RISK FACTORS

The Company’s business and operations involve numerous risks, some of which are beyond the Company’s control, which may affect future results and the market price of the Company’s Common Shares. The following discussion highlights allInvestors should take into accounts the material risks described below, and the Company faces.

The Company is now Required to Conduct its Manufacturing Operations Under the Rules and Regulations Applicable to Domestic Chinese Companies That Previously Did Not Affectother information contained in this Annual Report, when evaluating an investment in the Company. Since the Company commenced its manufacturing operations in China in 1991, the Company has conducted its operations in Long Hua, Shenzhen, China, pursuant to various agreements entered into, primarily, between two of the Company’s subsidiaries and the Shenzhen City Baoan District Foreign Economic Development Head Company and its designees (collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”). Under the BFDC Agreements, the BFDC was the party responsible for providing manufacturing facilities for the Company and for supplying workers to the Company. The Company paid the BFDC a management fee and certain other charges for the use of the facilities and the services of the workers. Because the Company’s manufacturing operations in Long Hua, Shenzhen, were conducted under the BFDC Agreements, its operations were not subject to many of the rules and regulations that would be imposed on entities that are considered under China law to be doing business in China (either as joint venture or as a wholly owned subsidiary organized in China). For example, the Company did not have to apply for permits or licenses in China or to register to do business in China and received beneficial treatment with respect to import/export taxes and duties.

Risks Related To Doing Business In China And Myanmar.

In 2010, the Company received official governmental notice that the foregoing BFDC license structure of operations would no longer be permitted and that, accordingly, all foreign companies operating under that structure, including the Company’s two subsidiaries that operated in Shenzhen, would have to reorganize their operations and register in China as a local company. As a result of the foregoing governmental decree, the Company formed Nissin Metal and Plastic (Shenzhen) Company Limited (herein referred to as “Nissin PRC”), a new wholly-owned subsidiary that is now a registered company in the PRC, and discontinued Nissin’s operations under the BFDC Agreements. All of Nissin’s assets, equipment, employees and manufacturing operations were transferred from Nissin Precision Metal Manufacturing Limited (herein referred to as “Nissin HK”), one of its Hong Kong subsidiaries, to Nissin PRC in 2011. While Nissin HK was forced to transfer its assets and operations to Nissin PRC, the Company’s other operating entity in Shenzhen, China, Hi-Lite Camera Company Limited (“Hi-Lite”), was temporarily allowed to continue to operate in Shenzhen under the BFDC Agreements. However, as of March 31, 2016, Hi-Lite also has transferred all of its assets and operations to Nissin PRC and has officially ceased operating under the BFDC Agreement. Hi-Lite is currently being dissolved. The dissolution process normally takes several years and involves several governmental agencies. While the Company believes that it has made all necessary payments to dissolve Hi-Lite, no assurance can be given that these governmental agencies will not during the dissolution process determine that the Company has to make additional payments to complete the dissolution. As a result of the termination of the operations of both Nissin HK and Hi-Lite, all of the Company’s future operations in China are now conducted through Nissin PRC. A foreign owned subsidiary, such as Nissin PRC, that is registered in China is commonly known as a “foreign invested enterprise” (a “FIE”), or as a “Wholly Foreign Owned Enterprise” (a “WFOE”). As a new PRC registered WFOE, Nissin PRC is now permitted to hire its own employees, lease its own facilities, and distribute its products in China. However, unlike the Company’s prior arrangements under the BFDC Agreements, Nissin PRC now has to obtain and maintain its own permits and licenses, is subject to China’s income and business taxes, and is subject to the rules and regulations applicable to other PRC registered companies. Most of these new rules, permits and taxes previously did not apply to its operations in China under the BFDC Agreements. These new rules, regulations and taxes have made the operations of Nissin PRC more cumbersome and expensive. To date, the Company has managed to restructure the operations of its new PRC subsidiary in a manner that has enabled it to comply with the additional rules and regulations. However, no assurance can be given that the Company will be able to continue to operate profitably through Nissin PRC and will be able to comply with future regulations and restrictions.

Terminating the BFDC Agreements and Conducting its Operations Through a Wholly Foreign Owned Enterprise Has Increased the Company’s Cost of Operations in Shenzhen, China, and Could Result in Additional Unexpected Costs. As part of the governmentally required transfer of the operations of the Company from the BFDC Agreements to a WFOE, the Company’s Nissin PRC wholly-owned limited liability company is now a registered PRC company and is governed by the PRC’s company laws and regulations. The cost of conducting operations through Nissin PRC is substantially higher than the operating under the BFDC Agreements. The regulations imposed on Nissin PRC have resulted in increased taxes and increased regulatory and accounting burdens. For example, Nissin PRC has to charge value added tax (“VAT”) on all of the products that its sells locally, and has to pay VAT on materials it purchases locally. Depending on the classification of products and/or materials not all of the VAT tax is refunded to Nissin PRC when it exports these products. As a result, the VAT increases the overall cost of those products. The Company, therefore, must either pass these increased costs on to its customers (which hurts the Company’s price competitiveness and its customer relations), or absorb the cost increases through smaller profit margins (which reduces the benefits of such sales to the Company). No assurance can be given that the cost of operating Nissin PRC as a WFOE will not continue to increase and will not further negatively affect the Company and its operations.

The Company’s Operations At Its Long Hua, Shenzhen, Facilities May Be Disrupted By Changes Made By The Landlord To The Leased Buildings. The Company’s current manufacturing facilities in Long Hua, Shenzhen, China, consist of approximately 261,000 square feet of space that are used for manufacturing and as dormitory facilities. These facilities are currently leased pursuant to several leases that permit the Company to operate in various buildings until February 28, 2017. The Company and its landlord recently agreed to enter into new leases (the “Premises Leases”) that will allow the Company to continue its operations at the current location through February 2020. However, the Company’s total annual cost under the Premises Leases is expected to increase by approximately 13%. The new leases are currently under review by the required governmental agencies and have not yet been executed. Accordingly, the terms of the lease agreements may vary from the terms agreed to by the parties. The landlord of the Company’s facilities recently completed a new building that the Company will hereafter use primarily for its metal stamping operations. Accordingly, the Company will have to move its entire metal stamping operations from the existing temporary facilities to the new building that the landlord built. Although the Company last year relocated this part of its operations without significant expense and without materially impacting its operations, no assurance can be given that the upcoming relocation of the Company’s metal stamping operations will not negatively impact its metal stamping operations, disrupt the Company’s other operations, and otherwise affect its ability to attract new customers or business. In addition, moving the plant and equipment could also be costly and may require the Company to incur additional expenses in refurbishing the new facilities and returning the old facilities. The cost and negative impact on the Company’s operations of this move cannot currently be accurately estimated, but the impact on the Company’s operations and financial results could be material.

Changes in Labor Laws, Environmental Regulation, Safety Regulation and Business Practices, and Operating Costs in China, and in Shenzhen China, inIn Particular, Have Significantly Increased theThe Costs and Risks ofAnd Burdens Of Doing Business And Could Continue To Negatively Impact The Company’s Operations And Profitability. In the past, foreign owned enterprises, such as the Company and its subsidiaries, have established manufacturing/assembly facilities in China because of China’s lower labor costs, lower facilities costs, less stringent regulations, and certain other benefits provided to foreign entities. As described elsewhere in this Annual Report, these benefits are no longer available to most companies operating in Shenzhen, including in particular foreign-owned entities. In fact, the Chinese government hascosts and burdens on foreign owned companies appear to be significantly greater than on local Chinese-owned companies. The cost of operating a manufacturing business in Shenzhen have increased significantly recently, including in particular rent and the cost of labor, and the amount of governmental inspections and intrusion have further significantly increased the costs and burdens of operating in China. For example, the Company estimates that there have been over 100 inspections at the Shenzhen facility during the past few years significantly changed and/year, most of which were unwarranted or increasedfrivolous and many of which resulted in the enforcement of a number of laws affecting employees (including regulations regarding their salaries and benefits, labor unions, working conditions and overtime restrictions, and contract duration—in particular, requirements leading to lifelong employment). These regulations now require companiesCompany having to make paymentscostly adjustments to up to six different employee benefit funds for each employee, which hasoperating practices. These factors have significantly increased the Company’s cost of employment. In addition, the Chinese government has also changed or increased the enforcement of certain environment protection laws, which have restricted some common practices and/or increased the Company’s cost of operations. Employees also now have the right to enforce labor laws relating to their termination and the right to strike. For example, as a result of the winding down of Hi-Lite’s operations, the Company intended to transfer Hi-Lite’s workers to Nissin PRC. The employees claimed that they had been terminated, went on strike, and demanded the required employment termination severance payments. While the Company was able to resolve this issue without much expense, other such labor actions can occur at any time, which actions could be more costly to the Company. The foregoing factors have increased the risks of doing business in China and have caused many companies to terminate their operations in Southern China and have caused manythe past few years. As a result of the remaining companies operating incost increases, the Company has attempted to increase the prices it charged to its customers for products emanating from its Shenzhen, China facilities, but has mostly been unable to restructuredo so. The Company offered its customers lower prices if the products could be produced at the Company’s Myanmar facilities, but most customers initially resisted. The initial refusal by some customers to allow production to be moved to Myanmar has resulted in lower sales by both the customers and the Company. Some of these customers have also decided to source their operations.products from other original equipment manufacturers (“OEMs”) that have a lower cost structure than the Company has. The foregoing changes in labor and other rules and regulationsfactors have adversely affected the Company’s recent financial results. Nonet sales and gross margins and may continue to do so in the future. While the Company is trying to offset the increasing costs and burdens of doing business in China (primarily by increasing automation and moving labor-intensive activities to Myanmar), no assurance can be given that other business changes will not be implemented that will further negatively affectin the longer term the Company and that the Company will in fact, be able to continue to operate in China and/or prosperremain viable under anythe new and evolving business or regulatory conditions.conditions in China.

Changing Internal Fiscal, Regulatory and Political Changes Continue to Negatively Affect The Company’s Operations in China. TheMost of the Company’s mainkey functions, including tool design and manufacturing, facilitiesengineering, administration, and automated manufacturing, are locatedconducted from the Company’s facilities in China. As a result, the Company’s operations and assets are subject to all ofaffected by the political, economic, legal and other uncertainties associated with doing business in China. Changes in policies by the Chinese government to its laws, regulations, or the interpretation thereof, the imposition of confiscatory taxation, restrictions on imports and sources of supply, currency re-valuations, or the expropriation of private enterprises, could materially adversely affect the Company. For example, the Chinese government has recently been imposing burdensome import regulations on companies, such as the Company, that heavily rely on imports of raw materials. In addition, foreign owned enterprises, including the Company, have recently been subject to numerous governmental inspections and have been subjected to additional burdensome regulations and, on occasion, to cash penalties and fines. While the Company has, to date, been able to continue its operations in China despite these changes and additional burdens, no assurance can be given that the increasing regulations and the more restrictive government policies will not, in the future, cause the Company’s operations to become financially untenable or otherwise materially affect its business, operations and financial condition.

Political Or Trade Controversies Between China And The United States Could Harm The Company’s Operating Results Or Depress The Company’s Stock Price. Relations between the U.S. and China have during the past few years been strained as a result of various economic and geopolitical disputes between the countries. These political and economic issues have resulted in tariffs being imposed by both China and the U.S. and have resulted in the imposition of restrictions on the import/export of certain products. Although the Company’s sales to the U.S. are not substantial, and the Company does not import raw materials from the U.S., these actions could increase the costs of manufacturing or otherwise interfere with the Company’s operations in China. These disruptions of the trade relations with the U.S. could have a material adverse effect on the Company’s future business. While the current trade disputes with China to date have not directly materially affected the Company’s business, no assurance can be given that these and any other future controversies will not negatively affect the Company’s business and operations in China. In addition to the impact that the trade dispute may have on the Company’s business, the political and trade friction between the U.S. and China could adversely affect the prevailing market price for the Company’s Common Shares. The Company, whose shares are publicly listed on the U.S. Nasdaq stock market, could be perceived in China to be an American company and, as such, could face persecution in various forms from the government. Similarly, because the Company operates in Shenzhen, China, the Company could be perceived to be a Chinese company by U.S. investors, These trade or political disputes between the U.S. and China could affect U.S. investors’ perception of China-based manufacturing companies listed on U.S. stock markets, which could adversely affect the Company’s stock price.

Increased Wages And The Other Costs Of Labor in China Have a Material Negative AffectImpact The Company’s Operations And Continue to Increase Its Operating Costs. Minimum wagesWages in China in general, and in Shenzhen in particular, have significantly increased during the past few years. While the Company pays its employees more than the minimum wage, the increase in the minimum wage has required the Company and other local manufacturers to increase their salaries by approximately the same percentage. Increases in wages has also resultresulted in increases in our and other employer’semployer contributions for various mandatory social welfare benefits for Chinese employees that are based on percentages of their salaries. These continuing material increases in ourthe cost of labor will continue to increase ourthe Company’s operating costs, and will adversely affect our financial results unless we pass on such increases to our customers by increasingreduce the prices of our products and services. In response to the increased cost of labor (as well as the other increases in doing business in Shenzhen), we have increased the prices that we charge our customers. The effect of these increases in the prices of our products and services has resulted,Company’s gross margins, and may continue to result in the loss of customers who may seek, and are able to obtain, comparable products and services comparable to those we offer in lower-cost regions of the world or from certain local Chinese companies that receive governmental support of subsidies. During the past few fiscal years, severalsome of ourthe Company’s larger customers werehave been unwilling to pay the higher prices that wethe Company had to charge in response to our higher cost of operations.operations and, accordingly, the Company’s new sales have decreased. Future increases in ourthe Company’s costs and in the prices that we charge ourit charges its customers may result the loss of additional customers and in futurethe loss of revenues, which could affect ourthe Company’s financial results.

The Company May Be Subject To Significant Employee Termination Payment Obligations In China. Under China’s labor laws, the Company’s local employees are entitled to receive significant employment termination payments if the Company terminates their employment. Although the Company has been reducing the amount of this potential liability by not replacing employees who resign or otherwise leave, any mass layoff could trigger the sudden payment of the entire severance payment obligation. For example, if the Company were forced to change the location of its Shenzhen factory, under the applicable regulations all employees would be deemed to be terminated, and the Company would have to pay out the entire accrued severance liability. While the Company has been accruing these severance payments as a liability on its financial statements (as of March 31, 2020, the Company accrued $1,167,000 of severance liabilities), the payment of these accrued amounts could result in a significant decrease in the Company’s cash reserves.

The Company’s Shenzhen, China, Leases Could Subject the Company To Substantial Future Risks and Costs. The Company’s engineering, research and development, and its automated manufacturing facilities are currently still located in Long Hua, Shenzhen, China. The Company recently extended its leases for this facility until February 28, 2023. As part of the lease extension, the landlord required the Company to make permanent improvements to the buildings at the Company’s expense. The landlord was able to extract these changes because it knows that the Company is unable to move its factory to another location without incurring significant expense and other difficulties. If the Company were to move its facilities to another location in Shenzhen, or elsewhere in China, the Company would have to pay all of the accrued employee severance obligations. See, “Risk Factors--The Company May Be Subject To Significant Employee Termination Payment Obligations In China”, above. In addition, the Company would have difficulty re-hiring many of its key employees, and those that it could re-hire would demand higher wages. As result, the Company could be subject to future demands by the landlord, and any renewal of the lease in three years could be at a substantially higher cost.

The Company Faces Risks From Its Expanded Operations In Myanmar. In response to these material, continuing increasesincreased costs and burdens of operating in wagesChina, and labor related costs,in order to partially insulate the Company’s manufacturing operations from the effects of the U.S./China trade and political disputes, the Company has during the past few years, been increasing the amount of automation and its use of robotics in its operations and has been attemptingdecided to move most of the Company’s labor intensivelabor-intensive work from Shenzhen, China, to lower labor cost countries.Yangon, Myanmar (formerly Burma). Following decades of authoritarian rule, Myanmar recently enacted various political and economic reforms that have made it possible for foreign businesses to operate in Myanmar, and to own an interest in Myanmar companies. In addition, the U.S. and European Union recently lifted many trade sanctions with Myanmar. As a result, a number of international and other enterprises have started acquiring interests in businesses in Myanmar. In March 2015 the Company acquired 75% of Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”), a foreign company authorized to operate in Myanmar. In January 2017 the Company increased its ownership interest in Kayser Myanmar to 84%. Early in 2019, Kayser Myanmar moved its existing operations to a larger and newer factory facility in Yangon. The Company has also transferred a substantial portion of its non-automated manufacturing equipment from its Shenzhen, China, operations to the Kayser Myanmar facilities in order to enable the Myanmar company to assemble and manufacture more of the increased automationCompany’s products in Myanmar. In addition to the assembly services currently performed in Myanmar, the Company recently commenced transferring some of its component manufacturing equipment to Myanmar. However, operating in an underdeveloped country such as Myanmar is subject to numerous risks and its abilityuncertainties. These risks include labor relations issues (including strikes), lack of infrastructure, uncertain rules and regulations, unpredictable access to utilities (including electricity), cultural and political issues with local governmental authorities, and the lack of international financing expertise. Because the Company is continuing to shift labor intensive operationsproduction from China to Myanmar, (formerly Burma)the impact of negative events in Myanmar will have a more significant impact on the Company in the future. The operations in Myanmar also are subject to the currency risks associated with the Myanmar Kyat (MMK), the Company has been ableofficial currency of that country. Myanmar recently permitted the exchange rate between the Kyat and the U.S. dollar to reduce the number of employees that it employs in Shenzhen from almost two thousand a few years ago, to approximately 290 currently. However,fluctuate, which fluctuations could materially change the cost of acquiring and manufacturing its own automation equipment has been high, and the increasesoperating in productivity and the decreasesMyanmar. No assurance can be given that unfavorable currency fluctuations will not occur in the cost of production that result from automation have not fully offsetfuture.

Wages In Myanmar Have Recently Increased Substantially and are Expected to Continue to Increase, Which Could Affect the increased labor costs. As a result, during the past year the Company been shifting part of its labor intensive assembly operations to Myanmar, a country where labor costs are substantially lower thanCompany’s Future Operations in Shenzhen, China. Myanmar. The Company now owns a 75% interestdecided to establish its manufacturing operations in Myanmar in large part because of athe lower wages paid to workers in Myanmar. However, the Myanmar company that operates an assembly facilitygovernment has recently made material changes to the labor laws in Yangon, Myanmar and has increased wages, which labor law changes and increased wages could make operating in Myanmar by Kayser Myanmar more expensive and difficult. Since the Company intendsCompany’s plan is to increasingly shift much of its expensive and highly regulated work from its China facility to Kayser Myanmar, increasing the cost of labor intensiveand imposing additional regulations in Myanmar may make the future operations in Myanmar economically less beneficial than anticipated. No assurance can be given that Kayser Myanmar will be able to operate in a cost-efficient manner in the future. Should Kayser Myanmar continue to experience increased costs and regulatory restrictions, the Company may lose the low-cost benefits of operating in Myanmar that new facility. See, “it was expecting in order to continue to service its larger clients.

The Company Faces Numerous RisksCompany’s Customers May Restrict, Or Prohibit, Their Products To Be Manufactured In ItsMyanmar, Which Would Negatively Affect The Company’s Operations In Myanmar,” below.. The Company has shifted approximately one-half of its assembly and manufacturing operations from the higher cost operations in China to the new lower cost facility in Myanmar as part of the Company’s business plan to retain its existing customers and to increase its competitiveness in the OEM marketplace. Accordingly, it is becoming increasingly important that that the Company’s customers agree to have their products manufactured in Yangon, Myanmar. To date, some of the Company’s customers have refused to have their products manufactured in Myanmar. While the quality of the products manufactured at Kayser Myanmar has satisfied those customers who have tested the quality of the products manufactured in Myanmar, other customers have been reluctant to permit the Company to outsource the manufacture of their products to the Myanmar assembly facility because of political and public relations issues. For example, the Rohingya humanitarian crisis, and the Myanmar government’s actions in expelling many Rohingya from Myanmar, have further tarnished Myanmar’s unfavorable human rights record. In the event that the Company’s customers prohibit the Company from manufacturing their products in Myanmar, the Company’s operations and financial condition will be significantly and adversely affected. No assurance can be given that customers will not, in the future, withdraw their work from Myanmar.

Uncertain Legal System and Application of Laws May Adversely Affect The Company’s Properties And Operations In Both China And Myanmar. The legal systems of China and Myanmar are often unclear and are continually evolving, and there can be no certainty as to the application of laws and regulations in particular instances. While China has an increasingly comprehensive system of laws, the application of these laws by the existing regional and local authorities is often in conflict and subject to inconsistent interpretation, implementation and enforcement. New laws and changes to existing laws occur quickly, sometimes unpredictably, and sometimes unpredictably.often arbitrarily. As is the case with all businesses operating in both China and Myanmar, the Company often is also required to comply with informal laws and trade practices imposed by local and regional administrators. Local taxes and other charges are levied depending on the local needs for tax revenues and may not be predictable or evenly applied. These local and regional taxes/charges and governmentally imposed business practices often affect the Company’s cost of doing business and require the Company to constantly modify its business methods to both comply with these local rules and to lessen the financial impact and operational interference of such policies. While the Company has, to date, been able to increase its compliance with the regulations and operate within the newly enforced rules and business practices in China, no assurance can be given that it will continue to be able to do so in the future. Should the local or regional governments or administrators impose new practices or levies that the Company cannot effectively respond to, or should the administrators continue to enforce more of those rules that they have not previously enforced, the Company’s operations and financial condition could be materially and adversely impacted. The Company’s ability to appeal many of the local and regionally imposed laws and regulations is limited, and the Company may not be able to seek adequate redress for laws that materially damage its business. The Chinese judiciary issystems in China and Myanmar are relatively inexperienced in enforcing the laws that exist,govern businesses, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate laws do exist in China and Myanmar, it may not be possible to obtain swift and equitable enforcement of that law.

The Company’s Operations In Myanmar Are Dependent Upon Its Newly Leased Factory Complex In Yangon, Myanmar, And The Loss Or Interference With That Lease Would Materially, And Adversely, Affect The Company’s Operations In Myanmar. On March 29, 2019 Kayser Myanmar entered into a 50-year lease for an approximately 6,900 square meter (1.67 acres) factory estate in Yangon. Kayser Myanmar advanced $950,000 to the landlord as a prepayment of rent under the lease (at currency conversion rate in effect at that time, the prepayment represents approximately 12 years of rental payments), and has spent approximately $600,000 on refurbishing the complex and building one new factory building and a new office building at the site. Accordingly, this new facility represents a significant long-term investment by the Company in its operations in Myanmar. All of Kayser Myanmar’s operations will be conducted at this new facility. Any interference or interruption of Kayser Myanmar’s right to operate that this new facility, including as a result of a dispute with the landlord or because of any actions or regulations by Myanmar governmental or administrative authorities, could materially negatively affect the Company’s investment in the new factory and its ability to operate in Myanmar.

The Company Has Substantial Assets In Myanmar, And Any Action By The Government To Expropriate Or Restrict Those Assets Would Materially Harm The Company. Myanmar has only recently permitted non-Myanmar businesses to operate in Myanmar. The laws governing foreign businesses regulate both the manner in which such foreign entities can operate as well as the ownership of assets by foreign entities. The laws and regulations under which foreign business can operate and own assets are still being developed and are changing. As a result, there is substantial uncertainty in operating in Myanmar and in owning equipment, machinery and inventory (the Company currently does not own any real estate, but it does hold a long-term lease on its factory in Myanmar). The Company has transferred a substantial amount of its machinery and equipment from its Shenzhen factor to its Myanmar factory, and has purchased new equipment for the Myanmar factory. Also, the Company has purchased raw materials and parts inventory for use at the Myanmar facility. As of March 31, 2020, the value of the Company’s property, plant and equipment residing in Myanmar, was approximately $751,000. While the Company is not aware of any expropriation of property from foreign entities or other similar actions taken by Myanmar, no assurance can be given that Myanmar will not in the future adopt laws, or take actions, that affect the Company’s Myanmar assets and properties. 

