☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31,
2022.
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________
to ____________.
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report: 4,036,825 Common Shares were outstanding
as of March 31, 2022.
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of large accelerated filer,”
“accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☐
Indicate by check mark which basis of accounting the registration has
used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the
previous question, indicate by check mark which financial statement item the registrant has elected to follow: ☐ Item 17
☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
This annual report contains forward-looking statements
that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These forward-looking
statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These
statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements
to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements
by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,”
“aim,” “estimate,” “intend,” “plan,” “believe,” “are likely to”
or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements include, but are not limited to:
You should read this annual report and the documents
that we refer to in this annual report thoroughly and with the understanding that our actual future results may be materially different
from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of
this annual report, including the section titled “Risk Factors” beginning on page 3, include additional factors that could
adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties
emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the
impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
You should not rely upon forward-looking statements
as predictions of future events. Except as required by law, we undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise
Highway Holdings Limited is a British Virgin Islands
holding company that operates through various controlled subsidiaries. Unless the context indicates otherwise, all references herein to
“the Company,” “we,” “us” or “our” refer collectively to Highway Holdings Limited and
its subsidiaries, including its 84% owned subsidiary in Myanmar. References to “China” or “PRC” are to the People’s
Republic of China (excluding Hong Kong), whereas references to “Hong Kong” are to the Hong Kong Special Administrative Region
of the People’s Republic of China. References to “Myanmar” are to the Republic of the Union of Myanmar. Unless otherwise
stated, all references to “dollars” or $ are to United States dollars. “RMB,” “Renminbi” or “yuan”
are references to the legal currency of China. “MMK” or “Kyat” are to the legal currency of Myanmar. The U.S.
Securities and Exchange Commission is referred to in this Annual Report as the “SEC.”
The Company prepares its consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America and publish our financial statements
in United States dollars.
PART
I
Item
1. Identity of Directors, Senior Management and Advisers
Not Applicable
Item
2. Offer Statistics and Expected Timetable
Not Applicable
Item
3. Key Information
RISK FACTORS
The Company’s business and operations
involve numerous risks, some of which are beyond the Company’s control, which may affect future results and the market price of
the Company’s Common Shares. Investors should take into accounts the risks described below, and the other information contained
in this Annual Report, when evaluating an investment in the Company.
Risks Related To Doing Business In China And Myanmar.
The Military Coup In Myanmar Has Negatively
Affected, And May Continue to Negatively Impact, the Company’s Operations In Myanmar. The Company operates two manufacturing
and assembly facilities, one of which is located in Yangon, Myanmar. The Myanmar facility generated 47% of the Company’s revenues
in the fiscal year ended March 31, 2022. On February 1, 2021, Myanmar’s military seized control of the government, declared a state
of emergency for the upcoming year, and reportedly placed the country’s civilian leader under house arrest. The U.S. State Department
has concluded that the military takeover in Myanmar constituted a coup d’état. The military’s takeover resulted in
widespread civil unrest, including in the area of Yangon in which the Company’s facilities are located, the devaluation of the Kyat,
disruption to the existing banking system, and other restrictions. The civil unrest caused the Company’s Myanmar facility to be
closed for about two weeks in March 2021. While no closure was caused by civil unrest in fiscal year 2022 and operations at the Myanmar
factory have mostly returned to the pre-takeover levels, the future impact of the military takeover on the Company’s operations
in Myanmar remains uncertain as of the date of this report. Any loss of property or interruption of the Company’s operations resulting
from political instability, civil unrest or changes in law or policy enacted by the military government could have a significant negative
impact on the Company’s business operations, earnings and cash flow.
In Response To Recently Enacted Global Human
and Environmental Rights Regulations Enacted In Germany And Pending in other Jurisdictions, The Company’s Customers May Prohibit
Or Limit The Manufacture Of Their Products In Myanmar, Which Will Negatively Affect The Company’s Operations In Myanmar. Germany
recently enacted the Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz), which requires larger German manufacturers to
take actions to identify and prevent suspected human rights and environmental law violations committed abroad in their supply chains,
including by their direct suppliers and indirect suppliers. Germany’s new law goes into effect on January 1, 2023. In order to comply
with this law, German manufacturers may stop purchasing products from foreign suppliers (such as the Company) that are based in countries
with bad human rights records. The European Union and various social responsibility organizations also are considering similar laws. During
the fiscal years ended March 31, 2022 and 2021, revenues generated from the Company’s operations in Myanmar represented 47% and
46%, respectively, of the Company’s total revenues. Since the military coup in February 2021 Myanmar has been listed as one of the
world’s worst human rights offenders. As a result of these social responsibility regulations and Myanmar’s human rights record,
at least one of the Company’s European customers has informed the Company that, starting in 2023, it will no longer purchase products
manufactured by at the Company’s Yangon factory. Other clients may also refuse to have their products manufactured at the Company’s
Myanmar assembly facility. In the event that the Company’s customers further limit or prohibit the Company from manufacturing their
products in Myanmar, the Company’s operations and financial condition will be significantly and adversely affected. No assurance
can be given that the Company’s customers will not, in the future, withdraw their work from Myanmar or refuse to permit their future
orders from being completed at the Company’s Myanmar facility.
Changes in Labor Laws, Environmental Regulation,
Safety Regulation and Business Practices, and Operating Costs in China, and in Shenzhen In Particular, Have Significantly Increased The
Costs And Burdens Of Doing Business And Could Continue To Negatively Impact The Company’s Operations And Profitability. In the
past, foreign owned enterprises, such as the Company and its subsidiaries, have established manufacturing/assembly facilities in China
because of China’s lower labor costs, lower facilities costs, less stringent regulations, and certain other benefits provided to
foreign entities. These benefits are no longer available to most companies operating in Shenzhen, including in particular foreign-owned
entities. In fact, the costs and burdens on foreign owned companies appear to be significantly greater than on local Chinese-owned companies.
The cost of operating a manufacturing business in Shenzhen have increased significantly, and the amount of governmental inspections and
intrusion have further increased the costs and burdens of operating in China. These factors have significantly increased the cost of doing
business in China in the past few years and have caused some of the Company’s customers to source their products from other original
equipment manufacturers (“OEMs”) outside of China that have a lower cost structure than the Company has. The increased costs
of manufacturing and the increased regulatory burdens have adversely affected the Company’s net sales and gross margins and may
continue to do so in the future. While the Company is trying to offset the increasing costs and burdens of doing business in China (primarily
by increasing automation and moving labor-intensive activities to Myanmar), no assurance can be given that in the longer term the Company
will be able to continue to operate in China and/or remain viable under the new and evolving business or regulatory conditions in China.
In Response To Recently Enacted Data Security
Law and Personal Information Protection Law in China, The Company May Face Additional Scrutiny From Its Operations In China. In the
fall of 2021 China enacted the two laws — the Data Security Law and the Personal Information Protection Law. The Data Security Law
sets up a framework that classifies data collected and stored in China based on its potential impact on Chinese national security and
regulates its storage and transfer depending on the data’s classification level. The Personal Information Protection Law is China’s
comprehensive legislation regulating the protection of personal information. Failure to comply with these laws may lead to fines and penalties
from the Chinese government and could have a significant negative impact on Company’s business operations.
Changing Internal Fiscal, Regulatory and Political
Changes Continue to Negatively Affect The Company’s Operations in China. Most of the Company’s key functions, including
tool design and manufacturing, engineering, administration, and automated manufacturing, are conducted from the Company’s facilities
in China. As a result, the Company’s operations and assets are affected by the political, economic, legal and other uncertainties
associated with doing business in China. Changes in policies by the Chinese government to its laws, regulations, or the interpretation
thereof, the imposition of confiscatory taxation, restrictions on imports and sources of supply, currency re-valuations, or the expropriation
of private enterprises, could materially adversely affect the Company. For example, foreign owned enterprises, including the Company,
have been subject to numerous governmental inspections and have been subjected to additional burdensome regulations and, on occasion,
to cash penalties and fines. Certain of the recent actions by Chinese government authorities appear to be intended to force the Company,
and other foreign businesses, out of Shenzhen, China. While the Company has, to date, been able to continue its operations in China despite
these changes and additional burdens, no assurance can be given that the increasing regulations and the more restrictive government policies
will not, in the future, cause the Company’s operations to become financially untenable or otherwise materially affect its business,
operations and financial condition.
Political Or Trade Controversies Between China
And The United States Could Harm The Company’s Operating Results Or Depress The Company’s Stock Price. Relations between
the U.S. and China have during the past few years been strained as a result of various economic and geopolitical disputes between the
countries. These political and economic issues have resulted in tariffs being imposed by both China and the U.S. and have resulted in
the imposition of restrictions on the import/export of certain products. Although the Company’s sales to the U.S. are not substantial,
and the Company does not import raw materials from the U.S., the political tensions between the two countries could negatively affect
the Company’s operations in China. No assurance can be given that these, and any other future controversies will not negatively
affect the Company’s business and operations in China. In addition, the political and trade friction between the U.S. and China
could adversely affect the prevailing market price for the Company’s Common Shares. The Company, whose shares are publicly listed
on the U.S. Nasdaq stock market, could be perceived in China to be an American company and, as such, could face persecution in various
forms from the government. Similarly, because the Company operates in Shenzhen, China, the Company could be perceived to be a Chinese
company by U.S. investors. These trade or political disputes between the U.S. and China could affect U.S. investors’ perception
of China-based manufacturing companies listed on U.S. stock markets, which could adversely affect the Company’s stock price.
Increased Wages And The Other Costs Of Labor
in China Have a Material Negative Impact The Company’s Operations And Continue to Increase Its Operating Costs. Wages in China
in general, and in Shenzhen in particular, have significantly increased during the past few years. Increases in wages has also resulted
in increases in employer contributions for various mandatory social welfare benefits for Chinese employees that are based on percentages
of their salaries. These increases in the cost of labor will continue to increase the Company’s operating costs, will reduce the
Company’s gross margins, and may continue to result in the loss of customers who may seek, and are able to obtain, comparable products
and services in lower-cost regions of the world or from certain local Chinese companies that receive governmental support of subsidies.
The Company May Be Subject To Significant Employee
Termination Payment Obligations In China. Under China’s labor laws, the Company’s local employees are entitled to receive
significant employment termination payments if the Company terminates their employment. Although the Company has been reducing the amount
of this potential liability by not replacing employees who resign or otherwise leave, any mass layoff could trigger the sudden payment
of the entire severance payment obligation. While the Company has been accruing these severance payments as a liability on its financial
statements (as of March 31, 2022, the Company accrued $1,462,000 of severance liabilities), the payment of these accrued amounts could
result in a significant decrease in the Company’s cash reserves.
The Company’s Shenzhen, China, Leases
Could Subject the Company To Substantial Future Risks and Costs. The Company’s engineering, research and development, and its
automated manufacturing facilities are currently still located in Long Hua, Shenzhen, China. In February 2020 the Company extended its
leases for this facility until February 28, 2023. Due the increasing rental rates and changes in the local regulatory environment that
disfavors manufacturing facilities, it is uncertain if the Company will be able to renew its lease in 2023 on acceptable terms, or at
all. In the event that the Company cannot, or does not renew its Shenzhen lease, the Company will incur significant costs to relocate
its facilities, and its operations could be significantly disrupted.
The Company Faces Risks From Its Expanded Operations
In Myanmar. The Company’s labor-intensive manufacturing operations are currently conducted in Yangon, Myanmar (formerly Burma).
The Company currently owns 84% of Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”), a foreign company authorized
to operate in Myanmar. Kayser Myanmar operates from a factory facility in Yangon. The Company has also transferred a substantial portion
of its non-automated manufacturing equipment from its Shenzhen, China, operations to the Kayser Myanmar facilities in order to enable
the Myanmar company to assemble and manufacture more of the Company’s products in Myanmar. However, operating in an underdeveloped
country such as Myanmar is subject to numerous risks and uncertainties. These risks include labor relations issues (including strikes),
lack of infrastructure, uncertain rules and regulations, unpredictable access to utilities (including electricity), cultural and political
issues with local governmental authorities, antiquated banking systems, and the lack of international financing expertise. The operations
in Myanmar also are subject to the currency risks associated with the Myanmar Kyat (MMK), the official currency of that country. Myanmar
recently permitted the exchange rate between the Kyat and the U.S. dollar to fluctuate, which fluctuations could materially change the
cost of operating in Myanmar. No assurance can be given that unfavorable currency fluctuations will not occur in the future.
Uncertain Legal System and Application of Laws
May Adversely Affect The Company’s Properties And Operations In Both China And Myanmar. The legal systems of China and Myanmar
are often unclear and are continually evolving, and there can be no certainty as to the application of laws and regulations in particular
instances. While China has an increasingly comprehensive system of laws, the application of these laws by the existing regional and local
authorities is often in conflict and subject to inconsistent interpretation, implementation and enforcement. New laws and changes to existing
laws occur quickly, sometimes unpredictably, and often arbitrarily. As is the case with all businesses operating in both China and Myanmar,
the Company often is also required to comply with informal laws and trade practices imposed by local and regional administrators. Local
taxes and other charges are levied depending on the local needs for tax revenues and may not be predictable or evenly applied. These local
and regional taxes/charges and governmentally imposed business practices often affect the Company’s cost of doing business and require
the Company to constantly modify its business methods to both comply with these local rules and to lessen the financial impact and operational
interference of such policies. While the Company has, to date, been able to increase its compliance with the regulations and operate within
the newly enforced rules and business practices, no assurance can be given that it will continue to be able to do so in the future. The
judiciary systems in China and Myanmar are relatively inexperienced in enforcing the laws that govern businesses, thereby making it difficult,
if not impossible, to obtain swift and equitable enforcement of violations of law against the Company.
The Company’s Operations
In Myanmar Are Dependent Upon Its Leased Factory Complex In Yangon, Myanmar, And The Loss Or Interference With That Lease Would Materially,
And Adversely, Affect The Company’s Operations In Myanmar. On March 29, 2019 Kayser Myanmar entered into a 50-year lease for
an approximately 6,900 square meter (1.67 acres) factory estate in Yangon. Kayser Myanmar advanced $950,000 to the landlord as a prepayment
of rent under the lease (at currency conversion rate in effect at that time, the prepayment represents approximately 12 years of rental
payments), and has spent approximately $600,000 on refurbishing the complex and building one new factory building and a new office building
at the site. Accordingly, this new facility represents a significant long-term investment by the Company in its operations in Myanmar.
All of Kayser Myanmar’s operations are now being conducted at this new facility. Any interference or interruption of Kayser Myanmar’s
right to operate at this new facility, or a challenge to the existence or validity of the 50-year lease, including as a result of a dispute
with the landlord or because of any actions or regulations by Myanmar governmental, administrative or taxation authorities, could materially
negatively affect the Company’s investment in the new factory and its ability to operate in Myanmar.
The Company Has Substantial
Assets In Myanmar, And Any Action By The Government To Expropriate Or Restrict Those Assets Would Materially Harm The Company. Myanmar
has only recently permitted non-Myanmar businesses to operate in Myanmar. The laws governing foreign businesses regulate both the manner
in which such foreign entities can operate as well as the ownership of assets by foreign entities. The laws and regulations under which
foreign business can operate and own assets are still being developed and are changing. As a result, there is substantial uncertainty
in operating in Myanmar and in owning equipment, machinery and inventory (the Company currently does not own any real estate, but it does
hold a long-term lease on its factory in Myanmar). Furthermore, the status of the laws prohibiting expropriation are uncertain since the
military seized control of the government in early 2021. No assurance can be given that Myanmar will not in the future adopt laws, or
take actions, that affect the Company’s Myanmar assets and properties.
Labor Shortages and Employee Turnover May Negatively
Affect The Company’s Operations and Profitability. One of the principal economic advantages of locating the Company’s
operations in China and Myanmar has been the availability of low-cost labor. Due to the enormous growth in manufacturing in China, workers’
higher salary expectations, and the after-effects of China’s one-child policy, the Company has recently had difficulty in filling
its lower cost labor needs in China. Due in part to these wage increases and labor shortages, the Company has stopped most of its labor-intensive
manufacturing in China and now uses its Shenzhen facilities mostly for engineering, tool manufacturing, design and administrative purposes.
Since these functions are performed by higher paid professional employees, the Company’s exposure to the labor issues in China has
been reduced. However, the cost and risks of hiring and training new employees has shifted to Myanmar where the Company now performs most
of its labor-intensive manufacturing in Myanmar. Myanmar also observes an extended new year’s celebration each year in April during
which the Company’s factories are closed and all workers temporarily leave. Because many of the Myanmar factory workers are migrant
workers who live far from the Company’s Yangon factory, many do not return after the holidays, as a result of which labor turnover
can be high at times. The Company is required to annually hire, and train, new workers.
Import Duties and Restrictions May Negatively
Affect The Company’s Operations and Liquidity. China is increasingly regulating and monitoring imports of raw materials and
parts by manufacturers in China, which regulations make it more burdensome and expensive to import the materials that the Company needs
to manufacture its products. The Company now also has to operate under import customs contracts in Myanmar, or under bonded warehouse
arrangements, in order to be able to import goods into Myanmar without paying taxes or duties. Failure by the Company or by third parties
who perform transportation services for the Company to comply with the import regulations can lead to financial penalties on the Company,
to additional restrictions on import activities, and could even result in the prohibition of future duty-free import/exports by the Company.
Any such prohibition would adversely affect the Company’s business and operations. No assurance can be given that the Company or
its transportation service providers will or will be able to fully comply with the increased import regulations.
The Increasing Rate of Inflation In China Myanmar
May Negatively Impact Our Operations. The rate of inflation in China and, in particular, in Myanmar, has noticeably increased this year. Inflation in Myanmar is more
than 10% per annum this year. As a result, employee compensation and other operating expenses in China, and in particular Myanmar, could
significantly increase. We can provide no assurance that we will not be affected in the future by higher rates of
inflation. Inflation could materially affect our financial performance by increasing our operating costs and expenses, including employee
compensation and the cost of raw materials. Additionally, because a substantial portion of our assets from time to time consists of cash
and cash equivalents and short-term investments, high inflation could significantly reduce the value and purchasing power of these assets.
Risks Related To The Company’s Operations,
Structure And Strategy.
The Company Faces On-Going Risks Related To
The COVID-19 Outbreak, Particularly At Its Shenzhen, China Facility. The outbreak of the coronavirus (COVID-19) pandemic has impacted
the Company’s operations in China and in Myanmar. The COVID-19 pandemic forced closures of the Company’s factory in Shenzhen,
China, including a brief closure for one week in March 2022, a closure of the Myanmar facility for one week in July 2021 and two weeks
in fiscal 2021, and could require the Company to temporarily close its facilities in the future. The travel and other restrictions that
were imposed as a result of COVID-19, many of which remain in effect, continue to hinder the Company’s operations and limit the
Company’s engineers and technicians from travelling from China to Myanmar to assist the Myanmar facility with its engineering needs.
The travel restrictions imposed as a result of the pandemic have materially limited the Company’s ability to market its products,
attend trade shows, and demonstrate its newly developed products, all of which have restricted the Company’s ability to attract
new customers. The outbreak of COVID-19 in both Shenzhen, China, and Yangon, Myanmar, currently is under control, and work has resumed
at the Company’s factories in both of these locations. However, China has adopted a “zero tolerance” COVID-19 policy
that is intended to control the spread of the virus, which policy includes quarantines on entire cities and regions, restrictions on travel
and public gatherings, and temporary closure of certain businesses and facilities. Accordingly, the Company’s facilities in Shenzhen
could be closed at any time for unknown periods. Any closures or other restrictions imposed as a result of COVID-19 may materially adversely
affect our operating and financial results in a manner that is not currently known to us. Closures of the facilities of our third-party
suppliers of parts and components due to the COVID-19 pandemic would likewise negatively affect our operations and could result in lost
sales, higher prices and manufacturing delays.
The Company Is Financially Dependent On A Few
Major Customers. During the years ended March 31, 2022 and 2021 the Company’s aggregate sales to its three largest customers
accounted for approximately 76.6% and 87.8% of net sales respectively. While there are material benefits to limiting its customer base
to a few, large, well-established and financially strong customers, having fewer customers also has significant risks. The Company’s
success will depend to a significant extent on maintaining its major customers and on the businesses of its major customers. The Company
could be materially adversely affected if it loses one or more of its major customers or if the business and operations of its existing
major customers declines.
In addition, a substantial portion of the Company’s
sales to its major customers are made on credit, which exposes the Company to the risk of significant revenue loss if a major customer
is unable to honor its credit obligations to the Company. Any material delay in being paid by its larger customers, or any default by
a major customer on its obligations to the Company would significantly and adversely affect the Company’s liquidity. As of March
31, 2022 and 2021, accounts receivable from the four customers with the largest receivable balances at year-end represented, in the aggregate,
88.1% and 94.5% of the total outstanding receivables, respectively. While most of the accounts receivable outstanding as of March 31,
2022 were from well-established long-time customers, 30.3% of those accounts receivable represented sales to a new customer with whom
the Company does not have an established credit history.
Interruptions In Supplies Provided By The Company’s
Third-Party Suppliers, Including Due To The COVID-19 Pandemic And The Ongoing War In Ukraine, May Subject The Company To External Procurement
Risks That Negatively Affect Its Business. The Company depends on third-party suppliers for its raw materials and many of its
components. Any disruptions to the Company’s supply chain, significant increase in component costs, or shortages of critical components,
could adversely affect the Company’s business and result in lost sales, customer dissatisfaction and increased costs. Such a disruption
could occur as a result of any number of events, including, but not limited to, an extended closure of or any slowdown at our supplier’s
plants or shipping delays due to efforts to limit the spread of COVID-19 or implementation of post-COVID-19 policies or practices, war
and economic sanctions against third parties, including those arising from the ongoing war between Russia and Ukraine, market shortages
due to surge in demand for any particular part or component, increases in prices or impact of inflation, the imposition of regulations,
quotas or embargoes on components, transportation delays or other failures affecting the supply chain and shipment of materials and finished
goods.
Fluctuating Shipping Costs And Disruptions In
Shipping Could Materially And Adversely Affect Our Business And Operating Results. Our foreign based customers purchase the products
that we manufacture for them in China and Myanmar based on an expectation of timely delivery at a reasonable transportation cost. Generally,
we ship our products from the ports in Hong Kong, Shenzhen, China and Yangon, Myanmar to their final destinations, and our customers bear
the transportation costs of their products. Certain of our customers also transport their products by air. During the past two years,
there has been a global shipping and logistics crisis due to lengthy port wait times and labor and container shortages. Simultaneously,
shipping costs have spiked. While shipping costs have somewhat moderated recently, shipping costs remain volatile. Delays in the transportation
of products and significant increases in shipping costs could adversely affect our customers production schedules and production costs.
These factors, in turn could cause our customers to consider using suppliers closer to their facilities or even manufacturing those products
themselves at their own domestic facilities. The loss of customers because of international transportation disruptions and cost fluctuations
could have a material adverse effect on our business and operating results. No assurance can be given that our customers will continue
to purchase our products if these delays in delivery and if these major shipping price hikes continue.
Transactions Between The Company And Its Subsidiaries
May Be Subject To Scrutiny By Various Tax Authorities And Could Expose The Company To Additional Taxes. The Company operates through
various subsidiaries in various countries. These subsidiaries make inter-company purchases at various prices. Under China’s enterprise
income tax law, all such inter-company transactions have to be made on an arm’s-length basis and are subject to scrutiny as transfer
pricing transactions between related parties. Transactions between the various subsidiaries located inside and outside of China must also
meet China’s transfer pricing documentation requirements that include the basis for determining pricing between the related entities,
as well as the computation methodology. The Company could face material and adverse consequences if the Chinese tax authorities determine
that transactions between the Company’s various subsidiaries do not represent arm’s-length pricing regulations and, therefore,
that such transactions are deemed to be structured to avoid taxes. Such a determination could result in increased tax liabilities of the
affected subsidiaries and potentially subject the Company to late payment interest and other penalties.
The Company Is Highly Dependent Upon Its Executive
Officers And Its Other Managers. The Company is highly dependent upon Roland Kohl, the Company’s Chief Executive Officer, and
its other officers and managers. Although the Company has signed employment contracts with Mr. Kohl and certain of its other key officers/managers,
no assurance can be given that those employees will remain with the Company during the terms of their employment agreements. The loss
of the services of any of the foregoing persons would have a material adverse effect on the Company’s business and operations. The
Company owns a $2,000,000 life insurance policy issued to insure the Company’s in the event of Mr. Kohl’s death. Mr. Kohl
is the primary contact between the Company and certain of its larger customers, particularly those based in Germany. Accordingly, the
resignation, retirement or other departure of Mr. Kohl from the Company could have a material negative impact on the Company’s relationship
with these customers and on the Company’s ability to retain these clients.
The Company Faces Significant Competition From
Numerous Larger, Better Capitalized, and International Competitors. The Company competes against numerous manufacturers for all of
its current products. Such competition arises from both third-party manufacturers and from the in–house manufacturing capabilities
of existing customers. Many of the larger, international competitors also operate competing facilities in Shenzhen, China, while others
have also established manufacturing facilities in other low-cost manufacturing countries, which have given those competitors the ability
to shift their manufacturing to those locations whenever costs at those other locations are cheaper. Many of our competitors have achieved
substantial market share and many have lower cost structures and greater manufacturing, financial or other resources than we do. If we
are unable to provide comparable manufacturing services and high-quality products at a lower cost than the other companies in our market,
our net sales could decline.
During The Course Of The Audits Of Our Consolidated
Financial Statements, We And Our Independent Registered Public Accounting Firms Identified Material Weaknesses In Our Internal Control
Over Financial Reporting. If We Fail To Re-Establish And Maintain An Effective System Of Internal Control Over Financial Reporting, Our
Ability To Accurately And Timely Report Our Financial Results Or Prevent Fraud May Be Adversely Affected, And Investor Confidence And
The Market Price Of Our Common Shares May Be Adversely Impacted. We are subject to reporting obligations under the U.S. securities
laws. The Securities and Exchange Commission, or the SEC, adopted rules pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiring
every public company to include a management report on such company’s internal control over financial reporting in its annual report,
which contains management’s assessment of the effectiveness of our internal control over financial reporting.
We and our independent registered public accounting
firms, in connection with the preparation and external audit of our consolidated financial statements for the year ended March 31, 2022,
identified material weaknesses related to internal control over financial reporting in respect of our operations in Myanmar. Following
the identification of the material weaknesses and other control deficiencies, we have taken measures and plan to continue to take measures
to remedy these deficiencies. However, the implementation of these measures has not yet, and may not in the future, fully address the
material weakness and deficiencies in our internal control over financial reporting.
Our management has concluded that our internal
control over financial reporting was not effective as of March 31, 2022, and the following material weaknesses were identified: (i) We
have not maintained sufficient internal controls over cash related controls at our Myanmar operations, which pertain to the maintenance
of records in reasonable detail to accurately and fairy reflect and record cash transactions. Although many of financial transactions
in Myanmar are conducted with cash, the effects of poor cash controls were mitigated by the fact that we only maintained a small balance
of cash in Myanmar; (ii) We do not have sufficient and skilled accounting personnel, particularly in Myanmar, with an appropriate level
of technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States commensurate
with the our financial reporting requirements; and (iii) We do not have appropriate and adequate policies and procedures in place in Myanmar
to evaluate the proper accounting and disclosures of key transactions and documents. See “Item 15. Controls and Procedures—Management’s
Annual Report on Internal Control over Financial Reporting.” Failure to correct these material weaknesses or failure to discover
and address any other control deficiencies could result in inaccuracies in our consolidated financial statements and could also impair
our ability to comply with applicable financial reporting requirements and make related regulatory filings on a timely basis. As a result,
our business, financial condition, results of operations and prospects, as well as the trading price of our common shares, may be materially
and adversely affected.
