10-K
1
f10k2021_jerashhold.htm
ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-38474
Jerash Holdings (US), Inc.
(Exact name of registrant as specified in its charter)
277 Fairfield Road, Suite 338, Fairfield, New
Jersey 07004
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including
area code: (214) 906-0065
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share JRSH The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s
common stock, par value $0.001 per share, held by non-affiliates of the registrant, as computed by reference to the September 30, 2020
closing price reported by Nasdaq, was approximately $13,562,115.36.
The number of the registrant’s shares of
common stock, $0.001 par value per share, outstanding on June 22, 2021 was 11,334,318.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement
for its 2021 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.
Table of Contents
Page
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Mine Safety Disclosure 18
Item 6. [Reserved] 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 28
Item 9B. Other Information 28
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 28
PART III 29
Item 10. Directors, Executive Officers and Corporate Governance 29
Item 11. Executive Compensation 29
Item 14. Principal Accounting Fees and Services 29
Item 15. Exhibit and Financial Statement Schedules 30
Signatures 33
i
PART I
Item 1. Business.
Overview
Jerash Holdings (US), Inc.
(“Jerash Holdings”), through its wholly owned operating subsidiaries and variable interest entity (“VIE”) (together
the “Group,” “we,” “us,” or “our”), is principally engaged in the manufacturing and exporting
of customized, ready-made sport and outerwear from knitted fabric and personal protective equipment (“PPE”) produced in its
facilities in the Hashemite Kingdom of Jordan (“Jordan”). Our website address is http://www.jerashholdings.com. Information
available on our website is not a part of, and is not incorporated into, this Annual Report on Form 10-K.
We are a manufacturer for
many well-known brands and retailers, such as Walmart, Costco, New Balance, G-III (which owns brands such as Calvin Klein, Tommy Hilfiger,
DKNY, and Guess), American Eagle, and VF Corporation (which owns brands such as The North Face, Timberland, and JanSport). Our production
facilities comprise four factory units, one workshop, and four warehouses and we currently employ approximately 4,300 people. The total
annual capacity at our facilities is approximately 12.0 million pieces (average for product categories including t-shirts, polo shirts,
pants, shorts, and jackets, and excluding PPE).
Organizational Structure
Jerash Holdings is a holding
company organized in Delaware in January 2016. As of the date of this annual report, Jerash Holdings has the following wholly owned subsidiaries:
(i) Jerash Garments and Fashions Manufacturing Co., Ltd. (“Jerash Garments”), an entity formed under the laws of Jordan, (ii)
Treasure Success International Limited (“Treasure Success”), an entity formed under the laws of Hong Kong Special Administrative
Region of the People’s Republic of China (“Hong Kong” or “HK”), (iii) Chinese Garments and Fashions Manufacturing
Co., Ltd. (“Chinese Garments”), an entity formed under the laws of Jordan and a wholly owned subsidiary of Jerash Garments,
(iv) Jerash for Industrial Embroidery Co., Ltd. (“Jerash Embroidery”), an entity formed under the laws of Jordan and a wholly
owned subsidiary of Jerash Garments, (v) Al-Mutafaweq Co. for Garments Manufacturing Ltd. (“Paramount”), an entity formed
under the laws of Jordan and a wholly owned subsidiary of Jerash Garments, (vi) Jiangmen Treasure Success Business Consultancy Co., Ltd.
(“Jiangmen Treasure Success”), an entity incorporated under the laws of the People’s Republic of China (“China”
or the “PRC”) and a wholly owned subsidiary of Treasure Success, (vii) Jerash The First Medical Supplies Manufacturing Company
Limited (“Jerash The First”), an entity formed under the laws of Jordan and a wholly owned subsidiary of Jerash Garments,
and (viii) Jerash Supplies, LLC (“Jerash Supplies”), an entity formed under the laws of the State of Delaware.
In addition, Jerash Garments
has a VIE, Victory Apparel (Jordan) Manufacturing Company Limited (“Victory Apparel”), a limited liability company formed
under the laws of Jordan. Although Jerash Garments does not own the equity interests of Victory Apparel, Mr. Choi Lin Hung (“Mr.
Choi”), our chairman, chief executive officer, president, treasurer, and a significant stockholder, is also a director of Victory
Apparel and controls all decision-making for Victory Apparel along with our other significant stockholder, Mr. Lee Kian Tjiauw, who has
the ability to control Victory Apparel’s financial affairs. In addition, Victory Apparel’s equity at risk is not sufficient
to permit it to operate without additional subordinated financial support from Mr. Choi. Based on these facts, we concluded that Jerash
Garments has effective control over Victory Apparel due to Mr. Choi’s roles at both organizations and therefore Victory Apparel
is considered a VIE under Accounting Standards Codification 810-10-05-08A. Accordingly, Jerash Garments consolidates Victory Apparel’s
operating results, assets, and liabilities.
1
This chart reflects our organizational structure
as of March 31, 2021:
Jerash Garments was established
in Jordan on November 26, 2000 and operates out of our factory unit in Al Tajamouat Industrial City, a Development Zone in Amman, Jordan.
