Jerash Holdings (US), Inc. - Quarter Report: 2020 December (Form 10-Q)

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 001-38474

Jerash Holdings (US), Inc.

(Exact name of registrant as specified in its charter)

277 Fairfield Road, Suite 338

Fairfield, New Jersey 07004

(Address of principal executive offices) (Zip Code)

(214) 906-0065

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☒

As of February 10, 2021, there were 11,325,000 shares of common stock, par value $0.001 per share, outstanding.

Jerash Holdings (US), Inc.

Form 10-Q

For the Quarterly Period Ended December 31, 2020

Contents

JERASH HOLDINGS (US), INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

JERASH HOLDINGS (US), INC.,

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

JERASH HOLDINGS (US), INC.,

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

JERASH HOLDINGS (US), INC.,

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

JERASH HOLDINGS (US), INC.,

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

JERASH HOLDINGS (US), INC

NOTES TO CONDENSED 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 December 31, 2020.

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 JOD50,000 as of December 31, 2020. 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 JOD100,000. 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 JOD150,000. 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 JOD50,000. 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 in the manufacturing and exporting of customized, ready-made sport and outerwear from knitted fabric produced in its facilities in Jordan and sold in the United States, Jordan, and other countries. 

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.

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. The Company’s VIE, Victory Apparel, was inactive for the nine months ended December 31, 2020, and the net assets of the VIE were approximately $0.3 million as of December 31, 2020 and March 31, 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 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 December 31, 2020, and March 31, 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.

Short-term Investments

The Company’s short-term investments consist of financial products purchased from banks. The bank invests the Company’s funds in certain financial instruments including money market funds, bonds, and mutual funds, with an expected annual return of 5%. 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 exited the investment before December 31, 2020.

The Company had no short-term investments as of December 31, 2020 and 2019. The Company recorded a realized gain of $60,197 and $Nil for the three months ended December 31, 2020 and $124,889 and $Nil for the nine months ended December 31, 2020 and 2019, respectively.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts Receivable

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 receivable balances, with a corresponding charge recorded in the consolidated statements of 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

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 collectability of the advance becomes doubtful. The Company uses the aging method to estimate the allowance for uncollectible 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:

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 nine months ended December 31, 2020 and 2019.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

Substantially all of the Company’s revenue is derived from product sales, which consist of sales of the Company’s customized ready-made outerwear for large brand-name retailers and personal protective equipment. The Company considers purchase orders to be a contract with a customer. Contracts with customers are considered to be short term when the time between order confirmation and satisfaction of the performance obligations is equal to or less than one year, and virtually all of the Company’s contracts are short term. The Company recognizes revenue for the transfer of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. The Company typically satisfies its performance obligations in contracts with customers upon shipment of the goods. Generally, payment is due from customers within seven to 150 days of the invoice date. The contracts do not have a significant financing component. Shipping and handling costs associated with outbound freight are not an obligation of the Company. Returns and allowances are not a significant aspect of the revenue recognition process as historically they have been immaterial.

The Company also derives revenue rendering cutting and making services to other apparel vendors who subcontract orders to the Company, and the revenue is recognized when the service is rendered.

All of the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per unit. All estimates are based on the Company’s historical experience, complete satisfaction of the performance obligation, and the Company’s best judgment at the time the estimate is made. Historically, sales returns have not significantly impacted the Company’s revenue.

The Company does not have any contract assets since the Company has an unconditional right to consideration when the Company has satisfied its performance obligation and payment from customers is not contingent on a future event. For the nine months ended December 31, 2020 and 2019, there was no revenue recognized from performance obligations related to prior periods. As of December 31, 2020, there was no revenue expected to be recognized in any future periods related to remaining performance obligations.

The Company has one revenue generating reportable geographic segment under ASC Topic 280 “Segment Reporting” and derives its sales primarily from its sales of customized ready-made outerwear. The Company believes disaggregation of revenue by geographic region best depicts the nature, amount, timing, and uncertainty of its revenue and cash flows (see “Note 14—Segment Reporting”).

Shipping and Handling

Proceeds collected from customers for shipping and handling costs are included in revenue. Shipping and handling costs are expensed as incurred and are included in operating expenses, as a part of selling, general and administrative expenses. Total shipping and handling expenses were $316,027 and $168,580 for the three months ended December 31, 2020 and 2019, respectively. Total shipping and handling expenses were $860,157 and $669,716 for the nine months ended December 31, 2020 and 2019, respectively.