Fluctuations in Foreign Currency Exchange Rates
Will Continue to Affect the Company’s Operations and Profitability. Because the Company engages in international trade and operates
using four different currencies, the Company is subject to the risks of foreign currency exchange rate fluctuations. The Company’s
operations are based in the PRC, Hong Kong and in Myanmar. However, because most the Company’s customers are located outside of
these markets (primarily in Europe), the Company makes and/or receives payments in various currencies (including U.S. dollars, Hong Kong
dollars and RMB), and pays its expenses in U.S. dollars, RMB, Hong Kong dollars, and MMK. As a result, the Company is exposed to the risks
associated with possible foreign currency controls, currency exchange rate fluctuations or devaluations. For example, the Company realized
currency exchange losses of $24,000 and $60,000 in the fiscal years ended March 31, 2022 and 2021, respectively. Notwithstanding its
exposure to currency conversion rate fluctuations, the Company does not attempt to hedge its currency exchange risks and, therefore, will
continue to experience certain gains or losses due to changes in foreign currency exchange rates. The Company does attempt to limit its
currency exchange rate exposure in certain of its OEM contracts through contractual provisions, which may limit, though not eliminate,
these currency risks. No assurance can be given that the Company will not suffer future currency exchange rate losses that will materially
impact the Company’s financial results and condition.
The Company is Exposed to Significant Worldwide
Political, Economic, Legal And Other Risks Related To Its International Operations. The Company is incorporated in the British Virgin
Islands, has administrative offices for its subsidiaries in Hong Kong, and has all of its manufacturing facilities in China and Myanmar.
The Company sells its products to customers in China, Europe, Hong Kong, North America and elsewhere in Asia. As a result, its operations
are subject to significant political and economic risks and legal uncertainties, including changes in international and domestic customs
regulations, changes in tariffs, trade restrictions, trade agreements and taxation, changes in economic and political conditions and in
governmental policies, difficulties in managing or overseeing foreign operations, and wars, civil unrest, acts of terrorism and other
conflicts. The occurrence or consequences of any of these factors may restrict the Company’s ability to operate in the affected
region and decrease the profitability of the Company’s operations in that region.
Acquisitions Or Strategic Investments May Not
Be Successful And May Harm The Company’s Operating Results. The Company has in the past, and may in the future, acquire, invest
in, or enter into strategic arrangements with other companies in China and elsewhere (including elsewhere in Asia, Europe or even in North
or Central America). Such acquisitions or strategic investments could have a material adverse effect on the Company’s business and
operating results because of:
| ● | The
assumption of unknown liabilities, including employee obligations. |
| ● | The
Company could incur significant expenses related to bringing the financial, accounting and
internal control procedures of the acquired business into compliance with U.S. GAAP financial
accounting standards and the Sarbanes Oxley Act of 2002. |
| ● | The
Company’s operating results could be impaired as a result of restructuring or impairment
charges related to amortization expenses associated with intangible assets. |
| ● | The
Company could experience significant difficulties in successfully integrating any acquired
operations, technologies, customers’ products and businesses with its operations. |
| ● | Future
acquisitions could divert the Company’s capital and management’s attention to
other business concerns. |
| ● | The
Company may not be able to hire the key employees necessary to manage or staff the acquired
enterprise operations. |
Risks Related To Regulatory Oversight And The
Company’s Charter.
Certain Legal Consequences of Incorporation
in the British Virgin Islands. The Company is incorporated under the laws of the British Virgin Islands, and its corporate affairs
are governed by its Amended and Restated Memorandum of Association and Articles of Association and by the BVI Business Companies Act of
the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of
the Company’s management, directors and controlling shareholders and the rights of the Company’s shareholders differ from
those that would apply if the Company were incorporated in a jurisdiction within the U.S. Further, the rights of shareholders under British
Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in
most U.S. jurisdictions. Thus, the public shareholders of the Company may have more difficulty in protecting their interests in the face
of actions of the management, directors or controlling shareholders than they might have as shareholders of a corporation incorporated
in a U.S. jurisdiction. In addition, there is doubt that the courts of the British Virgin Islands would enforce, either in an original
action or in an action for enforcement of judgments of U.S. courts, liabilities that are predicated upon the securities laws of the U.S.
The Company’s Rights Plan, And Certain
Provisions of Its Amended and Restated Memorandum And Articles of Association May Discourage a Change of Control. In April
2018, the Company adopted a shareholder rights plan (the “Rights Plan”) that provides for the issuance of one right (“Right”)
for each of our outstanding common shares. The Rights are designed to assure that all shareholders receive fair and equal treatment in
the event of any proposed takeover and to guard against partial tender offers, open market accumulations, undisclosed voting arrangements
and other abusive or coercive tactics to gain control of the Company or the Board of Directors without paying all shareholders a control
premium. The Rights will cause substantial dilution to a person or group that acquires 15% or more of the Common Shares on terms not approved
by our board of directors. The Rights Plan may discourage, delay or prevent a change in control of the Company or management that shareholders
may consider favorable.
Some provisions of the Company’s Amended
and Restated Memorandum and Articles of Association also may discourage, delay or prevent a change in control of the Company or management,
including provisions that (1) provide that a meeting of shareholders can be called only by the Company’s Board of Directors, Chairman
of the Board, Chief Executive Officer, or President and not by shareholders; (2) provide that directors of the Company may be removed
only for cause, and only by the affirmative vote of the holders of at least two-thirds in voting power of the Series A Preferred Shares
and a majority of the outstanding common shares; and (3) require a vote of at least two-thirds in voting power of the outstanding shares
to amend these and certain other provisions of the Amended and Restated Memorandum and Articles of Association.
These provisions could make it more difficult for
a third party to acquire the Company, even if the third party’s offer may be considered beneficial by many shareholders. As a result,
shareholders may be limited in their ability to obtain a premium for their shares.
It May be Difficult to Serve the Company with
Legal Process or Enforce Judgments Against the Company’s Management or the Company. The Company is a British Virgin Islands
holding corporation with subsidiaries in Hong Kong, Myanmar and China. Substantially, all of the Company’s assets are located in
the PRC (including Hong Kong) and Myanmar, and no assets, employees or operations are located in the U.S. In addition, other than one
director, all of the Company’s officers and directors reside outside of the U.S. It may not be possible to effect service of process
within the United States or elsewhere outside the PRC, Myanmar or Hong Kong upon the Company’s directors, or executive officers,
including effecting service of process with respect to matters arising under United States federal securities laws or applicable state
securities laws. Neither the PRC nor Myanmar have treaties providing for the reciprocal recognition and enforcement of judgments of courts
with the United States and many other countries. As a result, recognition and enforcement in the PRC or Myanmar of judgments of a court
in the United States or many other jurisdictions in relation to any matter, including securities laws, may be difficult or impossible.
Enforcement of a foreign judgment in Hong Kong
or the British Virgin Islands may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium,
or similar laws relating to or affecting creditors’ rights generally, and will be subject to a statutory limitation of time within
which proceedings may be brought.
Risks Related To Our Common Shares.
Volatility Of Market Price Of the Company’s
Shares. The markets for equity securities have been volatile, and the price of the Company’s Common Shares has been and could
continue to be subject to material fluctuations in response to quarter to quarter variations in operating results, news announcements,
trading volume, general market trends both domestically and internationally, currency movements and interest rate fluctuations.
Exemptions Under The Exchange Act As A Foreign
Private Issuer. The Company is a foreign private issuer within the meaning of rules promulgated under the U.S. Securities Exchange
Act of 1934 (the “Exchange Act”). As such, and though its Common Shares are registered under Section 12(b) of the Exchange
Act, it is exempt from certain provisions of the Exchange Act applicable to United States public companies including: the rules under
the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K; the sections
of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the
Exchange Act; the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities
and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale,
or sale and purchase, of the issuer’s equity securities within six months or less), and the provisions of Regulation FD aimed at
preventing issuers from making selective disclosures of material information. In addition, certain provisions of the Sarbanes-Oxley Act
of 2002 do not apply to the Company. Because of the exemptions under the Exchange Act and Sarbanes-Oxley Act applicable to foreign private
issuers, shareholders of the Company are not afforded the same protections or information generally available to investors in public companies
organized in the United States.
While The Company Has In The Past Paid Dividends,
No Assurance Can Be Given That The Company Will Declare Or Pay Cash Dividends In The Future. The Company’s policy has been to
pay a cash dividend at least once a year to all holders of its Common Shares, subject to its profitability and cash position. The Company
declared three dividend payments in the fiscal year ended March 31, 2022 (for a $0.06 per share dividend that was paid on October 12,
2021, a $0.06 per share dividend that was paid on November 24, 2021, and a $0.05 per share dividend that was paid on April 8, 2022). Dividends
are declared and payable at the discretion of the Board of Directors and depend upon, among other things, the Company’s results
of operations, the anticipated future earnings of the Company, the success of the Company’s business activities, the Company’s
capital requirements, and the general financial conditions of the Company. Although it is the Company’s intention to pay dividends
at least once a year, the Company does not expect to pay dividends during periods when the Company’s operations have not been profitable,
or when the Company uses a material amount of its financial resources for long-term capital investments. Accordingly, no assurance can
be given that the Company will pay dividends in fiscal 2023, or that the Company will pay any dividends in the future even if it has a
profitable year or is otherwise capable of doing so. If the Company does not pay a cash dividend, the Company’s shareholders will
not realize a return on their investment in the Common Shares except to the extent of any appreciation in the value of the Common Shares.
Risk of Cybersecurity Breaches Could Adversely
Affect Our Business, Revenues and Competitive Position. Security breaches and other disruptions could compromise the Company’s
information and expose the Company to liability, which would cause the Company’s business and reputation to suffer. In the ordinary
course of the Company’s business, the Company stores sensitive data, including business information and regarding its customers,
suppliers and business partners, in the Company’s networks. The secure maintenance and transmission of this information is critical
to the Company’s operations. Despite the Company’s security measures, its information technology and infrastructure may be
vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise
the Company’s networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access,
disclosure or other loss of information could result in legal claims or proceedings, regulatory penalties, disrupt the Company’s
operations, and damage the Company’s reputation, which could adversely affect its business, revenues and competitive position.
The Company Could Be Delisted If It Is Unable
To Meet The PCAOB Inspection Requirements In Time. On December 18, 2020, the Holding Foreign Companies Accountable Act (“HFCAA”)
was enacted. The HFCAA requires the SEC to prohibit the trading of securities of any foreign company identified by the SEC as a “Commission-Identified
Issuer” on any U.S. securities exchanges. The SEC will label a foreign company as a Commission-Identified Issuer if the company
retains a foreign accounting firm that cannot be inspected by the Public Company Accounting Oversight Board (United States), or PCAOB,
for three consecutive years, beginning in 2022. The Company’s independent registered public accounting firm is located in and organized
under the laws of Hong Kong, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese
authorities, and therefore our auditors are not currently inspected by the PCAOB.
On December 16, 2021, the PCAOB issued its determinations
(the “Determination”) that they are unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered
in mainland China and in Hong Kong. The Determination includes lists of public accounting firms headquartered in mainland China and Hong
Kong that the PCAOB is unable to inspect or investigate completely. Our auditor Centurion ZD CPA & Co. is subject to the Determination
list.
On December 2, 2021, the SEC adopted final amendments
implementing the disclosure and submission requirements of the HFCAA. In addition, the adopting release establishes the SEC’s procedures
for (i) determining whether an issuer is a “Commission-Identified Issuer” under the HFCAA and (ii) prohibiting the trading
of a Commission-Identified Issuer’s securities. A “Commission-Identified Issuer” is an issuer identified by the SEC
as having filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined
it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction (“PCAOB-Identified
Firm”). The SEC will identify such issuers promptly after the filing of their annual report by evaluating (via Inline XBRL tagging
or other structured data) whether the issuer’s annual report contains an audit report signed by a PCAOB-Identified Firm. The SEC
will then “provisionally identify” the issuer as a Commission-Identified Issuer on the SEC’s website at www.sec.gov/HFCAA.
Provisionally identified issuers will have 15 business days to email the SEC to dispute the identification, after which the determination
becomes conclusive. The earliest that the SEC could identify a Commission-Identified Issuer would be after companies file their annual
reports for 2022 (i.e., summer 2022 for calendar-year issuers). The SEC will impose an initial trading prohibition on an issuer as soon
as practicable after the issuer is conclusively identified as a Commission-Identified Issuer for three consecutive years. The prohibition
will apply to trading on a national securities exchange and in the over-the-counter market. The earliest any trading prohibitions would
apply to any issuer would be in 2024, once an issuer has been a Commission-Identified Issuer for three consecutive years (2022, 2023 and
2024).
On June 22, 2021, the U.S. Senate passed the Accelerating
Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCAA and require the SEC to prohibit an issuer’s
securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead
of three, thus reducing the time period before our securities may be prohibited from trading or delisted if our auditor is unable to meet
the PCAOB inspection requirement.
On February 4, 2022, the U.S. House of Representatives
passed the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022 (the
“America COMPETES Act”). If the America COMPETES Act is enacted into law, it would amend the HFCAA and require the SEC to
prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for
two consecutive years instead of three.
The enactment of the HFCAA and any additional rulemaking
efforts to increase U.S. regulatory access to audit information in China could cause investor uncertainty for Commission-Identified Issuers,
and the market price of the securities of those companies could be materially adversely affected. In March 2022 the SEC began identifying
public companies that retained a registered public accounting firm that cannot be inspected or investigated by the PCAOB as Commission-Identified
Issuer. We have not been identified as a Commission-Identified Issuer, but we may be so identified in the future. Whether the PCAOB will
be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on
a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be delisted from the
NASDAQ and our securities will not be permitted to trade in any U.S. securities markets. A delisting would substantially impair your ability
to sell or purchase our securities when you wish to do so, and the risk and uncertainty associated with delisting would have a negative
impact on the price of our securities. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable
to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.
The Audit Report Included In Our Annual Report
on Form 20-F Filed With The SEC Is Prepared By Auditors Who Are Not Inspected Fully By The Public Company Accounting Oversight Board (the
“PCAOB”), And As Such, Investors Are Deprived Of The Benefits Of Such Inspection. Our auditor, Centurion ZD CPA &
Co., is required to undergo regular inspections by the PCAOB as an auditor of companies that are publicly traded in the United States
and a firm registered with the PCAOB. However, because our auditor is based in Hong Kong, a jurisdiction where the PCAOB is currently
unable to conduct inspections without the approval, our auditor and its audit work are not currently able to be inspected independently
and fully by the PCAOB.
Inspections of other auditors conducted by the
PCAOB outside Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work
prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may
be deprived of the benefits of PCAOB inspections and may lose confidence in our reported financial information and procedures and the
quality of our financial statements.
Item
4. Information on the Company
Highway Holdings Limited is a manufacturing company
that produces a wide variety of high-quality products mostly for large, global original equipment manufacturers -- from simple parts and
components to sub-assemblies and finished products. The Company’s administrative offices are located in Hong Kong, and its manufacturing
facilities are located in Shenzhen in the People’s Republic of China, and in Yangon, Myanmar. The Chinese operations are conducted
by Nissin Metal and Plastic (Shenzhen) Company Limited, a foreign owned subsidiary that is registered in China (this type of foreign owned
company is commonly known as a “Wholly Foreign Owned Enterprise” (a “WFOE”)). The Myanmar operations are conducted
through Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”), a company registered to operate as a foreign company
in Myanmar that is 84% owned by the Company.
History and Development of the Company.
Overview. Highway Holdings Limited
is a holding corporation that was incorporated on July 20, 1990 as a limited liability International Business Company under the British
Virgin Islands International Business Companies Act, 1984 (the (“IBCA”). Effective on January 1, 2007, the British Virgin
Islands repealed the IBCA, and simultaneously with such repeal, the Company was automatically re-registered under the BVI Business Companies
Act, 2004, BVI’s corporate law that replaced the IBCA. In May 2018, the Company amended its Memorandum and Articles of Association
to conform to the IBCA. Our website is www.highwayholdings.com (the information contained in our website is not a part of this annual
report on Form 20-F and no portion of such information is incorporated herein). The SEC maintains a website at http://www.sec.gov that
contains reports and other information, including this Annual Report on Form 20-F.
As of the date of this Report, Highway Holdings
Limited conducts all of its operations through five wholly-owned or controlled subsidiaries that carry out the Company’s business
from Hong Kong, the Company’s principal design and manufacturing factory in Shenzhen, China, and from a manufacturing and assembly
facility in Yangon, Myanmar.
The Company began its operations in 1990 in Hong
Kong as a metal stamping company. In 1991, the Company transferred the metal stamping operations to a factory in Long Hua, Shenzhen, China.
From 1991 until the reorganization that commenced in 2011 (see, “Reorganization” below), the Company’s metal stamping
and other operations were conducted pursuant to agreements entered into between certain Chinese companies set up by the local government
and the Shenzhen City Baoan District Foreign Economic Development Head Company and its designees (collectively, the “BFDC”)
(the agreements, collectively the “BFDC Agreements”). Under the BFDC Agreements, the Company’s Long Hua, Shenzhen, operations
were provided with both manufacturing facilities and labor by affiliates of local government instrumentalities, for which the Company
paid management fees based on a negotiated sum per factory worker, and other charges, as well as rent for the factory complex. Under the
BFDC Agreements, the Company’s operations were limited by the terms of those agreements, and the Company could not sell its products
in China. As discussed in “Reorganization” below, all BFDC Agreements have been terminated, and the Company now operates in
Shenzhen, China, through “Nissin Metal and Plastic (Shenzhen) Company Limited” (herein referred to as “Nissin PRC”),
a new wholly-owned subsidiary that is a registered company in the PRC.
Realignment of Manufacturing and Assembly
Operations-- Myanmar Manufacturing Complex. The Company originally established its operations in Shenzhen, China to take advantage
of the low cost of operations in China, including in particular the low cost of labor. However, as the overall costs of operating a manufacturing
facility in Shenzhen increased, the cost advantages of operating in China were significantly eroded. Simultaneously, the administrative
and regulatory burdens of operating in China significantly increased. More recently, the Chinese regulatory agencies have required companies
operating in Shenzhen to automate and to operate as technology centers, rather than traditional manufacturing factories. As a result,
the Company’s Shenzhen facilities are currently primarily used for designing, tooling, engineering, and administrative activities,
and all of its manufacturing consist of automated manufacturing. The more labor-intensive operations have been moved to the Company’s
Yangon, Myanmar facilities.
As a result of the increasing costs and burdens
of operating in Shenzhen, and in order to lower its manufacturing costs and to remain competitive with OEMs who operate in low labor cost
locations outside of China, the Company developed a two-pronged strategy:
a. In
order to increase its production efficiency and reduce costs in Shenzhen, the Company now manufactures products in China primarily through
automation with automated, or semi-automated equipment. As a result, the Company’s manufacturing labor force in China has now been
reduced to about 30 workers. The Shenzhen facility is also the primary center of the Company’s product design and development, as
well as the tooling for new products.
b. The
Company has been shifting its labor-intensive assembly, and recently some of its component manufacturing, operations to Yangon, Myanmar,
a developing country that now permits foreign investment in that country. The cost of operating an assembly facility, particularly as
a result of the low cost of labor, currently is significantly lower in Myanmar than in Shenzhen, China. Early in 2013, the Company commenced
subcontracting some of its product assembly functions to Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”), a third-party
supplier in Yangon, Myanmar. This out-sourced assembly operation functioned satisfactorily and at a substantially lower cost, and the
Company’s customers were satisfied with the quality and timeliness of the products assembled in Myanmar. Accordingly, in June 2014
the Company purchased a 25% ownership interest in the Myanmar company, an additional 50% interest in March 2015, and additional 9% in
January 2017. As a result, since January 2017, the Company has owned 84% of Kayser Myanmar. The 16% interest in Kayser Myanmar that the
Company currently does not own is held by a Myanmar national and a founder and manager of Kayser Myanmar. The Company’s goal is
to shift its labor-intensive product assembly and labor-intensive component manufacturing operations from Shenzhen, China, to Myanmar.
On March 29, 2019, Kayser Myanmar entered into
a 50-year lease for an approximately 6,900 square meter (1.67 acres) factory estate in Yangon. Kayser Myanmar has upgraded the existing
two factories at the new leased facility and has constructed a third factory and a new office building on the site. Also, the Company
has transferred much of the machinery and manufacturing equipment from the Company’s Shenzhen, China, plant to the new Yangon facility.
See, “Organizational Structure/Offices and Manufacturing Facilities--Yangon Myanmar/Manufacturing Facilities” below.
The Company’s operations in Myanmar are subject to numerous risks associated with operating an assembly facility in an underdeveloped
country, and it is uncertain how many of the Company’s customers will permit their products to be assembled in Myanmar. See, “Risk
Factors-- The Company Faces Risks From Its Expanded Operations In Myanmar” and “Risk Factors--In Response To Recently
Enacted Global Human and Environmental Rights Regulations Enacted In Germany And Pending in other Jurisdictions, The Company’s Customers
May Prohibit Or Limit The Manufacture Of Their Products In Myanmar, Which Will Negatively Affect The Company’s Operations In Myanmar.”
Reorganization. In 2010 the regional
governments announced that the license arrangement previously used by the Company and numerous other foreign businesses to operate in
China would no longer be permitted. All foreign companies operating in China under this type of subcontract arrangement were required
to transfer their licensed China operations to foreign-owned companies organized and registered in China. Accordingly, in May 2011 the
Company formed Nissin Metal and Plastic (Shenzhen) Company Limited (“Nissin PRC”), a new wholly-owned subsidiary that is now
a registered company in the PRC, and transferred its China-based cash, assets, employees and operations to Nissin PRC. The termination
of the license operating agreements continued through the fiscal year ended March 31, 2016, at which time all of the Company’s operations
had either been transferred to Nissin PRC, or terminated (the foregoing reorganization and transfer of the Company’s operations
in China to Nissin PRC is herein referred to as the “Reorganization”). All of the Company’s operations in China since
the beginning of the fiscal year ended March 31, 2017 have been conducted through its Nissin PRC subsidiary. As a PRC registered company,
Nissin PRC is permitted to hire its own employees, lease its own facilities, and distribute its products in China. However, Nissin PRC
also is subject to China’s tax regulations and is subject to the rules and regulations applicable to other PRC registered companies.
As part of the Reorganization, the Company increased
certain of its administrative functions in Hong Kong. Currently, most of the Company’s non-manufacturing activities (i.e. its administrative
functions, marketing, sales, design, engineering, and purchasing) are now being conducted from two offices in Hong Kong, and most of its
manufacturing operations are being conducted at either the factory in Long Hua, Shenzhen, China, or Kayser Myanmar’s facility in
Yangon, Myanmar.
As a result of the Reorganization, the Company
is now structured as follow:
| ● | The
Company’s corporate administrative matters are conducted in the British Virgin Islands
through its registered agent: Harneys Corporate Services Limited, Craigmuir Chambers, Road
Town, Tortola, British Virgin Islands VG1110. |
| ● | The
Company’s administrative functions, and most of its engineering, design and marketing
functions, for its subsidiaries are conducted through the two offices located in Hong Kong
at Suite No. 1801, and Suite Nos. 1823-1823A, at Level 18, Landmark North, 39 Lung Sum Avenue,
Sheung Shui, New Territories, Hong Kong. The Company can be contacted in Hong Kong at (852)
2344-4248. |
| ● | The
Company’s automated manufacturing, and some of its engineering, tooling, and design
functions are now being conducted at the Company’s factory complex in Long Hua, Shenzhen,
China, through Nissin PRC. |
| ● | Most
of the Company’s assembly and manufacturing operations are now being conducted in Yangon,
Myanmar, through its 84% owned subsidiary, Kayser Myanmar. |
Current Business Overview/Plans
The Company is a fully integrated manufacturer
of high-quality metal, plastic, electric and electronic components, subassemblies and finished products for OEMs and contract manufacturers
(primarily in Europe, Asia, and to a lesser extent, in the United States). Since the Company’s formation, most of the Company’s
manufacturing activities were conducted through its factory complex in Long Hua, Shenzhen, China. Since 2013, the Company also conducts
many of its product assembly functions (and some of its component manufacturing functions) in Yangon, Myanmar, through Kayser Myanmar.
The Company currently manufactures and supplies
a wide variety of high-quality metal, plastic and electric parts, components and products to its OEM clients, which assemblies and components
are used by the Company’s customers in the manufacturing of products such as photocopiers, laser printers, print cartridges, electrical
connectors, electrical circuits, vacuum cleaners, LED power supplies, stepping motors, pumps for dishwashers, and other washing machine
components. As part of its manufacturing operations, the Company assists customers in the design and development of the tooling used in
the metal and plastic manufacturing process and provides a broad array of other manufacturing and engineering services. The manufacturing
services include metal stamping, screen printing, plastic injection molding, pad printing and electronic assembly of printed circuit boards.
Because it is able to provide these services, the Company eliminates the need to outsource these needed functions, and the Company is
better able to assure product quality, control overall manufacturing costs and provide timely product delivery, all of which management
believes is essential to maintaining, expanding and increasing the Company’s customer base. The Company believes its success as
a supplier to respected multi-national companies is mainly due to: (i) its German management culture; (ii) its comparatively low operating
costs; (iii) its ability to consistently manufacture the type of high quality products required by the Company’s targeted customers;
(iv) its expertise in manufacturing these products in the required quality at a reasonable cost; (v) the breadth of its manufacturing
capabilities, and (vi) its engineering, design and development capabilities (which it uses to assist its customers to design their products).
The Company is capable of manufacturing and assembling
a wide variety of complex products that require metal, plastics and electronics manufacturing capabilities, and therefore is able to manufacture
complete customized products for its customers.
The Company established its operations in Shenzhen,
China, almost 30 years ago to take advantage of China’s lower labor costs, lower facilities costs, less stringent regulations, and
various other benefits that were provided to foreign entities to encourage operations in China. As described elsewhere in this Annual
Report, these benefits are no longer available to most foreign companies operating in Shenzhen. In fact, the costs and burdens on foreign
owned companies appear to be significantly greater than on local Chinese-owned companies. In addition, recent actions by the Chinese government,
including heightened governmental inspections of foreign-owned enterprises and additional administrative requirements imposed on foreign-owned
entities, have during the past few years further significantly increased the costs and burdens of operating in China. These changes have
now effectively removed the benefits of being a foreign owned enterprise, and now make it more burdensome to operate in China as a foreign-owned
entity than as a locally owned enterprise. As a result, the Company has been decreasing its manufacturing operations in China, and has
been moving its assembly and manufacturing activities to the Company’s new facility in Myanmar. The Company also is considering
further reducing its manufacturing operations in China by various means, including by subcontracting some of these operations to a local
Shenzhen entity. This arrangement would shift much of the cost of maintaining and operating the Shenzhen manufacturing facility to the
new company, while still permitting the Company to have its customers’ components manufactured at the same facility by the same
equipment and personnel. Furthermore, the Company believes that transferring the manufacturing operations to a Chinese-owned entity may
reduce the number of inspections and will greatly relieve that entity from many other burdensome governmental regulations that appear
to be targeted at foreign-owned enterprises.
Industry Overview
The Company operates in the third-party contract
manufacturing industry. Manufacturers worldwide have increasingly outsourced the manufacture of some or all of their component and/or
product requirements to independent manufacturers. The benefits of using contract manufacturers (OEMs) include: access to manufacturers
in regions with low labor and overhead cost, reduced time to market, reduced capital investment, improved inventory management, improved
purchasing power and improved product quality.
The Company first commenced its metal stamping
operations for original equipment manufacturers in China in 1991. At that time, the Company gained a significant cost and logistical advantage
over other manufacturers by basing its manufacturing facilities in Long Hua, Shenzhen, China, less than 50 kilometers from Hong Kong.
However, there are now many other manufacturers in Shenzhen and in other similar low-cost areas in China and Asia. As a result, the Company
faces significantly more competition as a manufacturer of OEM parts. The Company has responded to the increased competition by restructuring
its operations and by trying to move from manufacturing low margin, low-cost individual parts to manufacturing higher margin, more expensive
components, subassemblies and even complete units for its customers.
Initially, the Company manufactured high-quality
metal parts, mostly for Japanese customers. More recently, the Company has been manufacturing high-quality parts and components for European
(primarily German) companies. The Company has remained flexible with respect to the types of products that it manufactures as well as
location of its customers in order to capitalize on market changes. During each of the past several years, more than 70% of the Company’s
revenues are derived from its European customers.
