Securities registered or to be registered
pursuant to Section 12(b) of the Act.
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
As of March 31, 2019, there were 15,885,239
common shares of the registrant outstanding.
Note – Checking the box
above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 from their obligations under those Sections.
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.
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 and post such files).
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):
If an emerging growth company
that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant
to Section 13(a) of the Exchange Act.
o
†The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which
basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
þ
International Financial Reporting Standards as issued by the International Accounting Standards Board
o
Other
o
If “Other” has been
checked, indicate by check mark which financial statement item the registrant has elected to follow: Item 17
o
Item 18
o
If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
o
Yes
þ
No
This Annual Report on Form 20-F
contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results
to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include,
but are not limited to those discussed in the section entitled Risk Factors under
Item
3 “Key Information.”
Readers should not place undue
reliance on forward-looking statements, which reflect management’s view only as of the date of this Annual Report. The Company
undertakes no obligation to revise these forward-looking statements to reflect subsequent events or circumstances. Readers should
also carefully review the risk factors described in other documents the Company files from time to time with the Securities and
Exchange Commission.
Except where the context otherwise
requires and for purposes of this Report only:
The Company prepares its consolidated
financial statements in accordance with generally accepted accounting principles in the United States of America and publishes
such statements in United States dollars. See “Report of Independent Registered Public Accounting Firm” included elsewhere
herein. The Company publishes its financial statements in United States dollars. The functional currency of the Company and its
subsidiaries is the U.S. dollar.
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
The selected financial data set
forth below should be read in conjunction with our Consolidated Financial Statements and Notes thereto included at page F-1 of
this Annual Report. The selected Operations Data for each of the three fiscal years in the period ended March 31, 2019, and the
Balance Sheet data as of March 31, 2018 and 2017 are derived from our audited Consolidated Financial Statements included in this
Annual Report. The selected Operations Data for the years ended March 31, 2015 and 2016, and the Balance Sheet data as of March
31, 2015 and 2016 are derived from our audited Consolidated Financial Statements, which are not included in this Annual Report.
Selected Financial Data
(1)
Consolidated Statement of Operations Data:
|
|
(in thousands except per share and statistical
data)
Year ended March 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
Net sales
|
|
$
|
38,076
|
|
|
$
|
44,568
|
|
|
$
|
44,522
|
|
|
$
|
60,667
|
|
|
$
|
66,581
|
|
Cost of sales
|
|
|
33,852
|
|
|
|
39,775
|
|
|
|
37,073
|
|
|
|
50,953
|
|
|
|
56,311
|
|
Gross profit
|
|
|
4,224
|
|
|
|
4,793
|
|
|
|
7,449
|
|
|
|
9,714
|
|
|
|
10,270
|
|
Selling, general and administrative expenses
|
|
|
9,123
|
|
|
|
9,119
|
|
|
|
8,856
|
|
|
|
8,806
|
|
|
|
9,459
|
|
Other income (expenses), net
|
|
|
93
|
|
|
|
(1,021
|
)
|
|
|
(696
|
)
|
|
|
894
|
|
|
|
(278
|
)
|
Operating (loss) income
|
|
|
(4,806
|
)
|
|
|
(5,347
|
)
|
|
|
(2,103
|
)
|
|
|
1,802
|
|
|
|
533
|
|
Non-operating income, net
|
|
|
2,553
|
|
|
|
571
|
|
|
|
3,688
|
|
|
|
4,395
|
|
|
|
3,884
|
|
(Loss) income before income taxes
|
|
|
(2,253
|
)
|
|
|
(4,776
|
)
|
|
|
1,585
|
|
|
|
6,197
|
|
|
|
4,417
|
|
Income taxes
|
|
|
207
|
|
|
|
158
|
|
|
|
209
|
|
|
|
7
|
|
|
|
144
|
|
(Loss) income from continuing operations, after income taxes
|
|
|
(2,460
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
|
|
6,190
|
|
|
|
4,273
|
|
Loss from discontinued operations, net of tax
|
|
|
(348
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (loss) income attributable to Deswell Industries, Inc.
|
|
|
(2,808
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
|
|
6,190
|
|
|
|
4,273
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities
(2)
|
|
|
33
|
|
|
|
(73
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Reclassification adjustment in connection with loss on disposal of available-for-sale securities transferred to profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
Total comprehensive (loss) income attributable
|
|
$
|
(2,775
|
)
|
|
$
|
(5,007
|
)
|
|
$
|
1,387
|
|
|
$
|
6,190
|
|
|
$
|
4,273
|
|
Net (loss) income per share attributable to Deswell Industries, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations per share
(3)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
Loss from discontinued operations per share
(3)
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
Basic weighted average common shares outstanding (shares in thousands)
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
|
|
15,885
|
|
|
|
15,885
|
|
Diluted weighted average common shares outstanding (shares in thousands)
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
|
|
15,985
|
|
|
|
16,059
|
|
Statistical Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin from continuing operations
|
|
|
11.1
|
%
|
|
|
10.8
|
%
|
|
|
16.7
|
%
|
|
|
16.0
|
%
|
|
|
15.4
|
%
|
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
Operating margin from continuing operations
|
|
|
(12.6
|
%)
|
|
|
(12.0
|
%)
|
|
|
(4.7
|
%)
|
|
|
3.0
|
%
|
|
|
0.8
|
%
|
Dividends per share
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
$
|
0.105
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
(4)
|
|
$
|
46,668
|
|
|
$
|
40,715
|
|
|
$
|
42,196
|
|
|
$
|
50,560
|
|
|
$
|
54,412
|
|
Total assets
|
|
|
96,439
|
|
|
|
87,571
|
|
|
|
90,987
|
|
|
|
100,399
|
|
|
|
100,169
|
|
Long-term debt, less current portion
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shareholders’ equity
|
|
|
84,063
|
|
|
|
76,808
|
|
|
|
76,201
|
|
|
|
81,279
|
|
|
|
83,964
|
|
__________
|
(1)
|
Our consolidated financial statements are prepared
in accordance with generally accepted accounting principles in the United States of America and are stated in U.S. dollars. See
“Financial Statements and Currency Presentation.”
|
|
(2)
|
See Note 2 of Notes to Consolidated Financial Statements
included later in this Report regarding unrealized gain (loss) on available-for-sale securities during the fiscal year ended March
31, 2017.
|
|
(3)
|
Basic loss per share excludes dilution from potential
common shares and is computed by dividing loss attributable to Deswell shareholders by the weighted-average number of common shares
outstanding for the period. Diluted loss per share reflects the potential dilution from potential common shares.
|
|
(4)
|
Deferred tax liabilities of $804, $825 and $889 as
of March 31, 2015, 2016 and 2017 have been retrospectively classified from current liabilities to long-term liabilities. The working
capital of those three years are adjusted accordingly.
|
Risk Factors
We may from time to time make
written or oral forward-looking statements. Written forward-looking statements may appear in this document and other documents
filed with the Securities and Exchange Commission, in press releases, in reports to shareholders, on our website, and other documents.
The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements on which we rely in
making such disclosures. In connection with this “safe harbor,” we are hereby identifying important factors that could
cause actual results to differ materially from those contained in any forward-looking statements made by us or on our behalf. Any
such statement is qualified by reference to the following cautionary statements:
We
are, and have been, dependent on a few major customers, the loss of, or substantial reduction in orders from, which would substantially
harm our business and operating results.
Historically, we have depended,
currently depend, and expect to continue to depend, on a small number of customers for a significant percentage of our net sales.
During the year ended March 31, 2019, we had three major customers, each accounting for more than 10% of our net sales and together
for 35.1% of our net sales. If our major customers experience a decline in the demand for their products as a result of the prevailing
economic environment or other factors, the products or services that we provide to them could be reduced or even terminated. The
loss of any of our major customers or a substantial reduction in orders from any of them would adversely impact our sales and operating
results unless and until we were able to increase sales from other existing customers or add sales from new customers.
Our sales are based on purchase
orders and we have no long-term contracts with any of our customers and the percentage of sales to any of our customers has fluctuated
in the past and may fluctuate in future. We cannot assure you that present or future customers will not cease using us as the source
of the injection-molded plastic parts and components we manufacture, for electronic manufacturing services of electrical products
and subassemblies or significantly change, reduce or delay the amount of products and services ordered from us.
Uncertainty
and adverse changes in the economy and financial markets have had, and could continue to have, an adverse impact on our business
and operating results.
The world economy has strengthened
as lingering fragilities related to the global financial crisis subside. In 2017, global economic growth reached 3 percent—the
highest growth rate since 2011—and growth is expected to remain
steady for the coming year. Global growth is expected
to decrease from 3 percent in 2018 to 2.7 percent in 2019 and increase to 2.9 percent in 2020 based on the World Economic Situation
and Prospects as of Mid-2019, published by the United Nations on May 21, 2019. However, economic progress has been highly uneven
across regions. Despite an improvement in growth prospects at the global level, we believe that the global economy is facing a
confluence of risks, such as an escalation of trade disputes, an abrupt tightening of global financial conditions, and intensifying
climate risks. While economic activity in the commodity exporting countries, notably fuel exporters, is gradually recovering,
growth remains susceptible to volatile commodity prices. Our customers that were affected by commodity exports, in turn, were
more conservative in ordering our products and services. There are continuing concerns over price instability, geopolitical issues,
availability and cost of credit, stability of financial markets and sovereign nations. Uncertainty or adverse changes in the economy
could negatively impact:
|
·
|
the demand for our customers’ products,
|
|
·
|
the amount, timing and stability of their orders to us,
|
|
·
|
the financial strength of our customers and suppliers,
|
|
·
|
our customers’ and suppliers’ ability or willingness to do business
with us,
|
|
·
|
our suppliers’ and customers’ ability to fulfill their obligations
to us,
|
|
·
|
the ability of our customers, our suppliers or us to obtain credit, secure
funds or raise capital, or
|
|
·
|
the prices at which we can sell our products and services,
|
which, in turn, could adversely
affect
|
·
|
our ability to manage inventory levels effectively or collect receivables,
|
|
·
|
our cash flow position,
|
|
·
|
our net sales, gross margins and operating results; or
|
|
·
|
otherwise adversely impact our results of operations, financial condition
and liquidity.
|
Our
gross margins fluctuate from year to year and may be adversely affected by a number of factors.
The following chart shows, for
the years indicated, our gross margins from our two principal operating segments and for our company as a whole:
Gross
Margins Percentage
We expect gross margins generally
and for specific products to continue to fluctuate from year to year. Fluctuations in our margins have been affected, often adversely,
and may continue to be affected, by numerous factors, including:
|
·
|
our cost of raw materials, especially our cost of electronic components
due to changes in the prices, availability and long lead time of components and parts needed for the manufacturing of electronic
products;
|
|
·
|
costs of labor, particularly in recent years, when such costs have increased
substantially as a consequence of increasing governmental regulation directed at labor practices and policies;
|
|
·
|
the appreciation of the exchange rate of the RMB, in which we pay our labor
and manufacturing costs, against the U.S. dollar, in which we present our financial statements;
|
|
·
|
changes in our customer mix or the mix of higher and lower margin products,
or a combination of both in any year;
|
|
·
|
price increases for products which, for competitive reasons, we choose to
allow as concessions in an effort to maintain our customer base;
|
|
·
|
increases in value-added taxes as result of changes in the value-added tax
policy of the Chinese government for various categories of export products; and
|
|
·
|
increased costs to conform our products to consumer and product safety laws
and regulations of the various countries in which our products are sold.
|
If we cannot maintain stability
in our gross margins, our operating results could suffer, dividend payments to shareholders may be decreased or eliminated, our
financial position may be harmed and our stock price may fall.
We
believe we were a passive foreign investment company, or “PFIC,” for our fiscal year ended March 31, 2019 under U.S.
income tax laws and may be a PFIC for years after fiscal 2019. If we were a PFIC in fiscal 2019, or are a PFIC in later years,
U.S. investors could suffer adverse U.S. federal income tax consequences in such years.
The determination of whether
we are a passive foreign investment company, or PFIC, in any taxable year is made on an annual basis after the close of that year
and depends on the composition of our income and the nature and value of our assets, including goodwill. Specifically, we will
be classified as a PFIC if, after applying relevant look-through rules with respect to the income and assets of subsidiaries, either
(i) 75% or more of our gross income for such taxable year is passive income, or (ii) 50% or more of the value of our assets (based
on an average of the quarterly values of the assets during such year) is attributable to assets that either produce passive income
or are held for the production of passive income (the “PFIC asset test”). Cash and cash equivalents, even if they are
part of the working capital of a company, constitute “passive” assets for the purposes of the PFIC asset test.
We believe that we were a PFIC
for our year ended on March 31, 2019 and may also be a PFIC in subsequent tax years. If we are a PFIC for any year during a U.S.
Holder’s holding period of our common shares, then such U.S. Holder generally could be subject to adverse U.S. tax consequences
including the requirement to treat any “excess distribution” received on our common shares, or any gain realized upon
a disposition of such common shares, as ordinary income and to pay an interest charge on a portion of such distributions or gain.
Because of the complexity of
the issues regarding our classification as a PFIC, U.S. investors are urged to consult their own tax advisors for guidance as to
our PFIC status. For further discussion of the adverse U.S. federal income tax consequences arising from the classification as
a PFIC, please see “United States Federal Income Tax – Passive Foreign Investment Company (PFIC)” in ITEM 10
Additional Information beginning on page 51 of this Report.
The
economy of China has been experiencing significant growth, leading to inflation and increased labor costs. Increases in labor costs
of workers in the PRC generally, and in the Province where our manufacturing facilities are located particularly, have had and
can be expected to continue to have a material and adverse effect on our operating results.
We generate all revenues from
sales of products that we manufacture at our facilities located in Dongguan, Guangdong Province, in the PRC. The economy in China
has grown significantly over the past 20 years, which has resulted in an increased inflation and the average cost of labor.
The inflation rate in China rose
to 2.7% year-on-year in May 2019. However, the Company’s actual cost of operations has significantly exceeded the overall
inflation rate in China. The rapid growth of China’s economy in general has in the past few years increased the Company’s
operating costs, including energy prices and labor costs. These increased costs have adversely affected the Company’s cost
of operations, caused the Company to increase its prices, and resulted in the loss of some customers.
There is no fixed minimum wage
which is applicable to all of China; local governments in China adopt different amounts based on the situation in their area. China’s
Guangdong Province, where our manufacturing facilities are located, raised minimum wages by approximately 20% in May 2011 and another
19.1% in March 2013. Effective May 1, 2015, minimum wage levels across Guangdong Province, including Dongguan, where our manufacturing
facilities are located, were increased by an average of 15.3%. Effective July 1, 2018, the Guangdong Provincial Government increased
the Province’s statutory minimum wage by around RMB200 per month. The Provincial Government sets different tiers of minimum
wages according to the developmental status of the Province’s urban clusters. In the City of Dongguan, where our manufacturing
facilities are located, the minimum wage increased by 13.9%.
In China, regional governments
are authorized to set their own minimum wages according to local conditions. Increases in wages also result in increases in our
and other employer’s contributions for various mandatory social welfare benefits for Chinese employees that are based on
percentages of their salaries. Continuing material increases in our cost of labor will continue to increase our operating costs
and will adversely affect our financial results unless we pass on such increases to our customers by increasing the prices of our
products and services. The effect of increases in the prices of our products and services would make our products more expensive
in global markets, such as the United States and the European Union. This could result in the loss of customers, who may seek,
and be able to obtain, products and services comparable to those we offer in lower-cost regions of the world. If we do not increase
our prices to pass on the effect of increases in our labor costs, our margins and financial results would suffer.
Because most of our labor costs
are incurred in China and therefore paid in RMB, the adverse effect on our business and financial results from increasing labor
costs has historically been exacerbated by the appreciation in the exchange rate to the U.S. dollar, as is discussed in the next
risk factor.
Changes
in currency exchange rates have and could continue to influence our financial results significantly.
Our sales are mainly in United
States dollars and Hong Kong dollars and our expenses are mainly in United States dollars, Hong Kong dollars and Chinese RMB.
The Hong Kong dollar has been
pegged to the U.S. dollar at approximately 7.80 and is relatively stable. The Hong Kong government may not continue to maintain
the present currency exchange mechanism, which fixes the Hong Kong dollar at approximately 7.80 to each United States dollar and
has not in the past presented a material currency exchange risk. Although announcements by Hong Kong’s central bank indicate
its intention to maintain the currency peg between the Hong Kong dollar and the U.S. dollar, if Hong Kong does change and follows
China to a floating currency system or otherwise changes the exchange rate system of Hong Kong dollars to U.S. dollars, our margins
and financial results could be adversely affected.
Between 1994 and July 2005, the
market and official RMB rates were unified and the value of the RMB was essentially pegged to the U.S. dollar and was relatively
stable. On July 21, 2005, the People’s Bank of China adjusted the exchange rate of RMB to the U.S. dollar by linking the
RMB to a basket of currencies and simultaneously setting the exchange rate of RMB to U.S. dollars, from 1:8.27, to a narrow band
of around 1:8.11.
The chart below illustrates the
fluctuations since the July 31, 2005 adjustment of the RMB to the U.S. dollar by showing the exchange ratio at the end of each
of Deswell’s fiscal years from March 31, 2006 to March 31, 2019. Because most of the Company’s labor costs are incurred
in China and therefore paid in RMB, the adverse effect on Deswell’s business and financial results from increasing labor
costs has in previous years been exacerbated by the appreciation in the exchange rate to the U.S. dollar.
_________
|
(1)
|
RMB (yuan) to U.S. dollar data presented in this chart
are the midpoint rates on March 31 of the year indicated as reported by “Historical Exchange Rates” at http://www.oanda.com/currency/historical-rates/.
|
The appreciation and depreciation
in the exchange ratio of the RMB to the U.S. dollar increases and decreases, respectively, our costs and expenses to the extent
paid in RMB. Of all of the costs and expenses for the PRC entities, which accounted for 95% of the Company total, about 48.9%,
42.3% and 37.2% were in RMB during the years ended March 31, 2017, 2018 and 2019, respectively.
Since the PRC government enacted
reform in its RMB exchange rate regime, the RMB has appreciated against the U.S. dollar. However, this trend has become unstable
in recent years, especially amid the trade controversy between the United States and China. It is difficult to predict how the
United States and China government policies
may affect the exchange rate
between the dollar and RMB.
If the RMB continues its appreciation
to the U.S. dollar under China’s currency exchange system, our operating costs will continue to increase, and if China adopts
a different or more flexible system of currency exchange resulting in greater appreciation of the RMB to the U.S. dollar, our operating
costs could increase even more. In either event, such appreciation would adversely affect our financial results in a manner similar
to the effects we have suffered, and may in the future suffer, as a consequence of our increasing labor costs.
For a discussion of the risks
to our business from increases in our costs of labor, please see the risk factor immediately above entitled “The economy
of China has been experiencing significant growth, leading to inflation and increased labor costs. Increases in labor costs of
workers in the PRC generally, and in the Province where our manufacturing facilities are located particularly, have had and can
be expected to continue to have a material and adverse effect on our operating results.”
If
OEMs stop or reduce their manufacturing outsourcing, our business could suffer.
Our revenues depend on outsourcing
by OEMs to us and to other contract manufacturers for which we manufacture end-products or parts and components. Current and prospective
customers continuously evaluate our capabilities against other providers as well as against the merits of manufacturing products
themselves. Our business would be adversely affected if OEMs decide to perform these functions internally. Similarly, we depend
on new outsourcing opportunities to militate against lost revenues arising from the decline in demand for our customers’
products as a consequence of prevailing global economic conditions, and our business would be adversely affected if we are not
successful in gaining additional business from these opportunities or if OEMs do not outsource additional manufacturing business.
We
could experience credit problems with our customers, which could adversely impact our operating results and financial condition
and could adversely reduce our future revenues.
We manufacture and sell injection-molded
plastic parts and components and provide manufacturing services for electrical products and subassemblies to companies and industries
that have in the past, and may in the future, experience financial difficulty, particularly in light of recent conditions in the
credit markets and the overall worldwide economy. For information on the concentration of our credit risk, see Note 15 of Notes
to Consolidated Financial Statements included later in this Report.
If our customers experience financial
difficulty, we could have problems recovering amounts owed to us from these customers, or demand for our products and services
from these customers could decline. If one or more of our customers, particularly customers to which we have extended substantial
credit and which have become material account debtors on our accounts receivables, were to become insolvent or otherwise were unable
to pay for the products or services provided by us on a timely basis, or at all, our operating results and financial condition
could be adversely affected. Such adverse effects could include one or more of the following:
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provision or increased provision for doubtful accounts,
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a charge for inventory write-offs,
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a reduction in revenue,
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increases in working capital requirements.
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Because
material amounts of our funds are held in banks where only limited protection on deposit accounts is required, the failure of any
bank in which we deposit our funds could result in a loss of those funds to the extent exceeding the amounts protected and could,
depending on the amount involved, affect our ability to continue in business.
At March 31, 2019, we had cash
on hand of $14.4 million and time deposits maturing over three months of $0.4 million, which were invested in interest bearing
investments at banks or other financial institutions. Of that amount, approximately $2.9 million was held in banks and other financial
institutions in Hong Kong, $6.2 million in Macao and $5.7 million in the PRC. The Hong Kong government provides deposit protection
up to a maximum amount of HK$500,000 (approximately U.S.$ 63,997 based on the midpoint exchange rate for June 30, 2019 reported
by “Historical Exchange Rates” at http:// www.oanda.com/currency/historical-rates/) for each depositor in any
individual bank in Hong Kong,
and the Macao government provides deposit protection up to a maximum amount of MOP$500,000 (approximately U.S.$ 62,133 based on
the midpoint exchange rate for June 30, 2019 reported by “Historical Exchange Rates” at http:// www.oanda.com/currency/historical-rates/)
for each depositor with any individual bank in Macao. We understand that in the event of a bank failure of a bank in the PRC, a
PRC-government agency is to provide some, unspecified, protections of deposit accounts to individual depositors. After three interest
rate hikes in 2011, there were recommendations in early 2012 from China’s economists that a formal insurance system from
China’s central bank is necessary to protect depositors’ assets. On May 1, 2015, the new “Deposit Insurance Regulations”
became effective in the PRC and provide that the maximum protection would be up to RMB500,000 (including principal and interest)
per depositor per insured financial institution. Depending upon the amounts of funds we have on deposit in a Hong Kong, Macao or
PRC financial institution that fails, our inability to have immediate access to our cash, and the lack of deposit protection in
excess of applicable protection limits, could impair our operations, and, if we are not able to access needed funds to pay our
suppliers, employees and other creditors, we may be unable to continue in business.
Our
industry is extremely competitive, with aggressive pricing dynamics, and if we are not able to continue to provide competitive
products and services, we may lose business.
We compete with a number of different
companies in production of injection-molded plastic parts and components, electrical products and subassemblies and metallic molds
and accessories. For example, we compete with Asian-based manufacturers and/or suppliers of injection-molded plastic parts and
components, major global electronic manufacturing services (“EMS”) providers, other smaller EMS companies that have
a regional or product-specific focus, and original design manufacturers with respect to some of the services that we provide. We
also compete with our current and prospective customers, who evaluate our capabilities in light of their own capabilities and cost
structures. Our market segments are extremely competitive, 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. We face particular competition from
Asian-based competitors, including Taiwanese EMS providers which compete in our end markets. If we are unable to provide comparable
manufacturing services and improved products at lower cost than the other companies in our market, our net sales could decline.
Uncertainty and adverse changes
in the economy and financial markets may also increase the competitive environment in our market segments which could also impact
our operating results. In addition, the EMS industry is currently experiencing excess manufacturing capacity and has seen increased
competition. To stay competitive, we have had retired some old machines and reinvested in some state of the art ones in order to
best achieve high efficiency, precision and quality.
Nonetheless, the above factors
have exerted and will continue to exert additional pressures on pricing for injection-molded plastic parts and components and for
our electronic manufacturing services, thereby increasing the competitive pressures in our market segments generally. We may not
be able to compete successfully against our current and future competitors, and the competitive pressures we face may have a material
adverse effect on us.
We
have no long-term contracts to obtain plastic resins and our profit margins and operating results could suffer from an increase
in resin prices.
The primary materials used
by us in the manufacture of our plastic injection molded products are various plastic resins. The following table shows our cost
of plastic resins as a percentage of our cost of plastic products sold and as a percentage of our total costs of goods sold for
the years ended March 31, 2017, 2018 and 2019:
We have no long-term contracts
with our resin suppliers. Accordingly, our financial performance is dependent to a significant extent on resin markets and the
ability to pass through price increases to our customers. The capacity, supply and demand for plastic resins and the petrochemical
intermediates from which they are produced are subject to cyclical price fluctuations, including those arising from supply shortages.
Consequently, resin prices may fluctuate as a result of changes in natural gas and crude oil prices and the capacity, supply and
demand for resin and petrochemical intermediates from which they are produced. Over the past several years, oil prices have experienced
significant volatility. In addition, we have found that increases in resin prices are difficult to pass on to our customers. In
the past, increases in resin prices have increased our costs of goods sold and adversely affected our operating margins. A significant
increase in resin prices in the future could likewise adversely affect our operating margins and results of operations.
Shortages
of components and materials used in our production of electronics products may delay or reduce our sales and increase our costs.
From time to time, we have experienced
shortages of some of the electronic components that we need and use in our electronics manufacturing market segment.
These
shortages can result from strong demand for those components or from problems experienced by suppliers. These unanticipated component
shortages could result in curtailed production or delays in production, which may prevent us from making scheduled shipments to
customers. Our inability to make scheduled shipments could cause us to experience a reduction in sales, increase in inventory levels
and costs, and could adversely affect relationships with existing and prospective customers. Component shortages may also increase
our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure
products to accommodate substitute components. As a result, component shortages could adversely affect our operating results. Our
performance depends, in part, on our ability to incorporate changes in component costs into the selling prices for our products
.
Certain of the electronic products
we manufacture, particularly those for customers whose orders are widely spaced at irregular intervals for small lots of customized
products, require components from single-source or customer-designated suppliers. Shortages of specific components often result
in the suppliers allocating available quantities among their customers based on volume and purchasing history. Generally, we lack
sufficient bargaining power with these suppliers to assure a stable supply of needed components. Delays in our obtaining, or our
inability to obtain, these materials could slow production, delay shipments to our customers, increase our costs and hamper our
operating results.
We
face inventory risks of obsolescence and impairment charges by providing turnkey manufacturing of electronic products.
We conduct most of the manufacturing
of electronic products for our customers on a “turnkey” basis, where we mainly take care of materials procurement,
as well as product design and development for customers’ selection and collaboration. Turnkey manufacturing involves greater
resource investment and inventory risk management than consignment manufacturing, where the customer provides the components and
materials needed to manufacture the products it orders. If we fail to manage our inventory effectively, we may bear the risk of
fluctuations in materials costs, scrap and excess inventory, all of which can have an adverse impact on our business, financial
condition and results of operations. In addition, delays, cancellations or reductions of orders by our customers could result in
an excess of materials. An excess of components and materials would increase our costs of maintaining inventory and may increase
the risk of inventory obsolescence and impairment charges, which may increase our costs and decrease operating margins and otherwise
harm our operating results.