Labor Shortages and Employee Turnover May Negatively Affect The Company’s Operations and Profitability. One of the principal economic advantages of locating the Company’s operations in China and Myanmar has been the availability of low cost labor. Due to the enormous growth in manufacturing in China, workers’ higher salary expectations, and the after effects of China’s one-child policy, the Company has recently experienced difficulty in filling its lower cost labor needs in China. In addition to the recently developing tight labor market, the Company has also been affected by cyclical trends and other shortages in labor supply. The Company regularly faces severe labor shortages in Shenzhen as a result of the Chinese New Year during which time the Company follows the customary practice at its factory complex to grant its employees home leave and to, therefore, temporarily discontinuing operations. Any material or prolonged shortage of labor would have a material adverse effect on the Company’s results of operations. As a result of the high cost of labor, the changing nature of the labor market, and the departure of employees that typically occurs during the Chinese New Year, many of the Company’s assembly workers have to be replaced every year. Due in part to these wage increases and labor shortages, the Company has stopped most of its labor-intensive manufacturing in China and now uses its Shenzhen facilities mostly for engineering, tool manufacturing, design and administrative purposes. Since these functions are performed by higher paid professional employees, the Company’s exposure to the labor issues in China has been reduced. However, the cost and risks of hiring and training new employees has shifted to Myanmar as the Company now performs most of its labor-intensive manufacturing in Myanmar. Myanmar also observes an extended new year’s celebration each year in April during which the Company’s factories are closed and all workers temporarily leave. Because many of the Myanmar factory workers are migrant workers who live far from the Company’s Yangon factory, many do not return after the holidays the Company is required to annually hire, and train, new workers.

Import Duties and Restrictions May Negatively Affect The Company’s Operations and Liquidity. China is increasingly regulating and monitoring imports of raw materials and parts by manufacturers in China, which regulations make it more burdensome and expensive to import the materials that the Company needs to manufacture its products. The Company now also has to operate under import customs contracts in Myanmar, or under bonded warehouse arrangements, in order to be able to import goods into Myanmar without paying taxes or duties. Failure by the Company or by third parties who perform transportation services for the Company to comply with the import regulations can lead to financial penalties on the Company, to additional restrictions on import activities, and could even result in the prohibition of future duty free import/exports by the Company. Any such prohibition would adversely affect the Company’s business and operations. No assurance can be given that the Company or its transportation service providers will be able to, or will in fact fully comply with the increased import regulations. Because of the burdensome bonded warehouse customs regulations in China, and because the Company only has a small amount of manufacturing left in China that requires the importation of goods, the Company plans to terminate its Chinese bonded warehouse custom contracts later in 2020. The action to terminate this 30-year old arrangement could have unforeseen consequences on the Company.

Risks Related To The Company’s Operations, Structure And Strategy.

The Company Faces On-Going Risks Related To The COVID-19 Outbreak. The outbreak of a novel strain of coronavirus (COVID-19) in December 2019 in China significantly impacted the Company’s operations in China and then also in Myanmar, and is expected to negatively impact the Company’s sales for an uncertain period of time. The COVID-19 pandemic has affected the Company’s operations in the fourth quarter of the fiscal year ended March 31, 2020, and is expected to impact its sales in the future as the virus spreads to most parts of the world. The COVID-19 pandemic forced the closure of the Company’s Shenzhen, China, factory for over four weeks from mid-January to mid-February, and then forced the closure of most of the factories in Yangon, Myanmar, for four weeks from early April. The travel and other restrictions that were imposed as a result of COVID-19, many of which remain in effect, continue to hinder the Company’s operations and limit the Company’s engineers and technicians from travelling to Myanmar to assist the Myanmar facility with its engineering needs. The actions taken by the Company to provide its employees with a safe and sanitary working environment has increased costs and reduced productivity at the Company’s facilities. The epidemic has also resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China, in most European countries and in the United States (including stay-at-home orders). As a result of these actions, demand for many of the products sold by the Company’s clients has decreased and is expected to continue to remain weak. The Company is unable to estimate the future negative impacts of the COVID-19 pandemic on the Company’s operations and its sales to its customers, but the impact may be significant and last for an extended period of time. Although the Company believes that its current financial condition will permit it to continue to operate for an extended period of time taking into consideration the anticipated consequences of the COVID-19 pandemic, no assurance can be given that the Company will in fact have sufficient financial resources to operate through an lengthy COVID-19 related economic downturn.

The Company Is Financially Dependent On A Few Major Customers. During the years ended March 31, 2020 and 2019 the Company’s aggregate sales to its five largest customers accounted for approximately 89.3% and 89.4% of net sales respectively. While there are material benefits to limiting its customer base to a few, large, well-established and financially strong customers, having fewer customers also has significant risks. The Company’s success will depend to a significant extent on maintaining its major customers and on the businesses of its major customers. The Company could be materially adversely affected if it loses one or more of its major customers or if the business and operations of its existing major customers declines. While the Company has in the past either been able to replace major customers or to increase the amount of orders it receives from its remaining customers, no assurance can be given that the Company will be able to do so in the future. In addition, with few, larger customers, the Company’s operations are more significantly impacted by a delay or reduction of any anticipated purchase orders or by the loss of any one or more of its major customers. The Company’s revenues have decreased during each of the past three years due to a reduction in sales to certain of the Company’s largest customers and the difficulty that the Company has had in attracting new customers. In the event that the Company is not able to attract new customers or obtain increased orders from its existing customers, the Company’s revenues in the current fiscal year ending March 31, 2021 could continue to decline and be less than the revenues in the prior fiscal years.

In addition to its increasing dependence on generating revenues from fewer, larger customers, the Company’s risk exposure to the collection of its accounts receivable likewise is increasing as the size of receivables from individual clients increases. A substantial portion of the Company’s sales to its major customers are made on credit, which exposes the Company to the risk of significant revenue loss if a major customer is unable to honor its credit obligations to the Company. Any material delay in being paid by its larger customers, or any default by a major customer on its obligations to the Company would significantly and adversely affect the Company’s liquidity. As of March 31, 2020 and 2019, accounts receivable from the five customers with the largest receivable balances at year-end represented, in the aggregate, 85.6% and 89.5% of the total outstanding receivables, respectively.

Transactions Between The Company And Its Subsidiaries May Be Subject To Scrutiny By Various Tax Authorities And Could Expose The Company To Additional Taxes. The Company operates through various subsidiaries in various countries. These subsidiaries make inter-company purchases at various prices. Under China’s enterprise income tax law, all such inter-company transactions have to be made on an arm’s-length basis and are subject to scrutiny as transfer pricing transactions between related parties. Transactions between the various subsidiaries located inside and outside of China must also meet China’s transfer pricing documentation requirements that include the basis for determining pricing between the related entities, as well as the computation methodology. The Company could face material and adverse consequences if the Chinese tax authorities determine that transactions between the Company’s various subsidiaries do not represent arm’s-length pricing regulations and, therefore, that such transactions are deemed to be structured to avoid taxes. Such a determination could result in increased tax liabilities of the affected subsidiaries and potentially subject the Company to late payment interest and other penalties.

The Company Faces Numerous Risks In Its New Operations In Myanmar. In March 2015, the Company completed its acquisition of 75% of Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”), a foreign company registered to operate in Myanmar. During the past fiscal year, the Company has transferred various equipment to the Myanmar company in order to enable the Myanmar company to assemble the Company’s products. To date, the Company has shifted the assembly of two of its product lines to Kayser Myanmar as part of the Company’s plan to shift much of its labor intensive assembly operations to Myanmar. In addition to the assembly services currently performed in Myanmar, in order to further avoid the high cost of operating in Shenzhen, China, the Company plans to move some of its component manufacturing operations to Myanmar. As a result, more of the Company’s overall operations may reside in Myanmar. Operating in an underdeveloped country such as Myanmar is subject to numerous risks and uncertainties. These risks include the lack of infrastructure, excessively high rent for suitable facilities and land (which rates appear to be continuing to increase), uncertain rules and regulations, unpredictable access to utilities (including electricity), cultural and political issues with local governmental authorities, and the lack of international financing expertise. The lease of the Myanmar subsidiary expires in January 2017. The Company intends to relocate the Myanmar subsidiaries’ facilities to a larger facility. To date, the Company has not identified an alternate site for its Myanmar operations, and no assurance can be given that the Company will locate a suitable facility at an acceptable price. Furthermore, the Company currently anticipates that the leasing costs of any alternate site will be significantly higher than the costs under the existing lease. The operations in Myanmar also are subject to the currency risks associated with the Myanmar Kyat (MMK), the official currency of that country. Myanmar recently permitted the exchange rate of the Kyat into the U.S. dollar to fluctuate. Such currency fluctuations could affect the operations in Myanmar, which would impact the Company’s plan to relocate some of its assembly functions to the Yangon, Myanmar facility. No assurance can be given that unfavorable currency fluctuations will not occur in the future.

The Company’s Customers May Not Permit Their Products To Be Manufactured In Myanmar, Which Would Negatively Affect The Company’s Plans To Move Much Of Its Assembly and Manufacturing Operations To Myanmar. Following decades of authoritarian rule, Myanmar recently enacted various political and economic reforms that have made it possible for foreign businesses to own an interest in a Myanmar company. In addition, the U.S. and European Union recently lifted many trade sanctions with Myanmar. As a result, a number of international and other enterprises have started acquiring interests in businesses in Myanmar. In March 2015, the Company completed its acquisition of a controlling interest in Kayser Myanmar, which the Company intends to increasingly use as a low cost product assembly and manufacturing facility. Shifting part of its assembly and manufacturing operations from the higher cost facilities in China to the lower cost facility in Myanmar is part of the Company’s business plan to retain its existing customers and to increase its competitiveness in the OEM marketplace. However, the Company will not be able to shift its assembly and/or manufacturing operations from Shenzhen, China, to Yangon, Myanmar, without the prior approval of its customers. To date, a few of the Company’s customers have permitted some of the assembly work on their products to be subcontracted to the Myanmar facility. However, other customers have been reluctant to permit the Company to outsource the manufacture of their products to the Myanmar assembly facility because of concerns related to the quality and delivery of the assembled products and because of political and public relations issues. Unless more of the Company’s customers allow the Company to shift the assembly and/or manufacture of products to Myanmar, the Company’s goal of offsetting its high costs of assembly in China may not be fully realized. While the Myanmar operations have, to date, met the expectations of the Company and its customers, no assurance can be given that enough assembly and manufacturing work can be subcontracted to Myanmar to materially lower the Company’s overall costs and to improve its price competitiveness.

Political Or Trade Controversies Between China And The United States Could Harm The Company’s Operating Results Or Depress The Company’s Stock Price. Relations between the U.S. and China have during the past few years been strained as a result of numerous events that have threatened the business relations between the countries. These strains on U.S./China relations could affect the ability of foreign companies listed on U.S. stock markets, such as the Company, from operating in China. Also, strains between the U.S. and China could interfere with the ability of the Company’s manufacturing in China from engaging in business with, or selling to the U.S. or U.S. companies. Any disruption of the current trade relations with the U.S. could have a material adverse effect on the Company’s business. No assurance can be given that these and any other future controversies will not change the status quo involving peaceful trade relations between the U.S. and China, or that the Company’s business and operations in China will not be materially and adversely affected. Even if trade relations between the U.S. and China are not affected by political difficulties between the two countries, such political friction could adversely affect the prevailing market price for the Company’s Common Shares.

China’s Political Issues With Japan Could Harm The Company’s Operations. As a result of the dispute between Japan and China (such as the on-going dispute over the Senkaku/Diaoyu island chain), the business environment has deteriorated for companies in China that do business with Japan or otherwise appear to be connected to Japan. Since the name of the Company’s subsidiary in China is a Japanese name (“Nissin”), and possibly because that subsidiary produces products for Japanese customers, the Company believes that its subsidiary has been subject to heightened scrutiny by Chinese authorities that may impact its operations. Accordingly, political strains between China and Japan may negatively impact the Company on-going operations in China.

Labor Shortages and Turnover. One of the principal economic advantages of locating the Company’s operations in China and Myanmar has been the availability of low cost labor. Due to the enormous growth in manufacturing in China, workers’ higher salary expectations, and the aftereffects of China’s one-child policy, the Company has recently experienced difficulty in filling its lower cost labor needs. In addition to the recently developing tight labor market, the Company has also been affected by cyclical trends and other shortages in labor supply. The Company regularly faces severe labor shortages in Shenzhen as a result of the Chinese New Year during which time the Company follows the customary practice at its factory complex to grant its employees home leave and to, therefore, temporarily discontinuing operations. Any material or prolonged shortage of labor would have a material adverse effect on the Company’s results of operations. As a result of the high cost of labor, the changing nature of the labor market, and the departure of employees that typically occurs during the Chinese New Year, many of the Company’s assembly workers have to be replaced every year. The cost of hiring and training new employees adds to the Company’s overall cost of operations. Myanmar also observes a 12-day new year’s celebration during which all workers leave.

The Recently Imposed Import Duty Deposits May Negatively Affect The Company’s Liquidity. The local authorities in China in 2012 imposed a “Customs License Deposit” on the Company for the import of raw materials, including sheet metal. These customs deposits serve as a guarantee to make sure that the Company re-exports all imported materials within a one-year period. As a result, the Company has had to deposit refundable payments with the Chinese Customs Department based on its import contracts for raw materials. These deposits are refundable, and the Chinese Customs Department periodically releases some of these funds. The Company will continually have to deposit funds with the Chinese Customs Department, which deposits will decrease the amount of cash available to the Company to fund its liquidity needs. Should the Chinese Customs Department delay the release of the remaining deposits, or should new, larger deposits be required, the Company’s liquidity could be negatively affected while its cash is held by the Chinese Customs Department.

The Global Economic Uncertainty and Weakness Has In the Past Adversely Affected The Company’s Business And Do So Again In the Future. Most of the Company’s customers are international companies that operate globally or serve global markets. The Company’s largest customers serve the European market. As a result, the Company’s customers have in the recent past been affected by the unstable financial and credit markets generally, and in Europe in particular, and by the recent downturn in many European economies. Although the Company’s principal customers have gradually been increasing the amount of purchases from the Company, a new round of instability of the markets and weakness of the global (and European) economy could adversely affect the future demand for the Company’s customers’ products and the amount and timing of their orders. Fluctuating economic uncertainties are expected to continue to affect the Company’s operations, earnings and financial condition. The instability also affects the prices at which the Company can sell its products, which in turn adversely affects the Company’s earnings and financial condition and its relations with its customers.

The Company Is Financially Dependent On A Few Major Customers.During the years ended March 31, 2016 and 2015 the Company’s aggregate sales to its three largest customers accounted for approximately 70.3% and 60.7% of net sales respectively. While the Company believes that there are material benefits to limiting its customer base to a few, large, well-established and financially strong customers, having fewer customers also has significant risks. The Company’s success will depend to a significant extent on maintaining its major customers and on the success achieved by its major customers. The Company could be materially adversely affected if it loses one or more of its major customers or if the business and operations of its existing major customers declines. While the Company has in the past either been able to replace major customers or to increase the amount of orders it receives from its remaining customers, no assurance can be given that the Company will be able to do so in the future. In addition, with few, larger customers, the Company’s operations are more significantly impacted by a delay or reduction of any anticipated purchase orders or by the loss of any one or more of its major customers.

In addition to its increasing dependence on generating revenues from fewer, larger customers, the Company’s risk exposure to the collection of its accounts receivable likewise is increasing as the size of receivables from individual clients increases. A substantial portion of the Company’s sales to its major customers are made on credit, which exposes the Company to the risk of significant revenue loss if a major customer is unable to honor its credit obligations to the Company. Any material delay in being paid by its larger customers, or any default by a major customer on its obligations to the Company would significantly and adversely affect the Company’s liquidity. During the fiscal years ended March 31, 2016 and 2015, accounts receivable from the three customers with the largest receivable balances at year-end represented, in the aggregate, 69.2% and 66.6% of the total outstanding receivables, respectively.

The Company Is Highly Dependent Upon Its Executive Officers And Its Other Managers. The Company is highly dependent upon Roland Kohl, the Company’s Chief Executive Officer, and its other officers and managers. Although the Company has signed employment contracts with Mr. Kohl and manycertain of its other key officers/managers, no assurance can be given that those employees will remain with the Company during the terms of their employment agreements. The loss of the services of any of the foregoing persons would have a material adverse effect on the Company’s business and operations. Mr. Kohl’s newcurrent employment agreement expireswas recently extended and revised so that his compensation can be reduced by 50% in March 2019.any subsequent fiscal quarter if the Company experiences a net loss in the prior fiscal quarter. The Company owns a $2,000,000 life insurance policy issued to insure the Company’s in the event of Mr. Kohl’s death. In addition, the Myanmar operations are highly dependent upon that facilities’ Managing Director (who also is its co-founder). Should the Myanmar co-founder leave, the Myanmar operations could be materially affected, and the Company could have difficulty in finding a replacement.

The Company Must Continuously Adapt Its Operations To Suit Its Customers Needs, Or Else It Will Lose Customers. The Company’s customers are continuously changing the mix of their products. Accordingly, the Company must continuously adapt its manufacturing abilities to suit the needs of its customers. No assurance can be given that the Company will be able to detect and correctly react to future changes in the needs of its principal customers, or that its investments in equipment and machinery made in anticipation of such changes will result in a positive return. Should the Company fail to react, or to incorrectly react to changes in the needs of its current or future customers, its business, operations and financial condition could be adversely affected.

The Company Faces Significant Competition From Numerous Larger, Better Capitalized, and International Competitors.The Company competes against numerous manufacturers for all of its current products. Such competition arises from both third partythird-party manufacturers and from the in–house manufacturing capabilities of existing customers. To a large extent, the Company competes in its Original Equipment Manufacturing (“OEM”)OEM business on the basis of quality, price, service, and the ability to deliver products on a reliable basis. Due to significant competition and the availability of alternate OEM suppliers for the Company’s customers, the Company has, at times, been reluctant, or even unable to pass through significant materials cost increases. This has, at times, led to lower gross margins and even to net losses in some product lines. During the past few years, the Company has also lost manufacturing contracts because of its price increases, which losses have resulted in lower net sales. As a result of these factors, the Company will have to continue to operate at narrow gross profit margins, which could jeopardize the Company’s financial position.

Since locating its facilities in Shenzhen, China, in 1991, the Company has been able to compete with other manufacturers based on its cost of operations in Shenzhen, the availability of a large labor pool, its favorable tax status, and its convenient access to Hong Kong’s shipping port and business/banking facilities. However, since the Company first moved to Shenzhen as one of the first manufacturers in that locality, many other manufacturers have re-located or established new facilities in Shenzhen, and the Company’s competitive advantage has been significantly diminished. In addition, many of the larger, international companies that have established competing facilities in Shenzhen have also established manufacturing facilities in other low-cost manufacturing locations, many located at sites outside of China, which have given those competitors the ability to shift their manufacturing to those locations whenever costs at those other locations are cheaper than in Shenzhen. Accordingly, the Company has indirectly been competing against both the competitors in Shenzhen as well as the other facilities outside of China. The significantly increases in the cost of operating in China, including changes in labor laws, changes in environmental regulations and in the enforcement of such regulations, increases in safety regulations, and a general increase in the cost of doing business have all collectively significantly eroded many of the advantages of operating in China. No assurance can be given that the Company will continue to be able to compete effectively against companies based in China or, in particular, those operating outside of China.

DependenceDuring The Course Of The Audits Of Our Consolidated Financial Statements, We And Our Independent Registered Public Accounting Firms Identified Material Weaknesses In Our Internal Control Over Financial Reporting. If We Fail To Re-Establish And Maintain An Effective System Of Internal Control Over Financial Reporting, Our Ability To Accurately And Timely Report Our Financial Results Or Prevent Fraud May Be Adversely Affected, And Investor Confidence And The Market Price Of Our Common Shares May Be Adversely Impacted. We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, adopted rules pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the Long Hua, Shenzhen, China, Factory Complex. The Company currently operates its sole manufacturing facilityeffectiveness of our internal control over financial reporting.

We and our independent registered public accounting firms, in Long Hua, Shenzhen. Althoughconnection with the Company has acquired a 75% interest in a Myanmar company, which company it currently usespreparation and external audit of our consolidated financial statements for the assemblyyear ended March 31, 2020, identified material weaknesses related to internal control over financial reporting in respect of someour operations in Myanmar. Following the identification of its products, the Company currently is,material weaknesses and willother control deficiencies, we have taken measures and plan to continue to be heavily dependent upon its Long Hua, Shenzhen facility. The losstake measures to remedy these deficiencies. However, the implementation of this facility, or anythese measures may not fully address the material disruptionweakness and deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied.

Our management has concluded that our internal control over financial reporting was not effective as of its operations at the Shenzhen facility, would be costly, would materially disrupt the Company’s overall operations, and would have a material and adverse impact on the Company’s operations and financial condition. The Company currently maintains fire, casualty and theft insurance aggregating approximately $10 million, covering its stock in trade goods and merchandize, furniture and equipment in China. The scope of the insurance coverage,March 31, 2020, and the amountfollowing material weaknesses were identified: (i) We have not maintained sufficient internal controls over cash related controls at our Myanmar operations, which pertain to the maintenance of records in reasonable detail to accurately and fairy reflect and record cash transactions. Although many of financial coverage providedtransactions in Myanmar are conducted with cash, the effects of poor cash controls were mitigated by this insurance maythe fact that we only maintained a small balance of cash in Myanmar; (ii) We do not behave sufficient and skilled accounting personnel, particularly in Myanmar, with an appropriate level of technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States commensurate with the our financial reporting requirements; and (iii) We do not have appropriate and adequate policies and procedures in place in Myanmar to coverevaluate the proper accounting and disclosures of key transactions and documents. See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” Measures that we implement to address these material damage to, or, the loss of, all or material portions of the factory complex due to fire, severe weather, flood, or other act of God or cause,weaknesses in our internal control over financial reporting might not fully address them, and such damage or loss would have a material adverse effect on the Company’s financial condition, business and prospects. The Company maywe might not be able to move its principal facilities from its current locationconclude that they have been fully remedied. Failure to correct these material weaknesses or failure to discover and address any other control deficiencies could result in Long Hua without significant costinaccuracies in our consolidated financial statements and expense. For example, ifcould also impair our ability to comply with applicable financial reporting requirements and make related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the Company were to permanently re-locate its manufacturing facilities (because it cannot extend its leases or for other reasons) outsidetrading price of the current locality, under local law the Company would have to terminate all of its employeesour common shares, may be materially and pay substantial termination fees and severance. The amount of such employment termination fees could substantially impact the Company’s financial condition.adversely affected. 

FluctuationFluctuations in Foreign Currency Exchange Rates Will Continue to Affect the Company’s Operations and Profitability.Because the Company engages in international trade and operates using three different currencies, the Company is subject to the risks of foreign currency exchange rate fluctuations. The Company’s operations are based in the PRC, and Hong Kong and recently, in Myanmar. However, because most the Company’s customers are located outside of these markets (primarily in Europe), the Company makes and/or receives payments in various currencies (including U.S. dollars, Hong Kong dollars, RMB and Euros)., and pays its expenses in RMB, Hong Kong dollars, and MMK. As a result, the Company is exposed to the risks associated with possible foreign currency controls, currency exchange rate fluctuations or devaluations. For example, the Company realized a currency exchange lossesgains of $21,000$7,000 and $125,000$63,000 in the fiscal years ended March 31, 20162020 and 2015, respectively. However, theseMarch 31, 2018, respectively, but incurred a currency fluctuations haveexchange loss of $8,000 in the past been more significant and have, in those prior years, materially affected the Company’s financial results.fiscal year ended March 31, 2019. Notwithstanding these currency conversion rate fluctuations, the Company does not attempt to hedge its currency exchange risks and, therefore, will continue to experience certain gains or losses due to changes in foreign currency exchange rates. The Company does attempt to limit its currency exchange rate exposure in certain of its OEM contracts through contractual provisions, which may limit, though not eliminate, these currency risks. In addition, the Company has an understanding with many of its larger European customers that the Company’s quoted prices will be periodically adjusted to reflect currency exchange rate fluctuations. The Company is also attempting to limit its exposure to currency fluctuations with its non-U.S. based customers by increasingly asking for payment in U.S. dollars. Nevertheless, no assurance can be given that the Company will not suffer future currency exchange rate losses that will materially impact the Company’s financial results and condition.

