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.
EXECUTIVE OVERVIEW
Overview
Through our wholly owned operating
subsidiaries and VIE, we are principally engaged in the manufacturing and exporting of customized, ready-made sport and outerwear from
knitted fabric and PPE produced in our facilities in Jordan.
We are an approved manufacturer
of 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, VF Corporation (which operates brands such as The North Face, Timberland, and JanSport). Our production
facilities are made up of four factory units, one workshop, and four warehouses and 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).
Impact of COVID-19 on our business
Collectability of receivables.
We had accounts receivable of $12.0 million as of March 31, 2021. Out of this $12.0 million, $11.8 million had been received through
June 12, 2021. There was approximately $0.2 million overdue account receivable as of March 31, 2021.
Inventory. We
had inventory of $25.0 million as of March 31, 2021. Most of them are for orders scheduled to be shipped within fiscal 2022.
19
Investments. We
acquired two pieces of land in fiscal 2020 for the construction of dormitory and production facility. Due to the COVID-19 pandemic, the
management decided to hold off the construction in fiscal 2021. In April 2021, we commenced the construction of a housing facility for
our multi-national workforce on the land. See “Item 1. Business”
Revenue. For
fiscal 2021, annual sales was $90.2 million, which was $2.8 million, or approximately 3%, lower than $93.0 million for fiscal 2020.
The decrease was mainly due to the loss in productivity in the gradual resumption of production in April 2020 after the national lockdown,
the limitation in overtime work, and the strengthened procedures in hygienic precautions. The aggregate sales in the first two quarters
of fiscal 2021 decreased by $7.3 million to $45.8 from $53.1 million in the same period in fiscal 2020. The decrease was mostly compensated
by the increase in sales of $4.5 million in the second half of fiscal 2021 to $44.4 million from $39.9 million in the same period in fiscal
2020. In addition, we managed to secure orders from new local customers that helped mitigate the impact of slower sales to the U.S. market.
Liquidity/Going Concern.
We had approximately $21.1 million of cash and cash equivalent as of March
31, 2021. We had net current assets of approximately $50.1 million with a current ratio of 4.5 to 1. In addition, we had banking facilities
with an aggregate limit of $26 million and $612,703 outstanding as of March 31, 2021. Given the above, we believe that we will have sufficient
financial resources to maintain as a going concern in fiscal 2022.
Seasonality of Sales
A significant portion of our
revenue is received during the first six months of our fiscal year. The majority of our VF Corporation orders are derived from winter
season fashions, the sales of which occur in Spring and Summer and are merchandized by VF Corporation during the months of September through
November. As such, the second half of our fiscal years reflect lower sales in anticipation of the spring and summer seasons. One of our
strategies is to increase sales with other customers where clothing lines are stronger during the spring months. This strategy also reflects
our current plan to increase our number of customers to mitigate our current concentration risk with VF Corporation.
Results of Operations
The following table presents
certain information from our statement of income for fiscal years 2021 and 2020 and should be read, along with all of the information
in this management’s discussion and analysis, in conjunction with the consolidated financial statements and related notes included
elsewhere in this filing.
(All amounts, other than percentages, in thousands
of U.S. dollars)
Fiscal Years Ended March 31,
Statement of Income Data: Amount As % of Sales Amount As % of Sales Amount %
Revenue. Revenue
decreased by approximately $2.8 million, or 3%, to approximately $90.2 million in fiscal 2021 from approximately $93.0 million in fiscal
2020. The decrease was mainly the result of the loss in productivity in the resumption of production in April 2020 after the national
lockdown in Jordan, the restriction in overtime work, and strengthened hygienic precautions. Approximately 88% and 96% of our products
were exported to the U.S. in fiscal 2021 and 2020, respectively.
20
The table below presents our
revenue for fiscal years 2021 and 2020 by geographic area.
Revenue by Geographic Area
(All amounts, other than percentages, in thousands
of U.S. dollars)
Fiscal Years Ended March 31,
Region Amount % Amount % Amount %
Since January 2010, all apparel
manufactured in Jordan can be exported to the U.S. without customs duty being imposed, pursuant to the United States-Jordan Free Trade
Agreement entered into in December 2001. This free trade agreement provides us with substantial competitiveness and benefit that allowed
us to expand our garment export business in the U.S. Our sales to the U.S. decreased by approximately 11% in fiscal 2021 compared to fiscal
2020. According to the Major Shippers Report issued by the Office of Textiles and Apparel under the U.S. Department of Commerce dated
May 4, 2021, U.S. apparel import from Jordan decreased by approximately 22% from $1.83 billion in the fiscal year ended March 31, 2020
to approximately $1.43 billion in the fiscal year ended March 31, 2021. Our sales decrease ratio has been lower than the industrial average
decrease ratio amid the COVID pandemic, and we expect we will still have plenty of room to expand our garment export business in the U.S.
in the long run, as Jerash accounted for only approximately 6% of the total Jordanian garment exports to the U.S. in fiscal 2021, according
to data from the Major Shippers Report issued by the U.S. Department of Commerce.
