Washington, D.C. 20549
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act: NONE
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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 57
of this Annual Report. The selected Operations Data for each
of the three fiscal years in the period ended March 31, 2017, and
the Balance Sheet data as of March 31, 2016 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, 2013 and 2014, and the Balance Sheet data as of
March 31, 2013, 2014, and 2015 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,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
|
$
|
53,382
|
|
|
$
|
40,932
|
|
|
$
|
38,076
|
|
|
$
|
44,568
|
|
|
$
|
44,522
|
|
Cost of sales
|
|
|
46,171
|
|
|
|
37,295
|
|
|
|
33,852
|
|
|
|
39,775
|
|
|
|
37,073
|
|
Gross profit
|
|
|
7,211
|
|
|
|
3,637
|
|
|
|
4,224
|
|
|
|
4,793
|
|
|
|
7,449
|
|
Selling, general and administrative expenses
|
|
|
10,714
|
|
|
|
10,257
|
|
|
|
9,123
|
|
|
|
9,119
|
|
|
|
8,856
|
|
Other income (expenses), net
|
|
|
233
|
|
|
|
(214
|
)
|
|
|
93
|
|
|
|
(1,021
|
)
|
|
|
(696
|
)
|
Operating loss
|
|
|
(3,270
|
)
|
|
|
(6,834
|
)
|
|
|
(4,806
|
)
|
|
|
(5,347
|
)
|
|
|
(2,103
|
)
|
Non-operating income, net
|
|
|
2,056
|
|
|
|
379
|
|
|
|
2,553
|
|
|
|
571
|
|
|
|
3,688
|
|
(Loss) income before income taxes
|
|
|
(1,214
|
)
|
|
|
(6,455
|
)
|
|
|
(2,253
|
)
|
|
|
(4,776
|
)
|
|
|
1,585
|
|
Income taxes
|
|
|
328
|
|
|
|
624
|
|
|
|
207
|
|
|
|
158
|
|
|
|
209
|
|
(Loss) income from continuing operations, after income
taxes
|
|
|
(1,542
|
)
|
|
|
(7,079
|
)
|
|
|
(2,460
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
Loss from discontinued operations,
net of tax
|
|
|
(449
|
)
|
|
|
(411
|
)
|
|
|
(348
|
)
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to Deswell Industries, Inc.
|
|
|
(1,991
|
)
|
|
|
(7,490
|
)
|
|
|
(2,808
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale
securities
(2)
|
|
|
718
|
|
|
|
57
|
|
|
|
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 to Deswell Industries, Inc.
|
|
$
|
(1,273
|
)
|
|
$
|
(7,433
|
)
|
|
$
|
(2,775
|
)
|
|
$
|
(5,007
|
)
|
|
$
|
1,387
|
|
Net (loss) income per share attributable to
Deswell Industries, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations per
share
(3)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
Loss from discontinued operations per share
(3)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
Weighted average common shares outstanding
(3)
(shares in
thousands)
|
|
|
16,467
|
|
|
|
16,186
|
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
Statistical Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin from continuing operations
|
|
|
13.5
|
%
|
|
|
8.9
|
%
|
|
|
11.1
|
%
|
|
|
10.8
|
%
|
|
|
16.7
|
%
|
Operating margin from continuing operations
|
|
|
(6.1
|
%)
|
|
|
(16.7
|
%)
|
|
|
(12.6
|
%)
|
|
|
(12.0
|
%)
|
|
|
(4.7
|
%)
|
Dividends per share
|
|
$
|
0.30
|
|
|
$
|
0.22
|
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
$
|
0.105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2017
|
|
Working capital
|
|
$
|
58,298
|
|
|
$
|
50,868
|
|
|
$
|
45,864
|
|
|
$
|
39,890
|
|
|
$
|
41,307
|
|
Total assets
|
|
|
112,565
|
|
|
|
100,636
|
|
|
|
96,439
|
|
|
|
87,571
|
|
|
|
90,987
|
|
Long-term debt, less current portion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Shareholders’ equity
|
|
|
101,576
|
|
|
|
89,610
|
|
|
|
84,063
|
|
|
|
76,808
|
|
|
|
76,201
|
|
(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 4 of Notes to Consolidated Financial Statements included later in this Report regarding unrealized gain (loss) on available-for-sale securities during the years ended March 31, 2016 and 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.
|
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, 2017,we had three major customers, each accounting for more than 10% of our net sales and together for 33.6%
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 majorcustomers 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.
As a result of the recent global
economic downturn, many businesses, including those of several of our customers, experienced weaker demand for their products and
services. Our customers so affected, 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, 2017 under U.S. income tax laws and may be a PFIC for years
after fiscal 2017. If we were a PFIC in fiscal 2017, 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, 2017 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 50 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
1.5% year-on-year in May of 2017. 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% 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%.Since May 1, 2015, there have been no adjustments made to the minimum
wage in Guangdong Province.
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 has been 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, 2017. 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. However, 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.
|
(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” athttp://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 98.2% of the Company total, about 52.0%,
47.2%, and 48.9% were in RMB during the years ended March 31, 2015, 2016 and 2017, respectively.
The PRC government may adopt an even
more flexible currency policy, which, if adopted, could result in appreciation of the exchange rate of the RMB to the U.S. dollar
beyond the appreciation experienced under China’s current system.
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 19 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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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, 2017, we had cash
on hand of $8.1 million, time deposits maturing over three months of $5.4 million and time deposits maturing over twelve
months of $2.9 million, which were invested in short-term interest bearing investments at banks or other financial
institutions. Of that amount, approximately $1.9 million was held in banks and other financial institutions in Hong Kong,
$4.7 million in Macao and $9.8 million in the PRC. The Hong Kong government provides deposit protection up to a maximum
amount of HK$500,000 (approximately U.S.$64,400 based on the midpoint exchange rate for June 30, 2017 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.$64,100 based on the midpoint exchange rate for June 30, 2017 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, couldimpair our operations, and, if we are not able to access needed funds to pay
our suppliers, employees and other creditors, we may be unable tocontinue 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, 2015, 2016 and 2017:
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, 2017, we maintained fire, casualty and theft insurance aggregating approximately $117.6 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, 2017,
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.
Payment of dividends by our subsidiaries in the
PRC to us is subject to restrictions under PRC law. The new PRC tax law could force us to reduce the amount of dividends we have
historically paid to our shareholders or possibly eliminate them or we may decide not pay dividends in the future.
Under PRC law, dividends may be paid
only out of distributable profits. Distributable profits with respect to our subsidiaries in the PRC refers to after-tax profits
as determined in accordance with accounting principles and financial regulations applicable to PRC enterprises (“China GAAP”)
less any recovery of accumulated losses and allocations to statutory funds that it is required to make. Any distributable profits
that are not distributed in a given year are retained and available for distribution in subsequent years. The calculation of distributable
profits under China GAAP differs in many respects from the calculation under U.S. GAAP. As a result, our subsidiaries in PRC may
not be able to pay any dividend in a given year as determined under U.S. GAAP. The China tax authorities may require changes in
determining income of the Company that would limit its ability to pay dividends and make other distributions. PRC law requires
companies, including our PRC subsidiaries, to reserve about 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”), dividends payable to foreign investors which are derived from sources within the PRC are subject
to income tax at the rate of 10% by way of withholding unless the foreign investors are companies incorporated in countries which
have a tax treaty agreement with PRC and the rate agreed by both parties will be applied. 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. The EIT Law and its implementing
rules were effective as of January 1, 2008 and represent a milestone in the PRC tax system.
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 21 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. 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. Political or trade
friction between the United States and China, whether or not actually affecting our business, could also adversely affect the
prevailing market price of our common shares. This risk has increased in recent years as our sales into the United States
have accounted for significant amounts of our global sales. The United States was our number two market in our years ended
March 31, 2015, March 31, 2016 and March 31, 2017. See
Item 4
“Information on the Company – Customers and Marketing”on page 20 of this Report for information
regarding our net sales as a percentage of total sales to customers by geographic area.
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 after China’s accession to the World Trade Organization
(introducing market liberalization in 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 new law. In response to prevailing business conditions, we
reduced our workforce by 10 and 68 during the years ended March 31, 2015 and 2016, respectively. 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, apparently has 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. Conducting business in China is inherently risky.
Corruption, extortion, bribery, pay-offs,
theft, and other fraudulent practices remain common in China. For example, in fiscal 2006, we recorded a provision of approximately
$1 million for doubtful sales transactions, consisting of orders primarily from three customers for products of the metallic parts
division of our electronic & metallic parts business segment that had been shown as shipped to, and received by, the customers
but in fact had been surreptitiously cancelled without shipment. Documentation reflecting the cancellation of the orders was uncovered
following the departure of the General Manager of the Company’s metallic parts division who, with the assistance of a former
Production and Materials Control Supervisor in that division, had concealed such documentation. We could suffer additional losses
from similar or other 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, 2017, approximately 61.7% 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, 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 new and upcoming
requirements relating to the materials composition of our electronic products, including the restrictions on lead and certain other
substances in electronics that apply to specified electronics products put on the market in the European Union as of July 1, 2006
(Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS)). The labeling provisions of similar
legislation in China went into effect on March 1, 2007. Consequently, many suppliers of products sold into the EU countries have
required their suppliers to be compliant with the new directive. Many of these customers in our electronic division have adopted
this approach and have required our full compliance. Though we have devoted a significant amount of resources and effort planning
and executing our RoHS program, it is possible that some of our products might be incompatible with such regulations. In such event,
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, 2017, our balance
sheet included approximately $32.0 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. Given the significant uncertainty and instability of macroeconomic conditions
on our business in recent periods, forecasting future business remains difficult and subject to modification. If actual market
conditions differ or our forecasts change, we may be required to reassess long-lived assets and could record an impairment charge.
For example, because of the impact during fiscal 2011 on our injection molded plastics business of the world-wide economic slowdown
prevailing in that period, we recorded non-cash impairment charges to property, plant and equipment used in that segment of $4.5
million, more than doubling the total operating loss we would have otherwise reported for the year ended March 31, 2011. We recorded
an impairment charge of $197,000 on property, plant and equipment used in our plastic manufacturing operations for the year ended
March 31, 2013 and $490,000 for the year ended March 31, 2014. There were no such impairment charges taken for fiscal 2015, 2016,
or 2017. 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 are likely
to impact our future financial position and results of operations and in the case of FASB’s pronouncement regarding the expensing
of stock options have adversely impacted, and will in the future, adversely impact our financial results.
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 or substantially influence the outcome of matters requiring shareholder approval.
On June 30, 2017, members of our
senior management and Board of Directors as a group beneficially owned approximately 51.5% of our outstanding common shares. As
a result, acting together, they are able 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. 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 foreign
private issuer, 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 foreign private issuer organized
under the law of the BVI, we may follow our home company practice in lieu of some of the corporate governance provisions of sections
5600
et. seq
. of NASDAQ’s Marketplace Rules. Accordingly, as the law of the BVI does not prohibit us from doing so
and since our practices are in compliance with our Memorandum and Articles of Association, we follow our home company practices
with respect to the following NASDAQ Market Place rules:
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Rule 5605(b)(2)
: Our independent directors do not meet in executive session;
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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.
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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.
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 IBCA Act”). Effective on January 1, 2007, the BVI repealed the IBCA Act, and simultaneously with such repeal,
we were automatically re-registered under the BVI’s corporate law replacing the IBCA Act, the BVI Business Companies Act,
2004.
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. See Note 10 of Notes to the Company’s Consolidated Financial
Statements for the results of the discontinued operations of the metallic parts business unit.
Organizational Structure
The following diagram illustrates
the organizational structure of the Company and its active subsidiaries at March 31, 2017.
