TRIO-TECH INTERNATIONAL 10-K

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. For purposes of this Management ’ s Discussion and Analysis within this Annual Report, all monetary amounts are stated in thousands except for par values and per share amounts, unless otherwise stated. During the years ended June 30, 2024 (“ Fiscal 2024 ”) and June 30, 2023 (“ Fiscal 2023 ”), Trio-Tech International operated in four segments: Manufacturing, Testing, Distribution, and Real Estate. During Fiscal 2024, revenue from the Manufacturing, Testing, Distribution, and Real Estate segments represented 37.9%, 42.4%, 19.6% and 0.1% of our revenue, respectively, as compared to 32.0%, 53.4%, 14.5% and 0.1% respectively, during Fiscal 2023. Overview Our core business is and historically has been in the semiconductor industry, including manufacturing of test equipment, testing services, and distribution of test and other semiconductor equipment and electronic components. TTI develops and manufactures an extensive range of test equipment used in the “front-end” and the “back-end” manufacturing processes of semiconductors. Our equipment includes leak detectors, autoclaves, centrifuges, burn-in systems and boards, HAST testers, temperature-controlled chucks, and more. TTI provides comprehensive electrical, environmental, and burn-in testing services to semiconductor manufacturers in our testing laboratories. In addition to marketing our proprietary products, we distribute complementary products made by manufacturers around the world. We act as value-added resellers by enhancing the value of the distributed products by customizing them to the needs of our customers through our expert design, engineering and integration. We also support our customers as their extended research and development arm in product design, leveraging the expert skills of our component engineers and design engineers. Revenue from the semiconductor industry, or our Manufacturing, Testing and Distribution segments, accounted for more than 99.9% of our total revenue for the years ended June 30, 2024 and 2023, respectively. Our Real Estate segment generates rental income and investment income from real estate investments made in Chongqing, China. No other investment income was recorded as revenue by the Real Estate segment in either Fiscal 2024 or Fiscal 2023. Fiscal 2024 Highlights ● Total revenue decreased by $938, or 2.2%, to $42,312 in Fiscal 2024, as compared to $43,250 in Fiscal 2023. ● Manufacturing segment revenue increased by $2,230, or 16.1%, to $16,057 in Fiscal 2024, as compared to $13,827 in Fiscal 2023. ● Testing segment revenue was $17,933 in Fiscal 2024, a decrease of $5,197, or 22.5%, as compared to $23,130 in Fiscal 2023. 7 Table of Contents ● Distribution segment revenue was $8,297 in Fiscal 2024, an increase of $2,027, or 32.3%, as compared to $6,270 in Fiscal 2023. ● Real Estate segment revenue increased by $2 to $25 in Fiscal 2024, as compared to $23 in Fiscal 2023. ● Overall gross profit margin decreased by 1.7% to 25.4% in Fiscal 2024, as compared to 27.1% in Fiscal 2023. ● General and administrative expense was $8,387 in Fiscal 2024 as compared to $8,403 in Fiscal 2023. ● Selling expense increased by $174, or 26.0%, to $844 in Fiscal 2024, as compared to $670 in Fiscal 2023. ● Profit from operations was $1,093 in Fiscal 2024, a decrease of $1,135, as compared to profit from operations of $2,228 in Fiscal 2023. ● Net other income increased by $394 to $500 in Fiscal 2024, as compared to $106 in Fiscal 2023. ● Profit from continuing operations before income taxes was $1,629 in Fiscal 2024, a decrease of $753, as compared to profit from continuing operations of $2,382 in Fiscal 2023. ● Net profit attributable to TTI for Fiscal 2024 was $1,050, as compared to net profit of $1,544 in Fiscal 2023. ● Net profit attributable to non-controlling interest for Fiscal 2024 was $92, as compared to net loss of $214 in Fiscal 2023. ● Working capital increased by $3,259, or 16.7%, to $22,760 as of June 30, 2024, as compared to $19,501 as of June 30, 2023. The highlights above are intended to identify certain of the Company’s significant events and transactions during Fiscal 2024. 