Cost of goods sold.
Following the decrease in sales revenue, our cost of goods sold decreased by approximately $0.8 million, or 1%, to approximately
$74.2 million in fiscal 2021 from approximately $75.0 million in fiscal 2020. As a percentage of revenue, the cost of goods sold increased
by approximately 1% point to 82% in fiscal 2021 from 81% in fiscal 2020. The increase in cost of goods sold as a percentage of revenue
was primarily attributable to the higher proportion of local orders that typically have a lower average profit margin.
For the fiscal year ended
March 31, 2021, we purchased approximately 13% of our garments from one major supplier. For the fiscal year ended March 31, 2020, we purchased
approximately 22%, 16%, and 11% of our raw materials from three major suppliers, respectively.
Gross profit margin.
Gross profit margin was approximately 18% in fiscal 2021, which decreased by approximately 1% point from 19% in fiscal 2020. The decrease
in gross profit margin was primarily driven by a higher proportion of local orders that typically have a lower gross margin, and the loss
in productivity in April 2020 due to the national lockdown in Jordan.
Selling, general, and
administrative expenses. Selling, general, and administrative expenses increased by approximately 3% from approximately $10.3
million in fiscal 2020 to approximately $10.6 million in fiscal 2021. The slight increase was mainly attributable to the increase in expenses
for pandemic precaution and the increase in headcounts to cater for sales growth in the second half of the year.
Other income
(expense), net. Other income, net was approximately $109,000 in fiscal 2021 and other expenses, net was approximately
$21,000 in fiscal 2020. The increase in other income was primarily due to a return from short-term investments that were realized
during the year.
Net income before taxation.
Net income before taxation for fiscal 2021 decreased by approximately 28% from approximately $7.6 million to approximately $5.5
million. The decrease was mainly attributable to the lower unit sales price due to higher proportion of local orders, the lower margin
of local orders, the loss of productivity in the national lockdown in April 2020, the increase in expenses for pandemic precaution, and
the increase in headcounts to cater for sales growth in the second half of the year discussed above.
21
U.S. taxation. Income
tax expense for fiscal 2021 was approximately $1.3 million compared to income tax expense of $1.2 million for fiscal 2020. The effective
tax rate was 24.5% and 15.4% for fiscal 2021 and 2020, respectively. The increase of effective tax rate was caused by the increase in
local tax rate in Jordan, true up of Jordan tax for fiscal year 2019, and higher proportion of losses in China, Hong Kong, and the U.S.
Jordan taxation.
Jerash Garments, Jerash Embroidery, Chinese Garments, Paramount, Jerash The First, and Victory Apparel are subject to the regulations
of Income Tax Department in Jordan. The corporate income tax rate has been 16% for the industrial sector starting from January 1, 2021.
In accordance with the Investment Encouragement Law, Jerash Garments’ export sales to overseas customers are entitled to a 100%
income tax exemption for a period of 10 years commencing at the first day of production. This exemption was extended for five years to
December 31, 2018. Effective January 1, 2019, in accordance to Development Zone law, Jerash Garments and its subsidiaries and VIE began
paying corporate income tax in Jordan at a rate of 10% plus a 1% social contribution. The income tax rate increased to 14% plus 1% social
contribution effective from January 1, 2020. The tax income tax rate increased to 16% plus a 1% social contribution effective from January
1, 2021. For fiscal 2021, our income tax in Jordan was approximately $1,342,000.
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.
Hong Kong taxation.
Treasure Success is registered in Hong Kong with an income tax rate of 8.25% on assessable profits up to HK$2,000,000 and 16.5% on any
part of assessable profits over HK$2,000,000. Treasure Success incurred no income tax expense for fiscal 2021 and 2020 due to its operating
loss. In accordance with tax legislation in Hong Kong, the accumulated loss can be used to offset future profit for income tax purposes.
PRC taxation.
Jiangmen Treasure Success was established in the PRC and is subject to an income tax rate of 25%.
Net income. Net
income for fiscal 2021 was approximately $4.1 million, a 36% decrease from approximately $6.5 million for fiscal 2020. The decrease was
mainly attributable to the decrease in sales revenue and the increase in cost of sales and selling and administration expenses discussed
above.
