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
result in negative publicity and may damage our reputation and discourage retail customers and consumers from buying our products.
Our products may not comply with various
industry and governmental regulations and our customers may incur losses in their products or operations as a consequence of our non-compliance.
Our products are produced
under strict supervision and controls to ensure that all materials and manufacturing processes comply with the industry and governmental
regulations governing the markets in which these products are sold. However, if our controls fail to detect or prevent non-compliant materials
from entering the manufacturing process, our products could cause damages to our customers’ products or processes and could also
result in fines being incurred. The possible damages, replacement costs, and fines could significantly exceed the value of our products
and these risks may not be covered by our insurance policies.
We depend on our suppliers for machinery
and maintenance of machinery. We may experience delays or additional costs satisfying our production requirements due to our reliance
on these suppliers.
We purchase machinery and
equipment used in our manufacturing process from third-party suppliers. If our suppliers are not able to provide us with maintenance or
additional machinery or equipment as needed, we might not be able to maintain or increase our production to meet any demand for our products,
which would negatively impact our financial condition and results of operations.
12
We are a holding company and rely on dividends,
distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.
We are a holding company that
does not conduct any business operations of our own. As a result, we rely on cash dividends and distributions and other transfers from
our operating subsidiaries to meet our obligations. The deterioration of income from, or other available assets of, our operating subsidiaries
for any reason could limit or impair their ability to pay dividends or other distributions to us, which in turn could adversely affect
our financial condition and results of operations.
Periods of sustained economic adversity
and uncertainty could negatively affect our business, results of operations, and financial condition.
Disruptions in the financial
markets, such as what occurred in the global markets in 2008, may adversely impact the availability and cost of credit for our customers
and prospective customers, which could result in the delay or cancellation of customer purchases. In addition, disruptions in the financial
markets may have an adverse impact on regional and world economies and credit markets, which could negatively impact the availability
and cost of capital for us and our customers. These conditions may reduce the willingness or ability of our customers and prospective
customers to commit funds to purchase our services or products, or their ability to pay for our services after purchase. These conditions
could result in bankruptcy or insolvency for some customers, which would impact our revenue and cash collections. These conditions could
also result in pricing pressure and less favorable financial terms to us and our ability to access capital to fund our operations.
Risks Related to Operations in Jordan
We are affected by conditions to, and possible
reduction of, free trade agreements.
Because of the United States-Jordan
Free Trade Agreement and the Association Agreement between the EU and Jordan, 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.
If there is a change in such benefits or if any such agreements were terminated, our profitability may be reduced.
Former President Donald Trump
expressed antipathy towards trade agreements, and took a starkly protectionist approach that included withdrawal and renegotiation of
trade agreements and trade wars with China and U.S. allies alike. The new Biden administration raises the possibility of a policy change.
President Joe Biden has expressed no desire to withdraw from existing agreements. It seems clear that his policy will be less protectionist
than former President Donald Trump’s. On the other hand, President Biden’s Buy American plan will make it harder for foreign
manufacturers to sell goods in the U.S. and his insistence on strong labor provisions in trade agreements will likely prevent them from
being implemented or protect U.S. industries when they are. It remains unclear what specifically President Biden would or would not do
with respect to trade agreements, tariffs, and duties relating to products manufactured in Jordan. If President Biden takes action or
publicly speaks out about the need to terminate or re-negotiate existing free trade agreements on which we rely, or in favor of restricting
free trade or increasing tariffs and duties applicable to our products, such actions may adversely affect our sales and have a material
adverse impact on our business, results of operations, and cash flows.
Our results of operations would be materially
and adversely affected in the event we are unable to operate our principal production facilities in Jordan.
All of our manufacturing process
is performed in a complex of production facilities located in Jordan. We have no effective back-up for these operations and, in the event
that we are unable to use the production facilities located in Jordan as a result of damage or for any other reason, our ability to manufacture
a major portion of our products and our relationships with customers could be significantly impaired, which would materially and adversely
affect our results of operation.
