{"url_path":"/sec/hiho/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 Operating and Financial Review and Prospects**","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-07-14","source_url":"https://www.sec.gov/Archives/edgar/data/1026785/0001213900-26-077959-index.html","accession_number":"0001213900-26-077959","cik":"0001026785","ticker":"HIHO","issuer_name":"HIGHWAY HOLDINGS LTD","edgar_url":"https://www.sec.gov/Archives/edgar/data/1026785/0001213900-26-077959-index.html","primary_entity_key":"0001026785","primary_entity_name":"HIGHWAY HOLDINGS LTD"},"word_count":6650,"has_tables":true,"body_markdown":"** **\n\n**Item 5. Operating and Financial Review and Prospects**\n\n** **\n\n**Overview**\n\n \n\nThe Company’s net sales during the past two\nyears were derived primarily from the manufacture and sale of metal, plastic and electronic parts and components for its international\nclients. For accounting purposes, the Company historically treated its (i) metal stamping and mechanical OEM manufacturing operations\nand (ii) electronic OEM manufacturing operations as two separate business segments. Beginning in fiscal 2026, the Company reports three\nsegments, consisting of the metal stamping and mechanical OEM segment, the electric OEM segment, and an Other Services segment that includes\nthe operations of SilverAge.\n\n \n\nThe Company is not taxed in the British Virgin\nIslands, the state of its formation.\n\n \n\nThe location of the Company’s administrative\noffices for its operating subsidiaries in Hong Kong enables the Company to pay low rates of income tax due to Hong Kong’s tax structure.\nThe Company’s income arising from its Hong Kong operations or derived from its operations within Hong Kong is subject to Hong Kong\nProfits Tax. As of March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 that introduces\nthe two-tiered profits tax rates regime. Under the two-tiered profits tax rates regime, the first HK$2 million (equivalent to U.S. $257,000)\nof profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%. The profits of\ngroup entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5%. The Company\nhas selected Kayser Limited as the qualified entity under two-tiered profit tax rates regime and the remaining Hong Kong based subsidiaries\nare not qualifying under the regime and continue to be taxed at 16.5%. There are no taxes on dividends or capital gains in Hong Kong.\n\n \n\nNissin PRC, the Company’s subsidiary that\nis established and operates in China, is subject to the uniform income tax rate of 25% in China. In March 2023, the State Taxation Administration\nof PRC issued an announcement regarding the requirements to qualify as a “small-size, low profit” enterprise. Nissin PRC satisfies\nthese requirements. Starting from January 1, 2023 and continuing until December 31, 2027, Nissin PRC will be eligible for a preferential\nincome tax rate of 5% for the first 3 million RMB assessable profit.\n\n \n\nKayser Myanmar, the Company’s 84%-owned Myanmar\nsubsidiary, is subject to the tax provisions applicable companies operating in Myanmar and is subject to income tax at a rate of 22%.\nKayser Myanmar is able to import many of the raw materials and parts that it uses to manufacture its export products free of taxes and\nfree of duties under an import/export license that requires Kayser Myanmar to use a bonded warehouse.\n\n \n\nThe Company is not subject to U.S. taxes.\n\n \n\nThe Company owns 84% of Kayser Myanmar. Accordingly,\nthe operations of Kayser Myanmar are included in the Company’s consolidated financial statements (and in the below discussion of\nthe Results of Operations) for the fiscal years ended March 31, 2026 and 2025. In addition, following the Company’s acquisition\nof a 51% interest in Regent-Feinbau Adermann GmbH on March 1 2026 and the Company’s formation of SilverAge during fiscal 2026, the\nresults of Regent-Feinbau and SilverAge are included in the Company’s consolidated financial statements from, respectively, the\ndate of acquisition and the date of formation.\n\n \n\nNet sales to customers by geographic area are generally\ndetermined by the physical locations of the customers. For example, if the products are delivered to a customer in China or Hong Kong,\nthe sales are recorded as generated in Hong Kong and China; if the customer directs the Company to ship its products to Europe, the sales\nare recorded as sold in Europe.\n\n** **\n\n34\n\n \n\n** **\n\n**Results of Operations**\n\n* *\n\n*General*\n\n \n\nDuring the past three years discussed below, the\nCompany’s revenues were derived primarily from the manufacture and sale of metal, plastic and electronic products, parts and components.\nFor the fiscal year ended March 31, 2026, net sales decreased by 35% from the fiscal year ended March 31, 2025. The decrease in net sales\nin fiscal 2026 is mainly owing to a general decrease in demand for the Company’s products in Europe due to an uncertain global macro-economic\noutlook.\n\n \n\nThe following table sets forth the percentages\nof net sales of certain income and expense items of the Company for each of the three most recent fiscal years ended March 31, 2026.