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.
6
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 Vans), directly and indirectly, accounted for approximately 60% and 67% of our total sales in
fiscal 2023 and fiscal 2022, respectively. From an accounting perspective, we are considered the principal 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.
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, 2021 to March 31, 2022, VF Corporation issued approximately 9,500 purchase
orders to us in amounts ranging from approximately $5 to $684,000. From April 1, 2022 to March 31, 2023, VF Corporation issued approximately
10,500 purchase orders to us in amounts ranging from approximately $6 to $372,000.
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 and Timberland brands, 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 and Timberland brands, which are 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 the image, reputation, or popularity of either VF Corporation, The North Face, or Timberland 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 name 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 these customers, these 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.
7
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.
Our financial condition, results of operations,
and cash flows in fiscal 2020 and 2021 were 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 factory 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 in fiscal 2021. In fiscal 2022, our production
facilities resumed full operation with additional medical and hygienic measures in place. The COVID-19 pandemic did not materially adversely
affect our business operations and condition and operating results for fiscal 2023. The Company currently expects that its operation results
for the fiscal year ending March 31, 2024 would not be significantly impacted by the COVID-19 pandemic. However, there is still significant
uncertainty around the breadth and duration of business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S.
and international economies. Given the dynamic nature of these circumstances, should there be resurgence of COVID-19 cases globally and
should the U.S. government or the Jordan government implement new restrictions to contain the spread, the Company’s business would
be negatively impacted.
We may require additional financing to fund
our operations and capital expenditures.
As of March 31, 2023, we had cash and cash equivalents
of approximately $17.8 million and restricted cash of approximately $1.6 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.
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, 2022, there was no outstanding amount under the SCBHK
facility. In June 2022, we were informed by SCBHK that the facility was cancelled due to persistently low usage and zero loan outstanding.
8
Pursuant to the DBS facility letter dated January
12, 2022, DBS Bank (Hong Kong) Limited (“DBSHK”) provided a bank facility of up to $5.0 million to Treasure Success. Pursuant
to the agreement, DBSHK agreed to finance cargo receipt, trust receipt, account payable financing, and certain type of import invoice
financing up to an aggregate of $5.0 million. The DBSHK facility bears interest at 1.5% per annum over Hong Kong Interbank Offered Rate
(“HIBOR”) for HKD bills and 1.3% per annum over DBSHK’s cost of funds for foreign currency bills. The facility is guaranteed
by Jerash Holdings and became available to the Company on June 17, 2022.
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 Enterprise Limited, Mr. Choi, our chairman, chief executive officer, president, treasurer, and a significant stockholder,
has an indirect ownership interest in Jiangmen V-Apparel Manufacturing Limited, with which we have entered into, or in the future may
enter into, agreements or arrangements. See also “Note 11—Related Party Transactions.” 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 sportswear 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 sportswear 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.
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.
9
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 sportswear 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.
Our results of operations are subject to fluctuations in currency
exchange rates.
Exchange rate fluctuations between the U.S. dollar
and Jordanian Dinar (“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.
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.
11
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.
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.
12
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. President Joe Biden has expressed no desire to withdraw from existing agreements, presumably
indicating 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.
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.
13
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.
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.
14
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.
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.
15
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 occupies a significant amount of time of our board of directors and management, significantly increases
our costs and expenses, and makes some activities more time-consuming and costly. As a reporting company, we are:
● 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.
During the course of the audit of our consolidated
financial statements, we identified material weaknesses in our internal control over financial reporting. If we are unable to effectively
implement and maintain our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, our ability to accurately
and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our
common stock may be adversely impacted.
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.
In connection with the preparation and external
audit of our consolidated financial statements for the fiscal year ended March 31, 2023, we identified certain material weaknesses in
our internal control over financial reporting and have formulated plans for remedial measures. See “Item 9A. Controls and Procedures.”
Measures that we implement may not fully address the material weaknesses in our internal control over financial reporting and we may not
be able to conclude that the material weaknesses have been fully remedied.
Failure to correct the material weaknesses and
other control deficiencies or failure to discover and address any other control deficiencies could result in inaccuracies in our consolidated
financial statements and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory
filings on a timely basis. As a result, our business, financial condition, results of operations, and prospects, as well as the trading
price of our common stock, may be materially and adversely affected. Due to the material weaknesses in our internal control over financial
reporting as described above, our management concluded that our internal control over financial reporting was not effective as of March
31, 2023. This could adversely affect the market price of our common stock due to a loss of investor confidence in the reliability of
our reporting processes.
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.
We are currently operating in a period of
economic uncertainty and capital market disruption, which has been significantly impacted by geopolitical instability due to the ongoing
military conflict between Russia and Ukraine. Our business, financial condition, and results of operations could be materially adversely
affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical
tensions.
U.S. and global markets are experiencing volatility
and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On
February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing
military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility
in commodity prices, credit and capital markets, and supply chain interruptions.
16
The military conflict in Ukraine has led to sanctions
and other penalties being levied by the United States, European Union, and other countries against Russia. Additional potential sanctions
and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the
global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult
for us to obtain additional funds. In addition, in managing an organization operating globally, we are subject to the risks and challenges
related to the potential to subject our business to materially adverse consequences should the situation escalate beyond its current scope,
including, among other potential impacts, the geographic proximity of the situation relative to the Middle East, where a material portion
of our business is conducted.