13
Our operations in Jordan may be adversely
affected by social and political uncertainties or change, military activity, health-related risks, or acts of terrorism.
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. In late May 2018, protests about a proposed tax bill began throughout Jordan. On June 5, 2018,
King Abdullah II of Jordan responded to the protests by removing and replacing Jordan’s prime minister. If political uncertainty
rises in Jordan, our business, financial condition, results of operations, and cash flows may be negatively impacted.
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 price of our common stock. We do not have insurance for losses and interruptions caused by terrorist attacks,
military conflicts, and wars, which could subject us to significant financial losses. The realization of any of these risks could cause
a material adverse effect on our business, financial condition, results of operations, and cash flows.
We may face interruption of production and
services due to increased security measures in response to terrorism.
Our business depends on the
free flow of products and services through the channels of commerce. In response to terrorists’ activities and threats aimed at
the United States, transportation, mail, financial, and other services may be slowed or stopped altogether. Extensive delays or stoppages
in transportation, mail, financial, or other services could have a material adverse effect on our business, results of operations, and
financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance, and security
as a result of the activities and potential delays. We may also experience delays in receiving payments from payors that have been affected
by the terrorist activities. The United States economy in general may be adversely affected by terrorist activities and any economic downturn
could adversely impact our results of operations, impair our ability to raise capital, or otherwise adversely affect our ability to grow
our business.
We are subject to regulatory and political
uncertainties in Jordan.
We conduct substantially all
of our business and operations in Jordan. Consequently, government policies and regulations, including tax policies, in Jordan will impact
our financial performance and the market price of 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. A significant change in Jordan’s economic policy
or any social or political uncertainties that impact economic policy in Jordan could adversely affect business and economic conditions
in Jordan generally and our business and prospects.
If we violate applicable anti-corruption
laws or our internal policies designed to ensure ethical business practices, we could face financial penalties and reputational harm that
would negatively impact our financial condition and results of operations.
We are subject to anti-corruption
and anti-bribery laws in the United States and Jordan. Jordan’s reputation for potential corruption and the challenges presented
by Jordan’s complex business environment, including high levels of bureaucracy, red tape, and vague regulations, may increase our
risk of violating applicable anti-corruption laws. We face the risk that we, our employees, or any third parties such as our sales agents
and distributors that we engage to do work on our behalf may take action determined to be in violation of anti-corruption laws in any
jurisdiction in which we conduct business, including the Foreign Corrupt Practices Act of 1977 (the “FCPA”). Any violation
of the FCPA or any similar anti-corruption law or regulation could result in substantial fines, sanctions, civil or criminal penalties,
and curtailment of operations that might harm our business, financial condition, or results of operations.
14
Our stockholders may face difficulties in
protecting their interests and exercising their rights as a stockholder of ours because we conduct substantially all of our operations
in Jordan and certain of our officers and directors reside outside of the United States.
Certain of our officers and
directors reside outside the United States. Therefore, our stockholders may experience difficulties in effecting service of legal process,
enforcing foreign judgments, or bringing original actions in any of these jurisdictions based upon U.S. laws, including the federal securities
laws or other foreign laws against us, our officers, and directors. Furthermore, we conduct substantially all of our operations in Jordan
through our operating subsidiaries. Because the majority of our assets are located outside the United States, any judgment obtained in
the United States against us or certain of our directors and officers may not be collectible within the United States.
Risk Factors Relating to our Securities
If we fail to comply with the continuing
listing standards of the Nasdaq, our common stock could be delisted from the exchange.
If we were unable to meet
the continued listing requirements of the Nasdaq Stock Market (“Nasdaq”), our common stock could be delisted from the Nasdaq.
Any such delisting of our common stock could have an adverse effect on the market price of, and the efficiency of the trading market for,
our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the
timing of transactions and less coverage of us by securities analysts, if any. Also, if in the future we were to determine that we need
to seek additional equity capital, being delisted from Nasdaq could have an adverse effect on our ability to raise capital in the public
or private equity markets.
