the backlog of $4,648 at June 30, 2021. The increase in backlog was mainly due to an increased forecast from customers. We believe that our competitive advantage in the distribution segment is our design and engineering capabilities in components and touch screen products, which allow customization to meet the specific requirement of our customers. Product volume for the distribution segment depends on sales activities, including placing orders and queries for products and backlog. Equipment and electronic component sales are very competitive, as the products are readily available in the market.

Real Estate Segment Revenue

Revenue generated by the real estate segment was 0.1% of total revenue for each of the years ended June 30, 2022 and 2021. Revenue generated by the real estate segment for Fiscal 2022 was $25, a decrease of $3, or 10.7%, compared to $28 for Fiscal 2021. Our real estate segment saw a decrease in rental income due to the low occupancy rate in the MaoYe and FuLi properties amid the pandemic.

Backlog in the real estate segment as of June 30, 2022, was $101, an increase of $61 as compared to $40 at June 30, 2021.

Overall Gross Margin

Overall gross margin as a percentage of revenue was 26.6% in Fiscal 2022, an increase of 3% compared to 23.6% in Fiscal 2021. The increase in gross margin as a percentage of revenue was mainly attributable to the testing segment. Overall gross profit for Fiscal 2022 was $11,733, an increase of $4,063, or 53%, compared to $7,670 for Fiscal 2021. The increase in the dollar value of the overall gross margin was mainly due to an increase of sales in the testing segment.

Gross margin as a percentage of revenue in the manufacturing segment was 25% in Fiscal 2022, a decrease of 0.4%, compared to 25.4% in Fiscal 2021, mainly due to increased payroll expeneses. Gross profit for the manufacturing segment in Fiscal 2022 was $3,379, an increase of $37 or 1.1%, compared to $3,342 in Fiscal 2021. The increase in the absolute dollar amount of gross margin was mainly due to an increase in revenue in our Singapore operations.

Gross margin as a percentage of revenue in the testing services segment was 33.5% in Fiscal 2022, an increase of 8.8%, compared to 24.7% in Fiscal 2021. The increase in gross profit margin as a percentage of revenue was primarily due to the continuous effort of cost control in the Singapore, China and Malaysia operations. Gross profit in the testing services segment in Fiscal 2022 was $6,517, an increase of $3,102, or 91.1%, compared to $3,415 in Fiscal 2021.

Gross margin as a percentage of revenue in the distribution segment was 17.1% in Fiscal 2022, a decrease of 0.6%, compared to 17.7% in Fiscal 2021. The decrease in gross margin percentage was due to an increase in direct material costs and freight charges. Gross profit in the distribution segment was $1,890, an increase of $928, or 96.5%, compared to $962 in Fiscal 2021. The decrease in gross 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 the changes in market demand.

Gross margin as a percentage of revenue in the real estate segment was (212.0)% in Fiscal 2022, a decrease of 55% compared to (157.0)% in Fiscal 2021. Gross (loss) margin in the real estate segment was $53 in Fiscal 2022, a decrease of $4 as compared to $49 in Fiscal 2021. The increase in gross loss was due to the low occupancy rate amid the pandemic.

General and administrative expense was $8,361 in Fiscal 2022, compared to $6,929 in Fiscal 2021. The increase in general and administrative expense was mainly attributable to higher stock option compensation expense led by the higher volatility of stock prices and higher payroll expense in Singapore, Malaysia and China.

Selling expense increased by $197, or 44.2%, to $643 in Fiscal 2022, compared to $446 in Fiscal 2021. The increase in selling expense was primarily attributable to an increase in commission expense in the Singapore operations as a result of higher commissionable sales.

Profit / (loss) from Operations

Profit from operations was $2,353 in Fiscal 2022, an increase of $2,414, compared to a loss from operations of $61 in Fiscal 2021. The increase in profit from operations was mainly due to increased revenue.

Interest Expense

Interest expense for the years ended June 30, 2022 and 2021 was as follows:

Interest expense decreased by $4 to $122 in Fiscal 2022, compared to $126 in Fiscal 2021. Additionally, the bank loan payable decreased by $316 to $1,744 in Fiscal 2022, as compared to $2,060 in Fiscal 2021.