\n\n \n\n \n \nYears Ended March 31,\n \n\n \n \n2024\n \n \n2025\n \n \n2026\n \n\n \n \n \n \n \n \n \n \n \n \n\nNet Sales\n \n \n100\n%\n \n \n100\n%\n \n \n100\n%\n\nCost of sales\n \n \n73.0\n \n \n \n66.7\n \n \n \n71.6\n \n\nGross profit\n \n \n27.0\n \n \n \n33.3\n \n \n \n28.4\n \n\nOperating loss\n \n \n(25.8\n)\n \n \n(7.2\n)\n \n \n(48.0\n)\n\nLoss before income taxes\n \n \n(18.0\n)\n \n \n(2.0\n)\n \n \n(42.2\n)\n\nIncome taxes\n \n \n2.5\n \n \n \n(0.5\n)\n \n \n10.1\n \n\nNet (loss)/income\n \n \n(15.5\n)\n \n \n1.5\n \n \n \n(31.7\n)\n\nNet (profit)/loss attributable to non-controlling interest\n \n \n0.3\n \n \n \n0.0\n \n \n \n0.4\n \n\nNet (loss)/income attributable to Highway Holdings Limited’s Shareholders\n \n \n(15.2\n)\n \n \n1.4\n \n \n \n(31.7\n)\n\n \n\n*Year Ended March 31, 2026 Compared to Year\nEnded March 31, 2025*\n\n \n\nNet sales for the fiscal year ended March 31, 2026\n(“fiscal 2026”) decreased by approximately $2,607,000, or 35.2% from the fiscal year ended March 31, 2025 (“fiscal 2025”)\ndue to a general decrease in demand in Europe. Europe constituted the Company’s highest region by net sales in both fiscal 2026\nand fiscal 2025. Net sales to European customers decreased to 78.8% in fiscal 2026 from 85.3% in fiscal 2025, while net sales to North\nAmerican customers increased to 7.5% in fiscal 2026 from 3.9% in fiscal 2025. Net sales to Hong Kong/China increased to 13.1% in fiscal\n2026 from 10.7% in fiscal 2025.\n\n \n\nThe Company historically operated in two principal\nmanufacturing segments, which it refers to as (i) the “metal stamping and mechanical OEM” segment and (ii) the “electric\nOEM” segment. The metal stamping and mechanical OEM segment focuses on the manufacture and sale of metal parts and components, whereas\nthe electric OEM segment focuses on the manufacture and sale of plastic and electronic parts, components and motors, with electronic products\nassembly sub-contracting services also provided during fiscal 2026. Beginning in fiscal 2026, the Company reports a third segment, “Other\nServices,” which includes the operations of SilverAge. For fiscal 2026, net sales of the metal stamping and mechanical OEM segment\ndecreased to 56.5% of the Company’s net sales, from 60.7% in fiscal 2025, due to changes in the product mix. Net sales of the electric\nOEM segment correspondingly increased to 43.2% of net sales in fiscal 2026 from 39.3% in fiscal 2025. Net sales of the Other Services\nsegment represented 0.3% of net sales in fiscal 2026 and nil in fiscal 2025.\n\n \n\nGross profits as a percentage of net sales decreased\nto 28.4% in fiscal 2026 from 33.3% in fiscal 2025 as a result of a decrease of our net sales to certain customers with higher margin products.\nDue to the decrease in net sales, the Company’s gross profit in dollar terms decreased by approximately $1,104,000 to $1,366,000\nin fiscal 2026 from approximately $2,470,000 in fiscal 2025.\n\n \n\n35\n\n \n\n \n\nSelling, general and administrative expenses increased\nby approximately $668,000, or 22.2%, in fiscal 2026 compared to fiscal 2025. Increased selling, general and administrative expenses in\nfiscal 2026 was mainly as a result of (a) a $125,000 impairment charge made on long-lived assets and right-of-use assets based on business\noperations forecasts, (b) expenses related to realization of restricted shares from the Regent businesses, and (c) additional $220,000\nin expenses from new business segments.\n\n \n\nFor fiscal 2026, $125,000 in impairment losses\non property, plant and equipment and operating lease right of use assets was recognized. No impairment losses on property, plant and equipment\nand operating lease right of use assets were recognized during fiscal 2025.\n\n \n\nGain on disposal of property, plant and equipment\ndecreased by approximately $258,000 in fiscal 2026 compared to fiscal 2025 as fiscal 2025 included a gain from the sale of an apartment\nin Shenzhen, China, net of transactions tax.\n\n* *\n\nAs selling, general and administrative expenses\nwere higher than the gross profit in fiscal 2026, the Company had an operating loss of approximately $2,307,000 in fiscal 2026 compared\nto operating loss of approximately $535,000 in fiscal 2025.\n\n \n\nThe Company had a currency exchange gain of approximately\n$22,000 and an exchange gain of approximately $124,000 in fiscal 2026 and fiscal 2025, respectively. The currency gain reflects the strength\nof the U.S. dollar relative to the RMB and the Kyat. Following the acquisition of Regent-Feinbau on March 1, 2026, the Company also has\nexposure to the Euro. The Company will continue to be exposed to currency fluctuations among the U.S. dollar, the RMB, the MMK and the\nEuro because the Company does not intend to undertake any currency hedging transactions.\n\n \n\nIn fiscal 2026, the Company had an income tax benefit\nof approximately $486,000. The Company had an income tax expense of approximately $38,000 in fiscal 2025.\n\n \n\nAs a result of the foregoing, the Company had a\nnet loss of approximately $1,524,000 in fiscal 2026, compared to net income of approximately $106,000 in fiscal 2025.\n\n* *\n\n*Year Ended March 31,\n2025 Compared to Year Ended March 31, 2024*\n\n \n\nNet sales for the fiscal year ended March 31, 2025\n(“fiscal 2025”) increased by approximately $1,091,000, or 17.3% from the fiscal year ended March 31, 2024 (“fiscal 2024”)\ndue to a general increase in demand in Europe. Europe constituted the Company’s highest region by net sales in both fiscal 2025\nand fiscal 2024. Net sales to European customers increased to 85.3% in fiscal 2025 from 66.7% in fiscal 2024, while net sales to North\nAmerican customers decreased to 3.9% in fiscal 2025 from 19.0% in fiscal 2024. Net sales to Hong Kong/China decreased to 10.7% in fiscal\n2025 from 14.3% in fiscal 2024.