The Company is Exposed to Significant Worldwide Political, Economic, Legal And Other Risks Related To Its International Operations.The Company is incorporated in the British Virgin Islands, has administrative offices for its subsidiaries in Hong Kong, and has all of its manufacturing facilities in China and Myanmar. The Company sells its products to customers in China, Europe, Hong Kong, North America Asia and Europe.elsewhere in Asia. As a result, its operations are subject to significant political and economic risks and legal uncertainties, including changes in international and domestic customs regulations, changes in tariffs, trade restrictions, trade agreements and taxation, changes in economic and political conditions and in governmental policies, difficulties in managing or overseeing foreign operations, and wars, civil unrest, acts of terrorism and other conflicts. The occurrence or consequences of any of these factors may restrict the Company’s ability to operate in the affected region and decrease the profitability of the Company’s operations in that region.

Acquisitions Or Strategic Investments, Including The Recent Expansion Into Myanmar, (Burma), May Not Be Successful And May Harm The Company’s Operating Results. The Company has in the past, and may in the future, acquire, invest in, or enter into strategic arrangements with other companies in China and elsewhere (including elsewhere in Asia, Europe or even in North or Central America). For example, as part of its strategy to reduce some of its operating expenses, in the past few years the Company recently acquired a 75%an 84% interest in a Myanmar company. In addition, in the fiscal year ended March 31, 2014, the Company acquiredcompany and a 51% interest in a venture that it co-owns with ACI Group GmbH, a company based in Zimmern Germany,o. R., Germany. The Company’s investments in Myanmar have, to date, met the Company’s goals. However, the Company’s much smaller investment in the German company that is established to manufacture a series of lower cost, proprietary CO₂ cleaning systems for industrial and commercial cleaning applications.applications, has not been a success. Such acquisitions or strategic investments could have a material adverse effect on the Company’s business and operating results because of:

Risks Related To Regulatory Oversight And The Company’s Charter.

Risk of Cybersecurity Breaches. Security breaches and other disruptions could compromise the Company’s information and expose the Company to liability, which would cause the Company’s business and reputation to suffer. In the ordinary course of the Company’s business, the Company stores sensitive data, including business information and regarding its customers, suppliers and business partners, in the Company’s networks. The secure maintenance and transmission of this information is critical to the Company’s operations. Despite the Company’s security measures, its information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise the Company’s networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, regulatory penalties, disrupt the Company’s operations, and damage our reputation, which could adversely affect its business, revenues and competitive position.

Certain Legal Consequences of Incorporation in the British Virgin Islands. The Company is incorporated under the laws of the British Virgin Islands, and its corporate affairs are governed by its Amended and Restated Memorandum of Association and Articles of Association and by the BVI Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of the Company’s management, directors and controlling shareholders and the rights of the Company’s shareholders differ from those that would apply if the Company were incorporated in a jurisdiction within the U.S. Further, the rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most U.S. jurisdictions. Thus, the public shareholders of the Company may have more difficulty in protecting their interests in the face of actions of the management, directors or controlling shareholders than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. In addition, there is doubt that the courts of the British Virgin Islands would enforce, either in an original action or in an action for enforcement of judgments of U.S. courts, liabilities that are predicated upon the securities laws of the U.S.

Anti-Takeover Provisions Of The Company’s Recently Enacted A Rights Plan, And Certain Provisions of Its Amended Articles Of Association Could Delay Or Prevent A Change Of Control That The Shareholders May Favor. Article 61 of the Company’sand Restated Memorandum And Articles of Association was amendedMay Discourage a Change of Control. In April 2018, the Company adopted a shareholder rights plan (the “Rights Plan”) that provides for the issuance of one right (“Right”) for each of our outstanding common shares. The Rights are designed to assure that all shareholders receive fair and equal treatment in June 2013the event of any proposed takeover and to divide the Board of Directors into three classes, with the directors of each classguard against partial tender offers, open market accumulations, undisclosed voting arrangements and other abusive or coercive tactics to be elected for staggered three-year terms. In August 2015, the Company’s Articles of Association were amended (i) to increase to 25% the number of shares required to call a special meeting of shareholders, (ii) to provide that shareholders can only act at a meeting (and not by written consent), and (iii) to provide that directors can only be nominated by the current/existing Board, or by shareholders who comply with certain procedures normally applicable to U.S. pubic companies. These changes may have the effect of discouraging, delaying or preventing a merger or other change ofgain control that the shareholders may consider favorable, or may impede the ability of the holders of our common shares to change the Company’s management. In addition, as permitted by the law of the British Virgin Islands and the Company’s Memorandum and Articles of Association, the Memorandum and Articles of Association may be amended byCompany or the Board of Directors without shareholder approval providedpaying all shareholders a control premium. The Rights will cause substantial dilution to a person or group that a majorityacquires 15% or more of the independent directors doCommon Shares on terms not vote against the amendment. This includes amendments to increaseapproved by our board of directors. The Rights Plan may discourage, delay or reduce our authorized capital stock or to create from time to time and issue one or more classes of preference shares (which are analogous to preferred stock of corporations organized in the United States). The Board’s ability to amend the Memorandum and Articles of Association without shareholder approval, including its ability to create and issue preference shares, could have the effect of delaying, deterring or preventingprevent a change in control of the Company or management that shareholders may consider favorable.

Some provisions of the Company’s Amended and Restated Memorandum and Articles of Association also may discourage, delay or prevent a change in control of the Company or management, including provisions that 1) provide that a tendermeeting of shareholders can be called only by the Company’s Board of Directors, Chairman of the Board, Chief Executive Officer, or President and not by shareholders; (2) provide that directors of the Company may be removed only for cause, and only by the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares; and (3) require a vote of at least two-thirds in voting power of the outstanding shares to amend these and certain other provisions of the Amended and Restated Memorandum and Articles of Association.

These provisions could make it more difficult for a third party to acquire the Company, even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to purchase our common shares atobtain a premium over the then current market price.for their shares.

It May be Difficult to Serve the Company with Legal Process or Enforce Judgments Against the Company’s Management or the Company.The Company is a British Virgin Islands holding corporation with subsidiaries in Hong Kong, Myanmar and China. Substantially, all of the Company’s assets are located in the PRC and Myanmar, and no assets, employees or operations are located in the U.S. In addition, mostother than one director, all of the Company’s directorsofficers and all of its executive officersdirectors reside outside of the U.S. It may not be possible to effect service of process within the United States or elsewhere outside the PRC, Myanmar or Hong Kong upon the Company’s directors, or executive officers, including effecting service of process with respect to matters arising under United States federal securities laws or applicable state securities laws. The PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States and many other countries. As a result, recognition and enforcement in the PRC or Myanmar of judgments of a court in the United States or many other jurisdictions in relation to any matter, including securities laws, may be difficult or impossible.

No treaty exists between Hong Kong or the British Virgin Islands and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong and the British Virgin Islands are generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Hong Kong or the British Virgin Islands for recovery of this debt. A Hong Kong or British Virgin Islands court will only accept a foreign judgment as evidence of a debt due if various conditions are met, including the condition that the judgment is for a liquidated amount in a civil matter, the foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong or the British Virgin Islands, the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of Hong Kong or the British Virgin Islands, and the person against whom the judgment is given is subject to the jurisdiction of the Hong Kong or the British Virgin Islands court.

Enforcement of a foreign judgment in Hong Kong or the British Virgin Islands may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium, or similar laws relating to or affecting creditors’ rights generally, and will be subject to a statutory limitation of time within which proceedings may be brought.

Risks Related To Our Common Shares.

Volatility Of Market Price Of the Company’s Shares. The markets for equity securities have been volatile, and the price of the Company’s Common Shares has been and could continue to be subject to material fluctuations in response to quarter to quarter variations in operating results, news announcements, trading volume, general market trends both domestically and internationally, currency movements and interest rate fluctuations.

Exemptions Under The Exchange Act As A Foreign Private Issuer. The Company is a foreign private issuer within the meaning of rules promulgated under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). As such, and though its Common Shares are registered under Section 12(b) of the Exchange Act, it is exempt from certain provisions of the Exchange Act applicable to United States public companies including: the rules under the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K; the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act; the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within six months or less), and the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information. In addition, certain provisions of the Sarbanes-Oxley Act of 2002 do not apply to the Company. Because of the exemptions under the Exchange Act and Sarbanes-Oxley Act applicable to foreign private issuers, shareholders of the Company are not afforded the same protections or information generally available to investors in public companies organized in the United States.

The Audit Report Included In This Annual Report is Prepared By Auditors Who Are Not Inspected By The Public Company Accounting Oversight Board And, As Such, You Are 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 U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board (United States) (the “PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. 

Because we have substantial operations within the Peoples' Republic of China and the PCAOB is currently unable to conduct inspections of the work of our auditors as it relates to those operations without the approval of the Chinese authorities, our auditors are not currently inspected fully by the PCAOB. 

Inspections of other firms that the PCAOB has conducted outside 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.  This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.  

The inability of the PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including the Company’s independent registered public accounting firm, in the administrative proceedings brought by the SEC alleging the firms' failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.Starting in 2011 the Chinese affiliates of the ‘‘big four’’ accounting firms (including the Company’s independent registered public accounting firm) were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under China law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.

In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms (including our independent registered public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to be not in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our common shares may be adversely affected.

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to be not in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead to the delisting of our common shares from the Nasdaq Capital Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our common shares in the United States.

Failure To Establish And Maintain Effective Internal Controls Over Financial Reporting Could Have A Material And Adverse Effect On The Accuracy In Reporting Our Financial Results Or Preventing Fraud.We are subject to the reporting obligations under the U.S. securities laws. The SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on the effectiveness of such companies’ internal control over financial reporting in its annual report.Because of the difficulty in hiring and keeping highly qualified accounting personnel and the high cost of maintaining proper internal controls, management may not be able to conclude that the Company’s internal control over financial reporting is fully effective. These possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which in turn could harm the Company’s business and negatively impact the trading price of the Company’s common shares. In addition, requirement that the Company maintain effective financial controls and systems applies to the Company’s new majority-owned Myanmar subsidiary. Although the Company has implemented its company-wide financial controls at the Myanmar facility, because of the lack of familiarity with U.S. controls and procedures, language issues and the training of its personnel, no assurance can be given that the Myanmar financial controls will be sufficient to prevent fraud or financial reporting inaccuracies.

Concentration of Share Ownership Allows Management to Substantially Influence the Outcome of Matters Requiring Shareholder Approval. As of June 29, 2016, members of the Company’s senior management and Board of Directors collectively beneficially owned approximately 33% of the Company’s outstanding Common Shares. As a result, if they were to act together, they may be able to substantially influence the outcome of all matters requiring approval by the 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 the Company, or causing a change in control of the Company that may not be favored by our other shareholders.

While The Company Has In The Past Paid Dividends, No Assurance Can Be Given That The Company Will Declare Or Pay Cash Dividends In The Future. The Company attemptsCompany’s policy has been to pay a cash dividend at least once a year to all holders of its Common Shares, subject to its profitability and cash position. The Company made four dividend payments in the fiscal year ended March 31, 20162019 (a total of $0.40$0.35 per shareshare), but only declared one dividend payment in fiscal 2016) and four dividend payments in the year ended March 31, 2015 (a total of $0.30 per share in fiscal 2015). In addition, the Company paid2020 (for a $0.10$0.08 per share dividend that was paid on April 18, 2016.6, 2020). Dividends are declared and payable at the discretion of the Board of Directors and depend upon, among other things, the Company’s net profit after taxes, the anticipated future earnings of the Company, the success of the Company’s business activities, the Company’s capital requirements, and the general financial conditions of the Company. Although it is the Company’s intention to pay dividends during profitable fiscal years, the Company does not expect to pay dividends during periods when the Company’s operations have not been profitable, or when the Company uses a material amount of its financial resources for long-term capital investments. Accordingly, no assurance can be given that the Company will pay dividends in fact,fiscal 2021, or that the Company will pay any dividends in the future even if itsit has a profitable year or is otherwise capable of doing so. If the Company does not pay a cash dividend, the Company’s shareholders will not realize a return on their investment in the Common Shares except to the extent of any appreciation in the value of the Common Shares. 

Risk of Cybersecurity Breaches Could Adversely Affect Our Business, Revenues and Competitive Position. Security breaches and other disruptions could compromise the Company’s information and expose the Company to liability, which would cause the Company’s business and reputation to suffer. In the ordinary course of the Company’s business, the Company stores sensitive data, including business information and regarding its customers, suppliers and business partners, in the Company’s networks. The secure maintenance and transmission of this information is critical to the Company’s operations. Despite the Company’s security measures, its information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise the Company’s networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, regulatory penalties, disrupt the Company’s operations, and damage the Company’s reputation, which could adversely affect its business, revenues and competitive position.

If Our Auditors Are Sanctioned Or Otherwise Penalized By The PCAOB Or The SEC As A Result Of Failure To Comply With Inspection Or Investigation Requirements, Our Financial Statements Could Be Determined To Be Not In Compliance With The Requirements Of The U.S. Exchange Act Or Other Laws Or Rules In The United States, Which Could Ultimately Result In Our Common Shares Being Delisted. The Company’s independent registered public accounting firms that issue the audit reports included in the Company’s annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and firms registered with the U.S. Public Company Accounting Oversight Board (United States) (the “PCAOB”), are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards.

Because the Company has substantial operations within the PRC and the PCAOB is currently unable to conduct inspections of the work of the Company’s auditors as it relates to those operations without the approval of the Chinese authorities, the Company’s auditors are not currently inspected fully by the PCAOB. Inspections of other firms that the PCAOB has conducted outside 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 the PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.

The SEC previously instituted proceedings against mainland Chinese affiliates of the “big four” accounting firms for failing to produce audit work papers under Section 106 of the Sarbanes-Oxley Act because of restrictions under PRC law. Each of the “big four” accounting firms in mainland China agreed to a censure and to pay a fine to the SEC to settle the dispute and stay the proceedings for four years, until the proceedings were deemed dismissed with prejudice on February 6, 2019. It remains unclear whether the SEC will commence a new administrative proceeding against the four mainland China-based accounting firms. While these issues raised by the proceedings are not specific to our auditors or to us, they potentially affect equally all PCAOB-registered audit firms based in China and all businesses based in China (or with substantial operations in China) with securities listed in the United States. Any such new proceedings or similar action against our audit firms for failure to provide access to audit work papers could result in the imposition of penalties, such as suspension of our auditors’ ability to practice before the SEC. If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC, and it was determined that our financial statements or audit reports were not in compliance with the requirements of the Exchange Act, we could be at risk of delisting or become subject to other penalties that would adversely affect our ability to remain listed on the Nasdaq.

In recent years, U.S. regulators have continued to express their concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. More recently, as part of increased regulatory focus in the U.S. on access to audit information, on May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, or the HFCA Act, which includes requirements for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. If the HFCA Act or any similar legislation were enacted into law, our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our common shares being delisted. While we understand that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that our auditor or us will be able to comply with requirements imposed by U.S. regulators. Delisting of our common shares would force our U.S.-based shareholders to sell their common shares. The market prices of our common shares could be adversely affected as a result of anticipated negative impacts of the HFCA Act upon, as well as negative investor sentiment towards, China-based companies listed in the United States, regardless of whether the HFCA Act is enacted and regardless of our actual operating performance.

Furthermore, on June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch, the SEC, the PCAOB or other federal agencies and departments with respect to Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the United States. The recommendations are to include actions that could be taken under current laws and rules as well as possible new rulemaking recommendations. Any resulting actions, proceedings or new rules could adversely affect the listing and compliance status of China-based issuers listed in the United States, such as our company, and may have a material and adverse impact on the trading prices of the securities of such issuers, including our common shares, and substantially reduce or effectively terminate the trading of our common shares in the United States.

Item 4. Information on the Company

Highway Holdings Limited is a manufacturing company that produces a wide variety of high-quality products mostly for large, global original equipment manufacturers —-- from simple parts and components to sub-assemblies and finished products. The Company’s administrative offices are located in Hong Kong, and its manufacturing facilities are located in Shenzhen in the People’s Republic of China. During the fiscal year ended March 31, 2015, theChina, and in Yangon, Myanmar. The Chinese operations are conducted by Nissin Metal and Plastic (Shenzhen) Company purchasedLimited, a 75% equity interestforeign owned subsidiary that is registered in China (this type of foreign owned company is commonly known as a “Wholly Foreign Owned Enterprise” (a “WFOE”)). The Myanmar operations are conducted through Kayser Myanmar Manufacturing Company Ltd. (Kayser Myanmar)(“Kayser Myanmar”), a company registered to operate as a foreign company in Myanmar (25% was purchased in June 2014, and another 50% interest was acquired in March 2015). Kayser Myanmar currently assembles products forthat is 84% owned by the Company at its product assembly facility in Yangon, Myanmar.Company.

History and Development of the Company.

Overview. Highway Holdings Limited is a holding corporation that was incorporated on July 20, 1990 as a limited liability International Business Company under the British Virgin Islands International Business Companies Act, 1984 (the (“IBCA”). Effective on January 1, 2007, the British Virgin Islands repealed the IBCA, and simultaneously with such repeal, the Company was automatically re-registered under the BVI Business Companies Act, 2004, BVI’s corporate law that replaced the IBCA. In May 2018, the Company amended its Memorandum and Articles of Association to conform to the IBCA. Our website is www.highwayholdings.com (the information contained in our website is not a part of this annual report on Form 20-F and no portion of such information is incorporated herein). The SEC maintains a website at http://www.sec.gov that contains reports and other information, including this Annual Report on Form 20-F.

As of the date of this Report, Highway Holdings Limited conducts all of its operations through sixfive wholly-owned or controlled subsidiaries that carry out the Company’s business from Hong Kong, the Company’s principal design and manufacturing factory in Shenzhen, China, and from is newa manufacturing and assembly facility in Yangon, Myanmar.

The Company began its operations in 1990 in Hong Kong as a metal stamping company. In 1991, the Company transferred the metal stamping operations to a factory in Long Hua, Shenzhen, China. From 1991 until recentlythe reorganization that commenced in 2011 (see, “2011 Reorganization”“Reorganization” below), the Company’s metal stamping and other operations have beenwere conducted pursuant to agreements entered into between certain Chinese companies set up by the local government and the Shenzhen City Baoan District Foreign Economic Development Head Company and its designees (collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”). As a result ofUnder the BFDC Agreements, the Company’s Long Hua, Shenzhen, operations were provided with both manufacturing facilities and labor by affiliates of local government instrumentalities, for which the Company paid management fees based on a negotiated sum per factory worker, and other charges, as well as rent for the factory complex. Under the BFDC Agreements, the Company’s operations were limited by the terms of those agreements, and the Company could not sell its products in China. As discussed in “Reorganization” below, all BFDC Agreements have been terminated, and the Company now operates in Shenzhen, China, through Nissin“Nissin Metal and Plastic (Shenzhen) Company LimitedLimited” (herein referred to as “Nissin PRC”), a new wholly-owned subsidiary that is now a registered company in the PRC.

SinceAs a result of the increasing costs and burdens of operating in Shenzhen, and in order to lower its organizationmanufacturing costs and to remain competitive with OEMs who operate in 1990,low labor cost locations outside of China, the Company has developed a two-pronged strategy:

a.  In order to increase its production efficiency and reduce costs in Shenzhen, the Company now manufactures products in China primarily been a manufacturer of high quality metal parts for major Japanese and German OEMs. The Company’s metal stamping capabilities have, however, over the years been supplementedthrough automation with additional manufacturing and assembly capabilities, such as the ability to manufacture and assemble plastic, electronic and electrical parts, components and complete products.automated, or semi-automated equipment. As a result, the Company’s manufacturing labor force in China has now been reduced to about 40 workers. However, most of the product design and development, and the tooling for new products has remained in Shenzhen.

b.  The Company has evolved from a company that was only engaged in manufacturing simple metal parts to a company that has the capabilities to manufacturebeen shifting its labor-intensive assembly, and assemble larger complex components, subsystems, subassemblies and even entire products forrecently some of its OEM clients.

In addition to its historicalcomponent manufacturing, operations to Yangon, Myanmar, a developing country that now permits foreign investment in that country. The cost of operating an assembly facility, particularly as a result of the low cost of labor, currently is significantly lower in Myanmar than in Shenzhen, China. Early in 2013, the Company continuescommenced subcontracting some of its product assembly functions to explore other possible meansKayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”), a third-party supplier in Yangon, Myanmar. This out-sourced assembly operation functioned satisfactorily and at a substantially lower cost, and the Company’s customers were satisfied with the quality and timeliness of leveraging its manufacturing capabilitiesthe products assembled in ChinaMyanmar. Accordingly, in June 2014 the Company purchased a 25% ownership interest in the Myanmar company, an additional 50% interest in March 2015, and to develop proprietary productsadditional 9% in January 2017. As a result, since January 2017, the Company has owned 84% of Kayser Myanmar. The 16% interest in Kayser Myanmar that the Company can manufacturecurrently does not own is held by a Myanmar national and sell asa founder and manager of Kayser Myanmar. The Company’s goal is to shift all of its own products. The manufacturelabor-intensive product assembly and sale of the Company’s own products would supplement the Company’s existing OEM business.labor-intensive component manufacturing operations from Shenzhen, China, to Myanmar. The Company believes that developing and selling its own productsit will complete this shift in Asia would lessen its dependence on third party customers and diversify its operationsmanufacturing to Myanmar in the near future.

On March 29, 2019 Kayser Myanmar entered into a higher margin line of business. As part of its goal to develop50-year lease for an approximately 6,900 square meter (1.67 acres) factory estate in Yangon. Kayser Myanmar has upgraded the existing two factories at the new leased facility and has constructed a line of proprietary products, in November 2013third factory and a new office building on the site. Also, the Company formedhas transferred much of the machinery and manufacturing equipment from the Company’s Shenzhen, China, plant to the new Yangon facility. As a jointly owned companyresult of the completion of the refurbishment of the existing buildings at the new facility, the completion of the construction of a new, third factory building, and the transfer of equipment, the new Yangon facilities are now fully operational. See, “Organizational Structure/Offices and Manufacturing Facilities--Yangon Myanmar/Manufacturing Facilities” below. The Company’s operations in Myanmar are subject to numerous risks associated with ACI Group GmbH, basedoperating an assembly facility in Zimmern, Germany. The purposean underdeveloped country, and it is uncertain how many of this new company (known as Advanced Cleaning Innovations Asia Limited) isthe Company’s customers will permit their products to develop and manufacture a series of lower cost, proprietary CO₂ snow-jet and dry ice cleaning systems for industrial and commercial cleaning applications. The new company’s goal is to market the cleaning systemsbe assembled in Asia and elsewhere.Myanmar. See, “Risk Factors-- The Company has not completed its development of any of the proposed cleaning systems,Faces Risks From Its Expanded Operations In Myanmar” and has not commercially introduced any of its proposed products.“Risk Factors-- The Company’s Customers May Restrict, Or Prohibit, Their Products To Be Manufactured In Myanmar, Which Would Negatively Affect The Company’s Operations In Myanmar.”

Reorganization. In 2010 the regional governments announced that the BFDC Agreement form of license arrangement previously used by the Company and numerous other foreign businesses to operate in China would no longer be permitted. All foreign companies operating in China under this type of subcontract arrangement were required to transfer their licensed China operations into foreign-owned companies organized and registered in China. The Company conducted its operationsAccordingly, in Shenzhen, China, through the BFDC Agreements that were entered into by two of its subsidiaries known as (i) Nissin Precision Metal Manufacturing Limited (“Nissin HK”), the manufacturing subsidiary, and (ii) Hi-Lite Camera Company Limited (“Hi-Lite”), the assembly subsidiary. In May 2011 the Company formed Nissin PRC,Metal and Plastic (Shenzhen) Company Limited (“Nissin PRC”), a new PRC-registeredwholly-owned subsidiary that is now a registered company in the PRC, and transferred theits China-based cash, assets, employees and operations of Nissin HK under the BFDC Agreements to Nissin PRC. Hi-Lite did not convert its operations into a PRC-registered company andThe termination of the license operating agreements continued to operate Hi-Lite under the BFDC Agreement until March 2016. Duringthrough the fiscal year ended March 31, 2016, Hi-Liteat which time all of the Company’s operations had either been transferred its remaining operations to Nissin PRC, or terminated (the foregoing reorganization and transfer of the Company’s operations in China to Nissin HK and Hi-LitePRC is herein referred to as the “Reorganization”). Accordingly, allAll of the Company’s operations in China are currentlysince the beginning of the fiscal year ended March 31, 2017 have been conducted through its Nissin PRC subsidiary. As a PRC registered company, Nissin PRC is permitted to hire its own employees, lease its own facilities, and distribute its products in China. However, Nissin PRC also is subject to China’s tax regulations and is subject to the rules and regulations applicable to other PRC registered companies.

