See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
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.
NOTES TO CONDENSED 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”) was incorporated in fiscal year ended June 30, 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 (“U.S.”). 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 first quarter of the fiscal year ended June 30, 2023 (“Fiscal 2023”), 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, Ireland 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.) | 52% | Batam, Indonesia |
Trio-Tech (Tianjin) Co., Ltd. * | 100% | Tianjin, China |
Trio-Tech (Jiangsu) Co., Ltd. (51% owned by Trio-Tech (SIP) Co., Ltd.) | 51% | Suzhou, China |
* 100% owned by Trio-Tech International Pte. Ltd.
The accompanying unaudited 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 intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements are presented in U.S. dollars unless otherwise stated. The accompanying condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. 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, 2022 (“Fiscal 2022”). The Company’s operating results are presented based on the translation of foreign currencies using the respective quarter’s average exchange rate.
The results of operations for the three months ended September 30, 2022 are not necessarily indicative of the results that may be expected for any other interim period or for the full year ending June 30, 2023.
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Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these consolidated financial statements are the estimated allowance for doubtful account receivables, reserve for obsolete inventory, impairments, provision of income tax, stock options and the deferred income tax asset allowance. Actual results could materially differ from those estimates.
Significant Accounting Policies. There have been no material changes to our significant accounting policies summarized in Note 1 “Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated Financial Statements included in our Annual Report on Form 10-K for Fiscal 2022.
2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02 updating Accounting Standards Codification (“ASC”) Topic 326: Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR") and Vintage Disclosures (“ASU 2022-02”), which require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The Company has completed its assessment and concluded that ASU 2022-02 has no significant impact to the Company’s consolidated financial statements.
In November 2021, FASB issued ASU 2021-10 ASC Topic 832: Government Assistance (“Topic 832”): Disclosures by Business Entities about Government Assistance (“ASU 2021-10”), which expected to increase transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance received. ASU 2021-10 is effective for financial statements issued for annual periods beginning after December 15, 2021 for all entities except not-for-profit entities and employee benefit plans within the scope of Topics 960, 962, and 965 on plan accounting. The Company has completed its assessment and concluded that ASU 2021-10 is applicable to the Company as the Company received government grants. The Company will make the necessary disclosures in the financial statements for Fiscal 2023.
In March 2020, FASB issued ASU 2020-04, updating ASC Topic 848: Reference Rate Reform (“Topic 848”): 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. ASU 2020-04 is effective for all entities as of March 12, 2020, and the Company may elect to apply ASU 2020-04 prospectively through December 31, 2022. The Company has completed its assessment and concluded that ASU 2020-04 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 (“Topic 326”) (“ASU 2016-13”) 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. Topic 326 is effective for the Company for annual periods beginning after December 15, 2022. The Company has completed its assessment and concluded that ASU 2016-03 has no significant impact to the Company’s consolidated financial statements.
Other new pronouncements issued but not yet effective until after September 30, 2022, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
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3. TERM DEPOSITS
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Short-term deposits | | $ | 2,941 | | | $ | 5,619 | |
Currency translation effect on short-term deposits | | | (112 | ) | | | (199 | ) |
Total short-term deposits | | | 2,829 | | | | 5,420 | |
Restricted term deposits | | | 1,680 | | | | 1,746 | |
Currency translation effect on restricted term deposits | | | (48 | ) | | | (68 | ) |
Total restricted term deposits | | | 1,632 | | | | 1,678 | |
Total term deposits | | $ | 4,461 | | | $ | 7,098 | |
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 noncurrent assets, as they relate to long-term obligations and will become unrestricted only upon discharge of the obligations. Short-term deposits represent bank deposits, which do not qualify as cash equivalents.
4. TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial conditions, and although management generally does not require collateral, letters of credit may be required from the customers in certain circumstances.
Senior management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. Management includes any accounts receivable balances that are determined to be uncollectible in the allowance for doubtful accounts. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, management believed the allowance for doubtful accounts as of September 30, 2022, and June 30, 2022, was adequate.
The following table represents the changes in the allowance for doubtful accounts:
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Beginning | | $ | 243 | | | $ | 311 | |
Additions charged to expenses | | | - | | | | 48 | |
Recovered | | | (17 | ) | | | (106 | ) |
Currency translation effect | | | (11 | ) | | | (10 | ) |
Ending | | $ | 215 | | | $ | 243 | |
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5. LOANS RECEIVABLE FROM PROPERTY DEVELOPMENT PROJECTS
The following table presents Trio-Tech (Chongqing) Co. Ltd (“TTCQ”)’s loan receivables from property development projects in China as of September 30, 2022.
| Loan Expiry | | Loan Amount | | Loan Amount |
| Date | | (RMB) | | (U.S. Dollars) |
Short-term loan receivables | | | | | |
JiangHuai (Project – Yu Jin Jiang An) | May 31, 2013 | | 2,000 | | 281 |
Less: allowance for doubtful receivables | | | (2,000) | | (281) |
Net loan receivables from property development projects | | | - | | - |
| | | | | |
Long-term loan receivables | | | | | |
Jun Zhou Zhi Ye | Oct 31, 2016 | | 5,000 | | 702 |
Less: transfer – down-payment for purchase of investment property | | | (5,000) | | (702) |
Net loan receivables from property development projects | | | - | | - |
The short-term loan receivables amounting to renminbi (“RMB”) 2,000, or approximately $281 arose due to 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 the fiscal year ended June 30, 2011 (“Fiscal 2011”). Based on TTI’s financial policy, a provision for doubtful receivables of $281 on the investment in JiangHuai was recorded during the fiscal year ended June 30, 2014 (“Fiscal 2014”). TTCQ did not generate other income from JiangHuai for the quarter ended September 30, 2022 or for Fiscal 2022. TTCQ is in the legal process of recovering the outstanding amount of approximately $281.