The Company’s Strategy
The Company’s future growth and profitability
depend on its ability to compete as a third party contract manufacturer. The Company’s business strategy and focus is to expand
its operations as an integrated OEM manufacturer of metal, plastic and electronic parts, components, subassemblies and competed products
for blue chip and international customers. The Company business strategy is to further develop and leverage its multi-disciplinary manufacturing
strengths, its cost structure, its logistical advantages, its reputation as a high-quality manufacturer, and its current and former relationships
with blue chip European customer to further expand its manufacturing operations and product offerings. In addition, the Company is attempting
to leverage these advantages by upgrading its equipment and machinery, expanding its manufacturing capabilities, and utilizing its cost
and logistical advantages. See, “Realignment of Manufacturing and Assembly Operations-- Myanmar Manufacturing Complex”
above.
The following are some of the elements that the
Company believes will enable it to compete as a third-party manufacturer.
Capitalize on, and leverage its manufacturing
strength: Unlike many of its manufacturing competitors, primarily those in Shenzhen, China, the Company is a vertically integrated
manufacturer that can design, manufacture and assemble complex components and subassemblies. In addition, unlike some of its competitors
that are limited to either metal stamping or to electronic and plastics manufacturing, the Company has the ability to combine metal stamping
and electronics and plastics manufacturing. For example, the Company manufactures stepping motors, which utilizes all of the Company’s
capabilities, starting with mold and die making for the metal and plastic parts, metal stamping, deep drawing and plastic injection molding,
electric coil winding, soldering, and assembling all the parts by using spot welding and riveting technologies. Accordingly, the Company’s
strategy is to focus on manufacturing more complex products that utilize the Company’s various manufacturing strengths.
Upgrading Equipment-Increased Automation.
In order to attract major European customers, and in order to reduce its labor costs and improve quality, the Company has continuously
upgraded the design and manufacturing equipment at its facilities and has made significant investments in automated/robotic machinery
that manufacture or assemble products. The Company designs and manufactures its own automated production lines. The Company’s goal
is to use automation/robotics to reduce it labor costs, improve the consistency and quality of its products, and to increase the quantity
of products that it manufactures at its work-stations. The automated machinery has significantly reduced the number of workers at the
Company’s facilities in Shenzhen, China.
Reduce Its Manufacturing And Assembly Costs
By Relocating Operations To Myanmar. The Company initially established its manufacturing and assembly operations in China to take
advantage of China’s low labor costs. Those costs have now risen to a level where the cost of manufacturing in China no longer is
competitive with manufacturing in underdeveloped nations. Accordingly, in order to be able to continue to provide price competitive products,
the Company now operates an assembly facility in Yangon, Myanmar. The Company has transferred much of its labor-intensive assembly operations
that cannot be economically automated to Myanmar, a country where the labor costs are significantly less than in China. The principal
purpose of operating in Myanmar is to reduce the cost of its products and, therefore, offset the increasing costs at its facility in Shenzhen,
China. In addition to lower labor and other operating costs, the Myanmar operations benefit from the preferential customs provisions,
particularly for the Company’s European customers. The European Commission has designated Myanmar as an undeveloped country whose
exports are currently still subject to tariff concessions called "preferential tariff quotas". Accordingly, the Company’s
European customers that satisfy the European Commission’s requirements currently benefit from purchasing products manufactured in
Myanmar. These benefits may attract other European customers to move at least a portion of their assembly needs to the Company’s
Myanmar facilities.
Maintaining customers and increasing market
share through financial strength: Many of the Company’s largest customers are global companies that require that their OEM manufacturers
have the financial strength to survive during financial and economic downturns. The Company has traditionally maintained a strong balance
sheet that has enabled it to continue to supply its customers during economic downturns.
Maintain production quality: Management
believes that maintaining close relations with the Company’s customers is important to the success of the Company’s business.
Understanding each customer’s needs and efficiently and quickly addressing its needs is vital to maintaining a competitive advantage.
Many of the Company’s customers have built the goodwill associated with their products and tradenames based on a high level of perceived
quality. By employing the type of high-quality management standards, production standards and quality control standards historically utilized
by many leading German companies, the Company has been able to satisfy the stringent requirements of its customers. Management believes
that the Company’s commitment to high level service, its attention to detail, and the quality of its manufacturing have the effect
of providing customers with a sense of confidence and security that their product requirements will be met.
The Company conducts most of its manufacturing
operations in accordance with typical German manufacturing standards, paying particular attention to cleanliness, incoming material control,
in process quality control, finished goods quality control and final quality audit. The Company’s factory in China has received
and maintained its ISO 9001 quality management system certification and an ISO 14001 environmental management systems certification. The
Company’s quality system helps to minimize defects and customer returns and create a higher confidence level among customers.
Operate as a socially responsible company.
The Company is committed to being a socially responsible company by operating morally and ethically, by protecting the employees physical
and mental well-being, by providing a safe work place, by following the legal employment requirements, by not employing underage persons,
and by protecting the surrounding environment. The Company’s social responsibility and accountability actions are important criteria
in the selection of OEMs by the Company’s global customers. Some of these customers demand compliance with the SA8000 social accountability
management system, and Kayser Myanmar’s compliance with SA8000 has been audited several times by the Company’s customers.
The safety of the Company’s employees and customers are of primary concern to the Company’s management. In response to the
COVID-19 pandemic, the Company implemented numerous changes to its operations (in addition to distributing masks and hand sanitizers,
and regularly disinfecting and cleaning all public areas) to protect the health and safety of its employees.
Manufacturing
The Company’s manufacturing business consists
of various stages: (i) tooling design and production; (ii) manufacturing parts made by metal stamping and plastic injection molding; (iii)
mechanical and/or electric/electronic assemblies, and (iv) finishing, packaging and shipping.
Tooling design and production: The metal
manufacturing process generally begins when a customer has completed the design of a new product and contacts the Company to supply certain
metal and plastic components to be used in the product. Generally, the Company must design and fabricate the tooling necessary to manufacture
these components in its tooling workshop that is currently located at its Shenzhen, China factory. In some instances, however, the customer
already possesses the tooling necessary to manufacture the metal component and simply delivers the tools to the Company. Customers will
sometimes also pay the Company to purchase and install the equipment necessary to manufacture the customer’s products. The Company
uses various computer-controlled manufacturing equipment to efficiently produce high quality tools designed to produce a high quality
product. Many of the metal parts manufactured by the Company make use of progressive, multi-stage stamping techniques. In order to conduct
and maintain this fully automated stamping method, tools and machines must be precisely fine-tuned and aligned to achieve the required
quality standard and maximum efficiency.
The tool making process for metal parts generally
takes between 14 to 50 working days depending on the size and complexity of the tool. Customers typically bear the cost of producing the
tools and, as is customary in the industry, the customers hold title to the tooling. However, the Company maintains and stores the tools
at its factory for use in production and the Company usually does not make tooling for customers unless they permit the Company to store
the tools on site and manufacture the related parts.
The Company also makes highly sophisticated plastic
injection molds based on its customers’ orders and requirements in a manner similar to the Company’s metal tool manufacturing
process.
The Company maintains its ISO 9001 quality management
system certification and its ISO 14001 environmental management systems certification.
Metal Stamping; Plastic Injection Molding:
Following the completion of the tooling, the materials required for the specific product is selected and purchased. See “Raw Material,
Components Parts and Suppliers.” Often the customer specifies the materials to be used as well as the supplier. The completed tooling
is fitted to the press which is selected for its size and pressing force.
Using separate shifts, part stamping and plastic
molding can be conducted 24 hours a day, seven days per week other than during normal down time periods required for maintenance and changing
of tools and during the traditional Chinese public holidays. Due to the strict quality requirements of customers, each tool and machine,
and each product produced by the tools/machines, are subject to stringent in-process quality controls.
Finishing, Packaging and Shipping: After
their manufacture, the parts and components are inspected for defects and checked with custom-built test gauges. Some components are then
painted either at the Company’s Myanmar facilities or by specially trained, third party spray-paint facilities. After being painted,
the parts are baked at high temperatures in drying ovens before final inspection and packaging. Some parts are also screen printed by
the Company. Each of the parts, assemblies and products is then inspected, packaged to the customer’s specific requirement and delivered
to the final quality audit department for final quality inspection which is conducted on a random sample basis. Depending on its agreement
with its customers, the Company may ship the parts, assemblies and products it has manufactured by truck directly from its factory to
the customer’s factory in China or elsewhere through the ports of Shenzhen, Yangon and/or Hong Kong. Alternatively, the customer
may pick up the products at the Company’s factory and arrange for its own shipping.
Raw Material, Component Parts and Suppliers
The primary raw materials used by the Company to
manufacture its metal stamped parts are various types of steel including pre-painted steel sheet, electrolytic zinc plated steel sheet,
PVC laminated steel sheet, stainless steel, and cold roll steel sheet. The Company selects suppliers based on the price they charge and
the quality and availability of their materials. Many of the Company’s suppliers of steel operate through Hong Kong or China-based
companies which deliver the materials directly to the site of the Company’s operations in China and Myanmar.
The parts, components and products manufactured
by the Company may include various plastic injected and metal stamped components, as well as integrated circuits, electronic components
and paper packaging products. The Company manufactures many of these products, but also purchases components that it uses in its products.
These materials are subject to price fluctuations, and the Company has, at times, been materially adversely affected by price increases
or shortages of supply. The recent shortages of certain raw materials, such as steel, copper, plastic, resins, and electronic components
have affected the Company’s operations and its net sales. The on-going global shortage of computer chips has also negatively affected
the Company’s operations and has significant delayed the manufacture of larger order for various electronic products.
Transportation
Most of the sales agreements entered into by the
Company are either F.O.B. agreements or Ex-factory agreement (in which the Company makes the goods available at its premises) or F.C.A.
agreements (in which the Company hands over the goods, cleared for export, into the custody of the first carrier).
The Company’s facilities in Long Hua, Shenzhen,
China, are located near both Hong Kong and the seaport in Shenzhen. Many of the Company’s customers use the Shenzhen seaport rather
than the port of Hong Kong.
Products manufactured at the Kayser Myanmar facility
are shipped to the Company’s OEM customer through the Port of Yangon or the Yangon airport, both of which are readily accessible
for the manufacturing facility. Kayser Myanmar typically arranges for the customs clearance of these shipments.
Customers and Marketing
The Company’s sales are generated from customers
primarily located in Hong Kong/China, Europe, the United States/Mexico, and other Asian countries. Net sales to customers by geographic
area are determined by reference to the physical locations of the Company’s customers. For example, if the products are delivered
to a customer in China or Hong Kong, the sales are recorded as generated in Hong Kong and China; if the customer directs the Company to
ship its products to Europe, the sales are recorded as sold in Europe. Most of the Company’s recent payments have been in U.S. dollars,
although the Company still receives payment in both RMB and Euros. Net sales as a percentage of net sales to customers by geographic area
consisted of the following for the years ended March 31, 2020, 2021 and 2022:
| |
Year Ended March 31 | |
Geographic Areas: | |
2020 | | |
2021 | | |
2022 | |
Hong Kong and China | |
| 17.4 | % | |
| 17.0 | % | |
| 17.0 | % |
Europe | |
| 78.0 | % | |
| 79.3 | % | |
| 70.9 | % |
Other Asian countries | |
| 0 | % | |
| 0.4 | % | |
| 0.6 | % |
North America | |
| 4.6 | % | |
| 3.3 | % | |
| 11.5 | % |
The Company currently has two business and reporting
segments, consisting of (i) its metal stamping and mechanical OEM operations, and (ii) its electric OEM operations (that include its plastic
operations). The sales by segments for the years ended March 31, 2020, 2021 and 2022 are as follows:
| |
Year Ended March 31 | |
Segment Sales: | |
2020 | | |
2021 | | |
2022 | |
Metal Stamping and Mechanical OEM | |
| 55.2 | % | |
| 56.6 | % | |
| 58.3 | % |
Electric OEM | |
| 44.8 | % | |
| 43.4 | % | |
| 41.7 | % |
Most of the Company’s customers for its components
and subassemblies generally are themselves manufacturers. The Company’s products are sold primarily to European owned companies
to be used in finished goods produced by customers at their own manufacturing facilities in China and Europe. However, the Company also
has in the past produced finished products, such as light fixtures, that it sold to its customers.
The Company markets its services through existing
contacts, word-of-mouth referrals and references from associated or related companies of the customers, as well as attendance at some
trade shows. During the past few years, the Company has employed a number of foreign sales persons to complement the activities of its
officers and in-house sales personnel. The Company has, from time to time, commissioned sales agents in Mexico, U.S. and Germany. These
sales agents typically receive an expense allowance and an on-going commission for sales made by the Company to customers introduced by
the agents. The Company’s sales and marketing efforts have been severely restricted by the travel restrictions imposed internationally
in response to the COVID-19 pandemic.
Major Customers
For the fiscal year ended March 31, 2022, the Company had three customers
who each accounted for more than 10% of the Company’s net sales. These three customers collectively accounted for 76.6% of the Company’s
net sales in fiscal 2022. The Company’s five largest customers collectively accounted for almost all of the Company’s net
sales during each of the past two years. As a result of the dependence on a few large customers, the loss of a major customer, or any
substantial decrease in orders from these customers, could materially and adversely affect the Company’s results of operations and
financial position, particularly if the Company is unable to replace such major customers.
Customers place manufacturing orders with the Company
in the form of purchase orders which are usually supported by a delivery schedule covering one to two months of orders. Customers provide
long term forecasts for their anticipated purchases, but are usually able to cancel or amend their forecasted orders at any time without
penalty. Certain of the Company’s larger customers provide the Company with non-binding forecasts of their anticipated needs for
the next year in order to enable the Company to plan for the anticipated orders. Orders from such customers are thereafter received from
time to time based on the customers’ needs, not necessarily on the forecasted amounts or at the projected time periods. Accordingly,
backlog has not been meaningful to the Company’s business.
In order to be able to timely fill the anticipated
orders from its larger customers, the Company may purchase raw materials and other products based on the non-binding forecasts. Since
the customer’s order forecasts are not binding orders, if a customer does not place as many orders as anticipated, the Company may
not be able to fully utilize the raw materials and other products that the Company has purchased. In that case, the Company may not be
able to utilize the raw materials and could suffer a financial loss.
Sales of manufactured products to established existing
clients are primarily on credit terms between 30-75 days, while the sale to new or lesser-known customers are completed on a wire transfer
payment basis before shipment or other similar payment terms. During fiscal 2022 the Company deviated from its customary credit terms
and entered into a contractual deferred payment arrangement with a new significant customer. Under the agreement, the customer has provided
the Company with collateral for the rolling credit facility. This new arrangement has resulted in an increase in the Company’s accounts
receivables, which increase shall remain in effect until the arrangement is terminated and the receivables are paid.
As a result of the concentration of sales among
a few of the Company’s larger customers, the Company is required to bear significant credit risk with respect to these customers.
Parts are generally shipped 14-90 days after an order has been placed unless the Company is required to manufacture new tools which require
an additional approximately 14-50 days to complete prior to commencing manufacturing. While the Company has not experienced material difficulty
in securing payment from its major customers, there can be no assurance that the Company’s favorable collection experience will
continue. The Company could be adversely affected if a major customer was unable to pay for the Company’s products or services.
Industrial Property Rights
As a manufacturer of parts, components and finished
products for other manufacturers, the Company primarily relies on its manufacturing technical expertise, its operating processes and efficiencies,
its knowledge of its customers’ products, and its long-term relationships with its customers. Accordingly, the Company’s operations
and competitive advantages are not dependent upon any intellectual property rights.
The Company has recently acquired, and now owns
three issued patents that relate to manufacturing processes and designs. However, the Company does not believe that these patents have
significant value, nor do they provide significant differentiation or benefits to the Company’s operations as an OEM.
More recently, the Company has been developing
its own proprietary line of energy saving brushless direct current motors. The Company has filed a utility patent application to protect
its rights in these motors. These motors are still in the development stage and have not yet been completed or marketed. If these motors
perform as intended, the Company plans to manufacture, offer and sell these electric motors for its own account.
Competition
The Company competes against numerous OEMs, including
both smaller local companies as well as large international companies. Although the Company operates in the same market as some of the
world’s largest contract manufacturers (for example, FoxConn also operates a major manufacturing facility in Long Hua, Shenzhen),
management believes that it principally competes with smaller firms that make up the largest segment of the contract and parts manufacturing
industry in China. Since some of the Company’s customers are large international enterprises that source their products from many
international providers, the Company also competes against contract manufacturing companies in other low cost manufacturing countries.
As a vertically integrated, multi-disciplinary manufacturer of complex components and products, the Company also competes against numerous
global OEM manufacturers, whether those other manufacturers are located in Shenzhen, China or elsewhere. Most of the international competitors
of the Company have substantially greater manufacturing, financial and marketing resources than the Company. The Company believes that
the significant competitive factors are quality, price, service, and the ability to deliver products on a reliable basis. The Company
believes that it is able to compete in its segment of the OEM manufacturing market by providing high quality products at a competitive
price with reliable delivery and service. The Company has managed to partially offset the increasing cost of manufacturing in China by
moving some of its operations to its Myanmar facility. However, it still maintains its automated manufacturing facilities in the Shenzhen
area, near some of its customers. Having manufacturing facilities in Shenzhen, the Company is able to reduce delivery times and transportation
costs for these customers, and by being able to offer “just in time” supply services.
Seasonality
The first calendar quarter (the last quarter of
the Company’s March 31 fiscal year) is typically the Company’s lowest sales period because, as is customary in China, the
Company’s manufacturing facilities in China are closed for one to two weeks for the Chinese New Year holidays. In addition, during
the one month before and the one month after the New Year holidays, the Company normally experiences labor shortages, which further impact
the operations during this period. The Company’s Myanmar operations also are negatively affected by the holidays that Myanmar employees
take annually during that country’s new year’s celebration (typically two weeks in April). The absence of workers during these
nationally mandated holidays in Myanmar has not, to date, materially affected the Company’s overall operations.
The Company does not experience any other significant
seasonal fluctuations, nor does it consider any other issues with respect to seasonality to be material.
Government Regulation
As of the date of this Annual Report, the Company’s
main tooling, engineering, design and automated manufacturing facility is located in Shenzhen, China. As a result, the Company’s
operations and assets are subject to significant political, economic, legal and other uncertainties associated with doing business in
China in general, and in Shenzhen, in particular. Since March 2015, the Company has owned a controlling interest in a Myanmar company
that operates a factory in Myanmar. As a result, the Company also is subject to the political, economic, legal and other uncertainties
associated with doing business in Myanmar. Myanmar commenced reforming its political and economic policies during the past few years,
and the effects of those reforms are still uncertain and evolving. In February 2021 the military took control of the government in Myanmar
and declared a state of emergency that permits the government to implement policies by decree. Although the military’s takeover
has affected the Company’s relations with its workers and has further complicated the Company’s payment and banking arrangements
in Myanmar, in general the Myanmar operations currently are not materially affected by the change in the government.
The Chinese government has during the past few
years significantly changed and/or increased the enforcement of a number of laws affecting employees (including regulations regarding
their salaries and benefits, labor unions, working conditions and overtime restrictions, and contract duration and, in particular, requirements
regarding pensions, housing and life-long employment), and safety regulations for buildings and workers. The Chinese governmental authorities
are increasingly formalizing workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of
trade unions. Employers found to be violating these labor rules are often severely penalized.
The Company’s labor costs in Shenzhen, China
have increased substantially in recent years. In addition, employees who have had two consecutive fixed-term contracts must be given an
“open-ended employment contract” that, in effect, constitutes a lifetime, permanent contract, which is terminable only in
the event the employee materially breaches the Company’s rules and regulations or is in serious dereliction of his duty. Such non-cancelable
employment contracts will substantially increase its employment related risks and may limit the Company’s ability to further downsize
its workforce. If an employee with such a contract is terminated, the Company is required to pay the terminated employee a substantial
severance payment. These contingent employment liabilities could become a material financial obligation of the Company if a large number
of employees are terminated by the Company all at once (such as upon a plant relocation and/or closure). While the Company has to date
absorbed and gradually reduced these employee termination liabilities, a sudden simultaneous termination of a large number of employees
would require the Company to make significant payments to the terminated employees, which payments could materially and adversely affect
the Company’s financial condition.
Since the Reorganization was completed in 2015,
all of its operations in the PRC are now conducted through a wholly-owned subsidiary that is registered in China as a limited liability
company. As a result, the Company’s operations in China are now subject to all of the rules and regulations that previously did
not apply to its operations in the PRC. Although the Company’s subsidiary is a Chinese registered company, the Company believes
that, because its subsidiary is a foreign owned entity, it has recently been subject to numerous governmental inspections that other Chinese
owned companies have not experienced. Accordingly, the operating environment for WFOEs in China is becoming increasingly burdensome.
The Chinese government continues to increase the
enforcement of certain environment protection laws, which are restricting some common practices and/or increasing the Company’s
cost of operations. In addition to enhanced governmental environmental regulations, the Company also has to comply with environmental
laws applicable to its customers, such as the regulations of the European Union and Japan known as the Restriction on Hazardous Substances
(known as “RoHS”) and the European Union’s Regulation for Registration, Evaluation, Authorization and Restriction of
Chemicals (known as “REACH”). The RoHS and REACH rules and regulations prohibit the importation products and parts that contain
certain levels of toxic materials (such as lead, cadmium and mercury) and chemicals that may pose health and environmental risks. The
Company believes that its operations are RoHS and REACH compliant.
The Company sells its products to customers in
Hong Kong/China, Europe, and the United States/Mexico. As a result, its operations are subject to significant regulations related to its
activities in these regions, including changes in international and domestic customs regulations, changes in tariffs, trade restrictions,
and trade agreements and taxation.
Research and Development
As a manufacturer of parts and components for use
in other products, the Company has traditionally not conducted a material amount of research or development. The Company does, however,
engage in some research and development activities in connection with developing automated machines that its uses in its own manufacturing
process.
The Company recently decided to try to use its
expertise in the production of electric motors to design and develop a line of new, lower cost electric motors. As a result, during the
fiscal year ended March 31, 2022, the Company engaged in an increased amount of research and development in connection with the development
of several small electric motors. The Company believes that its new motors, if and when developed, may fill the needs of some of its current
customers and may also address a need in the market in general. The Company’s goal is to develop its own proprietary electric motors
that will enable it to transition a portion of its operations from being an OEM to becoming an ODM, or “original design manufacturer,”
that designs, develops, manufactures, and sells its own products. Because the Company is an OEM, it has not historically separately accounted
for its research and development expenses.
Organizational Structure/Offices and Manufacturing Facilities
Highway Holdings Limited is a holding company that
operates through its subsidiaries. As of June 30, 2022, Highway Holdings Limited had four wholly-owned active subsidiaries (excluding
some dormant or deactivated subsidiaries), and one majority-owned active subsidiary (its 84% owned Myanmar subsidiary). Details of the
Company’s four principal wholly-owned operating subsidiaries and their principal activities are as follows:
Place
of incorporation |
|
Name
of entity |
|
Date
of incorporation |
|
Principal
activities |
Hong Kong |
|
Kayser Limited |
|
August 24, 1995 |
|
Trading of OEM products and procurement |
Hong Kong |
|
Nissin Precision Metal Manufacturing Limited |
|
November 21, 1980 |
|
Trading and procurement |
Hong Kong |
|
Golden Bright Plastic Manufacturing Company Limited |
|
May 19, 1992 |
|
Trading company, involved in trading plastic injection products |
China |
|
Nissin Metal and Plastic (Shenzhen) Company Limited |
|
May 18, 2011 |
|
Manufacturing and assembling metal, plastics, mould and electronic products, and automation equipment |
The Company also owns 84% of the equity of Kayser
Myanmar, a foreign company registered under Myanmar law that is authorized to operate in Myanmar. Kayser Myanmar’s principal activities
consist of manufacturing and assembling metal and plastic products. A Myanmar citizen owns 16% of the Kayser Myanmar and is the general
manager of the entity. Kayser Myanmar currently manufactures and assembles products for the Company’s OEM clients, and assembles
products manufactured by the Company in its China facilities.
British Virgin Islands/Corporate Administrative Office
The office of the registered agent of the Company
is located at Craigmuir Chambers, Road Town, Tortola, VG1110 British Virgin Islands. Only corporate administrative matters are conducted
at these offices, through the Company’s registered agent, Harneys Corporate Services Limited. The Company does not own or lease
any property in the British Virgin Islands.
Hong Kong/Operating Administrative Offices
The Company leases Suite 1801, and Suites 1823-1823A,
Level 18, Landmark North, 39 Lung Sum Avenue, Sheung Shui, New Territories, Hong Kong as its administrative and engineering offices. The
Company’s offices at the Suite 1801 location (consisting of approximately 2,000 sq. ft.) are leased by Nissin Precision Metal Manufacturing
Limited and are utilized primarily for engineering, import/export and marketing, while the offices located at Suite 1823-1823A (consisting
of approximately 2,100 sq. ft.) are leased by Kayser Limited and are used for finance, purchasing and marketing. The leases for the Hong
Kong offices expire in March 2023. The aggregate monthly rental cost of these offices will be approximately $12,400 per month for until
the expiration of the leases in March 2023, based on the exchange rate in affect as of the date of this Annual Report.
Shenzhen, China/Manufacturing Facility
During the past few years, the Company has
leased a total of approximately 24,400 square meters of space at a factory complex located at Long Hua, Shenzhen, China from the
Shenzhen Long & Cheng Industry & Trade Industrial Co., Ltd. pursuant to various related leases. The leased space included
both manufacturing space and dormitories for the Company’s factory workers. The leased space was used predominately for the
Company’s metal and electrical manufacturing, OEM product assembly, plastic injection, tooling workshop and warehouse
operations. There also are offices for production management, production engineering, and production support administration on the
premises.
In December 2019, the Company entered into a new
three-year lease for a portion of the existing Shenzhen facilities. Under the new lease, which became effective on March 1, 2020 and will
continue until February 28, 2023, the Company leases a total of approximately 15,800 square meters of space. In October 2021, part of
the factory space was restructured by the landlord, and the total leased space was reduced by about 1,000 square meters to 14,800 square
meters. Because the Company has relocated most of its labor-intensive manufacturing and assembly operations to its facility in Yangon,
Myanmar, the Company will no longer need the same amount of space in Shenzhen as it has in the past. Under the new lease, the Company
is required to pay approximately $77,000 per month for rent (at the current RMB to U.S. dollar exchange rate) until the expiration of
the lease. As a condition to its lease renewal, the Company has obtained a license from the local governmental agencies to operate as
a designated high technology company and to use the facilities primarily as a technology center and for automated manufacturing.
Yangon, Myanmar/Manufacturing Facility
On March 29, 2019 Kayser Myanmar
entered into a 50-year lease for a new manufacturing complex in Yangon, Myanmar (the “New Facility”), which lease has since
been officially approved and recorded. Prior to moving to the New Facility, Kayser Myanmar conducted its operations at another leased
facility in Yangon, Myanmar. Kayser Myanmar now conducts all of its operations at the New Facility. The New Facility is an approximately
6,900 square meter (1.67 acres) factory estate that is located in Hlaing Tharyar Township in Yangon. The New Facility is owned by Konig
Company Limited (“Konig Company”), a Myanmar company. Konig Company is owned by two Myanmar citizens who are related to Kayser
Myanmar. One of the principals of Konig Company currently is a manager and a shareholder of Kayser Myanmar (he owns a 16% interest in
Kayser Myanmar), and the other currently is a manager of Kayser Myanmar. Konig Company only recently acquired the New Facility.
The lease for the New Facility has a term of 50
years. Kayser Myanmar has the option to extend the lease term for two consecutive 10-year terms on the same terms and conditions as in
effect for the initial 50-year period. Kayser Myanmar, the tenant, is obligated under the lease to make monthly lease payments equal to
10 million Myanmar Kyat (approximately U.S. $5,800 per month, based on the currency conversion rate in effect on March 31, 2022). Kayser
Myanmar has paid Konig Company $950,000 as a prepayment of rent under the lease (the prepayment represents approximately 12 years of rental
payments). Under the lease, Kayser Myanmar must also pay all utilities (water, electricity, gas and sanitation), property taxes, and insurance
on the premises. Kayser Myanmar has the right to alter and improve the premises at its own cost. As permitted by this provision in the
lease, Kayser Myanmar has already upgraded the existing two factories at the New Facility and has constructed a third factory and a new
office building on the site. Kayser Myanmar has the right to sublet some or all of the New Facility.