\n\n \n\nThe Company operates in two segments that it refers\nto as (i) the “metal stamping and mechanical OEM” segment and (ii) the “electric OEM” segment. The metal stamping\nand mechanical OEM segment focuses on the manufacture and sale of metal parts and components, whereas the electric OEM segment focuses\non the manufacture and sale of plastic and electronic parts, components and motors, with electronic products assembly sub-contracting\nservices also provided during fiscal 2025. For fiscal 2025, net sales of the metal stamping and mechanical segment increased to 60.7%\nof the Company’s net sales, from 55.0% in fiscal 2024, due to changes in the product mix. Net sales of the electric OEM segment\ncorrespondingly decreased to 39.3% of net sales in fiscal 2025 from 45.0% in fiscal 2024.\n\n \n\nGross profits as a percentage of net sales increased\nto 33.3% in fiscal 2025 from 27.0% in fiscal 2024 as a result of certain customers with higher margin products making up a higher percentage\nof our net sales. Due to the increase in net sales, the Company’s gross profit in dollar terms increased by approximately $762,000\nto $2,470,000 in fiscal 2025 from approximately $1,708,000 in fiscal 2024.\n\n \n\n36\n\n \n\n \n\nSelling, general and administrative expenses increased\nby approximately $528,000, or 21.3%, in fiscal 2025 compared to fiscal 2024. Lower selling, general and administrative expenses in fiscal\n2024 was mainly as a result of the reversal of credit loss provision from a customer.\n\n \n\nFor fiscal 2025, there were no impairment losses\non property, plant and equipment and operating lease right of use assets. Impairment losses totaling approximately $862,000 were recognized\nduring fiscal 2024.\n\n \n\nGain on disposal of property, plant and equipment\nincreased by approximately $317,000 in fiscal 2025 compared to fiscal 2024 as a result of the gain from the sale of an apartment in Shenzhen,\nChina, net of transactions tax.\n\n \n\nAs selling, general and administrative expenses\nwere higher than the gross profit in fiscal 2025, the Company had an operating loss of approximately $535,000 in fiscal 2025 compared\nto operating loss of approximately $1,631,000 in fiscal 2024.\n\n \n\nThe Company had a currency exchange gain of approximately\n$124,000 and an exchange gain of approximately $198,000 in fiscal 2025 and fiscal 2024, respectively. The currency gain reflects strength\nof the U.S. dollar relative to both the RMB, the Kyat and Euro. The Company will continue to be exposed to currency fluctuations with\nU.S. dollar and the MMK because the Company does not intend to undertake any currency hedging transactions.\n\n \n\nIn fiscal 2025, the Company had an income tax expense\nof approximately $38,000. The Company had an income tax benefit of approximately $161,000 in fiscal 2024.\n\n \n\nAs a result of the foregoing, the Company had a\nnet income of approximately $106,000 in fiscal 2025, compared to net loss of approximately $959,000 in fiscal 2024.\n\n** **\n\n**Liquidity and Capital Resources**\n\n \n\nThe following table sets forth a summary of our\ncash flows for the periods indicated:\n\n \n\n  \nYears Ended March 31, \n\n  \n2024  \n2025  \n2026 \n\n  \n(In thousands of U.S. dollars) \n\nNet cash (used in) / provided by operating\nactivities \n$415  \n$(360) \n$(1,411)\n\nNet cash (used in) / provided by investing\nactivities \n (102) \n 232  \n (109)\n\nNet cash used in financing activities \n (557) \n (492) \n (25)\n\nNet decrease in cash and cash equivalents \n (244) \n (620) \n (1,538)\n\nCash and cash equivalents at beginning of year \n 6,952  \n 6,601  \n 5,972 \n\nEffect of exchange rate changes on cash and cash equivalents \n (107) \n (9) \n (18)\n\nCash and cash equivalents at end of year \n$6,601  \n$5,972  \n$4,409 \n\n \n\nAs of March 31, 2026, the Company had working capital\nof approximately $3,942,000, compared to working capital of approximately $5,493,000 as of March 31, 2025 and approximately $5,809,000\nas of March 31, 2024. As of March 31, 2026, the Company had a working capital ratio of 2.2 to 1.\n\n \n\nThe amount of cash and cash equivalents held by\nthe Company on March 31, 2026 decreased to approximately $4,409,000 from approximately $5,972,000 on March 31, 2025 and the Company had\ncash and cash equivalents of approximately $6,601,000 on March 31, 2024. The decrease in cash and cash equivalents held by the Company\non March 31, 2026 was largely due to cash used in operating activities.\n\n \n\nThe Company regularly purchases raw materials used\nto manufacture customer products in anticipation of receiving purchase orders from existing customers for such products. If the anticipated\ncustomer orders do not materialize, or if the orders are smaller than anticipated, unless the Company is able to repurpose those raw materials,\nit will incur a loss from such purchases. Should the customers be unable or unwilling to purchase the products that the Company intended\nto manufacture on behalf of this customer, the Company could be stuck with excess unusable inventory, which would adversely affect its\nliquidity.