JERASH HOLDINGS (US), INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
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 subsidiaries, we are principally engaged in the manufacture and export of customized ready-made sportswear and outerwear from knitted fabrics and PPE produced in our facilities
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 Vans). Our production facilities are made up of six factories and four warehouses and currently employ approximately 5,700 people. The total annual capacity at our facilities is approximately 14.0 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
$11.0 millionas of March 31, 2022, out of which $10.4 millionhad been received through June 23, 2022. Two major customers have offered early payment alternatives since May and July 2021, which have shortened payment terms to below 10 days from submission of documents. See "-Liquidity and Capital Resources" for more details.
Inventory. We had an inventory of
19 Investments. We acquired two pieces of land in fiscal 2020 for the construction of dormitory and production facilities. Due to the COVID-19 pandemic, management previously decided to hold off the construction to wait for a clearer picture on customer demand. As customer orders recovered to a satisfactory level, in
April 2021, management decided to begin work for the dormitory construction, which is expected to be completed and ready for use in fiscal 2023. In June and July 2021, we entered into two Sale and Purchase Contracts to acquire a garment factory and the physical land and building that the factory was leasing. The acquisition of the garment factory was completed on October 7, 2021. We accounted for the acquisition under the acquisition method of accounting. The operating results of this garment factory since the completion of the acquisition and the assets of this garment factory are included in the consolidated financial statements as of and for the fiscal year ended March 31, 2022included in elsewhere in this annual report. The acquisition of the land and building of the factory is expected to close in the second quarter of fiscal 2023 due to personal reasons of the seller in relation to health and quarantine requirements. See "Note 15-Commitments and Contingencies-Commitments." Revenue. For fiscal 2022, our sales were $143.4 million, which represented an approximate 58.9% increase from $90.2 millionfor fiscal 2021. We have been proactively communicating with our existing customers to reconfirm their orders and shipment schedules for fiscal 2023. However, our operating results are still subject to the economies in the U.S.and the EUthat would have significant impact on both order fulfilment and delivery schedules and our operating results may be adversely affected by the negative impact on the global economy and capital markets resulting from the conflict in Ukraineor any other geopolitical tensions, inflation, and a potential recession. Liquidity/Going Concern. As of March 31, 2022, we had approximately $25.2 millionof cash and net current assets of approximately $69.9 millionwith a current ratio of 4.9 to 1. In addition, we had banking facilities with aggregate limits of $3 millionwith $nil outstanding as of March 31, 2022. Given the above, we believe that we will have sufficient financial resources to maintain as a going concern in fiscal 2023. On October 4, 2021, we completed the placement of one million new shares to independent investors with a net proceed of approximately $6.3 millionto further bolster our financial position for further growth. Capital Expenditures. In fiscal 2021, management decided to put on hold the construction projects on the land acquired in fiscal 2020 to retain financial resources to support our operations, and also to wait and see how the global economy and customer demand recover after the COVID-19 pandemic. As customer orders recovered to a satisfactory level, management decided to restart the preparation work for the construction of the dormitory in April 2021. The dormitory is expected to be completed and ready for use in fiscal 2023. In fiscal 2022, the Company acquired five car parking spaces. 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. 20 Results of Operations The following table presents certain information from our statement of income for fiscal years 2022 and 2021 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, 2022 2021 Year over Year
Statement of Income As % of As % of Data: Amount Sales Amount Sales Amount % Revenue
$ 143,355100 % $ 90,213100 % $ 53,14259 % Cost of goods sold 116,023 81 % 74,214 82 % 41,809 56 % Gross profit 27,332 19 % 15,999 18 % 11,333 71 % Selling, general, and administrative expenses 16,843 12 % 10,614 12 % 6,229 59 % Other (expense) income, net (45 ) 0 % 109 0 % (154 ) (141 )% Net income before taxation $ 10,4447 % $ 5,4946 % $ 4,95090 % Income tax expense 2,524 2 % 1,346 1 % 1,178 88 % Net income $ 7,9205 % $ 4,1485 % $ 3,77291 % Revenue. Revenue increased by approximately $53.1 million, or 59%, to approximately $143.4 millionin fiscal 2022 from approximately $90.2 millionin fiscal 2021. The increase was mainly due to an increase in export sales to two of our major U.S.customers. Strong recovery in the U.S.markets along with our continued expansion of the cooperation with these two major customers generated substantial order increases. All factories, including MK Garments and Paramount(acquired in mid-2019), are fully booked until December 2022and were operating at or near capacity during fiscal 2022.