Jerash Garments’ principal activities are to house management offices and to operate production lines and printing, sewing, ironing,
packing, and quality control units, as well as house our trims and finished products warehouses. We also operate our workshop in Al-Hasa
County (as discussed below) under Jerash Garments.
Chinese Garments was established
in Jordan on June 13, 2013 and operates out of our factory unit in Al Tajamouat Industrial City. Chinese Garments’ principal activities
are to house administration, human resources, finance and management offices and to operate additional production lines and sewing, ironing,
and packing units, as well as house our trims warehouse.
Jerash Embroidery was established
in Jordan on March 11, 2013 and operates out of our factory unit in Al Tajamouat Industrial City. Jerash Embroidery’s principal
activities are to perform the cutting and embroidery for our products.
Paramount was incorporated
in Jordan on October 24, 2004 and operates out of our factory unit in Al Tajamouat Industrial City. Paramount’s principal activities
are to manufacture garments per customer orders.
Treasure Success was established
in Hong Kong on July 5, 2016 and operates in Hong Kong. Treasure Success’s primary activities are to employ sales and merchandising
staff and supporting personnel in Hong Kong to support the business of Jerash Garments and its subsidiaries and VIE.
Jiangmen Treasure Success
was established in Jiangmen City of Guangdong Province in the PRC on August 28, 2019 and operates in the PRC. Jiangmen Treasure Success’s
primary activities are to provide support in sales and marketing, sample development, merchandising, procurement, and other areas.
Victory Apparel was established
as a limited liability company in Amman, Jordan, on September 18, 2005. Victory Apparel has no significant assets or liabilities or other
operating activities of its own.
Jerash The First was incorporated
in Jordan on July 6, 2020 and operate out of our workshop in Al-Hasa County. Jerash The First’s principal activities are to manufacture
PPE products.
Jerash Supplies was formed
in Delaware on November 20, 2020. Jerash Supplies is engaged in the trading of PPE products.
2
Products
As a garment manufacturing
group, we specialize in manufacturing sport and outerwear. Our sport and outerwear product offering consists of jackets, polo shirts,
t-shirts, pants, and shorts. Our primary product offering is jackets, and in the fiscal years ended March 31, 2021 and 2020, approximately
25% and 50%, respectively, of our total shipped pieces were jackets.
In response to high demand for PPE due to the COVID-19 pandemic, we
started manufacturing PPE in 2020. Our PPE product offering consists of branded (washable) and disposable face masks, medical scrubs,
protective coveralls, and surgical gowns. In order to advance our PPE market development efforts, we incorporated a new entity, Jerash
The First, which received temporary permission from Jordan’s Food and Drug Administration to manufacture and export non-surgical
PPE. Our production facility for PPE needs to meet certain structural requirements before we can receive a permanent permission and we
are still planning the production facility. In September, 2020, we successfully registered as a medical device manufacturing facility
with the U.S. Food and Drug Administration for the sale and export of our PPE products to the United States. We also received an ISO 13485
designation covering the manufacturing, packing, and selling of medical supplies. PPE contributed 1% of our total revenue in the fiscal
year ended March 31, 2021.
Manufacturing and Production
Our production facilities
are located in Al Tajamouat Industrial City and in Al-Hasa County in the Tafilah Governorate of Jordan.
Our production facilities
in Al Tajamouat Industrial City comprise four factory units and four warehouses. Effective as of January 1, 2019, the government of the
Hashemite Kingdom of Jordan converted Al Tajamouat Industrial City into a Development Zone. Following this change, we continued to operate
under benefits similar to the Qualifying Industrial Zone designation, but were subject to 10% corporation income tax plus a 1% social
contribution. On January 1, 2020, the corporation income tax increased to 14%. Effective on January 1, 2021, we have been subject to 16%
corporate income tax plus a 1% social contribution. Currently, the first factory unit, which we own, employs approximately 1,500 people.
Its primary functions are to house our management offices, as well as production lines, trims warehouse, and printing, sewing, ironing,
and packaging units. The second factory unit, which we lease, employs approximately 1,300 people. Its primary functions are to house our
administrative and human resources personnel, merchandising and accounting departments, embroidery, printing, additional production lines,
trims and finished products warehouses, and sewing, ironing, packing and quality control units. The third factory unit, which we lease,
employs approximately 200 people. Its primary functions are to perform the cutting for our products. The fourth factory unit (under Paramount),
which we lease, currently employs approximately 1,000 people. Its primary functions are to house additional production lines.
Our production facility in
Al-Hasa County in the Tafilah Governorate of Jordan comprises a workshop. The workshop currently employs approximately 300 people and
its primary functions are to manufacture garment products per customer orders. We commenced the construction of this workshop in 2018,
and it was completed and started operation in November 2019. This is a joint project with the Jordanian Ministry of Labor and the
Jordanian Education and Training Department. According to our agreement with these government agencies, we will be using this workshop
without paying rent until December 2022, after which we anticipate entering into a lease agreement for the workshop with the Jordanian
Ministry of Labor for market rent. Provided that we satisfy certain employment requirements over certain time periods, we do not anticipate
incurring any significant costs for this project. In the event we breach our agreement with these government agencies, we will have to
pay such agencies 250,000 Jordanian Dinar (“JOD”) or approximately $353,000. See “Item 2. Properties” below for
more information regarding this workshop.