\n\n \n\n37\n\n \n\n \n\nThe Company has historically generated sufficient\nfunds from its operating activities to finance its operations and there has been little need for external financing other than capital\nleases which are used to finance equipment acquisitions and letter of credit facilities for secured purchases of materials and components\nfrom overseas vendors. For fiscal 2026, the Company used approximately $1,411,000 of net cash in its operating activities. In fiscal 2025,\nthe Company used approximately $360,000 of net cash from its operating activities and in fiscal 2024, the Company generated approximately\n$415,000 of net cash from its operating activities.\n\n \n\nThe Company used approximately $109,000 in fiscal\n2026 in its investing activities, which consisted primarily of acquisition of a subsidiary and payments for purchases of property, plant\nand equipment. In fiscal 2025, the Company generated approximately $232,000 of cash in its investing activities and in fiscal 2024, the\nCompany used approximately $102,000 of cash from its investing activities.\n\n \n\nNet cash used in financing activities mostly represents\ncash dividends paid by the Company during each of fiscal 2024, 2025 and 2026. Dividends of approximately $616,000, $492,000 and nil were\npaid in fiscal 2024, 2025 and 2026, respectively. Dividends are declared at the discretion of the Board of Directors, subject to applicable\nlaws, and depend on a number of factors, including the Company’s financial condition, results of operations, capital requirements,\nplans for future expenditures, general business conditions and other factors considered relevant by our Board of Directors. As a result,\nno assurance can be given that the Company will pay cash dividends in the current fiscal year or at any time in the future or, if dividends\nare paid, that the amounts will be consistent with amounts paid in prior years.\n\n \n\nAs of the date of this annual report the Company\nhas no outstanding bank loans. However, the Company also does not have any bank credit facilities under which it can borrow funds should\nthe Company need additional capital to fund unanticipated expenses (such as funding unbudgeted expenses related to the Yangon facility,\nposting additional deposits/bonds with governmental agencies, or funding certain operating expenses as a result of an unexpected slowdown\nof customer orders). Accordingly, the Company will be dependent on its current financial resources should unanticipated expenses arise.\nNo assurance can be given that its current reserves will be sufficient.\n\n \n\nThe Company believes that its currently available\nworking capital and funds generated from its operations are adequate to support its operations for at least the next 12 months.\n\n** **\n\n**Exchange Rates**\n\n \n\nThe Company transacts its business from its Hong\nKong sales and purchasing offices with its vendors and customers primarily in U.S. dollars and, to a lesser extent, in Hong Kong dollars\nand Euros. As a result of the assembly/manufacturing operations that the Company conducts in Myanmar, the Company now also pays labor\ncosts with respect to its Myanmar workforce and costs relating to its Myanmar manufacturing facilities in MMK. In addition, as a result\nof the acquisition of Regent-Feinbau on March 1, 2026, the Company now incurs operating costs and receives revenues in Germany that are\ndenominated in Euros, and will accordingly be increasingly exposed to fluctuations in the value of the Euro relative to the U.S. dollar.\nWhile the Company faces a variety of risks associated with changes among the relative value of these currencies, because the Company pays\nall of its Myanmar and Shenzhen factory expenses in MMK and RMB, respectively, the changes in the value of the MMK and RMB compared to\nthe U.S. dollar were significant in the fiscal year ended March 31, 2026. During the period from March 31, 2025 to March 31, 2026, although\nthe official rate of the MMK compared to the U.S. dollar remained relatively stable, the parallel rate was lower than the official rate,\nwhich was the primary cause for the Company’s currency exchange gain of $22,000 in fiscal 2026.\n\n \n\nThe Company makes its payments for its manufacturing\nfacilities and factory workers in Shenzhen, China in RMB. The value of the RMB compared to the U.S. dollar was higher on March 31, 2026\ncompared to the end of the prior fiscal year. An increase in the value of the RMB compared to the U.S. dollar increases the Company’s\noperating costs (expressed in U.S. dollars). Likewise, the Company makes its payments for its manufacturing facilities and factory workers\nin Yangon, Myanmar, in MMK. The value of the MMK compared to the U.S. dollar decreased as of March 31, 2026 compared to a year earlier,\nprimarily as a result of the economic uncertainty following the military takeover in that country. A decrease in the value of the MMK\ncompared to the U.S. dollar decreases the Company’s operating costs (expressed in U.S. dollars) in Myanmar. The weakening of the\nMMK compared to the U.S. dollar has decreased the Company’s operating expenses in Myanmar in U.S. dollar terms and has thereby increased\nthe Company’s overall currency exchange gain in fiscal 2026. Currency fluctuations in the future may have material impact on the\nresults of the Company’s operations.