Periods in which we receive rapid
increases in orders with the lengthening of lead times by suppliers could cause a shortage of materials needed for us to fulfill
orders received from customers expecting normal or accelerated delivery. A shortage of materials could lengthen production schedules
and costs substantially, particularly for orders from our customers placed for short-term or rapid delivery and could force us
to seek and purchase needed components at premium prices, which would increase our costs of goods sold and reduce our operating
margins.
The
Chinese government could change its policies toward or even nationalize private enterprise, which could result in the total loss
of our investment in that country.
Our manufacturing facilities
are located in China. As a result, our operations and assets are subject to significant political, economic, legal and other uncertainties
associated with doing business in China. Over the past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not
continue to pursue these policies or may significantly alter them to our detriment from time to time without notice. Changes in
policies by the Chinese government resulting in changes in laws, regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion or imports and sources of supply could materially and adversely affect us. The nationalization
or other expropriation of private enterprises by the Chinese government could result in the total loss of our investment in that
country.
There
may be a lack of remedies and impartiality under the Chinese legal system that prevents us from enforcing the agreements under
which we operate our factories.
We do not own the land on which
our factories in China are located. We occupy our manufacturing facilities under land use agreements or under tenancy agreements
with the local Chinese government. These agreements may be difficult to enforce in China, which could force us to accept terms
that may not be as favorable as those provided in our agreements. Unlike the U.S., China has a civil law system based on written
statutes in which judicial decisions have little precedential value. The Chinese government has enacted some laws and regulations
dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However,
their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination.
If
our business licenses in China were not renewed, we would be required to move our operations out of China, which would impair our
financial results, competitiveness and market position and jeopardize our ability to continue operations.
Our activities in China require
business licenses, the scope of which is limited to our present activities, and require review and approval of our activities by
various national and local agencies of Chinese government. The Chinese government may not continue to approve our activities, grant
or renew our licenses or grant or renew licenses to expand our existing activities. Our inability to obtain needed approvals or
licenses could prevent us from continuing to conduct operations in China. If for any reason we were required to move our manufacturing
operations outside of China, our financial results would be substantially impaired, our competitiveness and market position would
be materially jeopardized and we may not be able to continue operations.
Our
insurance coverage may not be adequate to cover losses related to major accidents, forces of nature or product liability risks.
Risks associated with our business
include risk of damage to our stock in trade, goods and merchandise, furniture
and equipment and factory buildings
in China. At March 31, 2019, we maintained fire, casualty and theft insurance aggregating approximately $109.6 million covering
damages to fixed and movable assets, equipment, manufacturing facilities in China and furniture and fixtures at our facilities.
The proceeds of this insurance may not be sufficient to cover material damage to, or the loss of, any of our factories due to fire,
severe weather, flood, forces of nature, such as major earthquakes, which are common in China, or other natural disasters. We may
experience difficulty or delays in receiving compensation from the insurance companies and may not receive insurance proceeds adequate
to compensate us fully for a potential loss. Although we maintain insurance addressing damage to and destruction to our facilities
and equipment, we do not have business interruption insurance.
Despite quality assurance measures,
there remains a risk that defects may occur in our products. The occurrence of any defects in our products could give rise to liability
for damages caused by such defects. They could, moreover, impair the market’s acceptance of our products. At March 31, 2019,
we had only limited product liability insurance. Although we have not experienced any product quality claims from significant customers,
if future claims do arise, costs to defend, adverse judgments or amounts we may be forced to pay in settlement would increase our
expenses. If we incur losses which are not covered under our insurance, or the amount of compensation that we receive from the
insurer is significantly less than the actual loss, our financial condition and results of operations could be materially and adversely
affected.
Due
to restrictions under PRC law on distributions of dividends by our subsidiaries in the PRC, we may be forced to reduce the amount
of, or not be able to pay, dividends to our shareholders.
Under the PRC Income Tax Law
and the implementation rules, only distributable profits earned by PRC entities can be distributed. The calculation of distributable
profits under accounting principles and financial regulations applicable to PRC enterprises differs in many ways from U.S. GAAP.
Our subsidiaries in the PRC are also required to reserve 10% of their profits for future development and staff welfare, which amounts
are not distributable as dividends. These rules and possible changes to them could restrict our PRC subsidiaries from repatriating
funds ultimately to us and our stockholders as dividends.
Under the unified enterprise
income tax law (“EIT Law”), profits of the PRC entities earned on or after January 1, 2008 and distributed to the Company
are subject to withholding tax at a rate of 10%, unless the Company is deemed a resident enterprise for tax purposes, or is incorporated
in a country which has a tax treaty with PRC that provides for a different withholding arrangement. As a result of this PRC withholding
tax, amounts available to us in earnings distributions from our PRC enterprises have been reduced. Since we derive the funds distributed
to shareholders from our subsidiaries in the PRC, the reduction in amounts available for distribution from our PRC enterprises
could, depending on the income generated by our PRC subsidiaries, force us to reduce, or possibly eliminate, the dividends we have
paid to our shareholders historically. For this reason, or other factors, we may decide not to declare dividends in the future.
If we do pay dividends, we will determine the amounts when they are declared and even if we do declare dividends in the future,
we may not continue them in any future period.
Under
China’s EIT Law, we may be classified as a “resident enterprise” for PRC tax purposes, which may subject us to
PRC enterprise income tax for any dividends we receive from our Chinese subsidiaries and to PRC income tax withholding for any
dividends we pay to our non-PRC stockholders.
Under the PRC’s EIT Law,
an enterprise established outside of China whose “de facto management bodies” are located in China is considered a
“resident enterprise” and is subject to the 25% enterprise income tax rate on its worldwide income.
All of our manufacturing operations
are conducted and managed in the PRC. Our corporate structure, illustrating our incorporation in BVI and our ownership of companies
inside and outside of China, is set forth on page 23 of this Report. If the PRC tax authorities determine that our holding company
structure utilizing companies outside of China is a “resident enterprise” for PRC enterprise income tax purposes, we
may be subject to an enterprise income tax rate of 25% on our worldwide taxable income. The “resident enterprise” classification
also could subject us to a 10% withholding tax on any dividends we pay to our non-PRC stockholders if the relevant PRC authorities
determine that such income is PRC-sourced income. If we are classified as a “resident enterprise” and we incur these
tax liabilities, our financial results would be negatively impacted accordingly.
Transactions
between our subsidiaries may be subject to scrutiny by the PRC tax authorities. A finding that any of our China subsidiaries owe
additional taxes, late payment interest or other penalties could adversely affect our operating results materially.
The PRC’s EIT Law emphasizes
the requirement of an arm’s-length basis for transfer pricing transactions between related parties. It requires enterprises
with transactions between related parties, such as transactions between our subsidiaries located inside and outside of China, to
prepare transfer pricing documentation that includes the basis for determining pricing, the computation methodology and detailed
explanations. We could face material and adverse consequences if the PRC tax authorities determine that transactions between our
subsidiaries do not represent arm’s-length pricing and are thereby deemed tax avoidance, or determine that related documentation
does not meet the requirements of the EIT Law. Such determinations could result in increased tax liabilities of the affected subsidiaries
and potentially subject them to late payment interest and other penalties.
Controversies
affecting China’s trade with the United States could harm our operations or depress our stock price.
Historically, the United States
has been the major or significant geographical area of our product sales in terms of shipping destinations. The United States was
our number two market in fiscal years ended March 31, 2017, March 31, 2018 and March 31, 2019. See
Item
4
“Information on the Company – Customers and Marketing” on page 29 of this Report for information regarding
our net sales as a percentage of total sales to customers by geographic area. While China has been granted permanent most favored
nation trade status in the United States, controversies between the United States and China may arise that threaten the status
quo involving trade between the United States and China. These controversies could adversely affect our business by, among other
things, causing our products in the United States to become more expensive, which could result in a reduction in the demand for
our products by customers in the United States. Recently, political and trade friction between the United States and China has
escalated.
In
July 2018 and again in September 2018, the United States imposed tariffs on a wide range of products and other goods
from China. In May 2019, negotiations on tariffs and other trade matters between the United States and China came to a halt,
and both sides escalated the trade dispute. In June 2019, trade talks resumed between the United States and China, and the
United States indicated it would not impose additional tariffs at this time. Although negotiations are to resume in the
second half of 2019 between the United States and China, it is possible the United States will impose additional tariffs.
Given our manufacturing in China, and our lack of manufacturing elsewhere, the imposition of tariffs by the United States
presents particular risks for us. Tariffs that have already been announced and implemented have covered certain of our
products. The trade controversy between the United States and China is still evolving, and we cannot predict future trade
policy. However, future tariffs could cover more or all of our products, resulting in an adverse effect on our operations,
including customer demand, or on the prevailing market price of our common shares.
Future
relocation of certain manufacturing lines may not be successful.
The outcome of the trade controversy
between the United States and China is not be predictable as of this time. I
n order to mitigate
the uncertainties caused by the issue, we have been studying the feasibility of reallocating part of our production to Southeast
Asian
countries since 2018. In June 2019, we engaged an internationally-recognized
professional service firm to provide advice and assistance in the completion of required statutory procedures for the incorporation
of a wholly foreign invested enterprise in Vietnam (the “FIE”).
The incorporation of the FIE is still in progress
as of the date of this Report. We are in the stage of visiting different locations in Vietnam, planning potential employee and
management relocations and negotiating the relocation with our customers.
While this may mitigate our exposure
to the trade dispute between the United States and China, relocation of manufacturing lines in Vietnam may face difficulties and
possibly be unsuccessful in the future. We may fail to select appropriate manufacturing plants in Vietnam. Some of our competent
and experienced employees and management may not be willing to relocate and work in Vietnam. The quality of the products manufactured
and assembled in Vietnam may not be accepted by our customers. A new manufacturing plant in Vietnam could require significant management
attention and could result in a diversion of resources away from our existing business. We may also need to obtain approvals and
licenses from relevant government authorities to comply with applicable laws and regulations, which could result in increased costs
and delays.
Restrictions
on the convertibility of RMB into foreign currency may limit our ability to transfer excess funds or dividends to the Company’s
subsidiaries outside China.
Our manufacturing operations
are conducted by our subsidiaries located in China and funds are frequently transferred into our subsidiaries in China. Thus,
any future restrictions on currency exchanges may limit our ability to transfer excess funds or dividends outside China. Although
the PRC government introduced regulations in 1996 to allow greater convertibility of RMB for current account transactions, significant
restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell and/or remit
foreign currencies at those
banks authorized to conduct foreign
exchange business after providing valid commercial documents. The Chinese regulatory authorities may impose more stringent restrictions
on the convertibility of RMB, especially with respect to foreign exchange transactions.
Political
and economic instability of Hong Kong and Macao could harm our operations.
Our administration and accounting
offices are located in Macao, formerly a Portuguese Colony, and some of our customers and suppliers are located in Hong Kong, formerly
a British Crown Colony. Sovereignty over Macao and Hong Kong was transferred to China effective on December 20, 1999 and July 1,
1997, respectively. Since their transfers, Macao and Hong Kong have become Special Administrative Regions of China, enjoying a
high degree of autonomy except for foreign and defense affairs. Moreover, China’s political system and policies are not practiced
in Macao or Hong Kong. Under the principle of “one country, two systems,” Macao and Hong Kong maintain legal systems
that are different from that of China. Macao’s legal system is based on the Basic Law of the Macao Special Administrative
Region and, similarly, Hong Kong’s legal system is based on the Basic Law of the Hong Kong Special Administrative Region.
It is generally acknowledged as an open question whether Hong Kong’s future prosperity in its role as a hub and gateway to
China will be diminished. The continued stability of political, economic or commercial conditions in Macao and Hong Kong remain
uncertain, and any instability could have an adverse impact on our business.
The
PRC’s national labor law restricts our ability to reduce our workforce if we conclude that we need to make future reductions.
In June 2007, the National People’s
Congress of the PRC enacted labor legislation, called the Labor Contract Law, and that law became effective on January 1, 2008.
The law formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade
unions. Considered one of the strictest labor laws in the world, among other things, this law requires an employer 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. Such employment contracts with qualifying workers would not be terminable if, for example,
we determined to downsize our workforce in the event of an economic downturn. Under the 2007 law, downsizing by 20% or more may
occur only under specified circumstances, such as a restructuring undertaken pursuant to China’s Enterprise Bankruptcy Law,
or where a company suffers serious difficulties in production and/or business operations. Also, if we lay off more than 20 employees
or 10% at one time, we have to communicate with the labor union of our Company and report to the District Labor Bureau. Deswell’s
entire staff, who are employed to work exclusively within the PRC, is covered by the law. In response to prevailing business conditions,
we decreased our workforce by 135 in the fiscal year ended March 31, 2019 after decreasing our workforce by 2 in the fiscal year
ended March 31, 2018. However, we may incur much higher costs under China’s Labor Contract Law if we are forced to downsize
our workforce in the future. Accordingly, this law can be expected to exacerbate the adverse effect of unfavorable economic conditions
on our results of operations and financial condition.
Our
customers are dependent on shipping companies for delivery of our products and interruptions to shipping could materially and adversely
affect our business and operating results.
Generally, we sell our products
F.O.B. Hong Kong or F.O.B. China and our customers are responsible for the transportation of products from Hong Kong or China to
their final destinations. Our customers rely on a variety of carriers for product transportation through various world ports. A
work stoppage, strike or shutdown of one or more major ports or airports could result in shipping delays materially and adversely
affecting our customers, which in turn could have a material adverse effect on our business and operating results. Similarly, an
increase in freight surcharges due to rising fuel costs or general price increases could materially and adversely affect our business
and operating results.
Protecting,
seeking licenses for, or asserting claims over, intellectual property could be costly.
We usually rely on trade secrets,
industry expertise and the sharing with us by our customers of their intellectual property. However, there can be no assurance
that intellectual property that we use in our business does not violate rights in such property belonging to others. We may be
notified that we are infringing patents, copyright or other intellectual property rights owned by other parties. In the event
of an infringement claim, we may be required to spend a significant amount of money to develop a non-infringing alternative or
to obtain licenses. We may not be successful in developing alternatives or in obtaining licenses on reasonable terms, if at all.
Any litigation, even
without merit, could result in
substantial costs and could adversely affect our business and operating results.
Our strategy has been to evaluate
trade names and trademarks, and to consider seeking patents, where we believe that such trade names, trademarks or patents would
be available and adequate to protect our rights to products or processes that we consider material to our business. To the extent
we do seek to obtain trade names, trademarks or patents, we may be required to institute litigation in order to enforce them or
other intellectual property rights to protect our business interests. Such litigation could result in substantial costs and could
adversely affect sales, financial results and growth.
We
are dependent on customers operating in highly competitive markets and the inability of our customers to succeed in their markets
can adversely impact our business, operating results and financial condition.
The end markets we serve can
experience major swings in demand which, in turn, can significantly impact our operations. Our financial performance depends on
our customers’ ability to compete and succeed in their markets, which have been, and could continue to be, affected directly
by prevailing global economic conditions. The majority of our customers’ products are characterized by rapid changes in technologies,
increased standardization of technologies and shortening of product lifecycles. In many instances, our customers have experienced
severe revenue erosion, pricing and margin pressures, and excess inventories during recent years.
We
could suffer losses from corrupt or fraudulent business practices.
Corruption and other fraudulent
practices remain a concern in China. We could suffer losses from fraudulent practices if we are not successful in implementing
and maintaining preventative measures.
Because
our operations are international, we are subject to significant worldwide political, economic, legal and other uncertainties.
We are incorporated in the BVI
and have subsidiaries incorporated in the BVI, Macao, Hong Kong, Samoa and China. Our administrative and accounting office is located
in Macao. We manufacture all of our products in China. As of March 31, 2019, approximately 54.0% of the net book value of our total
identifiable assets was located in China. We sell our products to customers principally in China, the United States, Hong Kong,
Europe (the United Kingdom, Norway and Holland) and Canada. Our international operations may be subject to significant political
and economic risks and legal uncertainties, including:
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changes in economic and political conditions and in governmental policies,
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changes in international and domestic customs regulations,
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wars, civil unrest, acts of terrorism and other conflicts,
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changes in tariffs, trade restrictions, trade agreements and taxation,
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difficulties in managing or overseeing foreign operations, and
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limitations on the repatriation of funds because of foreign exchange controls.
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The occurrence or consequences
of any of these factors may restrict our ability to operate in the affected region and negatively impact our operations in that
region, or as a whole.
We
depend on our executive officers, senior managers and skilled personnel.
Our success depends largely upon
the continued services of our executive officers as well as upon our ability to attract and retain qualified technical, manufacturing
and marketing personnel. Generally, our executive officers and senior managers are not bound by employment or non-competition agreements
and we cannot assure you that we will be able retain them. The loss of service of any of our officers or key management personnel
could have a material adverse effect on our business and operating results. We do not have key person insurance on our executive
officers. We believe that our future success will depend, in part, on our ability to attract and retain highly skilled executive,
technical and management personnel and if we are not able to do so, our business and operating results could be harmed.
Compliance
with current and future environmental regulations may be costly and could impact our future operating results adversely.
The laws and regulations related
to environmental protection have been tightening in recent years in China and
in our end markets, requiring
production facilities that may cause pollution or produce other toxic materials to take steps to protect the environment and establish
an environmental protection and management system. When an entity fails to adopt preventative measures or control facilities that
meet the requirements of environmental protection standards, it is subject to suspension of production or operations and for payment
of fines. Compliance with relevant laws and regulations can be costly and disrupt operations.
Our operations create some environmentally
sensitive waste that may increase in the future depending on the nature of our manufacturing operations. The general issue of the
disposal of hazardous waste has received increasing attention from Chinese national and local governments and foreign governments
and agencies and has been subject to increasing regulation. Currently, relevant Chinese environmental protection laws and regulations
impose fines on discharge of waste materials and empower certain environmental authorities to close any facility which causes serious
environmental problems. Although it has not been alleged that we have violated any current environmental regulations by China government
officials, the Chinese government could amend its current environmental protection laws and regulations. Our business and operating
results could be materially and adversely affected if we were to increase expenditures to comply with environmental regulations
affecting our operations.
In addition, we could face significant
costs and liabilities in connection with product take-back legislation, which enables customers to return a product at the end
of its useful life and charge us with financial and other responsibility for environmentally safe collection, recycling, treatment
and disposal. We also face increasing complexity in our product design and procurement operations as we adjust to requirements
relating to the materials composition of electronic products. If our products are not compatible with such requirements, we could
experience the loss of revenue, damages to our reputation, diversion of resources, monetary penalties, and legal action. Other
environmental regulations may require us to reengineer our products to utilize components that are more environmentally compatible.
Such reengineering and component substitution may result in additional costs to us. Although we currently do not anticipate any
material adverse effects based on the nature of our operations and the effect of such laws, there is no assurance that such existing
laws or future laws will not have a material adverse effect on us.
Power
shortages in China could affect our business.
We consume substantial amounts
of electricity in our manufacturing processes at our production facilities in China. In the past, we have experienced a number
of power shortages at our production facilities in China, though we are sometimes given advance notice of such power shortages.
In relation to these power shortages we have a backup power system. However, there can be no assurance that in the future our backup
power system will be completely effective in the event of a power shortage, particularly if that power shortage is over a sustained
period of time and/or we are not given advance notice of it. Any power shortage, brownout or blackout for a significant period
of time may disrupt our manufacturing, and as a result, may have an adverse impact on our business.
In
the future, we may be required to write down long-lived assets and these impairment charges would adversely affect our future operating
results.
As of March 31, 2019, our balance
sheet included approximately $30.2 million in long-lived assets. Under applicable accounting rules, we review long-lived assets,
such as property, plant, and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Valuation of our long-lived assets requires us to make various assumptions and these assumptions
are used to forecast future, undiscounted cash flows. If actual market conditions differ or our forecasts change, we may be required
to reassess long-lived assets and could record an impairment charge. If we are required to take substantial impairment charges
in future periods, our earnings would be decreased or our losses would be increased in the period or periods in which the charges
occur.
A material
failure of internal control over financial reporting could materially impact the Company’s financial results.
In designing and evaluating its
internal control over financial reporting, management recognizes that any internal control or procedure, no matter how well designed
and operated, can provide only reasonable assurance of achieving desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management believes that the Company’s
internal control over financial reporting currently provides reasonable assurance of achieving their control objectives. However,
no system of internal controls can be designed to provide absolute assurance of effectiveness. See
Item
15 “Controls and Procedures” later in this Report. A material failure of internal control over financial reporting
could materially impact the Company’s reported financial results and the market price of its stock could significantly decline.
Additionally,
adverse publicity related to
a material failure of internal control over financial reporting could have a negative effect on the Company’s reputation
and business.
Our
auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection
by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public
accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that
are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States),
or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the
laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently
unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public
accounting firms operating in China, is currently not inspected by PCAOB.
Inspections of other firms that
PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality.
The inability of PCAOB to conduct
inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness
of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of
PCAOB inspections.
Potential
new accounting pronouncements or changes in interpretation by NASDAQ may adversely impact our future financial position and results
of operations in the future.
We prepare our financial statements
in conformity with the generally accepted accounting principles of the United States of America “U.S. GAAP.” A change
in these accounting principles and policies, especially as interpreted by the Securities and Exchange Commission and The NASDAQ
Stock Market, may have an impact on our future financial position and results of operations. Historically, regulatory changes,
such as the requirement of the Financial Accounting Standards Board to expense stock options grants, and other legislative initiatives
have increased our general and administrative costs and future changes could have a similar adverse impact on our financial results.
The
concentration of share ownership in our senior management allows them to control the outcome of matters requiring shareholder approval.
As of June 30, 2019, the Chairman
of the Board of Directors of the Company, Richard Pui Hon Lau, beneficially owned approximately 51.7% of our outstanding common
shares, allowing Mr. Lau to control the outcome of all matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. This ability may have the effect of delaying or preventing a change
in control of Deswell, or causing a change in control of Deswell that may not be favored by our other shareholders. As of June
30, 2019, members of our senior management and Board of Directors as a group, including Mr. Lau, beneficially owned approximately
61.6% of our outstanding common shares. There are no agreements, understandings, or commitments among the members of our senior
management and Board of Directors to vote their shares in any specific manner, or to vote collectively for or against any matter
that may come before the shareholders.
Our
board’s ability to amend our charter without shareholder approval could have anti-takeover effects that could prevent a change
in control.
As permitted by the law of the
BVI, many provisions of our Memorandum and Articles of Association, which are the terms used in the BVI for a corporation’s
charter and bylaws, may be amended by our board of directors without shareholder approval provided that a majority of our independent
directors do not vote against the amendment. This includes amendments to increase or reduce our authorized capital stock. Our board’s
ability to amend certain provisions of our charter documents without shareholder approval, including its ability to create and
issue further common shares, could have the effect of delaying, deterring or preventing a change in control of Deswell, including
a tender offer to purchase our common shares at a premium over the then current market price.
Our
exemptions from certain of the reporting requirements under the Exchange Act limits the protections and information afforded to
investors.
We are a foreign private issuer
within the meaning of rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As a foreign private issuer, we are exempt or excluded from certain
provisions applicable to United
States public companies including:
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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;
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the sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations in respect to a security registered under the Exchange Act;
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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 less than
six months); and
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Regulation FD, the SEC’s rules regulating disclosure of information
by publicly traded companies and other issuers and requiring that when an issuer discloses material nonpublic information to certain
individuals or entities such as stock analysts, or holders of the issuer’s securities who may trade on the basis of the information,
the issuer must make public disclosure of that information.
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In addition, because we are a
“controlled company” under the NASDAQ Marketplace Rules, certain of the corporate governance standards of The NASDAQ
Stock Market that are applied to domestic companies having securities included on The NASDAQ Stock Market are not applicable to
us. For example, as a controlled company we are exempt from certain corporate governance provisions of sections 5600
et seq
.
of NASDAQ’s Marketplace Rules. We rely on exemptions from the following NASDAQ Marketplace Rules:
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Rule 5605(b)(1)
: Our board is not comprised of a majority of independent
directors.
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Rule 5605(d)
: Our board does not have a compensation committee and
compensation of our Chief Executive Officer and other executive officers is neither determined nor recommended to the board by
a majority of our independent directors. For information regarding why we do not have an independent compensation committee, see
the discussion under “Other Committees; NASDAQ Compliance” in
Item
6
“Directors and Senior Management” of this Report.
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Rule 5605(e)
: Nominees for appointment as our directors are not selected
or recommended by either a majority of our independent directors, or a nominating committee composed solely of independent directors,
and we do not have a formal written charter addressing the nominations process.
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Because of these exemptions or
exclusions, investors are not afforded the same protections or information generally available to investors in public companies
organized in the United States and having securities included on The NASDAQ Stock Market.
Legislation
enacted in the BVI as to Economic Substance may affect our operations
Pursuant to the Economic Substance
(Companies and Limited Partnerships) Act, 2018 of the BVI (the “BVI ES Act”) that came into force on 1 January 2019,
a “legal entity” carrying on a “relevant activity” is required to establish economic substance in the BVI
unless it is tax resident in another jurisdiction (which is not on Annex 1 to the European Union’s list of non-cooperative
jurisdictions for tax purposes). We are consulting with advisers on the extent to which we are required to comply with the BVI
ES Act with respect to our operations.
Further guidance is expected
from the BVI government to clarify certain definitions and requirements in the BVI ES Act and our advisers are monitoring these
developments. In the event that we are required to have economic substance in the BVI according to the BVI ES Act but fail to satisfy
such requirements, we may be liable to financial and other penalties in accordance with the BVI ES Act. If we are required to establish
economic substance in the BVI or if we choose to reorganize ourselves so as to not be subject to the BVI ES Act, or if we fail
to establish the required substance, this could result in additional costs that might adversely affect our financial condition
or results.
Item
4. INFORMATION ON THE COMPANY
Corporate Information
Deswell Industries, Inc. was
founded in 1987 in Hong Kong and moved its manufacturing operations to China in
1990 to take advantage of lower
overhead cost, competitive labor rate and tax concessions available in Shenzhen, China as compared with Hong Kong.
We were reincorporated in December
1993 as a limited liability International Business Company under the British Virgin Islands International Business Companies Act,
1984 (the “IBC Act”). Effective on January 1, 2007, the BVI repealed the IBC Act, and simultaneously with such repeal,
we were automatically re-registered under the BVI’s corporate law replacing the IBC Act, the BVI Business Companies Act,
2004 (the “BVI BC Act”).
The Company’s registered
agent in the BVI is Harneys Corporate Services Limited, P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands.
The Company’s principal administrative office is located in 10B Edificio Associacao Industrial De Macau, 32 Rua do Comandante
Mata e Oliveira, Macao, and its telephone number is (853) 2832-2096 and its facsimile number is (853) 2832-3265. Our principal
manufacturing facilities and operations are currently based in Dongguan, Guangdong, China.
Important Events in Deswell’s
Development
During the year ended March
31, 2015, the Company gradually outsourced manufacturing of the metal components used in assembly of the Company’s audio
products. As of March 31, 2015, all of the metallic components used in assembly of the Company’s audio products were provided
by third party suppliers. The operating results of the metallic parts business unit are reported as discontinued operations for
all periods presented. We have historically reported the results of the metallic parts business as a separate segment. The continuing
cash flows subsequent to the unit’s closure were not significant.
Organizational Structure
The following diagram illustrates
the organizational structure of the Company and its active subsidiaries at March 31, 2019.