The following table shows the dollar amount and percentage of total sales to our customers for the years ended
(All amounts, other than percentages, in thousands of
U.S.dollars) Fiscal Year Ended Fiscal Year Ended March 31, March 31, 2022 2021 Sales Sales Amount % Amount % VF Corporation(1) $ 96,45067.3 % $ 55,99462.1 % New Balance 34,506 24.1 % 11,050 12.3 % Jiangsu Guotai Huasheng Industrial Co(HK)., Ltd 3,245 2.3 % 2,982 3.3 % G-III 2,758 1.9 % 2,875 3.2 % Dynamic Design Enterprise, Inc 2,235 1.6 %
6,347 7.0 % Soriana 1,487 1.0 % - - % ARK Garments 829 0.6 % 2,896 3.2 % Onset Time Limited - - 1,672 1.9 % Others 1,845 1.2 % 6,397 7.0 % Total
$ 143,355100.0 % $ 90,213100.0 % (1) A large portion of our products are sold under The North Face brand that is owned by VF Corporation. 21 Revenue by Geographic Area (All amounts, other than percentages, in thousands of U.S.dollars) Fiscal Years Ended March 31, 2022 2021 Year over Year Region Amount % Amount % Amount % United States $ 136,06895 % $ 79,19088 % $ 56,87872 % Jordan 1,950 1 % 5,703 6 % (3,753 ) (66 )% Others 5,337 4 % 5,320 6 % 17 0 % Total $ 143,355100 % $ 90,213100 % $ 53,14259 % Since January 2010, all apparel manufactured in Jordancan be exported to the U.S.without customs duty being imposed, pursuant to the United States- JordanFree 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.The increase of approximately 72% in sales to the U.S.during fiscal year ended March 31, 2022was mainly attributable to the increase in the export sales to two of our major customers in the U.S.During the fiscal year ended March 31, 2022, aggregate sales to Jordanand other locations, such as Hong Kongand China, decreased by 34% from approximately $11.0 millionto $7.3 millionduring the fiscal year ended March 31, 2022as more production capacity was allocated to export orders, which typically have a higher profit margin. Cost of goods sold. Following the increase in sales revenue, our cost of goods sold increased by approximately $41.8 million, or 56%, to approximately $116.0 millionin fiscal 2022 from approximately $74.2 millionin fiscal 2021. As a percentage of revenue, the cost of goods sold decreased by approximately 1% points to 81% in fiscal 2022 from 82% in fiscal 2021. The decrease in cost of goods sold as a percentage of revenue was primarily attributable to a full resumption of production and a higher proportion of export orders in fiscal 2022. For the fiscal year ended March 31, 2022, we purchased approximately 20% and 11% of our garments and raw materials from two major suppliers, respectively. For the fiscal year ended March 31, 2021, we purchased approximately 13% of our garments from one major supplier. Gross profit margin. Gross profit margin was approximately 19% in fiscal 2022, which increased by approximately 1% points from 18% in fiscal 2021. The increase in gross profit margin was primarily driven by higher proportion of export orders that typically have higher margin. Selling, general, and administrative expenses. Selling, general, and administrative expenses increased by approximately 59% from approximately $10.6 millionin fiscal 2021 to approximately $16.8 millionin fiscal 2022. The increase was mainly attributable to (i) increased costs for employing additional migrant workers, (ii) the inclusion of approximately $0.9 millionof stock-based compensation expenses, (iii) an increase in headcounts from the completion of acquisition of MK Garment in October 