\n\n \n\n38\n\n \n\n \n\nCurrency exchange rate fluctuations affect the\nCompany’s operating costs, and also affect the price the Company receives for the products that it sells. A significant proportion\nof the Company’s net sales in fiscal 2026 were to Europe. In order to mitigate the currency exchange rate risks related to changes\nin the value of the dollar relative to the Euro, the Company has requested its European customers to pay in U.S. dollars, and in fiscal\n2026, substantially all of the Company’s European customers did so. In addition, the Company has entered into agreements with certain\nof its larger European customers that permit the Company’s prices to be adjusted every three months to account for currency fluctuations.\n\n \n\nIn fiscal 2026, the Company realized a currency\nexchange gain of approximately $22,000 compared to an exchange rate gain of approximately $124,000 in fiscal 2025. The Company had a currency\nexchange gain of approximately $198,000 in fiscal 2024.\n\n \n\nThe Company does not utilize any form of financial\nhedging or option instruments to limit its exposure to exchange rate or material price fluctuations and has no current intentions to engage\nin such activities in the future. Accordingly, material fluctuations in the exchange rates between the U.S. dollar and other currencies\ncould have a material impact on the Company’s future results. As a result of the Company’s expansion into Myanmar, it will\nalso be increasingly subject to the currency risks associated with the Myanmar Kyat (MMK), the official currency of that country.\n\n** **\n\n**Trend Information**\n\n \n\nAs discussed elsewhere in this annual report, certain\ntrends, uncertainties, demands, commitments or events had a material adverse effect, and could reasonably be expected in the future to\nhave a material adverse effect on, the Company’s net revenues, income, profitability, liquidity or capital resources. Specifically,\nthese trends consist of (i) the boom/bust cycle of purchase orders placed by certain of the Company’s customers because of post-\nCOVID-19 swings in demand for their products due to pent-up demand and the resulting over-production of inventory, (ii) the decrease in\norders from certain of the Company’s German customers for products manufactured at the Company’s Yangon, Myanmar, factory\nbecause of Myanmar’s civil unrest and human rights record and policies and the potential regulatory and brand risks that may result,\nand (iii) the recent diplomatic strains and trade disputes between China and the U.S., which issues have caused certain European customers\nto gradually reduce their dependence on products manufactured in China and may cause the Chinese government to impose additional restrictions\nor requirements that effect our business. In response to these trends, the Company has begun, through Regent-Feinbau, to offer certain\nEuropean customers localized inventory holding, key account management and delivery services from within Europe, and initial customer\nresponses have been positive. There can be no assurance, however, that this strategy will be successful or that the Company will realize\nits anticipated benefits. Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,\ncommitments or events for the year ended March 31, 2026 that are reasonably likely to have a material adverse effect on our net revenues,\nincome, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative\nof future operating results or financial conditions.\n\n** **\n\n**Recently issued accounting standards adopted**\n\n \n\nIn December 2023, the FASB issued ASU 2023-09, Improvement to Income\nTax Disclosure. This standard requires more transparency about income tax information through improvements to income tax disclosures primarily\nrelated to the rate reconciliation and income taxes paid information. This standard also includes certain other amendments to improve\nthe effectiveness of income tax disclosures. ASU 2023-09 is effective for public business entities, for annual periods beginning after\nDecember 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December\n15, 2025. Early adoption is permitted. As a public business entity, the Group adopted ASU 2023-09 effective on April 1, 2025 on a prospective\nbasis on its consolidated financial statements.\n\n \n\n39\n\n \n\n \n\n**Recently issued accounting standards not yet adopted**\n\n \n\nIn November 2024, the FASB issued ASU 2024-03,\nIncome Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement\nExpenses, which requires disclosure in the notes to the financial statements, of disaggregated information about certain costs and expenses\nthat are included in expense line items on the face of the income statement. The requirements of ASU 2024-03 are effective for fiscal\nyears beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027 with early adoption\npermitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements\nand disclosures.\n\n \n\n**Critical Accounting Policies and Estimates**\n\n \n\nThe Company prepares its consolidated financial\nstatements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial\nstatements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure\nof contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the\nreporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to bad and doubtful\ndebts. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are\nreasonable. Actual results may differ from these estimates under different assumptions or conditions.\n\n \n\nThe following critical accounting policies affect\nthe more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. For further\ndiscussion of our significant accounting policies, refer to Note 2 “Summary of Significant Accounting Policies” of our consolidated\nfinancial statements in Item 18.