Our majority stockholders will control us
for the foreseeable future, including the outcome of matters requiring stockholder approval.
Three of our stockholders
beneficially own approximately 71.4% of our outstanding common stock, as of June 22, 2021. Accordingly, our other stockholders do not
have any ability to exercise control over us and those majority stockholders will have the ability, acting together, to elect all of our
directors and to substantially influence the outcome of corporate actions requiring stockholder approval, such as: (i) a merger or a sale
of the Group, (ii) a sale of all or substantially all of our assets, and (iii) amendments to our corporate documents. This concentration
of voting power and control could have a significant effect in delaying, deferring, or preventing an action that might otherwise be beneficial
to our other stockholders and be disadvantageous to our stockholders with interests different from those entities and individuals.
Our stockholders’ ownership interest
in us may be diluted by exercises of currently outstanding or committed warrants.
We granted warrants to purchase
up to 71,100 units to designees of the placement agent in connection with a private placement offering that we initially closed on May
15, 2017 and had subsequent closings on August 18, 2017 and September 27, 2017 (the “Private Placement”). Each unit consists
of one share of our common stock and one warrant (with each such warrant being immediately exercisable for one-tenth of one share of common
stock at an exercise price of $6.25 per share for a period of five years from the issuance date). The private placement agent warrants
are exercisable with respect to 48,600 units beginning on July 15, 2017 and expiring on May 15, 2022, 18,000 units beginning on October
18, 2017 and expiring on August 18, 2022, and 4,500 units beginning on November 27, 2017 expiring on September 27, 2022. The private placement
agent’s warrants are exercisable at a price per unit equal to $5.50.
In connection with the Private
Placement, we also issued five-year warrants to purchase up to 79,000 shares of our common stock to various accredited investors at an
exercise price of $6.25 per share. Such warrants expire on May 15, 2022 with respect to 54,000 warrants, August 18, 2022 with respect
to 20,000 warrants, and September 27, 2022 with respect to 5,000 warrants. We have also issued a five-year warrant to our board observer
to purchase up to 50,000 shares of common stock. The warrant has an exercise price of $5.00 per share and may be converted by means of
a cashless exercise during the term of the warrant. This warrant may be exercised any time until May 15, 2022.
15
Finally, in connection with
our initial public offering, we issued to the underwriter and its affiliates warrants to purchase 57,200 shares of common stock at an
exercise price of $8.75 per share and an expiration date of May 2, 2023.
70,000 of the foregoing warrants
have been exercised as of the date of this annual report and there are currently 194,410 outstanding warrants to purchase shares of our
common stock. To the extent any additional warrants are exercised, our stockholders’ ownership interest in us will be diluted, which
may reduce the market price of our common stock.
Future sales and issuances of our common
stock or rights to purchase common stock could result in additional dilution of the percentage ownership of our stockholders and could
cause the market price of our common stock to decline.
We may issue additional securities
in the future. Pursuant to our amended and restated 2018 Stock Incentive Plan, we may issue up to 1,784,250 shares of common stock to
certain members of our management and key employees.
Future sales and issuances
of our common stock or rights to purchase our common stock could result in substantial dilution to our existing stockholders. We may sell
common stock, convertible securities, and other equity securities in one or more transactions at prices and in a manner as we may determine
from time to time. If we sell any such securities, our stockholders may be materially diluted. New investors in any future transactions
could gain rights, preferences, and privileges senior to those of holders of our common stock.
If securities or industry analysts do not
publish research or reports about us, or if they adversely change their recommendations regarding our common stock, our stock price and
trading volume of our common stock could decline.
The trading market for our
common stock will be influenced by the research and reports that industry or securities analysts publish about us, our industry, and our
market. If no analyst elects to cover us and publish research or reports about us, the market for our common stock could be severely limited
and our stock price could be adversely affected. In addition, if one or more analysts ceases coverage of us or fails to regularly publish
reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
If one or more analysts who elect to cover us issue negative reports or adversely change their recommendations regarding our common stock,
the market price of our common stock could decline.