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 Item 7 and with our consolidated financial statements and footnotes accompanying this Annual Report. General Financial Information Total assets as of June 30, 2024 were $42,540 an increase of $354, or 0.8%, compared to $42,186 as of June 30, 2023. The increase was primarily due to an increase in cash and cash equivalents, trade accounts receivable and inventories. The increase was partially offset by short-term deposits, other receivables, prepaid expenses and other current assets, assets held for sale, operating lease right-of-use assets and property, plant and equipment. Cash and cash equivalents totaled $10,035 as of June 30, 2024, representing an increase of $2,452, or 32.3%, compared to $7,583 as of June 30, 2023. Cash in banks increased due to a combination of reduced capital expenditures, lower loan repayment obligations and proceeds from exercise of stock options. Short-term deposits and restricted term deposits as of June 30, 2024 were $9,018, a decrease of $64, or 0.7% compared to $9,082 at June 30, 2023. Trade account receivables as of June 30, 2024 was $10,661, representing an increase of $857 or 8.7%, compared to $9,804 as of June 30, 2023. The increase corresponds to the increase in sales in Singapore operations. The number of days’ sales outstanding in account receivables was 90 days and 82 days for the years ended June 30, 2024 and 2023 respectively. As of June 30, 2024, other receivables were $541, a decrease of $398, or 42.4%, compared to $939 as of June 30, 2023. The decrease is mainly due to negotiating better payment terms with creditors, which led to a decrease in advance payments. Inventories as of June 30, 2024 were $3,162, an increase of $1,011, or 47%, compared to $2,151 as of June 30, 2023. The increase was mainly due to higher inventory levels in our Singapore operations relating to backlogs that are expected to be delivered over the first two quarters of Fiscal 2025. The number of days’ inventory held was 96 days at the end of Fiscal 2024, compared to 73 days at the end of Fiscal 2023. Prepaid expenses as of June 30, 2024 were $536 as of June 30, 2024 compared to $694 as of June 30, 2023. This is mainly related to the prepayment for insurance and software license fees. Investment properties in China as of June 30, 2024 were $407, a decrease of $67 from $474 as of June 30, 2023. The decrease was attributable to the depreciation charged for the year. Property, plant and equipment as of June 30, 2024 was $5,937, a decrease of $2,407 compared to $8,344 as of June 30, 2023. The decrease was primarily attributed to the depreciation of leasehold improvements over a shorter lease period and fluctuations in foreign currency exchange rates between June 30, 2023 and June 30, 2024. 8 Table of Contents Other assets as of June 30, 2024 were $232, an increase of $116, or 100%, compared to $116 as of June 30, 2023. This increase was primarily due to the increase of long-term deposits. Total liabilities as of June 30, 2024 were $10,962, a decrease of $1,653, or 13.1%, compared to $12,615 as of June 30, 2023. The decrease in liabilities was primarily due to a decrease in accrued expense, contract liabilities, income tax payable, operating leases, bank loans payable and finance lease, partially offset by an increase in accounts payable. Accounts payable as of June 30, 2024 increased by $1,515, or 91.3% to $3,175 from $1,660 as of June 30, 2023. This increase aligns with higher inventory levels and ongoing efforts to secure longer payment terms. Accrued expense as of June 30, 2024 decreased by $659, or 15.4% to $3,634 from $4,293 as of June 30, 2023. The decrease was mainly due to a decrease in accruals relating to purchases of property, plant and equipments. Income tax payable as of June 30, 2024 decreased by $153 to $520 from $673 as of June 30, 2023. The decrease was mainly due to lower taxable profit and also a payment made in connection with repatriation of taxes in Fiscal 2024. Bank loans payable decreased by $478 to $874 as of June 30, 2024, as compared to $1,352 as of June 30, 2023. The decrease was due to the repayments made in TTI’s Malaysia operation. Finance leases decreased by $58 to $91 as of June 30, 2024, as compared to $149 as of June 30, 2023. The decrease was due to the repayments made in TTI’s Singapore and Malaysia operations partially offset by the addition of finance leases in TTI’s Singapore operation. Other non-current liabilities decreased by $567 to $27 as of June 30, 2024, as compared to $594 as of June 30, 2023. The decrease was mainly due to a decrease in accruals relating to acquisition of property, plant and equipment in TTI’s China operations. Operating lease right-of-use assets and the corresponding lease liabilities decreased by $722 to $1,887 as of June 30, 2024, as compared to $2,609 as of June 30, 2023. This was due to the repayment made and the operating lease expense charged for the period. The decrease was partially offset by additional cost and liabilities created by new lease agreements in Malaysia and the renewal of leases in Singapore and China. Uncertainties and Remedies There are several influencing factors which create uncertainties when forecasting performance, such as the changing nature of technology, specific customer requirements, decline in demand for certain types of burn-in devices or equipment, decline in demand for testing services and fabrication services, and other