Under the lease, Kayser Myanmar has the option
to purchase the factory from Konig Company if and when Myanmar law is changed to permit ownership of real estate in Myanmar by foreign-owned
companies. Because Kayser Myanmar is an indirect subsidiary of the Company, under the Myanmar Transfer of Property Act 1882 and the Myanmar
Transfer of Immovable Property Restriction Law 1987, Kayser Myanmar is deemed to be a foreign-owned company and, therefore, is currently
not permitted to own the New Facility. If Myanmar law is changed to allow foreign-owned companies to own Myanmar real estate, Kayser Myanmar
will have the option to purchase the New Facility at a price equal to the then fair market value of the New Facility. The fair market
value will be determined by an independent appraiser. The valuation of the New Facility will, however, exclude the increased value of
the site attributable to any improvements, alterations, and additions made to the New Facility by Kayser Myanmar. Konig cannot sell, transfer
or mortgage the New Facilities without the consent of Kayser Myanmar.
Other Operations
In addition to its historical manufacturing operations,
the Company continues to explore other possible means of leveraging its manufacturing capabilities in China and to develop proprietary
products that the Company can manufacture and sell as its own products. As part of its goal to develop a line of proprietary products,
the Company is currently developing a line of brushless DC electric motors, which motors, if produced, the Company intends to sell both
for its own account and for use in its customers’ products. Previously, the Company developed proprietary CO2 snow-jet and dry ice
cleaning system for industrial and commercial cleaning applications. However, to date, the Company has only manufactured a few of these
cleaning systems. The Company has not been able to successfully market these machines and is, instead, currently using them in its own
manufacturing operations.
Item 4.A. Unresolved Staff Comments
Not applicable.
Item
5. Operating and Financial Review and Prospects
Overview
The Company’s net sales during the past two
years were derived primarily from the manufacture and sale of metal, plastic and electronic parts and components for its international
clients. For accounting purposes, the Company it treats its (i) metal stamping and mechanical OEM manufacturing operations, and its (ii)
electronic OEM manufacturing operations, as two separate business segments.
The Company is not taxed in the British Virgin
Islands, the state of its formation.
The location of the Company’s administrative
offices for its operating subsidiaries in Hong Kong enables the Company to pay low rates of income tax due to Hong Kong’s tax structure.
The Company’s income arising from its Hong Kong operations or derived from its operations within Hong Kong is subject to Hong Kong
Profits Tax. As of March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 that introduces
the two-tiered profits tax rates regime. Under the two-tiered profits tax rates regime, the first HK$2 million (equivalent to U.S. $257,000)
of profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%. The profits of
group entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5%. The Company
has selected Kayser Limited as the qualified entity under two-tiered profit tax rates regime and the remaining Hong Kong based subsidiaries
are not qualifying under the regime and continue to be taxed at 16.5%. There are no taxes on dividends or capital gains in Hong Kong.
Nissin PRC, the Company’s subsidiary that
is established and operates in China, is subject to the uniform income tax rate of 25% in China.
Kayser Myanmar, the Company’s majority-owned
Myanmar subsidiary, is subject to the tax provisions applicable companies operating in Myanmar and is subject to income tax at a rate
of 22%. Kayser Myanmar is able to import many of raw materials and parts that it uses to manufacture its export products free of taxes
and free of duties under an import/export license that requires Kayser Myanmar to uses a bonded warehouse.
The Company is not subject to U.S. taxes.
The Company owns 84% of Kayser Myanmar. Accordingly,
the operations of Kayser Myanmar are included in the Company’s consolidated financial statements (and in the below discussion of
the Results of Operations) for the fiscal years ended March 31, 2022 and 2021.
Net sales to customers by geographic area are generally
determined by the physical locations of the customers. For example, if the products are delivered to a customer in China or Hong Kong,
the sales are recorded as generated in Hong Kong and China; if the customer directs the Company to ship its products to Europe, the sales
are recorded as sold in Europe.
Results of Operations
General
During the past three years discussed below, the
Company’s revenues were derived primarily from the manufacture and sale of metal, plastic and electronic products, parts and components.
During the fiscal year ended March 31, 2022, net sales increased by 35% from the fiscal year ended March 31, 2021. The increase in net
sales is the direct result of (i) more normal level of operations in both the Yangon, Myanmar and Shenzhen, China factories, (ii) the
delivery of a new electronic product for a new customer based in the United States, and (iii) a general resurgence of demand in Europe
following the reduction of COVID-19 cases.
During the fiscal year ended March 31, 2022, the
Company’s factories in Yangon, Myanmar and Shenzhen, China were able to return to a more normal level of operations. Demand for
Company’s products, especially in Europe, increased following the reduction of COVID-19 cases. However, certain COVID-19 restrictions
imposed by various governments were still affecting the Company. Travel restrictions imposed as a result of the COVID-19 pandemic had
a negative impact on the Company’s operations. The Company’s marketing and customer relations activities are heavily dependent
upon the Company’s ability to send its teams to travel to visit its existing and potential customers. The inability to travel adversely
impacted the Company’s ability to generate more customer orders. Similarly, under normal circumstance management regularly travels
from the Company’s Hong Kong headquarters to its Shenzhen and Yangon factories. Because of the pandemic-related travel restrictions,
neither the engineers nor senior management was able to travel, which the Company believes affected operations and production.
During fiscal 2022, the Company delivered the initial
orders of video game consoles to a new customer based in the United States. The manufacture and delivery of these products had been delayed
by several months due to the shortage of electronic components and because of the cargo delivery backlog at U.S. ports.
During most of fiscal 2022, the Company experienced
shortages of various raw materials and components, which shortages are still continuing with respect to some materials and components.
Throughout much of fiscal 2022 the electronics supply chain suffered, resulting in a global shortage of electronic components and chips.
This shortage affected the Company’s operations, particularly with respect to a new customer for whom the Company agreed to manufacture
video game consoles. In addition to a shortage of chips and electronic components, the Company also suffered from shortages of aluminum,
steel, plastic and other raw materials. These shortages have delayed the Company’s overall production and, as a result, reduced
net sales for the fiscal year.
The following table sets forth the percentages
of net sales of certain income and expense items of the Company for each of the three most recent fiscal years ended March 31, 2022.
| |
Year Ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
| | |
| | |
| |
Net Sales | |
| 100 | % | |
| 100 | % | |
| 100 | % |
Cost of sales | |
| 66.9 | | |
| 70.5 | | |
| 69.5 | |
Gross profit | |
| 33.1 | | |
| 29.5 | | |
| 30.5 | |
Operating income/(loss) | |
| 5.9 | | |
| (6.7 | ) | |
| 4.6 | |
Income/(loss) before income taxes | |
| 7.1 | | |
| (6.5 | ) | |
| 4.6 | |
Income taxes | |
| (1.7 | ) | |
| 1.6 | | |
| (0.8 | ) |
Net income/(loss) | |
| 5.5 | | |
| (5.0 | ) | |
| 3.8 | |
Net profit attributable to non-controlling interest | |
| (0.0 | ) | |
| (0.1 | ) | |
| (0.2 | ) |
Net income/(loss) attributable to Highway Holdings Limited’s Shareholders | |
| 5.5 | | |
| (5.0 | ) | |
| 3.6 | |
Year Ended March
31, 2022 Compared to Year Ended March 31, 2021
Net sales for the fiscal year ended March 31, 2022
(“fiscal 2022”) increased by $3,197,000, or 34.9% from the fiscal year ended March 31, 2021 (“fiscal 2021”) due
to the return of a more normal level of operations in both of the Yangon, Myanmar and Shenzhen, China factories. In addition, in fiscal
2022 the Company commenced delivery of a new electronic product for a new customer, which production was delayed due to the shortage of
electronic components. The Company’s net sales also were higher in fiscal 2022 when compared to fiscal 2021 because of the resurgent
demand in Europe following a reduction of COVID-19 cases. Net sales in fiscal 2022 increased despite a one-week government ordered COVID-19
related lockdown of the Shenzhen facility during the fourth fiscal quarter. With a new customer of electronic product located in the United
States, net sales to North American customers increased to 11.5% in fiscal 2022 from 3.4% in 2021, and net sales to European customers
decreased to 70.9% in fiscal 2022 from 79.3% in fiscal 2021. Net sales to Hong Kong/China were 17.0% in both fiscal 2022 and fiscal 2021.
The Company operates in two segments that it refers
to as (i) the “metal stamping and mechanical OEM” segment and (ii) the “electric OEM” segment. The metal stamping
and mechanical OEM segment focuses on the manufacture and sale of metal parts and components, whereas the electric OEM segment focuses
on the manufacture and sale of plastic and electronic parts, components and motors. For fiscal 2022, net sales of the metal stamping and
mechanical segment increased to 58.3% of the Company’s net sales, from 56.6% in fiscal 2021, due to changes in the product mix.
Net sales of the electric OEM segment correspondingly decreased to 41.7% of net sales in fiscal 2022 from 43.4% in fiscal 2021.
Gross profits as a percentage of net sales increased
to 30.5% in fiscal 2022 from 29.5% in fiscal 2021. Due to the increase in net sales and the increase in gross margins, the Company’s
gross profit in dollar terms increased by $1,063,000 to $3,770,000 in fiscal 2022 from $2,707,000 in fiscal 2021.
Selling, general and administrative expenses decreased
by $120,000, or 3.6%, in fiscal 2022 compared to fiscal 2021 as a result of the continuous control on expenses. Selling, general and administrative
expenses decreased to 25.9% of net sales in fiscal 2022, compared to 36.2% of net sales in fiscal 2021.
As a result of the $1,063,000 increase in gross
profits in fiscal 2022 and the decrease in selling, general and administrative expenses, the Company had operating income of $567,000
in fiscal 2022 compared to operating loss of $616,000 in fiscal 2021.
The Company had currency exchange losses of $24,000
and $60,000 in fiscal 2022 and fiscal 2021, respectively. The currency gain/loss reflects the changing values of the U.S. dollar relative
to both the RMB and the Kyat. The Company will continue to be exposed to currency fluctuations with U.S. dollar and the Myanmar Kyat because
the Company does not intend to undertake any currency hedging transactions.
In fiscal 2022, the Company had an income tax expense
of $101,000, mainly due to the provision for deferred taxes payable. The Company had an income tax benefit of $146,000 in fiscal 2021.
As a result of the foregoing, the Company had a
net income of $443,000 in fiscal 2022, compared to net loss attributable to its shareholders of $461,000 in fiscal 2021.
Year Ended March
31, 2021 Compared to Year Ended March 31, 2020
Net sales for the fiscal year ended March 31, 2021
(“fiscal 2021”) decreased by $3,390,000, or 27.0% from the fiscal year ended March 31, 2020 (“fiscal 2020”) due
to lower sales to certain of the Company’s principal European customers, and to a delay in commencing the manufacture of new product
orders that the Company received in fiscal 2021. The greatest decrease in net sales occurred in the fourth quarter of fiscal 2021, the
quarter in which the Myanmar operations were disrupted due to the military takeover in Myanmar. The Company’s net sales also were
lower in fiscal 2021 when compared to fiscal 2020 because of the Company’s inability to consummate new sales orders due, in large
part, to the travel restrictions that prevented the Company’s sales personnel from concluding sales with its European customers.
Overall, net sales by region in fiscal 2021 changed slightly, with net sales to European customers increasing to 79.3% in fiscal 2021
compared to 78.0% of the Company’s net sales in fiscal 2020. Net sales to Hong Kong/China decreased slightly by $632,000 (from 17.4%
of net sales to 17.0% of net sales), and net sales to North America also decreased, from 4.6% to 3.4% in fiscal 2021 and fiscal 2020,
respectively.
The Company operates in two segments that it refers
to as (i) the “metal stamping and mechanical OEM” segment and (ii) the “electric OEM” segment. For fiscal 2021,
net sales of the metal stamping and mechanical segment increased to 56.6% of the Company’s net sales, from 55.2% in fiscal 2020,
due to changes in the product mix. Net sales of the electric OEM segment correspondingly decreased to 43.4% of net sales in fiscal 2021
from 44.8% in fiscal 2020.
Gross profits as a percentage of net sales decreased
to 29.5% in fiscal 2021 from 33.1% in fiscal 2020. However, the gross profit margin in fiscal 2020 was disproportionately high compared
to the Company’s historic gross profit margins due to the following: (i) Because the Company’s Shenzhen, China, factory was
shut down for approximately two weeks in early calendar year 2020 due to COVID-19 pandemic, the local Shenzhen government granted the
Company’s Shenzhen factory a rental subsidy of $148,000, which approximated the factory’s two months’ rental, and a
rebate of $7,000, which approximated the factory’s electricity bill for one month, and (ii) sublease income of $141,000 received
from the temporary sublease of factory space at its Shenzhen facility, and (iii) utilization of inventories which were previously impaired
in fiscal 2019. As a result, the Company’s costs of sales were reduced in fiscal 2020, which thereby improved the Company’s
gross margin. Excluding these one-time events in fiscal 2020, the Company’s gross margins remained substantially unchanged. Due
to the decrease in net sales and the decrease in gross margins, the Company’s gross profit in dollar terms decreased by $1,446,000
to $2,707,000 in fiscal 2021 from $4,153,000 in fiscal 2020.
Selling, general and administrative expenses decreased
slightly by $83,000, or 2.4%, in fiscal 2021 compared to fiscal 2020 as a result of cost cutting measures implemented as net sales decreased.
Selling, general and administrative expenses were lower in fiscal 2021 in part because of reduced headcount and lower bonus payments,
and a salary reduction among Company’s management personnel. Selling, general and administrative expenses increased to 36.2% of
net sales in fiscal 2021, compared to 27.1% of net sales in fiscal 2020.
As a result of the $1,446,000 decrease in gross
profits in fiscal 2021 and the decrease in selling, general and administrative expenses, the Company had an operating loss of $616,000
in fiscal 2021 compared to operating income of $747,000 in fiscal 2020.
The Company had a currency exchange loss of $60,000
in fiscal 2021 compared to gain of $7,000 in fiscal 2020. The currency gain/loss reflects the changing values of the U.S. dollar relative
to the RMB.
In fiscal 2021, the Company had an income tax benefit
of $146,000 because of its net loss before taxes. The Company incurred income taxes of $209,000 in fiscal 2020 on its $896,000 of income
before taxes. The Hong Kong statutory profits tax remained at 16.5% in fiscal 2021. However, the Company’s effective tax rate was
approximately 24.3 % in fiscal 2021 because of in certain non-deductible items, partially offset by the utilization of tax losses previously
not recognized.
As a result of the foregoing, the Company had a
net loss of $461,000 in fiscal 2021, compared to net income attributable to its shareholders of $686,000 in fiscal 2020.
Liquidity and Capital Resources
The following table sets forth a summary of our
cash flows for the periods indicated:
| |
Year
Ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
(In
thousands of U.S. dollars) | |
Net cash provided by/(used in) operating activities | |
$ | 442 | | |
$ | (104 | ) | |
$ | (164 | ) |
Net cash used in investing activities | |
| (64 | ) | |
| (78 | ) | |
| (1,195 | ) |
Net cash used in financing activities | |
| (297 | ) | |
| (902 | ) | |
| (549 | ) |
Net increase/(decrease) in cash and cash equivalents | |
| 81 | | |
| (1,084 | ) | |
| (1,908 | ) |
Cash and cash equivalents at beginning of year | |
| 8,827 | | |
| 8,827 | | |
| 7,757 | |
Effect of exchange rate changes on cash and cash equivalents | |
| (81 | ) | |
| 14 | | |
| 161 | |
Cash and cash equivalents at end of year | |
$ | 8,827 | | |
$ | 7,757 | | |
$ | 6,010 | |
As of March 31, 2022, the Company had working capital
of $7,140,000, compared to working capital of $7,517,000 as of March 31, 2021 and $8,235,000 as of March 31, 2020. As of March 31, 2022,
the Company had a working capital ratio of 2.38 to 1.
The amount of cash and cash equivalents held by the Company on March
31, 2022 decreased to $6,010,000 from $7,757,000 on March 31, 2021 and $8,827,000 on March 31, 2020. The decrease in cash and cash equivalents
held by the Company on March 31, 2022 was largely due to the transfer of $1,075,000 of cash into time deposits that have an original maturity
longer than three months, an increase in accounts receivable that resulted from the extended payment terms granted to a new customer,
and cash dividend payments.
The Company regularly purchases raw materials used
to manufacture customer products in anticipation of receiving purchase orders from existing customers for such products. If the anticipated
customer orders to not materialize, or if the orders are smaller than anticipated, unless the Company is able to repurpose those raw materials,
it will incur a loss from such purchases. Should the customers be unable or unwilling to purchase the products that the Company intended
to manufacture on behalf of this customer, the Company could be stuck with excess unusable inventory, which would adversely affect its
liquidity.
The Company has historically generated
sufficient funds from its operating activities to finance its operations and there has been little need for external financing other
than capital leases which are used to finance equipment acquisitions and letter of credit facilities for secured purchases of
materials and components from overseas vendors. For fiscal 2022, the Company used $164,000 of cash in its operating activities
despite a net profit of $467,000 for the year. The principal reason for the uses of cash included non-cash charges of $162,000 of
depreciation and amortization, an expected credit loss of $51,000, a $89,000 write down of inventories, share-based compensation of
$87,000, a $1,346,000 increase in accounts receivable, a $435,000 decrease in deferred tax payable, a $167,000 increase in
inventories, a $275,000 increase in prepaid expenses and other current assets, which were partially offset by an increase in
accounts payable of $153,000, an increase in accrued expenses and other current liabilities of $190,000, and a decrease in long-term
deposits of $276,000. In fiscal 2021, the Company used $104,000 of net cash in its operating activities and in fiscal 2020, the
Company generated $442,000 from its operating activities.
The
Company used $64,000, $78,000 and $1,195,000 in fiscal 2020, 2021 and 2022, respectively, of cash in its investing activities. For fiscal
2022, the Company’s cash balances decreased because some of its cash was deposited in time deposits and some cash was used for
the purchase of property, plant and equipment.
Net
cash used in financing activities mostly represents cash dividends paid by the Company during each of fiscal 2020, 2021 and 2022. Dividends
of $297,000, $981,000 and $569,000 were paid in fiscal 2020, 2021 and 2022, respectively. Dividends are declared at the discretion of
the Board of Directors, subject to applicable laws, and depend on a number of factors, including the Company's financial condition, results
of operations, capital requirements, plans for future expenditures, general business conditions and other factors considered relevant
by our Board of Directors. As a result, no assurance can be given that the Company will pay cash dividends in the current fiscal year
or at any time in the future or, if dividends are paid, that the amounts will be consistent with amounts paid in prior years.
As
of the date of this Annual Report the Company has no outstanding bank loans. However, the Company also does not have any bank credit
facilities under which it can borrow funds should the Company need additional capital to fund unanticipated expenses (such as funding
unbudgeted expenses related to the New Yangon Facility, posting additional deposits/bonds with governmental agencies, or funding certain
operating expenses as a result of an unexpected slowdown of customer orders). Accordingly, the Company will be dependent on its current
financial resources should unanticipated expenses arise. No assurance can be given that its current reserves will be sufficient.
The
Company believes that its currently available working capital and funds generated from its operations are adequate to support its operations
for at least the next 12 months.
Exchange
Rates
The
Company transacts its business from its Hong Kong sales and purchasing offices with its vendors and customers primarily in U.S. dollars
and, to a lesser extent, in Hong Kong dollars and Euros. As a result of the assembly/manufacturing operations that the Company conducts
in Myanmar, the Company now also transacts an increasing amount of business in the Myanmar Kyat. While the Company faces a variety of
risks associated with changes among the relative value of these currencies, because the Company pays all of its Shenzhen factory expenses
in RMB, the changes in the value of the RMB compared to the U.S. dollar was the most significant in the fiscal year ended March 31, 2022.
During the period from March 31, 2021 to March 31, 2022, the value of the RMB compared to the U.S. dollar increased by approximately
3.4%, which was the primary cause for the Company’s currency exchange loss of $24,000 in fiscal 2022.
The
Company makes its payments for its manufacturing facilities and factory workers in Shenzhen, China, in RMB. The value of the RMB compared
to the U.S. dollar was higher on March 31, 2022 compared to the end of the prior fiscal year. An increase in the value of the RMB compared
to the U.S. dollar increases the Company’s operating costs (expressed in U.S. dollars). Likewise, the Company makes its payments
for its manufacturing facilities and factory workers in Yangon, Myanmar, in MMK. The value of the Kyat compared to the U.S. dollar decreased
significantly as of March 31, 2022 compared to a year earlier, primarily as a result of the economic uncertainty following the military
takeover in that country. A decrease in the value of the Kyat compared to the U.S. dollar decreases the Company’s operating costs
(expressed in U.S. dollars) in Myanmar. The weakening of the Kyat compared to the U.S. dollar has decreased the Company’s operating
expenses in Myanmar in U.S. dollar terms and has thereby reduced the Company’s overall currency exchange loss. Currency fluctuations
in the future may have material impact on the results of the Company’s operations.
Currency
exchange rate fluctuations affect the Company’s operating costs, and also affect the price the Company receives for the products
that it sells. Most of the Company’s net sales in fiscal 2022 were to Europe. In order to mitigate the currency exchange rate risks
related to changes in the value of the dollar relative to the Euro, the Company has requested its European customers to pay in U.S. dollars,
and in fiscal 2022, substantially all of the Company’s European customers did so. In addition, the Company has entered into agreements
with certain of its larger European customers that permit the Company’s prices to be adjusted every three months to account for
currency fluctuations.
The
fluctuation of the RMB/U.S. dollar exchange rate has in each of the past two years resulted in currency exchange losses. In fiscal 2022,
the Company realized a currency exchange loss of $24,000 compared to an exchange rate loss of $60,000 in fiscal 2021. The Company has
a slight currency exchange gain of $7,000 in fiscal 2020.
The
Company does not utilize any form of financial hedging or option instruments to limit its exposure to exchange rate or material price
fluctuations and has no current intentions to engage in such activities in the future. Accordingly, material fluctuations in the exchange
rates between the U.S. dollar and other currencies could have a material impact on the Company’s future results. As a result of
the Company’s expansion into Myanmar, it will also be increasingly subject to the currency risks associated with the Myanmar Kyat
(MMK), the official currency of that country.
Trend
Information
The
three trends that the Company expected to impact its operations in fiscal 2022 are the same trends that the Company expects will affect
its business in fiscal year ending March 31, 2023.
(a) The
COVID-19 pandemic has had a material negative affect on the Company and on its customers in the past two years and may have a significant
impact on the Company’s operations in fiscal 2023. The COVID-19 pandemic receded late in fiscal 2022 and, as a result, business
activity accelerated in parts of Asia and Europe due to increasing consumer demand for the products produced by the Company and the Company’s
customers. Furthermore, the pandemic appears to have significantly subsided in Myanmar, and the Company’s factory in Myanmar has
been able to operate in the normal course (the COVID-19 outbreak previously resulted in full or partial factory closure at the Company’s
Myanmar factory). However, a variant of the COVID-19 has recently been detected in certain areas of China, and the Chinese government
has implemented strict lockdowns of most commercial and business activities in those areas. In fact, as a result of one such outbreak,
the Company’s Shenzhen, China, factory was shut down for one week in March 2022. If the Chinese government imposes a lockdown in
Shenzhen, the Company’s operations in China will be negatively impacted. Furthermore, if the coronavirus returns, particularly
in Asia and Europe, in fiscal 2023 the Company’s business and operations will be impacted.
(b) The
military’s takeover of the government in Myanmar in February 2021 caused civil unrest and interfered with the Company’s operations
at its Myanmar factory during the past fiscal year. While the level of civil strife has decreased, conflict between the military government
and opposition groups currently is still continuing. The ongoing civil unrest has not, however, recently affected the Company’s
operations in Yangon. Nevertheless, there is significant uncertainty about the business environment in Myanmar, and if the violence and
civilian resistance to the coup continues or worsens, the Company’s Yangon factory may have to reduce or terminate its operations.
Also, strong international condemnation of the military government and the human rights abuses in Myanmar may cause some of the customers
to refuse to permit their products to the manufactured at the Company’s Myanmar factory. Furthermore, it is possible that certain
jurisdictions (for example, the European Union) could impose additional restrictions on the importation of products manufactured in Myanmar.
Such restrictions would adversely affect the Company’s operations in Myanmar.
(c) The
on-going global supply chain problems, including the high price of transportation, the significant delays in shipping, and the shortages
of raw materials (such as steel, copper, aluminum, plastics, and electronic components and computer chips), will continue to restrain
the Company’s manufacturing activities. If these supply chain problems ease during the coming year, the Company’s manufacturing
output is expected to increase, and the Company’s customers will be more likely to continue to outsource the manufacture of certain
of their products to the Company and other OEMs.
Other
than as disclosed elsewhere in this Annual Report on Form 20-F, the Company is not aware of any trends, uncertainties, demands, commitments
or events for the period from April 1, 2022 to March 31, 2023 that are reasonably likely to have a material effect on the Company’s
net revenues, income, profitability, liquidity or capital resources.
Recent
issued accounting standards not yet adopted
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU
2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an
exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange
as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as
the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification
or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment
for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination
or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring
on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects
to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes
that interim period. The adoption of ASU 2021-04 is not expected to have any impact on the Company’s consolidated financial statement
presentation or disclosures.
In
November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.
This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution
accounting model by analogy. This update is effective for annual periods beginning after December 15, 2021, and early application is
permitted. This guidance should be applied either prospectively to all transactions that are reflected in financial statements at the
date of initial application and new transactions that are entered into after the date of initial application or retrospectively to those
transactions. The Company does not expect the impact of this guidance to have a material impact on the Company’s consolidated financial
statements.
Critical
Accounting Policies and Estimates
The
Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and
judgments, including those related to bad and doubtful debts. The Company bases its estimates and judgments on historical experience
and on various other factors that the Company believes are reasonable. Actual results may differ from these estimates under different
assumptions or conditions.
The
following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
consolidated financial statements. For further discussion of our significant accounting policies, refer to Note 2 “Summary of Significant
Accounting Policies” of our consolidated financial statements in Item 18.
Revenue
Recognition
We
recognize revenue when our customer obtains control of promised goods in an amount that reflects the consideration which we expect to
receive in exchange for those goods. To determine revenue recognition for the arrangements that we determine are within the scope of
Topic 606, we perform the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations
in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract
and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Product
revenue recognition. The revenue from contracts with customers is derived from product revenue principally from the sales of metal
stamping and mechanical OEM and electric OEM products directly to other consumer electronics product manufacturers. The Company sells
goods to its customers under sales contracts or by purchase orders. The Company has determined there is one performance obligation for
each of the sales contracts and purchase orders. The performance obligations are considered to be met and revenue is recognized when
the customer obtains control of the goods. The Company has two major goods delivery channels:
(1)
Delivering goods to customers’ predetermined location; the Company has satisfied the contracts’ performance obligations when
the goods have been delivered and relevant shipping documents have been collected by us; and
(2)
Picking up goods by customers in our warehouse; the Company has satisfied the contracts’ performance obligations when the goods
have been picked up and the acceptance document has been signed by the customers.
The
Company did not recognize any revenue from contracts with customers for performance obligations satisfied over time during the year ended
March 31, 2020, 2021 and 2022. Accordingly, the timing of revenue recognition is not impacted by the new standard.
The
transaction price is generally in the form of a fixed price which is agreed with the customer at contract inception. The transaction
price is recorded net of sales return, surcharges and value-added tax of gross sales. We have allocated the transaction price to each
performance obligation based on the sales contracts and purchase orders.
Normally,
the Company would request a deposit from certain customers upon receiving the purchase order and issue bills to customers upon transfer
control of goods and relevant acceptance documents have been collected. Customers’ deposits would be settled part of the outstanding
bill upon receiving an acknowledgement from customers. For the remaining balance of outstanding bills, Customers are required to pay
over an agreed upon credit period, usually between 30 to 75 days. During fiscal 2022, the Company deviated from its customary credit
terms and entered into a contractual deferred payment arrangement with a new significant customer. Under the agreement, the customer
has provided the Company with collateral for the rolling credit facility.