Liquidity and Capital Resources
Jerash Holdings is a holding
company incorporated in Delaware. As a holding company, we rely on dividends and other distributions from our Jordanian subsidiaries to
satisfy our liquidity requirements. Current Jordanian regulations permit our Jordanian subsidiaries and VIE to pay dividends to us only
out of their accumulated profits, if any, determined in accordance with Jordanian accounting standards and regulations. In addition, our
Jordanian subsidiaries and VIE are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund
certain reserve funds. These reserves are not distributable as cash dividends. We have relied on direct payments of expenses by our subsidiaries
and VIE (which generate revenue) to meet our obligations to date. To the extent payments are due in U.S. dollars, we have occasionally
paid such amounts in JOD to an entity controlled by our management capable of paying such amounts in U.S. dollars. Such transactions have
been made at prevailing exchange rates and have resulted in immaterial losses or gains on currency exchange but no other profit.
As of March 31, 2021, we had
cash of approximately $21.1 million and restricted cash of approximately $1.7 million compared to cash of approximately $26.1 million
and restricted cash of approximately $0.8 million as of March 31, 2020, which was mainly the security deposit supporting our duty-free
import into Jordan at the customs and deposit supporting letter of credit to suppliers.
Our current assets as of March
31, 2021 were approximately $64.7 million, and our current liabilities were approximately $14.5 million, which resulted in a current ratio
of approximately 4.5:1. Our current assets as of March 31, 2020 were approximately $59.0 million, and our current liabilities were approximately
$10.9 million, which resulted in a current ratio of approximately 5.4:1. Total equity as of March 31, 2021 and 2020 was approximately
$56.7 million and $54.8 million, respectively.
22
We had net working capital
of $50.1 million and $48.1 million as of March 31, 2021 and 2020, respectively. Based on our current operating plan, we believe that cash
on hand and cash generated from operation will be sufficient to support our working capital needs for the next 12 months after the date
of this annual report.
We have funded our working
capital needs from operations. Our working capital requirements are influenced by the level of our operations, the numerical and dollar
volume of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections.
Credit Facilities
HSBC Facility
On May 29, 2017, our
wholly owned subsidiary, Treasure Success, entered into a facility letter (“2017 Facility Letter”) with HSBC to provide credit
to us, which was first amended by an offer letter between HSBC, Treasure Success, and Jerash Garments dated June 19, 2018 (“2018
Facility Letter”), further amended on August 12, 2019 (“2019 Facility Letter”), and further amended pursuant to
a letter agreement dated July 3, 2020 (the “2020 Facility Letter,” and together with the 2017 Facility Letter, 2018 Facility
Letter, and 2019 Facility Letter, the “HSBC Facility”). The 2020 Facility Letter extended the term of the HSBC Facility indefinitely,
subject to review at any time by HSBC. Pursuant to the HSBC Facility, we have a total credit limit of $11,000,000.
The HSBC Facility currently
provides us with various credit facilities for importing and settling payment for goods purchased from our suppliers. The available credit
facilities as described in greater detail below includes an import facility, import facilities with loan against import, trust receipts,
clean import loan, and advances to us against purchase orders. HSBC charges an interest rate of 1.5% per annum over LIBOR or HIBOR, as
applicable, for credit related to the release of goods immediately on our documentary credit. LIBOR was 0.3% and HIBOR was 0.9% on June
24, 2020. HSBC charges a commission of: i) 0.25% for the first $50,000, ii) 0.125% for the balance in excess of $50,000 and up to $100,000,
and iii) 0.0625% for balance in excess of $100,000 and an interest rate of 1.5% per annum over LIBOR or HIBOR, as applicable, for credit
related to trust receipts whereby HSBC has title to the goods or merchandise released immediately to us. HSBC has approved certain of
our suppliers that are eligible to use clean import loans. HSBC charges a commission of: i) 0.25% for the first $50,000, ii) 0.125% for
the balance in excess of $50,000 and up to $100,000, and iii) 0.0625% for balance in excess of $100,000 and an interest of 1.5% per annum
over LIBOR or HIBOR, as applicable, for credit services related to clean import loans or release of the goods or merchandise based on
evidence of delivery or invoice. HSBC will advance up to 70% of the purchase order value in our favor. HSBC charges a handling fee of
0.25% and an interest rate of 1.5% per annum over LIBOR or HIBOR, as applicable, for credit services related to advances. Previously,
the HSBC Facility was secured by collateral provided by us, Jerash Garments, Treasure Success, and the personal guarantees of Mr. Choi
and Mr. Ng. The personal guarantees were released by HSBC in August 2019. Jerash Garments is also required to maintain an account
at HSBC for receiving payments from VF Sourcing Asia S.A.R.L. and its related companies.