\n\n \n\n*Revenue Recognition*\n\n \n\nWe recognize revenue when our customer obtains\ncontrol of promised goods or receives services provided in an amount that reflects the consideration which we expect to receive in exchange\nfor those goods. To determine revenue recognition for the arrangements that we determine are within the scope of Topic 606, we perform\nthe following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3)\ndetermine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue\nwhen (or as) the entity satisfies a performance obligation.\n\n \n\nThe revenue from contracts with customers is derived\nfrom the sales of metal stamping, mechanical OEM and electric OEM products, from the sub-contracting income for the provision of electronic\nproducts assembly service, and from the provision of machinery maintenance services.\n\n \n\nProduct revenue recognition-point of time.\nThe Company sells goods to its customers under sales contracts or by purchase orders. The Company has determined there is one performance\nobligation for each of the sales contracts and purchase orders. The performance obligations are considered to be met and revenue is recognized\nwhen the customer obtains control of the goods. Revenue is recognized at that point of time. The Company has two major goods delivery\nchannels:\n\n \n\n(1) Delivering goods to customers’ predetermined\nlocation; the Company has satisfied the contracts’ performance obligations when the goods have been delivered and relevant shipping\ndocuments have been collected by us; and\n\n \n\n(2) Picking up goods by customers in our warehouse;\nthe Company has satisfied the contracts’ performance obligations when the goods have been picked up and the acceptance document\nhas been signed by the customers.\n\n \n\nSub-contracting income recognition – point\nof time. The Company’s performance obligation is to provide sub-contracting services on electronic products assembly to one\ncustomer. When the Company satisfies a performance obligation, it will recognize as revenue the sub-contracting income it earns from the\nprovision of electronic products assembly service. The Company’s revenue from sub-contracting income was $818,000, approximately\nnil and $nil for the years ended March 31, 2024, 2025 and 2026 respectively.\n\n* *\n\n40\n\n \n\n* *\n\nService revenue recognition – over time.\nThe Company provides machinery maintenance services to customers, where revenue is recognized over time. The Company recognized certain\nrevenue from contracts with customers for performance obligations satisfied over time, consisting principally of machinery maintenance\nservice income. The Company’s revenue from machinery maintenance services was approximately nil, nil and nil for the years ended\nMarch 31, 2024, 2025 and 2026 respectively.\n\n \n\nOther service revenue recognition – over\ntime. The Company also provides services to elderly people, with revenue recognized over time as the services are rendered. For the years\nended March 31, 2024, 2025, and 2026, revenue from these educational services was nil, nil, and $14, respectively.\n\n \n\nBreakdown of revenue recognition by product line is as follows\n(USD’000):\n\n \n\n  \nYears ended March 31, \n\n  \n2024  \n2025  \n2026 \n\n  \n$  \n$  \n$ \n\n  \n   \n   \n  \n\nSale of products \n 5,503  \n 7,412  \n 4,791 \n\nSub-contracting income \n 818  \n -  \n - \n\nOther service income \n -  \n -  \n 14 \n\n  \n    \n    \n   \n\nTotal \n 6,321  \n 7,412  \n 4,805 \n\n \n\nBreakdown of revenue recognition at a point of time / over\ntime is as follows (USD’000):\n\n \n\n  \nYears ended March 31, \n\n  \n2024  \n2025  \n2026 \n\n  \n$  \n$  \n$ \n\n  \n   \n   \n  \n\nRevenue recognized at a point of time \n 6,321  \n 7,412  \n 4,791 \n\nRevenue recognized over time \n -  \n -  \n 14 \n\n  \n    \n    \n   \n\nTotal \n 6,321  \n 7,412  \n 4,805 \n\n \n\nReturn Rights. The Company does not provide\nits customers with the right of return (except for product quality issue) or production protection. Customers are required to perform\nproduct quality check before acceptance of goods delivery. We did not recognize for any refund liability according to the product return\non the consolidated balance sheets.\n\n \n\nValue-added taxes and surcharges. The Company\npresents revenue net of VAT and surcharges incurred. The surcharge is sales related taxes representing the City Maintenance and Construction\nTax and Education Surtax. The Company incurs expenses or pays fees to external delivery service providers, respectively, and records such\nexpenses and fees like shipping and handling expenses. Total VAT and surcharges paid by us during the years ended March 31, 2024, 2025\nand 2026 amounted to approximately $85,000, $77,000 and $67,000 respectively.\n\n \n\nPrincipals vs. agent accounting*.*\nThe Company records all product revenue on a gross basis. To determine whether we are agent or principal in the sale of products, we consider\nthe following indicators: we are primarily responsible for fulfilling the promise to provide the specified goods or services, we are subject\nto inventory risks before the specified goods have been transferred to a customer or after transfer of control to the customers, and we\nhave discretion in establishing the price of the specified goods.\n\n \n\n41\n\n \n\n \n\nDisaggregation of revenue*.