In 2015, we commenced a project
to build a 4,800 square foot workshop in the Tafilah Governorate of Jordan, which was previously intended to be used as a sewing workshop
for Jerash Garments, but which we now intend to use as a dormitory. Construction has been temporarily suspended since March 2020 due to
the COVID-19 pandemic. This dormitory is expected to be operational in fiscal 2022 to house management and supervisory staff for our production
facility in Al-Hasa County. This project is expected to cost approximately $200,000 upon completion.
3
In April 2021, we commenced
a construction on a 189,000 square-foot housing facility for our multi-national workforce, situated on a 49,000 square-foot site owned
by us, in Al Tajamouat Industrial City. We anticipate the completion and occupancy of the new building by mid-2022. To meet increasing
demand, we are also completing plans to construct an additional project on a nearby separate 133,000 square-foot parcel that we purchased
in 2019 for $1.2 million, with 2/3 of the land allocated for our fifth manufacturing plant and 1/3 for housing. We anticipate starting
the construction later this year.
Total annual capacity at our
existing facilities is approximately 12.0 million pieces (average for product categories including t-shirts, polo shirts, pants, shorts,
and jackets, and excluding PPE). Our production flow begins in the cutting department of our factory unit. Then the product is sent to
the embroidery department for embroidery if applicable. From there, the product moves to be processed by the sewing unit, finishing department,
quality control, and finally the ironing and packing units.
We do not have long term supply
contracts or arrangements with our suppliers. Most of our ultimate suppliers for raw materials, such as fabric, zippers, and labels, are
designated by customers and we purchase such materials on a purchase order basis.
Employees
As of March 31, 2021, we had
an aggregate of approximately 4,350 employees located in Jordan, Hong Kong, the People’s Republic of China, and the United States
of America, all of which are full-time employees.
Customers
The following table outlines
the dollar amount and percentage of total sales to our customers for the fiscal years ended March 31, 2021 (“fiscal 2021”),
and March 31, 2020 (“fiscal 2020”).
Sales Sales
(USD, in thousands) % (USD, in thousands) %
Jiangsu Guotai Huasheng Industrial 2,982 3.3 % - - %
Onset Time Limited 1,672 1.9 % - - %
In fiscal 2021 and fiscal
2020, we depended on a few key customers for our sales, and most of our sales in fiscal 2021 and 2020 were to one customer, VF Corporation.
We started producing garments
for VF Corporation in 2012. Most of the products we manufacture are sold under The North Face Brand which is owned by VF Corporation.
Currently, we manufacture primarily outerwear for The North Face. Approximately 62% and 77% of our sales in fiscal 2021 and 2020 were
derived from the sale of manufactured products to VF Corporation, respectively. We are not party to any long-term contracts with VF Corporation
or our other customers, and our sales arrangements with our customers do not have minimum purchase requirements. As is common in our industry,
VF Corporation and our other customers place purchase orders with us after we complete detailed sample development and approval processes
that we and our customers have agreed upon for their purchase of the relevant manufactured garments. It is through the sample development
and approval processes that we and VF Corporation and our other customers agree on the purchase and manufacture of the garments. For fiscal
2021, VF Corporate issued approximately 5,400 purchase orders to us in amounts ranging from approximately $8 to $596,000. For fiscal 2020,
VF Corporation issued approximately 7,400 purchase orders to us in amounts ranging from approximately $7 to $380,000.
4
Our customers are in the retail
industry, which is subject to substantial cyclical variations. Consequently, there can be no assurance that sales to current customers
will continue at the current rate or at all. In addition, our annual and quarterly results may vary, which may cause our profits and the
market price of our common stock to decline.
We continue to seek to expand
and strengthen our relationship with our current customers and other brand names. However, we cannot assure you that these brands will
continue to buy our products in the same volumes or on the same terms as they did in the past or that we will be successful in expanding
our relationship with other brand names.
Competition
The markets for the manufacturing
of sport and outerwear are highly competitive. The competition in those markets is focused primarily on the price and quality of the product
and the level of customer service. Our products compete with products of other apparel manufacturers in Asia, Israel, Europe, the United
States, and South and Central America.
Competition with other manufacturers
in the clothing industry focuses on reducing production costs, reducing supply lead time, design, product quality, and efficiency of supply
to the customer. Since production costs depend to a large extent on labor costs, in recent years most production in the industry has been
moved to countries where labor costs are low. Some of our competitors have lower cost bases, longer operating histories, larger customer
bases, and other advantages over us which allow them to compete with us. As described in more detail under “—Conditions
in Jordan” below, we are able to sell our products manufactured at our facilities in Jordan to the United States free from customs
duties and import quotas under certain conditions. These favorable terms enable us to remain competitive on the basis of price. According
to the Association Agreement between the European Union (the “EU”) and Jordan, which came into force in May 2002, and the
joint initiative on rules of origin reviewed and improved in December 2018 by the EU and Jordan, goods manufactured by us in Jordan that
are subsequently shipped to EU countries are shipped free from customs duties.