Capital Expenditures
Principal capital expenditures
and divestitures made by Deswell during the three year periods ended March 31, 2017, 2018 and 2019 included the following (dollar
amounts in thousands):
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Year ended March 31,
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2017
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2018
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2019
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Purchase of property, plant and equipment
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$
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2,152
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$
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1,707
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$
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878
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Proceeds from the sale of property, plant and equipment, net of transaction costs.
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$
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993
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$
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6
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$
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25
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Our major capital expenditures
in fiscal 2019 included:
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$97,000 for leasehold improvements;
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$228,000 for plant and machinery for plastic and electronic products;
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$446,000 for motor vehicles; and
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$107,000 for furniture, fixtures and equipment.
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Our major capital expenditures
in fiscal 2018 included:
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$815,000 for leasehold improvements;
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$666,000 for plant and machinery for plastic and electronic products;
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$144,000 for motor vehicles; and
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$82,000 for furniture, fixtures and equipment.
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Our major capital expenditures
in fiscal 2017 included:
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$1,309,000 for plant and machinery for plastic and electronic products;
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$718,000 for leasehold improvements;
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$45,000 for motor vehicles; and
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$80,000 for furniture, fixtures and equipment.
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All of the foregoing capital
expenditures were financed principally from internally generated funds and our current plan is to continue to use internally generated
funds principally to finance future capital expenditures.
The Company has constructed its
own manufacturing plant and dormitory buildings in Houjie, Dongguan China with an aggregate of approximately 1.3 million square
feet of land. Management believes that the current plant facility has sufficiently met the Company’s existing requirements.
Thus, the Company has postponed additional construction, consisting of previously planned additions of two dormitory units and
two other buildings. We may choose to inaugurate this last phase of construction if additional production capacity is required
in the future.
Availability of Additional
Information.
The SEC maintains an Internet
site that contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC. Such information is available at http://www.sec.gov. The Company’s website is http://www.deswell.com.
Business Overview
We are an independent manufacturer
of injection-molded plastic parts and components, electronic products and subassemblies and metallic molds and accessory parts
for original equipment manufacturers, or “OEMs” and contract manufacturers. We conduct all of our manufacturing activities
at separate plastics, electronics and metallic operation factories located in the People’s Republic of China.
We produce a wide variety of
plastic parts and components that are used in the manufacture of consumer and industrial products, using different plastic injection
technologies, such as film injection, integrated injection and insert injection. The products include:
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plastic components of electronic entertainment products;
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plastic components for power tools, accessories and outdoor equipment;
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cases for flashlights, telephones, paging machines, projectors and alarm
clocks;
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toner cartridges and cases for photocopy and printer machines;
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parts for electrical products such as air-conditioning and ventilators;
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parts for audio equipment;
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cases and key tops for personal organizers and remote controls;
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double injection caps and baby products ;
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parts for medical products such as apparatus for blood tests;
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Electronic products manufactured
by the Company include:
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sophisticated professional audio equipment including digital and analogue
mixing consoles, amplifiers, signal processors, audio interfaces, network audio equipment and speaker enclosures;
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high performance consumer audio products, such as multi-channel receivers-amplifiers,
wired and wireless audio streaming products;
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complex printed circuit board assemblies using surface mount technology
(“SMT”), automatic insertion (“AI”) and pin-through-hole (“PTH”) interconnection technologies;
and
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telecommunication products, such as VoIP keysets for business communications.
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Historically, metal products
manufactured by the Company included metallic molds and necessary parts used in audio equipment, telephones, copying machines,
pay telephones, multimedia stations, automatic teller machines, vending machines, and more. As manufacturing of metallic components
is a production process that may emit pollutants, during the year ended March, 31, 2015 the Company gradually outsourced manufacturing
of the metal components used in assembly of the Company’s audio products. Since March, 2015, all the metallic components
used in assembly of the Company’s audio products were provided by third party suppliers.
As part of its manufacturing
operations, the Company consults with its customers in the design of plastic parts and the design and production of the molds used
to manufacture plastic parts, which are made by Deswell at its customers’ expense, and provides advice and assistance in
the design and manufacturing of printed circuit boards. The Company believes that its ability to manufacture or assemble high-end
plastic and metallic accessory parts of the quality required by OEMs and contract manufacturers which furnish products and services
internationally, Deswell’s expertise in designing and manufacturing molds for its customers and the Company’s low production
costs distinguish Deswell from most other manufacturers of plastic products and provide it with a competitive advantage. However,
this advantage has been difficult to maintain as a result of increased competition and increased production overheads during the
last three fiscal years.
Industry Overview
Management believes that the
injection molding and parts manufacturing industries have each benefited in recent years from a trend among major users of injection
molded and metal products to outsource an increasing portion of the parts requirements and to select a small number of suppliers
or a sole supplier to provide those products. The Company is not aware of any empirical data defining the manufacturing industry
in China, however, management believes that injection molding firms which are much smaller than the Company make up the largest
segment of the industry in China. The Company’s experience indicates that such smaller firms are often unable to react quickly
and responsively to the diverse demands of many customers and are not capable of furnishing the level of quality that high-end
plastic and metal products require. Management believes that this inability on the part of these smaller manufacturers has created
opportunities for the Company to increase sales by catering to the outsourcing requirements of OEMs and contract manufacturers
that manufacture such high-end products.
Similarly, as a result of the
recognition by OEMs in the electronics industry of the rising costs of operating a manufacturing site and the need to add more
sophisticated and expensive manufacturing processes and equipment,
OEMs have turned increasingly to
outside contract manufacturers. By doing so, OEMs are able to focus on research, product conception, design and development, marketing
and distribution, and to rely on the production expertise of contract manufacturers. Other benefits to OEMs of using contract manufacturing
include: access to manufacturers in regions with low labor and overhead costs, reduced time to market, reduced capital investment,
improved inventory management, improved purchasing power and improved product quality. In addition, the use of contract manufacturers
has helped OEMs manage production in view of increasingly shorter product life cycles.
Operations
Plastic Injection Molding
Plastic injection molding manufacturing
accounted for 52.2%, 46.5% and 43.2% of the Company’s total sales during the years ended March 31, 2017, 2018, and 2019,
respectively. At March 31, 2019, the Company conducted its plastic manufacturing operations in approximately 1,070,000 square feet
of factory space in its factory located in Dongguan, China.
The Company’s plastic injection
molding process consists of three phases: (1) mold design and production; (2) plastic injection; and (3) finishing.
Mold design and production
The plastic injection-molding
process begins when a customer provides the Company with specifications for a product or part, which specifications are often created
in consultation with the Company’s technical staff. Next the Company designs and produces the mold, using great care in the
design process and in the selection of materials to produce the mold in an effort to create a high quality appearance of the completed
product by reducing or eliminating potential flaws such as the sinkage of materials and irregularities in the knit line of joints.
The mold-making process ranges from 40 to 50 days, depending on the size and complexity of the mold. Mold making requires specialized
machines and is capital intensive. At March 31, 2019, the Company used 30 EDMs (electrical discharge machines), 32 CNC (computer
numerical control) milling machines and 83 NC (numerical control) milling machines in the mold-making process.
The customer generally bears
the cost of producing the molds and, as is customary in the industry, the customer owns them. However, the Company maintains and
stores the molds at its factory for use in production and it is Deswell’s policy generally not to make molds for customers
unless the customer undertakes to store its molds at the Company’s factory and uses Deswell to manufacture the related parts.
In that way, the Company seeks to use its mold-making expertise to create dependence on it for the customer’s parts requirements.
Through its Export Tooling Department, Deswell produces molds for export to customers and thus does not use those molds to manufacture
related parts.
During the year ended March 31,
2019, the Company made an average of approximately 25 to 30 molds each month. The average weight of the molds produced by the Company
is about 2,300 pounds costing an average of $12,000 per set. Management believes that the Company’s skills and expertise
in mold-making, coupled with having its facilities and operations in China, allow the Company to produce molds at costs substantially
less than molds of comparable quality made in Japan, Korea and Taiwan.
Plastic Injection
During the mold-making process,
suitable plastic resin for the particular product is selected and purchased. See “Raw Materials, Component Parts and Suppliers,”
below. The completed mold is mounted onto injection machines, which are classified according to the clamping force (the pressure
per square inch required to hold a mold in place during the injection molding process). At March 31, 2019, the Company had approximately
198 injection molding machines, ranging from 30 to 1,600 tons of clamping force, with most machines in the range of from 86 to
380 tons. Each of the Company’s machines is capable of servicing a variety of applications and product configurations and
the Company has machines which permit the Company to fabricate plastic parts as small as a button and as large as a 3 ft. x 2 ft.
case for a copy machine.
Using separate shifts, injection
molding can be conducted 24 hours a day, five to seven days per week, other than during normal down time for maintenance and changing
of product molds. Molding of products requiring extra concerns for appearance, such as cases for calculators, personal organizers
and telephones are conducted in an isolated and dust free section of the factory. In a continuous effort to assure quality, the
Company’s quality control personnel inspect the products produced from each machine generally at hourly intervals during
production. When defects are discovered, the Company’s maintenance personnel inspect the mold and the machine to determine
which is responsible. If the mold is the cause of the defect, it will be immediately removed from the machine and serviced or
repaired by one of a team of technicians
employed to maintain molds. The mold will then be remounted on the machine and production will continue. If the machine is the
source of the defect, the Company’s technicians and engineers service the machine immediately. Through this continuous vigilance
to molds and machines, the Company has experienced what it believes to be a relatively low scrap rate and has been able to maintain
a high level of productivity of its injection molding machines.
During the year ended March 31,
2017, the Company disposed of 12 old plastic injection molding machines and added 10 new ones.
During the year ended March 31,
2018, the Company disposed of 3 old plastic injection molding machines and added 1 new one.
During the year ended March 31,
2019, the Company neither disposed of any plastic injection molding machines nor purchased new machines.
Finishing
After injection molding, products
are finished. Finishing consists of smoothing and polishing, imprinting letters, numbers and signs through silk screening process,
pad printing or epoxy ultra violet cutting, and treating the product with an anti-fog coating for a lasting and attractive appearance.
Most of these functions are conducted by hand.
Electronic Products and
Assemblies
In an aggregate of approximately
223,000 square feet of factory space at March 31, 2019 located at facilities in Dongguan, China, the Company manufactures and assembles
electronic products and electronic assemblies for OEMs. Finished products include consumer and sophisticated studio-quality audio
equipment, IPBX and commercial telephone units, network education platforms, IP switches and routers. Assemblies consist of printed
circuit boards (“PCBs”) with passive (e.g., resistors, capacitors, transformers, switches and wire) and active (e.g.,
semiconductors and memory chips) components mounted on them. During the years ended March 31, 2017, 2018, and 2019, manufacturing
of electronic products accounted for approximately 47.8%, 53.5% and 56.8%, respectively, of the Company’s total sales.
In assembling printed circuit
boards the Company purchases printed circuit boards, surface mounted components and chips and uses automatic insertion and pin-through-hole
interconnection technologies to assemble various components onto the PCBs. Before delivery, completed PCBs are checked by in-circuit
testers and outgoing quality assurance inspections are performed.
PTH is a method of assembling
printed circuit boards in which component leads are inserted and soldered into plated holes in the board. While this technology
is several decades old and is labor intensive, it still has a significant market, particularly for consumer product applications.
BGA is a method of mounting an
integrated circuit or other component to a PCB. Rather than using pins that consume a large area of the PCB, the component is attached
to the circuit board with small balls of solder at each contact. This method allows for greater component density and is used in
more complex PCBs.
SMT is the automatic process
of printed circuit board assembly in which components are mounted directly to the surface of the board, rather than being inserted
into holes. With this process, solder is accurately stenciled in paste form on pads located on the printed circuit board and the
components are then placed onto the solder paste and fused to the melting point of the paste to establish a strong solder joint
between components and the printed circuit board. The SMT process allows miniaturization of PCBs, cost savings and shorter lead
paths between components (which results in faster signal speed and improved reliability). Additionally, it allows components to
be placed on both sides of the printed circuit board, a major factor for the purpose of miniaturization.
Manufacturing operations include
PCB assembly, wiring and testing. The process is completed by assembling the PCBs into a plastic or metal housing that comprises
the finished product. Quality assurance is then conducted in accordance with the customers’ requirements before the shipment.
Metal Parts Manufacturing
During the fourth quarter of
2015, the Company closed down its metallic parts business unit and sold all of its assets. The operating results of the metallic
parts business unit are reported as discontinued operations for all periods presented. We have historically reported the results
of the metallic parts business as a separate segment. The continuing cash flows subsequent to the unit’s closure were not
significant.
Quality Control
The Company maintains strict
quality control procedures for its products. At hourly intervals, the Company’s quality control personnel monitor machines
and molds to assure that plastic parts are free from defects.
For electronic operations, the
Company’s quality control personnel check all incoming components. Moreover, during the production stage, the Company’s
quality control personnel check all work in process at several points in the production process. Finally, after the final assembly
and before shipment, the Company conducts quality assurance inspections in accordance with the customers’ Acceptable Quality
Level, or AQL, requirements.
In 1995, the Company earned ISO
9001 certifications for both its plastic and electronic products manufacturing operations. The “ISO” or International
Organization for Standardization is a Geneva-based organization dedicated to the development of worldwide standards for quality
management guidelines and quality assurance. ISO 9000, which is the first quality system standard to gain worldwide recognition,
requires a company to gather, analyze, document and monitor and to make improvements where needed. ISO 9001 is the ISO level appropriate
for manufacturers like the Company. The Company’s receipt of ISO 9001 certification demonstrates that the Company’s
manufacturing operations meet the established world standards.
In August 2004, the Company’s
plastic injection manufacturing plant in Dongguan also obtained ISO 14001 certification, which evidences that the Company’s
environmental management standards meet established international standards. ISO 14000 is a series of international standards on
environmental management. ISO 14001 is the most well-known of these standards and is often seen as the cornerstone standard of
the ISO 14000 series. In January 2006, the Company’s electronic manufacturing plant also obtained ISO 14001 certification.
In July 2006, Deswell obtained
ISO/TS 16949 Certification for its plastic injection manufacturing plant. ISO/TS 16949 is an ISO Technical Specification aligning
existing American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive quality systems standards within the
global automotive industry. Together with ISO 9001:2008, ISO/TS 16949 specifies the quality system requirements for the design/development,
production, installation and servicing of automotive related products. ISO/TS 16949 has been accepted as an equivalent to QS-9000,
VDA6.1, AVSQ, and EAQF. ISO/TS 16949 does not replace QS-9000; but is optional and eliminates the need for multiple certifications.
Raw Materials, Component
Parts and Suppliers
Plastic Resins
The primary raw materials used
by the Company in the manufacture of its plastic parts are various plastic resins, primarily ABS (acrylonitrile-butadiene-styrene).
The chart below shows Deswell’s average cost of ABS as a percentage of the total cost of plastic products sold and as a
percentage of total cost of goods sold during its last three fiscal years.
Because plastic resins are commodity
products, the Company has no long-term supply agreements for plastic resins. The Company selects its suppliers based on price,
lead time, the brand name or those that are appointed by its customers. Most of its plastic resins are obtained from suppliers
in Mainland China and Hong Kong. Deswell normally maintains a two to three month inventory supply.
The Company used in excess of
11,046,000 pounds of plastic resins during the year ended March 31, 2019. Management believes that the Company’s large volume
purchases of plastic resin have generally resulted in lower unit raw material costs and generally have enabled the Company to obtain
adequate shipments of raw materials. While the Company is not generally bound by fixed price contracts with its customers, the
Company has found that increases in resin prices can be difficult to pass on to its customers and, as a consequence, a significant
increase in resin prices could have, and in the past has had, a material adverse effect on the Company’s operations.
The primary plastic resins used
by the Company are produced from petrochemical intermediates derived from products of the natural gas and crude oil refining processes.
Natural gas and crude oil markets have in the past experienced substantially cyclical price fluctuations as well as other market
disturbances including shortages of supply and crises in the oil producing regions of the world. The capacity, supply and demand
for plastic resins and the petrochemical intermediates from which they are produced are also subject to cyclical and other market
factors. Consequently, plastic resin prices may fluctuate as a result of natural gas and crude oil prices and the capacity, supply
and demand for resin and petrochemical intermediates from which they are produced. Over the past several years, oil prices have
experienced significant volatility and remain extremely uncertain. Sustained increases in oil prices could result in higher costs
for plastic resins.
Although the plastics industry
has from time to time experienced shortages of plastic resins, the Company has not experienced to date any such shortages. Management
believes that there are adequate sources available to meet the Company’s raw material needs.
Component Parts and Supplies for Electrical Products
Manufacturing
The Company purchases a wide
variety of component parts from numerous suppliers and is not dependent upon any single supplier for any essential component. The
Company purchases from suppliers in China, Hong Kong, Taiwan, Singapore, the United Kingdom and the United States. At various times
there have been shortages of parts in the electronics industry, and certain components, including integrated circuits, diodes,
transistors and other semiconductors, have been subject to allocations by their suppliers, particularly if they are complex and/or
customized for a particular use. Although shortages of parts and allocations have not had a material adverse effect on the Company’s
results of operations, there can be no assurance that any future shortages or allocations would not have such an effect.
For a discussion of various risks
we face associated with obtaining needed components used in our manufacture of electronic products, please see “Shortages
of components and materials used in our production of electronics products may delay or reduce our sales and increase our costs”
and “We face inventory risks of obsolescence and impairment charges by providing turnkey manufacturing of electronic products”
beginning on page 13 of the Risk Factor section of this Report.
Transportation
Transportation of components
and finished products to customers in Shenzhen and to and from Hong Kong and Shenzhen and Dongguan is by truck. Generally, the
Company sells its products F.O.B. China or F.O.B. Hong Kong. To date, the Company has not been materially affected by any transportation
problems.
Customers and Marketing
The Company’s customers
are OEMs and contract manufacturers. The Company sells its products principally in China, the United States, Hong Kong and Europe
(the United Kingdom, Norway and Holland) and Canada. Net sales to customers by geographic area are determined by reference to
shipping destinations as directed by the Company’s customers. For example, if the products are delivered to the customer
in Hong Kong, the sales are recorded as generated in Hong Kong; if the customer directs the Company to ship its products to Europe,
the sales are recorded as sold to Europe. See Note 16 of Notes to Consolidated Financial Statements for the dollar amounts of
export sales by geographic area for each of the years ended March 31, 2017, 2018 and 2019. Net sales as a percentage of total
sales to customers by geographic area consisted of the following for the years ended March 31, 2017, 2018 and 2019:
|
|
Year ended March 31,
|
Geographical Area
|
|
2017
|
|
2018
|
|
2019
|
China
|
|
|
46.4
|
%
|
|
|
49.6
|
%
|
|
|
46.2
|
%
|
United States
|
|
|
20.0
|
|
|
|
17.5
|
|
|
|
19.3
|
|
Europe
|
|
|
10.7
|
|
|
|
13.7
|
|
|
|
12.3
|
|
Hong Kong
|
|
|
13.0
|
|
|
|
7.6
|
|
|
|
7.1
|
|
United Kingdom
|
|
|
3.4
|
|
|
|
4.7
|
|
|
|
5.4
|
|
Others
|
|
|
6.5
|
|
|
|
6.9
|
|
|
|
9.7
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
We believe that our reported
sales by geographic area do not necessarily reflect the final destinations of our products or the actual nationalities of our customers.
For example, we have reported product sales in China amounting to 46.2% of our total net sales for the year ended March 31, 2019
because China is where our customers directed us to deliver the products. However, we believe that these sales were to offshore
customers using local China shipping destinations, which in turn, transshipped our products offshore.
The Company markets its products
and services to existing customers through direct contact with the Company’s management and direct sales personnel. The Company’s
sales personnel attend trade shows, exhibitions and conventions. Collecting information from trade shows, as well as websites,
Deswell’s marketing staff contacts existing and potential customers directly by telephone, mail, fax, e-mail via the Internet
and in person, stressing Deswell’s capability as a complete solution provider for plastic injection mold design, tooling
and molding as well as an electronics manufacturing services, or EMS, provider of advanced technology manufacturing processes and
flexible logistic services.
The Company’s sales transactions
with all of its customers are based on purchase orders received by the Company from time to time. Except for these purchase orders,
the Company has no written agreements with its customers. Sales of plastic parts, electronic products and metallic products are
primarily made on credit terms, with payment in United States dollars or Hong Kong dollars expected within 30 to 90 days of shipment.
In certain cases, primarily new customers of electronic products, sales are supported by letters of credit and are payable in United
States dollars. To date, the Company has not experienced any significant difficulty in collecting accounts receivable on credit
sales. Management communicates regularly with credit sale customers and closely monitors the status of payment and in this way
believes it has kept the default rate low. Additionally, plastic parts deliveries are made in several installments over a lengthy
period of time, which permits the Company to withhold delivery in the event of any delinquency in payment for past shipments. While
the Company has not experienced any material difficulty in being paid by its customers, there can be no assurance that the Company’s
favorable collection experience will continue.
Customers
The Company’s success depends
to a significant extent on the success achieved by its customers in developing and marketing their products, some of which may
be new. Many of the industry segments served by the Company’s customers are subject to technological change, which can result
in short product life cycles. The Company could be materially adversely affected if advances in technology or other factors reduce
the marketability of essential products of its customers or if new products being developed by its customers do not attain desired
levels of acceptance.
Historically, the Company has
depended, currently depends, and expects to continue to depend, on a small number of customers for a significant percentage of
its net sales. The following table sets forth Deswell’s major customers which accounted for 10% or more of its net sales
during fiscal 2017, 2018 and 2019:
|
Year ended March 31,
|
|
2017
|
2018
|
2019
|
Customer A
|
12.8%
|
10.8%
|
*
|
Customer B
|
10.6%
|
*
|
11.5%
|
Customer C
|
10.2%
|
10.8%
|
*
|
Customer D
|
*
|
12.8%
|
12.5%
|
Customer E
|
*
|
11.9%
|
11.1%
|
__________
* Less
than 10% in the year indicated.
If the Company’s major
customers experience a decline in the demand for their products as a result of the prevailing economic environment or other factors,
the products or services that we provide to them could be reduced or even terminated. The loss of any of our major customers or
a substantial reduction in orders from any of them would adversely impact our sales and operating results unless and until we
were able to replace the customer or order with one or more of comparable size.
The Company’s sales are
based on purchase orders and there are no long-term contracts with any of Deswell’s customers. The percentage of sales to
the Company’s customers has fluctuated in the past and may fluctuate in future. Substantial decreases in sales to, or the
loss of major customers, have adversely impacted Deswell’s sales and financial performance.
Present or future customers could
cease to use Deswell as the source of the injection-molded plastic parts and components it manufactures for electronic manufacturing
services of electrical products and subassemblies or for metallic molds and accessories or significantly change, reduce or delay
the amount of products and services ordered. The Company’s sales may decline and its financial results will suffer if orders
from its largest customers, or orders from other substantial customers, cease or are significantly reduced, unless Deswell can
maintain strong relationships with longstanding customers or add sales from new customers.
Competition
We compete with a number of different
companies in production of injection-molded plastic parts and components, electrical products and subassemblies and metallic molds
and accessories. For example, we compete with major global EMS providers, other smaller EMS companies that have a regional or product-specific
focus, and original design manufacturers with respect to some of the services that we provide. We also compete with our current
and prospective customers, who can manufacture internally and who evaluate our capabilities in light of their own capabilities
and cost structures. Our market segments are extremely competitive, 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. We face particular competition
from Asian-based competitors, including Taiwanese EMS providers who compete in our end markets.
The Company believes that competition
for plastic injection molding, contract electronic manufacturing and parts manufacturing businesses are based on price, quality,
service and the ability to deliver products in a timely and reliable basis.
Patents, Licenses and Trademarks
The Company has no patents, trademarks,
licenses, franchises, concessions or royalty agreements that are material to its business.
Seasonality
For information concerning the
seasonality of the Company’s business, see “Seasonality” included under
Item
5 “Operating and Financial Review and Prospects.”
Property, Plants and Equipment
Macao
The Company leases Units 10B
and 10C Edificio Associacao Industrial De Macau, No. 32-36 Rua do Comandante Mata e Oliveira, Macao from an unaffiliated party,
each being for a term of two years to May 2020. The premises are used as trading, administrative and accounting offices for the
Company’s plastic injection business and electronic & metallic business, respectively. The monthly rent is approximately
$4,100.
Southern China
In January 2000, the Company
acquired under a land-lease agreement with the local government an aggregate of approximately 1.3 million square feet of land to
construct its own manufacturing plant and dormitory buildings in Houjie, Dongguan, China. Under the land-lease agreement, the Company
has the right to use the land for 50 years. On this land, Deswell has through March 31, 2019 constructed approximately
|
·
|
1,070,000 square feet of factory space,
|
|
·
|
91,000 square feet of amenity space,
|
|
·
|
133,000 square feet of office building space, and
|
|
·
|
470,000 square feet of dormitory space.
|
Deswell now uses this facility
for its plastic manufacturing operations.
Manufacturing facilities and
warehouses identified to be idle during the year were leased to third parties for rental income. Rental income of $839,000, $1,111,000,
and $1,445,000 was earned during the years ended March 31, 2017, 2018, and 2019, respectively.
In July 2003, the Company acquired
under a land-lease agreement with a third party an aggregate of approximately 244,000 square feet of land and approximately 420,000
square feet of buildings, including six blocks of dormitory buildings, a canteen, a factory building, a car park and a guard room,
at Chang An, Dongguan, China, which was previously named Kwan Hong Building. The land use period is for 50 years from February
1, 2003 to January 31, 2053. The Company uses the facilities for its electronic products manufacturing operations.
The Company believes that its
existing offices and manufacturing space, and manufacturing space in close proximity to its existing facilities, which management
believes will be available as needed for limited expansion, will be adequate for the operation of its business for at least the
next two years.
Material Effects of Government
Regulations
See discussion of increasing
minimum wage levels in Guangdong Province and corresponding increases in employer contributions for mandatory social welfare benefits
for Chinese employees on page 9 of this Report.
Item
4A. UNRESOLVED STAFF COMMENTS
Not applicable to Deswell.
Item
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Except
for statements of historical facts, this section contains forward-looking statements involving risks and uncertainties. You can
identify these statements by forward looking words including “expect,” “anticipate,” “believe,”
“seek,” and “estimate.” Forward looking statements are not guarantees of Deswell’s future performance
or results and the Company’s actual results could differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth under the section of this Report entitled
Item
3 “Key Information – Risk Factors.”
Operating Results
The following discussion should
also be read in conjunction with the consolidated financial statements and notes thereto included following
Item
18 of this Report. The Company prepares its financial statements in accordance with U.S. GAAP.
General
The Company’s revenues
are derived from the manufacture and sale of injection-molded plastic parts and components, electrical products and subassemblies
and metallic molds and accessories.
The manufacturing of the metallic
components is a production process which may emit pollutants. During the year ended March 31, 2015, the Company gradually outsourced
manufacturing of the metal components used in assembly of the Company’s audio products. As of March 31, 2015, all of the
metallic components used in assembly of the Company’s audio products were provided by third party suppliers. The operating
results of the metallic parts business unit are reported as discontinued operations for all periods presented. We have historically
reported the results of the metallic parts business as a separate segment. The continuing cash flows subsequent to the unit’s
closure were not significant.
The Company carries out all of
its manufacturing operations in Southern China, where it has been able to take advantage of the lower overhead costs and labor
rates as compared to Hong Kong. At the same time, the proximity of the Company’s factories in Southern China to Hong Kong
permits the Company to easily manage its manufacturing operations from Macao, and facilitates transportation of its products through
Hong Kong.