Capital Expenditures
Principal capital expenditures and
divestitures made by Deswell during the three year periods ended March 31, 2015, 2016 and 2017 included the following (dollar amounts
in thousands):
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Year ended March 31,
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2015
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2016
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2017
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Purchase of property, plant and equipment
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$
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890
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$
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591
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$
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2,152
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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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976
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$
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1,266
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$
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993
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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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Our major capital expenditures in
fiscal 2016 included:
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$295,000 for plant and machinery for plastic and electronic products;
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$114,000 for leasehold improvements;
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$73,000 for motor vehicles; and
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$109,000 for furniture, fixtures and equipment.
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Our major capital expenditures in
fiscal 2015 included:
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$320,000 for plant and machinery for plastic and electronic products;
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$140,000 for leasehold improvements;
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$320,000 for motor vehicles; and
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$110,000 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 acquired from the local government in January 2000. Management believes that the current plant facility has sufficiently
met the Company’s existing requirements.
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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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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laser key caps; and
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automobile components.
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Electronic products manufactured
by the Company include:
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sophisticated professional audio equipment including digital audio workstation, digital or analogue
mixing consoles, instrument amplifiers, signal processors, firewire/USB audio interfaces, keyboard controllers and speaker enclosures;
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high end home theatre audio products, such as 7.1-channel audio-visual Hi-Fi stereo receivers-amplifiers;
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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 include 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 the metallic components is considered
to be one of the production processes 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 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 51.9%, 44.5%, and 52.2% of the Company’s total sales during the years ended March 31, 2015,
2016, and 2017, respectively. At March 31, 2017, 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, 2017, 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. Beginning in 2005, however, through its then newly created Export Tooling Department,
Deswell’s began producing molds for export to customers and thus does not use those molds to manufacture related
parts.
During the year ended March 31, 2017,
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 1,800 pounds costing an average of $10,000 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, 2017, the Company had approximately
200 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, 2015,
the Company did not acquire any new nor dispose of any old injection molding machines.
During the year ended March 31, 2016,
the Company disposed of 47 old plastic injection molding machines and added 4 new ones.
During the year ended March 31, 2017,
the Company disposed of 12 old plastic injection molding machines and added 10 new ones.
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, 2017 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,
routers etc. 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, 2015, 2016, and 2017, manufacturing of electronic products accounted for approximately 48.1%, 55.5%,
and 47.8% 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.
See Note 10 of Notes to the Company’s Consolidated Financial Statements for the results of the discontinued operations of
the metallic parts business unit.
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 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 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 7,640,000
pounds of plastic resins during the year ended March 31, 2017. 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 12 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 and has found that the transition of Hong Kong to Chinese control in July 1997 has not had an adverse impact on the Company’s
ability to transport goods to and from Hong Kong and China.
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 20 of Notes to Consolidated Financial Statements for the dollar amounts of export sales
by geographic area for each of the years ended March 31, 2015, 2016 and 2017. Net sales as a percentage of total sales to customers
by geographic area consisted of the following for the years ended March 31, 2015, 2016 and 2017:
|
|
Year
ended March 31,
|
|
Geographical Area
|
|
2015
|
|
2016
|
|
2017
|
|
China
|
|
42.3
|
%
|
42.1
|
%
|
46.4
|
%
|
United States
|
|
26.0
|
|
18.2
|
|
20.0
|
|
Europe
|
|
9.2
|
|
14.4
|
|
10.7
|
|
Hong Kong
|
|
14.5
|
|
17.2
|
|
13.0
|
|
United Kingdom
|
|
2.7
|
|
2.3
|
|
3.4
|
|
Others
|
|
5.3
|
|
5.8
|
|
6.5
|
|
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 46.4% of our total net sales for the year ended March 31, 2017
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 2015, 2016 and 2017:
|
|
Year ended March 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Customer A
|
|
|
16.5
|
%
|
|
|
12.7
|
%
|
|
|
12.8
|
%
|
Customer B
|
|
|
*
|
|
|
|
13.6
|
%
|
|
|
10.6
|
%
|
Customer C
|
|
|
13.7
|
%
|
|
|
10.4
|
%
|
|
|
10.2
|
%
|
*
|
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 will continue to decline and its financial results will
suffer further if orders from its largest customers, or orders from other substantial customers, cease or are significantly reduced
unless Deswell can increase sales from other existing 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 2018. 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 $3,600.
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, 2017 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 $600,000,
$793,000 and $839,000 was earned during the years ended March 31, 2015, 2016, and 2017, respectively.
See Note 7 of Notes to the Company’s
Consolidated Financial Statements for Assets Held For Sale.
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 7.
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 considered to be one of the production processes 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. See Note 10 of Notes to the Company’s Consolidated Financial
Statements for the results of the discontinued operations of the metallic parts business unit.
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, facilitates transportation of its products through Hong Kong.
PRC Income Taxes
From January 1, 2008, with the effect
of the new PRC Income Tax Law, the standard income tax rate for all subsidiaries operating in the PRC has been reduced from the
rate of 33% to 25%.
Accordingly, with the enactment of
new PRC Enterprise Tax effective January 1, 2008, the benefits the Company previously enjoyed, such as receiving tax refunds as
a result of its reinvestment of profits in certain of its subsidiaries in China and favorable concession rates, are no longer available.
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 consultantshave
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, 2017 includes the deemed profit tax estimated by the management based on the Contemporaneous Documentations.
Business Segment Information
Deswell’s operations are generally
organized in three segments: plastic injection molding, which we sometimes refer to as the “plastics segment,”
electronic products assembling and metallic parts manufacturing (which has since been discontinued as discussed above). The Company’s
reportable segments are strategic business units that offer different products and services. See Note 20 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, 2017:
|
|
Year ended March 31, 2015
|
|
|
Year ended March 31, 2016
|
|
|
Year ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plastic
Injection
Molding
Segment
|
|
|
Electronic
Segment
|
|
|
Total from
Continuing
operations
|
|
|
Plastic
Injection
Molding
Segment
|
|
|
Electronic
Segment
|
|
|
Total from
Continuing
operations
|
|
|
Plastic
Injection
Molding
Segment
|
|
|
Electronic
Segment
|
|
|
Total from
Continuing
operations
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
83.1
|
|
|
|
95.1
|
|
|
|
88.9
|
|
|
|
82.9
|
|
|
|
94.3
|
|
|
|
89.2
|
|
|
|
78.6
|
|
|
|
88.4
|
|
|
|
83.3
|
|
Gross profit
|
|
|
16.9
|
|
|
|
4.9
|
|
|
|
11.1
|
|
|
|
17.1
|
|
|
|
5.7
|
|
|
|
10.8
|
|
|
|
21.4
|
|
|
|
11.6
|
|
|
|
16.7
|
|
Selling, general and administrative expenses
|
|
|
29.3
|
|
|
|
18.2
|
|
|
|
24.0
|
|
|
|
26.8
|
|
|
|
15.4
|
|
|
|
20.5
|
|
|
|
25.2
|
|
|
|
14.1
|
|
|
|
19.9
|
|
Other income, (expenses), net
|
|
|
—
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
(6.6
|
)
|
|
|
1.2
|
|
|
|
(2.3
|
)
|
|
|
(4.3
|
)
|
|
|
1.5
|
|
|
|
(1.6
|
)
|
Operating loss
|
|
|
(12.4
|
)
|
|
|
(12.8
|
)
|
|
|
(12.7
|
)
|
|
|
(16.3
|
)
|
|
|
(8.5
|
)
|
|
|
(12.0
|
)
|
|
|
(8.1
|
)
|
|
|
(1.0
|
)
|
|
|
(4.8
|
)
|
Non-operating income, net
|
|
|
10.7
|
|
|
|
2.4
|
|
|
|
6.7
|
|
|
|
2.8
|
|
|
|
—
|
|
|
|
1.3
|
|
|
|
11.8
|
|
|
|
4.5
|
|
|
|
8.3
|
|
Loss before income taxes
|
|
|
(1.7
|
)
|
|
|
(10.4
|
)
|
|
|
(6.0
|
)
|
|
|
(13.5
|
)
|
|
|
(8.5
|
)
|
|
|
(10.7
|
)
|
|
|
3.7
|
|
|
|
3.5
|
|
|
|
3.5
|
|
Income taxes
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.5
|
|
Net loss
|
|
|
(2.5
|
)%
|
|
|
(10.6
|
)%
|
|
|
(6.5
|
)%
|
|
|
(14.0
|
)%
|
|
|
(8.7
|
)%
|
|
|
(11.1
|
)%
|
|
|
3.0
|
%
|
|
|
3.2
|
%
|
|
|
3.0
|
%
|
Year ended March 31, 2017 (Fiscal 2017) Compared
to Year Ended March 31, 2016 (Fiscal 2016)
Net Sales
–
The Company’s net sales from continuing operations for the year ended March 31, 2017 were $44,522,000, a decrease of $46,000
or 0.1% as compared to $44,568,000 in fiscal 2016. The slight decrease was related to a decrease in sales revenues of $3,465,000
in our electronic segment, offsetting an increase of $3,419,000 in our plastic segment, as compared with the respective net sales
from these segments in the prior fiscal year.
The revenue increase in the plastic segment was due to
an increase of $5,041,000 in orders from existing customers for printing, office equipment, and local sales, offsetting a decrease
of $2,010,000 in sales orders from existing customers, mainly for tooling and audio products.
The revenue decrease in the electronic segment was mainly
due to a decrease of $5,636,000 in orders from existing customers for professional audio instruments, offsetting an increase of
$2,119,000 in orders for professional audio equipment from other existing customers.
Gross Profit
– Gross profit for the year
ended March 31, 2017 was $7,449,000, representing a gross profit margin of 16.7%. This compared with the overall gross profit of
$4,793,000 and gross profit margin of 10.8% for the year ended March 31, 2016.
Gross profit in the plastic segment increased by $1,598,000
to $4,979,000 or 21.4% of net sales for the year ended March 31, 2017, as compared to $3,381,000 or 17.1% of net sales for the
prior fiscal year. The increase in gross margin for the plastic segment was mainly due to a decrease in labor cost, as a percentage
of net sales, when compared with the prior fiscal year.
Gross profit in the electronic segment increased by $1,058,000
to $2,470,000 or 11.6% of net sales for the year ended March 31, 2017, as compared to $1,412,000 or 5.7% of net sales for the prior
fiscal year. Gross margin was twice that of fiscal year 2016, and mainly attributable to decreases in labor cost and raw materials
cost, as a percentage of sales, when compared with the prior fiscal year.
Selling, General and Administrative Expenses –
SG&A
expenses for the year ended March 31, 2017 were $8,856,000 or 19.9% of total net sales, as compared to $9,119,000 or 20.5% of
total net sales for the year ended March 31, 2016. SG&A expenses decreased by $263,000 or 2.9% in fiscal year 2017
compared to the prior fiscal year.
SG&A in the plastic segment increased by $559,000
to $5,866,000 or 25.2% of net sales for the year ended March 31, 2017, compared to $5,307,000 or 26.8% of net sales for fiscal
year 2016. The increase was primarily related to an increase in $482,000 in staff costs and $133,000 in selling expense, as compared
with the prior fiscal year.
SG&A expenses in the electronic segment decreased
by $822,000 to $2,990,000 or 14.1% of net sales for the year ended March 31, 2017, compared to $3,812,000 or 15.4% of net sales
for fiscal year 2016. The decrease was mainly due to decreases of $606,000 in staff costs and of $167,000 in selling expense, when
compared to the prior fiscal year.
Other Income/Expense,
Net
– Other expense was $696,000 for the year ended March 31, 2017, as compared to other expense of $1,021,000 in the
prior fiscal year.
On a segment basis, other expense attributable to the
plastic segment for the year ended March 31, 2017 was $1,006,000, as compared to other expense of $1,310,000 for the prior fiscal
year. Other expense in fiscal year 2017 was mainly due to $412,000 in exchange loss, $198,000 of loss on disposal of fixed assets
and a provision of $398,000 for doubtful receivables, as compared to disposal of fixed assets of $426,000, an exchange loss of
$600,000, and a provision of $273,000 for doubtful receivables during fiscal year 2016.