Income Taxes

The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled. Jerash Holdings and Jerash Supplies are incorporated/formed in the State of Delaware and is subject to federal income tax in the United States of America. Treasure Success is registered in Hong Kong and has no operating profit. Jiangmen Treasure Success is incorporated in China and is subject to corporate income tax in China. Jerash Garments, Jerash Embroidery, Chinese Garments, Paramount, Jerash the First and Victory Apparel are subject to income tax in Jordan, unless an exemption is granted. The corporate income tax rate is 14% for the businesses classified within the industrial sector. In accordance with the Investment Encouragement Law, Jerash Garments’ export sales to overseas customers were entitled to a 100% income tax exemption for a period of 10 years commencing at the first day of production. This exemption had been extended for five years until December 31, 2018. Effective January 1, 2019, the Jordanian government changed some features of its tax incentive programs and Jerash Garments and its subsidiaries and VIE are now qualified for incentives applicable to an industrial park that houses manufacturing operations in Jordan (“Development Zone”), a change from the previous incentive program relating to Qualifying Industrial Zone. In accordance with Development Zone law, Jerash Garments and its subsidiaries and VIE were subject to corporate income tax in Jordan at a rate of 10% plus a 1% social contribution. Effective January 1, 2020, income rate increased to 14% plus a 1% social contribution.

Jerash Garments and its subsidiaries and VIE are subject to local sales tax of 16% on purchases. Jerash Garments was granted a sales tax exemption from the Jordanian Investment Commission for the period from 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, 2021 and Jerash Garments is currently applying for another extension, though there is no guarantee that such an extension will be granted.

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes,” which requires the Company to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forwards. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes (Continued)

ASC 740 clarifies the accounting for uncertainty in tax positions. This interpretation requires that an entity recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of income and comprehensive income. No significant uncertainty in tax positions relating to income taxes were incurred during nine months ended December 31, 2020 and 2019.

Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar (“US$” or “$”). The Company uses JOD as its functional currency in Jordanian companies, HKD in Treasure Success, and Chinese Yuan (“CNY”) in Jiangmen Treasure Success as functional currency of each abovementioned entity. The assets and liabilities of the Company have been translated into US$ using the exchange rates in effect at the balance sheet date, equity accounts have been translated at historical rates, and revenue and expenses have been translated into US$ using average exchange rates in effect during the reporting period. Cash flows are also translated at average translation rates for the periods. Therefore, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income or loss. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

The value of JOD against US$ and other currencies may fluctuate and is affected by, among other things, changes in Jordan’s political and economic conditions. Any significant revaluation of JOD may materially affect the Company’s financial condition in terms of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:

Stock-Based Compensation

The Company measures compensation expense for stock-based awards to non-employee contractors and directors based upon the awards’ initial grant-date fair value. The estimated grant-date fair value of the award is recognized as expense over the requisite service period using the straight-line method.

The Company estimates the fair value of stock options using a Black-Scholes model. This model is affected by the Company’s stock price on the date of the grant as well as assumptions regarding a number of highly complex and subjective variables. These variables include the expected term of the option, expected risk-free rates of return, the expected volatility of the Company’s common stock, and expected dividend yield, each of which is more fully described below. The assumptions for expected term and expected volatility are the two assumptions that significantly affect the grant date fair value.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation (Continued)

Earnings per Share

The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS (See “Note 13—Earnings per Share”).

Comprehensive Income

Comprehensive income consists of two components, net income and other comprehensive income. The foreign currency translation gain or loss resulting from translation of the financial statements expressed in JOD or HKD or CNY to US$ is reported in other comprehensive income in the consolidated statements of income and comprehensive income.

Fair Value of Financial Instruments

ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash, including restricted cash, accounts receivable, other receivables, credit facilities, accounts payable, accrued expenses, income tax payable, other payables, and operating lease liabilities to approximate the fair value of the respective assets and liabilities at December 31, 2020 and March 31, 2020 based upon the short-term nature of these assets and liabilities.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations and Credit Risk

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. As of December 31, 2020, and March 31, 2020, respectively, $6,799,294 and $6,894,641 of the Company’s cash was on deposit at financial institutions in Jordan, where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure. As of December 31, 2020 and March 31, 2020, respectively, $5,598,902 and $125,830 of the Company’s cash was on deposit at financial institutions in China, where there currently is no rule or regulation requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure. As of December 31, 2020 and March 31, 2020, respectively, $16,734,532 and $19,847,852 of the Company’s cash was on deposit at financial institutions in Hong Kong, which are insured by the Hong Kong Deposit Protection Board subject to certain limitations. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness. As of December 31, 2020 and March 31, 2020, respectively, $95,029 and $48,386 of the Company’s cash was on deposit in the United States and are insured by the Federal Deposit Insurance Corporation up to $250,000.