As a resultpart of the reorganization at the Company’s manufacturing facilities in Shenzhen, China,Reorganization, the Company has also had to increaseincreased certain of its administrative functions in Hong Kong. As a result of the Reorganization,Currently, most of the Company’s non-manufacturing activities (i.e. its administrative functions, marketing, sales, design, engineering, and purchasing) are now being conducted from two offices in Hong Kong, and most of its manufacturing operations are being conducted at either the one factory in Long Hua, Shenzhen, China. A material portion of the assembly operations have, however, been transferred to Company’s majority-owned subsidiaryChina, or Kayser Myanmar’s facility in Yangon, Myanmar, and the Company also intends to transfer some of its manufacturing operations from Shenzhen to Yangon.

As part of the Reorganization, the Company transferred the former BFDC licensed operations of Nissin HK to Nissin PRC. (A foreign owned subsidiary such as Nissin PRC that is established in China is commonly known as a foreign invested enterprise, a “FIE”, or as a “Wholly Foreign Owned Enterprise,” or as a “WFOE.”) As a new PRC registered company, Nissin PRC is permitted to hire its own employees, lease its own facilities, and distribute its products in China. However, unlike the Company’s prior arrangements under the BFDC Agreements, Nissin PRC will be subject to China’s tax codes and will be subject to the rules and regulations applicable to PRC registered companies.Myanmar.

As a result of the Reorganization, the Company is now structured as follow:

Strategic Realignment of Assembly Operations—New Myanmar Assembly Facility

The Company originally established its operations in China to take advantage of the low cost of operations in China, including in particular the low cost of labor. However, during the past several years, the overall costs of operating a manufacturing facility have significantly increased, and the cost advantages of operating in China have significantly decreased. The Company was not always able to pass the increased costs through to the Company’s international customers, some of whom elected to move some of their OEM requirements to other, low labor cost, developing countries. In order to remain competitive with OEMs who operate in low labor cost locations outside of China, the Company has developed a two pronged strategy:

a.          In order to increase its production efficiency and reduce costs, the Company has been restructuring its manufacturing methods and, where possible, has been supplementing its manufacturing with automation or semi-automated equipment. As a result, during the past five years the Company has been able to reduce its labor force by more than 65%.

b.          The Company has decided to shift some of its labor intensive assembly operations to Yangon, Myanmar (formerly, Burma), a developing country that has started to permit foreign investment in that country. The cost of operating and assembly facility, particularly as a result of the low cost of labor, is significantly lower in Myanmar than in Shenzhen, China. Early in 2013, in order to test the feasibility of operating in Myanmar, the Company subcontracted the assembly of one of the Company’s products to a third party supplier in Yangon, Myanmar. Initially, the Company loaned the owners of the Myanmar facility some funds and sold the owners some equipment with which that facility could assemble a line of the Company’s products. This out-sourced assembly operation operated satisfactorily and at a substantially lower cost, and the Company’s customers were satisfied with the quality and timeliness of the products assembled in Myanmar. Accordingly, in order to take advantage of this cost difference, the Company decided to purchase a 75% interest in the Myanmar company from the two owners of that Company. In June 2014 the Company purchased a 25% ownership interest in the Myanmar company, and then acquired an additional 50% interest in March 2015. As a result, as of March 31, 2015, the Company was a 75% owner of the Myanmar company known as Kayser Myanmar. Kayser Myanmar is located in Yangon and operates in an approximately 15,000 sq. ft. facility that it leases from an unaffiliated landlord. The 25% interest in Kayser Myanmar that the Company currently does not own is held by a Myanmar national and a founder of Kayser Myanmar. The total purchase price for the 75% equity interest Kayser Myanmar that the Company paid to the two owners (excluding costs associated with the acquisition) was approximately $75,000. However, the Company has invested, and will continue to invest additional amounts in further equipping, expanding and developing the Kayser Myanmar facility and to comply with the local capital requirements (the Company is required to contribute approximately $200,000 of additional capital to the Myanmar subsidiary). The Company’s goal is to gradually shift most of its product assembly and other labor intensive operations from Shenzhen, China, to Myanmar. Eventually, the Company would also like to have Kayser Myanmar assume other functions, such as manufacturing components and producing tools. The Company’s operations in Myanmar are subject to numerous risks associated with operating an assembly facility in an underdeveloped country, and it is uncertain how many of the Company’s customers will permit their products to be assembled in Myanmar. See, “Risk Factors—The Company Faces Numerous Risks In Its Operations In Myanmar” and “Risk Factors—The Company’s Customers May Not Permit Their Products To Be Manufactured In Myanmar, Which Would Negatively Affect The Company’s Plans To Move Much Of Its Assembly Operations To Myanmar.”

Current Business OverviewOverview/Plans

The Company is a fully integrated manufacturer of high qualityhigh-quality metal, plastic, electric and electronic components, subassemblies and finished products for OEMs and contract manufacturers (primarily in Europe, Asia, and to a lesser extent, in the United States). DuringSince the fiscal year ended March 31, 2016, substantially allCompany’s formation, most of the Company’s manufacturing activities were conducted through its factory complex in Long Hua, Shenzhen, China. During the fiscal year ended March 31, 2016,past few years, the Company subcontracted somealso conducted an increasing amount of its product assembly functions to a facility(and some of its component manufacturing functions) in Yangon, Myanmar, through a Myanmar company that is now 75%84% owned by the Company.

The Company currently manufactures and supplies a wide variety of high quality metal, plastic and electric parts, components and products to its OEM clients, which partsassemblies and components are used by the Company’s customers in the manufacturing of products such as photocopiers, laser printers, compact disc players, laser disc players, computer equipment, electrical components,print cartridges, electrical connectors, electrical circuits, vacuum cleaners, light fixtures, electroLED power supplies, stepping motors, pumps automobiles and dishwasherfor dishwashers, and other washing machine components. As part of its manufacturing operations, the Company assists customers in the design and development of the tooling used in the metal and plastic manufacturing process and provides a broad array of other manufacturing and engineering services. The manufacturing services include metal stamping, screen printing, plastic injection molding, pad printing and electronic assembly services. The electronic assembly services include chip on board assembly, IC-bonding, and SMT automatic components assembly of printed circuit boards. Because it is able to provide these services, the Company eliminates the need to outsource these needed functions, and the Company is better able to assure product quality, control overall manufacturing costs and provide timely product delivery, all of which management believes is essential to maintaining, expanding and increasing the Company’s customer base. The Company believes its success as a supplier to respected multi-national companies is mainly due to: (i) its internationalGerman management structure which includes German, Chinese and Myanmar nationals;culture; (ii) its comparatively low operating costs; (iii) its ability to consistently manufacture the type of high quality products required by the Company’s targeted customers; (iv) its expertise in manufacturing these products in the required quality at a reasonable cost; (v) the breadth of its manufacturing capabilities, and (vi) its engineering, design and development capabilities (which it uses to assist its customers to design their products).

The Company has continuously tried to strategically align its manufacturing operations with the needs of its major customers to attract new OEM customers and retain its existing customers. For example, the Company is capable of manufacturing and assembling a wide variety of complex products that require metal, plastics and electronics manufacturing capabilities. In order to distinguish itself from the many other smaller manufacturing operations in Shenzhen, the Company manufactures more complex parts, components and entire products that utilize more of the Company’s vertically integrated technologies. Because the Company has the ability to design, manufacture and assemble complete componentsfunctional assemblies containing metal, plastic and electronics, the Company is able to manufacture complete customized products for global companies.its customers.

The Company established its operations in Shenzhen, China, almost 30 years ago to take advantage of China’s lower labor costs, lower facilities costs, less stringent regulations, and various other benefits that were provided to foreign entities to encourage operations in China. As described elsewhere in this Annual Report, these benefits are no longer available to most foreign companies operating in Shenzhen. In fact, the costs and burdens on foreign owned companies appear to be significantly greater than on local Chinese-owned companies. In addition, recent actions by the Chinese government, including heightened governmental inspections of foreign-owned enterprises and additional administrative requirements imposed on foreign-owned entities, have during the past few years further significantly increased the costs and burdens of operating in China. These changes have now effectively removed the benefits of being a foreign owned enterprise, and now make it more burdensome to operate in China as a foreign-owned entity than as a locally owned enterprise. For example, the Company estimates that there have been over 100 inspections at the Company’s Shenzhen facility during the past year, most of which were unwarranted or frivolous, and many of which resulted in the Company having to make costly adjustments to operating practices. In addition to being costly, these inspections have disrupted and hindered the Company’s regular operations. As a result, the Company has been decreasing its manufacturing operations in China, first by moving most of its manual assembly and manufacturing activities to the Company’s new facility in Myanmar. In order to further reduce its manufacturing operations in China, the Company currently is considering transferring its remaining China manufacturing operations to a local Chinese entity. Under its current plan, the Company would lease its Shenzhen component manufacturing operations to a newly formed Chinese company that is owned by the Company’s current Chinese managers who are employed by the Company in Shenzhen. The new Chinese entity would agree to bear all costs of maintaining and operating that facility, and would further agree to manufacture components for the Company on preferential terms. The Chinese entity could, however, also utilize the manufacturing equipment to manufacture components for Chinese owned companies, including companies controlled by the Chinese government, for its own benefit and account. This arrangement would shift must of the cost of maintaining and operating the Shenzhen manufacturing facility to the new company, while still permitting the Company to have its customers’ components manufactured at the same facility by the same equipment and personnel. Furthermore, the Company believes that transferring the manufacturing operations to a Chinese-owned entity will reduce the number of inspections and will greatly relieve that entity from many other burdensome governmental regulations that appear to be targeted at foreign-owned enterprises. The foregoing arrangement is still under consideration, and it is uncertain if the arrangement can, or will be implemented.

Industry Overview

During the past two decades, the third-party contract manufacturing industry has experienced major increases as manufacturers worldwide have increasingly outsourced the manufacture of some or all of their component and/or product requirements to independent manufacturers. The benefits to OEMs of using contract manufacturers (OEMs) include: access to manufacturers in regions with low labor and overhead cost, reduced time to market, reduced capital investment, improved inventory management, improved purchasing power and improved product quality.

The Company first commenced its metal stamping operations in China in 1991. At that time, the Company gained a significant cost and logistical advantage over other manufacturers by basing its manufacturing facilities in Long Hua, Shenzhen, China, less than 50 kilometers from Hong Kong. During the past few years, however,However, there are now many other manufacturers have located their facilities in Shenzhen and in other similar low-cost areas in China and Asia. As a result, the Company now faces significantly more competition as a manufacturer of OEM parts. The Company has responded to the increased competition by restructuring its operations and by trying to move from manufacturing low margin, low-cost individual parts to manufacturing higher margin, more expensive components, subassemblies and even complete units for its OEM customers.

Initially, the Company manufactured high-quality metal parts, mostly for Japanese customers. More recently, the Company has been manufacturing high-quality parts and components for European (primarily German) companies. The Company has remained flexible with respect to the types of products that it manufactures as well as location of its customers in order to capitalize on market changes. Recently,During the past several years, more than two-thirds of the Company’s revenues are derived from its European customers.

The Company’s Strategy

The Company’s future growth and profitability depend on its ability to compete as a third party contract manufacturer. The Company’s business strategy and focus is to expand its operations as an integrated OEM manufacturer of metal, plastic and electronic parts, components, subassemblies and competed products for blue chip and international customers. The Company business strategy is to further develop and leverage its multi-disciplinary manufacturing strengths, its cost structure, its logistical advantages, its reputation as a high-quality manufacturer, and its current and former relationships with blue chip European and Japanese customerscustomer to further expand its manufacturing operations and product offerings. In addition, the Company is attempting to leverage these advantages by upgrading its equipment and machinery, expanding its manufacturing capabilities, and utilizing its cost and logistical advantages. See, “Strategic Realignment of Assembly Operations—NewOperations--New Myanmar Assembly Facility,” above.

The following are some of the elements that the Company believes will enable it to compete as a third partythird-party manufacturer.

Capitalize on, and leverage its manufacturing strength: Unlike many of its metal parts manufacturing competitors, primarily those in Shenzhen, China, the Company hasis a vertically integrated manufacturing facilitymanufacturer that can design, manufacture and assemble more complex components and subassemblies. In addition, unlike some of its competitors in Shenzhen that are limited to either metal stamping or to electronic and plastics manufacturing, the Company also has the ability to combine metal stamping and electronics and plastics manufacturing. For example, the Company manufactures stepping motors, which utilizes all of the Company’s capabilities, starting with mold and die making for the metal and plastic parts, metal stamping, deep drawing and plastic injection molding, electric coil winding, soldering, and assembling all the parts by using spot welding and riveting technologies. Accordingly, the Company’s strategy is to focus on manufacturing more complex products that utilize the Company’s various manufacturing strengths.

Upgrading Equipment-Increased Automation. In order to attract major European and Japanese OEM customers, and in order to reduce its labor costs and improve quality, the Company has during the past few years continuously upgraded the design and manufacturing equipment at its facilities. In the past few years, the Companyfacilities and has made significant investments in automated manufacturing and assembly by increasing the number of automated stationsautomated/robotic machinery that manufacture or assemble products. The automated/robot machinery that the Company has installed is used to replace some of the repetitive functions performed by workers.designs and manufactures its own automated production lines. The Company’s goal is to use automation/robotics to reduce it labor costs, improve the consistency and quality of its products, and to increase the quantity of products that it manufactures at its work stations.work-stations. The automated machinery has significantly reduced the number of workers at the Company’s facilities by more than 65% in the past few years.Shenzhen, China. In addition to robotics that replace manual labor, the Company has also invested in machines for use in plastics manufacturing, including Computer Numerical Control (“CNC”) tooling machines, a CNC measurement machine, electronic injection molding machines, new stamping machines, and spectrum analyzers. Although the automation that has taken place at the Company’s facilities to date has reduced the Company’s headcount, the labor cost savings have largely been offset by continuous increases in salaries, employee benefit payments and other labor costs and expenses. Accordingly, while the Company’s cost of manufacturing has declined as a result of automation, these cost savings have been offset by significant increases in labor costs for the remaining employees and by other cost increases, including the cost of purchasing or building the automation equipment. As a result, the overall cost of manufacturing, despite the benefits of automation, have increased overall.well as numeric controlled stamping machines.

Reduce Its Manufacturing And Assembly Costs By Relocating Operations To Myanmar. The Company initially established its manufacturing and assembly operations in China to take advantage of China’s low labor costs. Those costs have now risen to a level where the cost of manufacturing andin China no longer is competitive with certainmanufacturing in underdeveloped nations. Accordingly, in order to be able to continue to provide price competitive products, the Company has now acquired a controlling interest inoperates an assembly facility based in Yangon, Myanmar. The Company’s goal is to transfer much of its labor intensivelabor-intensive assembly operations that cannot be economically automated to Myanmar, a country where the labor costs are significantly less than in China. The principal purpose of operating in Myanmar is to reduce the cost of assemblingits products and, therefore, offset the increasing costs at its facility in Shenzhen, China. ByIn addition to lower labor and other operating incosts, the Myanmar operations benefit from the Company initially did not intend to either lower the prices that it charges its clients or to increase its gross margins. However, as a condition to permitting some ofpreferential customs provisions, particularly for the Company’s manufacturing to be shifted to Myanmar, the Company has been forced to lower some of the prices of goods assembled in Myanmar, which has strained those operations.European customers. The Myanmar operations may also produce two ancillary affects: (i) As a “foreign company” under Myanmar law, Kayser Myanmar will be entitled to a tax holiday on profits generated by that subsidiary; and (ii) the taxation and customs union of the European Commission has designated Myanmar as an undeveloped country whose exports are currently still subject to tariff concessions called "preferential“preferential tariff quotas"quotas”. Accordingly, the Company’s European customer are benefittingcustomers that satisfy the European Commission’s requirements currently benefit from purchasing products manufactured in Myanmar, whichMyanmar. These benefits may attract other European customers to move at least a portion of their assembly needs to the Company’s Myanmar facilities.

Maintaining customers and increasing market share through financial strength: Many of the Company’s largest customers are global companies that require that their OEM manufacturers have the financial strength to survive during financial and economic downturns. The Company has traditionally maintained a strong balance sheet that has enabled it to continue to supply its customers during economic downturns. The Company’s financial policies enabled it to operate during the worldwide financial crisis that commenced in 2008. Many of the Company’s local competitors were unable to survive during the global economic slow-down.

Expansion by acquisition, merger, subcontract and other means: The Company continues to believe it has the opportunity to expand its business through acquisitions and through the establishment of additional manufacturing facilities. The Company continues to consider and evaluate possible acquisitions, both in China and elsewhere, to access low cost labor, to gain technology know how, to expand its product offerings, and to increase its customer base. An example of the Company’s expansion strategies is the recent acquisition of a 75% equity interest in Kayser Myanmar. Although the Company evaluates potential strategic relationships and acquisition targets of a regular basis, the Company has not definitively identified any such other transactions.

Maintain production quality: Management believes that maintaining close relations with the Company’s customers is important to the success of the Company’s business. Understanding each customer’s needs and efficiently and quickly addressing its needs is vital to maintaining a competitive advantage. Many of the Company’s customers have built the goodwill associated with their products and tradenames based on a high level of perceived quality. By employing the type of high qualityhigh-quality management standards, production standards and quality control standards historically utilized by many leading Japanese and German companies, the Company has been able to satisfy the stringent requirements of its customers. Management believes that the Company’s commitment to high level service, its attention to detail, and the quality of its manufacturing hashave the effect of providing customers with a sense of confidence and security that their product requirements will be met.

The Company conducts most of its manufacturing operations in accordance with typical Japanese and German manufacturing standards, paying particular attention to cleanliness, incoming material control, in process quality control, finished goods quality control and final quality audit. The Company’s metal factory complexin China has received and maintained its ISO 9001 quality management system certification and an ISO 14001 environmental management systems certification. The Company’s quality system helps to minimize defects and customer returns and create a higher confidence level among customers.

The Company tries to constantly improve its production quality. The recent initiatives consist of an increased use of automation (to consistently produce uniformly high quality products) and to improve the skills of its employees. In an effort to improve the technical skills and performance standards of its lower skilled workers, the Company has implementedprovides day time and evening technical training courses that provide these workers with the technical knowledge and skills to operate more efficiently and at a higher quality level.

Operate as a socially responsible company. The Company is committed to being a socially responsible company by operating morally and ethically, by protecting the employees physical and mental well-being, by providing a safe work place, by following the legal employment requirements, and by not employing underage persons, by allow freedom of association and collective bargaining, and by protectprotecting the surrounding environment. The Company’s social responsibility and accountability actions are an important criteria in the selection of OEM’s by the Company’s global customers. Some of these customers demand compliance with SA8000 social accountability management system. Kayser Myanmar already passed several of such SA8000 audits to satisfy this condition. The safety of the Company’s employees and customers are of primary concern to the Company’s management. Accordingly, in response to the COVID-19 pandemic, the Company has also implemented numerous changes to its operations and has taken other steps (such as distributing masks and hand sanitizers, and regularly disinfecting and cleaning all public areas) to protect the health and safety of its employees.

Manufacturing

The Company’s manufacturing business consists of various stages: (i) tooling design and production; (ii) manufacturing parts made by metal stamping and plastic injection molding; (iii) mechanical and/or electric/electronic assemblies, and (iv) finishing, packaging and shipping.

Tooling design and production: The metal manufacturing process generally begins when a customer has completed the design of a new product and contacts the Company to supply certain metal and plastic components to be used in the product. Generally, the Company must design and fabricate the tooling necessary to manufacture these components in its tooling workshop.workshop that is currently located at its Shenzhen, China factory. In some instances, however, the customer already possesses the tooling necessary to manufacture the metal component and simply delivers the tools to the Company. Customers will sometimes also pay the Company to purchase and install the equipment necessary to manufacture the customer’s products. The Company uses various computer controlled manufacturing equipment to efficiently produce high quality tools designed to produce a high quality product. As manyMany of the metal parts manufactured by the Company make use of progressive, multi-stage stamping techniques,techniques. In order to conduct and maintain this fully automated stamping method, tools and machines must be precisely fine-tuned and aligned to achieve the required quality standard and maximum efficiency.

The tool making process for metal parts generally takes between 14 to 50 working days depending on the size and complexity of the tool. Customers typically bear the cost of producing the tools and, as is customary in the industry, the customers hold title to the tooling. However, the Company maintains and stores the tools at its factory for use in production and the Company usually does not make tooling for customers unless they permit the Company to store the tools on site and manufacture the related parts.

The Company also makes highly sophisticated plastic injection molds based on its customers’ orders and requirements in a manner similar to the Company’s metal tool manufacturing process.

The Company maintains its ISO 9001 quality management system certification and its ISO 14001 environmental management systems certification.

Metal Stamping; Plastic Injection Molding: Following the completion of the tooling, the materials required for the specific product is selected and purchased. See “Raw Material, Components Parts and Suppliers.” Often the customer specifies the materials to be used as well as the supplier. The completed tooling is fitted to the press which is selected for its size and pressing force.

Using separate shifts, part stamping and plastic molding can be conducted 24 hours a day, seven days per week other than during normal down time periods required for maintenance and changing of tools and during the traditional Chinese public holidays. Due to the strict quality requirements of customers, each tool and machine, isand each product produced by the tools/machines, are subject to stringent in-process quality controls.

Electronic Assembly: The Company’s electronic assembly manufacturing consists of chip on board assembly, IC-bonding and SMT technology.

Finishing, Packaging and Shipping: After their manufacture, the parts and components are inspected for defects and checked with custom-built test gauges. Some components are then spray painted either at the Company’s Myanmar facilities or by specially trained, third party spray-paint facilities that perform the painting services to the Company’s specification and according to the Company’s instructions.facilities. After being painted, the parts are baked at high temperatures in drying ovens before final inspection and packaging. Some parts are also screen printed by the Company. Each of the parts, assemblies and products is then inspected, packaged to the customer’s specific requirement and delivered to the final quality audit department for final quality inspection which is conducted on a random sample basis. Depending on its agreement with its customers, the Company may ship the parts, assemblies and products it has manufactured by truck directly from its factory to the customer’s factory in China or elsewhere through the portports of Shenzhen, Yangon and/or Hong Kong. Alternatively, the customer may pick up the products at the Company’s factory and arrange for its own shipping.

Raw Material, Component Parts and Suppliers

The primary raw materials used by the Company to manufacture its metal stamped parts are various types of steel including pre-painted steel sheet, electrolytic zinc plated steel sheet, PVC laminated steel sheet, stainless steel, and cold roll steel sheet. The Company selects suppliers based on the price they charge and the quality and availability of their materials. Many of the Company’s suppliers of steel operate through Hong Kong or China-based companies which deliver the materials directly to the site of the Company’s operations in China.

During the past few years, the price of metal and plastics raw materials has fluctuated significantly, and at times there have been shortages for some materials.

The parts, components and products manufactured by the Company may include various plastic injected and metal stamped components, as well as integrated circuits, electronic components and paper packaging products. The Company manufactures many of these products, but also purchases components that it uses in its products. These materials are subject to price fluctuations, and the Company has, at times, been materially adversely affected by price increases or shortages of supply.

Transportation

Most of the sales agreements entered into by the Company are either F.O.B. agreements or Ex-factory agreement (in which the Company makes the goods available at its premises) or F.C.A. agreements (in which the Company hands over the goods, cleared for export, into the custody of the first carrier).