The loan amounting to RMB 5,000, or approximately $702, arose due to TTCQ entering into a Memorandum Agreement with JiaSheng Property Development Co. Ltd. (“JiaSheng”) to invest in their property development projects (Project B-48 Phase 2) located in Chongqing City, China in Fiscal 2011. The amount was unsecured and repayable at the end of the term. During the fiscal year ended June 30, 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 8).
6. INVENTORIES
Inventories consisted of the following:
| | Sept. 30, 2022 | | | June 30, 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Raw materials | | $ | 1,269 | | | $ | 1,764 | |
Work in progress | | | 2,211 | | | | 683 | |
Finished goods | | | 793 | | | | 238 | |
Less: provision for obsolete inventories | | | (625 | ) | | | (674 | ) |
Currency translation effect | | | (100 | ) | | | 247 | |
| | $ | 3,548 | | | $ | 2,258 | |
The following table represents the changes in provision for obsolete inventories:
| | Sept. 30, 2022 | | | June 30, 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Beginning | | $ | 674 | | | $ | 679 | |
Additions charged to expenses | | | - | | | | 17 | |
Usage – disposition | | | (38 | ) | | | (34 | ) |
Currency translation effect | | | (11 | ) | | | 12 | |
Ending | | $ | 625 | | | $ | 674 | |
7. INVESTMENT PROPERTIES
The following table presents the Company’s investment in properties in China as of September 30, 2022. The exchange rate is based on the market rate as of September 30, 2022.
| Investment Date / Reclassification | | Investment | | | Investment Amount | |
| Date | | Amount (RMB) | | | (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 - FuLi | Apr 08, 2010 | | | 4,025 | | | | 648 | |
Currency translation | | | | - | | | | (175 | ) |
Gross investment in rental property | | | 9,649 | | | | 1,354 | |
| | | | | | | | | |
Accumulated depreciation on rental property | Sep 30, 2022 | | | (7,643 | ) | | | (1,088 | ) |
Reclassified as “Assets held for sale”- MaoYe Property | July 01, 2018 | | | 2,822 | | | | 410 | |
Reclassification from “Assets held for sale”- MaoYe Property | Mar 31, 2019 | | | (1,029 | ) | | | (143 | ) |
| | | | (5,850 | ) | | | (821 | ) |
Net investment in property – China | | | 3,799 | | | | 533 | |
The following table presents the Company’s investment in properties in China as of June 30, 2022. The exchange rate is based on the market rate as of June 30, 2022.
| | Investment Date / Reclassification | | Investment | | | Investment Amount | |
| | Date | | Amount (RMB) | | | (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 - FuLi | | Apr 08, 2010 | | | 4,025 | | | | 648 | |
Currency translation | | | | | - | | | | (89 | ) |
Gross investment in rental property | | | | | 9,649 | | | | 1,440 | |
| | | | | | | | | | |
Accumulated depreciation on rental property | | Jun 30, 2022 | | | (7,523 | ) | | | (1,122 | ) |
Reclassified as “Assets held for sale”- MaoYe Property | | July 01, 2018 | | | 2,822 | | | | 410 | |
Reclassification from “Assets held for sale”- MaoYe Property | | Mar 31, 2019 | | | (1,029 | ) | | | (143 | ) |
| | | | | (5,730 | ) | | | (855 | ) |
Net investment in property – China | | | | | 3,919 | | | | 585 | |
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Rental Property I - MaoYe Property
In the fiscal year ended June 30, 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. During the year ended June 30, 2019, the Company sold thirteen of the fifteen units constituting the MaoYe Property. Management has decided not to sell the remaining two units of MaoYe properties in the near future, due to current conditions of the property market in China. A new lease agreement was entered into on February 10, 2022 for a period of 4 years at a monthly rate of RMB14, or approximately $2, after termination of the previous agreement. Pursuant to the agreement, monthly rental will increase by 5% each year.
Property purchased from MaoYe generated a rental income of $6 during the three months ended September 30, 2022, as compared to $2 for the same period in Fiscal 2022.
Depreciation expense for MaoYe was $4 for the three months ended September 30, 2022, as compared to $4 for the same period in Fiscal 2022.
Rental Property II - JiangHuai
During the year ended June 30, 2010 (“Fiscal 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. As of June 30, 2022, TTCQ had not received the title deed for properties purchased from JiangHuai. While the above is not expected to affect the property’s market value, the COVID-19 pandemic and current economic situation it is likely to cause delays in court to consummate the execution of the sale.
Property purchased from JiangHuai did not generate any rental income for the three months ended September 30, 2022 and 2021.
Depreciation expense for JiangHuai was $7 for the three months ended September 30, 2022, as compared to $7 for the same period in last Fiscal 2022.
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, the property was transferred to TTCQ in April 2013 and the title deed was received during the third quarter of Fiscal 2014.
One of the two commercial properties was leased from TTCQ by a third party under a two-year lease to rent out the 154.49 square meter space at a monthly rate of RMB9, or approximately $1, commencing from May 21, 2021, to May 23, 2023. This agreement was prematurely terminated in May 2022. As of mid August 2022, TTCQ had found a new tenant for this unit for a period of 1 year.
TTCQ is actively searching for tenants to occupy the one commercial properties, which is vacant as of the date of this Report.
Properties purchased from FuLi generated a rental income of $2 for the three months ended September 30, 2022, as compared to $9 for the same period in Fiscal 2022.
Depreciation expense for FuLi was $7 for the three months ended September 30, 2022, as compared to $8 for the same period in Fiscal 2022.
Summary
Total rental income for all investment properties in China was $8 for the three months ended September 30, 2022, as compared to $11 for the same period in Fiscal 2022.