Accounts receivable are typically unsecured and derived from revenue earned from customers, and therefore are exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

Customer and vendor concentration risk

The Company’s sales are made primarily in the United States. Its operating results could be adversely affected by U.S. government policies on exporting business, foreign exchange rate fluctuations, and changes in local market conditions. The Company has a concentration of its revenue and purchases with specific customers and suppliers. For the three months ended December 31, 2020, four end-customers accounted for 31%, 18%, 16%, and 14% of the Company’s total revenue respectively. For the three months ended December 31, 2019, two end-customers accounted for 66% and 24% of the Company’s total revenue respectively. For the nine months ended December 31, 2020, two end-customers accounted for 62% and 10% of the Company’s total revenue respectively. For the nine months ended December 31, 2019, one-end customer accounted for 83% of the Company’s total revenue. As of December 31, 2020, two end-customers accounted for 45% and 36% of the Company’s total accounts receivable balance, respectively. As of March 31, 2020, four end-customers accounted for 42%, 20%, 20%, and 14% of the Company’s total accounts receivable balance, respectively.

For the three months ended December 31, 2020, the Company purchased approximately 20% and 11% of its raw materials and garments from two major suppliers, respectively. For the nine months ended December 31, 2020, the Company purchased approximately 14% and 11% of its raw materials and garments from two major suppliers, respectively. For the three months ended December 31, 2019, the Company purchased 48% of its raw materials from one major supplier. For the nine months ended December 31, 2019, the Company purchased approximately 23% and 17% of its raw materials from two major suppliers, respectively. As of December 31 2020, accounts payable to the Company’s two major suppliers accounted for 54% and 15% of the total accounts payable balance, respectively. As of March 31, 2020, accounts payable to the Company’s three major suppliers accounted for 39%, 16%, and 10% of the total accounts payable balance, respectively.

Risks and Uncertainties

The principal operations of the Company are located in Jordan. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in Jordan, as well as by the general state of the Jordanian economy. The Company’s operations in Jordan are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic, and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in Jordan. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.

The spread of COVID-19 around the world since March 2020 has caused significant volatility in U.S. and international markets. The Company’s sales declined in the first nine months of fiscal 2021. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. Based on the assessment of the current economic environment, customer demand, and sales trend, and the negative impact from the prolonged COVID-19 outbreak and spread, management has indicated that the Company’s revenue and operating cash flows may be lower than expected for fiscal year 2021.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.

In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This ASU is effective for interim and annual periods beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an emerging growth company, the Company plans to adopt this guidance effective April 1, 2023. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements. 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company does not expect adoption of the new ASU to have a significant impact on its consolidated financial statements.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU is intended to transition away from referencing the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates (IBORs), and toward new reference rates that are more reliable and robust. The amendments in this ASU are effective immediately for all entities. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final ASU, up to the date that financial statements are available to be issued. The Company is evaluating the impact of adopting this new ASU and does not expect a significant impact on its consolidated financial statements.

NOTE 4 – ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:

NOTE 5 – INVENTORIES

Inventories consisted of the following:

NOTE 6 – ADVANCE TO SUPPLIERS

Advance to suppliers consisted of the following:

NOTE 7 – LEASES

The Company has 35 operating leases for manufacturing facilities and offices. Some leases include one or more options to renew, which is typically at the Company’s sole discretion. The Company regularly evaluates the renewal options, and, when it is reasonably certain of exercise, it will include the renewal period in its lease term. New lease modifications result in measurement of the right of use (“ROU”) assets and lease liability. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. ROU assets and related lease obligations are recognized at commencement date based on the present value of remaining lease payments over the lease term.

All of the Company’s leases are classified as operating leases and primarily include office space and manufacturing facilities.

Supplemental balance sheet information related to operating leases was as follows:

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2020:

During the three months ended December 31, 2020 and 2019, the Company incurred total lease expenses of $534,674 and $494,335, respectively. During the nine months ended December 31, 2020 and 2019, the Company incurred total lease expenses of $1,582,015 and $1,440,070, respectively.

NOTE 7 – LEASES (Continued)

The following is a schedule, by fiscal years, of maturities of lease liabilities as of December 31, 2020:

NOTE 8 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following:

NOTE 9 – EQUITY

Preferred Stock

The Company had 500,000 shares of preferred stock authorized with a par value of $0.001 per share; none were issued and outstanding as of December 31, 2020 and March 31, 2020. The preferred stock can be issued by the board of directors of Jerash Holdings (the “Board of Directors”) in one or more classes or one or more series within any class, and such classes or series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, rights, qualifications, limitations, or restrictions of such rights as the Board of Directors may determine from time to time.

Common Stock

The Company had 11,325,000 shares of common stock outstanding as of December 31, 2020 and March 31, 2020.