Conditions in Jordan
Our manufacturing facilities
are located in Jordan. Accordingly, we are directly affected by political, security, and economic conditions in Jordan.
From time to time Jordan has
experienced instances of civil unrest, terrorism, and hostilities among neighboring countries, including Syria and Israel. A peace agreement
between Israel and Jordan was signed in 1994. Terrorist attacks, military activity, rioting, or civil or political unrest in the future
could influence the Jordanian economy and our operations by disrupting operations and communications and making travel within Jordan more
difficult and less desirable. Political or social tensions also could create a greater perception that investments in companies with Jordanian
operations involve a high degree of risk, which could adversely affect the market and price for our common stock.
Jordan is a constitutional
monarchy, but the King holds wide executive and legislative powers. The ruling family has taken initiatives that support the economic
growth of the country. However, there is no assurance that such initiatives will be successful or will continue. The rate of economic
liberalization could change, and specific laws and policies affecting manufacturing companies, foreign investments, currency exchange
rates, and other matters affecting investments in Jordan could change as well.
In December 2019, “COVID-19”
was first identified in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19
a pandemic—the first pandemic caused by a coronavirus. On March 17, 2020, Jordan announced a shutdown of non-essential activities
as part of its proactive national efforts to limit the spread of COVID-19 and we suspended the operations of our facilities in Jordan
as a result on March 18, 2020. On March 26, 2020, the International Monetary Fund announced that its executive board approved a 48-month
arrangement under the Extended Fund Facility with Jordan for an amount of approximately $1.3 billion to support the country’s economic
and financial reform program. The arrangement also provided for spending to contain and treat COVID-19. On April 28, 2020, the World Bank
approved a $20 million project to help Jordan face the health impacts of the COVID-19 pandemic. On April 4, 2020, we resumed operations
of our main production facilities in Al Tajamount Industrial City under the condition that only migrant workers, living in dormitories
in Al Tajamouat Industrial City, are allowed to go to work in our factories under strict hygienic precautionary measures pursuant to an
approval from the Jordanian Government dated April 1, 2020. Our Al-Hasa workshop was also allowed to restart operation on April 26, 2020.
Eventually, local employees were allowed to resume work on June 1, 2020.
5
Trade Agreements
Because of the United States-Jordan
Free Trade Agreement, which came into force on December 17, 2001, and was implemented fully on January 1, 2010, and the Association Agreement
between the EU and Jordan, which came into force in May 2002, we are able to sell our products manufactured at our facilities in Jordan
to the U.S. free from customs duties and import quotas under certain conditions and to EU countries free from customs duties.
Income Tax Incentives
Effective January 1, 2019,
Jordan’s government converted the geographical area where Jerash Garments and its subsidiaries and VIE are located from a Free Zone
to a Development Zone. Development Zones are industrial parks that house manufacturing operations in Jordan. In accordance with Development
Zone law, Jerash Garments and its subsidiaries and VIE began paying corporate income tax in Jordan at a rate of 10% plus 1% social contribution.
Effective January 1, 2020, this rate increased to 14% plus 1% social contribution, and effective January 1, 2021, this rate further increased
to 16% plus 1% social contribution. For more information, see “Note 2—Summary of Significant Accounting Policies—Income
Taxes.”
In addition, Jerash Garments
and its subsidiaries and VIE are subject to local sales tax of 16%. However, Jerash Garments was granted a sales tax exemption from the
Jordanian Investment Commission for the period June 1, 2015 to June 1, 2018 that allowed Jerash Garments to make purchases with no sales
tax charge. This exemption was extended to February 5, 2022.
Government Regulation
Our manufacturing and other
facilities in Jordan are subject to various local regulations relating to the maintenance of safe working conditions and manufacturing
practices. Management believes that it is currently in compliance in all material respects with all such regulations. We are not subject
to governmental approval of our products or manufacturing process.
Item 1A. Risk Factors.
The following are factors
that could have a significant impact on our operations and financial results and could cause actual results or outcomes to differ materially
from those discussed in any forward-looking statements.
Risks Related to Our Business and Our Industry
We rely on one key customer for most of
our revenue. We cannot assure you that this customer or any other customer will continue to buy our products in the same volumes or on
the same terms.
Our sales to VF Corporation
(which owns brands such as The North Face, Timberland, and JanSport), directly and indirectly, accounted for approximately 62% and 77%
of our total sales in fiscal 2021 and fiscal 2020, respectively. From an accounting perspective, we are considered the principle in our
arrangement with VF Corporation. We bear the inventory risk before the specified goods are transferred to a customer, and we have the
right to determine the price and to change our product during the sample development process with customers in which we determine factors
including material usage and manufacturing costs before confirming orders. Therefore, we present the sales and related manufacturing activities
on a gross basis.
6
We are not party to any long-term
contracts with VF Corporation or our other customers, and our sales arrangements with our customers do not have minimum purchase requirements.