Depreciation expenses for all investment properties in China were $18 for the three months ended September 30, 2022, as compared to $19 for the same period in Fiscal 2022.
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8. OTHER ASSETS
Other assets consisted of the following:
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
Down payment for purchase of investment properties * | | $ | - | | | $ | - | |
Down payment for purchase of property, plant and equipment | | | - | | | | - | |
Deposits for rental and utilities and others | | | 136 | | | | 142 | |
Currency translation effect | | | (15 | ) | | | (5 | ) |
Total | | $ | 121 | | | $ | 137 | |
*Down payment for purchase of investment properties included:
| | 2022 | |
| | RMB | | | U.S. Dollars | |
Original Investment (10% of 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 | |
Less: Effect of foreign currency exchange | | | - | | | | (65 | ) |
Less: Provision of Impairment loss on other assets | | | (10,207 | ) | | | (1,580 | ) |
* Down Payment for Purchase of Investment Properties | | $ | - | | | $ | - | |
| a) | In Fiscal 2011, the Company signed a Joint Venture agreement (the “Agreement”) with Jia Sheng Property Development Co. Ltd. (the “Developer”) to form a new company, Junzhou Co. Limited (“Joint Venture” or “Junzhou”), to jointly develop the “Singapore Themed Park” project (the “Project”). 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 RMB 5 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. In Fiscal 2014, the Company disposed of its entire 10% interest in the Joint Venture but, to date, has not received payment in full therefor. The Company recognized a disposal based on the recorded net book value of RMB 5 million, or equivalent to $803K, from net considerations paid, in accordance with GAAP under ASC Topic 845 Non-monetary Consideration. It is presented under “Other Assets” as noncurrent assets to defer the recognition of the gain on the disposal of the 10% interest in the Joint Venture investment until such time that the consideration is paid, so the gain can be ascertained. |
| b) | Amounts of RMB 5,000, or approximately $814, as disclosed in Note 7, 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 are to be delivered to TTCQ upon completion of the construction of the shop lots in Singapore Themed Resort Project. The initial targeted date of completion was in the fiscal year ended June 30, 2017. However, the progress has been delayed as the developer is currently undergoing asset reorganization process, to re-negotiate with their creditors to complete the project. During the fourth quarter of Fiscal 2021, the Company accrued an impairment charge of $1,580 related to the doubtful recovery of the down payment on property in the Singapore Theme Resort Project in Chongging, China. The Company elected to take this non-cash impairment charge due to 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 in China and its relevant government policies, together with effects of the ongoing pandemic. The local court is verifying the documents due to the sizable number of creditors as of September 30, 2022. |
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9. 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 ready and adequate access to funds in global markets.
As of September 30, 2022, the Company had certain lines of credit that are collateralized by restricted deposits.
Entity with | | Type of | | Interest | | Credit | | Unused |
Facility | | Facility | | Rate | | Limitation | | Credit |
Trio-Tech International Pte. Ltd., Singapore | | Lines of Credit | | Ranging from 1.85% to 5.5% | | $ | 4,397 | | $ | 4,397 |
Universal (Far East) Pte. Ltd. | | Lines of Credit | | Ranging from 1.85% to 5.5% | | $ | 1,047 | | $ | 565 |
Trio-Tech Malaysia Sdn. Bhd. | | Revolving credit | | Cost of Funds Rate +2% | | $ | 327 | | $ | 327 |
As of June 30, 2022, the Company had certain lines of credit that are collateralized by restricted deposits.
Entity with | | Type of | | Interest | | Credit | | Unused |
Facility | | Facility | | Rate | | Limitation | | Credit |
Trio-Tech International Pte. Ltd., Singapore | | Lines of Credit | | Ranging from 1.85% to 5.5% | | $ | 4,090 | | $ | 3,651 |
Universal (Far East) Pte. Ltd. | | Lines of Credit | | Ranging from 1.85% to 5.5% | | $ | 1,076 | | $ | 586 |
Trio-Tech Malaysia Sdn. Bhd. | | Revolving credit | | Cost of Funds Rate +2% | | $ | 338 | | $ | 338 |
10. ACCRUED EXPENSE
Accrued expense consisted of the following:
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Payroll and related costs | | $ | 2,469 | | | $ | 2,158 | |
Commissions | | | 133 | | | | 116 | |
Customer deposits | | | 9 | | | | 10 | |
Legal and audit | | | 346 | | | | 320 | |
Sales tax | | | 76 | | | | 531 | |
Utilities | | | 215 | | | | 273 | |
Warranty | | | 18 | | | | 16 | |
Accrued purchase of materials and property, plant and equipment | | | 456 | | | | 905 | |
Provision for reinstatement | | | 298 | | | | 308 | |
Deferred income | | | 49 | | | | 55 | |
Contract liabilities | | | 1,218 | | | | 933 | |
Other accrued expense | | | 829 | | | | 571 | |
Currency translation effect | | | 63 | | | | (192 | ) |
Total | | $ | 6,179 | | | $ | 6,004 | |
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11. 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 upon 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.