Statutory Reserve

In accordance with the Corporate Law in Jordan, Jerash Garments, Jerash Embroidery, Chinese Garments, Paramount, Jerash the First, and Victory Apparel 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. This reserve is not available for dividend distribution. In addition, PRC companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses. The Company’s subsidiaries and VIE have already reserved the maximum amount required.

Dividends

During the fiscal year ending March 31, 2021, on November 2, 2020, August 5, 2020, and May 15, 2020, the Board of Directors declared a cash dividend of $0.05 per share of common stock, respectively. The cash dividends of $566,250 were paid in full on November 23, 2020, August 24, 2020, and June 2, 2020, respectively.

During the fiscal year ended March 31, 2020, on February 5, 2020, November 4, 2019, July 29, 2019, and May 17, 2019, the Board of Directors declared a cash dividend of $0.05 per share of common stock, respectively. The cash dividends of $566,250 were paid in full on February 26, 2020, November 26, 2019, August 19, 2019, and June 5, 2019, respectively.

NOTE 10 – STOCK-BASED COMPENSATION

Warrants issued for services

From time to time, the Company issues warrants to purchase its common stock. These warrants are valued using the Black-Scholes model and using the volatility, market price, exercise price, risk-free interest rate, and dividend yield appropriate at the date the warrants were issued.

Simultaneous with the closing of the IPO, the Company issued to the underwriter and its affiliates warrants to purchase 57,200 shares of common stock (“IPO Underwriter Warrants”) at an exercise price of $8.75 per share with an expiration date of May 2, 2023. The shares underlying the IPO Underwriter Warrants were subject to a 180-day lock-up that expired on October 29, 2018.

The fair value of these warrants was estimated as of the grant date using the Black-Scholes model with the major assumptions that the expected term is five years; risk-free interest rate is 1.8-2.8%; and the expected volatility is 50.3-52.2%. There were 264,410 warrants outstanding as of December 31, 2020 and March 31, 2020 with a weighted average exercise price of $6.35. All of the outstanding warrants were fully vested and exercisable as of December 31, 2020 and March 31, 2020.

Stock Options

On March 21, 2018, the Board of Directors adopted the Jerash Holdings (US), Inc. 2018 Stock Incentive Plan (the “Plan”), pursuant to which the Company may grant various types of equity awards. 1,484,250 shares of common stock of the Company were reserved for issuance under the Plan. In addition, on July 19, 2019, the Board of Directors approved an amendment and restatement of the Plan, which was approved by the Company’s stockholders at its annual meeting of stockholders on September 16, 2019. The amended and restated Plan increased the number of shares reserved for issuance under the Plan by 300,000, to 1,784,250, among other changes.

On April 9, 2018, the Board of Directors approved the issuance of 989,500 nonqualified stock options under the Plan to 13 executive officers and employees of the Company in accordance with the Plan at an exercise price of $7.00 per share, and a term of five years. The fair value of these options was estimated as of the grant date using the Black-Scholes model with the major assumptions that expected terms is five years; risk-free interest rate is 2.6%; and the expected volatility is 50.3%. All these outstanding options were fully vested and exercisable on issue date. 3,000 options were forfeited in November 2020.

NOTE 10 – STOCK-BASED COMPENSATION (Continued)

On August 3, 2018, the Board of Directors granted the Company’s then Chief Financial Officer and Head of U.S. Operations a total of 150,000 nonqualified stock options under the Plan in accordance with the Plan at an exercise price of $6.12 per share and a term of 10 years. The fair value of these options was estimated as of the grant date using the Black-Scholes model with the major assumption that expected term is 10 years; risk-free interest rate is 2.95%; and the expected volatility is 50.3%. All these outstanding options were fully vested. 50,000 options were forfeited in October 2020. 100,000 options were exercisable in August 2019.

On November 27, 2019, the Board of Directors granted the Company’s Chief Financial Officer 50,000 nonqualified stock options under the amended and restated Plan in accordance with the amended and restated Plan at an exercise price of $6.50 per share and a term of 10 years. All these outstanding options were fully vested and exercisable in May 2020.

The fair value of the options granted on November 27, 2019 was $126,454. It is estimated as of the grant date using the Black-Scholes model with the following assumptions:

All stock option activities are summarized as follows:

Total expense related to the stock options issued was $Nil and $Nil for the three months ended December 31, 2020 and 2019 respectively. Total expense related to the stock options issued was $42,151 and $193,955 for the nine months ended December 31, 2020 and 2019 respectively. As of December 31, 2020, all outstanding options were fully vested and exercisable.