Return
Rights. The Company does not provide its customers with the right of return (except for product quality issue) or production protection.
Customer is required to perform product quality check before acceptance of goods delivery. We did not recognize for any refund liability
according to the product return on the consolidated balance sheets.
Value-added
taxes and surcharges. The Company presents revenue net of VAT and surcharges incurred. The surcharge is sales related taxes representing
the City Maintenance and Construction Tax and Education Surtax. The Company incurs expenses or pays fees to external delivery service
providers, respectively, and records such expenses and fees like shipping and handling expenses. Total VAT and surcharges paid by us
during the years ended March 31, 2020, 2021 and 2022 amounted to $90,000, $121,000 and $133,000 respectively.
Principals
vs. agent accounting. The Company records all product revenue on a gross basis. To determine whether we are agent or principal
in the sale of products, we consider the following indicators: we are primarily responsible for fulfilling the promise to provide the
specified goods or services, is subject to inventory risks before the specified goods have been transferred to a customer or after transfer
of control to the customers, and has discretion in establishing the price of the specified goods.
Disaggregation
of revenue. The Company disaggregates its revenue from different types of contracts with customers by principal product categories,
as it believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See note 21 of the Company’s
consolidated financial statements in Item 20 for product revenues by segment.
Contract
balances. The Company did not recognize any contract asset as of March 31, 2021 and March 31, 2022. The timing between the recognition
of revenue and receipt of payment is not significant.
The Company’s contract liabilities consist of deposits received from
customers. As of March 31, 2021 and March 31, 2022, the balances of the contract liabilities were $72,000 and $79,000, including deposits
received from customers. All contract liabilities at the beginning of the year ended March 31, 2022 were recognized as revenue during
the year ended March 31, 2022 and all contract liabilities as of year ended March 31, 2022 are expected to be realized in the following
year.
Impairment
of goodwill
Goodwill
is the excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business combination.
Goodwill is not amortized but rather tested for impairment at least annually. The Company tests goodwill for impairment in March of each
fiscal year. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would be more
likely than not reduce the fair value of the reporting unit below its carrying amount.
Prior
to April 1, 2020, in performing the two-step quantitative impairment test, the first step compared the fair values of each reporting
unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill was not
considered to be impaired and the second step was not be required. If the carrying amount of a reporting unit exceeded its fair value,
the second step compared the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair
value of goodwill was determined in a manner similar to accounting for a business combination with the allocation of the assessed fair
value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities was the implied fair value of goodwill. This allocation process was only
performed for the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities.
Starting from April 1, 2020, the Company adopted No. 2017-04: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”),
which simplifies the accounting for goodwill impairment by eliminating Step 2 from the goodwill impairment test. If the carrying amount
of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining
an implied fair value in Step 2 to measure the impairment loss. Application of a goodwill impairment test requires significant management
judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and determining
the fair value of each reporting unit.
The
gross amount of goodwill and accumulated impairment losses as of March 31, 2021 and 2022 are as follows:
| |
Kayser Myanmar ($) | |
Gross as of April 1, 2020, March 31, 2021 and 2022 | |
| 77,000 | |
Accumulated impairment loss as of April 1, 2020 | |
| (77,000 | ) |
Accumulated impairment loss as at March 31, 2021 and 2022 | |
| (77,000 | ) |
Net as of March 31, 2021 and 2022 | |
| -- | |
The
balance represented the carrying value of Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”) and had an aggregate
carrying amount of $77,000 as of year ended March 31, 2017 and 2018. During the year ended March 31, 2019, we have tested goodwill for
impairment and estimated the fair value of Kayser Myanmar by using the income approach in step 1 of the impairment test. Based on the
quantitative test, it was determined the fair value was more likely than not below its carrying amount. Management has identified several
determinative events and factors, which has led to the above conclusion, included: (1) the financial result of Kayser Myanmar was below
management’s expectations due to higher than expected supply chain cost and increased competition, (2) the fiscal year 2020 annual
budget operating plan in March 31, 2019, which provided additional insights into expectations and priorities for the coming years, such
as lower growth and margin expectations and (3) increased and prolonged economic and regulatory uncertainty in the global economics as
of March 31, 2019. Management has compared the implied fair value of Kayser Myanmar’s goodwill to the carrying value of the goodwill
which is step 2 of the two-step impairment test. An impairment loss was recognized for the excess in the carrying value of goodwill over
the implied fair value of goodwill.
As
a result of the two-step impairment test, we have recognized a $77,000 impairment loss of Kayser Myanmar goodwill in selling, general
and administrative expenses during the year ended March 31, 2019, due to margin and revenue from contracts from customers declines as
well as the lower growth and margin expectation. No impairment expenses were recognized during the year ended March 31, 2020, 2021 and
2022.
Provision
for doubtful receivables
From
April 1, 2020, the Company adopted ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment
of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses.
The
Company’s accounts receivable, other current assets and loan receivables recorded in prepaid expenses and other current assets
are within the scope of ASC Topic 326. Accounts receivable primarily represent amounts due from customers, that are typically non-interest
bearing and are initially recorded at the invoiced amount. Accounts receivable balances are written-down against the allowance after
all means of collection have been exhausted and the potential for recovery is considered remote. Any off-balance sheet credit exposure
related to its customers is assessed in the same manner as on-balance sheet credit exposure.
To
estimate expected credit losses, the Company has identified the relevant risk characteristics of its customers and the related receivables,
other current assets and loan receivables which include size, type of the services or the products the Company provides, or a combination
of these characteristics. Receivables with similar risk characteristics have been grouped into pools. For each pool, the Company considers
the past collection experience, current economic conditions, future economic conditions (external data and macroeconomic factors) and
changes in the Company’s customer collection trends. Other key factors that influence the expected credit loss analysis include
customer demographics, payment terms offered in the normal course of business to customers, and industry-specific factors that could
impact the Company’s receivables. Additionally, external data and macroeconomic factors are also considered. This is assessed at
each quarter based on the Company’s specific facts and circumstances. No significant impact of changes in the assumptions since
adoption. As of March 31, 2022, expected credit loss provision recorded in accounts receivable was $51,000; the Company did not record any provision for expected credit losses
in fiscal 2021.
Provision
for uncollectible loan receivables
Loan
receivables mainly represent the loans to a non-controlling interest and a director of a subsidiary in Myanmar. The loan periods granted
by us to the staff amounts to 36 months and carries fixed interest rate of 8% per annum. The loan receivables principal and interest
are expected to be repaid on the expected settlement date. The loan receivables are stated at the historical carrying amount net of allowance
for uncollectible loan receivables. The loan receivables expected to be settled more than one year as of balance sheet date are classified
into other long-term assets on the consolidated balance sheets. No impairment was made on the loan receivables for the years ended March
31, 2020, 2021 and 2022.
Inventories
written-down
Inventories
are stated at the lower of cost and realizable value, with cost determined by the first-in-first-out method. Work-in-progress and finished
goods consist of raw materials, direct labor and overheads associated with the manufacturing process. Write-down of potential obsolete
or slow-moving inventories is recorded based on management's assumptions about future demands and market conditions.
Impairment
or disposal of long-lived assets (other than goodwill)
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the
long-lived assets to the sum of the estimated undiscounted future cash flows and the eventual disposition. Management would estimate
the future cash flow used to test the recoverability of the asset included the budgeted cash inflows less associated cash outflows, which
are directly associated with the result of use. The estimation should exclude the interest charges which will be recognized as an expense
when incurred. Management would consider all available evidence during the estimation process, to ensure the estimated budget would be
the most possible outcomes. If the sum of the expected undiscounted cashflow were to be less than the carrying amount of the assets,
the Company would recognize an impairment loss based on the fair value of the assets. Fair value is generally measured based on either
quoted market prices, if available, or discounted cash flow analyses.
During
the years ended 2022, 2021 and 2020, the Company reviewed the long-lived assets for impairment, since there are several indicative events
and factors identified, including (1) significant adverse changes in the business climate, including the possible negative impact of
political unrest in Myanmar, (2) operating and/or cash flow losses in prior years, and (3) negative impact of business operations as
a result of COVID-19 pandemic and new global human and environmental rights regulations pending or enacted. Management has compared the
carrying value of the long-lived asset to the estimated undiscounted operating cash flow based on the above factors.
As
a result of the comparison, management has identified the sum of expected undiscounted cashflow of multiple types of machinery and equipment
are more likely than not above their carrying value. The Company did not recognize any impairment in fiscal 2020, 2021 and 2022.
Leases
The
Company accounts for leases in accordance with ASC 842, Leases (“ASC 842”), which requires lessees to recognize leases on
the balance sheet and disclose key information about leasing arrangements. The Company elected not to apply the recognition requirements
of ASC 842 to short-term leases. The Company also elected not to separate non-lease components from lease components and, therefore,
it will account for lease component and the non-lease components as a single lease component when there is only one vendor in the lease
contract.
The
Company determines if a contract contains a lease based on whether it has the right to obtain substantially all of the economic benefits
from the use of an identified asset which the Company does not own and whether it has the right to direct the use of an identified asset
in exchange for consideration. Right of use (“ROU”) assets represent the Company’s right to use an underlying asset
for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU
assets are recognized as the amount of the lease liability, adjusted for lease incentives received. Lease liabilities are recognized
at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value
of the future lease payments is the Company’s incremental borrowing rate (“IBR”), because the interest rate implicit
in most of the Company’s leases is not readily determinable.
The
IBR is a hypothetical rate based on the Company’s understanding of what its credit rating would be to borrow and resulting interest
the Company would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term on a collateralized
basis. Lease payments may be fixed or variable, however, only fixed payments or in-substance fixed payments are included in the Company’s
lease liability calculation.
Variable
lease payments are recognized in operating expenses in the period in which the obligation for those payments are incurred.
No
impairment of ROU assets was made as of March 31, 2022 and March 31, 2021.
The
operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current
in the consolidated balance sheets at March 31, 2022 and March 31, 2021.
Item 6. Directors, Senior Management and Employees
Directors
and Executive Officers
The
Directors and executive officers of the Company as of June 30, 2022 are listed below.
Name | |
Age | |
Positions |
Roland W. Kohl | |
73 | |
Chief Executive Officer, Director, Chairman of the Board |
Ringo Tsang | |
56 | |
Chief Operating Officer |
Alan Chan | |
58 | |
Chief Financial Officer, Secretary |
Tiko Aharonov (1) (2) | |
75 | |
Director |
Uri Bernhard Oppenheimer (2) | |
86 | |
Director |
Kevin Yang Kuang Yu (2) | |
65 | |
Director |
Irene Wong Ping Yim (1) | |
56 | |
Director |
Heiko Sonnekalb (1) | |
51 | |
Director |
George Leung Wing Chan (2) | |
69 | |
Director |
Dirk Hermann, Ph.D. | |
58 | |
Director |
(1) | Current
member of Audit Committee. |
(2) | Member
of Compensation Committee |
The
Directors hold office until their term has expired and they are re-elected at an annual meeting of shareholders. The Company’s
Amended and Restated Memorandum and Articles of Association provide that the Board of Directors is divided into three classes of directors
with staggered terms of office. At each annual meeting of shareholders, the members of one class of directors will be elected for a term
of office to expire at the third succeeding annual meeting of shareholders after their election, and until their successors have been
duly elected and qualified. The next annual meeting of shareholders is currently scheduled to be held on August 15, 2022. At that meeting,
the terms of one class of directors (consisting of Roland W. Kohl, Irene Wong Ping Yim, and Tiko Aharonov) will expire, and nominees
for that class will be nominated elected to hold office for a three-year term expiring at the 2025 annual meeting.
As
a foreign private issuer organized under the law of the British Virgin Islands, the Company may follow its home company practice in lieu
of NASDAQ’s Marketplace Rule 5605(b)(1) requiring the independence of a majority of our directors. During the year ended March
31, 2022 and continuing to date, the composition of the Board of Director has consisted of a majority of directors deemed “independent”
under that Rule.
Roland
W. Kohl. Mr. Kohl was the founder of the Company and has been its Chief Executive Officer since its inception in 1990. He has been
a Director of the Company since March 1, 1995. He has overall responsibility for the day-to-day operations of the Company and its subsidiaries.
Prior to forming the Company, Mr. Kohl was the Managing Director of Dialbright Company Limited, a camera manufacturer located in China.
Mr. Kohl received a degree in mechanical engineering and has over thirty years’ experience in managing factories and manufacturing
operations in China. Mr. Kohl is a German national and resides in Hong Kong.
Ringo
Tsang. Mr. Tsang was appointed as the Chief Operating Officer in November 2017. Mr. Tsang joined the Company in March 2009 as a Production
Engineer and was promoted to Chief Technology Officer in 2010. Since becoming Chief Technology Officer, Mr. Tsang has been in charge
of the Company’s engineering department, its tool shop, its Computer Numerical Control (CNC) tooling system, and its automation
and information technologies. Mr. Tsang has a Bachelor of Science degree in mechanical engineering, and a Master’s Degree in each
of Business Administration, Information Systems, and Professional Accounting.
Alan
Chan. Mr. Chan was appointed as the Company’s Chief Financial Officer and Secretary in September 2010. From June 2009 until
he joined the Company, Mr. Chan served as chief financial officer for a joint venture in China with Laureate Education Group. He previously
served as vice president and chief financial officer for DeCoro, an Italian sofa manufacturer with two facilities in Shenzhen, and as
financial controller for San Miguel Shunde Brewery Co. Ltd., a foreign joint venture engaged in the manufacturing and sale of beer products
for China and overseas markets. He also served as financial controller for Hua Yang Printing Holdings Co. Ltd., a manufacturer of children’s
paper products. Mr. Chan began his professional career as an accountant with Nelson Wheeler, an Australian CPA firm, and subsequently
with PricewaterhouseCoopers – formerly Coopers and Lybrand. Mr. Chan earned a Master of Arts degree in accounting from Curtin University
in Australia and a Bachelor of Arts degree from the University of Lancaster in the United Kingdom.
Tiko
Aharonov. Mr. Aharonov has been a Director of the Company since its inception in 1990 and was a General Manager of the Company’s
camera operations from 1998 to 2004. Until the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as the General
Manager of the Bulgarian operations. He was a bank manager for a leading Israeli commercial and retail bank from 1969 to 1989 and has
operated his own real estate and investment company for high net worth individuals desiring to invest in real estate in Israel. Mr. Aharonov
also represents investors in real estate in Bulgaria.
Uri
Bernhard Oppenheimer. Mr. Oppenheimer was elected to the Board of Directors in July 2005. Mr. Oppenheimer is founder, managing director
and the majority owner of U.B. Oppenheimer GmbH in Germany and MIG Germany GmbH in Germany.
Kevin
Yang Kuang Yu. Mr. Yang was elected to the Board of Directors in July 2005. From 2004 until his retirement in 2013, Mr. Yang was
the China-USA Director of Holt Asia LLC (now owned by Chesta Co., Inc.) in the U.S. Prior thereto, from 2000 to May 2003, Mr. Yang set
up and managed a factory in Shanghai for CHT Co., Limited (now owned by Chesta Co., Inc.) and controlled and managed other manufacturing
facilities in China. Mr. Yang has also been involved with the trading companies that were engaged in exporting products to the US.
Irene
Wong Ping Yim. Ms. Wong was elected to the Board of Directors in July 2005. For over ten years, Ms Wong was the Chief Accountant
of CNIM Hong Kong Ltd. From 1994 to 2001, she was the Accounting Manager of Highway Holdings. Ms. Wong graduated from Deakin University
with a Master’s Degree in Business Administration. She is currently a fellow member of the Association of Chartered Certified Accountant
and a member of Hong Kong Institute of Certified Public Accountants.
George
Leung Wing Chan. Mr. Leung was appointed to the Board of Directors in December 2005. Since 2004, Mr. Leung has been a management
consultant. Prior thereto, from 1995 to 2004, he was the Managing Director/Vice President of Lucky Metal & Plastic Mfg. Co., Ltd.
Heiko
Sonnekalb. Mr. Sonnekalb was appointed to the Board of Directors on April 1, 2020. Mr. Sonnekalb currently serves as the chief executive
officer of Dr. Arnold Schaefer GmbH, a German holding company, Lakal GmbH, a German manufacturer of shutter blinds, and Bartz Werke GmbH,
a German casting foundry and heat and pipe technology company. In addition, he serves as a member of the supervisory board of Germany-based
Herwick AG and Stadtwerke Voelklingen Vertrieb GmbH. Mr. Sonnekalb also is a committee member of both the IHK Saarland Industrial Research
and Foreign Trade Committee and the DIHK Berlin Industrial Research and Foreign Trade Committee. He also serves as a judge on the labor
court in Saarbruecken, Germany. Mr. Sonnekalb received a degree in Business Administration from the University of Fulda, Germany, in
1997.
Dirk
Hermann, Ph.D. Dr. Hermann was appointed to the Board of Directors on April 1, 2020. Dr. Hermann previously served as a member of
the Company’s Board of Directors from January 2003 until August 2010. Dr. Hermann currently serves as chief executive officer of
Saarland Feuerversicherung AG, a German insurance company. He joined Versicherungskammer Bayern in 2012, parent company of Saarland Insurance
Group. Prior thereto, he held a variety of positions with Allianz Versicherungen AG, including a tenure as a member of the management
board. Dr. Hermann currently also serves on the board of two German banks, Landesbank Saar and Sparkassenverband, and on the board the
Consal Insurance Group. Dr. Hermann graduated from the University of Konstanz in Germany with a bachelor’s degree in business administration.
He also holds a master’s degree in business administration from the University of St. Gallen in Switzerland. He earned a Ph.D.
degree in business administration from the University of Leipzig, in Germany.
Dr.
Hermann is the brother-in-law of Roland Kohl, the Chairman, President and Chief Executive Officer of the Company. Other than Mr. Hermann’s
relationship with Mr. Kohl, there are no other family relationships between any of the above-named officers, directors or employees.
To the Company’s knowledge, no arrangement or understanding exists between any such director and executive officer and any major
shareholder, customer, supplier or other party pursuant to which any director or executive officer was elected as a director or executive
officer of the Company.
Compensation
of Directors and Officers
The
aggregate amount of compensation (including non-cash benefits, but excluding equity compensation) paid by the Company and its subsidiaries
during the year ended on March 31, 2022 to directors on the Company’s Board of Directors and officers as a group (ten people),
for services rendered to the Company and its subsidiaries in all capacities was approximately $876,000, excluding amounts paid by the
Company as dividends to directors and executive officers in their capacity as shareholders of the Company.
Mr.
Kohl is employed pursuant to an employment agreement that can only be terminated by the Company, other than for cause or in the case
of Mr. Kohl’s incapacity, by paying Mr. Kohl a severance payment equal to three times his annual base salary. However, since April
2019 under the employment agreement Mr. Kohl’s base salary will be reduced by one-half from his initial base salary following any
fiscal quarter in which the Company has a net quarterly loss, which salary reduction will remain in effect until the Company has net
income in any subsequent quarter. Accordingly, in the event that the Company has a quarterly loss, Mr. Kohl’s annual base salary
for the following quarter will be reduced by one-half. The forfeited salary will not be recouped if/when the Company has a profitable
fiscal quarter. Two of the Company’s other senior managers have also agreed to voluntarily reduce their base salaries by 50% in
the same manner as Mr. Kohl.
Mr.
Kohl, and the four other senior managers of the Company, are entitled to receive cash payments equal to three times their annual salary
in the event of a change of control of the Company without the approval of the Board of Directors.
During
the past fiscal year, the Company paid each of the non-executive directors an annual director’s fee of $12,000 and reimbursed them
for their reasonable expenses incurred in connection with their services as directors. In addition, the Chairman of any committee is
paid an additional fee of $2,000 per year, and the members of a committee are paid an additional fee of $2,000 per year for each committee
on which they serve.
Board
Practices
Directors
of the Company are elected at the Company’s annual meeting of shareholders and serve until their successors take office, or until
their death, resignation or removal. The Company’s Amended and Restated Memorandum and Articles of Association provide for the
classification of our Board of Directors into three classes of directors with staggered terms of office. At each annual meeting, one
class of directors (consisting of either two or three directors) will be elected for a term of office to expire at the third succeeding
annual meeting of shareholders after their election and until their successors have been duly elected and qualified (i.e. directors will
be elected for three year terms).
The
Company generally holds its annual meeting of shareholders within 90 days after the filing of its Annual Report on Form 20-F with the
Commission. Executive officers serve at the pleasure of the Board of Directors of the Company. As of the date of this Annual Report,
there are no agreements with any of the Directors that would provide the Directors with any benefits upon termination of employment.
However, in the event of a change of control without the approval of the Board of Directors, Mr. Kohl, and the four other senior managers
of the Company, are entitled to receive cash payments equal to three times their annual salary.
Audit
Committee. During fiscal 2022, the members of the Audit Committee of the Board of Directors were Irene Wong Ping Yim, Heiko Sonnekalb,
and Tiko Aharonov. The Audit Committee reviews, acts on and reports to the Board of Directors on various auditing and accounting matters,
including the selection of the Company’s auditors, the scope of the annual audits, fees to be paid to the auditors, the performance
of the independent auditors, any additional services to be provided by the auditors, and the Company’s accounting practices. Each
of these individuals is a non-employee director and is independent as defined under the Nasdaq Stock Market’s listing standards,
and each has significant knowledge of financial matters (one of the members has an advanced degree in business administration). Ms. Wong
has been designated by the Board as the “audit committee financial expert” as defined under Item 401(h)(2) of Regulation
S-K of the Securities Exchange Act of 1934, as amended. The Audit Committee met three times during fiscal 2022. The Audit Committee operates
under a formal charter that governs its duties and conduct.
Compensation
Committee. During the past fiscal year, the Compensation Committee of the Board of Directors consisted of Uri Bernhard Oppenheimer,
Tiko Aharonov, George Leung Wing Chan and Kevin Yang Kuang Yu. The Compensation Committee administers the Company’s 2020 Stock
Option And Restricted Stock Plan and establishes the salaries and incentive compensation of the executive officers of the Company.
The
Board of Directors does not have a separate Nominating Committee. Nominees for the election to the Board are selected and nominated by
the independent directors (there currently are eight directors, six of whom are independent). The Board of Directors has not established
any specific minimum qualifications for director candidates or any specific qualities or skills that a candidate must possess in order
to be considered qualified to be nominated as a director. Qualifications for consideration as a director nominee may vary according to
the particular areas of expertise being sought as a complement to the existing board composition. In making its nominations, the independent
members of the Board of Directors generally will consider, among other things, an individual’s business experience, industry experience,
financial background, breadth of knowledge about issues affecting our company, time available for meetings and consultation regarding
company matters and other particular skills and experience possessed by the individual.
Option
and Restricted Stock Plans
2010 Stock Option And Restricted Stock Plan.
On June 26, 2010, the Company has adopted the 2010 Stock Option And Restricted Stock Plan (the “2010 Option Plan”) that covered
600,000 shares of the Common Shares. The Option Plan provided for the grant of options to purchase Common Shares to employees, officers,
directors and consultants of the Company and for the grant of shares of restricted stock. The 2010 Option Plan expired on June 26, 2020.
On the date that the 2010 Option Plan expired, awards for all 600,000 shares available for grant under the 2010 Stock Option Plan had
been granted, and no additional shares were available for grant under the 2010 Option Plan.
2020
Stock Option And Restricted Stock Plan. Because the 2010 Option Plan was about to expire, on June 20, 2020, the Company adopted
the 2020 Stock Option And Restricted Stock Plan (the “2020 Option Plan”). Under the 2020 Option Plan, the Company is authorized
to grant options, and to issue restricted shares, for a total of 500,000 shares. To date, no options have been granted under the 2020
Option Plan. However, the Company has issued 15,000 shares of restricted stock to three consultants based in Germany. The 2020 Option
Plan became effective upon the approval of the plan by the shareholders at the Company’s October 8, 2020 annual meeting of shareholders.
Employees
As
of June 28, 2022, the Company had a total of 204 persons who were working on a full-time basis for the Company. All of the Company’s
employees are employed by the Company’s various subsidiaries. Of the foregoing workers and employees, 64 were engaged in the administration
of the Company (including marketing, purchasing, personal, bookkeeping, import/export, material control, shipping, security), engineering,
design and development, tool and fixture production, and teaching at the Company’s technical training school, and the balance,
140 employees, were engaged in manufacturing, quality assurance, warehousing and other supporting functions.
Kayser
Myanmar, the Myanmar based company in which the Company currently owns an 84% stake, employed a total of approximately 120 employees
as of June 28, 2022.
The
number of workers employed by the Company fluctuates largely due to the availability of workers and the time of year, and the Company
occasionally experiences temporary shortages of workers. From time to time, the availability of workers has been adversely affected because
of the high demand for such workers in Shenzhen due to transportation difficulties in bringing workers to Shenzhen, and due to seasonal
demands on labor such as harvesting when the mainly rural-based laborers are required to return to their village. In addition, most workers
are unavailable during the traditional Chinese holidays, including the Chinese New Year’s holiday. Due to these factors, the Company
experiences high turnover of employees annually.
Since
January 1, 2008, Chinese workers are allowed to join an official trade union. However, to the Company’s knowledge, none of the
Company’s employees have joined labor unions or become a party to a collective bargaining agreement. Employers in China are required
to conclude an “open-ended employment contract” with any employee who either has worked for the employer for 10 years or
more or has had two consecutive fixed-term contracts. An “open-ended employment contract” is in effect a lifetime, permanent
contract, which is terminable only in specified circumstances, such as a material breach of the employer’s rules and regulations,
or for a serious dereliction of duty. Under the new law, reducing the Company’s workforce by 20% or more may occur only under specified
circumstances. All of these new labor provisions have significantly increased the Company’s cost of labor and have restricted certain
of the Company’s operating procedures.
The
Company believes that its relations with its administrative employees in Hong Kong and with its managers and technicians in China are
good.
Myanmar
has adopted comprehensive labor laws that now allow employees to unionize. However, none of the employees currently employed at the Myanmar
facility belong to a union. Similar to China, many of the workers at the Company’s Myanmar facility are seasonal workers who frequently
change jobs. As a result, Kayser Myanmar typically only has a short-term relationship with these employees.
Share
Ownership
The
share ownership of the Company’s officers and directors is listed under Item 7 of this Annual Report.
Item 7. Major Shareholders and Related Party Transactions
Major
Shareholders. The Company is not directly or indirectly owned or controlled by any other corporation or any foreign government. The
following table sets forth, as of June 30, 2022, certain information with respect to the beneficial ownership of the Company’s
Common Shares by each person (i) who is an executive officer or director of the Company, (ii) known by the Company to own beneficially
more than 5% of the outstanding Common Shares outstanding as of such date, and (iii) the officers and directors of the Company as a group.
Name of Beneficial Owner or Identity of Group(1) | |
Number of Common Shares Beneficially Owned | | |
Percent Beneficial Owned(**) | |
Roland W. Kohl | |
| 674,067 | (2) | |
| 16.7 | % |
Tiko Aharonov | |
| 285,000 | (3) | |
| 7.1 | % |
Heiko Sonnekalb | |
| 25,000 | | |
| * | |
George Leung Wing Chan | |
| 28,000 | (4) | |
| * | |
Dirk Hermann | |
| 51,286 | | |
| 1.3 | % |
Irene Wong Ping Yim | |
| 43,000 | (5) | |
| 1.1 | % |
Kevin Yang Kuang Yu | |
| 36,224 | (4) | |
| * | |
Uri Bernhard Oppenheimer | |
| 52,000 | (4) | |
| 1.3 | % |
Alan Chan | |
| 50,000 | | |
| 1.2 | % |
Ringo Tsang
| |
| 50,000 | | |
| 1.2 | % |
All Directors and Officers as a Group (10 Persons) | |
| 1,294,577 | (6) | |
| 32.1 | % |
** | Under
the rules of the Securities and Exchange Commission, shares of Common Shares that an individual or group has a right to acquire within
60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other
person shown in the table. |
(1) | The
address of each of the named holders is c/o Highway Holdings Limited, Suite 1801, Level 18, Landmark North, 39 Lung Sum Avenue, Sheung
Shui, New Territories, Hong Kong. |
(2) | Includes
currently exercisable options to purchase 60,000 shares. |
(3) | Includes
currently exercisable options to purchase 50,000 shares. |
(4) | Includes
currently exercisable options to purchase 25,000 shares. |
(5) | Includes
currently exercisable options to purchase 40,000 shares. |
(6) | Includes
currently exercisable options to purchase 225,000 shares. |
As
of June 28, 2022, the Company had 55 record holders, of whom 24 were residents of the United States. To the Company’s knowledge,
foreign record holders own 537,210 Common Shares, although a number of the Company’s officers, directors and other foreign shareholders
also own shares in streetname. To the Company’s knowledge 965,507 of its Common Shares are owned by non-U.S. persons. Based on
the Company’s records of shares owned by its officers, by its record holders, and by other foreign holders who hold their shares
in street name, the Company estimates that at least 38.9% of the Company’s outstanding shares are owned by foreign shareholders.