Other income attributable to the electronic segment was
$310,000 for the year ended March 31, 2017, as compared with other income of $289,000 for the prior fiscal year. The increase in
other income was mainly due to an increase of $36,000 in gain on the disposal of fixed assets and $47,000 in other income offsetting
an increase of $69,000 in loss on the sale of materials during the year ended March 31, 2017 as compared to the prior fiscal year.
Operating Loss
– Operating loss was $2,103,000
for the year ended March 31, 2017, as compared to operating loss of $5,347,000 in the prior fiscal year.
On a segment basis, the operating loss in the plastic
segment was $1,893,000 in the year ended March 31, 2017, as compared to an operating loss of $3,236,000 in fiscal year 2016. The
decrease in operating loss in the plastic segment was mainly due to an increase in gross margin as well as a decrease in other
expense as a percentage of net sales.
The electronic segment reported an operating loss of
$210,000 in the year ended March 31, 2017, compared to an operating loss of $2,111,000 in fiscal year 2016. The significant decrease
in operating loss was largely due to the significant increase in gross margin as described above.
Non-Operating Income
– Non-operating income
for the year ended March 31, 2017 was $3,688,000, as compared to non-operating income of $571,000 in the prior fiscal year. The
increase was primarily due to unrealized gain from marketable securities of $1,999,000 in fiscal 2017 as compared to unrealized
loss from marketable securities of $1,860,000 in fiscal year 2016.
Income Taxes
– Income tax for the year ended
March 31, 2017 represented an income tax expense of $116,000 and a deferred tax provision of $93,000, as compared to an income
tax expense of $103,000 and a deferred tax provision of $55,000 in the prior fiscal year.
On a segment basis, there was income tax expense of $61,000
and a deferred tax provision of $93,000 in the plastic segment for the year ended March 31, 2017, as compared to income tax expense
of $50,000 and a deferred tax provision of $54,000 for the prior fiscal year. The income tax of the electronic segment was $55,000
for the year ended March 31, 2017, as compared to $54,000 in fiscal year 2016.
Net Income
- The Company had net income of $1,376,000
for the year ended March 31, 2017, as compared to a net loss of $4,934,000 for the year ended March 31, 2016. The increase in net
income was mainly the result of increases in gross margin and non-operating income as described above.
Net income for the plastic segment for the year ended
March 31, 2017 was $689,000, as compared to a net loss of $2,776,000 for fiscal year 2016. The increase in net income in the plastic
segment was mainly due to an increase in non-operating income as described above.
Net income for the electronic segment was $687,000 for
the year ended March 31, 2017, compared to a net loss of $2,158,000 in fiscal year 2016. The increase in net income in the
electronic segment was mainly attributable to increases in gross margin and non-operating income as described above.
Year ended March 31, 2016 (Fiscal 2016) Compared
to Year Ended March 31, 2015 (Fiscal 2015)
Net Sales
– The Company’s net sales from continuing
operations for the year ended March 31, 2016 were $44,568,000, an increase of $6,492,000 or 17.1% as compared to $38,076,000 in
fiscal 2015. The increase was related to an increase in sales revenues of $53,000 in our plastic segment and an increase of $6,439,000
in our electronic segment, as compared with the respective net sales from these segments in the prior fiscal year.
The revenue increase in the plastic segment was due to
an increase of $2,894,000 in orders from existing customers for printing, office equipment and local sales, offsetting a decrease
of $2,841,000 in sales orders from existing customers mainly for telephone, medical and other products.
The revenue increase in the electronic segment was mainly
due to an increase of $8,858,000 in orders from existing customers for home entertainment products and professional audio instruments,
offsetting a decrease of $2,535,000 in orders for professional audio equipment from other existing customers. The increase in sales
orders was mainly attributed to the continued efforts to develop new opportunities and collaborating new products with our existing
customers.
Gross Profit
– Gross profit from continuing operations
for the year ended March 31, 2016 was $4,793,000, representing a gross profit margin of 10.8%. This compared with the overall gross
profit from continuing operations of $4,224,000 and gross profit margin of 11.1% for the year ended March 31, 2015.
Gross profit in the plastic segment increased by $46,000
to $3,381,000 or 17.1% of net sales for the year ended March 31, 2016, as compared to $3,335,000 or 16.9% of net sales, for the
same period in the prior fiscal year. The increase in gross margin for the plastic segment was mainly due to a decrease in factory
overheads, as a percentage of net sales, when compared with the prior fiscal year.
Gross profit in the electronic segment increased by $523,000
to $1,412,000 or 5.7% of net sales for the year ended March 31, 2016, as compared to $889,000 or 4.9% of net sales, for the prior
fiscal year. The increase in gross margin was mainly attributed to decreases in labor cost and factory overheads, offsetting an
increase in raw materials cost, as a percentage of sales, when compared with the prior fiscal year.
Selling, general and administrative expenses
–
SG&A expenses from continuing operations for the year ended March 31, 2016 were $9,119,000 or 20.5% of total net sales from
continuing operations, as compared to $9,123,000 or 24.0% of total net sales from continuing operations for the year ended March
31, 2015. Selling, general and administrative expenses decreased by $4,000 in fiscal 2016 compared to fiscal 2015.
SG&A expenses in the plastic segment decreased by
$493,000 to $5,307,000 or 26.8% of net sales for the year ended March 31, 2016, compared to $5,800,000 or 29.3% of net sales for
fiscal 2015. The decrease was primarily related to decreases of $139,000 in stock compensation cost, $41,000 in legal and professional
fees, $64,000 in local government taxes, $28,000 in traveling expense, as well as $124,000 in selling expense, as compared with
the same period in the prior fiscal year.
SG&A expenses in the electronic segment increased
by $489,000 to $3,812,000 or 15.4% of net sales for the year ended March 31, 2016, compared to $3,323,000 or 18.2% of net sales
for fiscal 2015. The increase was mainly due to increases of $600,000 in staff costs, offsetting decreases of $60,000 in stock
compensation cost, $49,000 in local
government taxes and $15,000 in utility expense, as well as $29,000 in selling expense, when
compared to prior fiscal year.
Other income/expense, net
– Other expense from
continuing operations was $1,021,000 for the year ended March 31, 2016, as compared to other income from continuing operations
of $93,000 in prior fiscal year.
On a segment basis, other expense attributable to the
plastic segment for the year ended March 31, 2016 was $1,310,000, as compared to other income of $9,000 for prior fiscal year.
Other expense in fiscal 2016 was mainly due to $600,000 in exchange loss, $426,000 of loss on the disposal of fixed assets and
a provision of $273,000 for doubtful receivables, as compared to gains on the disposal of fixed assets of $259,000 and of $20,000
for materials, offsetting an exchange loss of $170,000 and a provision of $98,000 for doubtful receivables during fiscal 2015.
Other income attributable to the electronic segment for
the year ended March 31, 2016 was $289,000, as compared with other income of $84,000 for the prior fiscal year. This decrease in
other income was mainly due to gains of $49,000 from exchange, of $153,000 from sale of materials and others, and of $83,000 in
other income during the year ended March 31, 2016, as compared to a gain of $3,000 on the disposal of fixed assets and income of
$75,000 from the sale of materials and others in the prior fiscal year.
Operating Loss
– Operating loss from continuing
operations was $5,347,000 for the year ended March 31, 2016, as compared to operating loss from continuing operations of $4,806,000
in the prior fiscal year.
On a segment basis, the operating loss in the plastic
segment was $3,236,000 in the year ended March 31, 2016, as compared to an operating loss of $2,456,000 in fiscal 2015. The increase
in operating loss in the plastic segment was mainly due to incurring other expense (net) in fiscal 2016 compared to incurring other
income in fiscal 2015.
The electronic segment reported an operating loss of
$2,111,000 in the year ended March 31, 2016, compared to an operating loss of $2,350,000 in fiscal 2015. The decrease in operating
loss was largely due to an increase in sales turnover and gross margin as described above.
Non-operating income
– Non-operating income
from continuing operations for the year ended March 31, 2016 was $571,000, as compared to non-operating income from continuing
operations of $2,553,000 in the prior fiscal year. The decrease was primarily due to decreases of $2,814,000 on the fair value
of marketable securities, and of $163,000 in interest income, offsetting increases of $358,000 in dividend income, $424,000 in
realized gain on sale of marketable securities, and $192,000 in rental income as compared to fiscal 2015.
Income Taxes
– Income tax from
continuing operations for the year ended March 31, 2016 was comprised of an income tax expense of $103,000 and a deferred tax
provision of $55,000, as compared to an income tax expense of $92,000 and a deferred tax provision of $115,000 from
continuing operations in the prior fiscal year.
On a segment basis, there was income tax expense of $50,000 and
a deferred tax provision of $54,000 in the plastic segment for the year ended March 31, 2016, as compared to income tax expense
of $49,000 and a deferred tax provision of $115,000 during the prior fiscal year. The income tax of the electronic segment was
comprised of income tax expense of $54,000 for the year ended March 31, 2016, as compared to income tax expense of $43,000 in
fiscal 2015.
Loss from continuing operations
– The Company
had a net loss from continuing operations of $4,934,000 for the year ended March 31, 2016, as compared to a net loss from continuing
operations of $2,460,000 for the year ended March 31, 2015. The increase in net loss was mainly the result of decreases in other
and non-operating income as described above.
Net loss for the plastic segment for the year ended March
31, 2016 totaled $2,776,000, as compared to a net loss of $505,000 for fiscal 2015. The increase in net loss in the plastic segment
was mainly due to decreases in other and non-operating income described above.
Net loss for the electronic segment for the year ended
March 31, 2016 was $2,158,000, compared to net loss of $1,955,000 for fiscal 2015. The increase in net loss in the electronic segment
was mainly attributable to decrease in non-operating income as described above.
Loss from discontinued operations
– During the
fourth quarter of fiscal 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 had historically
reported the results of the metallic parts business unit as a separate segment. The continuing cash flows subsequent to its closure
were not significant.
The results of the discontinued operations of metallic
parts for the fiscal years ended March 31, 2015, 2016 and 2017 were as follows:
|
|
(in thousands)
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss from discontinued operations, before income taxes
|
|
$
|
(348
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss from discontinued operations, after income taxes
|
|
$
|
(348
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Seasonality
The following table sets forth certain
unaudited quarterly financial information sequentially for the four quarters in each of the years ended March 31, 2015 and March
31, 2016, and on a semi-annual basis for the year ended March 31, 2017 (in thousands):
|
|
|
Year Ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
Net sales
|
|
$
|
8,924
|
|
|
$
|
10,193
|
|
|
$
|
10,834
|
|
|
$
|
8,126
|
|
|
$
|
11,273
|
|
|
$
|
12,375
|
|
|
$
|
12,510
|
|
|
$
|
8,410
|
|
Gross profit
|
|
|
865
|
|
|
|
695
|
|
|
|
942
|
|
|
|
934
|
|
|
|
765
|
|
|
|
1,337
|
|
|
|
1,418
|
|
|
|
1,273
|
|
Operating loss
|
|
|
(813
|
)
|
|
|
(1,873
|
)
|
|
|
(1,725
|
)
|
|
|
(743
|
)
|
|
|
(1,029
|
)
|
|
|
(2,322
|
)
|
|
|
(262
|
)
|
|
|
(1,163
|
)
|
Net income (loss)
|
|
|
14
|
|
|
|
(1,702
|
)
|
|
|
(1,133
|
)
|
|
|
13
|
|
|
|
(1,097
|
)
|
|
|
(2,375
|
)
|
|
|
(305
|
)
|
|
|
(1,157
|
)
|
|
(1)
|
The sum of the unaudited quarterly financial data may not be equal to the respective figures as
stated in the audited financial statements because of the posting of reclassifications.
|
|
|
|
|
(2)
|
In fiscal year 2017, the Company adopted a semi-annual financial results reporting schedule, consistent
with many other foreign issuers, in order to minimize corporate overhead. Prior to fiscal year 2017 the Company reported financial
results on a quarterly basis.