factors. One factor that influences uncertainty is the highly competitive nature of the semiconductor industry. Additionally, certain customers are unable to provide a forecast of the products required in the upcoming weeks, rendering it, difficult to plan adequate resources needed to meet these customers’ requirements because of short lead time and last-minute order confirmation. This will normally result in a lower margin for these products as it is often more expensive to purchase materials in a short time frame. However, the Company has taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors. For example, to meet manufacturing customers’ demands upon short notice, the Company maintains higher inventories but continues to work closely with its customers to avoid stockpiling. We believe that we have improved customer service through our efforts to keep our staff up to date on the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. Finally, the Company is exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology while at the same time searching for improved testing methods for higher technology chips. The Company’s primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expense in its subsidiaries. Strengthening of the United States dollar (“ U.S. Dollar ”) relative to foreign currencies adversely affects the U.S. Dollar value of the Company’s foreign currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company’s products. Margins on sales of the Company’s products in foreign countries and on sales of products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the U.S. Dollar’s strengthening, or at all, which would adversely affect the U.S. Dollar value of the Company’s foreign currency-denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. Dollar, while generally beneficial to the Company’s foreign currency denominated sales and earnings, could cause the Company to reduce international pricing, thereby limiting the benefit. Additionally, strengthening of foreign currencies may also increase the Company’s cost of product components denominated in those currencies, thus adversely affecting gross margins. 9 Table of Contents As of June 30, 2024, although we have seen improvements in both our operations and those of our suppliers, we may continue to experience supply shortages as well as inflationary cost pressures in at least the near term. Risks and uncertainties related to supply chain challenges, and inflationary pressures may continue to negatively impact our revenue and gross margin. We continue to monitor and evaluate the business impact to react proactively. On August 9, 2022, the CHIPS and Science Act of 2022 (“ CHIPS Act ”) was enacted in the United States. The CHIPS Act will provide financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the U.S. We continue to evaluate the business impact and potential opportunities related to the CHIPS Act. As of date, we do not see any direct effect of the CHIPS Act on the Company in the foreseeable future. We sell our products and services worldwide, and our business is subject to risks inherent in conducting business activities in geographic regions outside of the United States. Periods of macroeconomic weakness or recession and heightened market volatility caused by adverse geopolitical developments could increase these risks, potentially resulting in adverse impacts on our business operations. We expect the sales of products for delivery outside of the United States will continue to represent a substantial portion of our future net sales. Our future performance will depend significantly upon our ability to continue to compete in foreign markets which in turn will depend, in part, upon a continuation of current trade relations between the United States and foreign countries in which semiconductor manufacturers or assemblers have operations. 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 events listed above, 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 statements depend. 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 Credit Losses 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 accounts for allowance for credit losses under the current expected credit loss (“ CECL ”) impairment model for its financial assets, including accounts receivable, and presents the net amount of the financial instrument expected to be collected. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers forecasts of future economic conditions in addition to information about past events and current conditions. Based on this model, the Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, communications with its customers, and macro-economic conditions. Amounts are written off after considerable collection efforts have been made and the amounts are determined to be uncollectible. 