Improved roads and highways in China have facilitated intra-China transportation, and the Hong Kong and China customs departments have opened additional border crossings, extended their operating hours, and generally have improved the flow of cross-border goods. The Company’s facilities in Long Hua, Shenzhen, China, are located near both Hong Kong and the seaport in Shenzhen. Many of the Company’s customers use the Shenzhen seaport rather than the port of Hong Kong.

Products manufactured at the Kayser Myanmar facility are shipped to the Company’s OEM customer through the Port of Yangon or the Yangon airport, both of which are readily accessible for the manufacturing facility. Kayser Myanmar typically arranges for the customs clearance of these shipments.

Customers and Marketing

The Company’s sales are generated from customers primarily located in Hong Kong/China, Europe, the United States/Mexico, and other Asian countries. Net sales to customers by geographic area are determined by reference to the physical locations of the Company’s customers. For example, if the products are delivered to a customer in China or Hong Kong, the sales are recorded as generated in Hong Kong and China; if the customer directs the Company to ship its products to Europe, the sales are recorded as sold in Europe. Most of the Company’s recent payments have been in U.S. dollars, although the Company still receives payment in both Hong Kong dollars and Euros. Net sales as a percentage of net sales to customers by geographic area consisted of the following for the years ended March 31, 2014, 20152018, 2019 and 2016:2020:

The Company currently has two business and reporting segments, of the Company consisting of (i) its metal stamping and mechanical OEM operations, and (ii) its electric OEM operations (that include its plastic operations). The sales by segments for the years ended March 31, 2014, 20152018, 2019 and 20162020 are as follows:

Most of the Company’s customers for its components and subassemblies generally are themselves manufacturers. The Company’s products are sold primarily to European owned companies to be used in finished goods produced by OEM customers at their own manufacturing facilities in China and Europe. However, the Company also produceshas in the past produced finished products, such as light fixtures, that it sold to its OEM customers.

The Company markets its services through existing contacts, word-of-mouth referrals and references from associated or related companies of the customers, as well as attendance at some trade shows. During the past few years, the Company has employed a number of foreign sales persons to complement the activities of its officers and in-house sales personnel. The Company currently has, from time to time, commissioned sales agents workingin Mexico, U.S. and Germany. These sales agents typically receive aan expense allowance and an on-going commission for sales made by the Company to customers introduced by the agents. Due to the international nature of senior management, the Company believes that it has been able to bridge the cultural, language and quality perception gaps that concern certain German companies when dealing in China.

Major Customers

For the fiscal year ended March 31, 2016,2020, the Company had three customertwo customers who each accounted for more than 10% of the Company’s net sales. These threetwo customers collectively accounted for 70.3%69.0% of the Company’s net sales. DuringThe Company’s five largest customers collectively accounted for over 80% of the Company’s net sales during each of the past few years,three years. As a result of the Company has relied to a large extentdependence on a few larger customers, and has consciously reduced the number of its smaller customers. The Company’s larger customers have, in general, accepted price increases that the Company has passed through to its customers because of the increasing cost of operating in China, but a few of the Company’s larger customers have in the past few years ceased using the Company’s services because of the price increases (or because the availability of cheaper costs in certain developing countries). To date, the loss of low margin customers has reduced the Company’s revenues but not its profitability. However, additional losses ofa major customers,customer, or any substantial decrease in orders from these customers, could materially and adversely affect the Company’s results of operations and financial position, particularly if the Company is unable to replace such major customers.

Customers place manufacturing orders with the Company in the form of purchase orders which are usually supported by a delivery schedule covering one to two months of orders. Customers usually do not provide long term contractsforecasts for their anticipated purchases, andbut are usually able to cancel or amend their forecasted orders at any time without penalty. In addition, certain customers enter into agreements with the Company in which the parties agree upon their purchase and sale procedures, but such agreements do not always contain any specific purchase orders or purchase requirements. Certain of the Company’s larger customers provide the Company with non-binding forecasts of their anticipated needs for the next year in order to enable the Company to plan for the anticipated orders. Orders from such customers are thereafter received from time to time by customers based on the customers’ needs, not necessarily on contractually fixedthe forecasted amounts or at the projected time periods. Accordingly, backlog has not been meaningful to the Company’s business.

In order to be able to timely fill the anticipated orders from its larger customers, the Company may purchase raw materials and other products based on the non-binding forecasts. Since the customer’s order forecasts are not binding orders, if a customer does not place as many orders as anticipated, the Company may not be able to fully utilize the raw materials and other products that the Company has purchased. In that case, the Company may not be able to utilize the raw materials and could suffer a financial loss.

Sales of manufactured products to established existing clients are primarily on credit terms between 30-75 days, while the sale to new or lesser known customers are completed on a wire transfer payment basis before shipment or other similar payment terms. Management constantlycontinuously communicates with its credit sale customers and closely monitors the status of payment in an effort to keep its default rate low. However, as a result of the concentration of sales among a few of the Company’s larger customers, the Company is required to bear significant credit risk with respect to these customers. Parts are generally shipped 40-9014-90 days after an order has been placed unless the Company is required to manufacture new tools which require an additional approximately 14-50 days to complete prior to commencing manufacturing. While the Company has not experienced material difficulty in securing payment from its major customers, there can be no assurance that the Company’s favorable collection experience will continue. The Company could be adversely affected if a major customer was unable to pay for the Company’s products or services.

Industrial Property Rights

As a manufacturer of parts, components and finished products for OEMs and contractother manufacturers, the Company has no industrial property rights, such as patents, licenses, franchises, concessions or royalty agreements, which it considers material to its OEM manufacturing business. Instead, the Company relies on its industry expertise, knowledge of niche products, and strong long-term relationships with its customers. The Company does, however, own some patents on certain clock and camera technologies. Since the Company does not currently generate significant revenues from products covered by these patents, the patents currently are not relevant to the Company’s principal operations, and their carrying value has been written off on the Company’s consolidated financial statements.

Competition

The Company competes against numerous manufacturers,OEMs, including both smaller local companies as well as large international companies. Although the Company operates in the same market as some of the world’s largest contract manufacturers (for example, FoxConn operates a major manufacturing facility in Long Hua, Shenzhen), management believes that it principally competes with smaller firms that make up the largest segment of the contract and metalparts manufacturing industry in China. As a result of the economic downturn that started in 2008, a number of these smaller competitors, including many located in Shenzhen, have ceased operations. However, sinceSince some of the Company’s customers are large international enterprises that source their products from many international sources,providers, the Company also competes against contract manufacturing companies in other low cost manufacturing countries. As a vertically integrated, multi-disciplinary manufacturer of complex components and products, the Company also competes against numerous global OEM manufacturers, whether those other manufacturers are located in Shenzhen, China or elsewhere. Most of the international competitors of the Company have substantially greater manufacturing, financial and marketing resources than the Company. The Company believes that the significant competitive factors are quality, price, service, and the ability to deliver products on a reliable basis. The Company believes that it is able to compete in its segment of the OEM manufacturing market by providing high quality products at a competitive price with reliable delivery and service. In addition, sinceThe Company has managed to partially offset the Company’s mainincreasing cost of manufacturing in China by moving some of its operations to its Myanmar facility. However, it still maintains its automated manufacturing facilities are located in the Shenzhen area, near some of its OEM customers,customers. Having manufacturing facilities in Shenzhen, the Company has a competitive advantage by beingis able to reduce delivery times and transportation costs for these customers, and by being able to offer “just in time” supply services, and by being able to recycle packaging materials for multi-use purposes.services.

Seasonality

The first calendar quarter (the last quarter of the Company’s March 31 fiscal year) is typically the Company’s lowest sales period because, as is customary in China, the Company’s manufacturing facilities in China are usually closed for one to two weeks for the Chinese New Year holidays. In addition, during the one month before and the one month after the New Year holidays, the Company normally experiences labor shortages, which further impact the operations during this period. As the Myanmar operations become larger, the Company will also be negatively affected by the leaveholidays that all Myanmar employees take annually during that country’s 12-day new year’s celebration.celebration (typically two weeks in April). The absence of workers during these nationally mandated holidays in Myanmar has not, to date, materially affected the Company’s overall operations, but the holidays are expected to impact the Company in the future as the Myanmar operations increase. The Company does not experience any other significant seasonal fluctuations, nor does it consider any other issues with respect to seasonality to be material.

Government Regulation

As of the date of this Annual Report, the Company’s main manufacturingtooling, engineering, design and assemblyautomated manufacturing facility is located in Shenzhen, China. As a result, the Company’s operations and assets are subject to significant political, economic, legal and other uncertainties associated with doing business in China in general, and in Shenzhen, in particular. InSince March 2015, the Company completed its acquisition of a 75% ownershiphas owned an interest in a Myanmar company that owns an assembly facilityoperates a factory in Myanmar. As a result, the Company also is subject to the political, economic, legal and other uncertainties associated with doing business in Myanmar. Myanmar commenced reforming its political and economic policies during the past few years, and the effects of those reforms are still uncertain and evolving.

The Chinese government has during the past few years significantly changed and/or increased the enforcement of a number of laws affecting employees (including regulations regarding their salaries and benefits, labor unions, working conditions and overtime restrictions, and contract duration—induration--in particular, requirements regarding pensions, housing and life-long employment), and safety regulations for buildings and workers. The Chinese governmental authorities are increasingly formalizing workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Employers found to be violating these labor rules are often severely penalized. As a result, the Company has had to reduce the number of hours of overtime its workers can work, substantially increase salaries of its workers, provide additional benefits to its workers, and revise certain other of its labor practices. The Shenzhen municipal government recently also issued the Interim Measures on the Administration of Housing Funds that require all local businesses to make contributions to a housing fund, which contributions range from 5% to 20%12% of an employee’s salary.

These increases in labor costs have increased the Company’s operating costs, which increase the Company has attempted to, but has not always been able to pass through to its customers. In addition, employees who have had two consecutive fixed-term contracts must be given an “open-ended employment contract” that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches the Company’s rules and regulations or is in serious dereliction of his duty. Such non-cancelable employment contracts will substantially increase its employment related risks and may limit the Company’s ability to further downsize its workforce. In addition, if an employee with such a contract is terminated, the Company is required to pay the terminated employee a substantial severance payment. The Company currently has some employees who are entitled to these lifetime employees, and others will become lifetime employees as they continue their service with the Company. These contingent employment liabilities will increase over time. The Company also is obligated to make future payments under pension and housing plans upon the termination of certain employees. These contingent employee liabilities could become a material financial obligation of the Company if a larger number of employees are terminated by the Company all at once (such as upon a plant closure). While the Company has to date absorbed and gradually reduced these employee termination liabilities, a sudden simultaneous termination of a large number of employees would require the Company to make significant payments to the terminated employees, which payments could materially and adversely affect the Company’s financial condition.

Since establishing its operations in China in 1991, the Company has operated its main manufacturing facility in Long Hua, Shenzhen, pursuant to the BFDC Agreements that largely exempted the Company’s operations in Long Hua, Shenzhen, from many of the rules and regulations that were imposed on entities that were considered under China law to be doing business in China as wholly owned subsidiaries organized in China. As a result, the Company was not required to apply for permits or licenses in China or to register to do business in China. As part of the Reorganization the Company had to discontinue its operations under the BFDC Agreements and, as of Aprilwas completed in 2015, all of its operations in the PRC are now conducted through a wholly-owned subsidiary that is registered in China as a limited liability company. As a result, the Company’s operations in China are now subject to all of the rules and regulations that previously did not apply to its operations in the PRC. Although the Company’s subsidiary is a Chinese registered company, the Company believes that, because its subsidiary is a foreign owned entity, it has structured its new operationsrecently been subject to numerous governmental inspections that other Chinese owned companies have not experienced. Accordingly, the operating environment for WFOEs in the PRC to substantially comply with the governmental regulations that are applicable to its new corporate structure, the exact scope, effect and impact of these government regulations on the Company’s wholly-owned Chinese subsidiary, and therefore on its assets and operations, are still unknown.China is becoming increasingly burdensome.

The Chinese government continues to increase the enforcement of certain environment protection laws, which are restricting some common practices and/or increasing the Company’s cost of operations. In addition to enhanced governmental environmental regulations, the Company also has to comply with environmental laws applicable to its customers, such as recently adopted regulations of the European Union and Japan known as the Restriction on Hazardous Substances (known as “RoHS”) and the European Union’s Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (known as “REACH”). The RoHS and REACH rules and regulations prohibit the importation products and parts that contain certain levels of toxic materials (such as lead, cadmium and mercury) and chemicals that may pose health and environmental risks. The Company believes that its operations are RoHS and REACH compliant.

The Company sells its products to customers in Hong Kong/China, Europe, and the United States/Mexico. As a result, its operations are subject to significant regulations related to its activities in these regions, including changes in international and domestic customs regulations, changes in tariffs, trade restrictions, and trade agreements and taxation.

Research and Development

As a manufacturer of parts and components and finishedfor use in other products, for OEMs and contract manufacturers, the Company conducts no material research or development. The Company does, however, invest minor amounts for certain research and development activities it conducts in connection with (i) developing potential proprietary products, (ii) automated machines that the Company uses in its manufacturing process, and (iii) an understanding of the technologies of its customers. The Company also is currently designing and developing several small electric motors that, the Company believes, will fill the needs of some of its current customers and that may also fill a need in the market in general.

Organizational Structure/Offices and Manufacturing Facilities

Highway Holdings Limited is a holding company that operates through its subsidiaries. As of June 29, 2016,July 31, 2020, Highway Holdings Limited had variousfour wholly-owned active subsidiaries of which(excluding some are dormant or being deactivated subsidiaries), and twoone majority-owned subsidiaries.active subsidiary. The Company currently conducts its business primarily through fivefour wholly-owned subsidiaries and its majority84% owned Myanmar subsidiary. The Company currently also is developing proprietary CO₂ snow-jet and dry ice cleaning systems through another majority-owned subsidiary. Details of the Company’s fivefour principal wholly-owned operating subsidiaries and their principal activities as of June 29, 2016 are as follows:

During the fiscal year ended March 31, 2014, the Company formed a Hong Kong subsidiary (Advanced Cleaning Innovations Asia Limited) that it co-owns with ACI Group GmbH, based in Zimmern, Germany, to manufacture a series of lower cost, proprietary CO₂ snow-jet and dry ice cleaning systems for industrial and commercial cleaning applications in use in Asia. The Company also owns a 51% interest in Advanced Cleaning Innovations Asia Limited. This entity operates from84% of the Company’s facilities in Shenzhen and has been designing and developing a prototype product and has not engaged in any material operations to date.

In March 2015, the Company completed its acquisitionequity of a 75% interest in Kayser Myanmar, Manufacturing Company Limited, a company formed on March 16, 2012 under the laws of Myanmar. Kayser Myanmar currently operates as a foreign company registered under Myanmar law that is authorized to operate in Myanmar. Kayser Myanmar’s principal activities consist of manufacturing and assembling metal and plastic products. A Myanmar citizen owns 25%16% of the Kayser Myanmar and is the general manager of the entity. Kayser Myanmar currently manufactures and assembles products for the Company’s OEM clients, and assembles products manufactured by the Company in China. The Company is Kayser Myanmar’s sole customer. Kayser Myanmar currently leases a 15,000 square foot manufacturing and assembly facility in Yangon, Myanmar. The lease for this facility will expire in early 2017, and the Company currently is planning to relocate the operations of Kayser Myanmar to a larger facility.its China facilities.

British Virgin Islands/Corporate Administrative Office

The office of the registered agent of the Company is located at Craigmuir Chambers, Road Town, Tortola, VG1110 British Virgin Islands. Only corporate administrative matters are conducted at these offices, through the Company’s registered agent, Harneys Westwood & Riegel.Corporate Services Limited. The Company does not own or lease any property in the British Virgin Islands.

Hong Kong/Operating Administrative Offices

The Company leases Suite 1801, and Suites 1823-1823A, Level 18, Landmark North, 39 Lung Sum Avenue, Sheung Shui, New Territories, Hong Kong as its administrative and engineering offices. The Company’s offices at the Suite 1801 location (consisting of approximately 2,000 sq. ft.) are leased by Nissin Precision Metal Manufacturing Limited and are utilized primarily for engineering, import/export and marketing, while the offices located at Suite 1823-1823A (consisting of approximately 2,100 sq. ft.) are leased by Kayser Limited and are used for finance, purchasing and marketing. Both of these offices are leased underIn January 2020, the Company entered into two new, three-year leases that expire onin March 20, 2017.2023 for these offices. The new leases have substantially the same terms as the prior leases (the aggregate monthly rental cost of these offices is currently iswill remain at approximately $9,000$11,000 per month, (basedbased on the exchange rate in affect as of the date of this Annual Report)report).

Shenzhen, China/Manufacturing Facility

TheDuring the past few years, the Company leaseshas leased a total of approximately 24,00024,400 square meters of space at a factory complex located at Long Hua, Shenzhen, China from the Shenzhen Long & Cheng Industry & Trade Industrial Co., Ltd. pursuant to various related leases. The leased space consists of 21,000 square meters ofincluded both manufacturing space with the balance representingand dormitories for the Company’s factory workers. The leased space iswas used predominately for the Company’s metal and electrical manufacturing, OEM product assembly, plastic injection, tooling workshop and warehouse operations. There also are offices for production management, production engineering, and production support administration on the premises. The leases

In December 2019, the Company entered into a new three-year lease for these facility were scheduled to expirea portion of the existing Shenzhen facilities. Under the new lease, which became effective on March 1, 2020 and will continue until February 28, 2017. However,2023, the Company now leases a total of approximately 15,700 square meters of space. Because the Company has relocated most of its labor-intensive manufacturing and assembly operations to its landlord recently agreedfacility in principleYangon, Myanmar, the Company will no longer need the same amount of space in Shenzhen as it has in the past. Under the new lease, the Company is required to enter into new leasespay approximately $68,000 per month for these facilities. The new leases,rent (at the current RMB to U.S. dollar exchange rate), which are currently being reviewedrent will increase by required5% per year in the second and third year of the lease. As a condition to its lease renewal, the Company has obtained a license from the local governmental agencies have not yetto operate as a designated high technology company and to use the facilities primarily as a technology center and for component manufacturing of metal and plastic parts to be sold to customers with manufacturing plants in China.

Yangon, Myanmar/Manufacturing Facility

On March 29, 2019 Kayser Myanmar entered into a 50-year lease for a new manufacturing complex in Yangon, Myanmar (the “New Facility”), which lease has since been signed,officially approved and recorded. Accordingly, Kayser Myanmar is now the legal tenant at the New Facility. Prior to moving to the New Facility, Kayser Myanmar conducted its operations at another leased facility in Yangon, Myanmar. Kayser Myanmar now conducts all of its operations at the New Facility. The New Facility is an approximately 6,900 square meter (1.67 acres) factory estate that is located in Hlaing Tharyar Township in Yangon. The New Facility is owned by Konig Company Limited (“Konig Company”), a Myanmar company. Konig Company is owned by two Myanmar citizens who are expectedrelated to continueKayser Myanmar. One of the principals of Konig Company currently is a manager and a shareholder of Kayser Myanmar (he owns a 16% interest in Kayser Myanmar), and the other currently is a manager of Kayser Myanmar. Konig Company only recently acquired the New Facility.

The lease for the New Facility has a term of 50 years. Kayser Myanmar has the option to extend the lease term for two consecutive 10-year terms on the same terms and conditions as in effect until February 2020for the initial 50-year period. Kayser Myanmar, the tenant, is obligated under the lease to make monthly lease payments equal to 10 million Myanmar Kyat (approximately U.S. $7,200 per month, based on the currency conversion rate in effect on the date of this report). Kayser Myanmar has paid Konig Company $950,000 as a prepayment of rent under the lease (the prepayment represents approximately 12 years of rental payments). Under the lease, Kayser Myanmar must also pay all utilities (water, electricity, gas and sanitation), property taxes, and insurance on the premises. Kayser Myanmar has the right to alter and improve the premises at its own cost. As permitted by this provision in the lease, Kayser Myanmar has already upgraded the existing two factories at the New Facility, and has constructed a third factory and a new office building on the site. Kayser Myanmar has the right to sublet some or all of the New Facility.

Under the new lease, Kayser Myanmar has the option to purchase the factory from Konig Company if and when, Myanmar law is changed to permit ownership of real estate in Myanmar by foreign-owned companies. Because Kayser Myanmar is an indirect subsidiary of the Company, under the Myanmar Transfer of Property Act 1882 and the Myanmar Transfer of Immovable Property Restriction Law 1987, Kayser Myanmar is deemed to be a foreign-owned company and, therefore, is currently not permitted to own the New Facility. If Myanmar law is changed to allow foreign-owned companies to own Myanmar real estate, Kayser Myanmar will have the option to purchase the New Facility at a price equal to the then fair market value of the New Facility. The fair market value will be determined by an independent appraiser. The valuation of the New Facility will, however, exclude the increased value of the site attributable to any improvements, alterations, and additions made to the New Facility by Kayser Myanmar. Konig cannot sell, transfer or mortgage the New Facilities without the consent of Kayser Myanmar.

Other Operations

In addition to its historical manufacturing operations, the Company continues to explore other possible means of leveraging its manufacturing capabilities in China and to increasedevelop proprietary products that the Company’s annual rental expenses by approximately 13%.Company can manufacture and sell as its own products. As part of the new leases,its goal to develop a line of proprietary products, in November 2013 the Company will have the rightformed a jointly owned company a German company to operate fromdevelop and manufacture a newly reconstructed building in whichseries of lower cost, proprietary CO2 snow-jet and dry ice cleaning systems for industrial and commercial cleaning applications. In 2018, the Company will locatecompleted its metal stamping business. Asdevelopment of the endCO2 cleaning system and started to market his cleaning system to manufacturers as an alternative method of cleaning machinery. However, to date, the Company has only manufactured nine of these cleaning systems, and has only sold three in the fiscal year ended March 31, 2016,2019 and two in fiscal 2020; two of the cleaning systems are currently being used by the Company did not fully utilize all ofin its own manufacturing facilities. Accordingly, the newly leased facilities will satisfy the Company’s space needs in the near future.operations.

Item 4.A. Unresolved Staff Comments

Not applicable.

Item 5. Operating and Financial Review and Prospects

Overview

The Company’s net sales during the past three years were derived primarily from the manufacture and sale of metal, plastic and electronic parts and components for its international clients. AlthoughFor accounting purposes, the Company manufactures metal, plastic and electronic parts and products for its customers, it treats its (i) metal stamping and mechanical OEM manufacturing operations, and its (ii) electricelectronic OEM manufacturing operations, as two separate business segments.

As described in this Annual Report, the Company has taken various actions to reduce its operating costs, including in particular steps to reduce its labor costs.costs and its rental expenses. During the past several years, increased wages, high employee turn-over rates, sign-up bonuses, retention bonuses, overtime payments, and contributions to the new housing fund and other benefit payments have resulted in high labor and staffing costs. In addition, since 2011 all of the local government’s proclamation that all subcontract license companies hadCompany’s operations in China have been conducted through Nissin Metal and Plastic (Shenzhen) Company Limited (herein referred to convert their operations toas “Nissin PRC”), a WFOE form of ownership, has further raised the cost of operating in China.WFOE. As a PRC registered company, the Company’s China subsidiaryWFOE, Nissin PRC now has to complyobtain and maintain its own permits and licenses, is subject to China’s income and business taxes, and is subject to the rules and regulations applicable to other PRC registered companies. These new rules, regulations and taxes have made the operations of Nissin PRC more cumbersome and expensive. In addition, since Nissin is a WFOE, the Company believes that it is targeted with additional burdensome inspections and governmental actions that Chinese owned companies do not experience. These inspections and additional compliance procedures interfere with the more burdensome permitting requirements, has to increase its record keeping functions,operations of Nissin PRC and has to pay VAT (which taxes, net of tax credits, adds to the cost of the materials).result in significant additional costs and expenses. The combination of the high labor costs and the additional costs and administrative burdens of operating as a PRC registered companyin Shenzhen, China, have, to a large extent, eroded one of the principal benefits of manufacturing in China, and have a negative impact on the Company’s competitiveness. As a result of the labor costs and the other burdens imposed on the Company’s PRC operations, the Company is attempting to shift someits labor-intensive operations and most of its labor intensivemanual manufacturing operations from Shenzhen, China, to Myanmar, a lower cost neighboring country.