2021, and (iv) an increase in export expenses in proportion to growth in sales in fiscal 2022. Other (expenses)/ income, net. Other expenses, net were approximately $45,000in fiscal 2022 and other income, net was approximately $109,000in fiscal 2021. The increase in other expenses was primarily due to the absence of a realized gain from short-term investments in the current period, compare with a $124,889realized gain from short-term investments in the corresponding period of fiscal 2021. Taxation. Income tax expenses for the fiscal 2022 were approximately $2.5 millioncompared to income tax expenses of approximately $1.3 millionfor fiscal 2021. The effective tax rate was slightly down to 24.2% for fiscal 2022, compared to 24.5% for the fiscal 2021 as Treasure Success started to report profit and the tax rate in Hong Kongis 16.5%, which is lower than 18% to 20% of Jordan. Net income. Net income for fiscal 2022 was approximately $7.9 million, a 91% increase from approximately $4.1 millionfor fiscal 2021. The increase was mainly attributable to the increase in sales and the improvement in the gross profit margin discussed above. 22 Liquidity and Capital Resources
Jerash Holdingsis a holding company incorporated in Delaware. As a holding company, we rely on dividends and other distributions from our Jordanian and Hong Kongsubsidiaries to satisfy our liquidity requirements. Current Jordanian regulations permit our Jordanian subsidiaries 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 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 (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, 2022, we had cash of approximately $25.2 millionand restricted cash of approximately $1.4 millioncompared to cash of approximately $21.1 millionand restricted cash of approximately $1.7 millionas of March 31, 2021. The increase in total cash was mainly a result of (i) the completion of a placement in October 2021that resulted in net proceeds of approximately $6.3 million, and (ii) the introduction of supply chain finance programs by two of our major customers that reduce payment terms from 60 to 90 days to within 10 days from shipments, offsetting approximately $8.7 millionused for the MK Garments acquisition, purchases of property, plant, and machinery, and payments for dormitory construction. Our current assets as of March 31, 2022were approximately $69.9 million, and our current liabilities were approximately $14.1 million, which resulted in a current ratio of approximately 4.9:1. Our current assets as of March 31, 2021were approximately $64.7 million, and our current liabilities were approximately $14.8 million, which resulted in a current ratio of approximately 4.4:1. The primary drivers in the increase in current assets were the increase in cash as a result of a share placement completed in October 2021and the increase in operating profit in the year. The primary driver in the decrease in current liabilities was the decrease in accounts payable due to the earlier payments to newly appointed suppliers, particularly for new customers introduced in recent years, and the repayment of short-term bank loans in light of the strong cash position. Total equity as of March 31, 2022was approximately $69.3 million, compared to $56.4 millionas of March 31, 2021. We had net working capital of $55.7 millionand $49.8 millionas of March 31, 2022and 2021, 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 from the date of this Annually Report.