PRC Income Taxes
Since January 1, 2008, under
the PRC Income Tax Law, the standard income tax rate for all subsidiaries operating in the PRC has been 25%.
The Company is subject to the
applicable transfer pricing rules in PRC in connection to the transactions between its subsidiaries located inside and outside
PRC. In accordance to Guo Shui Fa [2009] No.2 “Implementation Regulations of Special Tax Adjustments (Provisional)”(“Guo
Shui Fa [2009] No.2”), which took effect at the beginning of calendar year 2008 and set out the regulations in relation
to transfer pricing, contemporaneous documentation, disclosure and compliance of intercompany transactions, the Company and external
consultants have prepared transfer pricing contemporaneous documentations (the “Contemporaneous Documentations”) of
its subsidiaries in PRC for every calendar year.
The amount of current tax liability
at March 31, 2019 includes the deemed profit tax estimated by the management based on the Contemporaneous Documentations.
Business Segment Information
Deswell’s operations
are generally organized in two segments: plastic injection molding, which we sometimes refer to as the “plastics segment,”
and electronic products assembling. The Company’s reportable segments are strategic business units that offer different
products and services. See Note 16 of Notes to Consolidated Financial Statements. The following table sets forth selected consolidated
financial information presented as a percentage of net sales by segment for each of the three years in the period ended March
31, 2019:
|
|
|
Year ended March 31, 2017
|
|
|
Year ended March 31, 2018
|
|
|
Year ended March 31, 2019
|
|
|
|
Plastic Injection Molding Segment
|
|
|
Electronic Segment
|
|
|
Total
|
|
|
Plastic Injection Molding Segment
|
|
|
Electronic Segment
|
|
|
Total
|
|
|
Plastic Injection Molding Segment
|
|
|
Electronic Segment
|
|
|
Total
|
Net sales
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.00
|
|
|
|
100.00
|
|
|
|
100.00
|
Cost of sales
|
|
|
78.6
|
|
|
|
88.4
|
|
|
|
83.3
|
|
|
|
80.6
|
|
|
|
86.9
|
|
|
|
84.0
|
|
|
|
81.2
|
|
|
|
87.1
|
|
|
|
84.6
|
Gross profit
|
|
|
21.4
|
|
|
|
11.6
|
|
|
|
16.7
|
|
|
|
19.4
|
|
|
|
13.1
|
|
|
|
16.0
|
|
|
|
18.8
|
|
|
|
12.9
|
|
|
|
15.4
|
Selling, general and administrative expenses
|
|
|
18.0
|
|
|
|
14.1
|
|
|
|
16.1
|
|
|
|
15.5
|
|
|
|
9.8
|
|
|
|
12.4
|
|
|
|
15.9
|
|
|
|
9.3
|
|
|
|
12.2
|
Corporate expense
|
|
|
-
|
|
|
|
-
|
|
|
|
3.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.0
|
Other income (expenses), net
|
|
|
(4.3
|
)
|
|
|
1.5
|
|
|
|
(1.6
|
)
|
|
|
3.2
|
|
|
|
-
|
|
|
|
1.5
|
|
|
|
(1.9
|
)
|
|
|
0.7
|
|
|
|
(0.4
|
)
|
Operating (loss) income
|
|
|
(0.9
|
)
|
|
|
(1.0
|
)
|
|
|
(4.8
|
)
|
|
|
7.1
|
|
|
|
3.3
|
|
|
|
3.0
|
|
|
|
1.0
|
|
|
|
4.3
|
|
|
|
0.8
|
Non-operating income, net
|
|
|
11.8
|
|
|
|
4.5
|
|
|
|
8.3
|
|
|
|
12.1
|
|
|
|
3.1
|
|
|
|
7.2
|
|
|
|
11.9
|
|
|
|
1.2
|
|
|
|
5.8
|
Income before income taxes
|
|
|
10.9
|
|
|
|
3.5
|
|
|
|
3.5
|
|
|
|
19.2
|
|
|
|
6.4
|
|
|
|
10.2
|
|
|
|
12.9
|
|
|
|
5.5
|
|
|
|
6.6
|
Income taxes (benefit)
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
0.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.4
|
|
|
|
0.2
|
Net income
|
|
|
10.2
|
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
19.5
|
|
|
|
6.1
|
|
|
|
10.2
|
|
|
|
12.9
|
|
|
|
5.1
|
|
|
|
6.4
|
The Company used to include corporate
expenses, which mainly included directors’ remuneration, legal and professional expenses and corporate insurance, in the
segment of plastic injection. Commencing from fiscal year ended March 31, 2018, the corporate expenses are separately disclosed
in the segment information for a more precise presentation of the financial performance of each segment.
Year ended March 31, 2019
(Fiscal 2019) Compared to Year Ended March 31, 2018 (Fiscal 2018)
Net Sales
- The Company's
net sales for the year ended March 31, 2019 were $66,581,000, an increase of $5,914,000 or 9.7% as compared to $60,667,000 in the
corresponding period in fiscal 2018. The increase was related to increases in sales revenues of $563,000 in our plastic segment
and $5,351,000 in our electronic segment, as compared with the respective net sales from these segments in the corresponding period
of the prior fiscal year.
The revenue increase in the plastic
segment was mainly due to an increase of $2,436,000 in orders from existing customers for printers and tooling products offsetting
a decrease of $1,936,000 in sales orders from existing customers mainly for telephone and office equipment.
The revenue increase in the electronic
segment was mainly due to increase of $3,563,000 in orders from existing customers for professional audio instruments, and of $1,654,000
in orders for home entertainment equipment from other existing customers.
Gross Profit
- Gross profit
for the year ended March 31, 2019 was $10,270,000, representing a gross profit margin of 15.4%. This compared with the overall
gross profit and gross profit margin of $9,714,000 or 16.0% for the year ended March 31, 2018.
Gross profit in the plastic
segment decreased by $56,000 to $5,407,000 or 18.8% of net sales for the year ended March 31, 2019, as compared to $5,463,000
or 19.4% of net sales, for the same period in the prior fiscal year. The
slight decrease in gross margin
for the plastic segment was mainly due to the decrease in unit selling prices of certain products.
Gross profit in the electronic
segment increased by $612,000 to $4,863,000 or 12.9% of net sales for the year ended March 31, 2019, as compared to $4,251,000
or 13.1% of net sales, for the prior fiscal year. The increase in gross profit was mainly attributed to the increase in sales revenues,
though gross margin was slightly decreased due to higher raw materials and labor costs, as a percentage of sales, when compared
with last fiscal year.
Selling, General and Administrative
Expenses
- SG&A expenses for the year ended March 31, 2019 increased by $653,000 to $9,459,000 or 14.2% of total net sales,
as compared to $8,806,000 or 14.5% of total net sales for the year ended March 31, 2018.
Corporate expenses increased
by $91,000 to $1,346,000 for the year ended March 31, 2019, as compared to $1,255,000 for the year ended March 31, 2018. The increase
was primarily related to the increase of the provision of long service compensation.
SG&A expenses in the plastic
segment increased by $213,000 to $4,584,000 or 15.9% of net sales for the year ended March 31, 2019, compared to $4,371,000 or
15.5% of net sales for fiscal 2018. The increase was primarily related to an increase of $225,000 in staff costs and welfare, offsetting
a decrease of $7,000 in local government taxes and registration fees, as compared with the same period in the prior fiscal year.
SG&A expenses in the electronic
segment increased by $349,000 to $3,529,000 or 9.3% of net sales for the year ended March 31, 2019, compared to $3,180,000 or 9.8%
of net sales for fiscal 2018. The increase was mainly due to increase of $245,000 in staff costs and welfare, and of $53,000 in
local government taxes when compared to prior fiscal year.
Other Income (Expenses), Net
- Other expense was $278,000 for the year ended March 31, 2019, as compared to other income of $894,000 in the prior fiscal year.
On a segment basis, other expense
attributable to the plastic segment for the year ended March 31, 2019 was $560,000, as compared to other income of $910,000 for
prior fiscal year. Other expense in fiscal 2019 was mainly due to $249,000 in exchange loss, and a provision of $403,000 for doubtful
receivables during fiscal 2019, as compared to$308,000 in exchange income, a reversal of provision of $633,000 for doubtful debts
and a loss of $61,000 on disposal of fixed assets in fiscal 2018.
Other income attributable to
the electronic segment for the year ended March 31, 2019 was $282,000, as compared with other expense of $16,000 for the prior
fiscal year. The increase in other income was mainly due to an increase of $532,000 in exchange income, offsetting a decrease of
$196,000 in other income during the year ended March 31, 2019, as compared to last fiscal year.
Operating Income
- Operating
income was $533,000 for the year ended March 31, 2019, as compared to operating income of $1,802,000 in the prior fiscal year.
Corporate expenses of $1,346,000
and $1,255,000 were incurred during the fiscal year of 2019 and 2018, respectively.
On a segment basis, the operating
income in the plastic segment was $263,000 in the year ended March 31, 2019, as compared to operating income of $2,002,000 in fiscal
2018. The decrease in operating income in the plastic segment was mainly due to a decrease in other income as well as an increase
in SG&A expense as a percentage of net sales.
The electronic segment reported
an operating income of $1,616,000 in the year ended March 31, 2019, compared to an operating income of $1,055,000 in fiscal 2018.
The increase in operating income was mainly due to the increases in gross profit and in other income as described above.
Non-Operating Income
–
Non-operating income for the year ended March 31, 2019 was $3,884,000, as compared to non-operating income of $4,395,000 in last
fiscal year. The decrease was primarily due to decreases of $121,000 in dividend income from securities investments, of $510,000
on change of the fair value of marketable securities, and of $277,000 in other income, offsetting increases of $137,000 from realized
gain on marketable securities and of $344,000 from rental income, as compared to fiscal 2018.
Income Taxes
–
Income tax for the year ended March 31, 2019 represented an income tax expense of $236,000 and a deferred tax benefit of $92,000,
as compared to an income tax expense of $173,000 and a deferred tax benefit of $166,000 in last fiscal year.
On a segment basis, there was
income tax expense of $81,000 and a deferred tax benefit of $92,000 in the plastic segment for the year ended March 31, 2019, as
compared to income tax expense of $80,000 and a deferred tax benefit of $166,000 during the last fiscal year. The income tax expense
of the electronic segment was $155,000 for the year ended March 31, 2019, as compared to $93,000 in fiscal 2018.
Net Income
– The
Company had net income of $4,273,000 for the year ended March 31, 2019, as compared to a net income of $6,190,000 for the year
ended March 31, 2018. The decrease in net income was mainly the result of an increase in SG&A expenses as a percentage of sales,
as well as decreases in other and non-operating income as described above.
Net income for the plastic segment
for the year ended March 31, 2019 was $3,697,000, as compared to net income of $5,490,000 for fiscal 2018. The decrease in net
income in the plastic segment was mainly due to an increase in SG&A expenses as a percentage of sales, as well as decreases
in other income as described above.
Net income for the electronic
segment for the year ended March 31, 2019 was $1,922,000, as compared to net income of $1,955,000 for fiscal 2018. The decrease
in net income in the electronic segment was mainly attributable to decrease in non-operating income, offsetting increases in gross
profit and other income as described above.
Year ended March 31, 2018
(Fiscal 2018) Compared to Year Ended March 31, 2017 (Fiscal 2017)
Net Sales
– The
Company’s net sales for the year ended March 31, 2018 were $60,667,000, an increase of $16,145,000, or 36.3%, as compared
to $44,522,000 in the corresponding period in fiscal 2017. The increase was related to increases in sales revenue of $4,971,000
in our plastic segment and $11,174,000 in our electronic segment, as compared with the respective net sales from these segments
in the corresponding period of the prior fiscal year.
The revenue increase in the plastic
segment was mainly due to an increase of $6,037,000 in orders from existing customers for telephone equipment and kitchen and gardening
tools, offsetting a decrease of $1,524,000 in sales orders from existing customers mainly for printers and motor vehicles.
The revenue increase in the electronic
segment was mainly due to an increase of $8,672,000 in orders from existing customers for professional audio instruments, and an
increase of $1,273,000 in orders for home entertainment equipment from other existing customers.
Gross Profit
– Gross
profit for the year ended March 31, 2018 was $9,714,000, representing a gross profit margin of 16.0%. This compared with the overall
gross profit and gross profit margin of $7,449,000 or 16.7% for the year ended March 31, 2017.
Gross profit in the plastic segment
increased by $484,000 to $5,463,000 or 19.4% of net sales for the year ended March 31, 2018, as compared to $4,979,000 or 21.4%
of net sales for the same period in the prior fiscal year. The decrease in gross margin for the plastic segment was mainly due
to the appreciation of Renminbi and an increase in raw materials cost as a percentage of net sales when compared with last fiscal
year.
Gross profit in the electronic
segment increased by $1,781,000 to $4,251,000 or 13.1% of net sales for the year ended March 31, 2018, as compared to $2,470,000
or 11.6% of net sales for the same period in the prior fiscal year. The increase in gross margin was mainly attributable to the
result of our control of labor costs and factory overhead, offsetting the appreciation of the Renminbi and an increase in raw materials
cost as a percentage of net sales when compared with last fiscal year.
Selling, General and Administrative
Expenses (Including Corporate Expenses)
– SG&A expenses for the year ended March 31, 2018 decreased by $50,000 to
$8,806,000 or 14.5% of total net sales, as compared to $8,856,000 or 19.9% of total net sales for the year ended March 31, 2017.
Corporate expenses decreased
by $422,000 to $1,255,000 for the year ended March 31, 2018, as compared to $1,677,000 for the year ended March 31, 2017. The decrease
was primarily related to the decrease of the provision of long service compensation for the year ended March 31, 2017, while no
such provision was provided for the year ended March 31, 2018.
SG&A expenses in the
plastic segment increased by $182,000 to $4,371,000 or 15.5% of net sales for the year ended March 31, 2018, compared to
$4,189,000 or 18.0% of net sales for fiscal 2017. The increase was primarily related to an increase of $199,000 in staff
costs and welfare, offsetting a decrease of $28,000 in local government taxes and registration fees as compared with the same
period in the prior fiscal year.
SG&A expenses in the electronic
segment increased by $190,000 to $3,180,000 or 9.8% of net sales for the year ended March 31, 2018, compared to $2,990,000 or
14.1% of net sales for fiscal 2017. The increase was mainly due to an increase of $165,000 in staff costs and $67,000 in selling
expense, offsetting a decrease of $26,000 in local
government taxes when compared
to the prior fiscal year.
Operating Income
–
Operating income was $1,802,000 for the fiscal year ended March 31, 2018, as compared to operating loss of $2,103,000 in the prior
fiscal year.
Corporate expenses of $1,255,000
and $1,677,000 were incurred during fiscal year 2018 and fiscal year 2017, respectively.
On a segment basis, the operating
income in the plastic segment was $2,002,000 in the year ending March 31, 2018, as compared to an operating loss of $216,000 in
fiscal 2017. The increase in operating income in the plastic segment was mainly due to an increase in other income as well as a
decrease in SG&A expenses as a percentage of net sales.
The electronic segment reported
an operating income of $1,055,000 in the year ending March 31, 2018, as compared to an operating loss of $210,000 in fiscal 2017.
The significant increase in operating income was largely due to the increase in gross margin and a decrease in SG&A expenses
as a percentage of sales as described above.
Non-Operating Income
–
Non-operating income for the year ended march 31, 2018 was $4,395,000, as compared to non-operating income of $3,688,000 in last
fiscal year. The increase was primarily due to an increase of $245,000 in dividend income from securities investments, $540,000
from realized gain on marketable securities and $272,000 from rental income, offsetting a decrease of $598,000 on a change of the
fair value of marketable securities as compared to fiscal 2017.
Income Taxes
– Income
tax for the year ended March 31, 2018 represented an income tax expense of $173,000 and a deferred tax benefit of $166,000, as
compared to an income tax expense of $116,000 and a deferred tax provision of $93,000 in last fiscal year.
On a segment basis, there was
income tax expense of $80,000 and a deferred tax benefit of $166,000 in the plastic segment for the year ended March 31, 2018,a
s compared to income tax expense of $61,000 and a deferred tax provision of $93,000 during the last fiscal year. The income tax
expenses of the electronic segment was $93,000 for the year ended March 31, 2018, as compared to $55,000 in fiscal 2017.
Net Income
– the
Company had net income of $6,190,000 for the year ended March 31, 2018, as compared to a net income of $1,376,000 for the year
ended March 31, 2017. The increase in net income was mainly the result of an increase in sales, as well as increases in non-operating
and other income as described above.
Corporate expenses of $1,255,000
and $1,677,000 were incurred during fiscal year 2018 and fiscal year 2017, respectively.
Net income for the plastic segment
for the year ended March 31, 2018 was $5,490,000, as compared to a net income of $2,366,000 for fiscal 2017. The increase in net
income in the plastic segment was mainly due to a decrease in SG&A expenses as a percentage of sales, as well as increases
in non-operating and other income as described above.
Net income for the electronic
segment for the year ended March 31, 2018 was $1,955,000, as compared to a net income of $687,000 for fiscal 2017. The increase
in net income in the electronic segment was mainly attributable to an increase in gross margin and a decrease in SG&A expense
as a percentage of sales as described above.
Seasonality
The following table sets forth
certain unaudited financial information sequentially on a semi-annual basis for the each of the years ending March 31, 2017, March
31, 2018, and March 31, 2019 (in thousands):
|
|
Year ended March 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
H1
|
|
|
H2
|
|
|
H1
|
|
|
H2
|
|
|
H1
|
|
|
H2
|
|
Net sales
|
|
$
|
20,634
|
|
|
$
|
23,888
|
|
|
$
|
29,759
|
|
|
$
|
30,908
|
|
|
$
|
34,795
|
|
|
$
|
31,786
|
|
Gross profit
|
|
|
2,947
|
|
|
|
4,502
|
|
|
|
5,821
|
|
|
|
3,893
|
|
|
|
4,790
|
|
|
|
5,480
|
|
Operating income (loss)
|
|
|
(1,818
|
)
|
|
|
(285
|
)
|
|
|
1,585
|
|
|
|
217
|
|
|
|
250
|
|
|
|
283
|
|
Net income
|
|
|
711
|
|
|
|
665
|
|
|
|
3,669
|
|
|
|
2,521
|
|
|
|
2,757
|
|
|
|
1,516
|
|
Impact of Inflation
Historically, the Company focused
upon increasing transaction volume in order to compensate for inflation in China, where virtually all of the Company’s assets
and employees are located and inflation in China had little impact on Deswell. However, inflation in China has recently affected
the Company significantly.
The inflation rate in China rose
to 2.7% year-on-year in May of 2019. However, the Company’s actual cost of operations has significantly exceeded the overall
inflation rate in China. The rapid growth of China’s economy in general has in the past few years increased the Company’s
operating costs, including energy prices and labor costs. These increased costs have adversely affected the Company’s cost
of operations, caused the Company to increase its prices, and resulted in the loss of some customers.
There is no fixed minimum wage
which is applicable to all of China; local governments in China adopt different amounts based on the situation in their area. China’s
Guangdong Province, where our manufacturing facilities are located, raised minimum wages by approximately 20% in May 2011 and another
19.1% in March 2013. Effective May 1, 2015, minimum wage levels across Guangdong Province, including Dongguan, where our manufacturing
facilities are located, were increased by an average of 15.3%. Effective July 1, 2018, the Guangdong Provincial Government increased
the Province’s statutory minimum wage by around RMB200 per month. The Provincial Government sets different tiers of minimum
wages according to the developmental status of the Province’s urban clusters. In the City of Dongguan, where our manufacturing
facilities are located, the minimum wage was increased by 13.9%.
Increases in wages also result
in increases in our and other employer’s contributions for various mandatory social welfare benefits for Chinese employees
that are based on percentages of their salaries. Continuing material increases in our cost of labor will continue to increase the
Company’s operating costs and will adversely affect Deswell’s financial results unless it passes on such increases
to customers by increasing the prices of products and services. The effect of increases in the prices of products and services
would make the Company’s products more expensive in global markets, such as the United States and the European Union. This
could result in the loss of customers, who may seek, and be able to obtain, products and services comparable to those Deswell offers
in lower-cost regions of the world. If the Company does not increase prices to pass on the effect of increases in labor costs,
Deswell’s margins and profitability would suffer.
Because most of the Company’s
labor costs are incurred in China and therefore paid in RMB, the adverse effect on Deswell’s business and financial results
from increasing labor costs has in previous years been exacerbated by the appreciation in the exchange rate to the U.S. dollar,
as is discussed in “Exchange Rates” immediately below. In fiscal 2017, the RMB depreciated relative to the U.S. dollar,
with the exchange rate mitigating rather than exacerbating the increasing labor costs experienced by the Company, but the RMB appreciated
relative to the U.S. dollar in fiscal 2018. In fiscal 2019, the RMB again depreciated relative to the U.S. dollar.
Exchange Rates
The Company’s sales are
mainly in United States dollars and Hong Kong dollars and its expenses are mainly in United States dollars, Hong Kong dollars and
Chinese RMB.
The Hong Kong dollar has been
pegged to the U.S. dollar at approximately 7.80 and relatively stable. The Hong Kong government may not continue to maintain the
present currency exchange mechanism, which fixes the Hong Kong dollar at approximately 7.80 to each United States dollar and has
not in the past presented a material currency exchange risk. Although announcements by Hong Kong’s central bank indicate
its intention to maintain the currency peg between the Hong Kong dollar and the U.S. dollar, if Hong Kong does change and follows
China to a floating currency system or otherwise changes the exchange rate system of Hong Kong dollars to U.S. dollars, our margins
and financial results could be adversely affected.
Between 1994 and July 2005, the
market and official RMB rates were unified and the value of the RMB was essentially pegged to the U.S. dollar and was relatively
stable. On July 21, 2005, the People’s Bank of China adjusted the exchange rate of RMB to the U.S. dollar by linking the
RMB to a basket of currencies and simultaneously setting the exchange rate of RMB to U.S. dollars, from 1:8.27, to a narrow band
of around 1:8.11. The following chart illustrates the fluctuations since the July 31, 2005 adjustment of the RMB to the U.S. dollar
by showing the exchange ratio at the end of each of Deswell’s fiscal years from March 31, 2006 to March 31, 2019.
_________
|
(1)
|
RMB (yuan) to U.S. dollar data presented in this chart are the midpoint rates on March 31 of
the year indicated as reported by “Historical Exchange Rates” at http://www.oanda.com/currency/historical-rates/.
|
We did not hedge our currency
risk during the years ended March 31, 2017, 2018 and 2019 and at March 31, 2019, we had no open forward currency contracts. We
continually review our hedging strategy and there can be no assurance that hedging techniques we may implement will be successful
or will not result in charges to our results of operations.
Liquidity and Capital Resources
For the year ended March 31,
2019, net cash provided by operating activities totaled $2,166,000, including net income of $4,273,000 and depreciation and amortization
expenses of $2,114,000. For the year ended March 31, 2018, net cash provided by operations totaled $5,699,000, including net income
of $6,190,000 and depreciation and amortization expenses of $2,138,000. Accounts receivable increased by $225,000 as compared to
balances at March 31, 2018, primarily as a result of a slight increase in sales during the fiscal year. Inventories increased by
$353,000 over levels at March 31, 2018, mainly because of relatively higher level of work-in-process maintained during the fiscal
year to cope with increased sales turnover. Accounts payable decreased by $2,343,000 over levels at March 31, 2018, primarily because
of the decrease in materials purchases.
Net cash used in investing activities
amounted to $1,399,000 for the year ended March 31, 2019, while net cash from investing activities in fiscal year 2018 amounted
to $2,527,000. Capital expenditures during these periods totaled $878,000 and $1,707,000, respectively.
In fiscal year 2019, there was
a release in fixed deposits over three months of $1,819,000 and a decrease in fixed deposits over twelve months of $3,129,000.
Also during fiscal year 2019, we acquired marketable securities for $12,704,000 and received $7,210,000 in cash proceeds from the
sale of marketable securities.
Net cash used in financing activities
for the year ended March 31, 2019 was $1,588,000, which was solely used to fund dividend payments to shareholders. Net cash used
in financing activities for the year ended March 31, 2018 was $1,112,000, which was used to fund dividend payments to shareholders.
As a consequence of the fixed
exchange rate between the Hong Kong dollar and the U.S. dollar, interest rates on Hong Kong dollar borrowings are similar to U.S.
interest rates. The Hong Kong Prime Rate was raised to 5.125% in September 2018 while it remained at 5.0% at March 31, 2018 and
at March 31, 2017.
At March 31, 2019, the Company
had cash and cash equivalents of $14,371,000. At that date, the Company had no committed credit facilities. The Company expects
that working capital requirements and capital additions will continue to be funded through cash on hand and internally generated
funds. However, the Company may choose to
obtain additional debt or equity
financing if it believes it to be appropriate and available on reasonable terms. The Company’s working capital requirements
are expected to increase in line with the growth in the Company’s business.
At March 31, 2019, the Company
had capital commitments totaling approximately $235,000, mainly for leasehold improvements and vehicles, $185,000 of which are
expected to be disbursed during the year ending March 31, 2020.
A summary of our contractual
obligations and commercial commitments as of March 31, 2019 is as follows:
|
|
Payments due by period (in thousands)
|
Contractual obligations
|
|
Total
|
|
|
Year ending March 31, 2020
|
|
|
Period from April 1, 2020 to March 31, 2022
|
|
|
Period from April 1, 2022 to March 31, 2024
|
|
|
Period After March 31, 2024
|
Long-term bank borrowing
|
|
$
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
Capital (finance) lease obligations
|
|
$
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
Operating lease payments
|
|
$
|
57
|
|
|
|
53
|
|
|
|
4
|
|
|
|
–
|
|
|
|
–
|
Capital commitment
|
|
$
|
235
|
|
|
|
185
|
|
|
|
50
|
|
|
|
–
|
|
|
|
–
|
Other purchase obligations
|
|
$
|
6,394
|
|
|
|
6,394
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
Other long-term liabilities reflected on Company’s balance sheet under US GAAP
|
|
$
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
Total
|
|
$
|
6,686
|
|
|
$
|
6,632
|
|
|
$
|
54
|
|
|
$
|
–
|
|
|
$
|
–
|
Off Balance Sheet Arrangements
We do not use off-balance sheet
financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities.
Critical Accounting Policies
and Estimates
The preparation of our consolidated
financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based
upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions
are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future
circumstances. For more information on our significant accounting policies, refer to Note 2 of Notes to Consolidated Financial
Statements included in Part III,
Item
18, in this Report.
We have identified the following
most critical accounting policies, that involved a high degree of judgments and estimates, used in the preparation of our consolidated
financial statements:
Revenue
recognition
The Company
applies the following steps to recognize revenues: (1) identify the contract 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 Company satisfies a performance obligation.
Products
Sales
– the Company recognizes revenue upon transfer of control of its products to the customer, which typically occurs
upon delivery. The Company’s main performance obligation to its customers is the delivery of products in accordance with
purchase orders. Each purchase order defines the transaction price for the products purchased under the arrangement. Acceptance
of delivery of the products is evidenced by goods receipt notes signed by the customer. The Company has no remaining obligations
after the customer’s acceptance of the products.