NOTE 11 – RELATED PARTY TRANSACTIONS

The relationship and the nature of related party transactions are summarized as follow:

NOTE 11 – RELATED PARTY TRANSACTIONS (Continued)

On October 3, 2018, Treasure Success and FGIL entered into a lease agreement, pursuant to which Treasure Success leased its office space in Hong Kong from FGIL for a monthly rent in the amount of HKD119,540 (approximately $15,253) and for a one-year term with an option to extend the term for an additional year at the same rent. On October 3, 2019, Treasure Success exercised the option to extend the lease for an additional year at the same rent. On December 15, 2020, Treasure Success and FGIL renewed the lease agreement with the same term and lease amount.

On July 15, 2019, the Company, through Treasure Success, entered into an agreement to purchase office space together with certain parking spaces from FGIL for an aggregate purchase price of HKD63,000,000 (approximately $8.1 million). Pursuant to the agreement, Treasure Success paid an initial deposit of HKD6,300,000 (approximately $0.8 million) upon signing the agreement. On October 31, 2019, this agreement was terminated pursuant to its terms because the conditions precedent to closing under the agreement were not met. As a result of the termination, on November 7, 2019, FGIL repaid in full, without interest, the deposit Treasure Success paid at the time the agreement was signed.

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 between Treasure Success and Jiangmen V-Apparel Manufacturing Limited dated August 31, 2019, pursuant to which Treasure Success leases additional space for office and sample production purposes in Jiangmen, China from Jiangmen V-Apparel Manufacturing Limited for a monthly rent in the amount of CNY28,300 (approximately $4,000). The lease has one-year term and may be renewed with a one-month notice. If the lease is renewed, the rental amount will be reviewed by and negotiated between both parties according to the market rental rate annually.

On January 12, 2018, Treasure Success and Yukwise entered into a consulting agreement, pursuant to which Mr. Choi will serve as Chief Executive Officer and provide high-level advisory and general management services for $300,000 per annum. The agreement renews automatically for one-month terms. This agreement became effective as of January 1, 2018. Due to the COVID-19 pandemic, Yukwise’s compensation was temporarily reduced to $20,000 per month from May 2020 to August 2020. For the three months ended December 31, 2020 and 2019, total consulting fees under this agreement were $75,000 and $75,000, respectively. For the nine months ended December 31, 2020 and 2019, total consulting fees under this agreement were $205,000 and $225,000, respectively.

On January 16, 2018, Treasure Success and Multi-Glory entered into a consulting agreement, pursuant to which Multi-Glory will provide high-level advisory, marketing, and sales services to the Company for $300,000 per annum. The agreement renews automatically for one-month terms. The agreement became effective as of January 1, 2018. Due to the COVID-19 pandemic, Multi-Glory’s compensation was temporarily reduced to $20,000 per month from May 2020 to August 2020. For the three months ended December 31, 2020 and 2019, total consulting fees under this agreement were $75,000 and $75,000, respectively. For the nine months ended December 31, 2020 and 2019, total consulting fees under this agreement were $205,000 and $225,000, respectively.

NOTE 12 – CREDIT FACILITIES

Pursuant to a letter agreement dated May 29, 2017, Treasure Success entered into an initial $8,000,000 import credit facility with Hong Kong and Shanghai Banking Corporation (“HSBC”) (the “2017 Facility Letter”), which was first amended pursuant to a letter agreement between HSBC, Treasure Success, and Jerash Garments dated June 19, 2018 (the “2018 Facility Letter”), further amended pursuant to a letter agreement dated August 12, 2019 (the “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 extends the term of the HSBC Facility indefinitely. Pursuant to the HSBC Facility, the Company has a total credit limit of $11,000,000.

In addition, on June 5, 2017, Treasure Success entered into an Offer Letter - Invoice Discounting/Factoring Agreement, and on August 21, 2017, Treasure Success entered into an Invoice Discounting/Factoring Agreement (together, the “2017 Factoring Agreement”) with HSBC for certain debt purchase services related to the Company’s accounts receivable. On June 14, 2018, Treasure Success and Jerash Garments entered into another Offer Letter-Invoice Discounting/Factoring Agreement with HSBC, which amended the 2017 Factoring Agreement (the “2018 Factoring Agreement, and together with the 2017 Factoring Agreement, the “HSBC Factoring Agreement,” and together with the HSBC Facility, the “HSBC Credit Facilities”). Pursuant to the HSBC Factoring Agreement, HSBC offered to provide Treasure Success with a $12,000,000 factoring facility for certain debt purchase services related to Treasure Success’s accounts receivable.