Under the BFDC Agreements that used to apply to all of the Company’s operations in Shenzhen, the Company did not pay taxes in China based on the operations of the Shenzhen facilities because the Company’s two China-based companies were not considered to be tax residents in China (the BFDC was responsible for paying its own taxes incurred as a result of the operations under the BFDC Agreements, which taxes were indirectly passed through to the Company’s subsidiaries). However, these BFDC arrangements have now been terminated, and the Company’s two China-based subsidiaries have transferred their assets and operations to Nissin PRC, a wholly-owned subsidiary that is a WFOE. Accordingly, all future operations by the Company in China will be operated through its WFOE, which is subject to the uniform income tax rate of 25% in China.

The Company is not taxed in the British Virgin Islands, the state of its incorporation.

The location of the Company’s administrative offices for its operating subsidiaries in Hong Kong enables the Company to pay low rates of income tax due to Hong Kong’s tax structure. The Company’s income arising from its Hong Kong operations or derived from its operations within Hong Kong is subject to Hong Kong Profits Tax. Previously, while the Company operated under the BFDC Agreements, the Company had the ability to claim a 50% tax benefit from the Hong Kong Inland Revenue Department by providing support for its position that more than half of its income is derived from its activities outside of Hong Kong. Also, under the BFDC Agreements, the Company did not have to pay taxes in China. As a result of the conversion of Nissin Metal and Plastic (Shenzhen) Company Limited into a WFOE as part of the Reorganization, the foregoing Hong Kong tax benefit is no longer available to the Company. The statutory tax rate in Hong Kong currently is 16.5%, and there are no taxes on dividends or capital gains.

Commencing in the fiscal year ending March 31 2016, Kayser Myanmar, the Company’s majority-owned Myanmar subsidiary, has beenis subject to the tax provisions applicable as a result of its operationscompanies operating in Myanmar. However,Myanmar (prior to December 20, 2017, Kayser Myanmar was exempt from Myanmar income taxes under Myanmar’s Foreign Investment Law,Law). Since this exemption has expired, Kayser Myanmar has been paying income tax at a rate of 25%. Kayser Myanmar is exempt from Myanmar income tax until December 20, 2017. In addition,able to import many of raw materials and parts that it uses then to manufacture its export products free of taxes and duties under an import/export license that requires Kayser Myanmar also hasto uses a temporary exemption from customs duties and internal taxes on machinery and equipment and on certain imported raw materials used in the Myanmar operations, as well as relief from commercial taxes on goods produced for export. As a result, the tax impact of the Kayser Myanmar operations is not anticipated to be material in the near term.bonded warehouse.

The Company is not subject to U.S. taxes.

The Company acquired a 75% ownership interest inowns 84% of Kayser Myanmar at the end of March 2015.Myanmar. Accordingly, the operations of Kayser Myanmar are included in the Company’s consolidated financial statements (and in the below discussion of the Results of Operations) for the fiscal yearyears ended March 31, 2016.2018, 2019 and 2020.

Net sales to customers by geographic area are generally determined by the physical locations of the customers. For example, if the products are delivered to a customer is based in China or Hong Kong, the U.S., the sale issales are recorded as a salegenerated in Hong Kong and China; if the customer directs the Company to ship its products to Europe, the U.S.sales are recorded as sold in Europe.

Results of Operations

General

During the past three years discussed below, the Company’s revenues were derived primarily from the manufacture and sale of OEM manufacture of metal, plastic and electronic products, parts and components. During the past three years,fiscal year ended March 31, 2020, net sales have remained mostly unchanged ($22,936,000decreased by 12.0% from the fiscal year ended March 31, 2019. Notwithstanding the decrease in 2014, $22,373,000net sales, the Company had net income of $686,000 compared to a net loss of $630,000 for the year ended March 31, 2019. For the fiscal year ended March 31, 2020, the Company declared one dividend of $0.08 per share (which dividend was paid after the end of the fiscal year, on April 6, 2020), compared to $0.25 per share in 2015, and $22,935,000the prior fiscal year.

The Company’s financial results for the fiscal year ended March 31, 2016). However,2020 were negatively affected by COVID-19. The Company’s Shenzhen, China offices closed in mid-January 2020 for the annual Chinese New Year holiday and then remained closed until late February 2020 as a result of the Company’s cost cutting efforts and its unwillingnessCOVID-19 pandemic. In addition, production at the Shenzhen facilities was reduced due to accept very low margin orders,on-going restrictions on factory operations related to COVID-19 shutdown. During this period, the Company’s profitability has increasedMyanmar factory remained open and continued to operate. However, the Company’s Myanmar factory was closed for most of April 2020 and opened again since May 2020. These closures affected the Company’s operations in eachthe fourth quarter of fiscal 2020 and will impact the past three years (from net incomeCompany’s operations in the first and second quarters of $596,000 in 2014, to net income of $1,150,000 in 2015, to net income of $1,251,000 for the fiscal year ended March 31, 2016).2021.

The following table sets forth the percentages of net sales of certain income and expense items of the Company for each of the three most recent fiscal years.

Note:

Year Ended March 31, 20162020 Compared to Year Ended March 31, 20152019

Net sales for the fiscal year ended March 31, 20162020 (“fiscal 2016”2020”) increaseddecreased by $562,000,$1,719,000, or 2.5%12.0% from the fiscal year ended March 31, 20152019 (“fiscal 2015”2019”) as a result of increased orders from severaldue to lower sales to certain of the Company’s principal European customers and, the Company’s ability to replace an established customer that terminated its relationship with the Company after the Company announced that it was further increasing its prices in responsea lesser extent, due to the continuing increase in labor and related costs in China. Overall,effects of the Company was able to retain its principal customers despite the continuing increase in operating costs in China because the Company was able to lower some of its assembly costs by shifting some of its assembly operations to its Myanmar subsidiary. Completing some assembly work at the Company’s Yangon, Myanmar, subsidiary is substantially cheaper, even factoring in the additional costs associated with transferring products and materials betweenCOVID-19 pandemic on the Company’s Shenzhen, China, operations. One of the Company’s principal customers experienced a substantial decrease in the sale of its products, which resulted in a decrease in orders for the Company. The Company’s Shenzhen, China offices were closed from the middle of January 2020 until late February for the annual Chinese New Year holiday and then the COVID-19 pandemic. As a result of the impact of the COVID-19 pandemic on the Shenzhen operations, net sales during the fourth fiscal quarter of fiscal 2020 were 23% below the amount of net sales in the same quarter of fiscal 2019, which also reduced the Company’s annual net sales. The Company’s net sales were lower in fiscal 2020 when compared to fiscal 2019 because of lower sales to existing customers, and the Company’s inability to attract significant new customers in fiscal 2020, despite the lower cost of manufacturing in Myanmar. The Company continues to believe that the new, modernized Yangon manufacturing facility and its demonstrated ability to manufacture in Myanmar facilities. Duringat a cost lower than in China, but with the same quality as in China, will assist it in attracting more orders from existing customers and possibly attract orders from new customers. Overall, net sales by region in fiscal 2016,2020 changed slightly, with net sales to Europe increasedEuropean customers increasing to 71.2%78.0% in fiscal 2020 compared to 76.4% of the Company’s net sales in fiscal 2016,2019. Net sales to Hong Kong/China decreased slightly by $608,000 while net sales to North America increased slightly by $128,000 in fiscal 2020 when compared to 67.7% in fiscal 2015.2019.

The Company operates in two segments that it refers to as (i) the “metal stamping and mechanical OEM” segment and (ii) the “electric OEM” segment. The metal stamping and mechanical OEM segment focuses on the manufacture and sale of metal parts and components, whereas the electric OEM segment focuses on the manufacture and sale of plastic and electronic parts, components and machines.motors. For fiscal 2016,2020, net sales of the metal stamping and mechanical segment decreasedincreased to 44.8%55.2% of the Company’s net sales, from 56%54.1% in fiscal 20152019, due to changes in the product mix. Net sales of the electric OEM segment correspondingly decreased to 44.8% of net sales in fiscal 2020 from 45.9% in fiscal 2019.

Gross profits as a percentage of net sales increased to 33.1% in fiscal 2020 from 25.1% in fiscal 2019. This increase in the gross profit margin is, however, largely due to the following: (i)As the Company’s Shenzhen, China, factory was shut down for approximately two weeks in early calendar year 2020 due to COVID-19 pandemic, the local Shenzhen government granted the Company’s Shenzhen factory a rental subsidy of $148,000, which approximated the factory’s two months’ rental, and a rebate of $7,000, which approximated the factory’s electricity bill for one month, (ii) Sublease income of $141,000 received from the temporary sublease of factory space at its Shenzhen facility was offset in cost of sales, (iii) utilization of inventories which were previously impaired in fiscal 2019. As a result, the Company’s costs of sales were reduced in fiscal 2020, and thereby improved the Company’s gross margin. Excluding these one-time events, the Company’s gross margins increased as manufacturing and assembly operations transitioned from the Company’s China facilities to its Myanmar facilities with relatively lower operating costs. Due to the increase in gross margin, the Company’s gross profit increased by 16% to $4,153,000 in fiscal 2020 compared to fiscal 2019, despite lower sales in fiscal 2020.

Selling, general and administrative expenses decreased by $929,000, or 21.4%, in fiscal 2020 compared to fiscal 2019 as a result of cost cutting measures implemented as net sales decreased. Selling, general and administrative expenses were lower in fiscal 2020 in part because of reduced headcount and lower bonus payment, and salary reduction among Company’s management personnel. The foregoing reductions were partially offset by increases in non-cash share-based compensation expenses related to the restricted stock and stock options granted to the Company’s directors, senior executives and managers. Selling, general and administrative expenses decreased to 27.1% of net sales in fiscal 2020, compared to 30.4% of net sales in fiscal 2019.

As a result of the $573,000 increase in gross profits in fiscal 2020 and the decrease in selling, general and administrative expenses by $929,000, the Company had operating income of $747,000 in fiscal 2020 compared to an operating loss of $755,000 in fiscal 2019.

The Company had a major customer.currency exchange gain of $7,000 in fiscal 2020 compared to a currency exchange loss of $8,000 in fiscal 2019. The currency gain/loss reflects the changing values of the U.S. dollar relative to the euro, the RMB and the Myanmar kyat. The Company will continue to be exposed to currency fluctuations because the Company does not intend to undertake any currency hedging transactions.

The Company incurred income taxes of $209,000 in fiscal 2020 on its $896,000 of income before taxes. In fiscal 2019, the Company had an income tax benefit of $26,000 because of its net loss before taxes. The Hong Kong statutory profits tax remained at 16.5% in fiscal 2020. However, the Company’s effective tax rate was approximately 23.3 % in fiscal 2020 because of certain non-deductible items, partially offset by the utilization of tax losses previously not recognized.

As a result of the foregoing, the Company had net income attributable to its shareholders of $686,000 in fiscal 2020 as compared to a net loss of $630,000 in fiscal 2019.

Year Ended March 31, 2019 Compared to Year Ended March 31, 2018

Net sales for fiscal 2019 decreased by $4,889,000, or 25.5% from the fiscal year ended March 31, 2018 (“fiscal 2018”) due to lower sales to certain of the Company’s principal European customers, fewer tooling orders, adjustments to inventories, and a decreased sales of higher margin products. The decrease in net sales is attributable in part to decreased sales by the Company’s customers of their products and due to year-end inventory adjustments by those clients. Lower sales to certain European customers also are the result of increasing cost of manufacturing in China, which have caused some clients to shift their manufacturing from China to other Asian countries, or to Eastern Europe. The Company also was not been able to attract new customers in fiscal 2019 to replace the loss of sales to existing customers because of the high cost of manufacturing in China, and the concerns of some potential customers about manufacturing in Myanmar. Overall, net sales by region in fiscal 2019 changed slightly, with net sales to European customers increasing to 76.4% in fiscal 2019 compared to 75.4% of the Company’s net sales in fiscal 2018.

The Company operates in two segments (the “metal stamping and mechanical OEM” segment and the “electric OEM” segment). For fiscal 2019, net sales in the metal stamping and mechanical segment increased to 54.1% of the Company’s net sales from 50.3% in fiscal 2018 due to changes in the product mix. Net sales of the electric OEM segment (that also includes plastic parts) increasedcorrespondingly decreased to 55.2%45.9% of net sales in fiscal 20162019 from 44%49.7% in fiscal 2015 due to increased sales of existing customers.2018.

Gross profits as a percentage of net sales slightly improveddecreased to 25.8%25.1% in fiscal 20162019 from 25.6%35.2% in fiscal 2015. Increases in wages and other labor related expenses were offset by2018 due to decreased sales that increased the per unit overhead allocation, a slight decrease in the numbertooling orders, and additional provisions for aged closing inventories and write down of workers (through the use of automation)plant and machine’s value. Due to lower sales and lower gross margins, gross profits decreased by shifting some assembly work to Myanmar. Gross profits increased by $211,000$3,162,000 in fiscal 20162019 compared to fiscal 2015 due to the 2.5% increase in net sales.2018.

Selling, general and administrative expenses fordecreased by $469,000, or 9.8%, in fiscal 20162019 compared to fiscal 2018 as a result of cost cutting measures implemented as net sales decreased. Selling, general and 2015 remained substantially unchanged (selling,administrative expenses would have been even lower in fiscal 2019 had the Company not incurred significant transportation costs and additional administrative expenses related to the relocation of equipment and machinery from Shenzhen, China, to the new factory complex in Yangon, Myanmar. Because selling, general and administrative expenses decreased by $34,000, or 0.76%) asless than net sales, the Company was able to maintain its operating expenses at its Hong Kong administrative expense while absorbing the increased costs associated with establishing the Myanmar operations. Selling, general and administrative expense as a percentage of these expenses compared to net sales decreasedincreased to 19.2%30.4% in fiscal 2016 from 19.9%2019, compared to 25.1% in fiscal 2015 as a result of increased net sales.2018.

As a result of the $211,000 increase$3,162,000 decrease in gross profits in fiscal 2016 compared to fiscal 2015 and the slight decrease in selling, general and administrative expenses, the Company’s operating income increased by $245,000, or 19.3%, in fiscal 2016.

In fiscal 2016 and 2015,2019, the Company had an operating loss of $755,000 in fiscal 2019 compared to operating income of $1,938,000 in fiscal 2018.

The Company had a currency exchange rate lossesloss of $21,000 and $125,000, respectively,$8,000 in fiscal 2019 compared to a currency exchange gain of $63,000 in fiscal 2018. The loss in 2019 was due to the fluctuationsdecrease in the value of the RMB and Euro compared to the U.S. dollar. The Company will continue to be exposed to fluctuations in the exchange rate of the RMB and the Euro. The Company does not undertake any currency hedging transactions, and therefore its financial results will continue to be affected by the future fluctuations of currencies.

The currency exchange lossCompany recognized one-time gains of $28,000 and $50,000 in fiscal 2015 was partially offset by a $110,000 gain onyears 2019 and 2018, respectively, from the dispositionsale of excess equipment.equipment that the Company no longer needed.

The Company incurredhad an income tax benefit of $26,000 in fiscal 2019 because of its net loss before taxes, and income taxes of $243,000$512,000 in fiscal 2016 compared to2018 because of its $2,072,000 of income taxes of $134,000 in fiscal 2015 as a result of the increase in net income in fiscal 2016.before taxes. The Hong Kong statutory profits tax remained unchanged atwas 16.5% in fiscal 2016.2019. However, the Company’s effective tax rate was 16%3.7% in fiscal 2016 compared to 10.4% in fiscal 20152019 because of variances in certain non-deductible items.

Net gain/loss attributable to noncontrolling interest is contributed by Kayser Myanmar, the Company’s 75% owned subsidiary, to the Company’s profits in fiscal 2016.items and utilization of tax losses previously not recognized.

The Company’sCompany had a net incomeloss attributable to its shareholders of $630,000 in fiscal 2016 increased to $1,251,000 from $1,150,000 in fiscal 20152019 because of the increasea decrease in both net sales and gross margins while selling, general and administrative expenses remained substantially unchanged.

Year Ended March 31, 2015 Compared to Year Ended March 31, 2014

Net sales formargins. In fiscal 2015 decreased by $563,000, or 2.5% from the fiscal year ended March 31, 2014 (“fiscal 2014”). The principal reason for the decrease in net sales in fiscal 2015 was a significant decrease in sales to two of the Company’s principal European customers after2018 the Company announced that it was further increasing its prices in response to the continuing increase in labor and related costs in China. A portionhad net income of the lost sales was offset by increased orders from some$1,550,000 because of the Company’s other existing customers, as well as the price increase that the Company instituted. During fiscal 2015, net sales to Europe represented 67.7% of the Company’s net sales, compared to 67.9% in fiscal 2014.

During fiscal 2015 net sales of the metal stamping and mechanical segment decreased by $1,300,000, and net sales of the electric OEM segment (that also includes plastic parts) increased by $737,000. Net sales of the metal stamping segment (net of intersegment sales) in fiscal 2015 represented 56% of the Company’s net sales, while the electrical OEM segment (net of intersegment sales) increased to 44% of net sales.

Gross profits as a percentage of net sales increased to 25.6% in fiscal 2015 from 23.8% in fiscal 2014 due, in part, to the decrease in sales of a lower margin products to European customers. The Company was also able to maintain its gross margin by decreasing the number of workers (through the use of automation) and by shifting some assembly work to Myanmar. The Company achieved the increase in gross margins despite an increase in the average wage per employee in fiscal 2015. Because of the increase in the Company’s gross margins, the Company’s gross profits increased in fiscal 2015 by $265,000, or 4.9%, compared to fiscal 2014, despite the decrease in net sales.

Selling, general and administrative expenses for fiscal 2015 decreased from fiscal 2014 by $213,000 (or 4.6%) for approximately the same amount ofhigher net sales and despite the increased costs associated with establishing the Myanmar operations. Selling, general and administrative expense as a percentage of net sales decreased to 19.9% in fiscal 2015 from 20.3% in fiscal 2014 as a result of the Company’s streamline initiatives. The Company anticipates that its selling, general and administrative expenses will increase in the future due to increased lease payments it will have to make for its Long Hua, Shenzhen facility under the new Premises Leases that the Company recently agreed to, and the increased rent the Company expects to have to pay when the Company moves the factor utilized by its Myanmar subsidiary.

As a result of the $265,000 increase in gross profits in fiscal 2015 compared to fiscal 2014 and the $213,000 decrease in selling, general and administrative expenses, the Company’s operating income increased by $478,000, or 60.3%, in fiscal 2015.

In fiscal 2015 and 2014, the Company had currency exchange rate losses of $125,000 and $31,000, respectively, due to the fluctuations in the value of the RMB and Euro compared to the U.S. dollar. The Company will continue to be exposed to fluctuations in the exchange rate of the RMB and the Euro. The currency exchange loss in fiscal 2015 was offset by a $110,000 gain on the disposition of excess equipment. The Company had a loss of $23,000 in fiscal 2014 due to the write off of certain molds.

The Company incurred income taxes of $134,000 in fiscal 2015 compared to income taxes of $172,000 in fiscal 2014 despite the increase in net income as the Company was able to utilize more of its tax loss carry forwards from prior fiscal years. The Hong Kong statutory profits tax remained unchanged at 16.5% in fiscal 2015. However, the Company’s effective tax rate decreased to 10.4% in fiscal 2015 compared to a tax rate of 22.3% in fiscal 2014 because of variances in certain non-deductible items.

The Company’s net income in fiscal 2015 increased to $1,150,000 from $596,000 in fiscal 2014 despite the decrease in net sales. The increase in net income resulted from the increase insignificantly higher gross margins and the decrease in selling, general and administrative expenses.(and, therefore, gross profits).

Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the periods indicated:

As of March 31, 2016,2020, the Company had working capital of $10,657,000,$8,235,000, compared to working capital of $11,016,000$8,271,000 as of March 31, 2015.2019. As of March 31, 2016,2020, the Company had a working capital ratio of 3.102.65 to 1.

The Company’s prepaidamount of cash and other current assets ascash equivalents held by the Company on March 31, 2020 remained unchanged at $8,827,000 on both March 31, 2020 and March 31, 2019. As of March 31, 20162018, the Company had cash and March 31, 2015cash equivalents of $11,267,000. The Company incurred substantial cash outlays in fiscal 2019 to establish its new Yangon, Myanmar, factory complex (the “New Yangon Facility”). These outlays included (i) up-front payments (including $950,000 of pre-paid rent), (ii) costs to transfer equipment and operations from the prior Yangon factory to the New Yangon Facility, (iii) moving equipment from the Shenzhen, China, facility to the New Yangon Facility, and (iv) upgrading the existing two factories at the New Yangon Facility and building the third factory and the new office building. Collectively, excluding the prepaid rent, these costs were approximately $191,000$600,000 in fiscal 2019. Because the Company has prepaid rent for the New Yangon Facility, it will not incur rental payments costs at the New Yangon Facility for approximately eleven more years. The decrease in the amount of cash and $229,000, respectively, of depositscash equivalents held by the Chinese Customs Department under its Customs License Deposit program related to the Company’s imports of the raw materials. The amount of funds heldCompany on deposit with the Chinese Customs Department fluctuates depending on deposits madeMarch 31, 2019 was partially offset by the Company when it imports additional raw materialscash inflows from a decrease in inventories and when such funds are returned to the Company upon the export of the finished goods.an increase in unpaid accounts payable.

The Company has historically generated sufficient funds from its operating activities to finance its operations and there has been little need for external financing other than capital leases which are used to finance equipment acquisitions and letter of credit facilities for secured purchases of materials and components from overseas vendors. For fiscal 2016,2020, the Company had $1,256,000generated $442,000 of positivenet cash fromprovided by its operating activities primarily because of itsa net incomeprofit of $1,264,000, a $687,000 decrease in inventories, $317,000for the year, non-cash charges of $145,000 of depreciation and amortization, non-cash expenses, $1,378,000a $39,000 write down of increased collectioninventories, share-based compensation of accounts receivables,$181,000 and deferred tax of $209,000 partially offset by a $559,000 increase in inventories, and a $291,000 decrease in accounts payable. The decrease in inventories was in part due to the useaccrued expenses and other current liabilities of inventories previously held for customers who informed$570,000. In fiscal 2019, the Company that they were reducing or terminatingused $437,000 of net cash in its operating activities and in fiscal 2018, the Company’s future services.Company generated $2,388,000 from operating activities.

The amountCompany used $142,000, $736,000 and $64,000 in fiscal 2018, 2019 and 2020, respectively, of cash in its investing activities. The significant increase in fiscal 2019 is the result of the purchase of property, plant and equipment for the New Yangon Facility.

Net cash equivalents heldused in financing activities mostly represents cash dividends paid by the Company onduring each of fiscal 2018, 2019 and 2020. Dividends of $1,244,000 and $297,000 was paid in fiscal 2019 and fiscal 2020, respectively. Dividend of $319,000 was declared in the fiscal year ended March 31, 2016 decreased by $587,000 (from $9,727,000 in 2015) primarily2020. Dividends are declared at the discretion of the increaseBoard of Directors, subject to applicable laws, and depend on a number of factors, including the Company’s financial condition, results of operations, capital requirements, plans for future expenditures, general business conditions and other factors considered relevant by our Board of Directors. Even though the Company was profitable in accounts receivable. Accounts receivable increased due to an increasefiscal 2020, no assurance can be given that the Company will pay cash dividends in salesthe future or, if dividends are paid, that the amounts will be consistent with amounts paid in late the fourth fiscal quarter.prior years.

Historically, the Company has maintained a credit facility with one or more banks for letters of credit and import loans. However, because of changes in the method of international payments and the Company’s relationship with its vendors, and because the Company has sufficient cash on hand to fund its equipment and other capital requirements without having to borrow under a line of credit, in 2014 the Company terminated its existing credit facility. Accordingly, asAs of the date of this Annual Report the Company has no outstanding bank loans orloans. However, the Company also does not have any bank credit facilities under which it couldcan borrow funds. However,funds should the Company be requiredneed additional capital to incur significantfund unanticipated expenses (such as funding unbudgeted expenses related to the Myanmar facility,New Yangon Facility, posting additional deposits/bonds with governmental agencies, or funding certain operating expenses as a result of an unexpected slowdown of customer orders). Accordingly, the worldwide economic slowdown), the Company’sCompany will be dependent on its current financial resources may notshould unanticipated expenses arise. No assurance can be given that its current reserves will be sufficient.