As of March 31, 2021, there
was no amount outstanding under the HSBC Facility. Borrowings under the HSBC Facility are due upon demand by HSBC or within 120 days of
each borrowing date.
HSBC Factoring Agreement
On June 5, 2017, Treasure
Success entered into an Offer Letter—Invoice Discounting/Factoring Agreement, and on August 21, 2017, Treasure Success entered
into the Invoice Discounting/Factoring Agreement (together, the “2017 Factoring Agreement”) with HSBC for certain debt purchase
services related to our accounts receivable. On June 14, 2018, Treasure Success and Jerash Garments entered into another Offer Letter—Invoice
Discounting/Factoring Agreement with HSBC (the “2018 Factoring Agreement, and together with the 2017 Factoring Agreement, the “HSBC
Factoring Agreement”), which amended the 2017 Factoring Agreement. The HSBC Factoring Agreement was effective through May 1, 2019.
Under the current terms of the HSBC Factoring Agreement, we may borrow up to $12,000,000. In exchange for advances on eligible invoices
from HSBC for our approved customers, HSBC charges a fee to advance such payments at a discounting charge of 1.5% per annum over 2-month
LIBOR or HIBOR, as applicable. Such fee accrues on a daily basis on the amount of funds in use. HSBC has final determination of the percentage
amount available for prepayment from each of our approved customers. We may not prepay an amount from a customer in excess of 85% of the
funds available for borrowing.
23
HSBC also provides credit
protection and debt services related to each of our preapproved customers. For any approved debts or collections assigned to HSBC, HSBC
charges a flat fee of 0.35% on the face value of the invoice for such debt or collection. We may assign debtor payments that are to be
paid to HSBC within 90 days, defined as the maximum terms of payment. We may receive advances on invoices that are due within 30 days
of the delivery of our goods, defined as the maximum invoicing period.
The advances made by HSBC
were secured by collateral provided by us, Jerash Garments, and Treasure Success, and the personal guarantees of Mr. Choi and Mr. Ng.
If we fail to pay any sum due to HSBC, HSBC may charge a default interest at the rate of 8.5% per annum over the best lending rate quoted
by HSBC on such defaulted amount. In addition, to secure the Factoring Agreement, we had granted HSBC a charge of $3,000,000 over our
deposits. Following the effectiveness of the 2018 Factoring Agreement, the security collateral of $3,000,000 was released as of January 22,
2019. HSBC released the personal guarantees of Mr. Choi and Mr. Ng in August 2019.
The HSBC Factoring Agreement
is subject to the review by HSBC at any time and HSBC has discretion on whether to renew the HSBC Factoring Agreement. Either party may
terminate the agreement subject to a 30-day notice period. 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 HSBC Factoring Agreement between Treasure Success and HSBC were terminated with immediate effect. We
had no outstanding balance under the HSBC Factoring Agreement as of March 31, 2021.
SCBHK Facility Letter
Pursuant to the SCBHK facility
letter dated June 15, 2018, and issued to Treasure Success by SCBHK, SCBHK offered to provide an import facility of up to $3.0 million
to Treasure Success. The SCBHK facility covers import invoice financing and pre-shipment financing under export orders with a combined
limit of $3 million. Borrowings under the SCBHK facility are due within 90 days of each invoice or financing date. 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 approximately
$0.6 million outstanding under the SCBHK facility.
Fiscal Years ended March 31, 2021 and 2020
The following table sets forth
a summary of our cash flows for the fiscal years ended March 31, 2021 and 2020.
(All amounts in thousands of U.S. dollars)
For the fiscal years ended March 31,
Net cash (used in) provided by operating activities $ (1,500 ) $ 6,913
Net cash used in investing activities (894 ) (4,932 )
Net cash used in financing activities (1,653 ) (2,913 )
Effect of exchange rate changes on cash (8 ) 15
Net decrease in cash (4,055 ) (917 )
Cash and restricted cash, beginning of year 26,917 27,834
Cash and restricted cash, end of year $ 22,862 $ 26,917
Supplemental disclosure information
Cash paid for interest $ - $ 6
Non-cash financing activities
24
Operating Activities
Net cash used in operating
activities was approximately $1.5 million in fiscal 2021, compared to net cash provided by operating activities of approximately $6.9
million in fiscal 2020. The increase in net cash used in operating activities was primarily attributable to the following factors:
Investing Activities
Net cash used in investing
activities was approximately $0.9 million and $4.9 million for fiscal 2021 and 2020, respectively. The decrease in net cash used in investing
activities was mainly attributable to the deferred investment in expansion due to the pandemic and short-term investment income.