|
|
|
Year ended March 31,
|
|
|
|
2017
|
|
|
|
|
H1
|
|
|
|
H2
|
|
Net sales
|
|
$
|
20,634
|
|
|
$
|
23,888
|
|
Gross profit
|
|
|
2,947
|
|
|
|
4,502
|
|
Operating loss
|
|
|
(1,818
|
)
|
|
|
(285
|
)
|
Net income (loss)
|
|
|
711
|
|
|
|
665
|
|
The following table sets forth the
same unaudited information presented in the above table but by quarterly comparisons by year in the two-year period ended March
31, 2016, and by semi-annual comparisons for theyear ended March 31, 2017(in thousands):
|
|
Three months ended
|
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
March
31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2015
|
|
|
2016
|
|
Net sales
|
|
$
|
8,924
|
|
|
$
|
11,273
|
|
|
$
|
10,193
|
|
|
$
|
12,375
|
|
|
$
|
10,834
|
|
|
$
|
12,510
|
|
|
$
|
8,126
|
|
|
$
|
8,410
|
|
Gross profit
|
|
|
865
|
|
|
|
765
|
|
|
|
695
|
|
|
|
1,337
|
|
|
|
942
|
|
|
|
1,418
|
|
|
|
934
|
|
|
|
1,273
|
|
Operating loss
|
|
|
(813
|
)
|
|
|
(1,029
|
)
|
|
|
(1,873
|
)
|
|
|
(2,322
|
)
|
|
|
(1,725
|
)
|
|
|
(262
|
)
|
|
|
(743
|
)
|
|
|
(1,163
|
)
|
Net income (loss)
|
|
|
14
|
|
|
|
(1,097
|
)
|
|
|
(1,702
|
)
|
|
|
(2,375
|
)
|
|
|
(1,133
|
)
|
|
|
(305
|
)
|
|
|
13
|
|
|
|
(1,157
|
)
|
|
(1)
|
The sum of the unaudited quarterly financial data may not be equal to the respective figures as
stated in the audited financial statements because of the posting of reclassifications.
|
|
|
|
|
(2)
|
In fiscal year 2017, the Company adopted a semi-annual financial results reporting schedule, consistent
with many other foreign issuers, in order to minimize corporate overhead. Prior to fiscal year 2017 the Company reported financial
results on a quarterly basis.
|
|
|
|
Six months ending
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
|
$
|
20,634
|
|
|
$
|
23,888
|
|
Gross profit
|
|
|
2,947
|
|
|
|
4,502
|
|
Operating loss
|
|
|
(1,818
|
)
|
|
|
(285
|
)
|
Net income (loss)
|
|
|
711
|
|
|
|
665
|
|
The first calendar quarter (the fourth
fiscal quarter ending March 31 of our fiscal year) is typically the Company’s slowest sales period because, as is customary
in China, the Company’s manufacturing facilities in China are closed for two weeks for the Chinese New Year holidays. Through
March 31, 2017, the Company has not experienced any other significant seasonal fluctuations.
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 1.5% year-on-yearas of May of 2017. 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%. Since then, there have been no adjustments made to the minimum wage
in Guangdong Province.
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. However, in fiscal 2016 and 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.
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 has been 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, 2017.
|
(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, 2015, 2016 and 2017 and at March 31, 2017, 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, 2017,
net cash used in operating activities totaled $1,082,000, including net income of $1,376,000, and depreciation and amortization
expenses of $2,135,000. Accounts receivable increased by $4,322,000 as compared to balances at March 31, 2016, primarily as a result
of longer collection days generated during the fiscal year. Inventories increased by $2,509,000 over levels at March 31, 2016,
mainly because of relatively higher level of raw materials and work-in-process maintained during the fiscal year to cope with increased
sales turnover. Accounts payable increased by $2,924,000 over levels at March 31, 2016, primarily because of the increase in materials
purchases. For the year ended March 31, 2016, net cash provided by operations totaled $563,000, including a net loss of $4,934,000
and depreciation and amortization expenses of $2,373,000.
Net cash used in investing activities
amounted to $280,000 for the year ended March 31, 2017, while net cash used in investing activities in fiscal year 2016 amounted
to $1,206,000. Capital expenditures during these periods totaled $2,152,000 and $591,000, respectively.
During the year ended March 31, 2017,
the Company had invested over $2 million in new all-electric injection molding machines, robotic assembling equipment, upgrades
to the fire sprinkler system and other manufacturing facility upgrades. These capital expenditures will maintain the Company’s
plastic injection molding plant in Dongguan at a high level of capability and improve production efficiency.
In fiscal 2017, there was an increase
in fixed deposits over three months of $146,000 and a decrease in fixed deposits over twelve months of $1,664,000. Also during
fiscal year 2017, we acquired marketable securities for $3,159,000, received $920,000 in cash proceeds from the sale of marketable
securities, and received $1,600,000 from the sale of available-for-sale securities.
Net cash used in financing activities
for the years ended March 31, 2017 and 2016 were $2,556,000 and $1,686,000, respectively. Net cash used in financing activities
during the years ended March 31, 2017 and 2016 were solely used to fund dividend payments to shareholders and repurchase the Company’s
common stock for $308,000 in fiscal year 2017.
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 at March 31, 2017 remained at 5.0%, the same rate it was at March 31, 2016 and at March 31, 2015.
At March 31, 2017, the Company had
cash and cash equivalents of $8,078,000. At that date, Deswell had no committed credit facilities and no restricted cash. Deswell
expects that working capital requirements and capital additions will continue to be funded through cash on hand and internally
generated funds. However, Deswell may choose to seek 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, 2017, the Company had
capital commitments totaling approximately $111,909 mainly for leasehold improvements, which are expected to be disbursed during
the year ending March 31, 2018.
A summary of our contractual obligations
and commercial commitments as of March 31, 2017 is as follows:
|
|
Payments due by period (in thousands)
|
|
Contractual obligations
|
|
Total
|
|
|
Year ending March
31, 2018
|
|
|
Period from April 1,
2018 to March
31, 2020
|
|
|
Period from April 1,
2020 to March
31, 2022
|
|
|
Period After
March 31, 2022
|
|
Long-term bank borrowing
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital (finance) lease obligations
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease payments
|
|
$
|
49
|
|
|
|
45
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
Capital commitment
|
|
$
|
112
|
|
|
|
112
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other purchase obligations
|
|
$
|
5,538
|
|
|
|
5,538
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other long-term liabilities reflected on Company’s
balance sheet under US GAAP
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
5,699
|
|
|
$
|
5,695
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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:
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, 2015, 2016 and 2017. In fiscal 2017, 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 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.
Based on the result of the
first step of the goodwill impairment analysis, the Company determined that the fair value of electronic division was less
than its carrying value as of March 31, 2014 and, as such, the Company applied the second step of the goodwill impairment
test to this segment. Based on the result of the second step of the goodwill impairment test, the Company recorded a $392,000
impairment charge to reduce the carrying value of goodwill in electronic division for the year ended March 31, 2014. The
entire goodwill was fully impaired and, during fiscal years 2015, 2016 and 2017, 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, 2017 are as follows:
Name
|
|
Age
|
|
Position(s)
with Company
|
Richard Pui Hon Lau
|
|
73
|
|
Chairman of the Board of Directors
|
Edward So Kin Chung
|
|
44
|
|
Chief Executive Officer
|
Chin Pang Li
|
|
72
|
|
Executive Director of Manufacturing and Administration
for Plastic Operations and Member of the Board of Directors
|
Hung-Hum Leung
|
|
71
|
|
Non-Executive Director and Member of Audit Committee
|
Allen Yau-Nam Cham
|
|
70
|
|
Non-Executive Director and Chairman of Audit Committee
|
Wing-Ki Hui
|
|
73
|
|
Non-Executive Director and Member of Audit Committee
|
Herman Wong Chi Wah
|
|
39
|
|
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 15 years and has been with
Deswell for 8 years. He was recently 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.
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 $1,390,000 during the year ended March 31, 2017 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, 2017.
During the year ended March 31,
2017, 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 U.S. domestic public companies with securities listed on The NASDAQ Stock Market are not required of
foreign private issuers such as Deswell if such issuers follow their home country practice. Of the corporate governance
practices required under NASDAQ’s MarketPlace Rules of U.S. domestic public companies, Deswell follows home country
practices and does not have a compensation committee or a nominating committee consisting of independent directors; does not
have nominees to its board selected or recommended by a majority of its independent directors; 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; and Deswell’s independent directors do not meet in executive session. See “Our exemptions
from certain of the reporting requirements under the Exchange Act limits the protections and information afforded to
investors” on page 19 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 foreign private issuer, the Company is permitted under NASDAQ’s MarketPlace Rules to follow its home country
practice, which does not require such committees, and nevertheless maintain the listing of its common shares on the NASDAQ
Global Market.
Employees
At March 31, 2017, the Company employed
1,340 persons on a full-time basis, of which ten were located in Macao and 1,330 were located in or travel to and from China. Of
the Company’s employees in China, at March 31, 2017:
|
·
|
910 were engaged in plastic injection molding manufacturing, and
|
|
|
|
|
·
|
420 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, 2017, options to
purchase an aggregate of 5,669,000 shares had been granted under all of Deswell’s option plans. At June 30, 2017, there were
options to purchase an aggregate of 532,000 common shares outstanding, and 1,236,000 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, 2017, 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
|
|
|
6,659,238
|
(2)
|
|
|
41.4
|
|
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 15,885,239 shares outstanding on June 30, 2017. 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 6,459,238 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)
|
|
2015
|
|
2016
|
|
2017
|
Richard Pui Hon Lau
|
23.6
|
|
34.0
|
|
41.4
|
Chin Pang Li
|
10.0
|
|
10.0
|
|
10.1
|
Ulrich Bernhard Behringer
|
6.2
|
|
—
|
|
—
|
|
(1)
|
Based on 16,056,239 shares outstanding at June 30, 2015, 16,056,239 shares outstanding at June 30, 2016, and 15,885,239
shares outstanding at June 30, 2017. 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, 2017, 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, 2017, 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, 2014 through June 30, 2017,
the latest practical date prior to filing of this Annual Report.
Since Deswell completed its initial
public offering in the United States, it has been 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,
|
·
|
2015 aggregating $2,970,404, $802,812 of which was based on results for the last quarter of the
year ended March 31, 2014, and $2,167,592 of which was based on results for the first three quarters of the year ended March 31,
2015;
|
|
·
|
2016 aggregating $1,685,905, $561,968 of which was based on results for the last quarter of the
year ended March 31, 2015, and $1,123,937 of which was based on results for the first two quarters of the year ended March 31,
2016; and
|
|
·
|
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;
|
The Company declared a dividend
of $1,123,937 on June 12, 2017, which was based on the results of the last six months of the year ended March 31, 2017. The
dividend was paid on July 12, 2017.
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, 2017:
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, 2017
and for the quarter ended June 30, 2017:
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, 2017:
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”):
|
·
|
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)).
|
|
·
|
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 Business Companies Act, 2004, as amended
(the “Act”), the Act having come into force on January 1, 2004 superseding in certain respects the International Business
Companies Act, 1984, 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.
|
|
·
|
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.
|
|
·
|
Holders of our shares:
|
|
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 to 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
Our Articles of Association (Regulation
12.4) provides that except as otherwise provided in the BVI Business Companies Act, 2004 (No. 16 of 2004) – 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 of Association
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 15,855,239 common shares were outstanding on June 30, 2017.
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 of Association 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 of Association 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 of Association
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 Articles of Association
nor Memorandum 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 Articles of Association
nor Memorandum of Association provide that information about our shareholders, even those owning significant percentages of our
shares, must be disclosed.