The HSBC Credit Facilities are guaranteed by Jerash Holdings, Jerash Garments, and Treasure Success. In addition, the HSBC Credit Facilities required cash and other investment security collateral of $3,000,000 and were secured by the personal guarantees of Mr. Choi and Mr. Ng Tsze Lun (“Mr. Ng”). As of January 22, 2019, the security collateral of $3,000,000 had been released. HSBC also released the personal guarantees of Mr. Choi and Mr. Ng on August 12, 2019. The HSBC Credit Facilities provide that drawings under the HSBC Credit Facilities are charged interest at the Hong Kong Interbank Offered Rate plus 1.5% for drawings in HKD, and the London Interbank Offered Rate plus 1.5% for drawings in other currencies. In addition, the HSBC Credit Facilities also contain certain service charges and other commissions and fees.

Under the HSBC Factoring Agreement, HSBC also provides credit protection and debt services related to each of the Company’s 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. The Company may assign debtor payments that are to be paid to HSBC within 90 days, defined as the maximum terms of payment. The Company may receive advances on invoices that are due within 30 days of the delivery of its goods, defined as the maximum invoicing period.

The HSBC Credit Facilities are subject to review at any time, and HSBC has discretion on whether to renew the HSBC Facility. Either party may terminate the HSBC Factoring Agreement subject to a 30-day notice period.

As of December 31, 2020 and March 31, 2020, the Company had made $807,298 and $235 in withdrawals, under the HSBC Credit Facilities, which are due within 120 days of each borrowing date or upon demand by HSBC.

On January 31, 2019, Standard Chartered Bank (Hong Kong) Limited (“SCBHK”) offered to provide an import facility of up to $3.0 million to Treasure Success pursuant to a facility letter dated June 15, 2018. Pursuant to the agreement, SCBHK agreed to finance import invoice financing and pre-shipment financing of export orders up to an aggregate of $3.0 million. The SCBHK facility bears interest at 1.3% per annum over SCBHK’s cost of funds. As of December 31, 2020 and March 31, 2020, the Company had no outstanding amount, respectively, in import invoice financing under the SCBHK facility.

NOTE 13 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended December 31, 2020 and 2019. As of December 31, 2020, 1,453,910 warrants and stock options were issued, 53,000 options were forfeited and 1,400,910 warrants and stock options were outstanding. For the three and nine months ended December 31, 2020, 1,350,910 warrants and stock options were excluded from the EPS calculation as they contained anti-dilution provisions. For the three and nine months ended December 31, 2019, 107,200 warrants and stock options were excluded from the EPS calculation as they contained anti-dilution provisions.

NOTE 14 – SEGMENT REPORTING

ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of the Company’s products. The Company’s major product is outerwear. For the three months ended December 31, 2020 and 2019, outerwear accounted for approximately 89.7% and 73.4% of the Company’s total revenue, respectively. For the nine months ended December 31, 2020 and 2019, outerwear accounted for approximately 89.9% and 88.4% of the Company’s total revenue, respectively. Based on management’s assessment, the Company has determined that it has only one operating segment as defined by ASC 280.

The following table summarizes sales by geographic areas for the three months ended December 31, 2020 and 2019, respectively.

The following table summarizes sales by geographic areas for the nine months ended December 31, 2020 and 2019, respectively.

99.9% of long-lived assets were located in Jordan as of December 31, 2020

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Commitments

On August 28, 2019, Jiangmen Treasure Success, was incorporated under the laws of the People’s Republic of China in Jiangmen City, Guangdong Province, China, with a total registered capital of HKD3 million (approximately $385,000). On December 9, 2020, shareholders of Jiangmen Treasure Success approved to increase its registered capital to HKD15 million (approximately $1.9 million). The Company’s subsidiary, Treasure Success, as a shareholder of Jiangmen Treasure Success, is required to contribute HKD15 million (approximately $1.9 million) as paid-in capital in exchange for 100% ownership interest in Jiangmen Treasure Success. As of December 31, 2020, Treasure Success had made capital contribution of HKD3 million ($385,000). Pursuant to the articles of incorporation of Jiangmen Treasure Success, Treasure Success is required to complete the remaining capital contribution before December 31, 2029 as Treasure Success’ available funds permit.

Contingencies

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would not have a material adverse impact on the Company’s consolidated financial position, results of operations, and cash flows.

NOTE 16 – INCOME TAX 

Jerash Garments, Jerash Embroidery, Chinese Garments, Paramount, Jerash the First and Victory Apparel are subject to the regulations of the Income Tax Department in Jordan. The corporate income tax rate is 14% for the industrial sector. In accordance with the Investment Encouragement Law, Jerash Garments’ export sales to overseas customers were entitled to a 100% income tax exemption for a period of 10 years commencing on the first day of production. This exemption had been extended for five years until December 31, 2018. Effective January 1, 2019, the Jordanian government reclassified the area where Jerash Garments and its subsidiaries are to a Development Zone. In accordance with the 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. Effective January 1, 2020, this rate increased to 14% plus a 1% social contribution.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act imposed tax on previously untaxed accumulated earnings and profits (“E&P”) of foreign subsidiaries (the “Toll Charge”). The Toll Charge is based in part of the amount of E&P held in cash and other specific assets as of December 31, 2017. The Toll Charge can be paid over an eight-year period, starting in 2018, and will not accrue interest. Additionally, under the provisions of the Tax Act, for taxable years beginning after December 31, 2017, the foreign earnings of Jerash Garments and its subsidiaries are subject to U.S. taxation at the Jerash Holdings level under the new Global Intangible Low-Taxed Income (“GILTI”) regime.