Financing Activities
Net cash used in financing
activities was approximately $1.7 million for fiscal 2021 compared to net cash used of $2.9 million in fiscal 2020. The net cash outflow
in fiscal 2021 resulted from payments of dividend and partially offset by the proceeds from bank borrowings. Net cash used in fiscal 2020
was primarily for payments of dividend and repayment of bank borrowings.
Non-cash Financing Activities
There was approximately $1.4
million and $1.6 million of rights of use assets obtained in exchange for operating lease obligations in fiscal 2021 and 2020, respectively,
pursuant to new financial reporting requirements.
Statutory Reserves
In accordance with the Corporate
Law in Jordan, Jerash Holdings’ subsidiaries and VIE in Jordan are required to make appropriations to certain reserve funds, based
on net income determined in accordance with generally accepted accounting principles of Jordan. Appropriations to the statutory reserve
are required to be 10% of net income until the reserve is equal to 100% of the entity’s share capital. Jiangmen Treasure Success
is required to set aside 10% of its net income as statutory surplus reserve until such reserve is equal to 50% of its registered capital.
These reserves are not available for dividend distribution. The statutory reserve was $346,315 and $212,739 in fiscal 2021 and 2020, respectively.
The following table provides
the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets
as a percentage of consolidated net assets, as of March 31, 2021 and 2020.
(All amounts, other than percentages, in thousands
of U.S. dollars)
As of March 31,
Total Restricted Net Assets $ 346 $ 213
Restricted Net Assets as Percentage of Consolidated Net Assets 0.61 % 0.39 %
25
Total restricted net assets
accounted for approximately 0.61% of our consolidated net assets as of March 31, 2021. As our subsidiaries and VIE in Jordan are only
required to set aside 10% of net profits to fund the statutory reserves, it has reached the maximum amount. We believe the potential impact
of such restricted net assets on our liquidity is limited.
Capital Expenditures
We had capital expenditures of approximately $1.0 million and $4.7
million in fiscal 2021 and 2020, respectively, for purchases of equipment in connection with our business activities and to increase capacity.
Additions in plant and machinery amounted to approximately $0.8 million and $1.9 million in fiscal 2021 and 2020, respectively, and additions
to leasehold improvements amounted to approximately $0.2 million and $1.1 million in fiscal 2021 and 2020, respectively. In fiscal 2020,
we acquired two pieces of land for an aggregate purchase price of approximately $1.7 million.
In 2015, we commenced a project
to build a 4,800 square foot workshop in the Tafilah Governorate of Jordan, which was initially 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 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
with approximately 240 workers. Provided that we satisfy certain employment requirements over certain time periods, we do not anticipate
incurring any significant costs for the project, which was constructed in conjunction with the Jordanian Ministry of Labor and the Jordanian
Education and Training Department. In the event we breach our agreement with these government agencies, we will have to pay such agencies
JOD250,000 or approximately $353,000. See “Item 2. Properties” above for more information regarding this workshop.
On December 11, 2018, we entered
into an agreement through Jerash Garments to acquire all of the stock of Paramount, an existing garment manufacturing business, in order
to operate our fourth manufacturing facility in Al Tajamouat Industrial City in Amman, Jordan. We paid approximately $980,000 as of the
closing date of the transaction on June 18, 2019.
On August 7, 2019, we completed a transaction to acquire 12,340 square
meters (approximately three acres) of land in Al Tajamouat Industrial City, Jordan, from a third party to construct a dormitory for our
employees with aggregate purchase price JOD863,800 (approximately $1,218,303). Management has revised the plan to construct both dormitory
and production facilities on the land in order to capture the increasing demand for our capacity. We are conducting engineering design
and study on this project and we plan to begin construction in late 2021. On February 6, 2020, we completed a transaction to acquire 4,516
square meters (approximately 48,608 square feet) of land in Al Tajamouat Industrial City, Jordan, from a third party to construct a dormitory
for our employee with aggregate purchase price JOD313,501 (approximately $442,162). We expect to spend approximately $8.2 million in capital
expenditures to build the dormitory. Due to the ongoing COVID-19 pandemic, management decided to put on hold the construction project
in fiscal 2021 to retain financial resources to support our operations, and also to wait and see how the global economy and customer demand
recover after the outbreak. The preparation work resumed in early 2021 and construction work commenced in April 2021.
