Tungray Technologies Inc annual report, Q4 FY2023

Tungray Technologies Inc. Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 20-F and does not provide a separate fourth-quarter 2023 financial statement. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.

Business Context

Tungray is a Cayman Islands holding company whose operations are conducted primarily through subsidiaries in Singapore and mainland China. It provides engineer-to-order industrial manufacturing solutions to OEMs in the semiconductor, printer, electronics and home-appliance sectors. Its principal business lines are customized industrial manufacturing solutions, direct-drive and linear DC motors, and induction-welding equipment.

Revenue mix in 2023: 82% customized industrial manufacturing solutions, 6% motors and 12% welding equipment.
Geographic revenue mix: 62.9% Singapore and 37.1% China.
HP Inc. represented 64.2% of 2023 revenue; Chengdu Innorev represented 6.0%.
The Company had 170 full-time employees as of the filing date.

Financial Metrics

USD millions, except percentages	2023	2022	Change
Revenue	$14.36	$16.33	-12.1%
Gross profit	$6.74	$9.20	-26.8%
Gross margin	46.9%	56.3%	-9.4 pts
Operating income	$1.12	$3.21	-65.0%
Income before tax	$1.32	$3.40	-61.2%
Consolidated net income	$0.82	$2.88	-71.7%
Net income attributable to Tungray	$0.92	$2.89	-68.4%
Basic and diluted EPS	$0.06	$0.19	-$0.13
Net cash from operations	$0.45	$3.64	-87.6%

Revenue declined because post-pandemic demand for printers and automation equipment normalized, customer orders decreased, pricing pressure increased, the U.S.-China trade environment remained challenging, and the stronger U.S. dollar reduced the translated value of China revenue. HP and Goertek revenue declined by approximately $0.7 million and $1.0 million, respectively.

Cost of revenue increased 6.8% to $7.63 million, primarily due to higher raw-material, labor and overtime costs. Customized-product gross margin declined to 54.3% from 62.6%, while standardized-product gross margin declined to 14.2% from 34.5%. Operating expenses decreased 6.2% to $5.61 million, including lower selling, general and administrative, and R&D expenses.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $10.80 million at December 31, 2023, including approximately $9.76 million held by Singapore subsidiaries and $1.04 million held by China subsidiaries.
Working capital was approximately $10.1 million. Management stated that existing working capital was sufficient for the next twelve months.
Total assets were $26.87 million and total liabilities were $10.65 million.
Banking facilities totaled $2.09 million, of which $0.14 million was current and $1.95 million was noncurrent. The Company also had no short-term bank loan or third-party loan outstanding at year-end.
Contract liabilities increased to $4.01 million from $1.85 million, reflecting customer deposits received before performance obligations were satisfied.
Accounts and notes receivable, net, increased to $3.57 million from $2.42 million, while the allowance for credit losses increased to $0.47 million from $0.30 million.
Inventory increased to $2.28 million from $1.40 million, driven primarily by higher work in process.
Future contractual obligations totaled $2.65 million, including $2.09 million of banking facilities and $0.56 million of operating leases.

Cash Flow and Capital Allocation

Operating cash flow was $0.45 million, compared with $3.64 million in 2022, as working capital absorbed cash through higher receivables, inventories and related-party prepayments.
Investing cash flow was negative $0.08 million, principally reflecting related-party loans, capital expenditures of $43,000 and intangible-asset purchases of $38,000, offset by related-party repayments.
Financing cash flow was negative $2.81 million, including debt repayments, related-party repayments, $1.28 million of dividends and $0.47 million of deferred IPO costs.
Cash declined by $2.33 million during 2023, from $13.13 million to $10.80 million.
The Company reported no off-balance-sheet arrangements.

Material Changes Versus 2022

Revenue, gross profit, operating income and net income all declined materially.
Gross margin contracted by 9.4 percentage points as selling prices fell and labor and raw-material costs increased.
Standardized-product revenue fell 28.2%, and standardized-product gross margin fell 20.3 percentage points.
Customer concentration increased: HP accounted for 64.2% of revenue in 2023 versus 60.7% in 2022.
Net operating cash generation fell sharply, despite reported profitability.
Credit-loss provisions increased, and the Company adopted the current expected credit loss model under ASC 326 beginning January 1, 2023.
China operations generated a pretax loss of approximately $1.36 million in 2023, compared with pretax income of approximately $0.12 million in 2022.

Guidance, Outlook and Unusual Items

The filing does not provide quantitative revenue, earnings or margin guidance. Management expects to pursue ASEAN expansion, continued R&D and technology investment, employee recruitment and development, increased sales to existing customers, and potential strategic acquisitions. Management also expects R&D spending to increase over time.

The post-pandemic return to office reduced demand for office equipment, including printers. Global economic weakness, pricing pressure, customer cancellations and the U.S.-China trade environment may continue to affect results.
Foreign-exchange risk is significant because operating entities use Singapore dollars and RMB while the reporting currency is the U.S. dollar. The Company does not hedge this exposure.
HP and other major customers generally place orders through purchase orders rather than long-term contracts, increasing revenue volatility.
The Company identified three material weaknesses in internal control over financial reporting: insufficient formal control and risk-assessment processes, insufficient U.S. GAAP and SEC-reporting resources, and deficiencies in information-technology general controls. Disclosure controls were deemed ineffective as of December 31, 2023.
The Company is attempting remediation through additional qualified accounting personnel, training, formal U.S. GAAP policies and strengthened governance. No auditor attestation report was required because the Company is a non-accelerated filer and emerging growth company.
The Company stated that it is not currently subject to material litigation, and recorded loss contingencies were not material.
Subsequent to year-end, the Company acquired a 33% interest in Xi’an Tongri through related-party transactions and committed $3.3 million of capital, of which $1.0 million had been paid by the financial statement issuance date. Xi’an Tongri had not begun substantive operations.
On April 18, 2024, the Company completed an IPO of 1.25 million Class A ordinary shares at $4.00 per share, generating approximately $5.0 million of gross proceeds. The shares began trading on Nasdaq under TRSG.

Key Investor Verification Items

Reconcile the reported consolidated net income of $0.82 million with net income attributable to Tungray of $0.92 million and the noncontrolling-interest loss.
Assess whether the sharp decline in gross margin and operating cash flow is temporary or reflects structural pricing, customer-concentration and cost pressures.
Review the collectability and aging of receivables, the $0.47 million credit-loss allowance, increased inventory and the $1.05 million related-party prepayment.
Evaluate dependence on HP, which generated 64.2% of revenue, and the absence of long-term customer purchase commitments.
Monitor remediation of the three material weaknesses, particularly U.S. GAAP reporting capabilities and IT general controls.
Review related-party transactions, including the Xi’an Tongri investment, related-party purchases, balances, leases and financing activity.
Confirm the availability and transferability of cash held in Singapore and China, including PRC foreign-exchange, dividend and statutory-reserve restrictions.
Assess the impact of dual-class voting rights: Class B shares carry 20 votes per share, and the CEO controls approximately 88.64% of total voting power.
Monitor banking-facility maturities, interest-rate resets, lease obligations and the Company’s stated need for possible future financing.
Consider foreign-exchange exposure, customer and supplier concentration, PRC and Singapore regulatory risks, Nasdaq listing requirements and potential PFIC tax status for U.S. investors.