The requirements of being a public company,
including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
and the requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), may strain our resources, increase our costs,
and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
We are required to comply
with the laws, regulations, requirements, and certain corporate governance provisions under the Exchange Act and the Sarbanes-Oxley Act.
Complying with these statutes, regulations, and requirements will occupy a significant amount of time of our board of directors and management,
and will significantly increase our costs and expenses and will make some activities more time-consuming and costly. In connection with
becoming a reporting company, we will need to continue:
● instituting a more comprehensive compliance function;
Our ongoing compliance efforts
will increase general and administrative expenses and may divert management’s time and attention from the development of our business,
which may adversely affect our financial condition and results of operations.
16
If we are unable to effectively implement
and maintain our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of our common stock may decline.
We have been required to evaluate
our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act beginning with the annual report on Form 10-K
for the fiscal year ended March 31, 2019. The process of designing and implementing internal controls over financial reporting may divert
our internal resources and take a significant amount of time and expense to complete. If we identify material weaknesses in our internal
control over financial reporting, are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal
control over financial reporting is ineffective, investors may lose confidence in our reported financial information, which could negatively
impact the market for our common stock and cause us to be unable to obtain additional financing on acceptable terms or at all, which could
cause harm to our business and financial condition. In addition, as an emerging growth company, we are not required to obtain an auditor
attestation of management’s evaluation of internal controls over financial reporting once such internal controls are in place. As
a result, we may fail to identify and remediate a material weakness or deficiency in our internal control over financial reporting, which
may cause our financial statements and related disclosure to contain material misstatements and could cause delays in filing required
financial statements and related reports.
The reduced disclosure requirements applicable
to emerging growth companies may make our common stock less attractive to investors, which may lead to volatility and a decrease in the
market price of our common stock.
For as long as we continue
to be an emerging growth company, we may take advantage of exemptions from reporting requirements that apply to other public companies
that are not emerging growth companies. Investors may find our common stock less attractive because we may rely on these exemptions, which
include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding
a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
If investors find our common stock less attractive as a result of exemptions and reduced disclosure requirements, there may be a less
active trading market for our common stock and our stock price may be more volatile or may decrease.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Jerash Garments owns an industrial
building of approximately 89,300 square feet and two pieces of land totaling approximately 181,000 square feet in Al Tajamouat Industrial
City. We lease additional space totaling approximately 448,000 square feet in industrial buildings in Al Tajamouat Industrial City. In
addition, we lease space for our workers in dormitories located inside and outside of Al Tajamouat Industrial City.
Treasure Success leased its
office space in Hong Kong from Ford Glory, pursuant to an agreement effective October 3, 2018 providing for a rent in the amount of HK$119,540
(approximately $15,326) per month and having a one-year term with an option to extend the term for an additional year at the same rent.
On October 3, 2019, Treasure Success exercised the option to extend the lease for an additional year at the same rent. On December 15,
2020, Treasure Success renewed the lease for an additional year starting from October 3, 2020 at the same rent. In February 2021, Ford
Glory disposed of the property that was the subject of the tenancy agreement between Treasure Success and Ford Glory. Ever Winland Limited,
the new owner of the property and an independent party to the Group, entered into a new tenancy agreement with Treasure Success on February
26, 2021. The new tenancy agreement has a term from February 26, 2021 to February 25, 2023, with a rent in the amount of HK$119,540 (approximately
$15,326) per month.