We projected that there will
be an aggregate of approximately $27 million of capital expenditures in both the fiscal years ending March 31, 2022 and 2023 for further
enhancement of production capacity to meet future sales growth. We expect that our capital expenditures will increase in the future as
our business continues to develop and expand. We have used cash generated from operations of our subsidiaries and VIE to fund our capital
commitments in the past and anticipate using such funds to fund capital expenditure commitments in the future.
26
Off-balance Sheet Commitments and Arrangements
We have not entered into any
other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered
into any derivative contracts that are indexed to our own shares and classified as stockholders’ equity, or that are not reflected
in our consolidated financial statements.
For Management’s Discussion
and Analysis of the fiscal years ended March 31, 2020 and 2019, please see our Annual Report on Form 10-K for the fiscal year ended March
31, 2020, filed with the SEC on June 29, 2020.
Critical Accounting Policies
We prepare our financial statements
in conformity with U.S. GAAP, which require us to make judgments, estimates, and assumptions that affect our reported amount of assets,
liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting
estimates and assumptions in the past two years, we continually evaluate these estimates and assumptions based on the most recently available
information, our own historical experience, and various other assumptions that we believe to be reasonable under the circumstances. Since
the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as
a result of changes in our estimates.
We believe that certain accounting
policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates.
The policies that we believe are the most critical to understanding and evaluating our consolidated financial condition and results of
operations are summarized in “Note 2—Summary of Significant Accounting Policies” in the notes to our audited financial
statements.
Recent Accounting Pronouncements
See “Note 3—Recent
Accounting Pronouncements” in the notes to our audited financial statements for a discussion of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
27
Item 8. Financial Statements and Supplementary Data.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Jerash Holdings (US), Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Jerash Holdings (US), Inc. and Subsidiaries (collectively, the “Company”) as of March 31, 2021 and 2020,
and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for each of the years in
the two-year period ended March 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended
March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statement. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor
since 2016.
New York, New York
June 23, 2021
F-1
JERASH HOLDINGS (US), INC.,
SUBSIDIARIES AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
LIABILITIES AND EQUITY
Current Liabilities:
Commitments and Contingencies
Equity
Accumulated other comprehensive loss (15,901 ) (8,324 )
F-2
JERASH HOLDINGS (US), INC.,
SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
For the Fiscal Years Ended March 31,
Other Income (Expense):
Net loss attributable to noncontrolling interest 1,089 5,794
Net income attributable to Jerash Holdings (US), Inc.’s
Other Comprehensive Income:
Foreign currency translation (loss) gain (7,577 ) 6,116
Comprehensive loss attributable to noncontrolling interest - -
Earnings Per Share Attributable to Common Stockholders:
Basic and diluted $ 0.37 $ 0.57
Weighted Average Number of Shares
Dividend per share $ 0.20 $ 0.20
F-3
JERASH HOLDINGS (US), INC., SUBSIDIARIES AND
AFFILIATE
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE FISCAL YEARS ENDED MARCH 31, 2021 AND
2020
Shares Amount Shares Amount Capital Reserve Earnings Gain (Loss) Interest Equity
Foreign currency translation gain - - - - - - - 6,116 - 6,116
Shared issued - - 7,974 8 (8 ) - - - - -
Foreign currency translation loss - - - - - - - (7,577 ) - (7,577 )
F-4
JERASH HOLDINGS (US), INC.,
SUBSIDIARIES AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Bad debt expense - 6,641
Amortization of operating lease right-of-use assets 933,959 476,595
Short-term investment (124,889 ) -
Changes in operating assets:
Changes in operating liabilities:
Net cash (used in) provided by operating activities (1,500,440 ) 6,912,652
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investment (9,686,091 ) -
Proceeds of short-term investment 9,810,980 -
Purchases of property, plant, and equipment (890,462 ) (4,678,249 )
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment from short-term loan (235 ) (648,665 )
EFFECT OF EXCHANGE RATES CHANGES ON CASH (7,763 ) 14,682
LESS: RESTRICTED CASH 714,844 -
Supplemental disclosure information:
Cash paid for interest $ - $ 6,171
Non-cash financing activities:
F-5
JERASH HOLDINGS (US), INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Jerash Holdings (US), Inc. (“Jerash Holdings”)
is a corporation incorporated under the laws of the State of Delaware on January 20, 2016. Jerash Holdings is a parent holding company
with no operations. Jerash Holdings, and its subsidiaries and Variable Interest Entity (“VIE”) are herein collectively referred
to as the “Company.”