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 and net realizable value, 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 sale ability and obsolescence. 10 Table of Contents Property, Plant and Equipment & Investment Properties Property, plant and equipment and investment properties are stated at cost, less accumulated depreciation and amortization. Depreciation is provided for over the estimated useful lives of the assets using the straight-line method. Amortization of leasehold improvements is provided for over the lease terms or the estimated useful lives of the assets, whichever is shorter, using the straight-line method. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and improvements to property and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in the consolidated statements of operations and comprehensive income or loss. Foreign Currency Translation and Transactions The United States dollar (“ U.S. dollar ”) is the functional currency of the U.S. parent company. The Singapore dollar, the national currency of Singapore, is the primary currency of the economic environment in which the operations in Singapore are conducted. We also have business entities in Malaysia, Thailand, China and Indonesia, of which the Malaysian ringgit (“ RM ”), Thai baht, Chinese renminbi (“ RMB ”) and Indonesian rupiah are the national currencies. The Company uses the U.S. dollar for financial reporting purposes. The Company translates assets and liabilities of its subsidiaries outside the U.S. into U.S. dollars using the rate of exchange prevailing at the balance sheet date, and the statement of operations is measured using average rates in effect for the reporting period. Adjustments resulting from the translation of the subsidiaries’ financial statements from foreign currencies into U.S. dollars are recorded in shareholders' equity as part of accumulated comprehensive income or loss translation adjustment. Gains or losses resulting from transactions denominated in currencies other than functional currencies of the Company’s subsidiaries are reflected in income for the reporting period. Revenue Recognition 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 control has 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. 11 Table of Contents 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 a 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. 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. We have not identified any changes in circumstances requiring further impairment test in Fiscal 2024 except the phasing out of burn-in service contract with a customer in our Malaysia operation. In June 2023, our Malaysia operation received notification of termination of contract from a customer effective January 2024. In consideration of this impairment indicator, Management performed a further impairment test, and determined that majority of the primary assets used for servicing this customer in Malaysia had either fully depreciated before contract termination or repurposed for other customers. As the fair value of the primary assets were higher than the carrying value and hence, no impairment charges have been recorded in the year ended June 30, 2024. 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. 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 valuation allowance was provided as of June 30, 2024 and 2023. 12 Table of Contents 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. Non-controlling Interests in Consolidated Financial Statements ASC Topic 810, Consolidation (“ ASC Topic 810 ”) establishes accounting and reporting standards for the non-controlling interest in a subsidiary. This guidance requires that non-controlling interests in subsidiaries be reported in the equity section of the controlling company’s balance sheet. It also changes the way 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 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 November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The new guidance requires enhanced disclosures about significant segment expense. This standard update is effective for the Company for annual periods beginning in the fiscal year ending June 30, 2025 and interim period reports beginning in the first quarter of the fiscal year ending June 30, 2026. Early adoption is permitted on a retrospective basis. The Company is currently evaluating the impact of this ASU on segment disclosure. 