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Beginning | | $ | 16 | | | $ | 14 | |
Additions charged to cost and expense | | | 1 | | | | 7 | |
Reversal | | | (1 | ) | | | (4 | ) |
Currency translation effect | | | 2 | | | | (1 | ) |
Ending | | $ | 18 | | | $ | 16 | |
12. BANK LOANS PAYABLE
Bank loans payable consisted of the following:
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Note payable denominated in the Malaysian Ringgit for expansion plans in Malaysia, maturing in April 2028, bearing interest at the bank’s prime rate less 2.00% (3.6% and 3.791% at September 30, 2022 and June 30, 2022) per annum, with monthly payments of principal plus interest through August 2028, collateralized by the acquired building with a carrying value of $2,375 and $2,372, as at September 30, 2022 and June 30, 2022, respectively. | | $ | 1,254 | | | $ | 1,392 | |
Financing arrangement at fixed interest rate 3.2% per annum, with monthly payments of principal plus interest through July 2025. | | | 114 | | | | 128 | |
Financing arrangement at fixed interest rate 3.0% per annum, with monthly payments of principal plus interest through December 2026. | | | 206 | | | | 224 | |
Financing arrangement at fixed interest rate 3.0% per annum, with monthly payments of principal plus interest through August 2027. | | | 168 | | | | - | |
Total bank loans payable | | $ | 1,742 | | | $ | 1,744 | |
| | | | | | | | |
Current portion of bank loans payable | | | 508 | | | | 503 | |
Currency translation effect on current portion of bank loans | | | (17 | ) | | | (31 | ) |
Current portion of bank loans payable | | | 491 | | | | 472 | |
Long-term portion of bank loans payable | | | 1,295 | | | | 1,357 | |
Currency translation effect on long-term portion of bank loans | | | (44 | ) | | | (85 | ) |
Long-term portion of bank loans payable | | $ | 1,251 | | | | 1,272 | |
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Future minimum payments (excluding interest) as at September 30, 2022, were as follows:
Remainder of Fiscal 2023 | | $ | 367 | |
2024 | | | 497 | |
2025 | | | 270 | |
2026 | | | 242 | |
2027 | | | 221 | |
Thereafter | | | 145 | |
Total obligations and commitments | | $ | 1,742 | |
Future minimum payments (excluding interest) as at June 30, 2022, were as follows:
2023 | | $ | 472 | |
2024 | | | 481 | |
2025 | | | 246 | |
2026 | | | 214 | |
2027 | | | 190 | |
Thereafter | | | 141 | |
Total obligations and commitments | | $ | 1,744 | |
13. COMMITMENTS AND CONTINGENCIES
The Company had capital commitments in China for the purchase of equipment and other related infrastructure costs amounting to RMB17,203, or approximately $2,415 as of September 30, 2022. These commitments are primarily due within the next 24 months.
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.
14. BUSINESS SEGMENTS
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 (assembly of equipment that tests the structural integrity of integrated circuits and other products), distribution of various products from other manufacturers in Singapore and Asia and the real estate segment in China.
The cost of equipment, current year investment in new equipment and depreciation expense are allocated into respective segments based on primary purpose for which the equipment was acquired.
All intersegment sales were sales from the manufacturing segment to the testing and distribution segment. Total intersegment sales were $554 and $588 for 3 months ended September 30, 2022, and September 30, 2021 respectively. Corporate assets consisted primarily of cash and prepaid expense. Corporate expense consisted primarily of stock option expense, salaries, insurance, professional expenses and directors' fees. Corporate expenses are allocated to the four segments on a predetermined fixed amount calculated based on the annual budgeted sales, except the Malaysia operation, which is calculated based on actual sales. The following segment information table includes segment operating income or loss after including corporate expenses allocated to the segments, which gets eliminated in the consolidation.
The following segment Information is unaudited for the three months ended September 30, 2022, and September 30, 2021:
Business Segment Information:
| Three Months | | | | | | | | | | | | | | | | | | | | |
| Ended | | Net | | | Operating | | | Total | | | Depr. And | | | Capital | |
| Sept. 30, | | Revenue | | | Income / (Loss) | | | Assets | | | Amort. | | | Expenditures | |
Manufacturing | 2022 | | $ | 3,585 | | | $ | 176 | | | $ | 12,791 | | | $ | 97 | | | $ | - | |
| 2021 | | $ | 3,562 | | | $ | 300 | | | $ | 18,558 | | | $ | 103 | | | $ | 60 | |
| | | | | | | | | | | | | | | | | | | | | |
Testing Services | 2022 | | | 6,364 | | | | 1,087 | | | | 27,770 | | | | 767 | | | | 1,156 | |
| 2021 | | | 4,600 | | | | 536 | | | | 18,363 | | | | 585 | | | | 377 | |
| | | | | | | | | | | | | | | | | | | | | |
Distribution | 2022 | | | 1,982 | | | | 265 | | | | 1,603 | | | | - | | | | - | |
| 2021 | | | 1,998 | | | | 254 | | | | 1,288 | | | | 2 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Real Estate | 2022 | | | 8 | | | | (14 | ) | | | 1,490 | | | | 18 | | | | - | |
| 2021 | | | 11 | | | | (23 | ) | | | 1,588 | | | | 19 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | |
Corporate & Unallocated | 2022 | | | - | | | | (447 | ) | | | 151 | | | | - | | | | - | |
| 2021 | | | - | | | | (97 | ) | | | 314 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Total Company | 2022 | | $ | 11,939 | | | $ | 1,067 | | | $ | 43,805 | | | $ | 882 | | | $ | 1,156 | |
| 2021 | | $ | 10,171 | | | $ | 970 | | | $ | 40,111 | | | $ | 709 | | | $ | 438 | |
15. OTHER INCOME
Other income consisted of the following:
| | Three Months Ended | |
| | September 30, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | |
| | | | | | | | |
Interest income | | $ | 18 | | | $ | 22 | |
Other rental income | | | 27 | | | | 29 | |
Exchange gain | | | 70 | | | | 34 | |
Bad debt recovery | | | - | | | | 2 | |
Government grant | | | 21 | | | | 70 | |
Other miscellaneous income | | | 43 | | | | 4 | |
Total | | $ | 179 | | | $ | 161 | |
16. 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 2016 to 2022 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.
Due to the enactment of the 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. GILTI expense was $43 and $23 for the period ended September 30, 2022, and 2021, respectively.