To the Company’s knowledge there have been no significant changes in the percentage ownership held by any major shareholders during
the past three years, and there are no arrangements known to the Company, the operation of which may at a subsequent date result in a
change in control of the Company. All holders of the Common Shares have the same voting rights.
Related
Party Transactions.
The
Company did not engage in any related party transactions during the fiscal year ended March 31, 2022. However, as described elsewhere
in this Annual Report, on March 29, 2019 Kayser Myanmar, the Company’s 84% owned Myanmar subsidiary, entered into a 50-year lease
with Konig Company Limited (“Konig Company”), a Myanmar company. Neither the Company nor any of its subsidiaries owns an
equity interest in Konig Company, and Konig Company owns no shares of the Company. Furthermore, none of Konig Company’s principals
is an officer or director of the Company, nor are any of the Company’s officers or directors affiliated with Konig Company. Accordingly,
the Company does not believe that Konig Company is a related party. However, Konig Company is owned by two Myanmar citizens who are related
to Kayser Myanmar. One of the principals of Konig Company currently is a manager and a shareholder of Kayser Myanmar (he owns a 16% interest
in Kayser Myanmar), and the other currently is a manager of Kayser Myanmar. These two principals of Konig Company also collectively own
15,000 shares of the Company’s restricted stock. All discussions regarding the lease and the other arrangements between the Company
and Kayser Myanmar were conducted on behalf of the Company and Kayser Myanmar by officers of the Company, and the two principals of Konig
Company represented Konig Company in those interactions.
Item 8. Financial Information.
F. Consolidated Statements and Other Financial Information
The
Company has included consolidated financial statements as part of this annual report.
B. Significant
Changes
The
Company has not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
C. Dividend
Policy.
The
Company attempts to pay a cash dividend annually to all holders of its Common Shares, subject to its profitability and cash position.
The Company declared three dividend payments during the fiscal year ended March 31, 2022 (the Company’s Board declared a dividend
of $0.06 per share dividend that was paid on October 12, 2021, a $0.06 per share dividend that was paid on November 24, 2021, and a $0.05
per share dividend that was paid on April 8, 2022).
Dividends
are declared and paid at the discretion of the Board of Directors and depend upon, among other things, the Company’s results of operations, the anticipated future earnings of the Company, the success of the Company’s business activities, the Company’s
capital requirements, and the general financial conditions of the Company. Furthermore, since the payment of dividends is at the discretion
of the Board, no assurance can be given that the Company will pay any dividends in the future even if the Company has a profitable year
or is otherwise capable of doing so.
D. Legal
Proceedings.
The
Company may occasionally become subject to legal proceedings and claims that arise in the ordinary course of its business. However, the
Company is not currently subject to any pending legal proceedings that involve amounts that are material to the Company’s financial
condition.
Item 9. The Offer and Listing
F. Offer and Listing Details
The Company’s Common Shares are currently
traded on the Nasdaq Capital Market under the symbol “HIHO” and are not listed for trading in any trading market outside
the United States. On June 28, 2022, the last reported sale price of our Common Shares on the Nasdaq Capital Market was $2.25 per share.
As of June 28, 2022, there were 55 holders of record of the Company’s Common Shares. However, the Company believes that there are
a significantly greater number of “street name” shareholders of the Common Shares.
B. Plan
of Distribution
No
disclosure is required in response to this Item.
C. Markets
Our
Common Shares have been listed on the Nasdaq Capital Market during the past five years, under the symbol “HIHO.”
D. Selling
Shareholders
No
disclosure is required in response to this Item.
E. Dilution
No
disclosure is required in response to this Item.
F. Expenses
of the Issue
No
disclosure is required in response to this Item.
Item 10. Additional Information
Share
Capital
The Company’s authorized capital consists
of 20,020,000 shares, of which 20,000,000 are Common Shares, $0.01 par value per share, and 20,000 are shares of Series A Preferred Shares,
$0.01 par value per share. As of both March 31, 2022 and June 28, 2022, there were 4,036,825 Common Shares outstanding; no shares of
the Series A Preferred Shares were outstanding. As of both March 31, 2022 and June 28, 2022, options to purchase 350,000 Common Shares
were outstanding.
On
May 11, 2018, the Company filed with the Registrar of Corporate Affairs of the British Virgin Islands the Amended and Restated Memorandum
and Articles of Association of the Company setting forth, among other things, the rights and preferences of the Series A Preferred Shares.
A description of the rights and preferences of the Series A Preferred Shares is set forth below in “Amended and Restated Memorandum
and Articles of Association.”
There
have been no other events in the last three years that have changed the amount, the number of classes, or voting rights, of the Company’s
issued capital.
Amended
and Restated Memorandum And Articles Of Association
The
following represents a summary of certain key provisions of the Company’s amended and restated memorandum and articles of association.
The summary does not purport to be a summary of all of the provisions of our memorandum and articles of association and of all relevant
provisions of BVI law governing the management and regulation of BVI companies.
Highway
Holdings Limited is registered at Harneys Corporate Services Limited, Craigmuir Chambers, Road Town, Tortola, VG 1110, British Virgin
Islands and has been assigned company number 32576. The objectives or purposes of the Company are to engage in any act or activity that
is not prohibited under British Virgin Islands law as set forth in Clause 4 of the Amended and Restated Memorandum and Articles of Association
of the Company (the “Memorandum and Articles”). The Company’s Memorandum and Articles are the instruments governing
the Company. These documents are comparable in purpose and effect to certificates or articles of incorporation and bylaws of corporations
organized in a state of the United States. The Company does not believe that there are any restrictions in its charter or under British
Virgin Island law that materially limit the Company’s current or proposed operations.
Common
Shares: The Company has authorized 20,000,000 Common Shares with par value of $0.01 each. Holders of our Common Shares are entitled
to one vote for each whole share on all matters to be voted upon by members, including the election of directors. Holders of our Common
Shares do not have cumulative voting rights in the election of directors. All of our Common Shares are equal to each other with respect
to liquidation and dividend rights. Holders of our Common Shares are entitled to receive dividends if and when declared by our Board
of Directors out of surplus in accordance with British Virgin Islands law. In the event of our liquidation, all assets available for
distribution to the holders of our Common Shares are distributable among them according to their respective holdings. Holders of our
Common Shares have no preemptive rights to purchase any additional, unissued Common Shares.
Series
A Preferred Shares: Each Series A Preferred Share will be entitled, when, as and if declared, to a minimum preferential quarterly
dividend payment of the greater of (a) $10.00 per share, and (b) an amount (subject to certain adjustments) equal to 1,000 times the
dividend declared per Common Share. In the event of liquidation, dissolution or winding up of the Company, the holders of Series A Preferred
Shares will be entitled to a minimum preferential payment of the greater of (a) $10.00 per share (plus any accrued but unpaid dividends),
and (b) an amount equal to 1,000 times the payment made per Common Share. Each Series A Preferred Share will (subject to certain adjustments)
have 1,000 votes, voting together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in
which outstanding Common Shares are converted or exchanged, each Series A Preferred Share will be entitled to receive 1,000 times the
amount received per Common Shares. These rights are protected by customary anti-dilution provisions.
Rights
Agreement: On April 28, 2018, the Company’s Board of Directors declared a dividend of one preferred share purchase right (a
“Right”) for each outstanding Common Share. The Rights will also attach to Common Shares issued in the future. Each Right
initially entitles the registered holder to purchase from the Company one one-thousandth of a Series A Preferred Share, par value $0.01
per share, of the Company at a price of $10.00 per one one-thousandth of a Series A Preferred Share (the “Purchase Price”),
subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of May 8, 2018, as the same
may be amended from time to time (the “Rights Agreement”), between the Company and Computershare Trust Company, N.A., as
Rights Agent (the “Rights Agent”).
Until
the earlier to occur of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons
has become an Acquiring Person (as defined below) or (ii) 10 business days (or such later date as may be determined by action of the
Board of Directors of the Company prior to such time as any person or group of affiliated or associated persons becomes an Acquiring
Person) following the commencement of, or public announcement of an intention to make, a tender or exchange offer the consummation of
which would result in any person or group of affiliated or associated persons becoming an Acquiring Person (the earlier of such dates
being called the “Distribution Date”), the Rights will be evidenced, with respect to certificates representing Common Shares
(or book entry Common Shares) outstanding as of the Record Date, by such certificates (or such book entry shares) together with a copy
of a Summary of the Rights (the “Summary of Rights”). Except in certain situations, a person or group of affiliated or associated
persons becomes an “Acquiring Person” upon acquiring beneficial ownership of 15% or more of the outstanding Common Shares.
No such person or group having beneficial ownership of 15% or more of such outstanding shares at the time of the first announcement of
adoption of the rights plan reflected in the Rights Agreement will be deemed an Acquiring Person until such time as such person or group
becomes the beneficial owner of additional Common Shares (other than by reason of a stock dividend, stock split or other corporate action
effected by the Company in which all holders of Common Shares are treated equally).
The
Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred
with, and only with, the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share
certificates issued after the Record Date upon transfer or new issuances of Common Shares will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of
any certificates for Common Shares (or book entry Common Shares) outstanding as of the Record Date, even without such notation or a copy
of the Summary of Rights, will also constitute the transfer of the Rights associated with the Common Shares represented thereby. As soon
as practicable following the Distribution Date, separate certificates evidencing the Rights (“Right Certificates”) will be
mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates
alone will evidence the Rights.
The
Rights are not exercisable until the Distribution Date. The Rights will expire on May 8, 2028 (the “Final Expiration Date”),
unless the Final Expiration Date is extended or the Rights are earlier redeemed or exchanged by the Company as described below.
The
Purchase Price payable, and the number of Series A Preferred Shares or other securities or property issuable, upon exercise of the Rights
is subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Series A Preferred Shares, (ii) upon the grant to holders of the Series A Preferred Shares of certain rights
or warrants to subscribe for or purchase Series A Preferred Shares at a price, or securities convertible into Series A Preferred Shares
with a conversion price, less than the then-current market price of the Series A Preferred Shares or (iii) upon the distribution to holders
of the Series A Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable
in Series A Preferred Shares) or of subscription rights or warrants (other than those referred to above).
Because
of the nature of the Series A Preferred Shares’ dividend, liquidation and voting rights, the value of the one one-thousandth interest
in a Series A Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share.
In
the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon
exercise of a Right that number of Common Shares having a market value of two times the exercise price of the Right.
In
the event that, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold, proper provisions will be made so that each holder of
a Right (other than Rights beneficially owned by an Acquiring Person which will have become void) will thereafter have the right to receive
upon the exercise of a Right that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction
(or its parent) that at the time of such transaction have a market value of two times the exercise price of the Right.
At
any time after any person or group becomes an Acquiring Person and prior to the earlier of one of the events described in the previous
paragraph or the acquisition by such Acquiring Person of 50% or more of the outstanding Common Shares, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such Acquiring Person which will have become void), in whole or in part,
for Common Shares or Series A Preferred Shares (or a series of the Company’s preferred stock having equivalent rights, preferences
and privileges), at an exchange ratio of one Common Share, or a fractional Series A Preferred Share (or other preferred stock) equivalent
in value thereto, per Right.
With
certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least
1% in such Purchase Price. No fractional Series A Preferred Shares or Common Shares will be issued (other than fractions of Series A
Preferred Shares which are integral multiples of one one-thousandth of a share of Series A Preferred Shares, which may, at the election
of the Company, be evidenced by depositary receipts), and in lieu thereof an adjustment in cash will be made based on the current market
price of the Series A Preferred Shares or the Common Shares.
At
any time prior to the time an Acquiring Person becomes such, the Board of Directors of the Company may redeem the Rights in whole, but
not in part, at a price of $0.01 per Right (the “Redemption Price”) payable, at the option of the Company, in cash, Common
Shares or such other form of consideration as the Board of Directors of the Company shall determine. The redemption of the Rights may
be made effective at such time, on such basis and with such conditions as the Board of Directors of the Company in its sole discretion
may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
For
so long as the Rights are then redeemable, the Company may, except with respect to the Redemption Price, amend the Rights Agreement in
any manner. After the Rights are no longer redeemable, the Company may, except with respect to the Redemption Price, amend the Rights
Agreement in any manner that does not adversely affect the interests of holders of the Rights.
Until
a Right is exercised or exchanged, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
The
Rights Agreement, which includes the form of Rights Certificate as Exhibit A and the Summary of Preferred Share Purchase
Rights as Exhibit B, and the Amended and Restated Memorandum and Articles of Association setting forth the terms of the Series
A Preferred Shares are attached hereto as Exhibit 1.1 and 2.1, respectively, and incorporated herein by reference. The foregoing descriptions
of the Rights and the material terms of the Rights Agreement and the Series A Preferred Shares do not purport to be complete and are
qualified in their entirety by reference to such Exhibits.
Other:
The Memorandum and Articles also contain the following other provisions affecting the management of the Company and the rights of the
shareholders.
The
Company’s Board of Directors is divided into three classes designated as Class I, Class II and Class III. Each class shall consist,
as nearly as is possible, of one-third of the number of directors constituting the entire Board of Directors. At each annual meeting
of shareholders, the successors to the class of directors whose terms expire at that meeting will be elected for a term of office to
expire at the third succeeding annual meeting of shareholders after their election and until their successors have been duly elected
and qualified (i.e. directors will be elected for three year terms).
Directors
are elected by a plurality of the votes cast by the shareholders at a duly convened and constituted meeting of the shareholders. As a
result, candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, are elected.
Any
action required or permitted to be taken by the shareholders of the Company must be effected at a duly called meeting of the shareholders
and may not be effected by any consent in writing by the shareholders.
The
directors may convene meetings of the members of the Company at such times and in such manner and places as the directors consider necessary
or desirable, and they shall convene such a meeting upon the written request of members holding 25 percent or more of the outstanding
voting shares in the Company. Shareholders may nominate directors for election at an annual meeting of shareholders. To nominate a director,
the shareholder must provide the information required by the Memorandum and Articles (such as the nominee’s name and qualifications
for membership on the Board of Directors) and must give timely notice to our Secretary in accordance with the Memorandum and Articles.
An annual meeting of members is held for the election of directors of the Company and in the manner provided in the Memorandum and Articles.
Any other proper business may be transacted at the annual meeting. If the annual meeting for election of directors is not held on the
date designated therefore, the directors shall cause the meeting to be held as soon thereafter as convenient. If the Company fails to
hold the annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated for
a period of 13 months after the Company’s last annual meeting, a court of competent jurisdiction of the British Virgin Islands
may summarily order a meeting to be held upon the application of any member or director.
A
meeting of the shareholders can be called only by the Company’s Board of Directors, the Chairman of the Board of Directors, or
by the Company’s Chief Executive Officer. Shareholders may not convene a meeting of the shareholders. Any meetings of the shareholders
shall be held at such times and in such manner and places within or outside the British Virgin Islands as the Board of Directors, the
Chairman of the Board of Directors, or the Company’s chief executive officer (as applicable) considers necessary or desirable.
A
director may be removed from office only with cause (i) by the Board of Directors, or (ii) by a resolution of the shareholders holding
at least 66.66% of the votes of the shares entitled to vote passed at a meeting of shareholders called for the purpose of removing the
director.
The
rights conferred upon the holders of the shares of any class may only be varied, whether or not the Company is in liquidation in the
case of Series A Preferred Shares, with the affirmative vote of the holders of two-thirds of the outstanding Series A Preferred Shares,
voting together as a single series, and otherwise with the consent of the holders of a majority of the issued shares of that class or
by a resolution approved at a duly convened and constituted meeting of the shares of that class by the affirmative vote of a majority
of the votes of the shares of that class which were present at the meeting and were voted.
The
Company’s Board of Directors without shareholder approval may amend the Memorandum and Articles. This includes amendments to increase
or reduce our authorized capital stock. The Company’s ability to amend its Memorandum and Articles without shareholder approval
could have the effect of delaying, deterring or preventing a change in control of the Company, including a tender offer to purchase our
Common Shares at a premium over the then current market price.
BVI
law does not make a specific reference to cumulative voting, and Memorandum and Articles have no provision authorizing cumulative voting.
The
Company may purchase, redeem or otherwise acquire and hold its own shares, provided that no purchase, redemption or other acquisition
shall be made unless, immediately after the purchase, redemption or other acquisition the value of the Company’s assets will exceed
its liabilities and the Company will be able to pay its debts as they fall due.
The
directors are entitled to vote compensation to themselves in respect of services rendered to the Company.
There
is no provision in the Memorandum and Articles for the mandatory retirement of directors. Directors are not required to own shares of
the Company in order to serve as directors.
Under
BVI law and the Memorandum and Articles, the Company may indemnify against all expenses, including legal fees, and against all judgments,
fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any
person who is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil,
criminal, administrative or investigative, by reason of the fact that the person is or was a director of the Company or is or was, at
the request of the Company, serving as a director of, or in any other capacity is or was acting for, another body corporate or a partnership,
joint venture, trust or other enterprise.
To
be entitled to indemnification, these persons must have acted honestly and in good faith and in what he believes to be the best interest
of the Company, and they must have had no reasonable cause to believe their conduct was unlawful. Furthermore, such a person must be
indemnified by the Company if he has been successful in the defense of any proceedings.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us
under the foregoing provisions, the Company has been advised that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Material
Contracts
Other
than the leases described in the Property, Plant and Equipment section of Item 4 “Information on the Company” and filed as
exhibits to the Company’s Securities and Exchange Commission filings, all other material contracts to which the Company or any
member of the group is a party that were entered into during the two years immediately preceding the filing of this Annual Report were
entered into in the ordinary course of business.
Exchange
Controls
There
are no exchange control restrictions on payment of dividends on the Company’s Common Shares or on the conduct of the Company’s
operations either in Hong Kong, where the Company’s administrative offices are located, or the British Virgin Islands, where the
Company is incorporated. Other jurisdictions in which the Company conducts operations may have various exchange controls. With respect
to the Company’s subsidiaries in China, there are no material restrictions on the payment of dividends and the removal of dividends
from China once all taxes are paid and assessed and losses, if any, from previous years have been made good. To date, these controls
have not had and are not expected to have a material impact on the Company’s financial results. There are no material British Virgin
Islands laws which impose foreign exchange controls on the Company or that affect the payment of dividends, interest or other payments
to nonresident holders of the Company’s securities.
Taxation
No
reciprocal tax treaty regarding withholding tax exists between the U.S. and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to individuals and gains realized on the sale or disposition of shares
are not subject to tax as long as the recipient is not a resident of the British Virgin Islands. The Company is not obligated to withhold
any tax for payments of dividends and shareholders receive gross dividends irrespective of their residential or national status.
Under
current Hong Kong tax law, dividends, interest or royalties paid by the Company to individuals and gains realized on the sale or disposition
of shares are not subject to tax.
Under
the U.S. federal income tax law, cash dividends paid to an individual United States citizen or resident alien of the United States (as
specifically defined for United States federal income tax purposes) with respect to our Common Shares generally will be taxed as dividend
income to the extent such distribution does not exceed the Company’s current or accumulated earnings and profits, as calculated
for U.S. federal income tax purposes. Cash dividends made with respect of the Company’s Common Shares that are made in the United
States or by a United States related financial intermediary will be subject to United States information reporting rules. In addition,
such payments may be subject to United States federal backup withholding tax. U.S. shareholders will not be subject to backup withholding
provided that the shareholder provides his/her correct United States federal taxpayer identification number and certifies, under penalties
of perjury, that he/she is not subject to backup withholding. Amounts withheld under the backup withholding rules may be credited against
the U.S. shareholder’s United States federal income tax, and such shareholder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund with the IRS in a timely manner.
Dividends
and Paying Agents
The
Company has, during the past few years, periodically made dividend payments to its shareholders. Dividends are declared and paid at the
discretion of the Board of Directors and depend upon, among other things, the Company’s results of opeations, the anticipated
future earnings of the Company, the success of the Company’s business activities, the Company’s capital requirements, and
the general financial conditions of the Company. The Company has not set a date on which annual, or other, dividends are paid. To date,
the Company has used its transfer agent, Computershare, at C/O: Shareholder Services, 462 South 4th Street, Suite 1600 Louisville,
KY 40202 U.S.A., as its dividend paying agent.
Statement
by Experts
No
disclosure is required in response to this Item.
Documents
On Display
The
documents concerning the Company that are referred to in this Annual Report may be inspected by shareholders of this Company at the offices
of this Company in Hong Kong.
The
Company is subject to the information requirements of the Securities and Exchange Act of 1934, and, in accordance with the Securities
Exchange Act of 1934, the Company files annual reports on Form 20-F and submit other reports and information under cover of Form 6-K
with the SEC. Recent filings and reports are also available free of charge though the EDGAR electronic filing system at www.sec.gov.
As a foreign private issuer, the Company is exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing
and content of proxy statements to shareholders.
Subsidiary
Information
No
disclosure is required in response to this Item.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
The
Company sells most of its products in U.S. dollars, Hong Kong dollars, and in Euros. Because the exchange rate between the Euro, the
U.S. dollar and Hong Kong dollars fluctuate, the Company experiences currency exchange gains and losses. Although the exchange rate between
the U.S. and Hong Kong dollar has fluctuated slightly, such fluctuations have not had a material impact on the Company.
The
Company conducts all of its manufacturing and assembly operations through its PRC operating subsidiary and through its majority-owned
Myanmar subsidiary. The financial performance and position of the PRC subsidiary are measured in terms of Renminbi, and all of the operations
of the Myanmar subsidiary are denominated in Kyat. All of the Company’s costs of manufacturing in the PRC, including its labor
costs, are incurred, and paid, in Renminbi, and all costs in Myanmar are paid in Kyat. Any appreciation in the value of the renminbi
or Kyat against the U.S. dollar would consequently have an adverse effect on the Company’s operating costs and on its financial
performance when measured in terms of U.S. dollars.
The
Company has not engaged in currency hedging transactions to offset the risks associated with variations in currency exchange rates. Consequently,
significant foreign currency fluctuations and other foreign exchange risks may have a material adverse effect on the Company’s
business, financial condition and results of operations. The Company does not currently own any market risk sensitive instruments. The
Company does not hedge its currency exchange risks and, therefore, will continue to experience certain gains or losses due to changes
in foreign currency exchange rates. The Company has, however, attempted to limit its currency exchange rate exposure by (i) requesting
that more of the payments made by its clients be paid in U.S. dollars, and (ii) including in certain of its OEM contracts a contractual
provision that adjusts the payments the Company receives if the currency exchange rate changes significantly.
The
Company’s exposure to interest-rate risk primarily relates to the interest rates on its outstanding debt compared to the interest
income it generates on its excess cash. The Company maintains its excess cash in short-term interest-bearing deposits (that are subject
to interest rate fluctuations). The Company had no long-term borrowings that are subject to interest rate changes as of March 31, 2022.
Because the Company had cash and cash equivalents of $6,010,000 available as of March 31, 2022, $1,075,000 in time deposits, and no interest-bearing
indebtedness, the Company believes that its interest rate risk is acceptable.
Inflation
in the PRC, particularly the increase in wages and salaries, has impacted the Company’s cost of operations at its manufacturing
facility in the PRC. Continued increase in inflation could have an adverse affect the Company’s costs and margins in the PRC.
Item 12. Description of Securities Other Than Equity Securities
Not
applicable.
The accompanying notes are an integral part to these consolidated financial
statements.
The accompanying notes are an integral part to these consolidated financial
statements.
The accompanying notes are an integral part to these consolidated financial
statements.
The accompanying notes are an integral part to these consolidated financial
statements.
The accompanying notes are an integral part to these consolidated financial
statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except for shares
and per share data)
| 1. | ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS |
Highway Holdings Limited
(the “Company”) was incorporated in the British Virgin Islands on July 20, 1990. It operates through its subsidiaries operating
in Hong Kong Special Administrative Region (“Hong Kong”), Shenzhen (comprising Long Hua) of the People’s Republic of China (“China”)
and Yangon of the Republic of the Union of Myanmar (“Myanmar”).
The Company and its
subsidiaries (collectively referred as the “Group”) are engaged in manufacturing and sale of metal, plastic and electronic parts
and components. The Group’s manufacturing activities are principally conducted in Shenzhen of China and Yangon of Myanmar, while its selling
activities are principally conducted in Hong Kong.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) Principles
of consolidation - The consolidated financial statements of the Group have been prepared in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the financial
statements of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation. The
results of subsidiaries acquired have been consolidated from the date of acquisition.
(b) Use of estimates
- The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management of the Group to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. The Company’s management based on their estimates on historical
experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making
judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant accounting
estimates reflected in the Group’s consolidated financial statements included revenue recognition, valuation of goodwill, provision for
credit losses of accounts receivable, loan receivable valuation assessment, inventories impairment assessment, property, plant and equipment
impairment assessment, the valuation of stock-based compensation, the valuation allowance for deferred tax assets and the valuation of
non-controlling interests of the subsidiaries at acquisition dates. Actual results could differ from those estimates.
The COVID-19 pandemic
and the political unrest in Myanmar have created and may continue to create significant uncertainty in macroeconomic conditions, which
may cause further business slowdowns and adversely impact the Group’s results of operations. While operations at the Myanmar factory
have mostly returned to the pre-political unrest level, the COVID-19 pandemic has forced brief closure of one week for the Group’s
factories in Yangon, Myanmar and Shenzhen, China in July 2021 and March 2022, respectively. For fiscal 2021, the factory in Myanmar was
closed for about two weeks in March 2021 because of COVID-19. These closures did not have significant impact on the Group’s results
of operations.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(b) Use of estimates - continued
- As a result, during the year ended March 31, 2022, the Group faced uncertainties around its estimates of revenue collectability, accounts
receivable credit losses, impairment of inventories and long-lived assets. The Group expects uncertainties around its key accounting estimates
to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic and the political unrest in
Myanmar. Its estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed
in its consolidated financial statements.
(c) Investments
under equity method - The investments for which the Group has the ability to exercise significant influence are accounted for under
the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Group’s share of undistributed
earnings or losses of these entities, the amortization of intangible assets recognized upon purchase price allocation and dividend distributions
or subsequent investments. All unrecognized inter-company profits and losses have been eliminated under the equity method.
When the estimated amount to be realized
from the investments falls below its carrying value, an impairment charge is recognized in the consolidated statements of operations when
the decline in value is considered other than temporary.
(d) Cash and cash equivalents
- Cash and cash equivalents consist of cash on hand, bank deposits and short term, highly liquid investments which are unrestricted as
to withdrawal and use, and which have maturities of three months or less when purchased, and are readily convertible to known amount of
cash.
Cash equivalents are
placed with financial institutions with high credit ratings and quality.
(e) Time deposits - Time deposits
are those balances placed with the banks with original maturities longer than three months but less than one year.
(f) Accounts
receivable - Before April 1, 2020, the Group reviews its receivables on a periodic basis and records allowances when there is
a doubt as to the collectability of the balance. In evaluating the collectability of the accounts receivable balances, the Group considers
various factors, including the age of the balances, customer specific facts and economic conditions. From April 1, 2020, the Group
adopted ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments
by creating an impairment model that is based on expected losses rather than incurred losses.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(f) Accounts receivable - continued
- The Group’s accounts receivable, other current assets (note 7) and loan receivables (note 2(g)) recorded in prepaid expenses and
other current assets are within the scope of ASC Topic 326. Accounts receivable primarily represent amounts due from customers, that are
typically non-interest bearing and are initially recorded at the invoiced amount. Accounts receivable balances are write-down against
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Any off-balance-sheet
credit exposure related to its customers is assessed the same manner as on-balance-sheet exposure.