Since May and
October 2021, we have participated in supply chain financing programs of two of our major customers, respectively. The programs allow us to receive early payments for approved sales invoices submitted by us through the bank the customer cooperates with. For any early payments received, we are subject to an early payment charge imposed by the customer's bank, for which the rate is London Interbank Offered Rate ("LIBOR") plus a spread. The arrangement allows us to have better liquidity without the need to incur administrative charges and handling fees as in bank financing. 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 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 millionto 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, 2019that the SCBHK facility had been activated. As of March 31, 2022, there was no amount outstanding 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. DBS Facility Letter
Pursuant to the DBS facility letter dated
January 12, 2022, DBSHK provided a bank facility of up to $5.0 millionto 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 KongInterbank 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 Holdingsand became available to the Company on June 17, 2022. 23
Closed fiscal years
The following table presents a summary of our cash flows for the years ended
(All amounts in thousands of U.S. dollars) For the fiscal years ended March 31, 2022 2021 Net cash provided by (used in) operating activities
$ 8,963 $ (1,499 )Net cash used in investing activities (8,673 ) (894 ) Net cash provided by (used in) financing activities 3,289 (1,654 ) Effect of exchange rate changes on cash 144 (8 ) Net increase (decrease) in cash 3,723 (4,055 ) Cash and restricted cash, beginning of year 22,860 26,915 Cash and restricted cash, end of year $ 26,583 $ 22,860Cash paid for interest 211 - Income tax paid 1,762 773 Non-cash financing activities Right of use assets obtained in exchange for operating lease obligations $ 1,022 $ 1,352Operating Activities
Net cash provided by operating activities was approximately
? an increase in inventory
? a decrease in accounts receivable of
to an increase of
? an increase in prepaid expenses and other current assets of
compared to a decrease in
? a decrease in advances to suppliers of
? a decrease in accounts payable of
an augmentation of
? an increase in net income to
$4.1 millionin fiscal 2021. Investing Activities Net cash used in investing activities was approximately $8.7 millionand $0.9 millionfor fiscal 2022 and 2021, respectively. The increase in net cash used in investing activities was mainly attributable to $3.0 millionused in the acquisition of property, plant and machinery, $2.1 millionfor payments for the construction of a dormitory, and $2.7 millionfor the acquisition of all the share capital of MK Garments. 24 Financing Activities Net cash provided by financing activities was approximately $3.3 millionfor fiscal 2022, from the net proceeds of $6.3 millionin a placement completed in October 2021and outflows of dividend payments of approximately $2.4 millionand repayments of short-term loans of approximately $0.6 million. There was a net cash outflow of $1.7 millionin fiscal 2021 resulting from dividend payments and proceeds from short-term loans. Statutory Reserves In accordance with the corporate Law in Jordan, Jerash Holdings'subsidiaries in Jordanare 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 $379,323and $346,315as of March 31, 2022and 2021, 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, 2022and 2021. (All amounts, other than percentages, in thousands of U.S.dollars) As of March 31, 2022 2021 Statutory Reserves $ 379 $ 346Total Restricted Net Assets $ 379 $ 346Consolidated Net Assets $ 69,304
Net assets allocated as a percentage of consolidated net assets 0.55% 0.61%
Total restricted net assets accounted for approximately 0.55% of our consolidated net assets as of
March 31, 2022. As our subsidiaries in Jordanare only required to set aside 10% of net profits to fund the statutory reserves, we believe the potential impact of such restricted net assets on our liquidity
is limited. Capital Expenditures
We had capital expenditures of approximately
$8.7 millionand $1.0 millionin fiscal 2022 and 2021, respectively, for property, plant, and machinery, the construction of a dormitory, and the acquisition of MK Garment. Additions in property, plant, and machinery amounted to approximately $3.0 millionand $0.8 millionin fiscal 2022 and 2021, respectively. Payments for construction of a dormitory and factory expansion amounted to $2.1 millionin fiscal 2022, and payment made for the acquisition of all the share capital of MK Garment was
$2.7 millionin fiscal 2022. 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 use as a dormitory to house management and supervisory staff for the 54,000 square-foot workshop in Al-Hasa County. Construction was temporarily suspended in March 2020due to the COVID-19 pandemic but subsequently completed, and the building was 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 2019with approximately 240 workers. This project was constructed in conjunction with the Jordanian Ministry of Laborand the Jordanian Education and Training Department. 25 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 early 2022. On February 6, 2020, we completed a transaction to acquire 4,516 square meters (approximately 48,608 square feet) of land in Al Tajamouat IndustrialCity, 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 millionin 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. The dormitory is expected to be completed and ready for use in fiscal 2023. We project that there will be an aggregate of approximately $16 millionand $0.5 millionof capital expenditures in the fiscal years ending March 31, 2023and 2024, respectively, 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 to fund our capital commitments in the past and anticipate using such funds to fund capital expenditure commitments in the future.
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, 2021and 2020, please see our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the SECon June 23, 2021. Critical Accounting Policies We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America, 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.
© Edgar Online, source