The Company's income tax expense was $225 for the three months ended September 30, 2022, as compared to $180 for the same period in Fiscal 2022. Our effective tax rate (“ETR”) from continuing operations was 19% and 16% for the quarters ended September 30, 2022 and September 30, 2021, respectively. The increase in income tax expense and effective tax rate was due to the following:
1. | The Singapore operations incurred higher income tax due to higher income generated in period ended September 30,2022 compared to same period last fiscal year. |
2. | The Company recognizing higher GILTI expenses due to higher income derived from controlled foreign corporation |
The Company accrues penalties and interest related to unrecognized tax benefits when necessary as a component of penalties and interest expense, respectively. The Company had no unrecognized tax benefits or related accrued penalties or interest expense at September 30, 2022.
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 U.S. and various foreign jurisdictions.
17. REVENUE
The Company generates revenue primarily from 3 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.
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.
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 the required acceptance criteria, and when the installation of the system is deemed perfunctory). |
Not all 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 which are mainly assurance warranty and are not separate performance obligations. Warranty provided for some customized products may be classified as 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 renders 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 include warranty, late delivery penalty and reimbursement to solve nonconformance 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 and Taiwan. 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 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.
Contract Balances
The timing of revenue recognition, billings and collections may result in billed accounts receivable, unbilled receivables, contract assets, customer advances, deposits and 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.
The following table is the reconciliation of contract balances.
| | Sept. 30 | | | June 30 | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
| | | | | | | | |
Trade Accounts Receivable | | | 12,491 | | | | 11,592 | |
Accounts Payable | | | 3,469 | | | | 2,401 | |
Contract Liabilities | | | 1,218 | | | | 933 | |
Remaining Performance Obligation
As at September 30, 2022, the Company had $235 of remaining performance obligations, which represents our obligation to deliver products and services within two years.
As at June 30, 2022, the Company had $326 of remaining performance obligations, which represents our obligation to deliver products and services.
Refer to Note 14 “Business Segments” of the Notes to Condensed Consolidated Financial Statements for information related to revenue.
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18. EARNINGS PER SHARE
Options to purchase 636,375 shares of Common Stock at exercise prices ranging from $3.75 to $7.76 per share were outstanding as of September 30, 2022. 84,625 stock options were excluded in the computation of diluted earnings per share (“EPS”) for the three months ended September 30, 2022, because they were anti-dilutive.
Options to purchase 674,500 shares of Common Stock at exercise prices ranging from $2.53 to $5.98 per share were outstanding as of September 30, 2021. 94,011 stock options were included in the computation of diluted EPS for the three months ended September 30, 2021, because they 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 | |
| | September 30, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | |
Income attributable to Trio-Tech International common shareholders from continuing operations, net of tax | | $ | 882 | | | $ | 914 | |
Income attributable to Trio-Tech International common shareholders from discontinued operations, net of tax | | | - | | | | 3 | |
Net Income attributable to Trio-Tech International common shareholders | | $ | 882 | | | $ | 917 | |
| | | | | | | | |
Weighted average number of common shares outstanding – basic | | | 4,077 | | | | 3,913 | |
Dilutive effect of stock options | | | 81 | | | | 94 | |
Number of shares used to compute earnings per share – diluted | | | 4,158 | | | | 4,007 | |
| | | | | | | | |
Basic earnings per share from continuing operations attributable to Trio-Tech International | | | 0.22 | | | | 0.23 | |
| | | | | | | | |
Basic earnings per share from discontinued operations attributable to Trio-Tech International | | | - | | | | - | |
Basic earnings per share from net income attributable to Trio-Tech International | | $ | 0.22 | | | $ | 0.23 | |
| | | | | | | | |
Diluted earnings per share from continuing operations attributable to Trio-Tech International | | | 0.21 | | | | 0.23 | |
| | | | | | | | |
Diluted earnings per share from discontinued operations attributable to Trio-Tech International | | | - | | | | - | |
Diluted earnings per share from net income attributable to Trio-Tech International | | $ | 0.21 | | | $ | 0.23 | |
19. 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” and, together with the 2007 Employee Plan, the “2007 Plans”), each of which was approved by the shareholders on December 3, 2007. Each of the 2007 Plans were amended during the term of such plan to increase the number of shares covered thereby. Each of the 2007 Plans terminated by their respective terms on September 24, 2017.
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.
Assumptions
The fair value for the stock options granted to both employees and directors was estimated using the Black-Scholes option pricing model with the following weighted average assumptions, assuming:
● | An expected life varying from 2.50 to 3.25 years, calculated in accordance with the guidance provided in SEC Staff bulletin No. 110 for plain vanilla options using the simplified method, since our equity shares have been publicly traded for only a limited period of time and we did not have sufficient historical exercise data at the grant date of the options; |
● | A risk-free interest rate varying from 0.11% to 3.15% (2022: 0.11% to 2.35%); |
● | no expected dividend payments and |
● | expected volatility of 47.3% to 73.85% (2022: 45.38% to 55.59%). |
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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. The Company’s Board of Directors approved an amendment to the 2017 Employee Plan in December, 2021 to increase the shares covered thereby from 300,000 shares to an aggregate of 600,000 shares, which amendment was approved by the Company’s shareholders at the annual meeting held in December 2021. 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 first quarter of Fiscal 2023, 25,000 stock options were granted under the 2017 Employee Plan. There were 5,000 stock options exercised during the three-month period ended September 30, 2022. The Company recognized $32 in stock-based compensation expense during the three months ended September 30, 2022.
During the first quarter of Fiscal 2022, the Company did not grant any options pursuant to the 2017 Employee Plan. There were no stock options exercised during the three-month period ended September 30, 2021. The Company recognized $12 in stock-based compensation expense during the three months ended September 30, 2021.