To estimate expected credit losses,
the Group has identified the relevant risk characteristics of its customers and the related receivables, other current assets (note 7)
and loan receivables which include size, type of the services or the products the Group provides, or a combination of these characteristics.
Receivables with similar risk characteristics have been grouped into pools. For each pool, the Group considers the past collection experience,
current economic conditions, future economic conditions (external data and macroeconomic factors) and changes in the Group’s customer
collection trends. Other key factors that influence the expected credit loss analysis include customer demographics, payment terms offered
in the normal course of business to customers, and industry-specific factors that could impact the Group’s receivables. Additionally,
external data and macroeconomic factors are also considered. This is assessed at each quarter based on the Group’s specific facts
and circumstances. No significant impact of changes in the assumptions since adoption. As of March 31, 2022, the expected credit loss
provision recorded in accounts receivable was $51 (2021: $nil).
(g) Loan receivables - Loan receivables
mainly represent the loans to a non-controlling interest and a director of a subsidiary in Myanmar. The loan periods granted by the Group
to the staff amounts to 36 months and carries fixed interest rate of 8% per annum. The loan receivables principal and interest are expected
to be repaid on the expected settlement date. The loan receivables are stated at the historical carrying amount net of allowance for uncollectible
loan receivables (see (f) above). The loan receivables expected to be settled more than one year as of balance sheet date are classified
into other long-term assets on the consolidated balance sheets. No impairment was made on the loan receivables for the years ended March
31, 2020, 2021 and 2022.
(h) Inventories
- Inventories are stated at the lower of cost and net realizable value, with cost determined by the first-in-first-out method. Work-in-progress
and finished goods consist of raw materials, direct labor and overheads associated with the manufacturing process. Net realizable value
is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Write-down of potential obsolete or slow-moving inventories is recorded based on management’s assumptions about future demands and market
conditions.
(i) Goodwill - Goodwill is the
excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business combination.
Goodwill is not amortized but rather tested for impairment at least annually. The Company tests goodwill for impairment in March of each
fiscal year. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would be more
likely than not reduce the fair value of the reporting unit below its carrying amount.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(i) Goodwill - continued - Prior
to April 1, 2020, in performing the two-step quantitative impairment test, the first step compared the fair values of each reporting
unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill was not
considered to be impaired and the second step was not be required. If the carrying amount of a reporting unit exceeded its fair value,
the second step compared the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair
value of goodwill was determined in a manner similar to accounting for a business combination with the allocation of the assessed fair
value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities was the implied fair value of goodwill. This allocation process was only
performed for the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities.
Starting from April 1, 2020, the Group adopted No. 2017-04: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”),
which simplifies the accounting for goodwill impairment by eliminating Step 2 from the goodwill impairment test. If the carrying amount
of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining
an implied fair value in Step 2 to measure the impairment loss. Application of a goodwill impairment test requires significant management
judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and determining
the fair value of each reporting unit.
The gross amount of
goodwill and accumulated impairment losses as of March 31, 2021 and 2022 are as follows:
| |
Kayser
Myanmar | |
| |
$ | |
| |
| |
Gross as of April 1, 2020, March 31, 2021 and 2022 | |
| 77 | |
| |
| | |
Accumulated impairment loss as of April 1, 2020 | |
| (77 | ) |
| |
| | |
Accumulated impairment loss as at March 31, 2021 and 2022 | |
| (77 | ) |
| |
| | |
Net as of March 31, 2021 and 2022 | |
| - | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(i) Goodwill - continued - The
balance represented the carrying value of Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”) and had an aggregate
carrying amount of $77 as of year ended March 31, 2018. During the year ended March 31, 2019, the Group has tested goodwill for impairment
and estimated the fair value of Kayser Myanmar by using the income approach in step 1 of the impairment test. Based on the quantitative
test, it was determined the fair value was more likely than not below its carrying amount. Management has identified several determinative
events and factors, which has led to the above conclusion, included: (1) the financial result of Kayser Myanmar was below management’s
expectations due to higher than expected supply chain cost and increased competition, (2) the fiscal year 2020 annual budget operating
plan in March 31, 2019, which provided additional insights into expectations and priorities for the coming years, such as lower growth
and margin expectations and (3) increased and prolonged economic and regulatory uncertainty in the global economics as of March 31, 2019.
Management has compared the implied fair value of Kayser Myanmar’s goodwill to the carrying value of the goodwill which is step
2 of the two-step impairment test. An impairment loss was recognized for the excess in the carrying value of goodwill over the implied
fair value of goodwill.
As a result of the two-step impairment
test, the Group has recognized a $77 impairment loss of Kayser Myanmar goodwill in selling, general and administrative expenses during
the year ended March 31, 2019, due to margin and revenue from contracts from customers declines as well as the lower growth and margin
expectation.
No impairment expenses were recognized
during the years ended March 31, 2020, 2021 and 2022.
(j) Property,
plant and equipment - Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses, if any.
Depreciation is computed on a straight-line basis with no salvage value over the estimated useful lives of 5 to 10 years for machinery
and equipment, shorter of the lease term or the estimated useful life for leasehold improvements and 2 to 5 years for other property,
plant and equipment.
(k) Impairment
or disposal of long-lived assets (other than goodwill) - The Group reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group
measures impairment by comparing the carrying value of the long-lived assets to the sum of the estimated undiscounted future cash flows
and the eventual disposition. Management would estimate the future cash flow used to test the recoverability of the asset included the
budgeted cash inflows less associated cash outflows, which are directly associated with the result of use. The estimation should exclude
the interest charges which will be recognized as an expense when incurred. Management would consider all available evidence during the
estimation process, to ensure the estimated budget would be the most possible outcomes. If the sum of the expected undiscounted cashflow
were to be less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets.
Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(k) Impairment
or disposal of long-lived assets (other than goodwill) - continued - During the years ended 2020, 2021 and 2022, the Group has reviewed
the long-lived assets for impairment, since there are several indicative events and factors identified, including (1) significant adverse
changes in the business climate, including the possible negative impact of political unrest in Myanmar, (2) operating and/or cash flow
losses in prior years, and (3) negative impact on business operations as a result of COVID-19 pandemic and new global human and environmental
rights regulations pending or enacted. Management has compared the carrying value of the long-lived asset to the estimated undiscounted
operating cash flow based on the above factors.
As a result of the comparison, management
has identified the sum of expected undiscounted cashflow of multiple types of machinery and equipment are more likely than not below their
fair value. The Group did not recognize any impairment of long-lived assets during the years ended March 31, 2020, 2021 and 2022. The
impairment has been recorded in cost of sales and selling, general and administrative expenses, based on the nature of the impaired long-lived
assets.
(l) Concentration
of credit risk - Financial instruments that potentially expose the Group to the concentration of credit risk consist primarily of
cash and cash equivalents, accounts receivable, loan receivable, and other receivables and prepayments. The Group places its cash and
cash equivalents with financial institutions with high credit ratings and quality.
The risks with respect to accounts receivables
are mitigated by credit evaluations performed on the customers or debtors and ongoing monitoring of outstanding balances.
(m) Revenue recognition - The
Group recognizes revenue when its customer obtains control of promised goods in an amount that reflects the consideration which the Group
expects to receive in exchange for those goods. To determine revenue recognition for the arrangements that the Group determines are within
the scope of Topic 606, the Group performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance
obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in
the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(m) Revenue recognition - continued
Product revenue recognition
The Group’s revenue from contracts
with customers is derived from product revenue principally from the sales of metal stamping and mechanical OEM and electric OEM products
directly to other consumer electronics product manufacturers. The Group sell goods to the customer under sales contracts or by purchase
orders. The Group has determined there to be one performance obligation for each of the sales contracts and purchase orders. The performance
obligations are considered to be met and revenue is recognized when the customer obtains control of the goods. The Group has two major
goods delivery channels, included:
| (1) | Delivering goods to customers’ predetermined location, the Group has satisfied the contracts’
performance obligations when the goods have been delivered and relevant shipping documents have been collected by the Group; and |
| (2) | Picking up goods by customers in the Group’s warehouse, the Group has satisfied the contracts’
performance obligations when the goods have been picked up and the acceptance document has been signed by the customers. |
The Group did not recognize any revenue
from contracts with customers for performance obligations satisfied overtime during the years ended March 31, 2020, 2021 and 2022.
The transaction price is generally in
the form of a fixed price which is agreed with the customer at contract inception. The transaction price is recorded net of sales return,
surcharges and value-added tax of gross sales. The Group has allocated the transaction price to each performance obligation based on the
sales contracts and purchase orders.
Normally, the Group would request a
deposit from certain customers upon receiving the purchase order and issue bills to customers upon transfer control of goods and relevant
acceptance documents have been collected. Customers’ deposits would be settled part of the outstanding bill upon receiving an acknowledgement
from customers. For the remaining balance of outstanding bills, Customers are required to pay over an agreed upon credit period, usually
between 30 to 75 days. During fiscal 2022, the Group deviated from its customary credit terms and entered into a contractual deferred
payment arrangement with a new significant customer. Under the agreement, the customer has provided the Group with collateral for the
rolling credit facility (see note 14).
Return Rights
The Group does not provide its customers
with the right of return (except for product quality issue) or production protection. Customer is required to perform product quality
check before acceptance of goods delivery. The Group did not recognize for any refund liability according to the product return on the
consolidated balance sheets.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(m) Revenue recognition - continued
Value-added taxes and surcharges
The Group presents revenue net of VAT
and surcharges incurred. The surcharge is sales related taxes representing the City Maintenance and Construction Tax and Education Surtax.
The Group incurs expenses or pays fees to external delivery service providers, respectively, and records such expenses and fees like shipping
and handling expenses. Total VAT and surcharges paid by the Group during the years ended March 31, 2020, 2021 and 2022 amounted to $90,
$121 and $133 respectively.
Principals vs. agent accounting
The Group records all product revenue
on a gross basis. To determine whether the Group is an agent or principal in the sale of products, the Group considers the following indicators:
the Group is primarily responsible for fulfilling the promise to provide the specified goods or services, is subject to inventory risks
before the specified goods have been transferred to a customer or after transfer of control to the customers, and has discretion in establishing
the price of the specified goods.
Disaggregation of revenue
The Group disaggregates its revenue
from different types of contracts with customers by principal product categories, as the Group believes it best depicts the nature, amount,
timing and uncertainty of its revenue and cash flows. See note 21 for product revenues by segment.
Contract balances
The Group did not recognize any contract
asset as of March 31, 2021 and March 31, 2022. The timing between the recognition of revenue and receipt of payment is not significant.
The
Group’s contract liabilities consist of deposits received from customers. As of March 31, 2021 and March 31, 2022, the balances
of the contract liabilities are $72 and $79 including deposits received from customers. All contract liabilities at the beginning of
the year ended March 31, 2022 were recognized as revenue during the year ended March 31, 2022 and all contract liabilities as of year
ended March 31, 2022 are expected to be realized in the following year.
Movement of contract liabilities are
as follows:
| |
Year ended March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
| |
| | |
| |
At the beginning of the year | |
| 39 | | |
| 72 | |
Deposits received | |
| 57 | | |
| 71 | |
Recognized as revenue | |
| (26 | ) | |
| (65 | ) |
Exchange | |
| 2 | | |
| 1 | |
| |
| | | |
| | |
At the end of the year | |
| 72 | | |
| 79 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(n) Retirement and other post-retirement
benefits – Contributions to retirement schemes (which are defined contribution plans, see note 19) are charged to the consolidated
statement of operations as and when the related employee service is provided.
The Group operates a Mandatory Provident
Fund (“MPF”) scheme for all qualifying employees in Hong Kong. The MPF is a defined contribution scheme and the assets of
the scheme are managed by a trustee independent of the Group. The MPF is available to all employees aged 10 to 64 with a least 60 days
of service under the employment of the Group in Hong Kong. Contributions are made by the Group to a cap of HK$1,500 (equivalent to $0.19
per month). Total amounts of such employee benefit expenses, which were expensed as incurred, were approximately $99, $88 and $95 for
the years ended March 31, 2020, 2021 and 2022, respectively.
Full time employees of the Company in
the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee
housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiary of the Company
make contributions to the government for these benefits based on certain percentages of the employees’ salaries, up to a maximum
amount specified by the local government. The Company has no legal obligation for the benefits beyond the contributions made. Total amounts
of such employee benefit expenses, which were expensed as incurred, were approximately $124, $75 and $102 for the years ended March 31,
2020, 2021 and 2022, respectively.
The Group was required registration
of its employee in Myanmar with the Social Security Board. Contributions are made by the Group to the social security plan at a rate of
3% based on each employee’s relevant compensation, subject to a cap of 9,000 Kyat (equivalent to $0.005) per month. Total amounts
of such employee benefit expenses, which were expensed as incurred, were approximately $8, $6 and $4 for the years ended March 31, 2020,
2021 and 2022, respectively.
(o) Foreign currency translations
and transactions - The functional and reporting currency of the Company is the United States Dollars (“U.S. dollars”).
All transactions in currencies other than functional currencies during the year are remeasured at the exchange rates prevailing on the
respective transaction dates. Monetary assets and liabilities existing at the balance sheet date denominated in currencies other than
functional currencies are remeasured at the exchange rates on the balance sheet date. Exchange differences are recorded in the consolidated
statements of operations.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(o) Foreign currency
translations and transactions - continued - The books and records of the Company’s major subsidiaries are maintained in their
respective local currencies, the Hong Kong dollars, Myanmar kyat and Renminbi, which are also their respective functional currencies.
The financial statements of the Group’s entities of which the functional currency is not U.S. dollars are translated from their
respective functional currency into U.S. dollars. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars
at the rates of exchange prevailing at the balance sheet date. Equity accounts other than earnings generated in current period are translated
into U.S. dollars at the appropriate historical rates. Income and expense items are translated into U.S. dollars at the average rates
of exchange over the year. All exchange differences arising from the translation of subsidiaries’ financial statements are recorded as
a component of comprehensive income (loss).
(p) Income taxes
- Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are determined based on the
temporary difference between the financial reporting and tax bases of assets and liabilities, and net operating loss and tax credit carryforwards
using enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The Group records a valuation
allowance against the amount of deferred tax assets that it determines is not more likely than not of being realized. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
The Group recognizes
the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions
are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected
in the period in which the change in judgment occurs. The Group records interest related to unrecognized tax benefits and penalties, if
any, within income tax expenses.
(q) Net income (loss) per share
- Basic net income (loss) per share is computed by dividing net income (loss) attributable to the Company by the weighted average number
of common shares outstanding during the year.
Diluted net income (loss) per share
is computed similar to basic net income per share except that the denominator is increased to include the number of additional common
shares that would have been outstanding if all the potential common shares pertaining to stock options and similar instruments had been
issued and if the additional common shares were dilutive.
Diluted net income
(loss) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution
is computed by applying the treasury stock method for the outstanding unvested restricted stock and options, and the if-converted method
for the outstanding convertible instruments. Under the treasury stock method, options are assumed to be exercised at the beginning of
the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market
price during the period. Under the if-converted method, outstanding convertible instruments are assumed to be converted into common stock
at the beginning of the period (or at the time of issuance, if later).
Anti-dilutive potential ordinary shares
are not considered in the calculation of the diluted earnings per share. Potential ordinary shares are anti-dilutive when the conversion
of ordinary shares increases the earnings per share or decreases the net loss per share.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(r) Comprehensive income (loss) -
Comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments and is presented net of tax.
The Group presents
the components of net income (loss), the components of other comprehensive income (loss) and total comprehensive income (loss) in two
separate but consecutive statements.
(s) Fair value
measurement and financial instruments - The Group applies a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Under this hierarchy, there
are three levels of inputs that may be used to measure fair value:
| ● | Level 1 applies to assets or liabilities for
which there are quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 applies to assets or liabilities for
which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted
prices for similar assets or liabilities in active markets; quoted prices for identical asset or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can
be derived principally from, or corroborated by, observable market data. |
| ● | Level 3 applies to assets or liabilities for
which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets
or liabilities. |
Determining which category an asset
or liability falls within the hierarchy requires significant judgment.
The carrying amounts
of financial instruments, which consist of cash and cash equivalents, time deposits, accounts receivable, other current assets, accounts
payable and other liabilities approximate their fair values due to the short-term nature of these instruments.
(t) Non-controlling interest
- For the Group’s non-wholly owned subsidiary, a non-controlling interest is recognized to reflect the portion of equity that is
not attributable, directly or indirectly, to the Group. Non-controlling interests are classified as a separate line item in the equity
section of the Group’s consolidated balance sheets and have been separately disclosed in the consolidated statements of operations
and statements of changes in equity to distinguish the interests from that of the Group. Cash flows related to transactions with non-controlling
interests are presented under financing activities in the consolidated statements of cash flows.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(u) Stock-based compensation
- The Group adopted the provisions of ASC Topic 718 which requires the Group to measure and recognize compensation expenses for an award
of an equity instrument based on the grant-date fair value. The cost is recognized over the vesting period (or the requisite service period).
Further, ASC Topic 718 requires the Group to estimate forfeitures in calculating the expense related to stock-based compensation.
The fair value of each option award
is estimated on the date of grant using the Black-Scholes Option Valuation Model, and recognized as expenses (a) immediately at the grant
date if no vesting conditions are required; and (b) for share options or restricted shares granted with only service conditions, using
the straight-line vesting method, over the vesting period. The expected volatility was based on the historical volatilities of the Company’s
listed common stocks in the United States and other relevant market information. The Group uses historical data to estimate share option
exercises and employee departure behavior used in the valuation model. The expected terms of share options granted is derived from the
output of the option pricing model and represents the period of time that share options granted are expected to be outstanding. Since
the share options once exercised will primarily trade in the U.S. capital market, the risk-free rate for periods within the contractual
term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.
Details of grants of restricted shares
to non-employee consultants after the effectiveness of ASU 2018-07 -Compensation - stock compensation (Topic 718) - Improvements to nonemployee
share-based payment accounting are disclosed in note 20.
(v) Leases - The Group accounts
for leases in accordance with ASC 842, Leases (“ASC 842”), which requires lessees to recognize leases on the balance sheet
and disclose key information about leasing arrangements. The Group elected not to apply the recognition requirements of ASC 842 to short-term
leases. The Group also elected not to separate non-lease components from lease components, therefore, it will account for lease component
and the non-lease components as a single lease component when there is only one vendor in the lease contract.
The Group determines if a contract contains
a lease based on whether it has the right to obtain substantially all of the economic benefits from the use of an identified asset which
the Group does not own and whether it has the right to direct the use of an identified asset in exchange for consideration. Right of use
(“ROU”) assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent
the Group’s obligation to make lease payments arising from the lease. ROU assets are recognized as the amount of the lease liability,
adjusted for lease incentives received. Lease liabilities are recognized at the present value of the future lease payments at the lease
commencement date. The interest rate used to determine the present value of the future lease payments is the Group’s incremental
borrowing rate (“IBR”), because the interest rate implicit in most of the Group’s leases is not readily determinable.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(v) Leases - continued - The
IBR is a hypothetical rate based on the Group’s understanding of what its credit rating would be to borrow and resulting interest
the Group would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term on a collateralized
basis. Lease payments may be fixed or variable, however, only fixed payments or in-substance fixed payments are included in the Group’s
lease liability calculation.
Variable lease payments are recognized
in operating expenses in the period in which the obligation for those payments are incurred.
The Group recognized no impairment
of ROU assets as of March 31, 2022 and March 31, 2021.
The operating lease is included in operating
lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current in the consolidated balance
sheets at March 31, 2022 and March 31, 2021.
(w) Dividends – Dividends
are recognized when declared.
(x) Recently Adopted Accounting Standards
- In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies
the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current
guidance to promote consistent application among reporting entities. Adoption of the ASUs is on a modified retrospective basis. The Company
applied the new standard beginning April 1, 2021 and the adoption did not have a material impact on the Group’s consolidated financial
statements.
In August 2020, the FASB issued ASU
2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).
ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models.
Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that
is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification
will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings
per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(x) Recently Adopted Accounting Standards
- continued - For contracts in an entity’s own equity, the type of contracts primarily affected by ASU 2020-06 are freestanding
and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement assessment
by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral
is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15,
2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and only if adopted as of the beginning
of such fiscal year. The Company early adopted ASU 2020-06 effective from April 1, 2021. The adoption of ASU 2020-06 did not have any
impact on the Company’s consolidated financial statement presentation or disclosures.
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related
activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over
time as reference rate reform activities occur. The Company applied the new standard beginning April 1, 2021 and the adoption did not
have a material impact on the Group’s financial statements.
(y) Accounting standards issued but
not adopted as of March 31, 2022 - In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications
and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s
Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written
Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms
or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification
or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange
as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification
or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment
for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination
or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring
on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects
to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that
interim period. The adoption of ASU 2021-04 is not expected to have any impact on the Group’s consolidated financial statement presentation
or disclosures.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued |
(y) Accounting standards issued but
not adopted as of March 31, 2022 - continued - In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures
by Business Entities about Government Assistance. This update requires certain annual disclosures about transactions with a government
that are accounted for by applying a grant or contribution accounting model by analogy. This update is effective for annual periods beginning
after December 15, 2021, and early application is permitted. This guidance should be applied either prospectively to all transactions
that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date
of initial application or retrospectively to those transactions. The Group does not expect the impact of this guidance to have a material
impact on the Group’s consolidated financial statements.
Income is subject
to tax in the various countries in which the Group operates.
No income tax arose
in the United States of America in any of the periods presented.
The Company is not
taxed in the British Virgin Islands.
The Group’s operating
subsidiaries, other than Nissin Metal and Plastic (Shenzhen) Company Limited (“Nissin PRC”) and Kayser Myanmar Manufacturing
Company Ltd. (“Kayser Myanmar”), are all incorporated in Hong Kong and are subject to Hong Kong taxation on income derived from
their activities conducted in Hong Kong. Hong Kong Profits Tax has been calculated at 16.5% of the estimated assessable profit for the
years ended March 31, 2020, 2021 and 2022.
As
of March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”)
which introduces the two-tiered profits tax rates regime. The Bill was signed into law on March 28, 2018 and was gazetted on the following
day. Under the two-tiered profits tax rates regime, the first HK$2 million (equivalent to $257) of profits of the qualifying group entity
will be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%. The profits of group entities not qualifying for the two-tiered
profits tax rates regime will continue to be taxed at a flat rate of 16.5%. The Group has selected Kayser Limited (“Kayser”)
as the qualified entity under two-tiered profit tax rates regime and the remaining Hong Kong based subsidiaries are not qualifying under
the regime and continue to be taxed at 16.5%.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 3. | INCOME TAXES - continued |
Nissin PRC, which is established and
operated in China, was subject to the uniform income tax rate of 25% in China.
The Group’s manufacturing operations
were conducted mainly in Long Hua, Shenzhen and Yangon of Myanmar during the years ended March 31, 2020, 2021 and 2022. However, Kayser
Myanmar enjoyed a tax exemption for the period from the date of incorporation through the end of December 31, 2017 and was subject to
an income tax rate of 25% from January 1, 2018 to September 30, 2021. Starting from October 1, 2021 onwards, income tax rate was reduced
to 22%.
The components of income (loss) before
income taxes are as follows:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
| |
| | |
| | |
| |
Hong Kong | |
| 673 | | |
| (233 | ) | |
| 100 | |
China | |
| 229 | | |
| (458 | ) | |
| 354 | |
Myanmar | |
| (6 | ) | |
| 91 | | |
| 114 | |
| |
| 896 | | |
| (600 | ) | |
| 568 | |
Income tax expense
(credit) consists of the following:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
Current tax: | |
| | |
| | |
| |
| |
| | |
| | |
| |
Hong Kong | |
| | |
| | |
| |
Current tax | |
| 11 | | |
| 5 | | |
| - | |
(Over)/under provision in prior year | |
| - | | |
| 7 | | |
| (5 | ) |
| |
| | | |
| | | |
| | |
China | |
| | | |
| | | |
| | |
Current tax | |
| - | | |
| - | | |
| - | |
(Over)/under provision in prior year | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Myanmar | |
| | | |
| | | |
| | |
Current tax | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Deferred tax | |
| 198 | | |
| (158 | ) | |
| 106 | |
| |
| | | |
| | | |
| | |
Total | |
| 209 | | |
| (146 | ) | |
| 101 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
| 3. | INCOME TAXES - continued |
A reconciliation between income taxes
computed by applying the Hong Kong profits tax rate to profit/loss before income taxes, the income taxes are as follows:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
% | | |
% | | |
% | |
| |
| | |
| | |
| |
Profits tax rate in Hong Kong | |
| 16.5 | | |
| 16.5 | | |
| 16.5 | |
Non-deductible items/non-taxable income | |
| 26.9 | | |
| 25.5 | | |
| 30.8 | |
Changes in valuation allowances | |
| 1.1 | | |
| (18.4 | ) | |
| (1.9 | ) |
Overprovision of profits tax in prior year | |
| - | | |
| (1.1 | ) | |
| (0.9 | ) |
Effect of different tax rate of subsidiaries operating in other jurisdictions | |
| 1.8 | | |
| 5.7 | | |
| 6.3 | |
Tax effect of tax losses not recognized | |
| 0.1 | | |
| 2.0 | | |
| (4.4 | ) |
Tax effect of changes in tax rate | |
| - | | |
| - | | |
| (3.7 | ) |
Utilization of tax losses previously not recognized | |
| (11.6 | ) | |
| (6.8 | ) | |
| (3.7 | ) |
Others | |
| (11.5 | ) | |
| 0.9 | | |
| (21.2 | ) |
Effective tax rate | |
| 23.3 | | |
| 24.3 | | |
| 17.8 | |
Deferred income tax
liabilities (assets) are as follows:
| |
As of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
Deferred tax liabilities: | |
| | |
| |
Deferred severance payment | |
| 392 | | |
| - | |
Property, plant and equipment | |
| 5 | | |
| 4 | |
Operating lease right-of-use assets | |
| 632 | | |
| 389 | |
Total deferred tax liabilities | |
| 1,029 | | |
| 393 | |
| |
| | | |
| | |
Deferred tax assets: | |
| | | |
| | |
Lease liabilities | |
| (421 | ) | |
| (256 | ) |
Tax loss carry forwards | |
| (520 | ) | |
| (491 | ) |
Deferred deductible expenses | |
| (74 | ) | |
| - | |
Valuation allowance | |
| 593 | | |
| 494 | |
Total deferred tax assets | |
| (422 | ) | |
| (253 | ) |
Net deferred tax liabilities | |
| 607 | | |
| 140 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
3. | INCOME TAXES - continued |
Movement of valuation allowances are
as follows:
| |
Year
ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
| |
| | |
| | |
| |
At the beginning of the year | |
| 668 | | |
| 552 | | |
| 593 | |
Current year (reduction) addition | |
| (116 | ) | |
| 41 | | |
| (99 | ) |
| |
| | | |
| | | |
| | |
At the end of the year | |
| 552 | | |
| 593 | | |
| 494 | |
A valuation allowance
has been provided on the deferred tax asset because the Group believes it is not more than likely that the asset will be realized. As
of March 31, 2021 and 2022, a valuation allowance was provided for the deferred tax asset relating to the future benefit of net operating
loss carryforward and deferred deductible expenses, as the management determined that the net operating loss carryforward and deferred
deductible expenses were not more likely than not to be utilized. If events occur in the future that allows the Group to realize more
of its deferred tax assets than the presently recorded amount, an adjustment to the valuation allowance will be made when those events
occur.
As of March 31, 2021 and 2022, tax
losses amounting to approximately $2,972 and $2,837, respectively. As of March 31, 2022, the tax loss carried forward of $275 is to expire
during the year ending March 31 2027. As of March 31, 2021 and 2022, the other tax losses carried forward of $2,631 and $2,562, respectively
may be carried forward indefinitely.