Although our business has not been materially
impacted by the ongoing military conflict between Russian and Ukraine to date, it is impossible to predict the extent to which our operations,
or those of our suppliers and manufacturers, will be impacted in the short and long term, or the ways in which the conflict may impact
our business. The extent and duration of the military action, sanctions, and resulting market disruptions are impossible to predict, but
could be substantial. Any such disruptions may also magnify the impact of other risks described in this annual report.
We may be adversely affected by the effects
of inflation and a potential recession.
Inflation has the potential to adversely affect
our liquidity, business, financial condition, and results of operations by increasing our overall cost structure, particularly if we are
unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has resulted
in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor,
weakening exchange rates, and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost
increases. In addition, poor economic and market conditions, including a potential recession, may negatively impact market sentiment,
decreasing the demand for sportswear and outerwear, which would adversely affect our operating income and results of operations. If we
are unable to take effective measures in a timely manner to mitigate the impact of the inflation as well as a potential recession, our
business, financial condition, and results of operations could be adversely affected.
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 Ever Winland pursuant to a tenancy agreement dated February 26, 2021. The tenancy agreement had 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 August 29, 2022, Ever Winland became
a subsidiary of Treasure Success. See “—Item 1. Business—Organizational Structure.”
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 use as a dormitory to house management and supervisory staff who work at the factory in Al-Hasa County as discussed below.
Construction was temporarily suspended in March 2020 due to the COVID-19 pandemic but subsequently completed and ready for use as of September
30, 2021.
In 2018, we commenced another project to build a 54,000 square-foot
factory 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 (approximately $159,000) for this project and agreed to employ at least 500 workers for the first
12 months following the completion of the project, which requirement we have complied with. The Ministry of Labor financed the building
of the factory and the Employment and Training Department supported 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 used the factory without paying rent through
December 2022. We have continued to use the factory without paying rent since January 2023 as new arrangements with the Jordanian Ministry
of Labor are still being made.
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In April 2021, we commenced 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, located in Al
Tajamouat Industrial City. We anticipate the completion of the construction and the subsequent occupancy of the new building by August
2023. To meet increasing demand, we were also finalizing 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 the establishment of our seventh factory and 1/3
for housing purposes. We have resumed to work with engineering consultants to proceed with the architectural design of these buildings.
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 $4,100) 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 $7,300) for the first year, CNY60,270 (approximately $8,800) for the second year, and 5% further annual increments starting
from the third year.
On June 24, 2021, we entered into an agreement
through Jerash Garments to acquire all of the stock of an existing garment manufacturing business in order to operate our fifth manufacturing
facility in Al Tajamouat Industrial City located in Amman, Jordan. This acquisition increased Jerash’s annual capacity from 12 million
pieces to 14 million pieces. The new facilities are an existing garment manufacturing operation adjacent to Jerash’s four largest
manufacturing centers. Jerash assumed ownership of all of the machinery and equipment owned by MK Garments through the acquisition.
On July 14, 2021, Jerash Garments and the sole
shareholder of Kawkab Venus entered into an agreement, pursuant to which Jerash Garments acquired all of the outstanding stock of Kawkab
Venus. Apart from the land and factory premises, Kawkab Venus had no other significant assets or liabilities and no operation activities
or employees at the time of acquisition, so the acquisition was accounted for an asset acquisition. As of August 21, 2022, Kawkab Venus
became a subsidiary of Jerash Garments.
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 27, 2023, there were 12,294,840 shares of common stock issued and outstanding held by approximately 41 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.”
On June 13, 2022, the Board of Directors of Jerash
Holdings authorized a share repurchase program, under which the Company may repurchase up to $3.0 million of its outstanding shares of
common stock. The share repurchase program expired on March 31, 2023.
Total share repurchases under the share repurchase
program for the three months ended March 31, 2023 are as follows:
During the fiscal years ended March 31, 2023 and
2022, 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 2023 and 2022 and current 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.
EXECUTIVE OVERVIEW
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.
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Results of Operations
The following table presents certain information from our statements
of income and comprehensive income for fiscal 2023 and 2022 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,
As % of As % of Year over Year
Statement of Income Data: Amount Sales Amount Sales Amount %
Revenue. Revenue decreased by approximately
$5.3 million, or 4%, to approximately $138.1 million in fiscal 2023 from approximately $143.4 million in fiscal 2022. This slight decrease
was mainly due to a decline in export sales to two major U.S. customers. Despite receiving orders from new customers and observing an
increase in shipments to other existing customers, these efforts were not enough to offset the shortfall in sales.
The following table outlines the dollar amount
and percentage of total sales to our customers for the fiscal years ended March 31, 2023 and 2022, respectively.
(All amounts, other than percentages, in thousands
of U.S. dollars)
Fiscal Year Ended March 31, 2023 Fiscal Year Ended March 31, 2022
Sales Sales
Amount % Amount %
Jiangsu Guotai Huasheng Industrial Co (HK)., Ltd 9,454 6.8 % 3,245 2.3 %
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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