As of September 30, 2022, there were vested stock options granted under the 2017 Employee Plan covering a total of 131,750 shares of Common Stock. The weighted-average exercise price was $4.80 and the weighted average remaining contractual term was 1.95 years.
As of September 30, 2021, there were vested stock options granted under the 2017 Employee Plan covering a total of 164,750 shares of Common Stock. The weighted average exercise price was $4.35 and the weighted average remaining contractual term was 2.49 years.
A summary of option activities under the 2017 Employee Plan during the three months period ended September 30, 2022, is presented as follows:
| | | | | | Weighted | | | Weighted Average Remaining | | | Aggregate | |
| | | | | | Average | | | Contractual | | | Intrinsic | |
| | Options | | | Exercise Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | | | | | | |
Outstanding at July 1, 2022 | | | 236,375 | | | $ | 5.21 | | | | 2.61 | | | $ | 87 | |
Granted | | | 25,000 | | | | 5.18 | | | | - | | | | - | |
Exercised | | | (5,000 | ) | | | 3.75 | | | | - | | | | - | |
Forfeited or expired | | | (40,000 | ) | | | - | | | | - | | | | - | |
Outstanding at September 30, 2022 | | | 216,375 | | | $ | 5.16 | | | $ | 2.74 | | | $ | 106,419 | |
Exercisable at September 30, 2022 | | | 131,750 | | | $ | 4.80 | | | $ | 1.95 | | | $ | 80,314 | |
A summary of the status of the Company’s non-vested employee stock options during the three months ended September 30, 2022, is presented below:
| | | | | Weighted Average | |
| | | Options | | | Grant-Date Fair Value | |
| | | | | | | | |
Non-vested at July 1, 2022 | | | 75,875 | | | $ | 5.98 | |
Granted | | | 25,000 | | | | 5.18 | |
Vested | | | (16,250 | ) | | | - | |
Non-vested at September 30, 2022 | | | 84,625 | | | $ | 5.72 | |
A summary of option activities under the 2017 Employee Plan during the three months period ended September 30, 2021, is presented as follows:
| | | | | | Weighted | | | Weighted Average Remaining | | | Aggregate | |
| | | | | | Average | | | Contractual | | | Intrinsic | |
| | Options | | | Exercise Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | | | | | | |
Outstanding at July 1, 2021 | | | 267,000 | | | $ | 4.21 | | | | 3.22 | | | $ | 290 | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Forfeited or expired | | | - | | | | - | | | | - | | | | - | |
Outstanding at September 30, 2021 | | | 267,000 | | | $ | 4.21 | | | $ | 2.97 | | | $ | 170 | |
Exercisable at September 30, 2021 | | | 164,750 | | | $ | 4.35 | | | $ | 2.49 | | | $ | 100 | |
A summary of the status of the Company’s non-vested employee stock options during the three months period ended September 30, 2021, is presented below:
| | | | | Weighted Average | |
| | | Options | | | Grant-Date Fair Value | |
| | | | | | | | |
Non-vested at July 1, 2021 | | | 102,250 | | | $ | 2.29 | |
Granted | | | - | | | | - | |
Vested | | | - | | | | - | |
Forfeited | | | - | | | | - | |
Non-vested at September 30, 2021 | | | 102,250 | | | $ | 2.29 | |
2007 Employee Stock Option Plan
The Company’s 2007 Employee Plan permitted the issuance of options to employees. As of the last amendment thereof, the 2007 Employee Plan covered an aggregate of 600,000 shares of the Company’s Common Stock. The 2007 Employee Plan terminated by its terms on September 24, 2017 and no further options may be granted thereunder. Options outstanding thereunder continue to remain outstanding and in effect in accordance with their terms.
There were no options exercised during the three months ended September 30, 2022, and September 30, 2021. The Company did not recognize any stock-based compensation expense during the three months ended September 30, 2022, and September 30, 2021.
As of July 1, 2022 and September 30, 2022, there were no vested or unvested stock options outstanding under the 2007 Employee Plan.
As of September 30, 2021, there were vested stock options granted under the 2007 Employee Plan covering a total of 37,500 shares of Common Stock. The weighted average exercise price was $4.14 and the weighted average remaining contractual term was 0.49 years.
A summary of option activities under the 2007 Employee Plan during the three months ended September 30 2021, is presented as follows:
| | | | | | Weighted | | | Weighted Average Remaining | | | Aggregate | |
| | | | | | Average | | | Contractual | | | Intrinsic | |
| | Options | | | Exercise Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | | | | | | |
Outstanding at July 1, 2021 | | | 37,500 | | | $ | 4.14 | | | | 0.75 | | | $ | 34 | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Forfeited or expired | | | - | | | | - | | | | - | | | | - | |
Outstanding at September 30, 2021 | | | 37,500 | | | $ | 4.14 | | | $ | 0.49 | | | $ | 3 | |
Exercisable at September 30, 2021 | | | 37,500 | | | $ | 4.14 | | | $ | 0.49 | | | $ | 3 | |
There were no non-vested employee stock options during the three months ended September 30, 2021.
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2017 Directors Equity Incentive Plan
The 2017 Directors Plan initially covered an aggregate of 300,000 shares of the Company’s common stock. The Company’s Board of Directors approved an amendment to the 2017 Directors Plan in September 2020 to increase the shares covered thereby from 300,000 shares to an aggregate of 600,000 shares, which amendment was approved by the Company’s shareholders at the annual meeting held in December 2020. The 2017 Directors Plan permits the grant of options to its directors in the form of nonqualified options and restricted stock. The exercise price of the nonqualified options is required to be 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 quarter of Fiscal 2023 and Fiscal 2022, the Company did not grant any options pursuant to the 2017 Directors Plan. There were no stock options exercised and the Company did not recognize any stock-based compensation expense during the three months ended September 30, 2022 and 2021.