* The Company\ndisaggregates its revenue from different types of contracts with customers by principal product categories, as it believes it best depicts\nthe nature, amount, timing and uncertainty of its revenue and cash flows. See note 25 of the Company’s consolidated financial statements\nfor product revenues by segment.\n\n \n\nContract balances. The Company did not recognize\nany contract asset as of March 31, 2025 and March 31, 2026. The timing between the recognition of revenue and billings issuance is not\nsignificant.\n\n \n\nThe Company’s contract liabilities consist\nof deposits received from customers. As of March 31, 2025 and March 31, 2026, the balances of the contract liabilities were approximately\n$10,000 and $225,000, respectively, including deposits received from a customer. All contract liabilities as of March 31, 2026 are expected\nto be recognized as revenue during the year ending March 31, 2027.\n\n* *\n\n*Provision for doubtful receivables*\n\n \n\nFrom April 1, 2020, the Company adopted ASU No.\n2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC\nTopic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment\nmodel that is based on expected losses rather than incurred losses.\n\n \n\nThe Company’s accounts receivable, other\ncurrent assets and loan receivables recorded in prepaid expenses and other current assets are within the scope of ASC Topic 326. Accounts\nreceivable primarily represent amounts due from customers, that are typically non-interest bearing and are initially recorded at the invoiced\namount. Accounts receivable balances are written-down against the allowance after all means of collection have been exhausted and the\npotential for recovery is considered remote. Any off-balance sheet credit exposure related to its customers is assessed in the same manner\nas on-balance sheet credit exposure.\n\n \n\nTo estimate expected credit losses, the Company\nhas identified the relevant risk characteristics of its customers and the related receivables, other current assets and loan receivables\nwhich include size, type of the services or the products the Company provides, or a combination of these characteristics. Receivables\nwith similar risk characteristics have been grouped into pools. For each pool, the Company considers the past collection experience, current\neconomic conditions, future economic conditions (external data and macroeconomic factors) and changes in the Company’s customer\ncollection trends. Other key factors that influence the expected credit loss analysis include customer demographics, payment terms offered\nin the normal course of business to customers, and industry-specific factors that could impact the Company’s receivables. Additionally,\nexternal data and macroeconomic factors are also considered. This is assessed at each year end based on the Company’s specific facts\nand circumstances. No significant impact of changes in the assumptions since adoption. As of March 31, 2026, expected credit loss provision\nrecorded in accounts receivable was approximately $28,000 compared to approximately $109,000 in fiscal 2025.\n\n \n\nThe Company accounts for balance sheet offsetting\nin accordance with ASC 210, Balance Sheet. When all the following conditions are met and when the Company and the counterparty both consent,\naccounts receivable balances and account payable balances set off each other and the Company presents the asset and liability as a net\namount on the balance sheet: Each of the two parties owes the other determinable amounts, the Company has the right to set off the amount\nowed with the amount owed by the other party, the Company intends to set off and the right of set off is enforceable at law. Approximately\n$46,000 offsetting balance as of March 31, 2026 compared to no offsetting balance in fiscal 2025.\n\n* *\n\n*Inventories written-down*\n\n \n\nInventories are stated at the lower of cost and\nrealizable value, with cost determined by the first-in-first-out method. Work-in-progress and finished goods consist of raw materials,\ndirect labor and overheads associated with the manufacturing process. Write-down of potential obsolete or slow-moving inventories is recorded\nbased on management’s assumptions about future demands and market conditions.\n\n* *\n\n42\n\n \n\n* *\n\n*Impairment or disposal of long-lived assets and right of use (“ROU”)\nassets*\n\n \n\nThe Company reviews its long-lived assets and ROU\nassets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.\nWhen these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets and ROU assets to the\nsum of the estimated undiscounted future cash flows expected to be generated from the use of the assets and the eventual disposition.\nAn impairment exists when the estimated undiscounted future cash flows are less than the carrying value of the assets being evaluated.\nImpairment loss is calculated as the amount by which the carrying value of the assets exceeds their fair value.\n\n \n\nAt each year end as of March 31, 2024, 2025 and\n2026, the Company reviewed the long-lived assets and ROU assets for impairment, since there are several indicative events and factors\nidentified, including (1) significant adverse changes in the business climate, including the possible negative impact of political unrest\nin Myanmar, (2) operating and/or cash flow losses in prior years, and (3) negative impact of business operations as a result of trade\ncontroversies between China and the U.S. and new global human and environmental rights regulations pending or enacted.