As is common in our industry, VF Corporation and our other customers place purchase orders with us after we complete detailed sample development
and approval processes. It is through these sample development and approval processes that we and VF Corporation agree on the purchase
and manufacture of the garments in question. From April 1, 2020 to March 31, 2021, VF Corporation issued approximately 5,400 purchase
orders to us in amounts ranging from approximately $8 to $596,000.
We cannot assure you that
our customers will continue to buy our products at all or in the same volumes or on the same terms as they have in the past. The failure
of VF Corporation to continue to buy our products in the same volumes and on the same terms as in the past may significantly reduce our
sales and our earnings.
A material decrease in the
quantity of sales made to our principal customers, a material adverse change in the terms of such sales or a material adverse change in
the financial condition of our principal customers could significantly reduce our sales and our earnings.
We cannot assure you that
VF Corporation will continue to purchase our merchandise at the same historical rate, or at all, in the future, or that we will be able
to attract new customers. In addition, because of our reliance on VF Corporation as our key customer and their bargaining power with us,
VF Corporation has the ability to exert significant control over our business decisions, including prices.
Any adverse change in our relationship with
VF Corporation and its The North Face brand, or with their strategies or reputation, would have a material adverse effect on our results
of operations.
Most of our products are sold
under The North Face brand, which is owned by VF Corporation. Any adverse change in our relationship with VF Corporation would have a
material adverse effect on our results of operations. In addition, our sales of those products could be materially and adversely affected
if either VF Corporation’s or The North Face brand’s images, reputations, or popularity were to be negatively impacted.
If we lose our key customer and are unable
to attract new customers, then our business, results of operations, and financial condition would be adversely affected.
If our key customer, VF Corporation,
fails to purchase our merchandise at the same historical rate, or at all, we will need to attract new customers and we cannot assure you
that we will be able to do so. We do not currently invest significant resources in marketing our products, and we cannot assure you that
any new investments in sales and marketing will lead to the acquisition of additional customers or increased sales or profitability consistent
with prior periods. If we are unable to attract new customers or customers that generate comparable profit margins to VF Corporation,
then our results of operations and financial condition could be materially and adversely affected.
If we lose our larger brand and retail nominations
or customers, or the customers fail to purchase our products at anticipated levels, our sales and operating results will be adversely
affected.
Our results of operations
depend to a significant extent upon the commercial success of our larger brand name customers. If we lose our significant brand nominations,
our customers fail to purchase our products at anticipated levels, or our relationships with these customers or the brands and retailers
they serve diminishes, it may have an adverse effect on our results and we may lose a primary source of revenue. In addition, we may not
be able to recoup development and inventory costs associated with these customers and we may not be able to collect our receivables from
them, which would negatively impact our financial condition and results of operations.
If the market share of our customers declines,
our sales and earnings may decline.
Our sales can be adversely
affected in the event that our direct and indirect customers do not successfully compete in the markets in which they operate. In the
event that the sales of one of our major customers decline for any reason, regardless of whether it is related to us or to our products,
our sales to that customer may also decline, which could reduce our overall sales and our earnings.
7
Our financial condition, results of operations,
and cash flows have been adversely affected by the COVID-19 pandemic.
In December 2019, COVID-19
was first identified in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19
a pandemic—the first pandemic caused by a coronavirus. The outbreak has reached more than 160 countries, including Jordan and the
United States, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel
bans, intended to control the spread of the virus. On March 17, 2020, the country of Jordan announced a shutdown of non-essential activities
as part of its proactive national efforts to limit the spread of COVID-19. On April 4, 2020, we resumed operations of our main production
facilities in Al Tajamouat Industrial City under the condition that only migrant workers, living in dormitories in Al Tajamouat Industrial
City, were allowed to go to work in the factories under strict hygienic precautionary measures, pursuant to an approval from the Jordanian
government dated April 1, 2020. Our Al-Hasa workshop was also allowed to restart operation on April 26, 2020. Eventually, local employees
were also allowed to resume work starting June 1, 2020.
Owing to the national shutdown
in Jordan between March 18 and March 31, 2020, the shipment of approximately $1.6 million of our orders which were scheduled to be shipped
by March 31, 2020, the end of fiscal 2020, was postponed. We shipped these orders in the first quarter of fiscal 2021. There was also
loss of productivity in the shutdown period which negatively impacted our first quarter and full year profitability. There was a decrease
of sales of approximately 3% in fiscal 2021 comparing to fiscal 2020 due to the loss in productivity in the gradual resumption of production
in early April 2020 and the change in customer mix due to lower demand from U.S. customers in fiscal 2021. Our gross profit margin was
also down by approximately 1% point from 19% to 18% due to more limitation on overtime work, higher expenses on hygienic precautions,
and higher proportion of local orders that typically have a lower profit margin.
The COVID-19 pandemic may
also materially adversely affect our business operations and condition and operating results for fiscal 2022, including but not limited
to material negative impact on our total revenue, slower collection of accounts receivables, and additional allowance for doubtful accounts.