As all 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 September 30, 2022, or September 30, 2021.
As of September 30, 2022, there were vested stock options granted under the 2017 Directors Plan covering a total of 420,000 shares of Common Stock. The weighted average exercise price was $5.10 and the weighted average remaining contractual term was 2.57 years.
As of September 30, 2021, there were vested stock options granted under the 2017 Directors Plan covering a total of 320,000 shares of Common Stock. The weighted average exercise price was $4.27 and the weighted average remaining contractual term was 2.97 years.
A summary of option activities under the 2017 Directors Plan during the three months ended September 30, 2022, is presented as follows:
| | | | | | Weighted | | | Weighted Average Remaining | | | Aggregate | |
| | | | | | Average | | | Contractual | | | Intrinsic | |
| | Options | | | Exercise Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | | | | | | |
Outstanding at July 1, 2022 | | | 420,000 | | | $ | 5.10 | | | | 2.85 | | | $ | 228 | |
Granted | | | - | | | | - | | | | | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Forfeited or expired | | | - | | | | - | | | | - | | | | - | |
Outstanding at September 30, 2022 | | | 420,000 | | | $ | 5.10 | | | $ | 2.57 | | | $ | 278 | |
Exercisable at September 30, 2022 | | | 420,000 | | | $ | 5.10 | | | $ | 2.57 | | | $ | 278 | |
A summary of option activities under the 2017 Directors Plan during the three months ended September 30, 2021, is presented as follows:
| | | | | | Weighted | | | Weighted Average Remaining | | | Aggregate | |
| | | | | | Average | | | Contractual | | | Intrinsic | |
| | Options | | | Exercise Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | | | | | | |
Outstanding at July 1, 2021 | | | 320,000 | | | $ | 4.27 | | | | 3.22 | | | $ | 340 | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Forfeited or expired | | | - | | | | - | | | | - | | | | - | |
Outstanding at September 30, 2022 | | | 320,000 | | | $ | 4.27 | | | $ | 2.97 | | | $ | 210 | |
Exercisable at September 30, 2022 | | | 320,000 | | | $ | 4.27 | | | $ | 2.97 | | | $ | 210 | |
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2007 Directors Equity Incentive Plan
The Company’s 2007 Directors Plan permitted the grant of stock options to its directors in the form of nonqualified options and restricted stock. As of the last amendment thereof, the 2007 Directors Plan covered an aggregate of 500,000 shares of the Company’s Common Stock. The 2007 Directors Plan terminated by its terms on September 24, 2017, and no further options may be granted thereunder. Options outstanding thereunder continue to remain outstanding and in effect in accordance with their terms.
There were no stock options exercised during the three months ended September 30, 2022 and 2021. The Company did not recognize any stock-based compensation expense during the three months ended September 30, 2022 and 2021.
As of July 1, 2022 and September 30, 2022, there were no vested stock options outstanding under the 2007 Directors Plan.
As of September 30, 2022, there were no vested stock options granted under the 2007 Directors Plan.
As of September 30, 2021, there were vested stock options granted under the 2007 Directors Plan covering a total of 50,000 shares of Common Stock. The weighted average exercise price was $4.14 and the weighted average remaining contractual term was 0.49 years.
A summary of option activities under the 2007 Directors Plan during the three months ended September 30, 2021 is presented as follows:
| | | | | | Weighted | | | Weighted Average Remaining | | | Aggregate | |
| | | | | | Average | | | Contractual | | | Intrinsic | |
| | Options | | | Exercise Price | | | Term (Years) | | | Value | |
| | | | | | | | | | | | | | | | |
Outstanding at July 1, 2021 | | | 50,000 | | | $ | 4.14 | | | | 0.75 | | | $ | 45 | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Forfeited or expired | | | - | | | | - | | | | - | | | | - | |
Outstanding at September 30, 2021 | | | 50,000 | | | $ | 4.14 | | | $ | 0.49 | | | $ | 4 | |
Exercisable at September 30, 2021 | | | 50,000 | | | $ | 4.14 | | | $ | 0.49 | | | $ | 4 | |
20. LEASES
Company as Lessor
Operating leases under which the Company is the lessor arise from leasing 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 expense relating to the property held as investments in operating leases was $17 and $18 for 3 months ended September 30, 2022, and September 30, 2021, respectively.
Future minimum rental income in China and Thailand to be received from Fiscal 2023 to the fiscal year ended June 30, 2027 (“Fiscal 2027”) on noncancelable operating leases is contractually due as follows as of September 30, 2022:
Remainder of fiscal 2023 | | $ | 86 | |
Fiscal 2024 | | | 133 | |
Fiscal 2025 | | | 135 | |
Fiscal 2026 | | | 46 | |
Fiscal 2027 | | | 10 | |
| | $ | 410 | |
Future minimum rental income in China and Thailand to be received from Fiscal 2023 to Fiscal 2024 on non-cancelable operating leases is contractually due as follows as of June 30, 2022:
2023 | | $ | 6 | |
2024 | | $ | 27 | |
2025 | | $ | 28 | |
2026 | | $ | 29 | |
2027 | | $ | 10 | |
| | $ | 100 | |
Sales-type leases under which the Company is the lessor arise from the lease of four units of chiller systems. The Company classifies its lease arrangements at inception of the arrangement. The lease term is three years, contains an automatic transfer of title at the end of the lease term and a guarantee of residual value at the end of the lease term. The customer is required to pay for executory costs such as taxes.