Differences from United States Law
The laws of the BVI governing the
provisions of our Articles of Association and Memorandum 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
of Association without shareholder approval and with respect to potential anti-takeover deterrence. Delaware law requires shareholders
to approve any amendments to a corporation’s Certificate of Incorporation and contains provisions restricting a Delaware
corporation’s rights 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:
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·
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a dealer in securities or currencies;
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·
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a trader in securities that elects to use a mark-to-market method of accounting for its securities
holdings;
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·
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a financial institution or a bank;
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·
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an insurance company;
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·
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a tax-exempt organization;
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·
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a person that holds our common shares in a hedging transaction or as part of a straddle or a
conversion transaction;
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·
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a person whose functional currency for United States federal income tax purposes is not the U.S.
dollar;
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·
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a person liable for alternative minimum tax;
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a person that owns, or is treated as owning, 10% or more, by voting power or value, of our common
shares;
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certain former U.S. citizens and residents who have expatriated; or
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a person who receives our shares pursuant to the exercise of employee stock options or otherwise
as compensation.
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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:
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·
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an individual United States citizen or resident alien of the United States (as specifically defined
for United States federal income tax purposes);
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·
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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;
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an estate whose income is subject to United States federal income tax regardless of its source;
or
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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.
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If a partnership 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 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.” There are currently no rules that provide any 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, 2017, 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.
“Marking-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 interest charge that would otherwise be imposed on them if we were
to be classified as a PFIC. However, if we are a PFIC, such election will not be available for any of our Subsidiary PFIC because
they are not publicly traded, and those subsidiaries will continue to be subject to the PFIC rules described above.
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. We do
not expect to monitor our status (or the status of any of our subsidiaries) as a PFIC for the current taxable year or in any future
taxable year and, therefore, we may not be able to inform you as
whether we (or any of our subsidiaries) have become a PFIC in
any given year or whether we (or any of our subsidiaries) have subsequently ceased to be a PFIC, and, thus, as a practical matter,
any such deemed sale election may not be available to you.
If we are treated as a PFIC, each
U.S. Holder will be required to make an annual return on IRS Form 8621 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, recent legislation imposes,
beginning in 2013, a new 3.8% Medicare contribution tax on net investment income, including interest, dividends and capital gains,
of U.S. individuals with income exceeding $200,000 (or $250,000 if married filing jointly), estates and trusts. U.S. Holders should
consult 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:
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you conduct a trade or business in the United States and
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·
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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).
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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. 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:
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·
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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
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·
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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. 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:
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you are a corporation or other exempt recipient, or
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you provide your correct United States federal taxpayer identification number and certify, under
penalties of perjury, that you are not subject to backup withholding.
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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 Companies Act, 2004
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 Business Companies Act, 2004.
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 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, 2015, 2016 and 2017,
the Company had no open forward exchange contracts or option
contracts. Cash and cash equivalents on hand at March 31, 2017
of $8,078,000 were held in the following currencies:
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Equivalent U.S. Dollar Holdings
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(in thousands)
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United States dollars
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$
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5,319
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Chinese RMB
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1,573
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Hong Kong dollars
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1,031
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Macao dollars
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127
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Euro
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4
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Japanese yen
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24
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$
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8,078
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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 $5,422,000 as of March 31, 2017 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, 2017, we had no long-term debt or 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:
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Page
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Report of Independent Registered Public Accounting Firm –
BDO China Shu Lun Pan Certified
Public Accountants LLP
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F-1
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Consolidated Balance Sheets
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F-2
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Consolidated Statements of Comprehensive Income (Loss)
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F-3
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Consolidated Statements of Shareholders’ Equity
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F-4
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Consolidated Statements of Cash Flows
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F-5
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Notes to Consolidated Financial Statements
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F-6
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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
To the Shareholders and
the Board of Directors of
Deswell Industries, Inc.
We have audited the accompanying
consolidated balance sheets of Deswell Industries, Inc. and its subsidiaries (the “Company”) as of March 31, 2016 and
2017 and the related consolidated statements of comprehensive income (loss), shareholders’ equity, and cash flows for each of the
three years in the period ended March 31, 2017. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
at March 31, 2016 and 2017 and the results of its operations and its cash flows for each of the three years in the period ended
March 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO China
Shu Lun Pan Certified Public Accountants LLP
BDO China Shu Lun Pan Certified Public Accountants
LLP
Shenzhen, People’s Republic of China
July 14, 2017
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
(U.S.
dollars in thousands)
|
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March 31,
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2016
|
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2017
|
ASSETS
|
|
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|
Current assets:
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
11,996
|
|
|
$
|
8,078
|
|
Time deposits maturing over three months
|
|
|
5,276
|
|
|
|
5,422
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|
Marketable securities (note 3)
|
|
|
12,020
|
|
|
|
16,327
|
|
Available-for-sale securities (note 4)
|
|
|
1,603
|
|
|
|
—
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Accounts receivable, less allowances for doubtful accounts of $881 and $1,252 at March 31, 2016 and 2017, respectively
|
|
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9,208
|
|
|
|
13,159
|
|
Inventories (note 5)
|
|
|
8,114
|
|
|
|
10,688
|
|
Prepaid expenses and other current assets (note 6)
|
|
|
1,658
|
|
|
|
2,419
|
|
Assets held for sale (note 7)
|
|
|
778
|
|
|
|
—
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Total current assets
|
|
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50,653
|
|
|
|
56,093
|
|
Property, plant and equipment, net (note 8)
|
|
|
32,352
|
|
|
|
31,992
|
|
Time deposits maturing over twelve months
|
|
|
4,566
|
|
|
|
2,902
|
|
Goodwill (note 9)
|
|
|
—
|
|
|
|
—
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Total assets
|
|
$
|
87,571
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|
|
$
|
90,987
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
2,228
|
|
|
$
|
5,152
|
|
Accrued payroll and employee benefits
|
|
|
4,035
|
|
|
|
4,643
|
|
Customer deposits
|
|
|
1,423
|
|
|
|
2,152
|
|
Other accrued liabilities (note 11)
|
|
|
1,289
|
|
|
|
1,474
|
|
Income taxes payable
|
|
|
401
|
|
|
|
476
|
|
Deferred income tax liabilities (note 12)
|
|
|
825
|
|
|
|
889
|
|
Dividend payable
|
|
|
562
|
|
|
|
—
|
|
Total current liabilities
|
|
$
|
10,763
|
|
|
$
|
14,786
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Common shares nil par value; authorized 30,000,000 shares; 17,031,810 and 17,031,810 shares issued as of March 31, 2016 and 2017; 16,056,239 and 15,885,239 shares outstanding as of March 31, 2016 and 2017
|
|
$
|
53,063
|
|
|
$
|
53,063
|
|
Treasury stock at cost; 975,571 and 1,146,571 shares as of March 31, 2016 and 2017 (note 16)
|
|
|
(2,513
|
)
|
|
|
(2,821
|
)
|
Additional paid-in capital
|
|
|
8,005
|
|
|
|
8,005
|
|
Accumulated other comprehensive income
|
|
|
5,305
|
|
|
|
5,316
|
|
Retained earnings
|
|
|
12,948
|
|
|
|
12,638
|
|
Total shareholders’ equity
|
|
|
76,808
|
|
|
|
76,201
|
|
Total liabilities and shareholders’ equity
|
|
$
|
87,571
|
|
|
|
90,987
|
|
See
accompanying notes to consolidated financial statements.
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(U.S.
dollars in thousands, except per share data)
|
|
Year
ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
|
$
|
38,076
|
|
|
$
|
44,568
|
|
|
$
|
44,522
|
|
Cost of sales
|
|
|
33,852
|
|
|
|
39,775
|
|
|
|
37,073
|
|
Gross profit
|
|
|
4,224
|
|
|
|
4,793
|
|
|
|
7,449
|
|
Selling, general and administrative expenses
|
|
|
9,123
|
|
|
|
9,119
|
|
|
|
8,856
|
|
Other income (expenses), net (note
17)
|
|
|
93
|
|
|
|
(1,021
|
)
|
|
|
(696
|
)
|
Operating loss
|
|
|
(4,806
|
)
|
|
|
(5,347
|
)
|
|
|
(2,103
|
)
|
Non-operating income, net (note
18)
|
|
|
2,553
|
|
|
|
571
|
|
|
|
3,688
|
|
(Loss) income from continuing operations, before income
taxes
|
|
|
(2,253
|
)
|
|
|
(4,776
|
)
|
|
|
1,585
|
|
Income taxes (note 12)
|
|
|
207
|
|
|
|
158
|
|
|
|
209
|
|
(Loss) income from continuing operations, after income
taxes
|
|
|
(2,460
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
Loss from discontinued operations,
net of tax
|
|
|
(348
|
)
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to Deswell Industries,
Inc.
|
|
|
(2,808
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities
|
|
|
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 to Deswell Industries, Inc.
|
|
$
|
(2,775
|
)
|
|
$
|
(5,007
|
)
|
|
$
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to Deswell Industries, Inc. (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
Loss from discontinued operations per share
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income per share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
Weighted average common shares
outstanding(shares in thousands)
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
See
accompanying notes to consolidated financial statements.
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(U.S.
dollars in thousands, except per share data)
|
|
Common stock
|
|
Treasury Stock
|
|
Additional
|
|
|
Accumulated
other
|
|
|
|
|
Total
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
comprehensive
income
|
|
|
Retained
earnings
|
|
|
Shareholders’
Equity
|
|
Balance at March 31, 2014
|
|
|
17,031,810
|
|
|
|
53,063
|
|
|
|
(975,571
|
)
|
|
|
(2,513
|
)
|
|
|
7,806
|
|
|
|
5,345
|
|
|
|
25,909
|
|
|
|
89,610
|
|
Unrealized gain on available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
|
|
—
|
|
|
|
33
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
199
|
|
|
|
—
|
|
|
|
—
|
|
|
|
199
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,808
|
)
|
|
|
(2,808
|
)
|
Dividends ($0.185 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,971
|
)
|
|
|
(2,971
|
)
|
Balance at March 31, 2015
|
|
|
17,031,810
|
|
|
$
|
53,063
|
|
|
|
(975,571
|
)
|
|
$
|
(2,513
|
)
|
|
$
|
8,005
|
|
|
$
|
5,378
|
|
|
$
|
20,130
|
|
|
$
|
84,063
|
|
Unrealized loss on available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(73
|
)
|
|
|
—
|
|
|
|
(73
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,934
|
)
|
|
|
(4,934
|
)
|
Dividends ($0.14 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,248
|
)
|
|
|
(2,248
|
)
|
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
|
|
See
accompanying notes to consolidated financial statements.