The Company anticipates that, during the current fiscal year ending March 31, 2017, it will have to invest in additional equipment, will have to fund the expansion and improvement of assembly facilities of its Myanmar subsidiary, and will have to incur expenses in relocating and refurbishing a new building at its Shenzhen facility. Based on the Company’s an estimated budget for these planned expenditures, the Company believes that it has sufficient cash on hand to fund all of these anticipated capital expenditures.

As a result of its currently available working capital and funds generated from its internal projections for the next year, the Company expects thatoperations are adequate to support its working capital requirements and capital needsoperations for at least the next 12 months can be funded through a combination of internally generated funds and its current cash balances.months.

Impact of Inflation

The average annual inflation rate in China was reported at 1.44%approximately 2.9% in 2015. However,calendar year 2019 and 8.63% in Myanmar. In the past, the increase in the Company’s actual cost of operations has significantly exceeded the overall inflation rate in China. The rapidDespite the overall slowing of the growth of China’s economy, in general, and the growth in Shenzhen in particular, hasrising prices in the past few years in Shenzhen, China, have significantly increased itsthe Company’s operating costs, including energy prices and labor costs. These increased costs have adversely affected the Company’s cost of operations in China, have caused the Company to increase its prices, and have resulted in the loss of some customers. On the other hand, the impact of the reported inflation rate in Myanmar has been partially offset by the depreciation in the value of the Myanmar Kyat currency over the past few years, resulting in no significant negative financial impact on the Company’s operations in Myanmar to date.

In the fiscal year ended March 31, 2016,2020, the Company generated mostapproximately 55% of its revenues from sales of products that it manufactured at its facilities in Shenzhen, inChina; the PRC, and to a lesser text,balance of the Company’s net sales were generated from the assembly services provided by its facility in Yangon, Myanmar.Myanmar, operations. The economy in China has grown significantly over the past 25 years, which has resulted in increased inflation and a significant increase in the average cost of labor, especially in the coastal cities such as Shenzhen. China’s consumer price index, the broadest measure of inflation, officially rose on average 1.44%approximately 2.9% in 2015. The minimum wage2019. However, wages in Shenzhen, China was approximately 26.9%currently are significantly higher at December 31, 2015 than it was at the end 2013. Effective March 1, 2015, the Shenzhen municipal government increased the minimum wage by an additional 12.3%. Although the rate of increase in wages has slowed, accordingthey were a few years ago. According to China’s National Bureau of Statistics, the average workers’ wages throughout China rose 7.4% in 2015,by an estimated 9.8% in 2014calendar year 2019, 8.8% in 2018, 6.8% in 2017, and 13.9%8.0% in 2013. However, because of the labor shortage in the Company’s region, the Company has not been able to hire workers for the minimum wage, and the Company’s actual labor costs have risen by over 25% in the past three years.2016. Despite the slowing economy in China, because of the growing shortage of workers, the overall average wage in Shenzhen is expected to continue to grow. The Company’s efforts to control the wages it pays to its employees has lessened the Company’s exposure to changes in the wage increases of its workers. However, salaries for its trained technical/engineering employees and from its managerial staff have continued to rise, at rates greater than the rate of inflation. Continuing increases in China’s inflation and material increases in wages for its administrative and technical staff will diminish the Company’s competitive advantage against OEM companies in otherlower cost developing countries and, unless the Company is able to either shift these higher wage jobs to the Company’s lower cost operations in Myanmar, or pass onsome of these increased costs on to its customers by increasing prices for its products and services, the Company’s profitability and results of operations could be materially and adversely affected.

IfMyanmar has experienced inflation does continue as management currently anticipates,during each of the Company’s costs will likely further increase,past three years. Inflation in Myanmar was 5.1%, 3.48% and there can be no assurance that8.63%, in calendar year 2017, 2018 and 2019, respectively. The government of Myanmar has also recently introduced significant increases in the Company will be able to increase its prices to an extent that would offsetminimum wage in Myanmar. In May 2018, the increaseminimum wage in expenses.Myanmar was raised by approximately 33%.

Exchange Rates

The Company transacts its business from its Hong Kong sales and purchasing offices with its vendors and customers primarily in U.S. dollars and, to a lesser extent, in Hong Kong dollars and Euros. As a result of acquiring a 75% interest in anthe assembly/manufacturing companyoperations that the Company conducts in Myanmar, the Company now also transacts an increasing amount of business in the Myanmar Kyat. However, the Company’s current turnover in kyat is not significant. While the Company faces a variety of risks associated with changes among the relative value of these currencies, because the Company pays all of its Shenzhen factory expenses in RMB, the changes in the value of the EuroRMB compared to the U.S. dollar was the most significant in the fiscal year ended March 31, 2016.2020. During the period from March 31, 20152019 to March 31, 2016,2020, the value of the EuroRMB compared to the U.S. dollar increaseddecreased by approximately 0.046 Euros, or over 4.3%7%. As a result, since most of the Company’s European customers pay the Company in U.S. dollars, the price of the Company’s products (when converted into, and expressed in Euros) decreased slightly in the last fiscal year. The Company does not believe that the minor fluctuations in the relative exchange rate of the euro compared to the U.S. dollar had a material impact on the demand for the Company’s products.

The Company makes its payments for its manufacturing facilities and factory workers in Shenzhen, China, in RMB. The value of the RMB compared to the U.S. dollar was lower on March 31, 20162020 compared to a year earlier. A decrease in the value of the RMB compared to the U.S. dollar decreases the Company’s operating costs (expressed in U.S. dollars). These currency rateLikewise, the Company makes its payments for its manufacturing facilities and factory workers in Yangon, Myanmar, in MMK. The value of the Kyat compared to the U.S. dollar was higher on March 31, 2020 compared to a year earlier. An increase in the value of the Kyat compared to the U.S. dollar increases the Company’s operating costs (expressed in U.S. dollars) in Myanmar. The weakening of the RMB compared to the U.S. dollar in fiscal 2020 decreased the Company’s costs in China in the fiscal year ended March 31, 2020, while the increase in the value of the Kyat increased the Company’s operating costs in Myanmar. Currency fluctuations will continue to affectin the future may have material impact on the results of the Company’s operations in China.operations.

Currency exchange rate fluctuations affect the Company’s operating costs, and also affect the price the Company receives for the products that it sells. Most of the Company’s net sales in fiscal 2020 were to Europe. In order to mitigate the currency exchange rate risks related to changes in the value of the dollar relative to the Euro, the Company has increasingly askedrequested its European customers to pay in U.S. dollars. Fordollars, and in fiscal 2016,2020, substantially all of the Company’s sales to its European customers were paid in U.S. dollars.did so. In addition, the Company has entered into agreements with certain of its larger European customers that permit ourthe Company’s prices to be adjusted every three months to account for currency fluctuations. However, the Company purchases materials from Europe, which purchases are paid in Euros. As the value

The fluctuation of the Euro has increased during the past fiscal year, the Company’s cost of such purchases has increased. The fluctuation ofRMB/U.S. dollar and the Euro/U.S. dollar exchange rates have, infor the past three years, resulted in significant currency exchange gains and losses. In fiscal 2016 and 2015,2020, the Company incurredrealized a currency exchange lossesgain of $21,000$7,000, compared to a currency exchange loss of $8,000 in fiscal 2019 and $125,000, respectively.an exchange gain of $63,000 in fiscal 2018.

The Company does not utilize any form of financial hedging or option instruments to limit its exposure to exchange rate or material price fluctuations and has no current intentions to engage in such activities in the future. Accordingly, material fluctuations in the exchange rates between the U.S. dollar and other currencies could have a material impact on the Company’s future results. As a result of the Company’s expansion into Myanmar, it will also be increasingly subject to the currency risks associated with the Myanmar Kyat (MMK), the official currency of that country.

Trend Information

The primary trend in fiscal 2020 is expected to be the impact of the COVID-19 pandemic on the operations of the Company and on the demand for products produced by the Company and the Company’s customers. Although the Company’s factories in both China and Myanmar have now reopened after being closed because of the COVID-19 outbreak, a recurrence of COVID-19 in either Shenzhen, China, or Yangon, Myanmar, could result in full or partial factory closures in the future. Any government actions taken to help mitigate the spread of the coronavirus, such as travel restrictions, quarantines and self-isolation, and forced closures of public area and businesses, could also negatively impact the operations of Company’s customer and suppliers, as well as the financial resources available to them. The decreases in overall business and financing activities resulting from COVID-19 are expected to have a negative effect on the Company’s businesses for an uncertain period of time. For further information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—The Company Faces On-Going Risks Related To The COVID-19 Outbreak.”

The other trend that is expected to continue in the current fiscal year ending March 31, 2016,is the Company believes that it will shiftincrease in operating costs, particularly the cost of labor, in both China and Myanmar. Due in part to the decreased birth rate and the increased affluence of Chinese workers, lower wage factory workers are more of its assembly operations, and possibly some of its manufacturing activities,difficult to Myanmarfind in China. As a result, in order to offset increases in the operating costs (particularly the high cost of labor) and to be ableaddress the shortage of workers in China, the Company has shifted most of its manual assembly and manufacturing activities to employ workers who are still willing to be employed in manufacturing facilities. As a result of the decreased birth rate and the increased affluence of Chinese workers, factory workers are more difficult to find in China.Myanmar. To date, the Myanmar subsidiary has been able to lower the overall cost of some of the products that itthe Company manufactures for its clients. The Company has been able to shift approximately one-half of its assembly operations to the Myanmar subsidiary. In fiscal 2016, allsubsidiary will also commence manufacturing components, thereby shifting a portion of the Company’s manufacturing functions were performedcomponent business from Shenzhen to Yangon, which will also result in Shenzhen, China. In ordera reduction of costs transporting components to shift more of the assembly operations and some of the manufacturing to Myanmar, the Company will have find additional customers and obtain the permission from additional existing customers to use the Myanmar facility for the assembly of those customers’ products. The Company currently is searching for other locations where it can establish a larger factory and warehouse for the Myanmar subsidiary. As the operations of the Myanmar assembly facility are further integrated with the Company’s operations, the Company expects that it will be able to reduce its overall manufacturing and assembly costs, which the Company believes will enable it to retain manufacturing orders that otherwise could move to other developing countries (or even move back to Europe to be manufactured in highly automated facilities). In addition,Myanmar. However, the Company believes that its lowermaterial increases in the cost structure will also attract additional orders from newof labor in Myanmar are possible in the near future. Worker strikes in 2018 in Myanmar and existing customers, whichgovernment imposed wage increases in Yangon have increased costs in Myanmar. Although these increased costs to date have mostly been offset by the depreciation in the value of the Kyat over the past few years, a continuation of increased wages and the recent appreciation in the value of the Kyat could increase its net sales and its profitability. Overmake the longer term, the Company believes that it will be able to shift somefuture profitability of its component manufacturing to the Myanmar subsidiary which will yield greater efficiencies and will further stabilize the Company’s overall cost of manufacturing.uncertain.

Other than as disclosed elsewhere in this Annual Report on Form 20-F, the Company is not aware of any trends, uncertainties, demands, commitments or events for the period from April 1, 20162020 to March 31, 20172021 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

Off-Balance Sheet Arrangements

The Company is not a party to off-balance sheet arrangements and does not engage in trading activities involving non-exchange traded contracts. In addition, the Company has no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of the Company’s assets.

Contractual Obligations

The following is a summary ofsummarizes the Company’s contractual obligations as of March 31, 2016:2019:

Recent issued accounting standards not yet adopted

In May 2014,June 2016, the FASB issued ASU 2016-13, Financial Accounting Standards Board (“FASB”) issued an accounting standard updateInstruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which outlines a single comprehensive modelis intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for entitiesfinancial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use in accountingjudgment to determine which loss estimation method is appropriate for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.their circumstances. The core principal of this new revenue recognition model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This update alsoASU requires enhanced disclosures regardingto help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the nature, amount, timing,credit quality and uncertaintyunderwriting standards of revenuean organization’s portfolio. These disclosures include qualitative and cash flows arisingquantitative requirements that provide additional information about the amounts recorded in the financial statements. In November 2018, this was further updated with the issuance of ASU 2018-19, which excludes operating leases from an entity’s contractsthe scope. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with customers. In August 2015,credit deterioration. For public business entities that are U.S. SEC filers, the FASB issued an accounting standard update which defers theASU is effective date of the new revenue recognition accounting guidance by one year, to annualfor fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption2019. The Company is permitted for annual and interim periods beginning after December 15, 2016. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment asin the process of evaluating the date of adoption. Management is currently assessing the potential impact of adoptingadoption of this guidance on the Group’sour consolidated financial statements.

In January 2015,2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies the subsequent measurement of goodwill by eliminating step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a new pronouncementreporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update also eliminates from U.S. GAAP the concept of an extraordinary item, which is an eventrequirements for any reporting unit with a zero or transactionnegative carrying amount to perform a qualitative assessment and, if it fails that is both unusual in nature and infrequently occurring. As a resultqualitative test, to perform step 2 of the amendment, angoodwill impairment test. An entity will no longer segregate an extraordinary item fromstill has the resultsoption to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update should be applied on a prospective basis. The nature of ordinary operations; separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or disclose income taxes and earnings-per-share data applicable to an extraordinary item.reason for the change in accounting principle should be disclosed upon transition. The guidanceupdate is effective for any annual or interim and fiscalsgoodwill impairment tests in fiscal years beginning after December 15, 2015.2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance should be applied retrospectively to all prior periods. TheCompany expects the adoption of thisthe new guidance iswill not expected to have a materialan impact on the Company’sits consolidated financial statements.

In July 2015,August 2018, the FASB issued an accounting standard update, which changes the measurement principle for inventories that is measured using other than last-in, first-out or the retail inventory method from the lower of cost or marketASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the lowerDisclosure Requirements for Fair Value Measurement,” which is part of cost and net realizable value. Net realizable value is defined bythe FASB as estimated selling pricesdisclosure framework project to improve the effectiveness of disclosures in the ordinary course of business, less reasonably predictable costs of completion, disposalnotes to the financial statements. The amendments in the new guidance remove, modify and transportation.add certain disclosure requirements related to fair value measurements covered in Topic 820, “Fair Value Measurement.” The guidancenew standard is effective for fiscal years, and interim and fiscalsperiods within those fiscal years, beginning after December 15, 2016,2019. Early adoption is permitted for either the entire standard or only the requirements that modify or eliminate the disclosure requirements, with early adoption permitted. The guidance should becertain requirements applied prospectively. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued an accounting standard update which simplifies balance sheet classification of deferred taxes. The guidance requires thatprospectively, and all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent. The guidance is effective for interim and fiscals years beginning after December 15, 2016, with early adoption permitted. The guidance can beother requirements applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The adoptionCompany is currently evaluating the impact of adopting this guidance is not expected to have a material impact on the Company’s consolidated financial statements.guidance.

In January 2016,October 2018, the FASB issued anASU No. 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities, which modifies the guidance related to indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interest. ASU 2018-17 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting standard update which improvesfor income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Thethe current guidance changes the measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value, and also amends certain disclosure requirements associated with the fair value of financial instruments.to promote consistent application among reporting entities. The guidance is effective for interim and fiscalsfiscal years beginning after December 15, 2017, with early adoption permitted for certain changes. The guidance should be applied as a cumulative-effect adjustment as of the date of adoption, except for the guidance related to equity securities without readily determinable fair values should be applied prospectively. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued an accounting standard update on leases, which amends various aspects of existing accounting guidance for leases. The guidance requires all lessees to recognize a lease liability2020, and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for interim and fiscalsperiods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The guidance should beUpon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied aton a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest period presented using a modified retrospective approach. Managementfiscal year of adoption. The Company is currently assessingevaluating the potential impact of adopting this guidanceupdate will have on the Company’s consolidatedour financial statements.

Critical Accounting Policies and Estimates

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to bad and doubtful debts. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. For further discussion of our significant accounting policies, refer to Note 2 “Summary of Significant Accounting Policies” of our consolidated financial statements in Item 18.

Revenue Recognition

Effective with the adoption of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” and the associated ASUs (collectively, “Topic 606”) on April 1, 2018, we recognize revenue when our customer obtains control of promised goods in an amount that reflects the consideration which we expects to receive in exchange for those goods. To determine revenue recognition –for the arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. we adopted the ASU on April 1, 2018 for all revenue contracts with customers using the modified retrospective approach, while prior periods’ amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under ASC 605.

Product revenue recognition. The revenue from contracts with customers is derived from product revenue principally from the sales of metal stamping and mechanical OEM and electric OEM products directly to other consumer electronics product manufacturers. The Company recognizes revenue from the sale of products, when allsells goods to its customers under sales contracts or by purchase orders. The Company has determined there to is one performance obligation for each of the following conditionssales contracts and purchase orders. The performance obligations are met:

Revenue from sales of productsconsidered to be met and revenue is recognized when the titlecustomer obtains control of the goods. The Company has two major goods delivery channels:

(1) Delivering goods to customers’ predetermined location; the Company has satisfied the contracts’ performance obligations when the goods have been delivered and relevant shipping documents have been collected by us; and

(2) Picking up goods by customers in our warehouse; the Company has satisfied the contracts’ performance obligations when the goods have been picked up and the acceptance document has been signed by the customers.

The Company did not recognize any revenue from contracts with customers for performance obligations satisfied overtime during the year ended March 31, 2019. Accordingly, the timing of revenue recognition is passednot impacted by the new standard.

The transaction price is generally in the form of a fixed price which is agreed with the customer at contract inception. The transaction price is recorded net of sales return, surcharges and value-added tax of gross sales. We have allocated the transaction price to each performance obligation based on the sales contracts and purchase orders.

The Company would request a deposit from customers upon receiving the purchase order and issue bills to customers upon shipmenttransfer control of goods and when collectability is reasonably assured.relevant acceptance documents have been collected. Customers’ deposits would be settled part of the outstanding bill upon receiving an acknowledgement from customers. For the remaining balance of outstanding bills, Customers are required to pay over an agreed upon credit period, usually between 30 to 75 days.

Return Rights. The Company does not provide its customers with the right of return (except for quality)product quality issue) or priceproduction protection. There are no customerCustomer is required to perform product quality check before acceptance provisions associated withof goods delivery. We did not recognize for any refund liability according to the Company’s products. All sales are basedproduct return on firm customer orders with fixed terms and conditions, which generally cannot be modified.the consolidated balance sheets.

AllowanceValue-added taxes and surcharges. The Company presents revenue net of VAT and surcharges incurred. The surcharge is sales related taxes representing the City Maintenance and Construction Tax and Education Surtax. The Company incurs expenses or pays fees to external delivery service providers, respectively, and records such expenses and fees like shipping and handling expenses. Total VAT and surcharges paid by us during the years ended March 31, 2018, 2019 and 2020 amounted to $57,000, $77,000 and $90,000 respectively.

Principals vs. agent accounting. The Company records all product revenue on a gross basis. To determine whether we are agent or principal in the sale of products, we consider the following indicators: we are primarily responsible for doubtful debtsfulfilling the promise to provide the specified goods or services, is often based on complex judgmentssubject to inventory risks before the specified goods have been transferred to a customer or after transfer of control to the customers, and assumptions thathas discretion in establishing the price of the specified goods.

Disaggregation of revenue. The Company disaggregates its revenue from different types of contracts with customers by principal product categories, as it believes to be reasonable but are inherently uncertainit best depicts the nature, amount, timing and unpredictable. Actual results could differuncertainty of its revenue and cash flows. The Company did not recognize any revenue in the reporting period from those estimates.performance obligation satisfied (or partially satisfied) during the year ended March 31, 2017 and 2018. See note 19 for product revenues by segment.

Contract balances. The Company did not recognize any contract asset as of March 31, 2019 and March 31, 2020. The timing between the recognition of revenue and receipt of payment is not significant.

The Company’s contract liabilities consist of deposits received from customers. As of March 31, 2019 and March 31, 2020, the balances of the contract liabilities are $25,000 and $39,000, including deposits received from customers. All contract liabilities at the beginning of the year ended March 31, 2020 were recognized as revenue during the year ended March 31, 2020 and all contract liabilities as of year ended March 31, 2020 are expected to be realized in the following year.

In periods prior to the adoption of Topic 606, our accounting policy was to recognize revenue when persuasive evidence of an arrangement exists, products are delivered, the price to the buyer is fixed or determinable and collectability is reasonably assured.

Impairment of goodwill

Goodwill is the excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business combination. Goodwill is not amortized but rather tested for impairment at least annually. The Company evaluatestests goodwill for impairment in March of each fiscal year. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would be more likely than not reduce the recoverabilityfair value of the reporting unit below its carrying amount. Specifically, goodwill impairment is determined using a two-step process. Step 1 compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and step 2 will not be required. If the carrying amount of a reporting unit exceeds its fair value, step 2 compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in step 1 to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized in for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component).

The gross amount of goodwill and accumulated impairment losses as of March 31, 2019 and 2020 are as follows:

The balance represented the carrying value of Kayser Myanmar Manufacturing Company Ltd. (“Kayser Myanmar”) and had an aggregate carrying amount of $77,000 as of year ended March 31, 2017 and 2018. During the year ended March 31, 2019, we have tested goodwill for impairment and estimated the fair value of Kayser Myanmar by using the income approach in step 1 of the impairment test. Based on the quantitative test, it was determined the fair value was more likely than not below its carrying amount. Management has identified several determinative events and factors, which has led to the above conclusion, included: (1) the financial result of Kayser Myanmar was below management’s expectations due to higher than expected supply chain cost and increased competition, (2) the fiscal year 2020 annual budget operating plan in March 31, 2019, which provided additional insights into expectations and priorities for the coming years, such as lower growth and margin expectations and (3) increased and prolonged economic and regulatory uncertainty in the global economics as of March 31, 2019. Management has compared the implied fair value of Kayser Myanmar’s goodwill to the carrying value of the goodwill which is step 2 of the two-step impairment test. An impairment loss was recognized for the excess in the carrying value of goodwill over the implied fair value of goodwill.

As a result of the two-step impairment test, we have recognized a $77,000 impairment loss of Kayser Myanmar goodwill in selling, general and administrative expenses during the year ended March 31, 2019, due to margin and revenue from contracts from customers declines as well as the lower growth and margin expectation. No impairment expenses were recognized during the year ended March 31, 2020 and 2018.

Provision for doubtful receivables

Accounts receivable primarily represent amounts due from customers, that are typically non-interest bearing and are initially recorded at the invoiced amount. We review its accounts receivable primarilyon a periodic basis and records allowances when there is a doubt as to the collectability of the balance. In evaluating the collectability of the accounts receivable balances, the Company considers various factors, including the age of the balances, customer specific facts and economic conditions. Accounts receivable balances are write-down against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

Provision for uncollectible loan receivable

Loan receivables mainly represent the loans to a non-controlling interest and a director of a subsidiary in Myanmar. The loan periods granted by us to the staff amounts to 36 months and carries fixed interest rate of 8% per annum. The loan receivables, both principal and interest, is expected to be repaid by the agreed to settlement date. The loan receivables are stated at the historical carrying amount net of allowance for uncollectible loan receivables. The Company established an allowance for uncollectible loan receivable based on the ages of receivablesestimates, historical experience and other factors surrounding the credit risksrisk of specific customers. Uncollectible loan receivables are written off when the Company has determined that the balance will not be collected. The Company regularly analyses its customer accounts,loan receivables expected to be settled more than one year as of balance sheet date are classified into other long-term assets on the consolidated balance sheets. No impairment was made on the loan receivables for the years ended March 31, 2018, 2019 and when it becomes aware2020.

Inventories written-down

Inventories are stated at the lower of a specific customer’s inability to meet its financial obligationscost determined by the first-in-first-out method, or market value. Work-in-progress and finished goods consist of raw materials, direct labor and overheads associated with the manufacturing process. Write-down of potential obsolete or slow-moving inventories is recorded based on management’s assumptions about future demands and market conditions.