On December 11, 2018, we entered
into an agreement through Jerash Garments, one of our subsidiaries in Jordan, to acquire all of the stock of an existing garment manufacturing
business in order to operate our fourth manufacturing facility in Al Tajamouat Industrial City located in Amman, Jordan. This acquisition
increased Jerash’s annual capacity from 6.5 million pieces to 8 million pieces. The new facilities are an existing garment manufacturing
operation adjacent to Jerash’s three largest manufacturing centers. Jerash assumed ownership of all of the machinery and equipment
owned by Paramount through the acquisition. Jerash leases an approximately 100,900 square foot primary garment manufacturing factory and
housing accommodations for up to 500 workers located in Al Tajamouat Industrial City. Additionally, Jerash has coordinated with the Jordanian
Ministry of Industry and Trade, Ministry of Labor and Customs Department to assume the existing compliance certificates and workplace
certifications, including the facility’s Better Work Jordan credentials. In connection with the closing of this transaction, which
occurred as of June 18, 2019, Jerash paid an aggregate of $980,000 to Paramount to acquire all of its stock. Jerash intends to further
invest in machinery, dormitory expansion and facility audits to support additional growth at the new facility.
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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 the 54,000
square foot workshop in Al-Hasa County. This project is expected to cost approximately $200,000 upon completion.
In calendar year 2018, we
commenced another project to build a 54,000 square foot workshop in Al-Hasa County in the Tafilah Governorate of Jordan, which started
operation in November 2019. This project is a joint project with the Jordanian Ministry of Labor and the Employment and Training Department
in Jordan. Pursuant to the agreement between these parties and us, we guaranteed up to JOD112,500, or $159,000, for this project and agreed
to employ at least 500 workers for the first 12 months following the completion of the project. The Ministry of Labor financed the building
of the workshop and the Employment and Training Department will support 50% of the workers’ salaries, as well as transportation
and social security costs in the first 12 months following the completion of the project. We will be using the workshop without paying
rent until December 2022, after which time we anticipate entering into a lease agreement for the workshop with the Jordanian Ministry
of Labor for market rent. In the event that we do not comply with the terms of the agreement, we must pay the Ministry of Labor and the
Employment and Training Department JOD250,000 or $353,000.
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 were 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.
On July 1, 2020, Jiangmen
Treasure Success and Jiangmen V-Apparel Manufacturing Limited entered into a factory lease agreement, which was a replacement of a previous
lease agreement dated August 31, 2019. The new lease has a one-year term with monthly rent amount of CNY28,300 (approximately $4,300)
for additional office space and sample production purposes. On April 30, 2021, the factory lease agreement between Jiangmen Treasure Success
and Jiangmen V-apparel Manufacturing Limited was terminated. On January 1, 2021, Jiangmen Treasure Success entered a factory lease agreement
with an independent third party. The lease has a five-year term with monthly rent amount of CNY50,245 (approximately $7,700) for the first
year, CNY60,270 ($9,200) for the second year, and 5% further annual increments starting from the third year.
We believe the real property
that we own and lease is sufficient to conduct our operations as they are currently conducted.
Item 3. Legal Proceedings.
We are not currently involved
in any material legal proceedings. From time-to-time we are, and we anticipate that we will be, involved in legal proceedings, claims,
and litigation arising in the ordinary course of our business and otherwise. The ultimate costs to resolve any such matters could have
a material adverse effect on our financial statements. We could be forced to incur material expenses with respect to these legal proceedings,
and in the event that there is an outcome in any that is adverse to us, our financial position and prospects could be harmed.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been
traded and quoted on the Nasdaq Capital Market under the symbol “JRSH” since May 4, 2018. Before that, our stock was not traded
on any stock exchange. As of June 22, 2021, there were 11,334,318 shares of common stock issued and outstanding held by approximately
36 stockholders of record.
Since November 2018, the Board
of Directors of Jerash Holdings has declared a quarterly cash dividend payable to holders of its common stock. Subject to the discretion
of the Board of Directors and applicable law, we currently expect to continue declaring comparable quarterly cash dividends in the future.
For information on securities
authorized for issuance under our existing equity compensation plan, see Item 12 under the heading “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.”
We did not repurchase any
of our common stock in the fiscal year ended March 31, 2021.
During the fiscal years ended
March 31, 2021 and 2020, we did not have sales of unregistered securities other than those already disclosed in the quarterly reports
on Form 10-Q in the fiscal years 2021 and 2020 and current affair reports on Form 8-K.
Item 6. [Reserved].
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion
of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this filing.