13 Table of Contents In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. The new guidance requires enhanced disclosures about income tax expense. This standard update is effective for the Company beginning in the fiscal year ending June 30, 2026. Early adoption is permitted on a prospective basis. The Company is currently evaluating the impact of this ASU on annual income tax disclosures. Other new pronouncements issued but not yet effective until after June 30, 2024 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations. Comparison of Operating Results The following table presents certain data from the consolidated statements of operating income as a percentage of net sales for Fiscal 2024 and 2023: For the Year Ended June 30, 2024 2023 Revenue 100 % 100.0 % Cost of sales 74.6 % 72.9 % Gross Margin 25.4 % 27.1 % Operating expense: General and administrative 19.9 % 19.4 % Selling 2.0 % 1.5 % Research and development 0.9 % 0.9 % Loss on disposal of property, plant and equipment 0.1 % 0.0 % Total operating expense 22.9 % 21.8 % Income from Operations 2.5 % 5.3 % Revenue Revenue is comprised of revenue from the Manufacturing, Testing, Distribution and Real Estate segments. The components of revenue for Fiscal 2024 and 2023 were as follows: For the Year Ended June 30, 2024 2023 Manufacturing 37.9 % 32.0 % Testing 42.4 % 53.4 % Distribution 19.6 % 14.5 % Real estate 0.1 % 0.1 % Total 100 % 100 % Revenue during Fiscal 2024 was $42,312, a decrease of $938, or 2.2%, compared to $43,250 during Fiscal 2023. The decrease in revenue was primarily due to the decrease in sales from the Testing segment that reflects a drop in volume amidst a challenging semiconductor market environment. Manufacturing Segment Manufacturing segment accounted for 37.9% of revenue during Fiscal 2024, an increase of 5.9%, compared to 32.0% during Fiscal 2023. Revenue generated by the Manufacturing segment during Fiscal 2024 was $16,057, reflecting an increase of $2,230, or 16.1%, compared to $13,827 during Fiscal 2023. As of June 30, 2024, the backlog in the Manufacturing segment was $5,944, reflecting a decrease of $2,112 from $8,056 as of June 30, 2023. This decline is primarily due to a slowdown in budgeted capital spending by customers. The customers' capital spending is likely to slow down over the next two quarters, with a potential improvement thereafter. Testing Segment Revenue generated by the Testing segment accounted for 42.4% of total revenue during Fiscal 2024, as compared to 53.4% during Fiscal 2023. Revenue generated by the Testing segment for Fiscal 2024 was $17,933, reflecting a decrease of $5,197, or 22.5%, compared to $23,130 for Fiscal 2023. The decrease in revenue in the Testing segment reflects the drop in volume amidst a challenging semiconductor market environment. 14 Table of Contents Backlog in the Testing segment as of June 30, 2024 was $5,342, a decrease of $60, compared to $5,402 at June 30, 2023. Backlog is dependent on the estimated volume provided by customers, which is dependent on the customers’ inventory levels and demand. Distribution Segment Revenue generated by the Distribution segment during Fiscal 2024 accounted for 19.6% of total revenue, an increase of 5.1% compared to 14.5% for Fiscal 2023. Revenue for Fiscal 2024 was $8,297, an increase of $2,027, or 32.3%, compared to $6,270 for Fiscal 2023. In Fiscal 2023, customer demand was lower due to excess inventory levels. However, in Fiscal 2024, demand for electronic components has recovered. Backlog in the Distribution segment as of June 30, 2024 was $3,068, reflecting a decrease of $814 compared to the backlog of $3,882 at June 30, 2023. The decrease in backlog was mainly due to weaker demand from customers. Display and electronic component sales are very competitive, as the products are readily available in the market. We believe that our competitive advantage in the distribution segment is that we act as value-added provider by enhancing the value of the distributed products by customizing them to the needs of our customers through our expert design, engineering and integration. Even with a weak backlog, we see the potential to perform better in fiscal year 2025 than in fiscal year 2024. Real Estate Segment Revenue generated by the Real Estate segment was 0.1% of total revenue for both the years ended June 30, 2024 and 2023. Revenue generated by the Real Estate segment for Fiscal 2024 was $25, as compared to $23 for Fiscal 2023. Backlog in the Real Estate segment as of June 30, 2024, was $68, a decrease of $29 as compared to $97 at June 30, 2023. The decrease is mainly due to low occupancy rate in the Fu Li Real Estate Development Co. Ltd. Properties. Gross Margin Gross margin as a percentage of revenue was 25.4% in Fiscal 2024, a decrease of 1.6% compared to 27.1% in Fiscal 2023. Overall gross profit for Fiscal 2024 was $10,762, a decrease of $943, or 8.1%, compared to $11,705 for Fiscal 2023. The decrease in gross margin as a percentage of revenue was mainly attributable to the underperformance in the Testing segment. Gross margin as a percentage of revenue in the Manufacturing segment was 26.4% in Fiscal 2024, an increase of 3%, compared to 23.4% in Fiscal 2023. Gross profit for the Manufacturing