Jerash Garments and Fashions Manufacturing Company
Limited (“Jerash Garments”) is a wholly owned subsidiary of Jerash Holdings and was established in Amman, the Hashemite Kingdom
of Jordan (“Jordan”), as a limited liability company on November 26, 2000 with a declared capital of 150,000 Jordanian Dinar
(“JOD”) (approximately US$212,000) as of March 31, 2021.
Jerash for Industrial Embroidery Company
(“Jerash Embroidery”) and Chinese Garments and Fashions Manufacturing Company Limited (“Chinese Garments”)
were both incorporated in Amman, Jordan, as limited liability companies on March 11, 2013 and June 13, 2013, respectively, each with
a declared capital of JOD 50,000 as of March 31, 2021. Jerash Embroidery and Chinese Garments are wholly owned subsidiaries of
Jerash Garments.
Al-Mutafaweq Co. for Garments Manufacturing
Ltd. (“Paramount”) was a contract garment manufacturer that was incorporated in Amman, Jordan, as a limited liability
company on October 24, 2004 with a declared capital of JOD 100,000. On December 11, 2018, Jerash Garments and the sole stockholder
of Paramount entered into an agreement pursuant to which Jerash Garments acquired all of the outstanding shares of stock of
Paramount. Jerash Garments assumed ownership of all of the machinery and equipment owned by Paramount. Paramount had no other
significant assets or liabilities and no operating activities or employees at the time of this acquisition, so this transaction was
accounted for as an asset acquisition. As of June 18, 2019, Paramount became a subsidiary of Jerash Garments.
Jerash The First for Medical Supplies
Manufacturing Company Limited (“Jerash The First”) was incorporated in Amman, Jordan, as limited liability company on
July 6, 2020, with a registered capital of JOD 150,000. Jerash The First is engaged in the production of medical supplies in Jordan
and is a wholly owned subsidiary of Jerash Garments.
Treasure Success International Limited (“Treasure
Success”) was incorporated on July 5, 2016 in Hong Kong, China, for the primary purpose of employing staff from China to support
Jerash Garments’ operations and is a wholly-owned subsidiary of Jerash Holdings.
Victory Apparel (Jordan) Manufacturing
Company Limited (“Victory Apparel”) was incorporated as a limited liability company in Amman, Jordan, on September 18,
2005 with a declared capital of JOD 50,000. Victory Apparel has no significant assets or liabilities or other operating activities
of its own. Although Jerash Garments does not own the equity interest of Victory Apparel, the Company’s president, director,
and significant stockholder, Mr. Choi Lin Hung (“Mr. Choi”), is also a director of Victory Apparel and controls all
decision-making for Victory Apparel along with another significant stockholder of Jerash Garments, Mr. Lee Kian Tjiauw (“Mr.
Lee”), 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 Jerash Garments. Based on
these facts, the Company 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 (“ASC”)
810-10-05-08A. Accordingly, Jerash Garments consolidates Victory Apparel’s operating results, assets, and liabilities.
Jiangmen Treasure Success Business Consultancy
Company Limited (“Jiangmen Treasure Success”) was incorporated on August 28, 2019 under the laws of the People’s Republic
of China (“China”) in Guangzhou City of Guangdong Province in China with a total registered capital of 15 million Hong Kong
Dollars (“HKD”) (approximately $1.9 million) to provide support in sales and marketing, sample development, merchandising,
procurement, and other areas. Treasure Success owns 100% of the equity interests in Jiangmen Treasure Success.
Jerash Supplies, LLC (“Jerash
Supplies”) was formed under the laws of the State of Delaware on November 20, 2020. Jerash Supplies is engaged in the trading of
personal protective equipment products and is a wholly owned subsidiary of Jerash Holdings.
The Company is engaged primarily in the manufacturing
and exporting of customized, ready-made sport and outerwear and personal protective equipment (“PPE”) produced in its facilities
in Jordan and sold in the United States, Jordan, and other countries.
F-6
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial
statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”)
and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The consolidated financial statements
include the financial statements of Jerash Holdings, and its subsidiaries and VIE. All significant intercompany balances and transactions
have been eliminated in consolidation.
In accordance with accounting standards
regarding the consolidation of VIEs, VIEs are generally entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which a company is involved
must be evaluated to determine the primary beneficiary of the risks and rewards of the VIEs. The primary beneficiary is required to consolidate
the VIE for financial reporting purposes.
As described in Note 1, management
of the Company has concluded that Victory Apparel is a VIE, and that Jerash Garments is considered the primary beneficiary because Mr.