Under the
terms of the contracts or purchase orders between the Company and the customer, the control of the products is transferred to the
customer upon the signing of the goods receipt notes and the customer has no rights to return the products (other than for defective
products). Some customers examine and pick up the products at our plant while some local customers instruct us to deliver the products
to their plants nearby. Some overseas customers instruct us to deliver the products to the named port of shipment. Delivery of
the products occurs at that point of time when the control of the products is transferred to the customer.
The selling
price, which is specified in the purchase orders, is fixed. Under the terms of the purchase orders, upon the sale of the products
to the customer and the signing of the good receipts notes, the Company has the legally enforceable right to receive full payment
of the sales price. The customer’s obligation to pay the Company is not dependent on the customer selling the products or
collecting cash from their customers (or end customers). The customer is required to pay under normal sales terms. The Company’s
normal payment terms range from 30 days to 90 days and its sales arrangements do not have any material financing components. In
addition, the Company’s customer arrangements do not produce contract assets or liabilities that are material to its consolidated
financial statements. The Company permits the return of damaged or defective products and accounts for these actual returns as
deduction from sales. Product returns to the Company were insignificant during past years.
Incremental
costs to fulfill the Company’s customer arrangements are expensed as incurred, as the amortization period is less than one
year.
The Company’s
sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in
respect of product sales. VAT and business tax and surcharges collected from customers, net of VAT paid for purchases, is recorded
as a liability in the consolidated balance sheets until it is paid to the tax authorities.
Outbound
Freight and Handling Costs
– the Company accounts for
product outbound freight and handling
costs as fulfillment activities and present the associated costs in selling expenses in the period in which it sells the product.
Inventories
Our inventories are stated at
the lower of cost or market. Cost is determined on the weighted average basis. Work-in-progress and finished goods inventories
consist of raw materials, direct labor and overhead associated with the manufacturing process. The Company periodically performs
an analysis of inventory to determine obsolete or slow-moving inventory and determine if its cost exceeds the estimated market
value. Write down of potentially obsolete or slow-moving inventory are recorded based on management’s analysis of inventory
levels.
Impairment of long-lived assets
Our long-lived assets are included
in impairment evaluations when events and circumstances exist that indicate the carrying value of these assets may not be recoverable.
In accordance with ASC No. 360, “Property, Plant and Equipment,” the Company assesses the recoverability of the carrying
value of long-lived assets by first grouping its long-lived assets with other assets and liabilities at the lowest level for which
identifiable cash flows largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly,
estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual
disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life
of the primary asset within the
asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, the Company records an impairment
charge to the extent the carrying value of the long-lived asset exceeds its fair value. The Company determines fair value through
quoted market prices in active markets or, if quotations of market prices are unavailable, through the performance of internal
analysis using a discounted cash flow methodology. The undiscounted and discounted cash flow analyses based on a number of estimates
and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the
asset group, discount rate and long-term growth rate.
Each year, in evaluation of undiscounted
cash flows associated with long-lived assets, the Company assesses whether its long-lived assets at the reporting date are less
than the fair value and the sum of undiscounted cash flows. Based on its assessment, the Company did not impair the carrying values
of long-lived assets for the years ended March 31, 2017, 2018 and 2019. In fiscal 2019, there were no impairment charges on the
carrying values of long-lived assets based on management’s assessment and review.
Allowance for doubtful accounts
The Company regularly monitors
and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors
including: ongoing credit evaluations of its customers’ financial condition, an analysis of amounts current and past due
along with relevant history and facts particular to the customer. Based upon the results of this analysis, the Company records
an allowance for uncollectible accounts for this risk. This analysis requires the Company to make significant estimates, and changes
in facts and circumstances could result in material changes in the allowance for doubtful accounts. Unanticipated changes in the
liquidity or financial position of the Company’s customers may require additional provisions for doubtful accounts.
Goodwill
The excess purchase price over
the fair value of net assets acquired is recorded on the balance sheet as goodwill. The Company adopted Accounting Standards Codification
(“ASC”) No. 350, “Intangibles – Goodwill and Other,” which requires the carrying value of goodwill
to be evaluated for impairment on an annual basis or more frequently if impairment indicators arise. The Company regularly conducts
annual impairment evaluation. The impairment test requires the Company to estimate the fair value of our reporting units. If the
carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the
Company proceeds to step two of the impairment analysis. In the second step, the implied fair value of the reporting unit’s
goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill
(including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value
of the goodwill that results from the application of the second step is then compared to the carrying amount of the goodwill and
an impairment charge is recorded for the difference. The assumptions used in the estimate of fair value are generally consistent
with the past performance of each reporting unit and are consistent with the projections and assumptions that are used in current
operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.
During fiscal years 2017, 2018
and 2019, there were no impairment charges on goodwill after management’s assessment and review.
Item
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The directors and executive officers
of the Company at June 30, 2019 are as follows:
Name
|
|
Age
|
|
Position(s) with Company
|
Richard Pui Hon Lau
|
|
75
|
|
Chairman of the Board of Directors
|
Edward So Kin Chung
|
|
46
|
|
Chief Executive Officer
|
Chin Pang Li
|
|
74
|
|
Executive Director of Manufacturing and Administration for Plastic Operations and Member of the Board of Directors
|
Hung-Hum Leung
|
|
73
|
|
Non-Executive Director and Member of Audit Committee
|
Allen Yau-Nam Cham
|
|
72
|
|
Non-Executive Director and Chairman of Audit Committee
|
Wing-Ki Hui
|
|
75
|
|
Non-Executive Director and Member of Audit Committee
|
Herman Wong Chi Wah
|
|
41
|
|
Chief Financial Officer
|
Richard Pui Hon Lau
.
Mr. Lau served as Chief Executive Officer and Chairman of the Board of Directors of the
Company and its predecessors since
their inception in 1987 until February 2007, at which time he retired as Chief Executive Officer. Mr. Lau remains as Chairman of
the Board.
Edward So Kin Chung
.
Mr. So has been in the electronic manufacturing industry internationally and in China for more than 20 years and has been with
Deswell for 13 years. He was previously appointed the Managing Director of the electronics division. Previously, Mr. So spent five
years at Peavey Electronics in increasing roles of responsibility and prior to that was employed at HSBC. Mr. So holds a Bachelor’s
degree in Electrical and Electronic Engineering from the University of Hong Kong, and Master’s in Business Administration
from Royal Holloway, University of London.
Chin Pang Li
.
Mr. Li has served the Company as a Member of the Board of Directors and in various executive capacities with the Company and its
predecessors since their inception in 1987. He became Secretary of the Company in February 1995 and Chief Financial Officer in
May 1995, a position which he held until March 31, 2006. As Executive Director of Manufacturing and Administration for Plastic
Operations, Mr. Li is in charge of the manufacturing and administrative operations for the Company’s plastic products. Mr.
Li received his Bachelor of Science degree from Chun Yan Institute College, Taiwan in 1967.
Hung-Hum Leung
.
Mr. Leung has been a non-executive director of the Company and member of the Audit Committee since December 1999. Mr. Leung has
over 25 years of experience in the manufacture of electronic products. Mr. Leung was the founder of Sharp Brave Holdings Ltd. (since
2007 known as China Properties Investment Holdings Limited), a Hong Kong public company listed on the Hong Kong Stock Exchange,
and from 1991 to 1995 served as the Chairman of Sharp Brave Holdings Ltd. Since 1995, Mr. Leung has been an independent consultant
to the electronics industry. He received his Bachelor of Science degree in Physics from the National Taiwan University in 1971.
Allen Yau-Nam Cham
. Mr.
Cham has been a non-executive director of the Company and member of the Audit Committee since August 2003. He has over 20
years of experience in the securities industry. He obtained his Bachelor of Science degree from St. Mary’s University, Halifax,
Canada, Bachelor of Engineering (Electrical) degree from Nova Scotia Technical College, Halifax, Canada and Master of Business
Administration degree from University of British Columbia, Canada.
Wing-Ki Hui
.
Mr. Hui has been a non-executive director of the Company and member of the Audit Committee since October 2004. Since
1995 he has been the Operation Director of the Electronic Products Division of Tomorrow International Holdings Limited, a company
listed on the Hong Kong Stock Exchange engaged in manufacturing of consumer electronics and printed circuit boards. Prior to serving
in this capacity, Mr. Hui was Executive Director of Sharp Brave International Holdings Limited from 1991 to 1995 and Director of
Sharp Brave Electronics Co., Ltd. from 1984 to 1995. Mr. Hui possesses over 20 years of experience in the electronic manufacturing
industry, and is a graduate of South East Electronic College in Hong Kong.
Herman Wong Chi Wah
. Mr.
Wong joined the Company as Chief Financial Officer effective on April 1, 2011. During the 10 years immediately before joining Deswell,
Mr. Wong worked for Deloitte Touche Tohmatsu, an international public accounting and auditing firm, where he most recently served
as senior manager. During his tenure at Deloitte Touch Tohmatsu, he worked in an auditing capacity with a variety of Hong Kong
listed companies and multinational corporations as well as working on several initial public offerings for Hong Kong listed companies.
Mr. Wong received his Bachelor of Business Administration in Accounting from Hong Kong Polytechnic University.
No family relationship exists
among any of the named directors, executive officers or key employees. No arrangement or understanding exists between any director
or officer and any other persons pursuant to which any director or executive officer was elected as a director or executive officer
of the Company, provided that Mr. Lau’s beneficial ownership allows him to determine who is elected as a director or executive
officer of the Company.
There are no arrangements or
understandings with major shareholders, customers, suppliers or others, pursuant to which any member of the board of directors
or senior management was selected as a director or member of senior management.
Compensation of Directors
and Executive Officers
Executive Officers
The
amount of compensation (cash benefits) paid by the Company and its subsidiaries was approximately $1,418,000 during the year ended
March 31, 2019 to all directors and to executive officers as a group for services in all service capacities. These amounts exclude
amounts paid by the Company or its subsidiaries as dividends to directors and executive officers in their capacity as shareholders
of the Company for the year ended March 31, 2019.
During the year ended March 31,
2019, no options to purchase shares of common stock were granted to the Company’s directors and officers.
See the discussion under “We
depend on our executive officers, senior managers and skilled personnel.” in
Item
3 “Key Information – Risk Factors” on page 17 of this Report.
Directors
Our policy is to pay directors
who are not employees of the Company or any of its subsidiaries $2,000 per month for services as a director, and to reimburse directors
for all reasonable expenses incurred in connection with their services as a director and member of Board committees.
The Board has determined that
Messrs. Hung-Hum Leung, Allen Yau-Nam Cham and Wing-Ki Hui are each “independent” within the meaning of Rule 5605(a)(2)
of the NASDAQ Marketplace Rules.
Board Practices
The directors of the Company
are elected at its annual meeting of shareholders and serve until their successors take office or until their death, resignation
or removal. The executive officers serve at the pleasure of the Board of Directors of the Company
.
Audit Committee
The Audit Committee meets from
time to time to review the financial statements and matters relating to the audit and has full access to management and the Company’s
auditors in this regard. The Audit Committee recommends the engagement or discharge of the Company’s independent accountants,
consults on the adequacy of the Company’s internal controls and accounting procedures, and reviews and approves financial
statements and reports. Deswell’s audit committee consists of Messrs. Hung-Hum Leung, Allen Yau-Nam Cham and Wing-Ki Hui,
each of whom is an independent director within the meaning of that term under Rule 5605(a)(2) of the NASDAQ Marketplace Rules.
Mr. Allen Yau-Nam Cham currently acts as the Chairman of the Audit Committee.
Other Committees; NASDAQ
Compliance
Various corporate governance
practices required of public companies with securities listed on The NASDAQ Stock Market are not required of “controlled
companies” such as Deswell. Of the corporate governance practices required under NASDAQ’s MarketPlace Rules, Deswell
does not have a compensation committee or a nominating committee consisting of independent directors; does not have a formal written
charter addressing the nominations process; does not have nominees to its board selected or recommended by a majority of its independent
directors; and does not have the compensation of its Chief Executive Officer and other executive officers determined or recommended
to the board by a majority of its independent directors. See “Our exemptions from certain of the reporting requirements under
the Exchange Act limits the protections and information afforded to investors” on page 21 in the Risk Factors section of
this Report for a further discussion of how our SEC reporting and corporate governance practices differ from those applicable to
U.S. domestic issuers and U.S. NASDAQ-listed companies. The reason that Deswell does not have a compensation committee or a nominating
committee consisting of independent directors is that, as a “controlled company,” the Company is not required to have
such committees, and nevertheless maintain the listing of its common shares on the NASDAQ Global Market.
Employees
At March 31, 2019, the Company
employed 1,203 persons on a full-time basis, of which ten were located in Macao and 1,193 were located in or travel to and from
China. Of the Company’s employees in China, at March 31, 2019:
|
·
|
700 were engaged in plastic injection molding manufacturing, and
|
|
·
|
493 were engaged in contract electronic manufacturing.
|
The Company has not experienced
significant labor stoppages. Management believes that relations with the Company’s employees are satisfactory.
Share and Option Ownership
of Directors and Senior Management
For information concerning the
beneficial ownership of the Company’s common shares, including options, by directors and senior management and major shareholders,
see
Item
7 of this Report.
Employee Stock Option Plans
In 1995, the Company adopted
its 1995 Stock Option Plan permitting the Company to grant options to purchase up to 1,012,500 common shares to employees, officers,
directors and consultants of the Company. On September 29, 1997, the Company’s Board of Directors and shareholders approved
an increase of 549,000 shares in the number of shares that can be optioned and sold under the Option Plan bringing to a total of
1,561,500 shares the number of common shares that can be optioned and sold under the 1995 Stock Option Plan. No shares remain available
for grant under the Company’s 1995 Stock Option Plan.
On August 15, 2001 the Board
approved the adoption of the 2001 Stock Option Plan permitting the Company to grant options to purchase up to an additional 1,125,000
common shares to employees, officers, directors and consultants of the Company. On January 7, 2002 shareholders approved the 2001
plan.
On August 20, 2003, the Board
approved the adoption of the 2003 Stock Option Plan permitting the Company to grant options to purchase up to an additional 900,000
common shares to employees, officers, directors, consultants and advisors of the Company. On September 30, 2003 shareholders approved
the 2003 plan. On August 1, 2005, the Company’s Board of Directors, subject to shareholder approval, approved amendments
to the 2003 Stock Option to increase by 500,000 shares in the number of shares that can be optioned and sold under the 2003 Stock
Option Plan, bringing to a total of 1,400,000 shares the number of common shares that can be optioned and sold under the 2003 Stock
Option Plan. The Company’s shareholders approved this amendment at the Company’s Annual Shareholders’ Meeting
held on September 19, 2005.
On August 17, 2007, the Company’s
Board of Directors, subject to shareholder approval, approved amendments to the 2003 Stock Option to increase by 400,000 shares
in the number of shares that can be optioned and sold under the 2003 Stock Option Plan, bringing to a total of 1,800,000 shares
the number of common shares that can be optioned and sold under the 2003 Stock Option Plan. The Company’s shareholders approved
this amendment at the Company’s Annual Shareholders’ Meeting held on October 9, 2007.
On August 13, 2010, the Company’s
Board of Directors, subject to shareholder approval, approved amendments to the 2003 Stock Option Plan to increase by 800,000 shares
in the number of shares that can be optioned and sold under the 2003 Stock Option Plan, bringing to a total of 2,600,000 shares
the number of common shares that can be optioned and sold under the 2003 Stock Option Plan. The Company’s shareholders approved
this amendment at the Company’s Annual shareholders’ Meeting held on September 16, 2010.
On August 7, 2013, the Company’s
Board of Directors, subject to shareholder approval, approved amendments to the 2003 Stock Option Plan to increase by 900,000 shares
the number of shares that can be optioned and sold under the 2003 Stock Option Plan, bringing to a total of 3,500,000 shares the
number of common shares that can be optioned and sold under the 2003 Stock Option Plan. The Company’s shareholders approved
this amendment at the Company’s Annual shareholders’ Meeting held on September 11, 2013.
The Company’s option plans
are administered by the Board of Directors, which determines the terms of options granted, including the exercise price, the number
of shares subject to the option and the option’s exercisability. The exercise price of all options granted under the option
plans must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted
under the option plans is 10 years.
Through June 30, 2019, options
to purchase an aggregate of 5,669,000 shares had been granted under all of Deswell’s option plans. At June 30, 2019, there
were options to purchase an aggregate of 470,000 common shares outstanding, and 1,268,000 shares were available for future grant
under Deswell’s option plans.
Item
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The Company is not directly owned
or controlled by another corporation or by any foreign government. The following table sets forth, as of June 30, 2019, the beneficial
ownership of the Company’s common shares by each person known by the Company to beneficially own 5% or more of the common
shares of the Company and by each of the Directors and Senior Management of the Company who beneficially own in excess of one percent
of the Company’s common shares.
|
|
Shares beneficially owned
(1)
|
Name of beneficial owner or identity of group
|
Amount
|
Percent
|
Richard Pui Hon Lau
|
|
8,328,980
|
(2)
|
51.7
|
Chin Pang Li
|
|
1,625,750
|
(3)
|
10.1
|
Herman Wong Chi Wah
|
|
50,000
|
(4)
|
*
|
Edward So Kin Chung
|
|
50,000
|
(5)
|
*
|
Hung-Hum Leung
|
|
-
|
|
-
|
Allen Yau-Nam Cham
|
|
-
|
|
-
|
Wing-Ki Hui
|
|
-
|
|
-
|
___________
* Less than 1%.
|
(1)
|
Based on 15,915,239 shares outstanding on June 30, 2019. However, in accordance with Rule 13d-3(d)(1)
under the Securities Exchange Act of 1934, shares not outstanding but which are the subject of currently exercisable options have
been considered outstanding for the purpose of computing the percentage of outstanding shares owned by the listed person holding
such options, but are not considered outstanding for the purpose of computing the percentage of shares owned by any of the other
listed persons.
|
|
(2)
|
Consists of 8,128,980 shares held of record by Mr. Lau and
options to purchase 200,000 shares granted to Mr. Lau under the Company’s stock option plans. Mr. Lau’s options are
exercisable at an exercise price of $2.09 per share, with a term expiring on July 29, 2024.
|
|
(3)
|
Consists of 1,425,750 shares held of record by Mr. Li and options to purchase 200,000 shares
granted to Mr. Li under the Company’s stock option plans. Mr. Li’s options are exercisable at an exercise price of
$2.09 per share, with a term expiring on July 29, 2024.
|
|
(4)
|
Consists of 30,000 shares held of record by Mr. Wong and options to purchase 20,000 shares granted
to Mr. Wong under the Company’s stock option plans. Mr. Wong’s options are exercisable at an exercise price of $2.14
per share, with a term expiring on March 7, 2022.
|
|
(5)
|
Consists of 50,000 shares held of record by Mr. So.
|
Change in the Percentage
Ownership Held by Major Shareholders
The following table reflects
the percentage of beneficial ownership of Deswell’s common shares by its major (five percent or more) shareholders during
the past three years:
|
Percentage Ownership at June 30,
(1)
|
|
2017
|
|
2018
|
|
2019
|
Richard Pui Hon Lau
|
41.4
|
|
47.0
|
|
51.7
|
Chin Pang Li
|
10.1
|
|
10.1
|
|
10.1
|
_____________
|
(1)
|
Based on 15,885,239 shares outstanding at June 30, 2017 and at June 30, 2018, and 15,915,239
shares outstanding at June 30, 2019. In accordance with Rule 13d-3(d) (1) under the Securities Exchange Act of 1934, common shares
not outstanding at the specified date but which were the subject of options exercisable within 60 days of the specified date are
considered outstanding for the purpose of computing the percentage of outstanding common shares owned by the listed person holding
such options, but are not considered outstanding for the purpose of computing the percentage of common shares owned by any of the
other listed persons.
|
All of the holders of the Company’s
common shares (including Deswell’s major shareholders) have equal voting rights with respect to the common shares held. As
of June 30, 2019, approximately 10 holders of record, who, management believes, held for more than 3,000 beneficial owners, held
Deswell’s common shares. According to information supplied to the Company by its transfer agent, at June 30, 2019, 10 holders
of record with addresses in the United States held approximately 12.7 million of our outstanding common shares.
Related Party Transactions
Deswell had no transactions of
the kind specified in
Item
7.B. of Form 20-F from April 1, 2016 through June 30,
2019, the latest practical date prior to filing of this Annual Report.
It is Deswell’s policy
that all transactions between Deswell and any interested director or executive officer be approved by a majority of the disinterested
directors and be on terms that are no more favorable than would be available from an independent third party.
Item
8. FINANCIAL INFORMATION
Financial Statements
Our Consolidated Financial Statements
are set forth under
Item
18 “Financial Statements.”
Legal Proceedings
The Company is not involved in
any material legal proceedings.
Export Sales
Information regarding our export
sales is provided in
Item
4 “Information on the Company – Business Overview
– Customers and Marketing.”
Dividend Policy
The Company declared and paid
dividends during the year ended March 31,
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·
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2017 aggregating $2,247,873, $1,123,937 of which was based on results for
the last two quarters of the year ended March 31, 2016, and $1,123,937 of which was based on results for the first six months of
the year ended March 31, 2017;
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|
·
|
2018 aggregating $1,111,967 which was based on results for the last six
months of the year ended March 31, 2017;
|
|
·
|
2019 aggregating $1,588,524, $635,410 of which was based on results for
the last six months of the year ended March 31, 2018; and $953,114 of which was based on results of the first six months of the
year ended March 31, 2019.
|
The Company declared a dividend
of $0.04 on June 12, 2018, which was based on the results of the last six months of the year ended March 31, 2018. The dividend
was paid on July 12, 2018.
The Company declared a dividend of $0.06 on November 15,
2018, which was based on the results of the first six months of the year ended March 31, 2019. The dividend was paid on December
18, 2018.
The Company declared a dividend
of $0.07 on June 10, 2019, which was based on the results of the last six months of the year ended March 31, 2019. The dividend
was paid on July 12, 2019.
The Company’s financial
results are released semi-annually. The Company expects to pay cash dividends on a semi-annual basis based on the Company’s
six-month results. Whether future dividends will be declared will depend upon the Company’s future growth and earnings, of
which there can be no assurance, and the Company’s cash flow needs for future development, which growth, earning or cash
flow needs may be adversely affected by one or more of the factors discussed in
Item
3 “Key Information — Risk Factors.” Accordingly, there can be no assurance that future cash dividends on the
Company’s common shares will be declared, what the amounts of such dividends will be or whether such dividends, once declared
for a specific period will continue for any future period or at all.
Item
9. THE OFFER AND LISTING
The Company’s shares are
traded exclusively on the NASDAQ Global Market under the symbol “DSWL.”
The following chart shows the
annual high and low market prices as reported by The NASDAQ Global Market for each of Deswell’s fiscal years in the five-year
period ended March 31, 2019:
The following chart shows the
high and low market prices as reported by the NASDAQ Global Market for each of the quarters in the two-year period ended March
31, 2019 and for the quarter ended June 30, 2019:
The following chart shows the
high and low market prices as reported by the NASDAQ Global Market during each of the months in the six-month period ended June
30, 2019:
Item
10. ADDITIONAL INFORMATION
Memorandum and Articles
of Association
Effective December 13, 2007,
we amended and restated our Memorandum and Articles of Association (collectively the “2007 Charter”), the instruments
governing a company organized under the law of the BVI, which are comparable in purpose and effect to certificates or articles
of incorporation and bylaws of corporations organized in a state of the United States.
Effective March 26, 2010, we
amended Regulation 6.15 of our Articles of Association to reduce the number of our outstanding common shares that must be present
in person or by proxy in order to hold any meeting of shareholders from no less than 50 percent to no less than 33⅓ percent
and on March 30, 2010 an amended and restated Memorandum and Articles of Association was registered which incorporated the March
26, 2010 amendment into a restated Memorandum and Articles of Association.
Under our 2007 Charter, as amended
through March 26, 2010 and applicable to the date of this Report (“our Charter”):
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·
|
our shares are eligible for a direct registration system operated by a securities
depository in accordance with NASDAQ Marketplace Rule 5210(c) (formerly Rule 4350(1)).
|
|
·
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various consequential amendments were made to our Memorandum and Articles
of Association in accordance with the advice from our U.S. and BVI counsel so as to (a) be consistent with the BVI BC Act, the
BVI BC Act having come into force on January 1, 2004 superseding in certain respects the IBC Act, the relevant legislation which
had previously governed us and (b) to make conforming changes resulting from the transition of the NASDAQ Stock Market’s
operations on August 1, 2006 to that of a national securities exchange in the United States.
|
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·
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certain special provisions of our Memorandum and Articles of Association
that we adopted in preparation for our initial public offering of securities in the United States.
|
|
·
|
provisions were added in recognition of, and to assure compliance with,
certain laws, rules and regulations of the United States applicable to us, including the Sarbanes-Oxley Act of 2002, and the Marketplace
Rules of the NASDAQ Stock Market.
|
|
o
|
are entitled to one vote for each whole share on all matters to be voted
upon by shareholders, including the election of directors.
|
|
o
|
do not have cumulative voting rights in the election of directors.
|
|
o
|
are entitled to receive dividends if and when declared by our board of directors
out of funds legally available under BVI law.
|
|
·
|
all of common shares are equal to each other with respect to liquidation
and dividend rights.
|
|
·
|
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.
|
Objects and Purposes
Our objects and purposes are
described in Clause 5 of our Memorandum of Association and are generally to engage in any act or activity that is not prohibited
under the laws of the BVI.
Directors
Regulation 12.4 of our Articles
of Association provides that except as otherwise provided in the BVI BC Act – the BVI corporate law that governs BVI companies
like Deswell – no agreement or transaction between the Company and one or more of its directors or any person in which any
director has a financial interest or to whom any director is related, including as a director of that other person, is void or
voidable for this reason only or by reason only that the director is present at the meeting of directors or at the meeting of the
committee of directors that approves the agreement or transaction or that the vote or consent of the director is counted for that
purpose if the material facts of the interest of each director in the agreement or transaction and his interest in or relationship
to any other party to the agreement or transaction are disclosed in good faith or are known by the other directors and such agreement
or transaction has been approved by the irrevocable vote of a majority of the Company’s directors, including at least one
Independent Director. In addition, the favorable vote of a majority of the directors, including at least one Independent Director,
shall be required to approve any transaction or agreement between the Company and any officer of the Company or any person or entity
holding ten percent or more of the outstanding Shares.
Our Articles of Association (Regulation
7.11) provide that the directors may by a resolution of directors, fix the emoluments of directors with respect to services to
be rendered in any capacity to the Company.
BVI law and our Articles of Association
provide that the management of the business and the control of Deswell shall be vested in the directors, who in addition to the
powers and authorities expressly conferred by the Articles of Association, may also exercise all such powers, and do all such acts
and things, as may be done by Deswell and are not by the Articles of Association or BVI law expressly directed or required to be
exercised or done by a meeting of shareholders. Our Articles of Association provide that the directors may by resolution exercise
all the powers of Deswell to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue
debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation
of Deswell or of any third party.
BVI law and our Memorandum and
Articles of Association do not contain an age limit requirement for our directors. Under our Articles of Association, no shares
are required for director’s qualification.
Rights, Preferences and
Restrictions of Authorized and Outstanding Shares and Changes to Rights of Shareholders
Deswell has one class and series
of shares authorized or outstanding: common shares, no par value per share. Our authorized capital consists of 30,000,000 common
shares, no par value per share, of which 15,915,239 common shares were outstanding on June 30, 2019.