Other income increased by $241 to $595 for Fiscal 2022, compared to $354 for Fiscal 2021. The increase in other income in Fiscal 2022 was mainly due to an increase of $189 and $198 from commission income received by China operation and exchange gain, respectively.

Government Grant

During Fiscal 2022, the Company received government grants amounting to $228, of which $139 was financial assistance received from the Singapore and Malaysia governments amid the COVID-19 pandemic.

During Fiscal 2021, the Company received government grants amounting to $514, of which $401 was financial assistance received from the Singapore and Malaysia governments amid the COVID-19 pandemic.

Income Tax (Expense) / Benefits

Income tax expense for Fiscal 2022 was $757, representing an increase of $529, as compared to income tax expense of $228 for Fiscal 2021. The change was primarily due to the Company fully utilizing its tax benefits, and as a result, was subject to tax in the Singapore operation.

At June 30, 2022, the Company had no federal net operating loss carryforwards, and a state net operating loss carryforward of $1,940, which expires in 2033. These carryovers may be subject to limitations under I.R.C. Section 382. 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 valuation allowance has been established against deferred tax assets recorded in the US and various foreign jurisdictions.

Profit / loss from Discontinued Operations

Profit from discontinued operations was $2 in Fiscal 2022, compared to loss from discontinued operations of $28 in Fiscal 2021. The Company discontinued its fabrication segment in fiscal year 2013.

Noncontrolling Interest

As of June 30, 2022, we held an indirect 55% interest each in Trio-Tech (Malaysia) Sdn. Bhd. (“TTM”), Trio-Tech (Kuala Lumpur) Sdn. Bhd. (“TTKL”), SHI and PT SHI, 76% interest in Prestal Enterprise Sdn. Bhd. (“Prestal”) and an indirect interest of 51% in Trio-Tech Jiangsu Co., Ltd. (“TTJS”). The noncontrolling interest for Fiscal 2022, in the net loss of subsidiaries, was $96, a change of $468 compared to a noncontrolling interest in the net loss of $564 for the previous fiscal year. The change in the noncontrolling interest was primarily attributable to the lower net loss generated by the Malaysia operation in Fiscal 2022 as compared to Fiscal 2021.

Net Income / (Loss) Attributable to Trio-Tech International Common Shareholders

Net income attributable to Trio-Tech International Common Shareholders for Fiscal 2022 was $2,395 compared to the net loss attributable to Trio-Tech International Common Shareholders of $591 for Fiscal 2021.

Earnings/(Loss) per Share

Basic earnings per share from continuing operations was $0.61 in Fiscal 2022, as compared to basic loss per share of $0.16 in Fiscal 2021. Basic loss per share from discontinued operations was $0.01 for Fiscal 2022 and $nil for Fiscal 2021.

Diluted earnings per share from continuing operations was $0.57 in Fiscal 2022, as compared to diluted loss per share $0.15 in Fiscal 2021. Diluted loss per share from discontinued operations was $nil for both Fiscal 2022 and 2021.

Income (loss) by Segment

The revenue, gross margin and income or loss from each segment for the years ended June 30, 2022 and 2021 are presented below. As the segment revenue and gross margin have been discussed in previous sections, only the comparison of income or loss from operations is discussed below.

Income from operations in the manufacturing segment was $275 in Fiscal 2022, a decrease of $101, as compared to $376 in Fiscal 2021. The decrease in net income was attributable to an increase in the operating expense of $137. Operating expense was $3,104 and $2,966 for fiscal years 2022 and 2021, respectively. The increase in operating expense was mainly due to an increase in selling expense of $38 and an increase of $223 in corporate overhead compared to the same period of last fiscal year. The increases were partially offset by a decrease of $132 in general and administrative expenses.

The increase in selling expense was primarily due to travelling expenses as travel restriction eased and economic activities resumed. The increase in corporate overhead was mainly attributable to an increase in payroll-related expense.

Profit from operations in the testing services segment in Fiscal 2022 was $1,313, compared to a loss of $997 in Fiscal 2021. The significant increase in operating profit was attributable to an increased gross profit in Malaysia and Thailand operations. Operating expense was $5,205 and $4,412 for fiscal years 2022 and 2021, respectively. The increase of $793 in operating expense was mainly due to an increase of $816 in general and administrative expense. The increases were partially offset by a decrease of $76 in corporate overhead expense. The increase in general and administrative expense was mainly due to higher payroll related expense in the Singapore and Malaysia operation and higher staff benefit expense in China operations.