Financing receivables, consisting of net investment in sales-type leases and receivables from financed sales of four units of chiller systems are as follows:
Components of Lease Balances | | Sept. 30, | |
| | 2022 | |
Assets | | | | |
Gross financial sales receivable | | $ | 33 | |
Unearned finance income | | | (2 | ) |
Financed sales receivable | | $ | 31 | |
| | | | |
Net financed sales receivables due within one year | | $ | 20 | |
Net financed sales receivables due after one year | | $ | 11 | |
As of September 30, 2022, the financed sale receivables had a weighted average effective interest rate of 11.2% and weighted average remaining lease term of 1.5 years.
Company as Lessee
The Company is the lessee under operating leases for corporate offices and research and development facilities with remaining lease terms of one year to four years and finance leases for plant and equipment.
Supplemental balance sheet information related to leases was as follows (in thousands):
| | Sept. 30, | | | June 30, | |
| | 2022 | | | 2022 | |
| | (Unaudited) | | | | | |
Finance Leases (Plant and Equipment) | | | | | | | | |
Plant and equipment, at cost | | $ | 1,671 | | | $ | 1,727 | |
Accumulated depreciation | | | (1,066 | ) | | | (1,179 | ) |
Plant and Equipment, Net | | $ | 605 | | | $ | 548 | |
| | | | | | | | |
Current portion of finance leases | | $ | 104 | | | $ | 118 | |
Net of current portion of finance leases | | | 91 | | | | 119 | |
Total Finance Lease Liabilities | | $ | 195 | | | $ | 237 | |
| | | | | | | | |
Operating Leases (Corporate Offices, Research and Development Facilities) | | | | | | | | |
Operating lease right-of-use assets | | $ | 2,759 | | | $ | 3,152 | |
Operating lease right-of-use assets, Net | | $ | 2,759 | | | $ | 3,152 | |
Current portion of operating leases | | | 1,130 | | | | 1,218 | |
Net of current portion of operating leases | | | 1,629 | | | | 1,934 | |
Total Operating Lease Liabilities | | $ | 2,759 | | | $ | 3,152 | |
| | Three Months Ended | |
| | Sept. 30, | | | Sept. 30, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | |
Lease Cost | | | | | | | | |
Finance lease cost: | | | | | | | | |
Interest on finance lease | | $ | 16 | | | $ | 6 | |
Amortization of right-of-use assets | | | 48 | | | | 28 | |
Total finance lease cost | | | 64 | | | | 34 | |
| | | | | | | | |
Operating lease cost | | $ | 380 | | | $ | 242 | |
Other information related to leases was as follows (in thousands except lease term and discount rate):
| | Three Months Ended | |
| | Sept. 30, | | | Sept. 30, | |
| | 2022 | | | 2021 | |
| | | (Unaudited) | | | | (Unaudited) | |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | | | | | | |
Operating cash flows from finance leases | | $ | (16 | ) | | $ | (6 | ) |
Operating cash flows from operating leases | | | (380 | ) | | | (146 | ) |
Finance cash flows from finance leases | | | (36 | ) | | | (53 | ) |
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities | | | | | | | - | |
| | | | | | | | |
Weighted-Average Remaining Lease Term: | | | | | | | | |
Finance leases | | | 1.79 | | | | 2.72 | |
Operating leases | | | 2.83 | | | | 3.64 | |
Weighted-Average Discount Rate: | | | | | | | | |
Finance leases | | | 3.23 | % | | | 3.56 | % |
Operating leases | | | 5.52 | % | | | 4.57 | % |
As of September 30, 2022, the maturities of the Company’s operating and finance lease liabilities are as follow:
| | Operating Lease Liabilities | | | Finance Lease Liabilities | |
Fiscal Year | | | | | | | | |
Remainder of Fiscal 2023 | | | 1,969 | | | | 110 | |
2024 | | | 1,005 | | | | 89 | |
2025 | | | 552 | | | | 7 | |
2026 | | | 399 | | | | - | |
Thereafter | | | 65 | | | | - | |
Total future minimum lease payments | | | 2,990 | | | | 206 | |
Less: amount representing interest | | | (231 | ) | | | (11 | ) |
Present value of net minimum lease payments | | | 2,759 | | | | 195 | |
| | | | | | | | |
Presentation on statement of financial position | | | | | | | | |
Current | | | 1,130 | | | | 104 | |
Non-Current | | | 1,629 | | | | 91 | |
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As of June 30, 2022, future minimum lease payments under finance leases and noncancelable operating leases were as follows:
| | Operating Lease Liabilities | | | Finance Lease Liabilities | |
Fiscal Year | | | | | | | | |
2023 | | | 1,357 | | | | 129 | |
2024 | | | 1,032 | | | | 104 | |
2025 | | | 554 | | | | 20 | |
2026 | | | 423 | | | | - | |
Thereafter | | | 69 | | | | - | |
Total future minimum lease payments | | | 3,435 | | | | 253 | |
Less: amount representing interest | | | (283 | ) | | | (16 | ) |
Present value of net minimum lease payments | | | 3,152 | | | | 237 | |
| | | | | | | | |
Presentation on statement of financial position | | | | | | | | |
Current | | | 1,218 | | | | 118 | |
Non-Current | | | 1,934 | | | | 119 | |
21. 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 three months ended September 30, 2022 and 2021.
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 loans payable 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.
22. CONCENTRATION OF CUSTOMERS
The Company had two major customers that accounted for the following revenue and trade account receivables:
| | For the Period Ended Sept. 30, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | | | (Unaudited) | |
Revenue | | | | | | | | |
- Customer A | | | 38.9 | % | | | 40.3 | % |
- Customer B | | | 16.4 | % | | | 13.0 | % |
Trade Account Receivables | | | | | | | | |
- Customer A | | | 36.7 | % | | | 38.4 | % |
- Customer B | | | 16.9 | % | | | 13.6 | % |
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TRIO-TECH INTERNATIONAL AND SUBSIDIARIES