NOTE 17 – SUBSEQUENT EVENTS

On February 5, 2021, the Board of Directors approved the payments of a dividend of $0.05 per share, payable on February 23, 2021 to stockholders of record as of the close of business on February 16, 2021.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to: any projections of earnings, revenue, or other financial items; any statements regarding the adequacy, availability, and sources of capital, any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan,” “project,” or “anticipate,” and other similar words. In addition to any assumptions and other factors and matters referred to specifically in connection with such forward-looking statements, factors that could cause actual results or outcomes to differ materially from those contained in the forward-looking statements include those factors set forth in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 and in subsequent reports that we file with the Securities and Exchange Commission (the “SEC”).

Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed in this Quarterly Report. We do not intend, and undertake no obligation, to update any forward-looking statement, except as required by law.

The information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on June 29, 2020. References to fiscal 2021 and fiscal 2020 in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to our fiscal year ending March 31, 2021, and fiscal year ended March 31, 2020, respectively.

Impact of COVID-19 on our business

Collectability of receivables. We had accounts receivable of $10.3 million as of December 31, 2020, out of which $1.6 million had been received through February 8, 2021. There was no overdue account receivable as of December 31, 2020.

Inventory. We had inventory of $19.2 million as of December 31, 2020, substantially for orders scheduled to be shipped within fiscal 2021.

Investments. We acquired two pieces of land in fiscal 2020 for the construction of dormitory and production facilities. Due to the COVID-19 outbreak, 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, management has decided to resume the preparation work for the dormitory construction, which is expected to be completed and ready for use in fiscal 2022. Management is still reviewing the construction plan for the production facilities.

Revenue. For the quarter ended December 31, 2020, our sales were $20.7 million, which amounted to about 81% of that of the same period in fiscal 2020. This quarterly percentage was lower than the year to date average of 85% up to December 31, 2020. We are continuing to proactively communicate with our existing customers to reconfirm their orders and shipment schedules for the fourth quarter of fiscal 2021. We also managed to start business with some new customers. However, the above is subject to the progress of reopening of economies in the U.S. and the EU that would have significant impact on both order fulfilment and delivery schedules.

Liquidity/Going Concern. As of December 31, 2020, we had approximately $25.6 million of cash and cash equivalent and net current assets of approximately $64.5 million with a current ratio of 4.5 to 1. In addition, we had banking facilities with aggregate limits of $26 million with approximately $807,000 outstanding as of December 31, 2020. Given the above, we believe that we will have sufficient financial resources to maintain as a going concern in fiscal 2021.

Capital Expenditures. Management previously decided to put on hold the construction projects 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. As customer orders recovered to a satisfactory level, management has decided to restart the preparation work for the construction of the dormitory.

Results of Operations

Three months ended December 31, 2020 and December 31, 2019

The following table summarizes the results of our operations during the three-month periods ended December 31, 2020 and 2019, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

(All amounts, other than percentages, in thousands of U.S. dollars)

Revenue. Revenue decreased by approximately $4.8 million, or 19%, to $20.7 million, for the three months ended December 31, 2020, from approximately $25.4 million for the same period in fiscal 2020. The decrease was mainly due to a decrease in export sales to one of our major customers in the U.S.

The following table outlines the dollar amount and percentage of total sales to our customers for the three months ended December 31, 2020 and 2019.

(All amounts, other than percentages, in thousands of U.S. dollars)

Revenue by Geographic Area

(All amounts, other than percentages, in thousands of U.S. dollars)

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 allowed us to expand our garment export business in the U.S.

The decrease of approximately 38% in sales to the U.S. during the three months ended December 31, 2020 was mainly attributable to a decrease in shipment to one of our major customers in the U.S.

During the three months ended December 31, 2020, aggregate sales to Jordan and other locations, such as Hong Kong and China, increased over seven times from approximately $622,000 to $5.2 million from the same period last year as our factories took up more local orders and orders to other destinations to diversify our customer portfolio. We continued selling personal protective equipment to Jordanian local customers and such sales did not represent a significant percentage of our total sales.