\n\n \n\nFor the years ended March 31, 2025, as a result\nof the comparisons, management has identified the sum of expected undiscounted cashflow of long-lived assets and ROU assets are higher\nthan their carrying values. The Company did not recognize any impairment of long-lived assets and ROU assets during the years ended March\n31, 2025.\n\n \n\nFor the year ended March 31, 2024 and 2026, as\na result of the comparison, management has identified the sum of estimated undiscounted future cashflow of long-lived assets and ROU assets\nare lower than their carrying values. Accordingly, an impairment loss of approximately $335,000 and $19,000 for long-lived assets and\nan impairment loss of approximately $527,000 and $106,000 for ROU assets are recognized in fiscal 2024 and fiscal 2026 respectively, which\nare the amounts by which the carrying values of assets exceed their fair value.\n\n \n\nFor the year ended March 31, 2026, The Company\nperforms its annual goodwill impairment test if events or changes in circumstances indicate that the carrying amount of a reporting unit\nmay exceed its fair value.\n\n \n\nThe impairment test compares the estimated fair\nvalue of each reporting unit to its carrying amount. The Company determines the fair value of its reporting units using a discounted cash\nflow model based on management’s internal forecasts, which include assumptions such as revenue growth rates, operating margins,\nand discount rates.\n\n \n\nAs of March 31, 2026, the estimated fair value\nof each reporting unit exceeded its carrying amount. Accordingly, no goodwill impairment was recognized during the fiscal year ended March\n31, 2026. The Company also evaluated whether any events or changes in circumstances subsequent to the annual test date would suggest that\ngoodwill might be impaired and determined that no such indicators existed.\n\n* *\n\n*Leases*\n\n \n\nThe Company accounts for leases in accordance with\nASC 842, Leases (“ASC 842”), which requires lessees to recognize leases on the balance sheet and disclose key information\nabout leasing arrangements. The Company elected not to apply the recognition requirements of ASC 842 to short-term leases. The Company\nalso elected not to separate non-lease components from lease components and, therefore, it will account for lease component and the non-lease\ncomponents as a single lease component when there is only one vendor in the lease contract.\n\n \n\nThe Company determines if a contract contains a\nlease based on whether it has the right to obtain substantially all of the economic benefits from the use of an identified asset which\nthe Company does not own and whether it has the right to direct the use of an identified asset in exchange for consideration. Right of\nuse (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities\nrepresent the Company’s obligation to make lease payments arising from the lease. ROU assets are recognized as the amount of the\nlease liability, adjusted for lease incentives received. Lease liabilities are recognized at the present value of the future lease payments\nat the lease commencement date.\n\n \n\n43\n\n \n\n \n\nLease payments may be fixed or variable, however,\nonly fixed payments or in-substance fixed payments are included in the Company’s lease liability calculation.\n\n \n\nVariable lease payments are recognized in operating\nexpenses in the period in which the obligation for those payments are incurred.\n\n \n\nThe Company reviews its long-lived assets and ROU\nassets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.\n$106 was made on ROU assets as of March 31, 2026 (2025 impairment: none).\n\n \n\nThe operating lease is included in operating lease\nright-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current in the consolidated balance sheets\nat March 31, 2025 and March 31, 2026.\n\n \n\n*Business Acquisition*\n\n* *\n\nOn March 1, 2026, the Company acquired a 51% controlling\ninterest in Regent. The total consideration transferred for the 51% interest was €662,000 (approximately $758,000), consisting of\ncash of €612,000 and the issuance of restricted shares of the 64,851 Company’s common shares valued at €50,000.\n\n \n\nPursuant to the Share Purchase Agreement, the Company completed the\ntransfer of the consideration on March 1, 2026, and the acquisition was completed on the same date. Upon completion of the transaction,\nthe Company obtained control of Regent through its majority voting rights and, accordingly, accounted for the transaction as a business\ncombination in accordance with ASC 805, Business combinations.\n\n \n\nThe acquisition was accounted for as a business\ncombination by applying the acquisition method. Accordingly, the acquired assets and liabilities were recorded at their fair value on\nthe date of acquisition. The Company engaged an independent third-party valuation firm to assist with the valuation of assets acquired\nand liabilities assumed in this business combination. The following table summarizes the fair values of the assets acquired and liabilities\nassumed at the acquisition date, including the recognition of the Non-controlling Interest (NCI) at fair value.\n\n \n\nConsideration transferred (51%): \n  \n\nBy cash \n$701 \n\nBy common shares \n$57 \n\nFair value of Noncontrolling Interest (49%) \n$566 \n\nTotal \n$1,324 \n\n \n\nTangible Assets, net \n$527 \n\nIntangible asset – Customer relationship \n$537 \n\nGoodwill (residual) \n$260 \n\nTotal \n$1,324 \n\n \n\n44"}