Because of the significant uncertainties surrounding the COVID-19 pandemic, we cannot reasonably estimate the extent of the business disruption
and the related financial at this time.
Defaults under the Secured Credit Facilities
could result in a foreclosure on our assets by our lender which would negatively impact our financial condition and results of operations.
We are party to secured credit
facilities with Hong Kong and Shanghai Banking Corporation (“HSBC”) for up to $23,000,000 (the “Secured Credit Facilities”)
to finance our working capital needs. The Secured Credit Facilities consist of (i) an $11,000,000 import credit facility with HSBC entered
into on May 29, 2017 and amended on June 19, 2018, August 12, 2019, and July 3, 2020, and (ii) a $12,000,000 invoice discounting/factoring
facility entered into on August 21, 2017 and amended on June 14, 2018. The Secured Credit Facilities are guaranteed by us, Jerash Garments,
and Treasure Success. The Secured Credit Facilities are collateralized by a blanket security interest and includes various financial and
other covenants. If in the future we default under the Secured Credit Facilities, our lender could, among other things, declare our debt
to be immediately due and payable. If this were to occur, we would be unable to repay our bank debt in full unless we could sell sufficient
assets or obtain new financing through a replacement credit facility or equity transaction. If a new credit facility could be obtained,
it is likely that it would have higher interest rates and impose significant additional restrictions and requirements on us. There is
no assurance that we would be able to obtain a waiver or amendment from our lender or obtain replacement debt financing or issue sufficient
equity securities to refinance these facilities. If we are unable to pay off the facility, our lender could foreclose on our assets, which
may negatively impact our financial condition and results of operations. In fiscal 2021, Treasure Success had no transaction or balance
in the invoice discounting/factoring facility granted by HSBC. In May 2021, Treasure Success received a letter from HSBC dated March 30,
2021 that the debts purchase services under the invoice discounting/factoring facility between Treasure Success and HSBC were terminated
with immediate effect. We had no outstanding balance in the invoice discounting/factoring facility granted by HSBC as of March 31, 2021.
8
We may require additional financing to fund
our operations and capital expenditures.
As of March 31, 2021, we had
cash and cash equivalents of approximately $21.1 million and restricted cash of approximately $1.7 million. There can be no assurance
that our available cash, together with resources from our operations, will be sufficient to fund our operations and capital expenditures.
In addition, our cash position may decline in the future, and we may not be successful in maintaining an adequate level of cash resources.
We are party to the Secured
Credit Facilities with HSBC. As of March 31, 2021, we had incurred no indebtedness under the Secured Credit Facilities.
Pursuant to a facility letter
(the “SCBHK facility”) dated June 15, 2018 issued to Treasure Success by Standard Chartered Bank (Hong Kong) Limited (“SCBHK”),
SCBHK offered to provide an import facility of up to $3,000,000 to Treasure Success. The SCBHK facility covers import invoice financing
and pre-shipment financing under export orders with a combined limit of $3,000,000. SCBHK charges interest at 1.3% per annum over SCBHK’s
cost of funds. In consideration for arranging the SCBHK facility, Treasure Success paid SCBHK HKD50,000. We were informed by SCBHK on
January 31, 2019 that the SCBHK facility had been activated. As of March 31, 2021, there was an outstanding amount of approximately
$0.6 million under the SCBHK facility.
In addition, we may be required
to seek additional debt or equity financing in order to support our growing operations. We may not be able to obtain additional financing
on satisfactory terms, or at all, and any new equity financing could have a substantial dilutive effect on our existing stockholders.
If we cannot obtain additional financing, we may not be able to achieve our desired sales growth, and our results of operations would
be negatively affected.
We may have conflicts of interest with our
affiliates and related parties, and in the past we have engaged in transactions and entered into agreements with affiliates that were
not negotiated at arms’ length.
We have engaged, and may in
the future engage, in transactions with affiliates and other related parties. These transactions may not have been, and may not be, on
terms as favorable to us as they could have been if obtained from non-affiliated persons. While an effort has been made and will continue
to be made to obtain services from affiliated persons and other related parties at rates and on terms as favorable as would be charged
by others, there will always be an inherent conflict of interest between our interests and those of our affiliates and related parties.
Through his wholly-owned entity Merlotte, Mr. Choi, our chairman, chief executive officer, president, treasurer, and a significant stockholder,
has an indirect ownership interest in certain companies, including Ford Glory International Limited (“Ford Glory”) and Jiangmen
V-Apparel Manufacturing Limited, with which we have entered into, or in the future may enter into, agreements or arrangements. In August
2019, HSBC released the personal guarantees of Mr. Choi and Mr. Ng Tsze Lun (“Mr. Ng”), a significant stockholder, in exchange
for Treasure Success and Jerash Holdings agreeing to guarantee the amounts under our Secured Credit Facilities with HSBC. The release
of these guarantees personally benefited Mr. Choi and Mr. Ng but required Jerash Holdings and Treasure Success to incur potential liability
in connection with their guarantee. See also “Note 11—Related Party Transactions.” Our majority stockholders may economically
benefit from our arrangements with related parties. If we engage in related party transactions on unfavorable terms, our operating results
will be negatively impacted.