Impairment or disposal of long-lived assets (other than goodwill)

We reviewed our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the Company, such as insum of the case of bankruptcy filings or deterioration inestimated undiscounted future cash flows and the customer’s operating results or financial positions,eventual disposition. Management would estimate the Company records a reserve for bad debtsfuture cash flow used to reduce the related receivables to the amount that it reasonably believes is collectible.

If circumstances related to specific customers changes, the Company’s estimates oftest the recoverability of receivablesthe asset included the budgeted cash inflows less associated cash outflows, which are directly associated with the result of use. The estimation should exclude the interest charges which will be further adjusted. Inrecognized as an expense when incurred. Management would consider all available evidence during the event that accounts receivable become uncollectible,estimation process, to ensure the estimated budget would be the most possible outcomes. If the sum of the expected undiscounted cashflow were to be less than the carrying amount of the assets, the Company records additional allowanceswould recognize an impairment loss based on the fair value of the assets. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses.

During the years ended 2020, 2019 and 2018, we have reviewed the long-lived assets for impairment, since there are serval indicative events and factors identified, including (1) significant adverse changes in the business climate, (2) current-period operating and cash flow losses, and (3) changes in production plan by shifting certain production lines from Shenzhen to such receivables.Myanmar. Management has compared the carrying value of the long-lived asset to the estimated undiscounted operating cash flow based on the above factors.

As a result of the comparison, management has identified the sum of expected undiscounted cashflow of multiple types of machinery and equipment are more likely than not below their fair value. We have recognized an impairment of long-lived assets amounted to $113,000, $233,000 and $nil during the years ended March 31, 2018, 2019 and 2020. The impairment has been recorded in cost of sales and selling, general and administrative expenses, based on the nature of the impaired long-lived assets.

Leases

On April 1, 2019, we adopted Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with its historical accounting under Topic 840.

We elected the package of practical expedients permitted under the transition guidance, which allowed it to carry forward its historical lease classification, its assessment on whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. We also elected to combine its lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.

Upon adoption, we recognized total ROU assets of $2,184,000 with corresponding liabilities of $1,275,000 on the consolidated balance sheets. All leases are classified as operating leases. For the 50-year lease for a manufacturing complex in Yangon, Myanmar, the Company has prepaid $950,000 under the lease, or approximately 12 years of rental payments. The ROU assets include adjustments for prepayments and accrued lease payments. The adoption of the new lease standard does not have significant impact on the consolidated statements of comprehensive income and cash flows and there was no adjustment to the beginning retained earnings on April 1, 2019.

Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of its leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise such options.

Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and non-current operating lease liabilities, on the consolidated balance sheets.

Item 6. Directors, Senior Management and Employees

Directors and Executive Officers

The Directors and executive officers of the Company as of June 29, 2016July 31, 2020 are listed below.

The Directors hold office until their term has expired and they are re-elected at an annual meeting of shareholders. The Company’s Amended and Restated Memorandum and Articles of Association provide that the Board of Directors is divided into three classes of directors with staggered terms of office. At each annual meeting of shareholders, the members of one class of directors will be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election, and until their successors have been duly elected and qualified. The next annual meeting of shareholders is currently scheduled to be held on August 15, 2016.October 8, 2020. At that meeting, the terms of one class of directors (consisting of Roland W. Kohl, Tiko AharonovUri Bernhard Oppenheimer and Irene Wong Ping Yim)Dirk Hermann) will expire, and nominees for that class will be nominated elected to hold office for a three-year term expiring at the 20192023 annual meeting.

As a foreign private issuer organized under the law of the British Virgin Islands, the Company may follow its home company practice in lieu of NASDAQ’s Marketplace Rule 5605(b)(1) requiring the independence of a majority of our directors. During the year ended March 31, 20162020 and continuing to date, the composition of the Board of Director has consisted of a majority of directors deemed “independent” under that Rule.

Roland W. Kohl. Mr. Kohl was the founder of the Company and has been its Chief Executive Officer since its inception in 1990. He has been a Director of the Company since March 1, 1995. He has overall responsibility for the day-to-day operations of the Company and its subsidiaries. Prior to forming the Company, Mr. Kohl was the Managing Director of Dialbright Company Limited, a camera manufacturer located in China. Mr. Kohl received a degree in mechanical engineering and has over twenty year’syears’ experience in managing factories and manufacturing operations in China. Mr. Kohl is a German national and resides in Hong Kong.

Holger WillRingo Tsang. Mr. Will has been employed with the Company since 1996 andTsang was appointed as the Company’s Chief Operating Officer effective May 1, 2010.in November 2017. Mr. Will started withTsang joined the Company in March 2009 as a Production consultantEngineer and was promoted to oneChief Technology Officer in 2010. Since becoming Chief Technology Officer, Mr. Tsang has been in charge of the Company’s subsidiariesengineering department, its tool shop, its Computer Numerical Control (CNC) tooling system, and eventually became the Production Managerits automation and information technologies. Mr. Tsang has a Bachelor of that subsidiary. In 2000, Mr. Will became the General ManagerScience degree in mechanical engineering, and a Master’s Degree in each of Kayser Technik Ltd., the Company’s marketing arm to German customers. As Chief Operating Officer, Mr. Will now is involved in all of the Company’s operations.Business Administration, Information Systems, and Professional Accounting.

Alan Chan. Mr. Chan was appointed as the Company’s Chief Financial Officer and Secretary in September 2010. From June 2009 until he joined the Company, Mr. Chan served as chief financial officer for a joint venture in China with Laureate Education Group. He previously served as vice president and chief financial officer for DeCoro, an Italian sofa manufacturer with two facilities in Shenzhen, and as financial controller for San Miguel Shunde Brewery Co. Ltd., a foreign joint venture engaged in the manufacturing and sale of beer products for China and overseas markets. He also served as financial controller for Hua Yang Printing Holdings Co. Ltd., a manufacturer of children’s paper products. Mr. Chan began his professional career as an accountant with Nelson Wheeler, an Australian CPA firm, and subsequently with PricewaterhouseCoopers —-- formerly Coopers and Lybrand. Mr. Chan earned a Master of Arts degree in accounting from Curtin University in Australia and a Bachelor of Arts degree from the University of Lancaster in the United Kingdom.

Tiko Aharonov. Mr. Aharonov has been a Director of the Company since its inception in 1990 and was a General Manager of the Company’s camera operations from 1998 to 2004. Until the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as the General Manager of the Bulgarian operations. He was a bank manager for a leading Israeli commercial and retail bank from 1969 to 1989 and has operated his own real estate and investment company for high net worth individuals desiring to invest in real estate in Israel. Mr. Aharonov also represents investors in real estate in Bulgaria.

Uri Bernhard Oppenheimer. Mr. Oppenheimer was elected to the Board of Directors in July 2005. Mr. Oppenheimer is founder, managing director and the majority owner of U.B. Oppenheimer GmbH in Germany and MIG Germany GmbH in Germany.

Shlomo Tamir. Mr. Tamir was elected to the Board of Directors in July 2005. Mr. Tamir worked with Taman/Israel Aircraft Industry from 1969 until his retirement in 2013. While at Taman/Israel Aircraft Industry, he held various positions, including Director of Product Assurance, Program Manager, and Group of Programs Manager.

Kevin Yang Kuang Yu.Mr. Yang was elected to the Board of Directors in July 2005. From 2004 until his retirement in 2013, Mr. Yang was the China-USA Director of Holt Asia LLC (now owned by Chesta Co., Inc.) in the U.S. Prior thereto, from 2000 to May 2003, Mr. Yang set up and managed a factory in Shanghai for CHT Co., Limited ( now owned by Chesta Co., Inc.) and controlled and managed other manufacturing facilities in China. Mr. Yang has also been involved with the trading companies that were engaged in exporting products to the US.

Irene Wong Ping Yim.Ms. Wong was elected to the Board of Directors in July 2005. For the pastover ten years, Ms Wong was the Chief Accountant of CNIM Hong Kong Ltd. From 1994 to 2001, she was the Accounting Manager of Highway Holdings. MsMs. Wong graduated from Deakin University with a master degreeMaster’s Degree in Business Administration. She is currently a fellow member of the Association of Chartered Certified Accountant and a member of Hong Kong Institute of Certified Public Accountants.

Brian Geary. Mr. Geary was appointed to the Board of Directors in December 2005. Mr. Geary has since 2002 been a director of LMI Aerospace, a public company that manufactures components, assemblies, and kits for the aerospace, defense, and technology industries. From 1978 until 2002, Mr. Geary was the President and owner Versaform Corp. and Versaform Canada, two companies that were sold to LMI Aerospace in 2002.

George Leung Wing Chan. Mr. Leung was appointed to the Board of Directors in December 2005. Since 2004, Mr. Leung has been a management consultant. Prior thereto, from 1995 to 2004, he was the Managing Director/Vice President of Lucky Metal & Plastic Mfg. Co., Ltd.

ThereHeiko Sonnekalb. Mr. Sonnekalb was appointed to the Board of Directors on April 1, 2020. Mr. Sonnekalb currently serves as the chief executive officer of Dr. Arnold Schaefer GmbH, a German holding company, Lakal GmbH, a German manufacturer of shutter blinds, and Bartz Werke GmbH, a German casting foundry and heat and pipe technology company. In addition, he serves as a director of Germany-based Herwick AG and Stadtwerke Voelklingen Vertrieb GmbH. Mr. Sonnekalb also is a committee member of both the IHK Saarland Industrial Research and Foreign Trade Committee and the DIHK Berlin Industrial Research and Foreign Trade Committee. He also serves as a judge on the labor court in Saarbruecken, Germany. Mr. Sonnekalb received a degree in Business Administration from the University of Fulda, Germany, in 1997.

Dirk Hermann, Ph.D. Dr. Hermann was appointed to the Board of Directors on April 1, 2020. Dr. Hermann previously served as a member of the Company’s Board of Directors from January 2003 until August 2010. Dr. Hermann currently serves as chief executive officer of Saarland Feuerversicherung AG and Saarland Lebensversicherung AG, two German insurance companies. He joined Bayerische Versicherungskammer in 2012, parent company of Saarland Insurance Group. Prior thereto, he held a variety of positions with Allianz Versicherungen AG, including a tenure as a member of the management board. Mr. Hermann currently also serves on the board of two German banks, Landesbank Saar and Sparkassenverband, and on the board the Consul Investment company. Dr. Hermann graduated from the University of Konstanz in Germany with a bachelor’s degree in business administration. He also holds a master’s degree in business administration from the University of St. Gallen in Switzerland. He earned a Ph.D. degree in business administration from the University of Leipzig, in Germany.

Dr. Hermann is the brother-in-law of Roland Kohl, the Chairman, President and Chief Executive Officer of the Company. Other than Mr. Hermann’s relationship with Mr. Kohl, there are no other family relationshiprelationships between any of the above-named officers, directors or employees. To the Company’s knowledge, no arrangement or understanding exists between any such director and executive officer and any major shareholder, customer, supplier or other party pursuant to which any director or executive officer was elected as a director or executive officer of the Company.

Compensation of Directors and Officers

The aggregate amount of compensation (including non-cash benefits)benefits, but excluding equity compensation) paid by the Company and its subsidiaries during the year endingended on March 31, 20162020 to alldirectors on the Company’s Board of the directorsDirectors and officers, listed above, as a group (10(ten people), for services rendered to the Company and its subsidiaries in all capacities was approximately $825,000,$730,000, excluding amounts paid by the Company as dividends to directors and executive officers in their capacity as shareholders of the Company. In addition to the foregoing compensation, on August 8, 2019 non-qualified stock options for the purchase of 250,000 shares were granted to the seven directors on the Company’s Board of Directors under the Company’s 2010 Stock Option And Restricted Stock Plan. Roland Kohl, the Company’s Chief Executive Officer and Chairman of the Board, received an option to purchase 60,000 of these option shares. The options are fully vested, have a five-year term, and an exercise price of $1.97 (the closing price of the Company’s common stock on August 7, 2019).

Mr. Kohl’s prior employment agreement expired in March 2019. Mr. Kohl has entered into a new employment agreement expireson substantially the same terms as the prior agreement, except that under his new agreement, his compensation will be reduced by one-half from his initial base salary following any fiscal quarter in March 2019. Aswhich the Company has a net quarterly loss, which salary reduction will remain in effect until the Company has net income in any subsequent quarter. Accordingly, in the event that the Company has a quarterly loss, Mr. Kohl’s annual base salary for the following quarter will be reduced by one-half. The forfeited salary will not be recouped if/when the Company has a profitable fiscal quarter. Two of the Company’s other senior managers have also agreed to voluntarily reduce their base salaries by 50% in the same manner as Mr. Kohl. In response to the impact of the COVID-19 on the Company’s operations, Mr. Kohl has previously done in fiscal 2014 and 2015, inthese two other managers have recently voluntarily reduced their salaries for three months, and all of the fiscal year ended March 31, 2016 Mr. Kohl once again voluntarilyCompany’s Hong Kong-based engineers and managers have likewise agreed to temporarily reduce hisa three-month 20% salary by 23%. reduction.

Mr. Kohl, and the fivefour other senior managers of the Company, are entitled to receive cash payments equal to three times their annual salary in the event of a change of control of the Company without the approval of the Board of Directors.

During the past fiscal year, the Company paid each of the following non-executive director (Tiko Aharonov, Uri Bernhard Oppenheimer, Shlomo Tamir, Kevin Yang Kuang Yu, Irene Wong Ping Yim, Brian Geary, and George Leung Wing Chan) an annual director’s fee of $12,000, and reimbursed them for their reasonable expenses incurred in connection with their services as directors.directors: Tiko Aharonov, Uri Bernhard Oppenheimer, Kevin Yang Kuang Yu, Irene Wong Ping Yim, and George Leung Wing Chan. Brian Geary did not attend all meetings in 2019 and thereafter resigned in December 2019 and, accordingly, was not compensated in fiscal 2020. Heiko Sonnekalb and Dirk Hermann did not become directors until April 1, 2020 and, therefore, did not receive any compensation in fiscal 2020. In addition, the Chairman of any committee is paid an additional fee of $2,000 per year, and the members of a committee are paid an additional fee of $2,000 per year for each committee on which they serve.

Options ofFor Directors and Senior Management

During the past few years,On June 26, 2010, the Company has not granted anyadopted the “2010 Stock Option And Restricted Stock Plan” (the “2010 Option Plan”) under which the Company was authorized to grant options, and to issue restricted shares, for a total of its officers or directors any options to purchase Common Shares.600,000 shares. The 2010 Option Plan expired on June 26, 2020. As a result,of July 31, 2020, awards for all 600,000 shares available for grant under the 2010 Stock Option Plan have been granted. The awards outstanding as of MarchJuly 31, 20162020 consisted of the following:

None of the shares underlying the options issued to the 20 employees and the eight directors have been registered. Accordingly, none of the Company’s directorsshares can be sold for at least six months after the applicable option has been exercised by the employee or executive officers owned anydirector.

The recipients of the 175,000 restricted shares and the 160,000 stock options.options entered into voting agreements pursuant to which the holders agreed to vote their Company shares in favor of management’s proposals.

For additional information regarding the share ownership in the Company by the Company’s directors, executive officers, and principal shareholders is set forth in Item 7, “Major Shareholders and Related Party Transactions,” below.

In 2010 the Company adopted the “2010 Stock Option And Restricted Stock Plan” (the “2010 Option Plan”). Under the 2010 Option Plan, the Company is authorized to grant options, and to issue restricted shares, for a total of 600,000 shares. The 2010 Option Plan is administered by the Compensation Committee appointed by the Board, which determines the terms of the options granted, including the exercise price, the number of Common Shares subject to the option and the option’s exercisability. The exercise price of options granted to participants who are not subject to taxation in the United States may be less than the fair market value of the Common Shares on the date of grant. Unless otherwise specified by the Compensation Committee, the maximum term of options granted under the 2010 Option Plan is five years. As of March 31, 2015, no options had been granted under the 2010 Option Plan.

Board Practices

Directors of the Company are elected at the Company’s annual meeting of shareholders and serve until their successors take office, or until their death, resignation or removal. The Company’s Amended and Restated Memorandum and Articles of Association provide for the classification of our Board of Directors into three classes of directors with staggered terms of office. At each annual meeting, one class of directors (consisting of either two or three directors) will be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election and until their successors have been duly elected and qualified (i.e. directors will be elected for three year terms).

The Company generally holds its annual meeting of shareholders within 90 days after the filing of its Annual Report on Form 20-F with the Commission. Executive officers serve at the pleasure of the Board of Directors of the Company. As of the date of this Annual Report, there are no agreements with any of the Directors that would provide the Directors with any benefits upon termination of employment. However, in the event of a change of control without the approval of the Board of Directors, Mr. Kohl, and the fivefour other senior managers of the Company, are entitled to receive cash payments equal to three times their annual salary.

Audit CommitteeCommittee. During fiscal 2016,2020, the members of the Audit Committee of the Board of Directors were Irene Wong Ping Yim, Uri Bernhard Oppenheimer, Shlomo Tamir, George Leung Wing Chan, and Tiko Aharonov. The Audit Committee reviews, acts on and reports to the Board of Directors on various auditing and accounting matters, including the selection of the Company’s auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of the independent auditors, any additional services to be provided by the auditors, and the Company’s accounting practices. Each of these individuals is a non-employee director and is independent as defined under the Nasdaq Stock Market’s listing standards, and each has significant knowledge of financial matters (one of the members has an advanced degree in business administration). Ms. Wong has been designated by the Board as the “audit committee financial expert” as defined under Item 401(h)(2) of Regulation S-K of the Securities Exchange Act of 1934, as amended. The Audit Committee met three timestwice during fiscal 2016.2020. The Audit Committee operates under a formal charter that governs its duties and conduct.

Compensation CommitteeCommittee. During the past fiscal year, the Compensation Committee of the Board of Directors consisted of Shlomo Tamir, Uri Bernhard Oppenheimer, Brian Geary and Tiko Aharonov.Aharonov (Brian Geary served on the Compensation Committee until his resignation on December 31, 2019). The Compensation Committee administers the Company’s 2010 Stock Option And Restricted Stock Plan and establishes the salaries and incentive compensation of the executive officers of the Company.

All of the Company’s directors (there currently are eight directors, sevensix of whom are independent) participate in the selection of director nominees. Accordingly, the Board of Directors has not yet found it necessary to have a separate Nominating Committee. The Board of Directors has not established any specific minimum qualifications for director candidates or any specific qualities or skills that a candidate must possess in order to be considered qualified to be nominated as a director. Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing board composition. In making its nominations, the Board of Directors generally will consider, among other things, an individual’s business experience, industry experience, financial background, breadth of knowledge about issues affecting our company, time available for meetings and consultation regarding company matters and other particular skills and experience possessed by the individual.

Option and Restricted Stock Plans

On June 26, 2019, the Company has adopted the 2010 Stock Option And Restricted Stock Plan (the “2010 Option Plan”) that covered 600,000 shares of the Common Shares. The Option Plan provided for the grant of options to purchase Common Shares to employees, officers, directors and consultants of the Company and for the grant of shares of restricted stock. The 2010 Option Plan expired on June 26, 2020. On the date that the 2010 Option Plan expired on June 26, 2020, awards for all 600,000 shares available for grant under the 2010 Stock Option Plan have been granted, and no additional shares were available for grant under the 2020 Option Plan.

Because the 2010 Option Plan was about to expire, on June 20, 2020, the Company adopted the 2020 Stock Option And Restricted Stock Plan (the “2020 Option Plan”). Under the new option and restricted stock plan, the Company is authorized to grant options, and to issue restricted shares, for a total of 500,000 shares. To date, no options have been granted under the 2020 Option Plan. The adoption of the 2020 Stock Option Plan is subject to the approval of the Company’s shareholders and will not become effective unless approved by the shareholders. Accordingly, the Company intends to submit the 2020 Option Plan to the shareholders for their approval at the 2020 annual meeting of shareholders to be held later in 2020.

Employees

As of June 29, 2016,the end of July 2020, the Company had a total of 304206 persons who were working on a full-time basis for the Company. All of the Company’s employees are employed by the Company’s various wholly-owned subsidiaries. Of the foregoing workers and employees, as of June 29, 2016, 6889 were engaged in the administration of the Company (including marketing, purchasing, personal, book keeping, import/export, material control, shipping, security), engineering, design and development, tool and fixture production, and teaching at the Company’s technical training school, and the balance, 236109 employees, were engaged in manufacturing, quality assurance, warehousing and other supporting functions.

In addition to the employees hired by the Company (through(directly or through its 75% ownedwholly-owned subsidiaries), Kayser Myanmar, the Myanmar based company in which the Company currently owns a 75%an 84% stake, employed a total of 9799 employees as of MarchJuly 31, 2016.2020.

The number of workers employed by the Company fluctuates largely due to the availability of workers and the time of year, and the Company occasionally experiences temporary shortages of workers. From time to time, the availability of workers has been adversely affected because of the high demand for such workers in Shenzhen due to transportation difficulties in bringing workers to Shenzhen, and due to seasonal demands on labor such as harvesting when the mainly rural-based laborers are required to return to their village. In addition, most workers are unavailable during the traditional Chinese holidays, including the Chinese New Year’s holiday. Due to these factors, the Company experiences high turnover of employees annually.

Since the enactment of the new Labor Contract Law that became effective on January 1, 2008, Chinese workers are allowed to join an official trade union. However, to the Company’s knowledge, none of the Company’s employees have joined labor unions or become a party to a collective bargaining agreement. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008. That law formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. The law also requires employers in China are required to conclude an “open-ended employment contract” with any employee who either has worked for the employer for 10 years or more or has had two consecutive fixed-term contracts. An “open-ended employment contract” is in effect a lifetime, permanent contract, which is terminable only in specified circumstances, such as a material breach of the employer’s rules and regulations, or for a serious dereliction of duty. Under the new law, reducing the Company’s workforce by 20% or more may occur only under specified circumstances. All of these new labor provisions have significantly increased the Company’s cost of labor and have restricted certain of the Company’s operating procedures. Partly in response to this labor law, the Company has been gradually reducing its workforce in China by moving some of the manual labor jobs to its Myanmar facility and by increasing the amount of automation used in its manufacturing processes and has been reducing the size of its workforce. In addition, in order to partially offset the increasing labor costs in Shenzhen, China, the Company acquired a 75% interest in Kayser Myanmar and has transferred approximately one-half of its assembly operations to the Myanmar assembly facility that is owned by the Myanmar company.processes.

The Company believes that its relations with its administrative employees in Hong Kong and with its managers and technicians in China are good. However, mostmany employees engaged in manufacturing, packaging and shipping at the Company’s Shenzhen, China, factory are seasonal workers who frequently change jobs at least once a year.jobs. Accordingly, the Company’s relationship with these transient workers depends is short-term and superficial and depends on the labor market in Shenzhen in general. During any operating year, because of the transient nature of many of its workers (most workers(many of whom resign during the year and new workers have to be hired)year), the Company will normally have a high turnover rate of over 100% for its workers (excluding managers, technicians and Hong Kong employees).rate. As a result, the Company cannot guarantee that its workers will not strike in the future or otherwise leave and accept employment elsewhere.

Myanmar has adopted comprehensive labor laws that now allow employees to unionize. However, none of the employees currently employed at the Myanmar facility belong to a union. As in China, many of the workers at the Company’s Myanmar facility are seasonal workers who frequently change jobs. As a result, Kayser Myanmar typically only has a short-term relationship with these employees.

Share Ownership

The share ownership of the Company’s officers and directors is listed under Item 7 of this Annual Report.

Item 7. Major Shareholders and Related Party Transactions

Major Shareholders. The Company is not directly or indirectly owned or controlled by any other corporation or any foreign government. The following table sets forth, as of June 29, 2016,August 17, 2020, certain information with respect to the beneficial ownership of the Company’s Common Shares by each person (i) who is an executive officer or director of the Company, or (ii) known by the Company to own beneficially more than 5% of the outstanding Common Shares outstanding as of such date.date, and (iii) the officers and directors of the Company as a group.