DESWELL
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,808
|
)
|
|
$
|
(4,934
|
)
|
|
$
|
1,376
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,824
|
|
|
|
2,373
|
|
|
|
2,135
|
|
Provision for doubtful accounts, net
|
|
|
73
|
|
|
|
274
|
|
|
|
371
|
|
Additional charges/(usage), net
|
|
|
341
|
|
|
|
(252
|
)
|
|
|
(65
|
)
|
(Gain) loss on disposal of property, plant and equipment
|
|
|
(766
|
)
|
|
|
420
|
|
|
|
162
|
|
Unrealized holding (gain) loss on marketable securities
|
|
|
(954
|
)
|
|
|
1,860
|
|
|
|
(1,999
|
)
|
Gain on sales of marketable securities
|
|
|
(102
|
)
|
|
|
(526
|
)
|
|
|
(69
|
)
|
Loss on disposal of available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
Stock-based compensation expenses
|
|
|
199
|
|
|
|
—
|
|
|
|
—
|
|
Deferred income tax
|
|
|
115
|
|
|
|
21
|
|
|
|
64
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,724
|
)
|
|
|
95
|
|
|
|
(4,322
|
)
|
Inventories
|
|
|
(157
|
)
|
|
|
2,966
|
|
|
|
(2,509
|
)
|
Prepaid expenses and other current assets
|
|
|
(646
|
)
|
|
|
462
|
|
|
|
(761
|
)
|
Accounts payable
|
|
|
683
|
|
|
|
(1,120
|
)
|
|
|
2,924
|
|
Accrued payroll and employee benefits
|
|
|
(163
|
)
|
|
|
(193
|
)
|
|
|
608
|
|
Customer deposits
|
|
|
670
|
|
|
|
(1,027
|
)
|
|
|
729
|
|
Other accrued liabilities
|
|
|
(36
|
)
|
|
|
88
|
|
|
|
185
|
|
Income taxes payable
|
|
|
81
|
|
|
|
56
|
|
|
|
75
|
|
Net cash provided by (used in) operating activities
|
|
|
(2,370
|
)
|
|
|
563
|
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(890
|
)
|
|
|
(591
|
)
|
|
|
(2,152
|
)
|
Proceeds from sale of property, plant and equipment, net of transaction costs
|
|
|
976
|
|
|
|
1,266
|
|
|
|
993
|
|
Purchase of marketable securities
|
|
|
(4,455
|
)
|
|
|
(10,349
|
)
|
|
|
(3,159
|
)
|
Proceeds from sales of marketable securities
|
|
|
1,011
|
|
|
|
6,798
|
|
|
|
920
|
|
Proceeds from disposal of available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,600
|
|
Release of (increase in) fixed deposits maturing over three months
|
|
|
1,347
|
|
|
|
4,635
|
|
|
|
(146
|
)
|
(Increase in) decrease in fixed deposits maturing over twelve months
|
|
|
(1,601
|
)
|
|
|
(2,965
|
)
|
|
|
1,664
|
|
Net cash used in investing activities
|
|
|
(3,612
|
)
|
|
|
(1,206
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(2,971
|
)
|
|
|
(1,686
|
)
|
|
|
(2,248
|
)
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(308
|
)
|
Net cash used in financing activities
|
|
|
(2,971
|
)
|
|
|
(1,686
|
)
|
|
|
(2,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(8,953
|
)
|
|
|
(2,329
|
)
|
|
|
(3,918
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
23,278
|
|
|
|
14,325
|
|
|
|
11,996
|
|
Cash and cash equivalents, end of year
|
|
$
|
14,325
|
|
|
$
|
11,996
|
|
|
$
|
8,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes
|
|
$
|
7
|
|
|
$
|
25
|
|
|
$
|
21
|
|
See
accompanying notes to consolidated financial statements.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
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. During the
fourth quarter of fiscal 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. See
note 10 – discontinued operations for further discussion.
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 was fully impaired. Please refer to note 9 - goodwill for details.
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 (loss) 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 (loss) and reported net of taxes in the accumulated other
comprehensive income component of shareholders’ equity until realized.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
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.
Assets held for sale
– When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates
the sales price, net of selling costs, of such assets. If in management’s opinion, the estimated net sales price of the assets
which have been identified as held for sale and/or disposed of are presented as Asset held for sale for all periods presented.
If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously
classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded
individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation
(amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the
fair value at the date of the subsequent decision not to sell.
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.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
2.
Summary of Significant Accounting Policies - continued
Revenue
recognition
– Sales of goods are recognized when goods are shipped, title of goods sold has passed to the purchaser, the price
is fixed or determinable as stated on the sales contracts and/or orders, and its collectability is reasonably assured. Customers
do not have a general right of return on products shipped. The Company permits the return of damaged or defective products and
accounts for these actual returns as deduction from sales. Products returns to the Company were insignificant during past years.
Other
comprehensive income (loss) –
Other comprehensive income for the years ended March 31, 2015, 2016 and 2017 represented unrealized gain/(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 (loss).
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 account
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Balance at beginning of the year
|
|
$
|
534
|
|
|
$
|
607
|
|
|
$
|
881
|
|
Provision for the year
|
|
|
216
|
|
|
|
376
|
|
|
|
420
|
|
Bad debt recovery
|
|
|
(143
|
)
|
|
|
(102
|
)
|
|
|
(49
|
)
|
|
|
$
|
607
|
|
|
$
|
881
|
|
|
$
|
1,252
|
|
The provision and the bad debt recovery
for the years were charged to other income (expenses) in consolidated statements of comprehensive income (loss).
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, 2015, 2016 and 2017, shipping and handling costs expensed to selling expenses were $514, $458
and $501, 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.
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 7.7524, 7.7904 and 7.7904 as of March 31, 2015, 2016
and 2017, respectively. The exchange rates between the Chinese Renminbi and the U.S. dollar were approximately 6.2456, 6.5698 and
6.8915 as of March 31, 2015, 2016 and 2017, respectively.
Aggregate
net foreign currency transaction loss included in other income were $(205), $(559) and $(361) for the years ended March 31, 2015,
2016 and 2017, respectively.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
2.
Summary of Significant Accounting Policies - continued
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.
For the
years ended March 31, 2015, 2016 and 2017, the Company records stock-based compensation expenses amounted to $199, $nil and $nil
in the consolidated statement of comprehensive income (loss) respectively. There is no tax benefit recognized in relation to the
stock-based compensation expenses incurred for the three years.
The fair
value of options granted in the years ended March 31, 2015, 2016 and 2017 were estimated using the Binomial option pricing model
with the following assumptions:
|
|
Year ended March 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
|
|
|
|
|
Risk-free interest rate – weighted average
|
|
|
2.606
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected life of options – weighted average
|
|
|
10 years
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Stock volatility
|
|
|
44.37
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected dividend yield
|
|
|
7.8
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Company
applied judgment in estimating key assumptions in determining the fair value of the stock options on the date of grant. The Company
used historical data to estimate the expected life of options, stock volatility and expected dividend yield. The risk-free interest
rate of the option was based on the 10 years U.S. Treasury yield at time of grant.
Net
(loss) income per share
– Basic net (loss) 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 (loss) 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 (loss) income per share and diluted net loss per share calculated in accordance with ASC No. 260, “Earnings Per Share”,
are reconciled as follows (shares in thousands):
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net (loss) income attributable to Deswell Industries, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(2,460
|
)
|
|
$
|
(4,934
|
)
|
|
$
|
1,376
|
|
Loss from discontinued operations
|
|
|
(348
|
)
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to Deswell Industries, Inc.
|
|
$
|
(2,808
|
)
|
|
$
|
(4,934
|
)
|
|
$
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
Loss from discontinued operations per share
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
—
|
|
Basic net (loss) income per share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
2.
Summary of Significant Accounting Policies - continued
|
|
Year ended March 31,
|
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2017
|
|
Basic weighted average common shares outstanding
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
Effect of dilutive securities – Options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common and potential common shares outstanding
|
|
|
16,056
|
|
|
|
16,056
|
|
|
|
16,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
Loss from discontinued operations per share
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
—
|
|
Diluted net (loss) income per share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.09
|
|
For the
years ended March 31, 2015, 2016 and 2017, potential common shares of 532,000, 532,000 and 532,000 shares related to stock options
are excluded from the computation of diluted net loss per share as their exercise prices were higher than the average market price.
As of March 31, 2015, 2016
and 2017, nil shares related to stock options are excluded from the calculations of diluted net loss per share because their inclusion
would have been anti-dilutive.
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.
Its 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.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
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.
Discontinued
Operations
– For the year ended March 31, 2015, the Company sold all of the assets of metallic segment. The
operating results of metallic segment are reported as discontinued operations in the consolidated statements of comprehensive
income (loss) for all periods presented. For the breakdown of the assets and liabilities of metallic segment, please see note
10 – discontinued operations.
Recent changes in
accounting standards
– In May 2017, the FASB issued ASU 2017-09-Compensation—Stock Compensation (Topic 718):
Scope of Modification Accounting. The requirement provides guidance on determining which changes to the terms and conditions
of share-based payment awards require an entity to apply modification accounting under Topic 718. For public business
entities, this ASU should be effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2017. We are currently evaluating the impact the adoption of ASU 2017-09 will have on its consolidated
financial statements.
In February 2017, the FASB
issued ASU 2017-05 Other Income
—
Gains and Losses from the De-recognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset De-recognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets, which clarifies the scope of the nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that the de-recognition
of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with
customers) should be accounted for in accordance with the de-recognition and deconsolidation guidance in Subtopic 810-10. The amendments
in this ASU also provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets within
the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other non-controlled investee. The
amendments in this ASU are effective for annual reporting reports beginning after December 15, 2017, including interim reporting
periods within that reporting period. Public entities may apply the guidance earlier but only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period. We do not expect the adoption of ASU
2017-05 to have a material impact on our consolidated financial statements.
In December 2016, the FASB
issued ASU 2016-20 - Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers: The requirement
affect narrow aspects of the guidance including loan guarantee fees, contract costs, provisions for losses on construction-type
and production-type contracts, disclosure of remaining performance obligations, disclosure of prior period performance obligations,
contract modifications, contract asset vs. receivable, refund liability, advertising costs, fixed odds wagering contracts in the
casino industry, and costs capitalized for advisors to private funds and public funds. This guidance is effective for financial
statements issued for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e.,
January 1, 2018, for a calendar year entity). The adoption of ASU 2016-20 is not expected to have material impact on its consolidated
financial statements.
In August 2016,
the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments, which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs;
settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business
combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance
policies (including bank-owned life insurance policies; distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance
principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact of the adoption of ASU No. 2016-15 on its consolidated financial
statements.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
2.
Summary of Significant Accounting Policies - continued
In June 2016, the FASB issued
ASU 2016-13 Financial Instruments
—
Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instrument. Financial Instruments
—
Credit Losses (Topic 326)
amends guideline 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 incurrent 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers.
This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer
of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those
goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent
Considerations (Reporting Gross versus Net), which is effective upon adoption of ASU 2014-09. This ASU clarifies the implementation
guidance in ASU 2014-09 on principal versus agent considerations. These ASUs are effective for annual reporting periods beginning
after December 15, 2017 and interim periods within those annual periods. The Company will adopt ASU 2014-09, and its related
clarifying ASUs, as of April 1, 2018. The Company is continuing to assess the potential effects of these ASUs on its consolidated
financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company anticipates
adopting the standard using the modified retrospective transition approach. Under this approach, the new standard would apply
to all new contracts initiated on or after April 1, 2018. For existing contracts that have remaining obligations as of April
1, 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices
would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. The Company does not
expect the adoption of these ASUs to have a material impact on our condensed consolidated financial statements.
3.
Marketable Securities
The Company
acquired equity securities listed in Hong Kong.
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Cost
|
|
$
|
13,661
|
|
|
$
|
15,919
|
|
|
|
|
|
|
|
|
|
|
Market value
|
|
$
|
12,020
|
|
|
$
|
16,327
|
|
Unrealized
gain (loss) for the years ended March 31, 2015, 2016 and 2017 were $954, $(1,860) and $1,999, respectively.
Net proceeds
from sale of marketable securities for the years ended March 31, 2015, 2016 and 2017 were $1,011, $6,798 and $920 respectively
and realized gain from sales of marketable securities for the years ended March 31, 2015, 2016 and 2017 were $102, $526 and $69,
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.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
4.
Available-for-sale Securities
The Company
acquired corporate bonds issued by Hong Kong listed companies with contractual maturities after 5 years.
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Cost
|
|
$
|
1,614
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Market value
|
|
$
|
1,603
|
|
|
$
|
—
|
|
Unrealized
gain (loss) for the years ended March 31, 2015, 2016 and 2017 were $33, $(73) and $(3), respectively.
During
the year ended March 31, 2017, all available-for-sales securities were disposed for a consideration of $1,600.
5.
Inventories
Inventories,
net of allowances, by major categories are summarized as follows:
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Raw materials
|
|
$
|
4,038
|
|
|
$
|
5,740
|
|
Work-in-progress
|
|
|
2,372
|
|
|
|
3,404
|
|
Finished goods
|
|
|
1,704
|
|
|
|
1,544
|
|
|
|
$
|
8,114
|
|
|
$
|
10,688
|
|
Obsolescence
allowance for inventory is as follows:
|
|
Year ended March 31
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Balance at beginning of the year
|
|
$
|
3,554
|
|
|
$
|
3,887
|
|
|
$
|
3,635
|
|
Additional charges/(usage), net
|
|
|
341
|
|
|
|
(252
|
)
|
|
|
(65
|
)
|
Written off
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance at the end of the year
|
|
$
|
3,887
|
|
|
$
|
3,635
|
|
|
$
|
3,570
|
|
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
6.