We are dependent on a product segment comprised
of a limited number of products.
Presently, we generate revenue
primarily from manufacturing and exporting sport and outerwear. A shift in demand from such products may reduce the growth of new business
for our products, and reduce existing business in those products. If demand in sport and outerwear were to decline, we may endeavor to
expand or transition our product offerings to other segments of the clothing retail industry. There can be no assurance that we would
be able to successfully make such an expansion or transition, or that our sales and margins would not decline in the event we made such
an expansion or transition.
Our revenue and cash requirements are affected
by the seasonal nature of our business.
A significant portion of our
revenue is received during the first six months of our fiscal year, or from April through September. A majority of our VF Corporation
orders are derived from winter season fashions, the sales of which occur in the spring and summer and are merchandized by VF Corporation
during the autumn months (September through November). As such, the second half of our fiscal year reflect lower sales in anticipation
of the spring and summer seasons. In addition, due to the nature of our relationships with customers and our use of purchase orders to
conduct our business, our revenue may vary from period to period.
9
Changes in our product mix and the geographic
destination of our products or source of our supplies may impact our cost of goods sold, net income, and financial position.
From time to time, we experience
changes in the product mix and the geographic destination of our products. To the extent our product mix shifts from higher revenue items,
such as jackets, to lower revenue items, such as pants, our cost of goods sold as a percentage of gross revenue will likely increase.
In addition, if we sell a higher proportion of products in geographic regions where we do not benefit from free trade agreements or tax
exemptions, our gross margins will fall. If we are unable to sustain consistent product mix and geographic destinations for our products,
we could experience negative impacts to our financial condition and results of operations.
Our direct and indirect customers are in
the clothing retail industry, which is subject to substantial cyclical variations and could have a material adverse effect on our results
of operations.
Our direct and indirect customers
are in the clothing retail industry, which is subject to substantial cyclical variations and is strongly affected by any downturn or slowdown
in the general economy. Factors in the clothing retail industry that may influence our operating results from quarter to quarter include:
● the volume and timing of customer orders we receive during the quarter;
● the timing and magnitude of our customers’ marketing campaigns;
● the loss or addition of a major customer or of a major retailer nomination;
● the availability and pricing of materials for our products;
● the increased expenses incurred in connection with introducing new products;
● currency fluctuations;
● political factors that may affect the expected flow of commerce; and
● delays caused by third parties.
In addition, uncertainty over
future economic prospects could have a material adverse effect on our results of operations. Many factors affect the level of consumer
spending in the clothing retail industry, including, among others:
● general business conditions;
● interest rates;
● the availability of consumer credit;
● taxation; and
● consumer confidence in future economic conditions.
Consumer purchases of discretionary
items, including our products, may decline during recessionary periods and also may decline at other times when disposable income is lower.
Consequently, our customers may have larger inventories of our products than expected, and to compensate for any downturn they may reduce
the size of their orders, change the payment terms, limit their purchases to a lower price range, and try to change their purchase terms,
all of which may have a material adverse effect on our financial condition and results of operations.
The clothing retail industry is subject
to changes in fashion preferences. If our customers misjudge a fashion trend or the price which consumers are willing to pay for our products
decreases, our revenue could be adversely affected.
The clothing retail industry
is subject to changes in fashion preferences. We design and manufacture products based on our customers’ judgment as to what products
will appeal to consumers and what price consumers would be willing to pay for our products. Our customers may not be successful in accurately
anticipating consumer preferences and the prices that consumers would be willing to pay for our products. Our revenue will be reduced
if our customers are not successful, particularly if our customers reduce the volume of their purchases from us or require us to reduce
the prices at which we sell our products.
10
If we experience product quality or late
delivery problems, or if we experience financial problems, our business will be negatively affected.
We may from time to time experience
difficulties in making timely delivery of products of acceptable quality. Such difficulties may result in cancellation of orders, customer
refusal to accept deliveries, or reductions in purchase prices, any of which could have a material adverse effect on our financial condition
and results of operations. There can be no assurance that we will not experience difficulties with manufacturing our products.
We face intense competition in the worldwide
apparel manufacturing industry.
We compete directly with a
number of manufacturers of sport and outerwear. Some of these manufacturers have lower cost bases, longer operating histories, larger
customer bases, greater geographical proximity to customers, or greater financial and marketing resources than we do. Increased competition,
direct or indirect, could reduce our revenue and profitability through pricing pressure, loss of market share, and other factors. We cannot
assure you that we will be able to compete successfully with existing or new competitors, as the market for our products evolves and the
level of competition increases. We believe that our business will depend upon our ability to provide apparel products of good quality
and meeting our customers’ pricing and delivery requirements, and our ability to maintain relationships with our major customers.
There can be no assurance that we will be successful in this regard.
We may not be successful in integrating acquired businesses.
Our growth and profitability
could be adversely affected if we acquire businesses or assets of other businesses and are unable to integrate the business or assets
into our current business. To grow effectively, we must find acquisition candidates that meet our criteria and successfully integrate
the acquired business into ours. If acquired businesses do not achieve expected levels of production or profitability, we are unable to
integrate the business or assets into our business, or we are unable to adequately manage our growth following the acquisition, our results
of operations and financial condition would be adversely affected.