Income from operations in the distribution segment was $1,525 in Fiscal 2022, as compared to $657 in Fiscal 2021. The increase was mainly due to the increase in gross margin of $928 and were partly offset by an increase in operating expense. Operating expense was $363 and $306 for the years ended June 30, 2022 and 2021, respectively. The increase of $57 in operating expense was mainly due to an increase of $59 in selling expense and $6 in general and administrative expense. The increases were partially offset by a decrease of $8 in corporate overhead. The increase in selling expense was mainly due to commission expense in Singapore operation as a result of an increase in commissionable revenue.

Loss from operations in the real estate segment was $119 in Fiscal 2022, as compared to $116 in Fiscal 2021. Operating expense was $67 in each of the years ended June 30, 2022 and 2021.

Corporate

The following table presents the income / (loss) from operations for Corporate for the years ended June 30, 2022 and 2021, respectively:

In Fiscal 2022, corporate operating loss was $641, a change of $651, compared to operating income of $10 in Fiscal 2021. The significant fluctuation was mainly due to increased stock option expenses in fiscal year 2022.

Liquidity

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

Net cash provided by operating activities increased by $485 to $2,123 for the year ended June 30, 2022, compared to $1,638 for the prior year. The increase in net cash provided by operating activities was primarily due to an increase in net income of $3,454, partially offset by a decrease in trade receivables receipts of $899, a decrease in other receivables of $672, a decrease in prepaid expenses and other current assets of $729, an increase in payments for operating lease liabilities of $387.

Net cash used in investing activities decreased by $123 to an outflow of $444 for the year ended June 30, 2022, from $567 for the prior year. The decrease in net cash used in investing activities was primarily due to cash inflows of $768 from the withdrawal of unrestricted deposits, partially offset by an outflow of $289 used for investments in restricted and unrestricted deposits and $356 used on additional property, plant and equipment.

Net cash provided by financing activities for the year ended June 30, 2022, was $911, representing an increase of $913 compared to outflow of $2 during the prior year. Net cash from financing activities increased mainly due to cash inflow of $43 and $1,921 from bank loans and lines of credits proceeds, respectively, partially offset by an increase in lines of credit payments of $954 and increase of $39 in bank loans payments.

We believe that our projected cash flows from operations, borrowing availability under our revolving lines of credit, cash on hand, trade credit and the secured bank loans will provide the necessary financial resources to meet our projected cash requirements for at least the next 12 months. The Company has filed the S3 registration statement on December 3, 2021. We may raise capital of US$10,000,000 from any combination of securities (common stock, warrants, debt securities or units) for expansion of the Company’s testing capacity and working capital purposes if necessary.

Capital Resources

Our working capital (defined as current assets minus current liabilities) has historically been generated primarily from the following sources: operating cash flow, availability under our revolving line of credit, and short-term loans. The working capital was $17,273 as of June 30, 2022, representing an increase of $2,073, or 13.6%, compared to working capital of $15,200 as of June 30, 2021. The increase in working capital was mainly due to increases in current assets, including cash and cash equivalents, trade account receivables, inventories, prepaid expense and other current assets, and decreases in current liabilities, including accounts payable, bank loans payable and finance leases. Such fluctuations were partially offset by decreases in current assets, including short-term deposits, and increases in current liabilities, including accrued expense, lines of credits and operating lease payable, as discussed above.

The majority of our capital expenditures are based on demands from our customers, as we are operating in a capital-intensive industry. Our capital expenditures were $1,468 and $1,112 for the years ended June 30, 2022 and 2021, respectively. The capital expenditures in Fiscal 2022 were mainly in the Singapore, China, Malaysia and Thailand operations, which provide testing services to our customers. We financed our capital expenditures and other operating expense through operating cash flows and long-term debts.

Our credit rating provides us with ready and adequate access to funds in the global market. At June 30, 2022, the Company had certain lines of credit that are collateralized by restricted deposits.

As of June 30, 2021, the Company had certain lines of credit that are collateralized by restricted deposits.

Off-Balance Sheet Arrangements

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