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Value added tax recoverable
|
|
$
|
118
|
|
|
$
|
328
|
|
Rental and utility deposit
|
|
|
15
|
|
|
|
19
|
|
Advance to suppliers
|
|
|
123
|
|
|
|
410
|
|
Prepayment
|
|
|
403
|
|
|
|
654
|
|
Coupon and dividend receivable
|
|
|
140
|
|
|
|
93
|
|
Others
|
|
|
859
|
|
|
|
915
|
|
|
|
$
|
1,658
|
|
|
$
|
2,419
|
|
7.
Assets held for sale
As of March 31, 2016, assets held for sale under plastic injection molding business in the amount of $778 represented seven properties to be sold to third parties. The sale was completed with disposal gain of $86 recognized in other income (expenses), net, during the year ended March 31, 2017.
8.
Property, Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
March
31,
|
|
|
|
2016
|
|
|
2017
|
|
Leasehold land and buildings
|
|
$
|
31,927
|
|
|
$
|
31,927
|
|
Plant and machinery
|
|
|
41,062
|
|
|
|
39,589
|
|
Furniture, fixtures and equipment
|
|
|
11,734
|
|
|
|
11,622
|
|
Motor vehicles
|
|
|
1,369
|
|
|
|
1,396
|
|
Leasehold improvements
|
|
|
2,510
|
|
|
|
3,228
|
|
Impairment
|
|
|
(3,467
|
)
|
|
|
(3,218
|
)
|
|
|
|
85,135
|
|
|
|
84,544
|
|
Less: accumulated depreciation and amortization
|
|
|
(52,783
|
)
|
|
|
(52,552
|
)
|
Net book value
|
|
$
|
32,352
|
|
|
$
|
31,992
|
|
Included in furniture,
fixtures and equipment is computer software with net values of $57 and $8 as of March 31, 2016 and 2017, respectively.
Cost of
leasehold land and buildings consist of the following:
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2017
|
|
Land use right of state-owned
land and buildings erected thereon (a)
|
|
$
|
27,771
|
|
|
$
|
27,771
|
|
Long term leased
land and buildings erected thereon (b)
|
|
|
4,156
|
|
|
|
4,156
|
|
|
|
$
|
31,927
|
|
|
$
|
31,927
|
|
|
(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, 2017, the Company is not aware of
any steps being taken by the Dongguan Chang An Xiaobian District Co-operation for such application.
|
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
8.
Property, Plant and Equipment - continued
Included in leasehold land
and buildings is property on lease with net values of $6,203 and $6,594 as of March 31, 2016 and 2017, respectively. Details of
the property on lease are as follows:
Included in leasehold land and buildings
|
|
March
31,
|
|
|
|
2016
|
|
|
2017
|
|
Cost
|
|
$
|
8,099
|
|
|
$
|
8,831
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,896
|
)
|
|
|
(2,237
|
)
|
Net book value
|
|
$
|
6,203
|
|
|
$
|
6,594
|
|
During the years ended March
31, 2015, 2016 and 2017, the Company had no impairment on its property, plant and equipment. Depreciation of property, plant and
equipment were $2,824, $2,373 and $2,135 during the years ended March 31, 2015, 2016 and 2017, respectively.
9.
Goodwill
The entire
goodwill was fully impaired since March 31, 2014. Details of the goodwill are as follows:
Acquisitions
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2017
|
|
Electronic division
|
|
$
|
393
|
|
|
$
|
393
|
|
Metallic division
|
|
|
317
|
|
|
|
—
|
|
Foreign exchange differences
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Impairment – electronic division
|
|
|
(392
|
)
|
|
|
(392
|
)
|
Impairment – metallic division
|
|
|
(317
|
)
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
10.
Discontinued Operations
During the fourth quarter of fiscal 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 had historically reported the results of the metallic parts business unit as a separate segment. The continuing cash flows subsequent to its closure were not significant.
The results of the discontinued operations of metallic parts for the fiscal years ended March 31, 2015, 2016 and 2017 were as follows:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, before income taxes
|
|
$
|
(348
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from discontinued operations, after income taxes
|
|
$
|
(348
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
As of
March 31, 2016 and 2017, the discounted operations of metallic parts had no assets and liabilities.
In the
consolidated statements of cash flows, the activities of metallic parts were included along with our activities from continuing
operations.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
11.
Other Accrued Liabilities
Other
accrued liabilities consist of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Accrued expenses
|
|
$
|
572
|
|
|
$
|
595
|
|
Value added tax payable
|
|
|
7
|
|
|
|
—
|
|
Others
|
|
|
710
|
|
|
|
879
|
|
|
|
$
|
1,289
|
|
|
$
|
1,474
|
|
12.
Income Taxes
The components
of (loss) income before income taxes are as follows:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Hong Kong
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
Macao
|
|
|
292
|
|
|
|
840
|
|
|
|
189
|
|
PRC
|
|
|
(2,543
|
)
|
|
|
(5,614
|
)
|
|
|
1,398
|
|
(Loss) income from continuing operations
|
|
$
|
(2,253
|
)
|
|
$
|
(4,776
|
)
|
|
|
1,585
|
|
Loss from discontinued operations - PRC
|
|
|
(348
|
)
|
|
|
—
|
|
|
|
—
|
|
Net Loss
|
|
$
|
(2,601
|
)
|
|
$
|
(4,776
|
)
|
|
$
|
1,585
|
|
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% (2015: 16.5%, 2016: 16.5%) to the estimated taxable income arising in or derived from Hong Kong, if applicable.
From January 1, 2008, with
the effect of the new PRC Income Tax Law, the standard income tax rate for all subsidiaries operating in the PRC has been reduced
from the rate of 33% to 25%.
Under applicable PRC tax laws and regulations,
arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten
years after the taxable year when the arrangements or transactions are conducted. The Company is subject to the applicable transfer
pricing rules in the PRC in connection to the transactions between its subsidiaries located inside and outside PRC.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
12.
Income Taxes - continued
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, 2017 includes the deemed profit tax estimated by the management based on the Contemporaneous Documentations.
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. There is no material impact on the adoption of ASC 740. The Company classifies interest and/or penalties related to
unrecognized tax benefits as a component of income tax provisions; however, as of March 31, 2017, there is no interest and penalties
related to uncertain tax positions.
The provision
for income taxes consists of the following:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Current tax
|
|
|
|
|
|
|
|
|
|
|
|
|
- PRC
|
|
$
|
92
|
|
|
$
|
103
|
|
|
$
|
116
|
|
Deferred tax
|
|
|
115
|
|
|
|
55
|
|
|
|
93
|
|
|
|
$
|
207
|
|
|
$
|
158
|
|
|
$
|
209
|
|
Reconciliation
between the provision for income taxes computed by applying the statutory tax rate in the PRC to (loss) income before income taxes
and the actual provision for income taxes is as follows:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Provision for income taxes at statutory tax rate in the PRC
|
|
$
|
(650
|
)
|
|
$
|
(1,194
|
)
|
|
$
|
396
|
|
Effect of income for which no income tax is chargeable
|
|
|
(441
|
)
|
|
|
(210
|
)
|
|
|
(47
|
)
|
Effect of expense for which no income tax is deductible
|
|
|
1,209
|
|
|
|
1,452
|
|
|
|
648
|
|
Net change in valuation allowances
|
|
|
89
|
|
|
|
110
|
|
|
|
(788
|
)
|
Effective tax
|
|
$
|
207
|
|
|
$
|
158
|
|
|
|
209
|
|
The net
deferred income tax consists of the following:
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Deferred income tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred income tax liabilities
|
|
|
(825
|
)
|
|
|
(889
|
)
|
Net deferred income tax liabilities
|
|
$
|
(825
|
)
|
|
|
(889
|
)
|
The components
of net deferred income tax are as follows:
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Deferred income tax assets (liabilities) :
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
106
|
|
|
$
|
—
|
|
Provision of employee benefits
|
|
|
331
|
|
|
|
392
|
|
Depreciation and amortization
|
|
|
901
|
|
|
|
(9
|
)
|
Revenue and cost of sales recognized for financial reporting purpose before being recognized for tax purpose
|
|
|
(1,153
|
)
|
|
|
(1,170
|
)
|
Others
|
|
|
(56
|
)
|
|
|
64
|
|
Less: Valuation allowances
|
|
|
(954
|
)
|
|
|
(166
|
)
|
Net deferred income tax liabilities
|
|
$
|
(825
|
)
|
|
|
(889
|
)
|
The Company operates through the PRC entities and the valuation allowance is considered on each individual basis.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
12.
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. As at March 31, 2017, the Company had no unused tax losses.
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, 2017.
13.
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 (loss) were $177, $75 and $62 for the years ended March
31, 2015, 2016 and 2017, respectively.
At March
31, 2017, the Company was obligated under operating leases requiring minimum rentals as follows:
Year ending March 31, 2018
|
|
$
|
45
|
|
Year ending March 31, 2019
|
|
$
|
4
|
|
Total minimum lease payments
|
|
$
|
49
|
|
We have
non-cancellable agreements to lease our factory buildings to tenants under operating lease, which provide for payments through
2017. At March 31, 2017, the minimum future rental income to be received is as follows:
Year ending March 31, 2018
|
|
$
|
641
|
|
Year ending March 31, 2019
|
|
$
|
412
|
|
Year ending March 31, 2020
|
|
$
|
191
|
|
Total minimum future rental income
|
|
$
|
1,244
|
|
At March
31, 2017, the Company had capital commitments for purchase of plant and machinery, and leasehold improvement totaling $112, which
are expected to be disbursed during the year ending March 31, 2018.
14.
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 $370, $633 and $604 included in the consolidated statements of comprehensive income (loss) 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, 2015,
2016 and 2017, respectively.
15.
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.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
15.
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, 2017, 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,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
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
|
|
|
132,000
|
|
|
$
|
2.14
|
|
|
|
532,000
|
|
|
$
|
2.1
|
|
|
|
532,000
|
|
|
$
|
2.1
|
|
Granted during the year
|
|
|
400,000
|
|
|
|
2.09
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding and exercisable at the end of the year
|
|
|
532,000
|
|
|
$
|
2.10
|
|
|
|
532,000
|
|
|
$
|
2.1
|
|
|
|
532,000
|
|
|
$
|
2.1
|
|
Range of exercise price per share
|
|
$2.09 to $2.14
|
|
|
|
|
|
|
$2.09 to $2.14
|
|
|
|
|
|
|
$2.09 to $2.14
|
|
|
|
|
|
The weighted
average fair value of options granted for the year ended March 31, 2015 was $0.50 per share. At March 31, 2016 and 2017, the aggregated
intrinsic value of options outstanding and exercisable was $nil and $nil.
No options
were cancelled or exercised for the years ended March 31, 2015, 2016 and 2017. The weighted average remaining contractual life
of the share options outstanding at March 31, 2017 was 6.7 years. At March 31, 2016 and 2017, there were 1,236,000 and 1,236,000
options available for future grant under the plans, respectively.
16.
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.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
17.
Other income (expenses), net
Other
income (expenses), net consist of the following:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Gain (loss) on disposal of property, plant and equipment, net
|
|
$
|
262
|
|
|
$
|
(420
|
)
|
|
|
(162
|
)
|
Exchange loss, net
|
|
|
(205
|
)
|
|
|
(559
|
)
|
|
|
(361
|
)
|
Provision for doubtful accounts, net
|
|
|
(73
|
)
|
|
|
(274
|
)
|
|
|
(371
|
)
|
Others
|
|
|
109
|
|
|
|
232
|
|
|
|
198
|
|
Other income (expenses), net from continuing operations
|
|
$
|
93
|
|
|
$
|
(1,021
|
)
|
|
$
|
(696
|
)
|
18.