We have previously experienced material
weaknesses in our internal control over financial reporting. If we fail to establish and maintain an effective system of internal control
over financial reporting, we may not be able to accurately and timely disclose information about our financial results or prevent fraud.
Any inability to accurately and timely disclose financial results could harm our business and reputation and cause the market price of
our common stock to decline.
A system of financial controls
and procedures is necessary to ensure that information about our financial results is recorded, processed, summarized, and reported in
an accurate and timely fashion. Effective internal control over financial reporting is necessary for us to provide reliable financial
reports and prevent fraud. If we cannot disclose required information or provide reliable financial reports, we may not be able to manage
our business as effectively as we would if an effective control environment existed, and our business and reputation may be harmed. Our
independent registered public accounting firm previously identified that we had a material weakness because we lacked sufficient personnel
with an appropriate level of knowledge of accounting principles generally accepted by the United States of America (“U.S. GAAP”)
and financial reporting. Although we have taken certain steps to address this deficiency and it is no longer a material weakness, it is
possible that we may have a material weakness identified in the future if the controls and procedures we have implemented are inadequate.
Our results of operations are subject to fluctuations in currency
exchange rates.
Exchange rate fluctuations
between the U.S. dollar and JOD, Hong Kong dollar, or Chinese Yuan (“CNY”), as well as inflation in Jordan, Hong Kong, or
the PRC, may negatively affect our earnings. A substantial majority of our revenue and a substantial portion of our expenses are denominated
in U.S. dollars. However, a significant portion of the expenses associated with our Jordanian, Hong Kong, or PRC operations, including
personnel and facilities-related expenses, are incurred in JOD, Hong Kong dollars, or CNY, respectively. Consequently, inflation in Jordan,
Hong Kong, or the PRC will have the effect of increasing the dollar cost of our operations in Jordan, Hong Kong, or the PRC, respectively,
unless it is offset on a timely basis by a devaluation of JOD, Hong Kong dollar, or CNY, as applicable, relative to the U.S. dollar. We
cannot predict any future trends in the rate of inflation in Jordan, Hong Kong, or the PRC or the rate of devaluation of JOD, Hong Kong
dollar, or CNY, as applicable, against the U.S. dollar. In addition, we are exposed to the risk of fluctuation in the value of JOD, Hong
Kong dollar, and CNY vis-a-vis the U.S. dollar. There can be no assurance that JOD or Hong Kong dollar will remain effectively pegged
to the U.S. dollar. Any significant appreciation of JOD, Hong Kong dollar, or CNY against the U.S. dollar would cause an increase in our
JOD, Hong Kong dollar, or CNY expenses, as applicable, as recorded in our U.S. dollar denominated financial reports, even though the expenses
denominated in JOD, Hong Kong dollars, or CNY, as applicable, will remain unchanged. In addition, exchange rate fluctuations in currency
exchange rates in countries other than Jordan where we operate and do business may also negatively affect our earnings.
11
We are subject to the risks of doing business
abroad.
All of our products are manufactured
outside the United States, at our subsidiaries’ production facilities in Jordan. Foreign manufacturing is subject to a number of
risks, including work stoppages, transportation delays and interruptions, political instability, foreign currency fluctuations, economic
disruptions, expropriation, nationalization, the imposition of tariffs and import and export controls, changes in governmental policies
(including U.S. policies towards Jordan), and other factors, which could have an adverse effect on our business. In addition, we may be
subject to risks associated with the availability of and time required for the transportation of products from foreign countries. The
occurrence of certain of these factors may delay or prevent the delivery of goods ordered by customers, and such delay or inability to
meet delivery requirements would have a severe adverse impact on our results of operations and could have an adverse effect on our relationships
with our customers.
Our ability to benefit from
the lower labor costs in Jordan will depend on the political, social, and economic stability of Jordan and in the Middle East in general.
We cannot assure you that the political, economic, or social situation in Jordan or in the Middle East in general will not have a material
adverse effect on our operations, especially in light of the potential for hostilities in the Middle East. The success of the production
facilities also will depend on the quality of the workmanship of laborers and our ability to maintain good relations with such laborers
in these countries. We cannot guarantee that our operations in Jordan or any new locations outside of Jordan will be cost-efficient or
successful.
Our business could suffer if we violate
labor laws or fail to conform to generally accepted labor standards or the ethical standards of our customers.
We are subject to labor laws
issued by the Jordanian Ministry of Labor for our facilities in Jordan. In addition, many of our customers require their manufacturing
suppliers to meet their standards for working conditions and other matters. If we violate applicable labor laws or generally accepted
labor standards or the ethical standards of our customers by, for example, using forced or indentured labor or child labor, failing to
pay compensation in accordance with local law, failing to operate our factories in compliance with local safety regulations, or diverging
from other labor practices generally accepted as ethical, we could suffer a loss of sales or customers. In addition, such actions could