Holders of our common shares
are entitled to one vote for each whole share on all matters to be voted upon by shareholders, 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 funds legally available under BVI 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. There are
no
provisions of the Articles of Association
or Memorandum that impose conditions with respect to changes in Deswell capital that are more stringent than is required by applicable
law.
Calling Annual General
Meetings and Extraordinary General Meetings of Shareholders
BVI law does not require a company,
such as Deswell, to have an annual meeting. Our Articles of Association do, however, require an annual meeting of shareholders
for the election of directors and for such other business as may come before the meeting (Regulation 6.3).
Under BVI law, unless otherwise
provided by a company’s Memorandum or Articles of Association, the directors may call meetings of shareholders at any time
(Regulation 6.1) and, upon the written request of shareholders entitled to exercise ten percent or more of the voting rights in
respect of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders (Regulation 6.2).
BVI law and our Articles of Association
state that the directors may fix the date that notice is given of a meeting of shareholders, whether extraordinary or annual, as
the record date for determining those shares that are entitled to vote at the meeting (Regulation 6.5).
BVI law and our Articles of Association
provide that notice of all meetings of shareholders, stating the time, place and purposes thereof, shall be given not fewer than
seven days before the date of the proposed meeting to those persons whose names appear as shareholders in our share register on
the date of the notice and are entitled to vote at the meeting (Regulation 6.8).
Limitations on Share Ownership
BVI law and our Memorandum and
Articles of Association do not impose any limitations on the right of anyone to own, hold or exercise voting rights to our common
shares.
Potential Anti-Takeover
Deterrence
Neither our Memorandum nor Articles
of Association contain provisions that would have an effect of delaying, deferring or preventing a change in control of Deswell
and that would operate only with respect to a merger, acquisition or corporate restructuring involving Deswell or any of its subsidiaries.
However, pursuant to our Memorandum and Articles of Association and pursuant to the laws of the BVI, our board of directors without
shareholder approval may amend our Memorandum and Articles of Association, which could have the effect of changing the rights of
shareholders, provided that a majority of our independent directors do not vote against the amendment and provided further that
our directors may not make an amendment:
|
(a)
|
to restrict the rights or powers of the shareholders to
amend the Memorandum or the Articles;
|
|
(b)
|
to change the percentage of shareholders required to pass
a Resolution of Shareholders to amend the Memorandum or the Articles;
|
|
(c)
|
where the Memorandum or the Articles cannot be amended
by the Shareholders;
|
|
(d)
|
change Clause 7 of our Articles of Association conferring
the rights of our shareholders to one vote per share, the right to equal share in dividend paid by the company, or to surplus
assets on liquidation; or
|
|
(e)
|
change Clause 9 of our Articles of Association which sets
forth rights of our shareholders and directors to amend our Memorandum and Articles of Association.
|
Our directors’ ability
to amend our Memorandum and Articles of Association, without shareholder approval in certain circumstances, could have the effect
of delaying, deterring or preventing a change in control of Deswell, including a tender offer to purchase our common shares at
a premium over the then current market price.
Ownership Information
Neither our Memorandum nor Articles
of Association provide that information about our shareholders, even those owning significant percentages of our shares, must be
disclosed publicly.
Differences from United
States Law
The laws of the BVI governing
the provisions of our Memorandum and Articles of Association discussed above are not significantly different than the laws governing
similar provisions in the charter documents of Delaware companies, other than with respect to amending our Memorandum and Articles
of Association without shareholder
approval and with respect to potential
anti-takeover deterrence. Delaware law requires shareholders to approve amendments to a corporation’s Certificate of Incorporation,
with limited exceptions, and contains provisions restricting the rights of a Delaware corporation with a class of voting stock
listed on a national exchange or held of record by more than 2,000 stockholders to engage in a business combination with an “interested
stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder
unless the business combination is approved in the manner prescribed under Delaware law.
Material Contracts
During the two years immediately
preceding the filing of this Report, neither the Company nor any of its subsidiaries entered into any material contract, other
than contracts in the ordinary course of business.
Taxation
United States Federal Income
Tax Consequences
The discussion below is for general
information only and is not, and should not be interpreted to be, tax advice to any holder of our common shares. Each holder or
a prospective holder of our common shares is urged to consult his, her or its own tax advisor.
General
This section is a general summary
of the material United States federal income tax consequences to U.S. Holders, as defined below, of the ownership and disposition
of our common shares as of the date of this Report. This summary is based on the provisions of the Internal Revenue Code of 1986,
as amended, or the Code, the applicable Treasury regulations promulgated and proposed thereunder, judicial decisions and current
administrative rulings and practice, all of which are subject to change, possibly on a retroactive basis. The summary applies to
you only if you hold our common shares as a capital asset within the meaning of Section 1221 of the Code. In addition, this summary
generally addresses certain U.S. federal income tax consequences to U.S. Holders if we were to be classified as a PFIC. The United
States Internal Revenue Service, or the IRS, may challenge the tax consequences described below, and we have not requested, nor
will we request, a ruling from the IRS or an opinion of counsel with respect to the United States federal income tax consequences
of acquiring, holding or disposing of our common shares. This summary does not purport to be a comprehensive description of all
the tax considerations that may be relevant to the ownership of our common shares. In particular, the discussion below does not
cover tax consequences that depend upon your particular tax circumstances nor does it cover any state, local or foreign law, or
the possible application of the United States federal estate or gift tax. You are urged to consult your own tax advisors regarding
the application of the United States federal income tax laws to your particular situation as well as any state, local, foreign
and United States federal estate and gift tax consequences of the ownership and disposition of the common shares. In addition,
this summary does not take into account any special United States federal income tax rules that apply to a particular U.S. or Non-U.S.
holder of our common shares, including, without limitation, the following:
|
·
|
a dealer in securities or currencies;
|
|
·
|
a trader in securities that elects to use a market-to-market
method of accounting for its securities holdings;
|
|
·
|
a financial institution or a bank;
|
|
·
|
a tax-exempt organization;
|
|
·
|
a person that holds our common shares in a hedging transaction
or as part of a straddle or a conversion transaction;
|
|
·
|
a person whose functional currency for United States federal
income tax purposes is not the U.S. dollar;
|
|
·
|
a person liable for alternative minimum tax;
|
|
·
|
a person that owns, or is treated as owning, 10% or more,
by voting power or value, of our common shares;
|
|
·
|
certain former U.S. citizens and residents who have expatriated;
or
|
|
·
|
a person who receives our shares pursuant to the exercise
of employee stock options or otherwise as compensation.
|
U.S. Holders
For purposes of the discussion
below, you are a “U.S. Holder” if you are a beneficial owner of our common shares who or which is:
|
·
|
an individual United States citizen or resident alien of the United States
(as specifically defined for United States federal income tax purposes);
|
|
·
|
a corporation, or other entity treated as a corporation for United States
federal income tax purposes, created or organized in or under the laws of the United States, any State or the District of Columbia;
|
|
·
|
an estate whose income is subject to United States federal income tax regardless
of its source; or
|
|
·
|
a trust (x) if a United States court can exercise primary supervision over
the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the
trust or (y) if it was in existence on August 20, 1996, was treated as a United States person prior to that date and has a valid
election in effect under applicable Treasury regulations to be treated as a United States person.
|
If a partnership, or other entity
treated as a partnership for United States federal income tax purposes holds our common shares, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partner of a partnership
holding our common shares, you should consult your tax advisor.
Passive Foreign Investment
Company (PFIC)
A U.S. Holder generally will
be subject to a special tax regime if we are a PFIC at any time during which such Holder has held our shares.
A foreign corporation will be
treated as a PFIC for United States federal income tax purposes if, after applying relevant look-through rules with respect to
the income and assets of its subsidiaries, 75% or more of its gross income consists of certain types of passive income (the “income
test”) or 50% or more of the gross value of its assets (based on an average of the quarterly values of the assets during
such year) is attributable to assets that produce passive income or are held for the production of passive income (the “asset
test”). For this purpose, passive income generally includes dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. An actual determination
of PFIC status is factual in nature and cannot be made until the close of the applicable tax year.
The legislative history of the
PFIC provisions states that Congress intended that “[i]n applying the PFIC asset test ….., the total value of a publicly-traded
foreign corporation’s assets generally will be treated as equal to the sum of the aggregate value of its outstanding stock
plus its liabilities.” We do not believe there are currently any rules that provide further guidance on this issue. Therefore,
based on the average ratio of our passive assets to our market cap plus our current liabilities (“Market Cap Value”)
at the end of each quarter (“Testing Quarter”) of our fiscal year ended March 31, 2019, we are a PFIC. We have not
conducted an appraisal of the fair market value of all of our assets, including our plant and equipment. However, in the absence
of specific guidance, it is at best unclear that such an appraisal, even if it resulted in a fair market value in excess of our
market cap, would satisfy the IRS as to our PFIC status.
As a result of the classification
as a PFIC, a special tax regime will apply to both (a) any “excess distribution” by us (generally, the U.S. Holder’s
ratable share of distributions in any year that are greater than 125% of the average annual distributions received by such U.S.
Holder in the three preceding years or its holding period, if shorter) and (b) any gain recognized on the sale or other disposition
of your common shares. Under the PFIC regime, any excess distribution and recognized gain will be treated as ordinary income. The
U.S. federal income tax on such ordinary income is determined under the following steps: (i) the amount of the excess distribution
or gain is allocated ratably over the U.S. Holder’s holding period for our common shares; (ii) tax is determined for amounts
allocated to the first year in the holding period in which we were classified as a PFIC and all subsequent years (except the year
in which the excess distribution was received or the sale occurred) by applying the highest applicable tax rate in effect in the
year to which the income was allocated; (iii) an interest charge is added to this tax calculated by applying the underpayment interest
rate to the tax for each year determined under the preceding sentence from the due date of the income tax return for such year
to the due date of the return for the year in which the excess distribution or sale
occurs; and (iv) amounts allocated
to a year prior to the first year in the U.S. Holder’s holding period in which we were classified as a PFIC or to the year
in which the excess distribution or the disposition occurred are taxed as ordinary income and no interest charge applies. The interest
charge is non-deductible by individuals but is generally deductible by corporations
Under certain attribution rules,
if we are a PFIC, U.S. Holders will generally be deemed to own their proportionate share of our direct or indirect equity interest
in any company that is also a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income
tax on their proportionate share of (a) any “excess distributions,” as described below, on the stock of a Subsidiary
PFIC and (b) a disposition or deemed disposition of the stock of a Subsidiary PFIC by us or another Subsidiary PFIC, both as if
such U.S. Holders directly held the shares of such Subsidiary PFIC. In addition, U.S. Holders may be subject to U.S. federal income
tax on any indirect gain realized on the stock of a Subsidiary PFIC on the sale or disposition of our common shares held by such
U.S. Holders. Accordingly, U.S. Holders should be aware that they could be subject to tax even if no distributions are received
and no redemptions or other dispositions of our common shares held by them are made.
A U.S. Holder may generally avoid
the PFIC regime by making a “qualified electing fund” election which generally provides that, in lieu of the foregoing
treatment, our earnings, on a pro rata basis, would be currently included in their gross income. However, we may be unable or unwilling
to provide information to our U.S. Holders that would enable them to make a “qualified electing fund” election; thus,
such election may not be available.
In addition, U.S. Holders may
generally avoid the PFIC regime by making the “mark-to-market” election with respect to our common shares as long as
we are a PFIC and our common shares are considered to be readily tradable on an established securities market within the United
States. “Mark-to-market,” in this context, means including in ordinary income each taxable year the excess, if any,
of the fair market value of our common shares over your tax adjusted basis in such common shares as of the end of each year. This
“mark-to-market” election generally enables a U.S. Holder to avoid the deferred tax amount or interest charge that
would otherwise be imposed on them if we were to be classified as a PFIC. However, if we are a PFIC, a mark-to-market election
would not be available with respect to stock of a Subsidiary PFIC.
If we are treated as a PFIC at
any time that you hold our shares but cease to be classified as a PFIC in a later year, we will continue to be classified as a
PFIC with respect to you unless you make a deemed sale election in a timely manner to be taxed as if you sold your shares on the
last day of our last year during which we were treated as a PFIC. In this case, you would pay tax on the gain on the deemed sale
treated as ordinary income and an interest charge, and no loss will be allowed to you. A timely deemed sale election can also be
made with respect to any of our Subsidiary PFIC, in which case you will be taxed on the amount of gain treated as ordinary income
and pay an interest charge as if the stock of such subsidiary had been actually sold or disposed of by us while we were a PFIC
and you held our shares. If we subsequently become a PFIC, you will again be subject to the general PFIC rules discussed herein.
If we are treated as a PFIC,
each U.S. Holder will be required to make an annual return on IRS Form 8621 (unless a
de minimis
exception applies) or its
successor, reporting, among other things, distributions received and gain realized with respect to each PFIC in which such holder
holds a direct or indirect interest, and may be required to provide other information as specified by the IRS.
An actual determination of PFIC
status is highly factual in nature. Given the complexity of the issues that may result if we are classified as or become a PFIC,
you are urged to consult your own tax advisors with respect to the tax consequences to you, including any reporting obligations
that may be imposed on you, in the event that this should occur, in view of your particular circumstances.
In addition, individuals, estates
and certain trusts whose income exceeds certain thresholds will be required to pay a 3.8% Medicare surtax on “net investment
income” including interest, dividends and capital gains. U.S. Holders should consult with their own tax advisors regarding
the effect, if any, of such tax on their ownership and disposition of our shares.
Non-U.S. Holders
If you are not a U.S. Holder,
you are a “Non-U.S. Holder.”
Distributions on Our
Common Shares
You generally will not be subject
to U.S. federal income tax, including withholding tax, on distributions made on our common shares unless:
|
·
|
you conduct a trade or business in the United States and
|
|
·
|
the distributions are effectively connected with the conduct of that trade
or business (and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal income tax
on a net income basis in respect of income from our common shares, such distributions are attributable to a permanent establishment
that you maintain in the United States).
|
If you meet the two tests above,
you generally will be subject to tax in respect of such dividends in the same manner as a U.S. Holder as described above (other
than with respect to the Medicare tax described above). In addition, any effectively connected dividends received by a non-U.S.
corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30 percent
rate or such lower rate as may be specified by an applicable income tax treaty.
Sale, Exchange or Other
Disposition of Our Common Shares
Generally, you will not be subject
to U.S. federal income tax, including withholding tax, in respect of gain recognized on a sale or other taxable disposition of
our common shares unless:
|
·
|
your gain is effectively connected with a trade or business that you conduct
in the United States (and, if an applicable income tax treaty so requires as a condition for you to be subject to U.S. federal
income tax on a net income basis in respect of gain from the sale or other disposition of our common shares, such gain is attributable
to a permanent establishment maintained by you in the United States), or
|
|
·
|
you are an individual Non-U.S. Holder and are present in the United States
for at least 183 days in the taxable year of the sale or other disposition, and certain other conditions exist.
|
You will be subject to tax in
respect of any gain effectively connected with your conduct of a trade or business in the United States generally in the same manner
as a U.S. Holder as described above (other than with respect to the Medicare tax described above). Effectively connected gains
realized by a non-U.S. corporation may also, under certain circumstances, be subject to an additional “branch profits tax”
at a rate of 30 percent or such lower rate as may be specified by an applicable income tax treaty.
Backup Withholding and
Information Reporting
Payments, including dividends
and proceeds of sales, in respect of our 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. You will not be subject to backup withholding provided that:
|
·
|
you are a corporation or other exempt recipient, or
|
|
·
|
you provide your correct United States federal taxpayer identification number
and certify, under penalties of perjury, that you are not subject to backup withholding.
|
Amounts withheld under the backup
withholding rules may be credited against your United States federal income tax, and you 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.
British Virgin Islands Tax
Consequences
Under the BVI BC Act of the BVI
as currently in effect, a holder of common equity, such as our shares, who is not a resident of the BVI is exempt from BVI income
tax on dividends paid with respect to the common equity and all holders of common equity are not liable to the BVI for income tax
or capital gains tax on gains realized on sale or disposal of such shares. The BVI does not impose a withholding tax on dividends
paid by a company incorporated under the BVI BC Act.
There are no capital gains, gift
or inheritance taxes levied by the BVI on companies, like the Company, which were originally incorporated under the IBCA Act. In
addition, our common shares are not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or
convention currently in effect between the United States and the BVI.
Documents on Display
Deswell is subject to the information
requirements of the Securities and Exchange Act of 1934, and, in accordance with the Securities Exchange Act of 1934, Deswell files
annual reports on Form 20-F within four months of its fiscal year end, and submits other reports and information under cover of
Form 6-K with the SEC. You may read and copy this information at the SEC’s public reference room at 100 F Street, NE, Washington
DC, 20549. Recent filings and
reports are also available free
of charge though the EDGAR electronic filing system at http://www.sec.gov. You can also request copies of the documents, upon payment
of a duplicating fee, by writing to the public reference section of the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference room or accessing documents through EDGAR.
As a foreign private issuer,
Deswell is exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements
to shareholders.
Exchange Controls
There are no exchange control
restrictions on payments of dividends on the Company’s common shares or on the conduct of the Company’s operations
either in Macao, where the Company’s principal executive offices are located, or the BVI, where the Company is incorporated.
Other jurisdictions in which the Company conducts operations may have various exchange controls. There are no material BVI laws
which impose foreign exchange controls on the Company or that affect the payment of dividends, interest or other payments to non-resident
holders of the Company’s common shares. BVI law and the Company’s Memorandum and Articles of Association impose no
limitations on the right of nonresident or foreign owners to hold the Company’s Securities or vote the Company’s common
shares.
To the extent that the Company
may decide to pay cash dividends in the future, such dividends will be determined by resolution of the directors of the Company.
The directors may authorize a distribution by way of a dividend at a time and of an amount they think fit if they are satisfied,
on reasonable grounds, that, immediately after the distribution, 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 (i.e. a balance sheet and cash flow test). As the Company is a holding
company, the amount available for distribution will be limited by the amount of dividends that can be declared and paid to it by
its subsidiaries. Dividends declared by subsidiaries will be based on the profits reported in their statutory accounts prepared
in accordance with generally accepted accounting principles in the relevant countries, primarily Macao and China, which differ
from U.S. GAAP. To date these controls, with the exception of a requirement that 10% of profits to be reserved for future developments
and staff welfare in China, have not had and are not expected to have a material impact on the Company’s financial results.
Item
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
At March 31, 2017, 2018 and 2019,
the Company had no open forward exchange contracts or option contracts. Cash and cash equivalents on hand at March 31, 2019 of
$14,371,000 were held in the following currencies:
|
|
Equivalent U.S. Dollar Holdings
|
|
|
|
(in thousands)
|
|
United States dollars
|
|
$
|
6,461
|
|
Chinese RMB
|
|
|
4,523
|
|
Hong Kong dollars
|
|
|
3,209
|
|
Macao dollars
|
|
|
150
|
|
Euro
|
|
|
3
|
|
Japanese yen
|
|
|
25
|
|
|
|
$
|
14,371
|
|
See discussion of Exchange Rate
Fluctuation in
Item
5 Operating and Financial Review and Prospects.
Interest Rate Risk
Our interest expenses and income
are sensitive to changes in interest rates, as all of our cash reserves and borrowings are subject to interest rate changes. Cash
on hand of $371,000 as of March 31, 2019 was invested in short-term interest bearing investments. As such, interest income will
fluctuate with changes in short term interest rates. As of March 31, 2019, we had neither long-term debt nor short-term bank loans
outstanding on our credit facilities.
Item
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Disclosures under
Item
s
12A to 12D(2) of Form 20-F with respect to debt securities, warrants and rights, other securities, and American depository shares
are not required when Form 20-F is used as an annual report and, in any
event, are not applicable to Deswell.
Disclosures under
Item
s 12D(3) and 12D(4) of Form 20-F are required even when Form
20-F is used as an annual report. Deswell has no American Depositary Receipts deposited or outstanding.
PART
III
Item
17. FINANCIAL STATEMENTS
Not Applicable to Deswell.
Item
18. FINANCIAL STATEMENTS
The following financial statements
are filed as part of this Report:
|
Page
|
Report of Independent Registered Public Accounting
Firm –
BDO China Shu Lun Pan Certified
Public Accountants LLP
|
F-1
|
Consolidated Balance Sheets
|
F-2
|
Consolidated Statements of Comprehensive Income (Loss)
|
F-3
|
Consolidated Statements of Shareholders’ Equity
|
F-4
|
Consolidated Statements of Cash Flows
|
F-5
|
Notes to Consolidated Financial Statements
|
F-6
|
All other schedules for which
provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Report of Independent
Registered Public Accounting Firm
Shareholders and Board of Directors
Deswell Industries, Inc.
Opinion on the Consolidated
Financial Statements
We have audited the accompanying
consolidated balance sheets of Deswell Industries, Inc. and its subsidiaries (the “Company”) as of March 31, 2019
and 2018, the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of
the three years in the period ended March 31, 2019, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at March 31, 2019 and 2018, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2019, in conformity with accounting principles generally accepted in the United
States of America.
Basis
for Opinion
These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO China Shu Lun Pan Certified
Public Accountants LLP
We have served as the Company's
auditor since 2012.
Shenzhen, People’s Republic
of China
July 12, 2019
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
(U.S.
dollars in thousands)
|
|
March 31,
|
|
|
2018
|
|
2019
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,192
|
|
|
$
|
14,371
|
|
Time deposits maturing over three months
|
|
|
2,190
|
|
|
|
371
|
|
Time deposits maturing over twelve months – current portion
|
|
|
3,129
|
|
|
|
-
|
|
Marketable securities (note 3)
|
|
|
17,282
|
|
|
|
24,446
|
|
Accounts receivable, less allowances for doubtful accounts of $270 and $658 at March 31, 2018 and 2019, respectively
|
|
|
15,912
|
|
|
|
15,734
|
|
Inventories (note 4)
|
|
|
12,933
|
|
|
|
13,030
|
|
Prepaid expenses and other current assets (note 5)
|
|
|
2,267
|
|
|
|
2,006
|
|
Total current assets
|
|
|
68,905
|
|
|
|
69,958
|
|
Property, plant and equipment, net (note 6)
|
|
|
31,494
|
|
|
|
30,211
|
|
Goodwill (note 2)
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
100,399
|
|
|
$
|
100,169
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,596
|
|
|
$
|
6,253
|
|
Accrued payroll and employee benefits
|
|
|
5,566
|
|
|
|
5,676
|
|
Customer deposits
|
|
|
1,707
|
|
|
|
1,298
|
|
Other accrued liabilities (note 7)
|
|
|
1,873
|
|
|
|
1,662
|
|
Income taxes payable
|
|
|
603
|
|
|
|
657
|
|
Total current liabilities
|
|
$
|
18,345
|
|
|
$
|
15,546
|
|
Deferred income tax liabilities (note 8)
|
|
|
775
|
|
|
|
659
|
|
Total liabilities
|
|
$
|
19,120
|
|
|
$
|
16,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common shares nil par value; authorized 30,000,000 shares; 17,031,810 shares issued as of March 31, 2018 and 2019; 15,885,239 shares outstanding as of March 31, 2018 and 2019
|
|
$
|
53,063
|
|
|
$
|
53,063
|
|
Treasury stock at cost; 1,146,571 and 1,146,571 shares as of March 31, 2018 and 2019 (note 12)
|
|
|
(2,821
|
)
|
|
|
(2,821
|
)
|
Additional paid-in capital
|
|
|
8,005
|
|
|
|
8,005
|
|
Accumulated other comprehensive income
|
|
|
5,316
|
|
|
|
5,316
|
|
Retained earnings
|
|
|
17,716
|
|
|
|
20,401
|
|
Total shareholders' equity
|
|
|
81,279
|
|
|
|
83,964
|
|
Total liabilities and shareholders' equity
|
|
$
|
100,399
|
|
|
|
100,169
|
|
|
|
|
|
|
|
|
|
|
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(U.S.
dollars in thousands, except per share data)
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Net sales
|
|
$
|
44,522
|
|
|
$
|
60,667
|
|
|
$
|
66,581
|
|
Cost of sales
|
|
|
37,073
|
|
|
|
50,953
|
|
|
|
56,311
|
|
Gross profit
|
|
|
7,449
|
|
|
|
9,714
|
|
|
|
10,270
|
|
Selling, general and administrative expenses
|
|
|
8,856
|
|
|
|
8,806
|
|
|
|
9,459
|
|
Other (expenses) income, net (note 13)
|
|
|
(696
|
)
|
|
|
894
|
|
|
|
(278
|
)
|
Operating (loss) income
|
|
|
(2,103
|
)
|
|
|
1,802
|
|
|
|
533
|
|
Non-operating income, net (note 14)
|
|
|
3,688
|
|
|
|
4,395
|
|
|
|
3,884
|
|
Income, before income taxes
|
|
|
1,585
|
|
|
|
6,197
|
|
|
|
4,417
|
|
Income taxes (note 8)
|
|
|
209
|
|
|
|
7
|
|
|
|
144
|
|
Net income attribute to Deswell Industries, Inc.
|
|
|
1,376
|
|
|
|
6,190
|
|
|
|
4,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Reclassification adjustment in connection with loss on disposal of available-for-sale securities transferred to profit or loss
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
Total comprehensive income attributable to Deswell Industries, Inc.
|
|
$
|
1,387
|
|
|
$
|
6,190
|
|
|
$
|
4,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Deswell Industries, Inc. (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.09
|
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
Weighted average common shares outstanding
(shares in thousands)
|
|
|
16,035
|
|
|
|
15,885
|
|
|
|
15,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.09
|
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
Weighted average common shares outstanding
(shares in thousands)
|
|
|
16,035
|
|
|
|
15,985
|
|
|
|
16,059
|
|
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S.
dollars in thousands, except per share data)
|
|
Common
stock
|
|
Treasury
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
paid-in
capital
|
|
other
comprehensive
income
|
|
Retained
earnings
|
|
Total
Shareholders’
Equity
|
Balance at March 31, 2016
|
|
|
17,031,810
|
|
|
$
|
53,063
|
|
|
|
(975,571
|
)
|
|
$
|
(2,513
|
)
|
|
$
|
8,005
|
|
|
$
|
5,305
|
|
|
$
|
12,948
|
|
|
$
|
76,808
|
|
Unrealized loss on available-for-sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Reclassification adjustment in
connection with loss on disposal of available-for-sale securities transferred to profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
Repurchase of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(171,000
|
)
|
|
|
(308
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(308
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,376
|
|
|
|
1,376
|
|
Dividends ($0.105 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,686
|
)
|
|
|
(1,686
|
)
|
Balance at March 31, 2017
|
|
|
17,031,810
|
|
|
$
|
53,063
|
|
|
|
(1,146,571
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
8,005
|
|
|
$
|
5,316
|
|
|
$
|
12,638
|
|
|
$
|
76,201
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,190
|
|
|
|
6,190
|
|
Dividends ($0.07 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,112
|
)
|
|
|
(1,112
|
)
|
Balance at March 31, 2018
|
|
|
17,031,810
|
|
|
$
|
53,063
|
|
|
|
(1,146,571
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
8,005
|
|
|
$
|
5,316
|
|
|
$
|
17,716
|
|
|
$
|
81,279
|
|
Unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,273
|
|
|
|
4,273
|
|
Dividends ($0.1 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,588
|
)
|
|
|
(1,588
|
)
|
Balance at March 31, 2019
|
|
|
17,031,810
|
|
|
$
|
53,063
|
|
|
|
(1,146,571
|
)
|
|
$
|
(2,821
|
)
|
|
$
|
8,005
|
|
|
$
|
5,316
|
|
|
$
|
20,401
|
|
|
$
|
83,964
|
|
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(U.S.