segment in Fiscal 2024 was $4,234, an increase of $994 or 30.7%, compared to $3,240 in Fiscal 2023. The increase in gross profit was primarily due to an increase in system and equipment sales that generates higher margins in Fiscal 2024 compared to Fiscal 2023. Gross margin as a percentage of revenue in the Testing segment was 28.6% in Fiscal 2024, a decrease of 3.7%, compared to 32.3% in Fiscal 2023. Gross profit in the Testing segment in Fiscal 2024 was $5,124, a decrease of $2,348, or 31.4%, compared to $7,472 in Fiscal 2023 due to lower margins in the Testing segment resulting from lower demand. The gross margin was negatively impacted by the decrease in revenue across all test operations where a significant portion of our cost of goods sold are fixed, and as the demand for services and factory utilization decrease, the fixed costs are spread over the decreased output, which reduces the gross profit margin. Gross margin as a percentage of revenue in the Distribution segment was 17.5% in Fiscal 2024, an increase of 0.9%, compared to 16.6% in Fiscal 2023. Gross profit in the Distribution segment was $1,450, an increase of $408, or 39.2%, compared to $1,042 in Fiscal 2023. The increase in gross profit was due to the increase in distribution sales compared to the Fiscal 2023. Gross loss in the Real Estate segment was $46 in Fiscal 2024, a decrease of $3 as compared to $49 in Fiscal 2023. Operating Expense Operating expense for the years ended June 30, 2024 and 2023 was as follows: For the Year Ended June 30, 2024 2023 General and administrative $ 8,387 $ 8,403 Selling 844 670 Research and development 392 397 Loss on disposal of property, plant and equipment 46 7 Total $ 9,669 $ 9,477 15 Table of Contents General and administrative expense was $8,387 in Fiscal 2024, remaining nearly unchanged from $8,403 in Fiscal 2023. During Fiscal 2024, we incurred professional fees of approximately $307 related to the identification and evaluation of potential divestment opportunities. These fees were primarily associated with advisory services aimed at optimizing our portfolio and aligning our strategic focus. While these costs impacted our operating expense for the year, they are considered non-recurring and directly linked to our ongoing efforts to streamline operations and enhance shareholder value. Excluding these expenses, total general and administrative expense was lower on a trailing twelve-month basis, reflecting our rigorous cost-saving efforts across our organization. Selling expense increased by $174, or 26%, to $844 in Fiscal 2024, compared to $670 in Fiscal 2023. The increase in selling expense was primarily attributable to an increase in commission because of an increase in commissionable revenue and increased business travel in Fiscal 2024 as compared to Fiscal 2023. Profit from Operations Profit from operations was $1,093 in Fiscal 2024, a decrease of $1,135, compared to profit from operations of $2,228 in Fiscal 2023. The decrease was mainly due to the decrease in revenue, coupled with a decrease in gross profit margin in the Testing segment. Interest Expense Interest expense for the years ended June 30, 2024 and 2023 was as follows: For the Year Ended June 30, 2024 2023 Interest expense $ 77 $ 105 Interest expense decreased by $28 to $77 in Fiscal 2024, compared to $105 in Fiscal 2023 due to lower utilization of credit facilities. The bank loans payable decreased by $478 to $874 in Fiscal 2024, as compared to $1,352 in Fiscal 2023 due to payments made. Other Income Other income for the years ended June 30, 2024 and 2023 was as follows: For the Year Ended June 30, 2024 2023 Interest income $ 370 $ 174 Other rental income 127 115 Exchange loss (74 ) (269 ) Other miscellaneous income 77 86 Total $ 500 $ 106 Other income increased by $394 to $500 for Fiscal 2024, compared to $106 for Fiscal 2023. The increase was mainly due to an increase in interest income and a favorable foreign currency impact. Government Grant During Fiscal 2024, the Company received government grants amounting to $113, $23 of which was financial assistance received from the Singapore government, $57 from the U.S. government related to Employee Retention Credit (“ ERC ”) and the remaining related to capital expenditure subsidy received from the government in China. During Fiscal 2023, the Company received government grants amounting to $153, $107 of which was financial assistance received from the Singapore government and the remaining related to capital expenditure subsidy received from the government in China. 16 Table of Contents Income Tax Expense Income tax expense for Fiscal 2024 was $486, representing a decrease of $136, as compared to income tax expense of $622 for Fiscal 2023. The decrease was primarily due to lower taxable income in Fiscal 2024 compared to Fiscal 2023. At June 30, 2024, the Company had no federal net operating loss carry-forwards, and a state net operating loss carry-forward of $2,219, which expires in 2034. 