Choi, the Company’s president, director, and significant stockholder absorbs the risks and rewards of Victory Apparel; therefore,
the Company consolidates Victory Apparel for financial reporting purposes. Noncontrolling interests result from the consolidation of Victory
Apparel, which is 100% owned by Wealth Choice Limited.
The following table sets forth the carrying
amounts of the assets and liabilities of the VIE, Victory Apparel, which was included in the Company’s consolidated balance sheets:
Third party current liabilities 1,058 1,763
* Receivables from Jerash Garments are eliminated upon consolidation.
Victory Apparel was inactive for the fiscal years ended March 31, 2021
and 2020.
Use of Estimates
The preparation of the consolidated
financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and
the reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates include allowance
for doubtful accounts, valuation of inventory reserve, useful lives of buildings and other property, and the measurement of stock-based
compensation expenses. Actual results could differ from these estimates.
Cash
The Company’s cash consists of cash on hand
and cash deposited in financial institutions. The Company considers all highly liquid investment instruments with an original maturity
of three months or less from the original date of purchase to be cash equivalents. As of March 31, 2021 and 2020, the Company had no cash
equivalents.
Restricted Cash
Restricted cash consists of cash used as security
deposits to obtain credit facilities from a bank and to secure customs clearance under the requirements of local regulations. The Company
is required to keep certain amounts on deposit that are subject to withdrawal restrictions. These security deposits at the bank are refundable
only when the bank facilities are terminated. The restricted cash is classified as a current asset if the Company intends to terminate
these bank facilities within one year, and as a non-current asset if otherwise.
F-7
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Short-term Investments
From time to time, the Company purchased financial
products that can be readily converted into cash and accounted for such financial products as short-term investments. The financial products
include money market funds, bonds, and mutual funds. The carrying values of the Company’s short-term investments approximate fair
value because of their liquidity. The gain and interest earned are recognized in the consolidated statements of income over the contractual
terms of these investments.
The Company had no short-term investments as of
March 31, 2021 and 2020. The Company recorded a realized gain of $124,889 and $Nil for the fiscal years ended March 31, 2021 and 2020,
respectively.
Accounts Receivable, Net
Accounts receivable are recognized and
carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually grants extended payment
terms to customers with good credit standing and determines the adequacy of reserves for doubtful accounts based on individual account
analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence
that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses
on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables
balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Actual amounts received
may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written
off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories are stated at the lower
of cost or net realizable value. Inventories include cost of raw materials, freight, direct labor and related production overhead. The
cost of inventories is determined using the First in, First-out method. The Company periodically reviews its inventories for excess or
slow-moving items and makes provisions as necessary to properly reflect inventory value.
Advance to Suppliers, Net
Advance to suppliers consists of balances
paid to suppliers for services or materials purchased that have not been provided or received. Advance to suppliers for services and materials
is short-term in nature. Advance to suppliers is reviewed periodically to determine whether its carrying value has become impaired. The
Company considers the assets to be impaired if the performance by the suppliers becomes doubtful. The Company uses the aging method to
estimate the allowance for the questionable balances. In addition, at each reporting date, the Company generally determines the adequacy
of allowance for doubtful accounts by evaluating all available information, and then records specific allowances for those advances based
on the specific facts and circumstances.
Property, Plant, and Equipment
Property, plant, and equipment are recorded
at cost, reduced by accumulated depreciation and amortization. Depreciation and amortization expense related to property, plant, and equipment
is computed using the straight-line method based on estimated useful lives of the assets, or in the case of leasehold improvements, the
shorter of the initial lease term or the estimated useful life of the improvements. The useful life and depreciation method are reviewed
periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items
of property, plant, and equipment. The estimated useful lives of depreciation and amortization of the principal classes of assets are
as follows:
Useful life
Land Infinite
Property and buildings 15 years
Equipment and machinery 3-5 years
Office and electronic equipment 3-5 years
Automobiles 5 years
Leasehold improvements Lesser of useful life and lease term
Expenditures for maintenance and repairs,
which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and
betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation or amortization
of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements
of income and comprehensive income.
Impairment of Long-Lived Assets
The Company assesses its long-lived
assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset group may not be recoverable. Factors which may indicate potential impairment include a significant underperformance relative
to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to
be generated by that asset. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated
fair value of the asset. The fair value is estimated based on the discounted future cash flows or comparable market values, if available.
The Company did not record any impairment loss during the fiscal years ended March 31, 2021 and 2020.
F-8
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)