dollars in thousands)
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,376
|
|
|
$
|
6,190
|
|
|
$
|
4,273
|
|
Adjustments to reconcile net loss to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,135
|
|
|
|
2,138
|
|
|
|
2,114
|
|
Provision for (reversal of) doubtful accounts, net
|
|
|
371
|
|
|
|
(674
|
)
|
|
|
403
|
|
(Usage) additional charges for obsolescence allowance of inventories, net
|
|
|
(65
|
)
|
|
|
296
|
|
|
|
256
|
|
Loss on disposal of property, plant and equipment
|
|
|
162
|
|
|
|
61
|
|
|
|
22
|
|
Unrealized holding gain on marketable securities
|
|
|
(1,999
|
)
|
|
|
(1,401
|
)
|
|
|
(891
|
)
|
Gain on sales of marketable securities
|
|
|
(69
|
)
|
|
|
(609
|
)
|
|
|
(746
|
)
|
Loss on disposal of available-for-sale securities
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
Deferred income tax
|
|
|
64
|
|
|
|
(114
|
)
|
|
|
(116
|
)
|
Scrip dividend received
|
|
|
-
|
|
|
|
(168
|
)
|
|
|
(33
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,322
|
)
|
|
|
(2,079
|
)
|
|
|
(225
|
)
|
Inventories
|
|
|
(2,509
|
)
|
|
|
(2,541
|
)
|
|
|
(353
|
)
|
Prepaid expenses and other current assets
|
|
|
(761
|
)
|
|
|
152
|
|
|
|
261
|
|
Accounts payable
|
|
|
2,924
|
|
|
|
3,444
|
|
|
|
(2,343
|
)
|
Accrued payroll and employee benefits
|
|
|
608
|
|
|
|
923
|
|
|
|
110
|
|
Customer deposits
|
|
|
729
|
|
|
|
(445
|
)
|
|
|
(409
|
)
|
Other accrued liabilities
|
|
|
185
|
|
|
|
399
|
|
|
|
(211
|
)
|
Income taxes payable
|
|
|
75
|
|
|
|
127
|
|
|
|
54
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,082
|
)
|
|
|
5,699
|
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(2,152
|
)
|
|
|
(1,707
|
)
|
|
|
(878
|
)
|
Proceeds from sale of property, plant and equipment, net of transaction costs
|
|
|
993
|
|
|
|
6
|
|
|
|
25
|
|
Purchase of marketable securities
|
|
|
(3,159
|
)
|
|
|
(5,357
|
)
|
|
|
(12,704
|
)
|
Proceeds from sales of marketable securities
|
|
|
920
|
|
|
|
6,580
|
|
|
|
7,210
|
|
Proceeds from disposal of available-for-sale securities
|
|
|
1,600
|
|
|
|
-
|
|
|
|
-
|
|
Release of (increase in) fixed deposits maturing over three months
|
|
|
(146
|
)
|
|
|
3,232
|
|
|
|
1,819
|
|
(Increase in) decrease in fixed deposits maturing over twelve months
|
|
|
1,664
|
|
|
|
(227
|
)
|
|
|
3,129
|
|
Net cash (used in) provided by investing activities
|
|
|
(280
|
)
|
|
|
2,527
|
|
|
|
(1,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(2,248
|
)
|
|
|
(1,112
|
)
|
|
|
(1,588
|
)
|
Repurchase of common stock
|
|
|
(308
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(2,556
|
)
|
|
|
(1,112
|
)
|
|
|
(1,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,918
|
)
|
|
|
7,114
|
|
|
|
(821
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
11,996
|
|
|
|
8,078
|
|
|
|
15,192
|
|
Cash and cash equivalents, end of year
|
|
$
|
8,078
|
|
|
$
|
15,192
|
|
|
$
|
14,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
21
|
|
|
$
|
85
|
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Organization
and Basis of Financial Statements
Deswell Industries,
Inc. was incorporated in the British Virgin Islands on December 2, 1993.
The principal
activities of the Company comprise the manufacturing and sales of injection-molded plastic parts and components and electronic
products assembling. The manufacturing activities are subcontracted to subsidiaries operating in the People's Republic of China
(“PRC”). The selling and administrative activities were originally performed in the Hong Kong Special Administrative
Region ("Hong Kong") of the PRC. From August 2003, these activities were moved to the Macao Special Administrative Region
(“Macao”) of the PRC.
As the Company
is a holding company, the amount of any dividends to be declared by the Company will be dependent upon the amount which can be
distributed from its subsidiaries. Dividends from subsidiaries are declared based on profits as reported in their statutory accounts.
2.
Summary of Significant Accounting Policies
Principles
of consolidation
- The consolidated financial statements, prepared in accordance with generally accepted accounting principles
in the United States of America, include the assets, liabilities, revenues, expenses and cash flows of all subsidiaries. Intercompany
balances, transactions and cash flows are eliminated on consolidation.
Goodwill
- The excess purchase
price over the fair value of net assets acquired is recorded on the balance sheet as goodwill. The Company adopted Accounting Standards
Codification (“ASC”) No. 350, “Intangibles – Goodwill and Other”, which requires the carrying value
of goodwill to be evaluated for impairment on an annual basis or more frequently if impairment indicators arise. The Company regularly
conducted annual impairment evaluation. The impairment test requires the Company to estimate the fair value of our reporting units.
If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and
the Company proceeds to step two of the impairment analysis. In the second step, the implied fair value of the reporting unit’s
goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill
(including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value
of the goodwill that results from the application of the second step is then compared to the carrying amount of the goodwill and
an impairment charge is recorded for the difference. The assumptions used in the estimate of fair value are generally consistent
with the past performance of each reporting unit and are consistent with the projections and assumptions that are used in current
operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The entire
goodwill of $393 was fully impaired since March 31, 2014.
Cash and
cash equivalents
- Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time
certificates of deposit with a maturity of three months or less when purchased.
Marketable
securities -
All marketable securities are classified as trading securities and are stated at fair market value. Market value
is determined by the most recently traded price of the security at the balance sheet date. Net realized and unrealized gains and
losses on trading securities are included in non-operating income. The cost of investments sold is based on the average cost method.
Interest and dividend income earned are included in non-operating income.
Available-for-sales
securities -
Available-for-sale securities are investments in debt securities that have readily determinable fair values not
classified as trading securities or as held-to-maturity securities. All available-for-sale securities are carried at fair value
and represent securities that are available to meet liquidity and/or other needs of the Company. Gains and losses are recognized
and reported separately in the consolidated statements of comprehensive income upon realization or when impairment of values is
deemed to be other than temporary. In estimating other-than temporary impairment losses, management considers, (i) the length of
time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the
issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient
to allow for anticipated recovery in fair value. Gains or losses are recognized using the specific identification method. Unrealized
holding gains and losses for securities available-for-sale are excluded from the consolidated statements of comprehensive income
and reported net of taxes in the accumulated other comprehensive income component of shareholders' equity until realized. During
the year ended March 31, 2017, all available-for-sales securities were disposed for a consideration of $1,600. Unrealized gain
(loss) for the years ended March 31, 2017 was $(3).
2. Summary
of Significant Accounting Policies - continued
I
nventories
-
Inventories are stated at the lower of cost or market. Cost is determined on the weighted
average basis. Work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with
the manufacturing process. The Company periodically performs an analysis of inventory to determine obsolete or slow-moving inventory
and determine if its cost exceeds the estimated market value. Write down of potentially obsolete or slow-moving inventory are recorded
based on management’s analysis of inventory levels.
Property,
plant and equipment
- Property, plant and equipment is stated at cost including the cost of improvements. Maintenance and repairs
are charged to expense as incurred. Depreciation and amortization are provided on the straight line method based on the estimated
useful lives of the assets as follows:
Leasehold land and buildings
|
30 - 50 years
|
Plant and machinery
|
5 - 15 years
|
Furniture, fixtures and equipment
|
4 - 5 years
|
Motor vehicles
|
3 - 5 years
|
Leasehold improvements
|
2 - 5 years
|
Leases
- Leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital
lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there
is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life or d)
the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased
property to the lessor at the inception date. For the lessor, in addition to the four criteria mentioned above, a capital lease
has to meet both of the following incremental criteria: a) the collectability of the minimum lease payments under the lease has
to be reasonable predictable, and b) no important uncertainties surround the amount of unreimbursable costs yet to be incurred
by the lessor under the lease.
For the lessee, a capital lease
is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All
other leases are accounted for as operating leases. The total rental payments made under the leases are recognized in the consolidated
statement of comprehensive income (loss) as incurred. For the lessor, a capital lease is accounted for as sale-type lease, direct
financing lease or leveraged lease. All other leases are accounted for as operating leases. Revenues are recorded to statement
of comprehensive income (loss) on a straight-line basis over the term of the lease. The Company has no capital leases as a lessee
or lessor for any of the periods presented.
Impairment of long-lived
assets
- Long-lived assets are included in impairment evaluations when events and circumstances exist that indicate the carrying
value of these assets may not be recoverable. In accordance with ASC No. 360, “Property, Plant and Equipment”, the
Company assesses the recoverability of the carrying value of long-lived assets by first grouping its long-lived assets with other
assets and liabilities at the lowest level for which identifiable cash flows largely independent of the cash flows of other assets
and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with
and expected to arise from the use of and eventual disposition of such asset group. The Company estimates the undiscounted cash
flows over the remaining useful life of the primary asset within the asset group. If the carrying value of the asset group exceeds
the estimated undiscounted cash flows, the Company records an impairment charge to the extent the carrying value of the long-lived
asset exceeds its fair value. The Company determines fair value through quoted market prices in active markets or, if quotations
of market prices are unavailable, through the performance of internal analysis using a discounted cash flow methodology. The undiscounted
and discounted cash flow analyses based on a number of estimates and assumptions, including the expected period over which the
asset will be utilized, projected future operating results of the asset group, discount rate and long-term growth rate.
2.
Summary of Significant Accounting Policies - continued
Revenue
recognition
–
Effective April 1, 2018, the Company adopted the new guidance
of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC
Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. The Company applies the following steps to recognize revenues: (1) identify the contract 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 Company satisfies a performance obligation.
Products sales
The Company recognizes revenue upon transfer of control
of its products to the customer, which typically occurs upon delivery. The Company’s main performance obligation to its customers
is the delivery of products in accordance with purchase orders. Each purchase order defines the transaction price for the products
purchased under the arrangement. Acceptance of delivery of the products is evidenced by goods receipt notes signed by the customer.
The Company has no remaining obligations after the customer’s acceptance of the products.
Under the terms of the contracts or purchase orders between
the Company and the customer, the control of the products is transferred to the customer upon the signing of the goods receipt
notes and the customer has no rights to return the products (other than for defective products). Some customers examine and pick
up the products at our plant while some local customers instruct us to deliver the products to their plants nearby. Some overseas
customers instruct us to deliver the products to the named port of shipment. Delivery of the products occurs at that point of time
when the control of the products is transferred to the customer.
The selling price, which is specified
in the purchase orders, is fixed. Under the terms of the purchase orders, upon the sale of the products to the customer and the
signing of the good receipts notes, the Company has the legally enforceable right to receive full payment of the sales price. The
customer’s obligation to pay the Company is not dependent on the customer selling the products or collecting cash from their
customers (or end customers). The customer is required to pay under normal sales terms. The Company’s normal payment terms
range from 30 days to 90 days and its sales arrangements do not have any material financing components. In addition, the Company’s
customer arrangements do not produce contract assets or liabilities that are material to its consolidated financial statements.
The Company permits the return of damaged or defective products and accounts for these actual returns as deduction from sales.
Product returns to the Company were insignificant during past years.
Costs to obtain a contract and
incremental costs to fulfill the Company’s customer arrangements are expensed as incurred, as the amortization period
is less than one year.
The Company’s sales are net of value added tax (“VAT”)
and business tax and surcharges collected on behalf of tax authorities in respect of product sales. VAT and business tax and surcharges
collected from customers, net of VAT paid for purchases, is recorded as a liability in the consolidated balance sheets until it
is paid to the tax authorities.
Outbound freight and Handling costs:
The company accounts for product outbound freight and
handling costs as fulfillment activities and present the associated costs in selling expenses in the period in which it sells the
product.
2. Summary
of Significant Accounting Policies - continued
Disaggregation of Revenues:
The following table disaggregates product sales by business
segment by geography which provides information as to the major source of revenue. See Note 16 for additional description of our
reportable business segments.
|
|
Year
ended March 31, 2019
|
|
|
|
Injection molded
Plastic parts
|
|
Electronic
Products
|
|
Total
|
Net sales
|
|
|
|
|
|
|
United States of America
|
|
$1,504
|
|
$11,358
|
|
$12,862
|
|
PRC
|
|
25,637
|
|
5,135
|
|
30,772
|
|
United Kingdom
|
|
255
|
|
3,331
|
|
3,586
|
|
Hong Kong
|
|
1,195
|
|
3,531
|
|
4,726
|
|
Europe
|
|
188
|
|
7,998
|
|
8,186
|
|
Others
|
|
-
|
|
6,449
|
|
6,449
|
|
Total net sales
|
|
$28,779
|
|
$37,802
|
|
$66,581
|
|
Other
c
omprehensive income -
Other comprehensive income for the year ended March 31, 2017 represented unrealized loss on available-for-sale
securities and reclassification adjustment in connection with loss on disposal of available-for-sale securities transferred to
profit or loss, and were included in the consolidated statement of comprehensive income.
Allowance
for doubtful account
- The Company regularly monitors and assesses the risk of not collecting amounts owed to the Company by
customers. This evaluation is based upon a variety of factors including: ongoing credit evaluations of its customers’ financial
condition, an analysis of amounts current and past due along with relevant history and facts particular to the customer. Based
upon the results of this analysis, the Company records an allowance for uncollectible accounts for this risk. This analysis requires
the Company to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance
for doubtful accounts. Unanticipated changes in the liquidity or financial position of the Company’s customers may require
additional provisions for doubtful accounts.
|
|
Year ended March 31,
|
Allowance for doubtful accounts
|
|
2017
|
2018
|
2019
|
|
|
|
|
|
Balance at beginning of the year
|
|
$881
|
$1,252
|
$270
|
Provision for the year
|
|
420
|
34
|
419
|
Bad debt recovery
|
|
(49)
|
(708)
|
(16)
|
Written off
|
|
-
|
(308)
|
(15)
|
|
|
$1,252
|
$270
|
$658
|
|
|
|
|
|
|
|
The provision and the bad debt
recovery for the years were charged to other income (expenses) in consolidated statements of comprehensive income.
Shipping
and handling cost -
Shipping and handling costs related to the delivery of finished goods are included in selling expenses.
During the years ended March 31, 2017, 2018 and 2019, shipping and handling costs expensed to selling expenses were $501, $557
and $529, respectively.
Income
taxes
- Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes.
Any PRC tax paid by subsidiaries during the year is recorded. Deferred income taxes are recognized for all significant temporary
differences at enacted rates and classified as current or non-current based upon the classification of the related asset or liability
in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered
more likely than not that some portion of, or all, the deferred tax asset will not be realized. The Company classifies interest
and/or penalties related to unrecognized tax benefits, if any, as a component of income tax provisions.
2. Summary
of Significant Accounting Policies - continued
The Company
adopted the provisions of ASC No. 740 “Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty
in income taxes recognized by prescribing a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides accounting guidance on de-recognition,
classification, interest and penalties, disclosure and transition.
Foreign
currency translation
- The consolidated financial statements of the Company are presented in U.S. dollars as the Company is
incorporated in the British Virgin Islands where the currency is the U.S. dollar. The Company's subsidiaries conduct substantially
all of their business in U.S. dollars, Hong Kong dollars or Chinese Renminbi. Notwithstanding this, U.S. dollar is considered by
management to be the most appropriate functional currency of the Company’s subsidiaries because most of our customers contracted
with our subsidiaries in U.S. dollars.
All transactions
in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the transaction
dates. Monetary items existing at the balance sheet date denominated in currencies other than the functional currencies are translated
at period end rates. Gains and losses resulting from the translation of foreign currency transactions and balances are included
in the consolidated statement of comprehensive income (loss).
The exchange
rates between the Hong Kong dollars and the U.S. dollar were approximately 7.7904, 7.7904 and 7.7904 as of March 31, 2017, 2018
and 2019, respectively. The exchange rates between the Chinese Renminbi and the U.S. dollar were approximately 6.8915, 6.3916 and
6.7472 as of March 31, 2017, 2018 and 2019, respectively. Aggregate net foreign currency transaction gain included in other income
were, $(361), $(56) and $(82) for the years ended March 31, 2017, 2018 and 2019, respectively.
Post-retirement
and post-employment benefits
- The Company and its subsidiaries contribute to a state pension scheme in respect of its Chinese
employees.
Stock-based
compensation
- The Company adopts ASC No. 718, “Compensation – Stock Compensation”, which requires that share-based
payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument
issued and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under
this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based
on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange
for the award, which generally is the vesting period.
There were
no stock options granted during the year ended March 31, 2017, 2018 and 2019.
Net income
per share
- Basic net income per share is computed by dividing net loss available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted net income per share gives effect to all dilutive potential common
shares outstanding during the period. The weighted average number of common shares outstanding is adjusted to include the number
of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In computing
the dilutive effect of potential common shares, the average stock price for the period is used in determining the number of treasury
shares assumed to be purchased with the proceeds from the exercise of options.
Basic net
income per share and diluted net income per share calculated in accordance with ASC No. 260, “Earnings Per Share”,
are reconciled as follows (shares in thousands):
|
Year ended March 31,
|
|
2017
|
|
2018
|
|
2019
|
Net
income attributable to Deswell Industries, Inc.
|
$1,376
|
|
$6,190
|
|
$4,273
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
16,035
|
|
15,885
|
|
15,885
|
|
|
|
|
|
|
Basic net income per share
|
$0.09
|
|
$0.39
|
|
$0.27
|
|
|
|
|
|
|
2. Summary
of Significant Accounting Policies - continued
|
Year ended March 31,
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
16,035
|
|
15,885
|
|
15,885
|
Effect of dilutive securities – Options
|
-
|
|
100
|
|
174
|
Diluted
weighted average common and potential common
shares
outstanding
|
16,035
|
|
15,985
|
|
16,059
|
|
|
|
|
|
|
Diluted net income per share
|
$0.09
|
|
$0.39
|
|
$0.27
|
For the
years ended March 31, 2017, potential common shares of 532,000 shares related to stock options are excluded from the computation
of diluted net income per share as their exercise prices were higher than the average market price.
Use of
estimates -
The preparation of financial statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair value
of financial instruments -
The fair value of a financial instrument is defined as the exchange price that would be received
from an asset or paid to transfer a liability (as exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants at the measurement date. The carrying amounts of financial assets
and liabilities, such as cash and cash equivalents, time deposits, accounts receivable, prepaid expenses and other current assets,
accounts payable, and other current liabilities, approximate their fair values because of the short maturity of these instruments
and market rates of interest.
Fair value
measurements -
The Company has adopted ASC No. 820, Fair Value Measurements and Disclosures, which defines fair value, establishes
a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new
fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify
the source of the information.
It establishes
a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure
fair value and include the following:
Level 1 - Quoted prices in active markets for identical
assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded
in an active exchange market, as well as certain securities that are highly liquid and are actively traded in over-the-counter
markets.
Level 2 - Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
Level 3 - Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques
based on significant unobservable inputs, as well as instruments for which the determination of fair value requires significant
management judgment or estimation.
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
2. Summary
of Significant Accounting Policies - continued
Non-recurring
fair value measurements
- Long-lived assets are measured at fair value on a non-recurring basis using mostly Level 3 inputs
as defined in the fair value hierarchy. These assets are not measured at fair value on an ongoing basis, but are subject to fair
value adjustments only in certain circumstances. Assets that are written down to fair value when impaired and retained investments
are not subsequently adjusted to fair value unless further impairment occurs.
Fair value
of long-lived assets, including real estate, are determined by estimating the amount and timing of net future cash flows (which
are unobservable inputs) and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based
on its experience and knowledge of the market. Significant increases or decreases in actual cash flows may result in valuation
changes. For real estate, fair values are based on discounted cash flow estimates which reflect current and projected lease profiles
and available industry information about capitalization rates and expected trends in rents and occupancy and are corroborated by
external appraisals.
Recent changes in accounting standards
– In June 2016, Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Financial Instruments-Credit
Losses (Topic 326) amends guidelines on reporting credit losses for assets held at amortized cost basis and available-for-sale
debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current
GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses
is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected
to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP,
however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects
entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The
amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance
receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments
in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued
ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842,
Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective
of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial
statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842
and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic
840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing
between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between
capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases
and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive
income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. We expect to adopt the new standard on April 1, 2019 using the
modified retrospective method. The transition method allows entities to initially apply the requirements by recognizing a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. The new standard provides a number of optional
practical expedients in transition. We expect to elect all of the new standard and practical expedients in the transition period.
While we continue to evaluate certain aspects of the new standard, including those still being revised by the FASB, we do not
expect the new standard to have a material effect on our financial statements. And we do not expect a significant change in our
leasing activities between now and adoption. We believe substantially all of our leases will continue to be classified as operating
leases under the new standard.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement
(Topic 820) (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements.
The modified standard eliminates the requirement to disclose changes in unrealized gains and losses included in earnings for recurring
Level 3 fair value measurements and requires changes in unrealized gains and losses be included in other comprehensive income for
recurring Level 3 fair value measurements of instruments. The standard also requires the disclosure of the range and weighted average
used to develop significant unobservable inputs and how weighted average is calculate for recurring and nonrecurring Level 3 fair
value measurements. The amendment is effective for fiscal years beginning after December 15, 2019 and interim periods within that
fiscal year with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2018-13 on our consolidated
financial statements.
3. Marketable
Securities
The Company
acquired equity securities listed in Hong Kong and Australian Securities Exchange.
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
|
|
|
|
|
|
Cost
|
|
|
$15,473
|
|
$21,746
|
|
|
|
|
|
|
Market value
|
|
|
$17,282
|
|
$24,446
|
Unrealized
gain for the years ended March 31, 2017, 2018 and 2019 were $1,999, $1,401 and $891, respectively.
Net proceeds
from sale of marketable securities for the years ended March 31, 2017, 2018 and 2019 were $920, $6,580 and $7,210 respectively
and realized gain from sales of marketable securities for the years ended March 31, 2017, 2018 and 2019 were $69, $609 and $746,
respectively. For the purposes of determining realized gains and losses, the cost of securities sold was determined based on the
average cost method.
The marketable
securities were classified as Level 1 of the hierarchy established under ASC No. 820 because the valuations were based on quoted
prices for identical securities in active markets.
4. Inventories
Inventories,
net of allowances, by major categories are summarized as follows:
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
|
|
|
|
|
|
Raw materials
|
|
|
$6,961
|
|
$7,020
|
Work-in-progress
|
|
|
3,698
|
|
3,884
|
Finished goods
|
|
|
2,274
|
|
2,126
|
|
|
|
$12,933
|
|
$13,030
|
|
|
|
|
|
|
|
|
|
Obsolescence
allowance for inventory is as follows:
|
|
|
Year ended March 31
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
|
$3,635
|
|
$3,570
|
|
$3,634
|
(Usage) additional charges, net
|
|
|
(65)
|
|
296
|
|
256
|
Written off
|
|
|
-
|
|
(232)
|
|
-
|
Balance at the end of the year
|
|
|
$3,570
|
|
$3,634
|
|
$3,890
|
5. Prepaid
Expenses and Other Current Assets
Prepaid expenses
and other current assets consist of the following:
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
|
|
|
|
|
|
Value added tax recoverable
|
|
|
$419
|
|
$322
|
Rental and utility deposit
|
|
|
19
|
|
20
|
Advance to suppliers
|
|
|
243
|
|
220
|
Prepayment
|
|
|
520
|
|
526
|
Coupon and dividend receivable
|
|
|
176
|
|
109
|
Others
|
|
|
890
|
|
809
|
|
|
|
$2,267
|
|
$2,006
|
6. Property,
Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
At cost:
|
|
|
|
|
|
Leasehold land and buildings
|
|
|
$32,233
|
|
$32,233
|
Plant and machinery
|
|
|
39,424
|
|
38,839
|
Furniture, fixtures and equipment
|
|
|
11,559
|
|
11,642
|
Motor vehicles
|
|
|
1,540
|
|
1,513
|
Leasehold improvements
|
|
|
3,737
|
|
3,832
|
Impairment
|
|
|
(3,183)
|
|
(3,093)
|
|
|
|
85,310
|
|
84,966
|
Less: accumulated depreciation and amortization
|
|
|
(53,816)
|
|
(54,755)
|
Net book value
|
|
|
$31,494
|
|
$30,211
|
Included in furniture, fixtures and equipment is computer
software with net values of $26 and $26 as of March 31, 2018 and 2019, respectively.
Cost of leasehold land and buildings consist of the following:
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
Land use
right of state-owned land and buildings erected thereon (a)
|
|
|
$28,077
|
|
$28,077
|
Long term leased land and buildings erected thereon (b)
|
|
|
4,156
|
|
4,156
|
|
|
|
$32,233
|
|
$32,233
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The land use rights of state-owned land and buildings erected
thereon represent land and buildings located in the PRC on which an upfront lump-sum payment has been made for the right to use
the land and building with lease terms of 50 years expiring in 2050.
|
|
(b)
|
Long term leased land and buildings erected thereon represent
land and buildings on collectively-owned land located in the PRC on which an upfront lump-sum payment has been made for the right
to use the land and building for a term of 50 years to 2053. Dongguan Chang An Xiaobian District Co-operation, the lessor, is
the entity to whom the collectively-owned land has been granted. According to existing PRC laws and regulations, collectively-owned
land is not freely transferable unless certain application and approval procedures are fulfilled by the Dongguan Chang An Xiaobian
District Co-operation to change the legal form of the land from collectively-owned to state-owned. As of March 31, 2019, the Company
is not aware of any steps being taken by the Dongguan Chang An Xiaobian District Co-operation for such application.
|
Included in leasehold land and buildings
is property on lease with net values of $6,409 and $6,224 as of March 31, 2018 and 2019, respectively. Details of the property
on lease are as follows:
Included in leasehold land and buildings
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
|
|
|
|
|
|
Cost
|
|
|
$8,831
|
|
$8,831
|
Less: accumulated depreciation and amortization
|
|
|
(2,422)
|
|
(2,607)
|
Net book value
|
|
|
$6,409
|
|
$6,224
|
During the years ended March
31, 2017, 2018 and 2019, the Company had no impairment on its property, plant and equipment. Depreciation of property, plant and
equipment were $2,135, $2,138 and $2,114 during the years ended March 31, 2017, 2018 and 2019, respectively.