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. Loss from Discontinued Operations Loss from discontinued operations was $4 in Fiscal 2024, compared to loss from discontinued operations of $1 in Fiscal 2023. The Company discontinued its fabrication segment in Fiscal 2013. Non-controlling Interest As of June 30, 2024, the Company held a 55% interest in each of Trio-Tech (Malaysia) Sdn. Bhd., Trio-Tech (Kuala Lumpur) Sdn. Bhd., and SHI International Pte Ltd, a 52% interest in PT SHI Indonesia, a 76% interest in Prestal Enterprise Sdn. Bhd. and a 51% interest in Trio-Tech Jiangsu Co., Ltd. The non-controlling interest for Fiscal 2024, in the net profit of subsidiaries, was $92, a change of $122 compared to a non-controlling interest in the net profit of $214 for the previous fiscal year. The change in the non-controlling interest was primarily attributable to the decrease in net income generated by the Company’s operations in China. Net Income Attributable to Trio-Tech International Common Shareholders Net income attributable to Trio-Tech International common shareholders for Fiscal 2024 was $1,050 compared to the net income attributable to Trio-Tech International common shareholders of $1,544 for Fiscal 2023. The decrease was mainly due to the decrease in revenue and gross margin, partially offset by an increase in other income. Earnings per Share Basic earnings per share from continuing operations was $0.25 in Fiscal 2024, as compared to basic earnings per share of $0.38 in Fiscal 2023. Basic earnings per share from discontinued operations was $nil for Fiscal 2024 and Fiscal 2023. Diluted earnings per share from continuing operations was $0.24 in Fiscal 2024, as compared to diluted earnings per share $0.37 in Fiscal 2023. Diluted earnings per share from discontinued operations was $nil for Fiscal 2024 and Fiscal 2023. Segment Information The revenue, gross margin and income/(loss) from each segment for the years ended June 30, 2024 and 2023 are presented below. As the segment revenue and gross margin for each segment has been discussed in previous sections, only the comparison of income/(loss) from operations is discussed below. Manufacturing Segment The revenue, gross margin and income/(loss) from operations for the Manufacturing segment for the years ended June 30, 2024 and 2023 were as follows: For the Year Ended June 30, 2024 2023 Revenue $ 16,057 $ 13,827 Gross margin 26.4 % 23.4 % Income / (Loss) from operations $ 616 $ (58 ) 17 Table of Contents Income from operations in the Manufacturing segment was $616 in Fiscal 2024, an increase of $674, as compared to a loss from operations of $58 in Fiscal 2023. The increase in net income was attributable to an increase in gross margin of $1,007 partially offset by the increase in operating expense of $384. Operating expense was $3,618 and $3,298 for Fiscal 2024 and 2023, respectively. The increase in operating expense was mainly attributable to higher remuneration expense due to improved performance, business travel and entertainment expenses, and an increased allocation of corporate expense. Testing Segment The revenue, gross margin and income from operations for the Testing segment for the years ended June 30, 2024 and 2023 were as follows: For the Year Ended June 30, 2024 2023 Revenue $ 17,933 $ 23,130 Gross margin 28.6 % $ 32.3 % (Loss) / Income from operations $ (322 ) $ 1,648 Loss from operations in the Testing segment in Fiscal 2024 was $322, as compared to income from operations of $1,648 in Fiscal 2023. The decrease in operating profit was mainly due to lower gross profit resulting from lower revenue. Operating expense was $5,446 and $5,824 for Fiscal 2024 and 2023, respectively. The decrease of $378 in operating expense was mainly due to effective cost control measures implemented across Test operations in response to drop in volume, coupled with lower corporate expenses allocated to the Testing segment due to drop in revenue. Distribution Segment The revenue, gross margin and income from operations for the Distribution segment for the years ended June 30, 2024 and 2023 were as follows: For the Year Ended June 30, 2024 2023 Revenue $ 8,297 $ 6,270 Gross margin 17.5 % 16.6 % Income from operations $ 1,129 $ 816 Income from operations in the Distribution segment was $1,129 in Fiscal 2024, as compared to $816 in Fiscal 2023. The increase in operating income was primarily due to an increase in gross margin by $408, which was partially offset with an increase in operating expense of $97. Operating expense was $321 and $224 for the years ended June 30, 2024 and 2023, respectively. The increase in operating expense was mainly contributed by business travel and entertainment expenses, and an increased allocation of corporate expenses. Real Estate Segment The revenue, gross margin and loss from operations for the Real Estate segment for the years ended June 30, 2024 and 2023 were as follows: For the Year Ended June 30, 2024 2023 Revenue $ 25 $ 23 Gross loss (184.0 )% (213.0 )% Loss from operations $ (100 ) $ (98 ) Loss from operations in the Real Estate segment was $100 in Fiscal 2024, as compared to $98 in Fiscal 2023. Operating expense was $54 and $49 in each of the years ended June 30, 2024 and 2023 respectively. 