Uncertainties exist
with respect to how China’s current income tax law applies to the Group’s overall operations, and more specifically, with
regard to tax residency status. China’s Enterprise Income Tax (“EIT”) Law includes a provision specifying that legal
entities organized outside of China will be considered residents for China income tax purposes if their place of effective management
or control is within China. The Implementation Rules to the EIT Law provides that non-resident legal entities will be considered as China
residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties,
etc. occur within China. The Company does not believe that its legal entities organized outside of China should be treated as residents
for the EIT Law’s purposes. Substantially, the Company’s overall management and business operation are located outside China.
The Company does not expect any significant adverse impact on the Company’s consolidated results of operations.
The Group has made
its assessment of the level of the tax authority for each tax position (including the potential application of interest and penalties)
based on the technical merits and has measured the unrecognized tax benefits associated with the tax positions. Based on the evaluation
by the Group, it was concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial
statements.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
3. | INCOME TAXES - continued |
The Group classifies
interest and/or penalties related to unrecognized tax benefits as a component of income tax provisions; however, as of March 31, 2021
and 2022, there is no interest and penalties related to uncertain tax positions, and the Group has no material unrecognized tax benefit
which would favourably affect the effective income tax rate in future periods. The Group does not anticipate any significant increases
or decreases to its liability for unrecognized tax benefit within the next twelve months. The fiscal years 2015 to 2022 remain subject
to examination by the Hong Kong tax authority. For PRC, fiscal years 2011 to 2021 remain subject to examination by the PRC tax authority.
For Myanmar, fiscal years 2019 to 2022 remain subject to examination by Myanmar tax authority.
4. | CASH AND CASH EQUIVALENTS |
Cash and cash equivalents consisted
of the following:
| |
As
of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
| |
| | |
| |
Cash on hand | |
| 37 | | |
| 49 | |
Bank deposits | |
| 7,720 | | |
| 5,961 | |
| |
| | | |
| | |
| |
| 7,757 | | |
| 6,010 | |
5. | ACCOUNTS RECEIVABLE, NET |
Accounts receivable, net is analyzed
as follows:
| |
As
of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
| |
| | |
| |
Accounts receivable | |
| 973 | | |
| 2,311 | |
Less: allowance for expected credit losses | |
| - | | |
| (51 | ) |
| |
| | | |
| | |
Total accounts receivable, net | |
| 973 | | |
| 2,260 | |
Details of the movements of the expected
credit loss provision are as follows:
| |
Year
ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
| |
| | |
| | |
| |
At beginning of year | |
| - | | |
| - | | |
| - | |
Provision for the year | |
| - | | |
| - | | |
| 51 | |
| |
| | | |
| | | |
| | |
At end of year | |
| - | | |
| - | | |
| 51 | |
As of March 31, 2022, $8 of the expected
credit loss provision relates to an off-balance sheet exposure of a customer (2021: $nil).
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
Inventories consisted of the following:
| |
As
of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
| |
| | |
| |
Raw materials | |
| 1,574 | | |
| 1,578 | |
Work in progress | |
| 263 | | |
| 417 | |
Finished goods | |
| 401 | | |
| 355 | |
| |
| | | |
| | |
| |
| 2,238 | | |
| 2,350 | |
Slow moving inventories amounting to
$39, $125 and $89 were written off during the years ended March 31, 2020, 2021 and 2022, respectively.
7. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets
consisted of the following:
| |
As of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
| |
| | |
| |
Prepaid expenses | |
| 198 | | |
| 145 | |
Payment in advance | |
| 291 | | |
| 154 | |
Deposits | |
| 3 | | |
| 295 | |
Other | |
| 21 | | |
| 26 | |
| |
| | | |
| | |
| |
| 513 | | |
| 620 | |
8. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and
equipment, net consisted of the following:
| |
As of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
At cost: | |
| | |
| |
Machinery and equipment | |
| 11,738 | | |
| 11,707 | |
Furniture and fixtures | |
| 91 | | |
| 89 | |
Leasehold improvements | |
| 1,114 | | |
| 1,086 | |
Motor vehicles | |
| 167 | | |
| 168 | |
| |
| | | |
| | |
Total | |
| 13,110 | | |
| 13,050 | |
Less: Accumulated depreciation and impairment | |
| (12,277 | ) | |
| (12,407 | ) |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 833 | | |
| 643 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
8. | PROPERTY, PLANT AND EQUIPMENT, NET - continued |
Depreciation expense
incurred for the years ended March 31, 2020, 2021 and 2022 were $145, $159 and $162, respectively.
No impairment of property, plant and equipment was recognized during
the years ended March 31, 2020, 2021 and 2022, respectively.
9. | INVESTMENTS IN EQUITY METHOD INVESTEES |
The following table
provides a reconciliation of the investments in equity method investees in the Group’s consolidated balance sheets as of March 31,
2021 and 2022 and the amount of underlying equity in net assets of the equity investees:
| |
As of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
| |
| | |
| |
The Group’s proportionate share of equity in the net assets of equity investees | |
| 5 | | |
| 5 | |
Less: Accumulated impairment losses recognized | |
| (5 | ) | |
| (5 | ) |
| |
| | | |
| | |
Investments in equity investees reported in the consolidated balance sheets | |
| - | | |
| - | |
As of March 31, 2021
and 2022, investment in equity method investees represented the 50% equity interest in Kayser Technik (Overseas) Inc. (K.T.I) (“Kayser
Technik (Overseas)”), a company incorporated in Republic of Panama, which was formerly engaged in the trading of camera batteries,
films, and disposable cameras. Kayser Technik (Overseas) was inactive, and the investment was fully impaired as of March 31, 2021 and
2022.
10. | Accrued expenses and other current liabilities |
Accrued expenses and
other current liabilities consisted of the following:
| |
As of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
Accrued payroll | |
| 143 | | |
| 243 | |
Accrued housing allowance | |
| 264 | | |
| 231 | |
Accrued other social benefits | |
| 1,304 | | |
| 1,462 | |
Deposits received from customers | |
| 72 | | |
| 79 | |
Accrued audit fee | |
| 228 | | |
| 200 | |
Others | |
| 336 | | |
| 384 | |
| |
| 2,347 | | |
| 2,599 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
10. | Accrued expenses and other current liabilities -
continued |
Accrued other social
benefits represented the provision of employment termination payments based on management approved restructuring plan for relocating its
manufacturing facilities based on China’s Labor laws. The restructuring plan is currently in process and expected to be completed
within twelve months from March 31, 2022. The provision amount is reasonably estimated based on China’s Labor laws and management
estimation of acceptance rate.
On March 21, 2020 , the Group entered
into two lease agreements for executive and administrative offices in Hong Kong, under three-year leases that expire in March 2023.
On March 1, 2020 , the Group entered
into two lease agreements for factory space and dormitories located in Shenzhen, China that expire in February 2023. In October 2021,
part of the factory space was restructured by the landlord. As a result, total leased space was reduced by about 1,000 square meters to
14,800 square meters.
On March 29, 2019, the Group entered
into a lease agreement for factory space located in Yangon, Myanmar that expire in March 2069. The lease for the factory space has a term
of 50 years, Kayser Myanmar has the option to extend the lease term for two consecutive 10-year terms on the same terms and conditions
as in effect for the initial 50-year period. Kayer Myanmar is obligated under the lease to make monthly lease payment equal to 10 million
Myanmar Kyat (equivalent to $5.8 per month as of March 31, 2022).
During the year ended March 31, 2019,
Kayser Myanmar has paid Konig Company $950 as prepaid rent under the lease, approximately 12 years of rental payments.
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
| |
| | |
| | |
| |
Operating lease cost | |
| 991 | * | |
| 731 | * | |
| 871 | * |
Weighted Average Remaining Lease Term - Operating leases | |
| 7.51 years | | |
| 9.06 years | | |
| 11.22 years | |
Weighted Average Discount Rate - Operating leases | |
| 7.63 | % | |
| 8.17 | % | |
| 8.59 | % |
| * | Included unconditional government subsidy $289, $66 and $nil
for factory space and dormitories located in Shenzhen in 2020, 2021 and 2022 respectively. |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
The following is a schedule, by years,
of maturities of lease liabilities as of March 31, 2022
| |
Operating leases | |
| |
$ | |
Year ending March 31, | |
| |
2023 | |
| 957 | |
2024 | |
| - | |
2025 | |
| - | |
2026 | |
| - | |
2027 | |
| - | |
Thereafter | |
| 2,573 | |
Total undiscounted cash flows | |
| 3,530 | |
Less: imputed interest | |
| (2,329 | ) |
Present value of lease liabilities | |
| 1,201 | |
| 12. | LONG-TERM LOAN RECEIVABLE |
Long-term loan receivable represents loans to the managing director
of a subsidiary with a fixed interest rate of 8% per annum and loan periods of 36 months, repayable by March 30, 2024 to March 30, 2025.
The loan receivables principal and interest are expected to be repaid on the loan maturity date.
13. | COMMITMENTS AND CONTINGENCIES |
As of March 31, 2021 and 2022, the Group
had commitments for capital expenditure contracted for but not provided in the consolidated financial statements in respect of the acquisition
of property, plant and equipment of $50 and $nil, respectively.
14. | OFF-BALANCE SHEET EXPOSURES |
Pursuant to agreements signed in October
2020 and January 2021, the Group has extended a credit facility of $1,000 to a new customer for 30 months. This credit facility is collateralized
by the intellectual property rights of the customer, personal guarantees of the shareholders of the customer and 10% of the common stock
of the customer. As of March 31, 2022, the customer has utilized $699 of the credit facility and the amount was reflected in accounts
receivable. The Group has an off-balance sheet exposure of credit facility of $301 as of March 31, 2022. The allowance for expected credit
losses for the utilized credit facility and unutilized credit facility were $18 and $8 respectively, as of March 31, 2022.
as
of March 31, 2021 and 2022, no shares were held in treasury.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
Dividends are recognized when declared. The Company declared three
dividend payments during the fiscal year ended March 31, 2022: a dividend of $0.06 per share that was paid on October 12, 2021, a dividend
of $0.06 per share that was paid on November 24, 2021, and a dividend of $0.05 per share that was paid on April 8, 2022.
The Company declared three dividend payments during the fiscal year
ended March 31, 2021: a dividend of $0.10 per share that was paid on October 13, 2020, a dividend of $0.06 per share that was paid on
November 25, 2020, and a dividend of $0.02 per share that was paid on April 8, 2021.
The Company declared one dividend payment
during the fiscal year ended March 31, 2020: a dividend of $0.08 per share that was paid on April 6, 2020.
17. | CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS |
The Group’s
financial instruments that are exposed to concentrations of credit risk consist primarily of its cash and cash equivalents and trade receivables.
The Group’s
cash and cash equivalents are high-quality deposits placed with authorized banking institutions. This investment policy limits the Group’s
exposure to concentrations of credit risk.
The trade receivable
balances largely represent amounts due from the Group’s principal customers who are generally international organizations with high
credit ratings. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts from a customer.
As a consequence, related credit risk is limited.
Accounts receivable
from the four customers with the largest receivable balances or customers that individually comprised 10% or more of receivable balance
as of March 31, 2021 and 2022 are as follows:
| |
Percentage of | |
| |
accounts receivable | |
| |
2021 | | |
2022 | |
| |
% | | |
% | |
| |
| | |
| |
Customer A | |
| ** | | |
| 30.3 | |
Customer B | |
| 43.5 | | |
| 23.3 | |
Customer C | |
| 10.8 | | |
| 22.0 | |
Customer D | |
| 28.0 | | |
| 12.5 | |
Customer E | |
| 12.2 | | |
| ** | |
| |
| | | |
| | |
Four largest receivable balances | |
| 94.5 | | |
| 88.1 | |
| ** | Not among the top four receivable balances or individually comprised
10% or more of receivable balance as of respective year end. |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
17. | CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS - continued |
A substantial percentage
of the Group’s sales are made to three customers and are typically on an open account basis. Customers accounting for 10% or more
of total revenue from contracts with customers in any of the years ended March 31, 2020, 2021 and 2022 are as follows:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
% | | |
% | | |
% | |
| |
| | |
| | |
| |
Customer B (note a) | |
| 48.2 | | |
| 46.6 | | |
| 33.4 | |
Customer C (note b) | |
| 20.8 | | |
| 25.9 | | |
| 26.5 | |
Customer D (note a) | |
| 14.4 | | |
| 15.3 | | |
| 16.7 | |
| |
| | | |
| | | |
| | |
| |
| 83.4 | | |
| 87.8 | | |
| 76.6 | |
Notes:
| (a) | Sales to this customer were reported in both of the Metal Stamping and Mechanical OEM and Electric OEM
operating segments. |
| (b) | Sales to this customer was reported in the Metal Stamping operating segment. |
18. | NET INCOME (LOSS) PER SHARE |
The following table
sets forth the computation of basic and diluted net income (loss) per share for years indicated:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
| |
| | |
| | |
| |
Net income (loss) attributable to Highway Holdings Limited’s shareholders, basic and diluted | |
| 686 | | |
| (461 | ) | |
| 443 | |
| |
| | | |
| | | |
| | |
Shares: | |
| | | |
| | | |
| | |
Weighted average common shares used in computing basic net income (loss) per share | |
| 3,909,976 | | |
| 4,006,400 | | |
| 4,033,346 | |
Dilutive stock option | |
| - | | |
| - | | |
| 154,385
| |
Weighted average common shares used in computing diluted net income (loss) per share | |
| 3,909,976 | | |
| 4,006,400 | | |
| 4,187,731 | |
| |
| | | |
| | | |
| | |
Net income (loss) per share, basic | |
| 0.18 | | |
| (0.12 | ) | |
| 0.11 | |
| |
| | | |
| | | |
| | |
Net income (loss) per share, diluted | |
| 0.18 | | |
| (0.12 | ) | |
| 0.11 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
18. | NET INCOME (LOSS) PER SHARE - continued |
For the year ended March
31, 2020, stock options to purchase 385,000 shares of the Company’s
stock were excluded from the EPS calculation, as their effects were anti-dilutive.
For the year ended March 31, 2021, stock
options to purchase 365,000 shares of the Company’s stock were excluded from the EPS calculation, as their effects were anti-dilutive.
19. | STAFF RETIREMENT PLANS |
The Group operates
a Mandatory Provident Fund (“MPF”) scheme for all qualifying employees in Hong Kong. The MPF is a defined contribution scheme
and the assets of the scheme are managed by a trustee independent of the Group.
The MPF is available
to all employees aged 18 to 64 with at least 60 days of service under the employment of the Group in Hong Kong. Contributions are made
by the Group to the MPF at a rate of 5% based on each employee’s relevant compensation, subject to a cap of HK$1,500 (equivalent
to $0.19) per month.
The Group’s
full-time employees in China participate in a government-mandated multiemployer defined contribution plan pursuant to which certain medical
care unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The China labor regulations require
the Group to accrue for these benefits based on certain percentages of the employees’ salaries. No forfeited contributions may be
used by the employer to reduce the existing level of contributions.
Under the Social Security
Schemes in Myanmar, the Group was required registration of its employees with the Social Security Board. Contributions are made by the
Group to the social security plan at a rate of 3% based on each employee’s relevant compensation, subject to a cap of 9,000 Kyat
(equivalent to $0.005) per month.
There is no gratuity/end
of service/pension entitlements stipulated under Myanmar law for private sector employees. Presently there is no pension plan required
by Myanmar law compelling private sector employees or employers to make pension contributions. The Group does not provide additional private
pension plans to its employees in Myanmar.
The cost of the Group’s
contribution to the staff retirement plans in Hong Kong, China and Myanmar amounted to $231, $169 and $201 for the years ended March 31,
2020, 2021 and 2022, respectively.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
20. | STOCK OPTIONS AND RESTRICTED SHARES |
The
Group has adopted the “2010 Stock Option and Restricted Stock Plan” (the “2010 Option Plan”). The 2010
Option Plan is administered by the Compensation Committee appointed by the Board of Directors, which determines the terms of the options
granted, including the exercise price, the number of common shares subject to the option and the option’s exercisability. Unless
otherwise specified by the Compensation Committee, the maximum term of options granted under the 2010 Option Plan is five years.
Under the 2010 Option Plan, the Group
is authorized to grant options, and to issue restricted shares, for a total of 600,000 shares. On August 8, 2019, the Board of Directors
of the Company granted awards for a total of 585,000 shares of stock options and restricted shares under the Company’s 2010 Option
Plan. The awards consisted of 160,000 non-qualified share options to 20 key employees, 250,000 non-qualified share options to 7 directors
of the Company, including 60,000 options to the Company’s Chief Executive Officer and Chairman of the Board, and 175,000 restricted
shares to 12 managers and key employees.
The stock options are fully vested,
have a five-year term, and an exercise price of $1.97 (the closing price of the Company’s common stock on August 7, 2019). The restricted
shares granted will vest in five years, on August 8, 2024. In the event that any recipient’s employment with the Company or its
subsidiaries is terminated before August 8, 2024, the Company will have the right to repurchase the restricted shares at a price of $0.01
per share.
On June 20, 2020, the Board of Directors
of the Company granted awards for a total of 40,000 shares options to two directors under the Company’s 2010 Option Plan.
On June 20, 2020, the Group has adopted
the “2020 Stock Option and Restricted Stock Plan” (the “2020 Option Plan”). Under the 2020 Option Plan, the Company
is authorized to grant options, and to issue restricted shares, for a total of 500,000 shares. The 2020 Option Plan is administered by
the Compensation Committee appointed by the Board of Directors, which determines the terms of the options granted, including the exercise
price, the number of common shares subject to the option and the option’s exercisability. Unless otherwise specified by the Compensation
Committee, the maximum term of options granted under the 2020 Option Plan is five years.
No options have been granted under the
2020 Option Plan.
On January 4, 2021, the Board of Directors
granted awards for a total of 15,000 restricted shares at share price $4.12 to three consultants (5,000 restricted shares to each consultant)
based in Germany under the 2020 Option Plan. The number of restricted shares to be vested will be based on the aggregate amount of qualified
revenues brought by the consultants to the Group during the 3-year vesting period from January 4, 2021 to January 4, 2024.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
20. | STOCK OPTIONS AND RESTRICTED SHARES - continued |
Stock Options Issued to Directors
and Key Employees
For the year ended March 31, 2020, 410,000
stock options were granted by the Company. The fair value of options granted to employees and directors in fiscal year 2020 was $0.33
per stock option, which was estimated on the date of grant using the Black-Scholes Option Valuation Model:
| |
2020 | |
Exercise price | |
$ | 1.97 | |
Risk-free interest rate | |
| 1.66 | % |
Expected life | |
| 2.5 years | |
Expected volatility | |
| 41.83 | % |
Expected dividend yield | |
| 8 | % |
For the year ended March 31, 2021, 40,000
stock options were granted by the Company. The fair value of options granted to directors in fiscal year 2021 was $0.66 per stock option.
It was estimated on the date of grant using the Black-Scholes Option Valuation Model:
| |
2021 | |
Exercise price | |
$ | 2.42 | |
Risk-free interest rate | |
| 0.22 | % |
Expected life | |
| 2.5 years | |
Expected volatility | |
| 53.56 | % |
Expected dividend yield | |
| 8 | % |
No options were granted for the year
ended March 31, 2022.
The expected volatility
was based on the volatilities of the Company’s listed common stocks in the United States and other relevant market information.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The dividend yield assumption is
based on the Group’s history and expectation of dividend payouts. The expected life of employee stock options represents the weighted-average
period the stock options are expected to remain outstanding.
For the years ended March 31, 2020,
2021 and 2022, compensation expense of $135, $20 and reversal of compensation expense of $2 was included in selling, general and administrative
expenses, respectively.
There was no unrecognized compensation
cost related to non-vested stock options granted under the 2010 Option Plan, nor non-vested stock options as at March 31, 2021 and 2022.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
20. | STOCK OPTIONS AND RESTRICTED SHARES - continued |
A summary of stock option activity during
the years ended March 31, 2020, 2021 and 2022 is as follows:
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
average | |
| |
Number of | | |
average | | |
remaining | |
| |
stock | | |
exercise | | |
contractual | |
| |
options | | |
price | | |
life (years) | |
| |
| | |
$ | | |
| |
Outstanding as of April 1, 2020 | |
| - | | |
| - | | |
| - | |
Granted | |
| 410,000 | | |
| 1.97 | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Cancelled | |
| (25,000 | ) | |
| - | | |
| - | |
Outstanding as of March 31, 2020 | |
| 385,000 | | |
| 1.97 | | |
| 4.36 | |
| |
| | | |
| | | |
| | |
Granted | |
| 40,000 | | |
| 2.42 | | |
| - | |
Exercised | |
| (40,000 | ) | |
| - | | |
| - | |
Cancelled | |
| (20,000 | ) | |
| - | | |
| - | |
Outstanding as of March 31, 2021 | |
| 365,000 | | |
| 1.97 | | |
| 3.36 | |
| |
| | | |
| | | |
| | |
Exercised | |
| (10,000 | ) | |
| - | | |
| - | |
Cancelled | |
| (5,000 | ) | |
| - | | |
| - | |
Outstanding as of March 31, 2022 | |
| 350,000 | | |
| 1.97 | | |
| 2.36 | |
Exercisable as of March 31, 2021 | |
| 365,000 | | |
| 1.97 | | |
| 3.36 | |
Exercisable as of March 31, 2022 | |
| 350,000 | | |
| 1.97 | | |
| 2.36 | |
The aggregate intrinsic values of the
stock options outstanding as of March 31, 2021 and 2022 were $642 and $298, respectively. The intrinsic values of the stock options at
March 31, 2021 and 2022 are the amount by which the market value of the Company’s common stock of $3.73 and $2.82 as of March 31,
2021 and 2022, respectively, exceeds the exercise price of the option.
Restricted Shares Issued to Key Employees
and Consultants
For the year ended March 31, 2020, 175,000
restricted shares were granted to key employees under the 2010 Option Plan. The restricted shares will vest in five years. In the event
that any recipient’s employment with the Group is terminated before August 8, 2024, the Company will have the right to repurchase
the restricted shares at a price of $0.01 per share.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
20. | STOCK OPTIONS AND RESTRICTED SHARES - continued |
For the year ended March 31, 2021, a
total of 15,000 restricted shares were granted to three consultants under the 2020 Option Plan. The number of restricted shares to be
vested will be based on the aggregate amount of qualified revenues brought by the consultants to the Group during the 3-year vesting period
from January 4, 2021 to January 4, 2024. On condition that the qualified revenues at the end of the vesting period do not meet the pre-agreed
target, the number of restricted shares to be vested will be in proportion to the actual qualified revenues to the pre-agreed target.
The fair value of these shares was $4.12 based on the stock price per share on January 4, 2021, the date the awards were determined by
the Compensation Committee of the Board.
No restricted shares were granted for
the year ended March 31, 2022.
The restricted shares granted under
the 2010 Option Plan and the 2020 Option Plan resulted in a compensation expense of $46, $73 and $89 for the years ended March 31, 2020,
2021 and 2022 respectively, which is included in selling, general and administrative expenses.
As of March 31, 2020, 2021 and 2022,
there were respectively $299, $287 and $198 unrecognized compensation cost related to non-vested restricted shares granted under the 2010
Option Plan and the 2020 Option Plan. The cost was expected to be recognized over a weighted-average period of 4.36, 3.36 and 2.36 years
respectively.
As of March 31, 2020, 2021 and 2022,
the Company has the right to repurchase 175,000, 190,000 and 190,000 restricted shares respectively at a price of $0.01 per share when
restricted shares be forfeited and reconveyed to the Company.
The Group’s
chief operating decision maker, who has been identified as the Company’s Chief Executive Officer, evaluates segment performance
and allocates resources based on several factors, of which the primary financial measure is operating income.
The Group operates in two segments,
Metal stamping and mechanical OEM segment and Electric OEM segment. The Metal stamping and mechanical OEM segment focus on manufacturing
and sale of metal parts and components. The Electric OEM segment focuses on manufacturing and sale of plastic and electronic parts and
components.
Corporate represented
expenses that are not allocated to reportable segments and other corporate items.
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
21. | SEGMENT INFORMATION - continued |
A summary of the revenue
from contracts with customers, profitability information and asset information by segment and geographical areas is shown below:
| |
Year ended March
31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
Revenue from contracts with customers: | |
| | |
| | |
| |
Metal stamping and Mechanical OEM | |
| 6,929 | | |
| 5,192 | | |
| 7,213 | |
Electric OEM | |
| 5,629 | | |
| 3,976 | | |
| 5,152 | |
Total revenue from contracts with customers | |
| 12,558 | | |
| 9,168 | | |
| 12,365 | |
| |
| | | |
| | | |
| | |
Operating income (loss): | |
| | | |
| | | |
| | |
Metal stamping and Mechanical OEM | |
| 458 | | |
| (327 | ) | |
| 339 | |
Electric OEM | |
| 355 | | |
| (207 | ) | |
| 307 | |
Corporate | |
| (66 | ) | |
| (82 | ) | |
| (79 | ) |
Total operating income (loss) | |
| 747 | | |
| (616 | ) | |
| 567 | |
| |
| | | |
| | | |
| | |
Depreciation expense: | |
| | | |
| | | |
| | |
Metal stamping and Mechanical OEM | |
| 83 | | |
| 90 | | |
| 95 | |
Electric OEM | |
| 62 | | |
| 69 | | |
| 67 | |
Total depreciation | |
| 145 | | |
| 159 | | |
| 162 | |
| |
| | | |
| | | |
| | |
Capital expenditure: | |
| | | |
| | | |
| | |
Metal stamping and Mechanical OEM | |
| 53 | | |
| 50 | | |
| 78 | |
Electric OEM | |
| 38 | | |
| 38 | | |
| 56 | |
Total capital expenditure | |
| 91 | | |
| 88 | | |
| 134 | |
| |
As
of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
Total assets: | |
| | |
| |
Metal stamping and Mechanical OEM | |
| 7,874 | | |
| 7,784 | |
Electric OEM | |
| 7,440 | | |
| 6,961 | |
Corporate | |
| 172 | | |
| 114 | |
| |
| | | |
| | |
Total assets | |
| 15,486 | | |
| 14,859 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
21. | SEGMENT INFORMATION - continued |
| |
As
of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
Property, plant and equipment, net: | |
| | |
| |
Metal stamping and Mechanical OEM | |
| 474 | | |
| 380 | |
Electric OEM | |
| 359 | | |
| 263 | |
| |
| | | |
| | |
Total property, plant and equipment, net | |
| 833 | | |
| 643 | |
All of the Group’s
sales are coordinated through its head office in Hong Kong. The Group considers revenues to be generated by geographic area based on the
physical location of customers. the breakdown by geographic area is as follows:
| |
Year ended March 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
$ | | |
$ | | |
$ | |
Revenue from contracts with customers: | |
| | |
| | |
| |
Hong Kong and China | |
| 2,186 | | |
| 1,554 | | |
| 2,105 | |
Europe | |
| 9,790 | | |
| 7,269 | | |
| 8,761 | |
Other Asian countries | |
| - | | |
| 37 | | |
| 76 | |
North America | |
| 582 | | |
| 308 | | |
| 1,423 | |
| |
| | | |
| | | |
| | |
Total revenue from contracts with customers | |
| 12,558 | | |
| 9,168 | | |
| 12,365 | |
All of the Group’s
property, plant and equipment are located in Hong Kong, China and Myanmar. The breakdown by geographic area is as follows:
| |
As of March 31, | |
| |
2021 | | |
2022 | |
| |
$ | | |
$ | |
Property, plant and equipment, net: | |
| | |
| |
Hong Kong and China | |
| 98 | | |
| 128 | |
Myanmar | |
| 735 | | |
| 515 | |
| |
| | | |
| | |
Total property, plant and equipment, net | |
| 833 | | |
| 643 | |
HIGHWAY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(In thousands of U.S. dollars, except for shares
and per share data)
22. | RELATED PARTY TRANSACTION |
There are no material
related party transactions for the years ended March 31, 2020, 2021 and 2022.
The Group has evaluated events from
the year ended March 31, 2022 through the date the financial statements were issued. There were no subsequent events that need disclosure.
* * * * * *
F-41
Not among the top four receivable balances or individually comprised 10% or more of receivable balance as of respective year end.
Sales to this customer were reported in both of the Metal Stamping and Mechanical OEM and Electric OEM operating segments.
Sales to this customer was reported in the Metal Stamping operating segment.
false
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