7. Other
Accrued Liabilities
Other accrued
liabilities consist of the following:
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
|
|
|
|
|
|
Accrued expenses
|
|
|
$620
|
|
$541
|
Others
|
|
|
1,253
|
|
1,121
|
|
|
|
$1,873
|
|
$1,662
|
|
|
|
|
|
|
|
|
8. Income
Taxes
Net income
before taxes of $1,585, $6,197 and $4,417 were solely attributed by non-U.S. for the years ended March 31, 2017, 2018 and 2019,
respectively.
Under the
current BVI law, the Company’s income is not subject to taxation. Subsidiaries operating in Hong Kong and the PRC are subject
to income taxes as described below, and the subsidiaries operating in Macao are exempted from income taxes. Under the current Samoa
Law, subsidiary incorporated in Samoa is not subject to profit tax as it has no business operations in Samoa.
The provision
for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation
of 16.5% (2017: 16.5%, 2018: 16.5%) to the estimated taxable income arising in or derived from Hong Kong, if applicable.
In accordance w
ith
the effect of the PRC Income Tax Law, the standard income tax rate for all subsidiaries operating in the PRC is 25%.
8. Income
Taxes - continued
The provision
for income taxes consists of the following:
|
|
Year
ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Current tax
|
|
|
|
|
|
|
- PRC
|
|
$116
|
|
$173
|
|
$236
|
Deferred tax
|
|
|
|
|
|
|
- PRC
|
|
93
|
|
(166)
|
|
(92)
|
|
|
$209
|
|
$7
|
|
$144
|
Reconciliation
between the provision for income taxes computed by applying the statutory tax rate in the PRC to income before income taxes and
the actual provision for income taxes is as follows:
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Provision for income taxes at statutory tax rate in the PRC
|
|
$396
|
|
$1,549
|
|
$1,105
|
Tax rate differential on entities not subject to PRC income tax
|
|
(128)
|
|
(797)
|
|
(284)
|
Effect of income for which no income tax is chargeable
|
|
(666)
|
|
(757)
|
|
(791)
|
Effect of expense for which no income tax is deductible
|
|
1,395
|
|
207
|
|
142
|
Net change in valuation allowances
|
|
(788)
|
|
(195)
|
|
(22)
|
Over provision of income tax is previous years
|
|
-
|
|
-
|
|
(6)
|
Effective tax
|
|
$209
|
|
$7
|
|
144
|
The net deferred
income tax consists of the following:
|
|
|
March
31,
|
|
|
|
2018
|
|
2019
|
Deferred income tax assets
|
|
|
$-
|
|
$-
|
Deferred income tax liabilities
|
|
|
(775)
|
|
(659)
|
Net deferred income tax liabilities
|
|
|
$(775)
|
|
(659)
|
The components
of net deferred income tax are as follows:
|
|
|
|
|
March
31,
|
|
|
|
|
|
2018
|
|
|
2019
|
Net operating loss carry forwards
|
|
|
$-
|
|
$-
|
Provision of employee benefits
|
|
|
539
|
|
582
|
Depreciation and amortization
|
|
|
(128)
|
|
85
|
Revenue and cost of sales recognized for financial reporting purpose before being recognized for tax purpose
|
|
|
(1,333)
|
|
(1,277)
|
Others
|
|
|
328
|
|
110
|
Less: Valuation allowances
|
|
|
(181)
|
|
(159)
|
Net deferred income tax liabilities
|
|
|
$(775)
|
|
(659)
|
|
|
|
|
|
|
|
|
|
The Company
operates through the PRC entities and the valuation allowance is considered on each individual basis.
The Company’s
assessment is that it is not more likely than not that these deferred tax assets will be realized.
8. Income
Taxes - continued
The net operating
loss attributable to those PRC entities can only be carried forward for a maximum period of five years. Tax losses of non-PRC entities
can be carried forward indefinitely.
Under the PRC Income Tax Law
and the implementation rules, profits of the PRC entities earned on or after January 1, 2008 and distributed by the PRC entities
to the Company are subject to a withholding tax at a rate of 10%, unless the Company will be deemed as a resident enterprise for
tax purposes. Since the Company intends to reinvest the earnings of the PRC entities in operations in the PRC, the PRC entities
do not intend to declare dividends to their immediate non-PRC established holding companies in the foreseeable future. Accordingly,
no deferred taxation on undistributed earnings of the PRC entities has been recognized as of March 31, 2019.
The Company has adopted the provisions
of ASC 740 on April 1, 2007. The evaluation of a tax position in accordance with ASC 740 begins with a determination as to whether
it is more-likely-than-not that a tax position will be sustained upon examination based on the technical merits of the position.
A tax position that meets the more-likely-than-not recognition threshold is then measured at the largest amount of benefit that
if greater than 50 percent likely of being realized upon ultimate settlement for recognition in the financial statements. The Company
classifies interest and/or penalties related to unrecognized tax benefits as a component of income tax provisions; however, as
of March 31, 2018 and 2019, there is no interest and penalties related to uncertain tax positions.
A reconciliation of the beginning
and ending amount of total unrecognized tax benefits is as follows:
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
$268
|
|
$316
|
|
$424
|
Increase related to current year tax positions
|
|
48
|
|
108
|
|
58
|
Balance at the end of the year
|
|
$316
|
|
$424
|
|
$482
|
At March 31, 2018 and 2019,
there are $424 and $482 of unrecognized tax benefits that if recognized, would affect the annual effective tax rate. For the year
ended March 31, 2017, 2018 and 2019, the Company did not recognize any interest and penalties related to unrecognized tax benefits.
The unrecognized tax benefits
represent the estimated income tax expenses the Company would be required to pay, should the income tax rate used, taxable income
and deductible expenses for tax purpose recognized in accordance with tax laws and regulations. The Company is currently unable
to provide an estimate of a range of the total amount of unrecognized tax benefits that is reasonably possible to change significantly
within the next twelve months
According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made
by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are
not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of
limitations in the case of tax evasion.
In accordance with Guo Shui
Fa [2009] No.2, the PRC tax authorities have the right to deem the Company for a tax amount based on the transfer pricing contemporaneous
documentations (the “Contemporaneous Documentations”) or a basis that they considered reasonable. The amount of income
taxes payable at March 31, 2018 and 2019 includes the deemed profit tax estimated by the management based on the Contemporaneous
Documentations.
9. Commitments
and Contingencies
The Company
leases premises under various operating leases, certain of which contain escalation clauses. Rental expenses under operating leases
included in the consolidated statements of comprehensive income were $62, $68 and 72 for the years ended March 31, 2017, 2018 and
2019, respectively.
At March 31,
2019, the Company was obligated under operating leases requiring minimum rentals as follows:
|
|
|
|
|
|
Year ending March 31, 2020
|
|
|
|
|
$53
|
Year ending March 31, 2021
|
|
|
|
|
4
|
Total minimum lease payments
|
|
|
|
|
$57
|
|
|
|
|
|
|
|
We have non-cancellable
agreements to lease our factory buildings to tenants under operating lease, which provide for payments through 2019. At March 31,
2019, the minimum future rental income to be received is as follows:
|
|
|
|
|
|
|
Year ending March 31, 2020
|
|
|
|
|
$1,291
|
|
Year ending March 31, 2021
|
|
|
|
|
274
|
|
Year ending March 31, 2022
|
|
|
|
|
6
|
|
Total minimum future rental income
|
|
|
|
|
$1,571
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
2019, the Company had capital commitments for purchase of plant and machinery, and leasehold improvement totaling $235, which are
expected to be disbursed during the year ending March 31, 2021.
10. Employee
Benefits
The Company
contributes to a state pension scheme run by the Chinese government in respect of its employees in the PRC. The expense of $604,
$800 and $751 included in the consolidated statements of comprehensive income related to this plan, which is calculated at the
range of 8% to 14% of the average monthly salary, was provided for the years ended March 31, 2017, 2018 and 2019, respectively.
11. Stock
Option Plan
On March 15,
1995, the Company adopted 1995 Stock Option Plan that permits the Company to grant options to officers, directors, employees and
others to purchase up to 1,012,500 shares of Common Stock. On September 29, 1997, the Company approved an increase of 549,000 shares
making a total of 1,561,500 shares of common stock available under the stock option plan. On January 7, 2002, the Company adopted
2001 Stock Option Plan to purchase an additional 1,125,000 shares of Common Stock. On September 30, 2003, the Company adopted 2003
Stock Option Plan to purchase an additional 900,000 shares of Common Stock. On September 19, 2005, the Company’s shareholders
approved an increase of 500,000 shares making a total of 1,400,000 shares of common stock available under the 2003 Stock Option
Plan. On August 17, 2007, the Company’s Board of Directors, subject to shareholders’ approval, approved an increase
of 400,000 shares making a total of 1,800,000 shares of common stock available under the 2003 Stock Option Plan. The Company’s
shareholders approved this amendment at the Company’s Annual Shareholders’ Meeting held on October 9, 2007. On August
13, 2010, the Company’s Board of Directors, subject to shareholders’ approval, approved an increase of 800,000 shares
making a total of 2,600,000 shares of common stock available under the 2003 Stock Option Plan. The Company’s shareholders
approved this amendment at the Company’s Annual Shareholders’ Meeting held on September 16, 2010.
11. Stock
Option Plan - continued
On August
7, 2013, the Company’s Board of Directors, subject to shareholder approval, approved amendments to the 2003 Stock Option
Plan to increase by 900,000 shares the number of shares that can be optioned and sold under the 2003 Stock Option Plan, bringing
to a total of 3,500,000 shares the number of common shares that can be optioned and sold under the 2003 Stock Option Plan. The
Company’s shareholders approved this amendment at the Company’s Annual shareholders’ Meeting held on September
11, 2013.
As of March
31, 2019, options to purchase an aggregate of 5,669,000 common shares had been granted under the stock option plans. Options granted
under the stock option plans vest immediately and are exercisable for a period of up to 10 years commencing on the date of grant,
at a price equal to at least the fair market value of the Common Stock at the date of grant, and may contain such other terms as
the Board of Directors or a committee appointed to administer the plan may determine. A summary of the option activity (with weighted
average prices per option) is as follows:
|
Year ended March 31,
|
|
2017
|
2018
|
2019
|
|
Number
of stock
options
|
Weighted average exercise price
|
Number
of stock
options
|
Weighted average exercise price
|
Number
of stock
options
|
Weighted average exercise price
|
Outstanding
at beginning of the year
|
532,000
|
$2.1
|
532,000
|
$2.1
|
506,000
|
$2.1
|
Cancelled during the year
|
-
|
-
|
(26,000)
|
$2.1
|
(6,000)
|
$2.09
|
Outstanding and exercisable at the end of the year
|
532,000
|
$2.1
|
506,000
|
$2.1
|
500,000
|
$2.1
|
Range of exercise price per share
|
$2.09 to $2.14
|
$2.09 to $2.14
|
$2.09 to $2.14
|
No options
were granted or exercised for the years ended March 31, 2017, 2018 and 2019. The weighted average remaining contractual life of
the share options outstanding at March 31, 2019 was 4.8 years. At March 31, 2018 and 2019, there were 1,262,000 and 1,268,000 options
available for future grant under the plans, respectively.
12. Repurchase
of stock
On March 14,
2012, the Company’s Board of Directors authorized a stock buyback plan to repurchase up to an aggregate of $4,000 of its
issued and outstanding common shares in compliance with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange
Act of 1934 during the next two years. The program does not obligate the Company to acquire any particular number or dollar amount
of its common shares and may be suspended, modified, extended or discontinued at any time. No assurance can be given that any particular
number or dollar amount of common stock will be repurchased. By the ended March 31, 2014, 975,571 common shares had been repurchased
under the stock buyback plan for a total consideration of $2,513 at an average price of $2.57 per share. During the year ended
March 31, 2017, the Company repurchased 171,000 shares from Mr. Franki Tse Shing Fung, the former CEO of the Company, for a total
consideration of $308 at a price of $1.80 per share.
13. Other
(expenses) income, net
Other (expenses)
income, net consist of the following:
|
|
|
|
|
|
|
|
|
Year
ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Loss on disposal of property, plant and equipment, net
|
|
$(162)
|
|
$(61)
|
|
$(22)
|
Exchange loss, net
|
|
(361)
|
|
(56)
|
|
(82)
|
(Provision for) reversal of doubtful accounts, net
|
|
(371)
|
|
674
|
|
(403)
|
Others
|
|
198
|
|
337
|
|
229
|
Other (expenses) income, net
|
|
$(696)
|
|
$894
|
|
$(278)
|
14. Non-operating
income, net
Non-operating
income, net consist of the following:
|
|
|
|
|
|
|
|
|
Year
ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Dividend income from marketable securities
|
|
$616
|
|
$859
|
|
$738
|
Interest income from available-for-sales securities
|
|
5
|
|
-
|
|
-
|
Interest income from bank deposits
|
|
314
|
|
267
|
|
184
|
Unrealized gain from marketable securities
|
|
1,999
|
|
1,401
|
|
891
|
Realized gain from sales of marketable securities
|
|
69
|
|
609
|
|
746
|
Rental income
|
|
839
|
|
1,111
|
|
1,455
|
Others
|
|
(154)
|
|
148
|
|
(130)
|
Non-operating income, net
|
|
$3,688
|
|
$4,395
|
|
$3,884
|
15. Operating
Risk
Concentrations
of Credit Risk and Major Customers
- A substantial percentage of the Company's sales are made to a small number of customers
and are typically sold either under letter of credit or on an open account basis. Details of customers accounting for 10% or more
of total net sales for each of the three years ended March 31, 2017, 2018 and 2019 are as follows:
|
|
|
|
|
Percentage of net sales
|
|
Year ended March 31,
|
|
2017
|
2018
|
2019
|
|
|
|
|
Customer A
|
12.8%
|
10.8%
|
*
|
Customer B
|
10.6%
|
*%
|
11.5%
|
Customer C
|
10.2%
|
10.8%
|
*
|
Customer D
|
*
|
12.8%
|
12.5%
|
Customer E
|
*
|
11.9%
|
11.1%
|
Sales to the
above customers relate to both injection-molded plastic parts and electronic products.
15. Operating
Risk - continued
Debtors accounting
for 10% or more of total accounts receivable at March 31, 2018 and 2019, respectively, are as follows:
|
|
Percentage of
|
|
|
accounts
|
|
|
receivable at
|
|
|
March 31,
|
|
|
2018
|
2019
|
|
|
|
|
Customer A
|
|
15.5%
|
14.4%
|
Customer C
|
|
*
|
10.8%
|
Customer D
|
|
21.0%
|
26.0%
|
Customer E
|
|
12.9%
|
*
|
There were
$nil, $308 and $15 accounts receivable written off during the years ended March 31, 2017, 2018 and 2019, respectively. There were
net provision for (reversal of) doubtful accounts of $371, $(674) and 403 during the years ended March 31, 2017, 2018 and 2019,
respectively. At March 31, 2018 and 2019, allowances for doubtful accounts were $270 and $658, respectively.
Concentrations
of Suppliers
- For the years ended March 31, 2017, 2018 and 2019, the Company had no single suppliers contributed over 10%
of total purchase.
Country
risk
- The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by
changes in the political and social conditions in the PRC, and by changes in Chinese government policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods taxation, among other
things. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact.
Investment
price risk
- The Company is exposed to equity price risk on marketable securities. The Company’s
marketable securities are investment listed on the Stock Exchange of Hong Kong and Australia. Decisions to buy and sell securities are
based on daily monitoring of the performance of individual securities compared to that of the Index and other industry
indicators, as well as the Company’s liquidity needs. The Company believes the exposure to investment price risk from
the Company’s investment activities is acceptable in the Company’s circumstances.
16. Segment
Information
The Company
has two reportable segments: plastic injection molding and electronic products assembling. The Company's reportable segments are
strategic business units that offer different products and services. They are managed separately because each business requires
different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of
the acquisition was retained.
The Company used to include
the corporate expenses, which mainly comprised of directors’ remuneration, legal and professional expenses and corporate
insurance expenses, in the segment of plastic injection. Commencing from this year, the corporate expenses are separately disclosed
in the segment information for a more precise presentation of the financial performance of each segment.
The accounting
policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts
for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.
16. Segment
Information - continued
Contributions
of the major activities, profitability information and asset information of the Company's reportable segments for the years ended
March 31, 2017, 2018 and 2019 are as follows:
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
Net
sales
|
|
Intersegment
Sales
|
|
Income (loss) before income tax
|
|
Net
sales
|
|
Intersegment
Sales
|
|
Income (loss) before income tax
|
|
Net
sales
|
|
Intersegment
Sales
|
|
Income (loss) before income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Injection molded plastic parts
|
|
$23,594
|
|
$(350)
|
|
$2,520
|
|
$28,609
|
|
$(394)
|
|
$5,405
|
|
$28,956
|
|
$(178)
|
|
$3,686
|
Electronic products
|
|
21,331
|
|
(53)
|
|
742
|
|
32,512
|
|
(60)
|
|
2,047
|
|
37,865
|
|
(62)
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
$44,925
|
|
$(403)
|
|
$3,262
|
|
$61,121
|
|
$(454)
|
|
$7,452
|
|
$66,821
|
|
$(240)
|
|
$5,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to consolidated
totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales eliminations
|
|
(403)
|
|
403
|
|
-
|
|
(454)
|
|
454
|
|
-
|
|
(240)
|
|
240
|
|
-
|
Corporate expenses
|
|
|
|
|
|
$(1,677)
|
|
|
|
|
|
$(1,255)
|
|
|
|
|
|
$(1,346)
|
Consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$44,522
|
|
$-
|
|
|
|
$60,667
|
|
$-
|
|
|
|
$66,581
|
|
$-
|
|
|
Income before income taxes
|
|
|
|
|
|
$1,585
|
|
|
|
|
|
$6,197
|
|
|
|
|
|
$4,417
|
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
Interest
income
from bank deposits
|
|
Interest
expenses
|
|
Interest
income
from bank deposits
|
|
Interest
expenses
|
|
Interest
income
from bank deposits
|
|
Interest
expenses
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Injection molded plastic parts
|
|
$306
|
|
$-
|
|
$257
|
|
$-
|
|
$173
|
|
$-
|
Electronic products
|
|
8
|
|
-
|
|
10
|
|
-
|
|
11
|
|
-
|
Consolidated total
|
|
$314
|
|
$-
|
|
$267
|
|
$-
|
|
$184
|
|
$-
|
|
|
Year ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
Identifiable
assets
|
|
Capital
expenditure
|
|
Depreciation
and
amortization
|
|
Identifiable
assets
|
|
Capital
expenditure
|
|
Depreciation
and
amortization
|
|
Identifiable
assets
|
|
Capital
expenditure
|
|
Depreciation
and
amortization
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Injection molded
plastic parts
|
|
$67,912
|
|
$2,050
|
|
$1,750
|
|
$72,691
|
|
$1,644
|
|
$1,802
|
|
$71,615
|
|
$711
|
|
$1,849
|
Electronic products
|
|
23,075
|
|
102
|
|
385
|
|
27,708
|
|
63
|
|
336
|
|
28,554
|
|
167
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$90,987
|
|
$2,152
|
|
$2,135
|
|
$100,399
|
|
$1,707
|
|
$2,138
|
|
$100,169
|
|
$878
|
|
$2,114
|
16. Segment
Information - continued
The
breakdown of sales by destination is analyzed as follows:
|
|
Year
ended March 31,
|
|
|
2017
|
|
2018
|
|
2019
|
Net sales
|
|
|
|
|
|
|
United States of America
|
|
$8,883
|
|
$10,630
|
|
$12,862
|
|
PRC
|
|
20,637
|
|
30,077
|
|
30,772
|
|
United Kingdom
|
|
1,515
|
|
2,878
|
|
3,586
|
|
Hong Kong
|
|
5,801
|
|
4,610
|
|
4,726
|
|
Europe
|
|
4,750
|
|
8,304
|
|
8,186
|
|
Others
|
|
2,936
|
|
4,168
|
|
6,449
|
|
Total net sales
|
|
$44,552
|
|
$60,667
|
|
$66,581
|
|
The location
of the Company's identifiable assets is as follows:
|
|
|
March 31,
|
|
|
|
2018
|
|
2019
|
Hong Kong and Macao
|
|
|
$39,024
|
|
$46,077
|
PRC
|
|
|
61,375
|
|
54,092
|
Total identifiable assets
|
|
|
100,399
|
|
100,169
|
Goodwill
|
|
|
-
|
|
-
|
Total assets
|
|
|
$100,399
|
|
$100,169
|
17. Condensed
Financial Information of Deswell Industries, Inc.
The
condensed financial statements of Deswell Industries, Inc. have been prepared in accordance with accounting principles generally
accepted in the United States of America. Under the PRC laws and regulations, Deswell Industries, Inc.’s PRC subsidiaries
are restricted in their ability to transfer certain of their net assets to Deswell Industries, Inc. in the form of dividend payments,
loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally
accepted accounting principles, totaling $64,647 (equivalent to RMB 413 million) and $61,240 (equivalent to RMB 413 million) as
of March 31, 2018 and 2019, respectively.
17.
Condensed Financial Information of Deswell Industries, Inc. - continued
Balance sheets
|
|
March 31,
|
|
|
2018
|
|
2019
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$259
|
|
$566
|
Prepaid expenses and other current assets
|
|
58
|
|
41
|
Amounts due from subsidiaries
|
|
26,996
|
|
23,641
|
Total current assets
|
|
27,313
|
|
24,248
|
Investments in subsidiaries
|
|
55,669
|
|
61,447
|
Total assets
|
|
$82,982
|
|
$85,695
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accrued payroll and employee benefits
|
|
$1,590
|
|
$1,588
|
Other accrued liabilities
|
|
113
|
|
143
|
Total current liabilities
|
|
1,703
|
|
1,731
|
Total shareholders’ equity
|
|
81,279
|
|
83,964
|
Total liabilities and shareholders’ equity
|
|
$82,982
|
|
$85,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of comprehensive income
|
Year
ended March 31,
|
|
2017
|
|
2018
|
|
2019
|
Equity in earnings of subsidiaries
|
$3,211
|
|
$7,586
|
|
$5,778
|
Operating expenses
|
1,835
|
|
1,396
|
|
1,505
|
Income before income taxes
|
1,376
|
|
6,190
|
|
4,273
|
Income taxes
|
-
|
|
-
|
|
-
|
Net income
|
1,376
|
|
6,190
|
|
4,273
|
Share of other comprehensive income (loss) of subsidiaries
|
11
|
|
-
|
|
-
|
Total comprehensive income
|
$1,387
|
|
$6,190
|
|
$4,273
|
|
|
|
|
|
|
17.
Condensed Financial Information of Deswell Industries, Inc. - continued
Statements
of cash flows
|
Year
ended March 31,
|
|
2017
|
|
2018
|
|
2019
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
$1,376
|
|
$6,190
|
|
$4,273
|
Adjustments
to reconcile net loss to net cash
provided
by operating activities:
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
(3,211)
|
|
(7,586)
|
|
(5,778)
|
Depreciation
|
17
|
|
-
|
|
-
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
46
|
|
(28)
|
|
17
|
Amounts due from subsidiaries
|
3,841
|
|
2,625
|
|
3,355
|
Accrued payroll and employee benefits
|
362
|
|
2
|
|
(2)
|
Other accrued liabilities
|
5
|
|
(6)
|
|
30
|
Net cash provided by operating activities
|
2,436
|
|
1,197
|
|
1,895
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Dividends paid
|
(2,248)
|
|
(1,112)
|
|
(1,588)
|
Repurchase of common stock
|
(308)
|
|
-
|
|
-
|
Net cash used in financing activities
|
(2,556)
|
|
(1,112)
|
|
(1,588)
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
(120)
|
|
85
|
|
307
|
Cash and cash equivalents, beginning of year
|
294
|
|
174
|
|
259
|
Cash and cash equivalents, end of year
|
$174
|
|
$259
|
|
$566
|
|
|
|
|
|
|
17.
Condensed Financial Information of Deswell Industries, Inc. - continued
In Deswell
Industries, Inc. - only financial statements, Deswell Industries, Inc.’s investments in subsidiaries are stated at cost plus
its equity interest in undistributed earnings of subsidiaries since inception. Accordingly, such financial statements should be
read in conjunction with the Company’s consolidated financial statements.
Deswell Industries,
Inc. records its investments in its subsidiaries under the equity method of accounting as prescribed in ASC 323 “Investment-Equity
Method and Joint Ventures”. Such investment is presented on the balance sheets as “Investments in subsidiaries”
and share of the subsidiaries’ profit or loss as “Equity in earnings (loss) of subsidiaries”, on the statements
of comprehensive income (loss).
The subsidiaries
paid dividends of $nil, $nil and $nil to Deswell Industries, Inc. for the years ended March 31, 2017, 2018 and 2019, respectively.
Certain information
and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted.
|
b)
|
Related party transactions
|
For the years
ended March 31, 2017, 2018 and 2019, related party transactions mainly composed of $120, $120 and $120 paid to Jetcrown Industrial
(Macao Commercial Offshore) Limited as service fee for each year.
DESWELL INDUSTRIES, INC.
Item 19
.
EXHIBITS
The following documents are filed as exhibits herewith:
Exhibit
No.
|
Description
|
1.1
|
Memorandum and Articles of Association (as amended and restated on 13th December, 2007) (incorporated by reference to Exhibit 1.1 to registrant’s Registration Statement on Form 8-A filed with the SEC on December 31, 2007).
|
1.2
|
Amendment to Regulation 6.15 of registrant’s Articles of Association as filed with the Registrar of Corporate Affairs of the British Virgin Islands on March 26, 2010 (incorporated by reference to Exhibit 1.2 to registrant’s Amendment No. 1 to Registration Statement on Form 8-A filed with the SEC on March 31, 2010).
|
2.1
|
Form of common share certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Deswell’s Registration Statement on Form F-1 filed with the SEC on July 13, 1995).
|
4.1
|
2001 Stock Option Plan (incorporated by reference to Exhibit A to the Company’s Proxy Statement for its 2001 Annual Meeting of Stockholders filed with the SEC under cover of Form 6-K on December 12, 2001.)
|
4.2
|
2003 Stock Option Plan of Deswell Industries, Inc. (as adopted August 20, 2003 and amended August 1, 2005, August 17, 2007 and August 13, 2010) (incorporated by reference to Annex A to the Company’s Proxy Statement furnished to the SEC on Form 6-K on August 16, 2010).
|
8.1
|
Diagram of the Company’s operating subsidiaries and affiliates
|
11.1
|
Code of Ethics (incorporated by reference to Exhibit 11.1 of registrant’s Form 20-F for the year ended March 31, 2004, filed with the SEC on July 16, 2004)
|
12.1
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934
|
12.2
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934
|
13.1
|
Certification Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
|
15.1
|
Consent of BDO China Shu Lun Pan Certified Public Accountants LLP to incorporation of its report on the Company’s consolidated financial statements into Registrant’s Registration Statements on Form S-8.
|
101*
|
Financial information from registrant for the year ended March 31, 2018 formatted in eXtensible Business Reporting Language (XBRL):
|
|
(a) Consolidated Balance Sheets as of March 31,2017 and
2018; (b) Consolidated Statements of Comprehensive Income for the Years Ended March 31, 2016, 2017 and 2018; (c) Consolidated
Statements of Shareholders Equity for the Years Ended March 31, 2016, 2017 and 2018; (d) Consolidated Statements of Cash Flows
for the Years Ended March 31, 2016, 2017 and 2018; and (e) Notes to Consolidated Financial Statements
|
*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit
101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise are not subject to liability under those sections.