18 Table of Contents Corporate The loss from operations for corporate for the years ended June 30, 2024 and 2023, respectively: For the Year Ended June 30, 2024 2023 Loss from operations $ (230 ) $ (80 ) In Fiscal 2024, corporate operating loss was $230, a change of $150, compared to loss of operations of $80 in Fiscal 2023. During Fiscal 2024, the operating loss increased due to $307 in professional fees associated with advisory services aimed at optimizing our portfolio and aligning our strategic focus. Liquidity Net cash provided by operating activities was $2,558 for the year ended June 30, 2024, a decrease of $5,552 as compared to $8,110 provided by operating activities for the prior year. The decrease in net cash provided by operating activities was primarily due to decrease in depreciation and amortization of $854, trade receivables receipts of $2,650, inventories of $1,276, contract liabilities of $810, and other non-current liabilities of $1,133 partially offset by an increase in cash inflow from accounts payable and accrued expense of $1,896. Net cash used in investing activities was $113 for the year ended June 30, 2024, a decrease of $5,961 as compared to $6,074 used in investing activities in the prior year. The decrease in net cash used in investing activities was primarily due to a decrease in outflow of $2,167 used for investments in unrestricted deposits and $3,956 used on additional property, plant and equipment. Net cash used in financing activities for the year ended June 30, 2024, was $90, compared to $1,243 used during the prior year. The decrease in cash outflow for financing activities was mainly due to settlement of lines of credit of $541 relating to the prior year. In Fiscal 2024, lines of credit of $961 were availed and were settled within the same period. Proceeds from exercising stock options during that period amounted to $506, which was a $437 increase as compared to the same period in Fiscal 2023. 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 filed a Shelf Registration Statement on Form S-3 on December 3, 2021, under which we may raise capital of $10,000,000 from any combination of securities (common stock, warrants, debt securities or units) for business expansion 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. Working capital was $22,760 as of June 30, 2024, representing an increase of $3,259, or 16.7%, compared to working capital of $19,501 as of June 30, 2023. The increase in working capital was mainly due to increases in current assets, including cash and cash equivalents, trade receivables and inventories, and decreases in current liabilities, including accrued expense, contract liabilities, income taxes payable, bank loans payable, finance leases, and operating leases. Such fluctuations were partially offset by decreases in current assets, including short-term deposits, other accounts receivable, prepaid expenses and assets held for sale and increases in current liabilities, including accounts payable. 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 $542 and $4,498 for the years ended June 30, 2024 and 2023, respectively. The capital expenditures in Fiscal 2024 were primarily for motor vehicles and equipment. 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. 19 Table of Contents At June 30, 2024, 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 Cost of Funds Rate +1.25% $ 3,907 $ 3,626 Universal (Far East) Pte. Ltd. Lines of Credit Cost of Funds Rate +1.25% $ 1,843 $ 1,818 Trio-Tech Malaysia Sdn. Bhd. Revolving credit Cost of Funds Rate +2% $ 318 $ 318 As of June 30, 2023, 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 Cost of Funds Rate +1.25% to +1.3% $ 3,907 $ 3,701 Universal (Far East) Pte. Ltd. Lines of Credit Cost of Funds Rate +1.25% to +1.3% $ 1,843 $ 1,559 Trio-Tech Malaysia Sdn. Bhd. Revolving credit Cost of Funds Rate +2% $ 319 $ 319 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. ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, we are not required to provide the information required by this item. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is included in the Company's consolidated financial statements beginning on page F-2 of this Annual Report. ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.