Non-operating income, net
Non-operating
income, net consist of the following:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Dividend income from marketable securities
|
|
$
|
238
|
|
|
$
|
596
|
|
|
$
|
616
|
|
Interest income from available-for-sales securities
|
|
|
126
|
|
|
|
126
|
|
|
|
5
|
|
Interest income from bank deposits
|
|
|
535
|
|
|
|
372
|
|
|
|
314
|
|
Unrealized gain (loss) from marketable securities
|
|
|
954
|
|
|
|
(1,860
|
)
|
|
|
1,999
|
|
Realized gain from sales of marketable securities
|
|
|
102
|
|
|
|
526
|
|
|
|
69
|
|
Rental income
|
|
|
600
|
|
|
|
793
|
|
|
|
839
|
|
Others
|
|
|
(2
|
)
|
|
|
18
|
|
|
|
(154
|
)
|
Non-operating income, net from continuing operations
|
|
$
|
2,553
|
|
|
$
|
571
|
|
|
$
|
3,688
|
|
19.
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, 2015, 2016 and 2017 are as follows:
|
|
Percentage of net sales
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Customer A
|
|
|
16.5
|
%
|
|
|
12.7
|
%
|
|
|
12.8
|
%
|
Customer B
|
|
|
*
|
|
|
|
13.6
|
%
|
|
|
10.6
|
%
|
Customer C
|
|
|
13.7
|
%
|
|
|
10.4
|
%
|
|
|
10.2
|
%
|
Sales
to the above customers relate to both injection-molded plastic parts and electronic products.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
19.
Operating Risk - continued
Debtors
accounting for 10% or more of total accounts receivable at March 31, 2016 and 2017, respectively, are as follows:
|
|
Percentage of
accounts
receivable at
March
31,
|
|
|
|
2016
|
|
|
2017
|
|
Customer A
|
|
|
23.7
|
%
|
|
|
22.2
|
%
|
Customer D
|
|
|
*
|
|
|
|
14.8
|
%
|
There
were no accounts receivable written off during the years ended March 31, 2015, 2016 and 2017, respectively. There were net provision
for doubtful accounts of $73, $274 and $371 during the years ended March 31, 2015, 2016 and 2017, respectively. There were no charge
off of provision for doubtful accounts during the years ended March 31, 2015, 2016 and 2017. At March 31, 2016 and 2017, allowances
for doubtful accounts were $881 and $1,252, respectively.
Concentrations
of Suppliers
- For the years ended March 31, 2015, 2016 and 2017, 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 and bond price risk on marketable and available-for-sale securities. The Company’s
marketable securities are investment listed on the Stock Exchange of Hong Kong. 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. Listed investments held in the available-for-sale portfolio have been chosen based on
their longer term growth potential and are monitored regularly for performance against expectations. The Company believes the exposure
to investment price risk from the Company’s investment activities is acceptable in the Company’s circumstances.
20.
Segment Information
The Company has three
reportable segments: plastic injection molding, electronic products assembling and metallic parts manufacturing (discontinued
in fiscal 2015). 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. During the fourth
quarter of fiscal 2015, the Company completed its exit from metallic parts business. See note 10 – discontinued
operations for details.
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.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
20.
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, 2015, 2016 and 2017 are as follows:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
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
|
|
$
|
20,206
|
|
|
$
|
(434
|
)
|
|
$
|
(341
|
)
|
|
$
|
20,181
|
|
|
$
|
(356
|
)
|
|
$
|
(2,671
|
)
|
|
$
|
23,594
|
|
|
$
|
(350
|
)
|
|
$
|
843
|
|
Electronic products
|
|
|
18,409
|
|
|
|
(105
|
)
|
|
|
(1,912
|
)
|
|
|
24,847
|
|
|
|
(104
|
)
|
|
|
(2,105
|
)
|
|
|
21,331
|
|
|
|
(53)
|
|
|
|
742
|
|
Metallic parts
(Discontinued in fiscal 2015)
|
|
|
1
|
|
|
|
—
|
|
|
|
(348
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Segment total
|
|
$
|
38,616
|
|
|
$
|
(539
|
)
|
|
$
|
(2,601
|
)
|
|
$
|
45,028
|
|
|
$
|
(460
|
)
|
|
$
|
(4,776
|
)
|
|
$
|
44,925
|
|
|
$
|
(403
|
)
|
|
$
|
1585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
to consolidated
totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales eliminations
|
|
|
(539
|
)
|
|
|
539
|
|
|
|
—
|
|
|
|
(460
|
)
|
|
|
460
|
|
|
|
—
|
|
|
|
(403
|
)
|
|
|
403
|
|
|
|
—
|
|
Consolidated
totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
38,077
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
44,568
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
44,522
|
|
|
$
|
—
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(2,601
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(4,776
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1585
|
|
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
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
|
|
$
|
509
|
|
|
$
|
—
|
|
|
$
|
364
|
|
|
$
|
—
|
|
|
$
|
306
|
|
|
$
|
—
|
|
Electronic products
|
|
|
26
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
Metallic parts
(Discontinued in fiscal 2015)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated
total
|
|
$
|
535
|
|
|
$
|
—
|
|
|
$
|
372
|
|
|
$
|
—
|
|
|
$
|
314
|
|
|
$
|
—
|
|
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
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
|
|
$
|
73,829
|
|
|
$
|
550
|
|
|
$
|
2,384
|
|
|
$
|
67,528
|
|
|
$
|
424
|
|
|
$
|
1,969
|
|
|
$
|
67,912
|
|
|
$
|
2,050
|
|
|
$
|
1,750
|
|
Electronic products
|
|
|
22,610
|
|
|
|
340
|
|
|
|
415
|
|
|
|
20,043
|
|
|
|
167
|
|
|
|
404
|
|
|
|
23,075
|
|
|
|
102
|
|
|
|
385
|
|
Metallic parts (Discontinued in
fiscal 2015)
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated
Totals
|
|
$
|
96,439
|
|
|
$
|
890
|
|
|
$
|
2,824
|
|
|
$
|
87,571
|
|
|
$
|
591
|
|
|
$
|
2,373
|
|
|
$
|
90,987
|
|
|
$
|
2,152
|
|
|
$
|
2,135
|
|
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
20.
Segment Information - continued
The
Company’s sales are coordinated through the Macao subsidiaries and a breakdown of sales by destination is as follows:
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
9,910
|
|
|
$
|
8,116
|
|
|
$
|
8,883
|
|
PRC
|
|
|
16,119
|
|
|
|
18,785
|
|
|
|
20,637
|
|
United Kingdom
|
|
|
1,023
|
|
|
|
1,007
|
|
|
|
1,515
|
|
Hong Kong
|
|
|
5,505
|
|
|
|
7,672
|
|
|
|
5,801
|
|
Europe
|
|
|
3,501
|
|
|
|
6,403
|
|
|
|
4,750
|
|
Others
|
|
|
2,018
|
|
|
|
2,585
|
|
|
|
2,936
|
|
Net sales from continuing operations
|
|
$
|
38,076
|
|
|
$
|
44,568
|
|
|
$
|
44,522
|
|
Net sales from discontinued operations
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Total net sales
|
|
$
|
38,077
|
|
|
$
|
44,568
|
|
|
$
|
44,522
|
|
The location
of the Company’s identifiable assets is as follows:
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Hong Kong and Macao
|
|
$
|
32,528
|
|
|
$
|
34,821
|
|
PRC
|
|
|
55,043
|
|
|
|
56,166
|
|
Total identifiable assets
|
|
|
87,571
|
|
|
|
90,987
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
87,571
|
|
|
$
|
90,987
|
|
21.
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 $72,890 (equivalent to RMB 479 million) and $66,099 (equivalent to RMB 456 million) as
of March 31, 2016 and 2017, respectively.
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
21.
Condensed Financial Information of Deswell Industries, Inc. - continued
Balance sheets
|
|
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
294
|
|
|
$
|
174
|
|
Prepaid expenses and other current assets
|
|
|
76
|
|
|
|
30
|
|
Amounts due from subsidiaries
|
|
|
33,462
|
|
|
|
29,621
|
|
Total current assets
|
|
|
33,832
|
|
|
|
29,825
|
|
Investments in subsidiaries
|
|
|
44,861
|
|
|
|
48,083
|
|
Property, plant and equipment-net
|
|
|
17
|
|
|
|
—
|
|
Total assets
|
|
$
|
78,710
|
|
|
$
|
77,908
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and employee benefits
|
|
$
|
1,226
|
|
|
$
|
1,588
|
|
Other accrued liabilities
|
|
|
114
|
|
|
|
119
|
|
Dividend payable
|
|
|
562
|
|
|
|
—
|
|
Total current liabilities
|
|
|
1,902
|
|
|
|
1,707
|
|
Total shareholders’ equity
|
|
|
76,808
|
|
|
|
76,201
|
|
Total liabilities and shareholders’ equity
|
|
$
|
78,710
|
|
|
$
|
77,908
|
|
Statements of comprehensive income (loss)
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Equity in (loss) earnings of subsidiaries
|
|
$
|
(1,120
|
)
|
|
$
|
(3,426
|
)
|
|
$
|
3,211
|
|
Operating expenses
|
|
|
1,688
|
|
|
|
1,508
|
|
|
|
1,835
|
|
(Loss) income before income taxes
|
|
|
(2,808
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income
|
|
|
(2,808
|
)
|
|
|
(4,934
|
)
|
|
|
1,376
|
|
Share of other comprehensive income (loss) of subsidiaries
|
|
|
33
|
|
|
|
(73
|
)
|
|
|
11
|
|
Total comprehensive (loss) income
|
|
$
|
(2,775
|
)
|
|
$
|
(5,007
|
)
|
|
$
|
1,387
|
|
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
21.
Condensed Financial Information of Deswell Industries, Inc. - continued
Statements
of cash flows
|
|
Year ended March 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,808
|
)
|
|
$
|
(4,934
|
)
|
|
$
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss (earnings) of subsidiaries
|
|
|
1,120
|
|
|
|
3,426
|
|
|
|
(3,211
|
)
|
Depreciation
|
|
|
87
|
|
|
|
39
|
|
|
|
17
|
|
Stock-based compensation expenses
|
|
|
199
|
|
|
|
—
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
—
|
|
|
|
—
|
|
|
|
46
|
|
Amounts due from subsidiaries
|
|
|
3,956
|
|
|
|
2,171
|
|
|
|
3,841
|
|
Accrued payroll and employee benefits
|
|
|
—
|
|
|
|
(89
|
)
|
|
|
362
|
|
Other accrued liabilities
|
|
|
47
|
|
|
|
(2
|
)
|
|
|
5
|
|
Net cash provided by operating activities
|
|
|
2,601
|
|
|
|
611
|
|
|
|
2,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(2,971
|
)
|
|
|
(1,686
|
)
|
|
|
(2,248
|
)
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(308
|
)
|
Net cash used in financing activities
|
|
|
(2,971
|
)
|
|
|
(1,686
|
)
|
|
|
(2,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(370
|
)
|
|
|
(1,075
|
)
|
|
|
(120
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,739
|
|
|
|
1,369
|
|
|
|
294
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,369
|
|
|
$
|
294
|
|
|
$
|
174
|
|
DESWELL
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
21.
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, 2015, 2016 and 2017, 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, 2015, 2016 and 2017, 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 - (see page 21 of this report)
|
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, 2017 formatted in eXtensible Business Reporting Language (XBRL):
|
|
|
(a) Consolidated Balance Sheets as of March 31,2016 and 2017; (b) Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2015, 2016 and 2017; (c) Consolidated Statements of Shareholders Equity for the Years Ended March 31, 2015, 2016 and 2017; (d) Consolidated Statements of Cash Flows for the Years Ended March 31, 2015, 2016 and 2017; 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.