Cost of goods sold. Following the decrease in sales revenue, our cost of goods sold decreased by approximately $2.3 million, or 11%, to approximately $18.2 million for the three months ended December 31, 2020, compared to approximately $20.5 million for the same period in fiscal 2020. As a percentage of revenue, the cost of goods sold increased by approximately 7% points to 88% for the three months ended December 31, 2020, compared to 81% for the same period in fiscal 2020. The increase in cost of goods sold as a percentage of revenue was primarily attributable to the decrease in shipments to the U.S. which typically have a higher margin. For the three months ended December 31, 2020, we purchased 20% and 11% of our raw materials and garments from two major suppliers, Dynamic Design Enterprises, Inc. and Agencia Commercial Wai Yuen (“Wai Yuen”), respectively. For the three months ended December 31, 2019, we purchased 48% of our raw materials from one major supplier, Dynamic Resources Ent. Ltd. We have been actively seeking cooperation with various suppliers to diversify our supplier chain and to control the cost of raw materials.

Gross profit margin. Gross profit margin was approximately 12% for the three months ended December 31, 2020, which decreased by 7% points from 19% for the same period in fiscal 2020. The decrease in gross profit margin was primarily driven by the higher proportion of sales in Jordan and destinations other than the U.S., which typically have a lower profit margin.

Selling, general, and administrative expenses. Selling, general, and administrative expenses decreased by approximately 9% from approximately $2.6 million for the three months ended December 31, 2019, to approximately $2.4 million for the three months ended December 31, 2020. The decrease was primarily attributable to a decrease in travelling and recruitment expenses in relation to foreign workers.

Other income, net. Other income, net was approximately $66,000 for the three months ended December 31, 2020, as compared to approximately $6,000 for the same period in fiscal 2020. The increase in income was primarily due to a return from short-term investments that were realized by the end of the quarter. 

Taxation. Income tax expense for the three months ended December 31, 2020 was approximately $20,000 compared to income tax expense of approximately $256,000 for the same period in fiscal 2020. The increase in the effective tax rate mainly resulted from a 4% point increase in the local tax rate to 14% plus a 1% social contribution. In addition, due to the higher operating loss in Jerash Holdings during the three months ended December 31, 2020, which lowered the consolidated net income before taxation, the effective tax rate was up to 17.5% for the three months ended December 31, 2020, compared to 11.0% for the three months ended December 31, 2019.

Net income. Net income for the three months ended December 31, 2020 was approximately $94,000 compared to net income of approximately $2.1 million for the same period in fiscal 2020. The decrease was mainly attributable to the decrease in sales to one of our major customers in the U.S. in the quarter and higher proportion of lower gross margin sales to Jordan and other destinations other than U.S.

Nine months ended December 31, 2020 and December 31, 2019

The following table summarizes the results of our operations during the nine-month periods ended December 31, 2020 and 2019, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

(All amounts, other than percentages, in thousands of U.S. dollars)

Revenue. Revenue decreased by approximately $12.1 million, or 15%, to $66.5 million, for the nine months ended December 31, 2020, from approximately $78.6 million for the same period in fiscal 2020. The decrease was mainly because of a decrease in shipments to one of our major customers in the U.S.

The following table outlines the dollar amount and percentage of total sales to our customers for the nine months ended December 31, 2020 and 2019.

(All amounts, other than percentages, in thousands of U.S. dollars)

Revenue by Geographic Area

(All amounts, other than percentages, in thousands of U.S. dollars)

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 allowed us to expand our garment export business in the U.S.

The decrease of approximately 26% in sales to the U.S. during the nine months ended December 31, 2020 was mainly attributable to a decrease in shipments to one of our major customers in the U.S. in the period.

During the nine months ended December 31, 2020, sales to Jordan and other locations, such as Hong Kong and China, increased by 130% and 29 times, respectively, as our factories took up more local orders and sales to other destinations to stay flexible in our production plans. We continued selling personal protective equipment to Jordanian local customers and such sales did not represent a significant percentage of our total sales.

Cost of goods sold. Following the decrease in sales revenue, our cost of goods sold decreased by approximately $6.7 million, or 11%, to approximately $55.1 million for the nine months ended December 31, 2020, compared to approximately $61.9 million for the same period in fiscal 2020. As a percentage of revenue, the cost of goods sold increased by approximately 4% points to 83% for the nine months ended December 31, 2020, compared to 79% for the same period in fiscal 2020. The increase in cost of goods sold as a percentage of revenue was primarily attributable to the lower proportion of sales to U.S. customers which typically provide higher profit margins. For the nine months ended December 31, 2020, we purchased 14% and 11% of our raw materials and garments from two major suppliers, Dynamic Design Enterprises, Inc. and Wai Yuen, respectively. For the nine months ended December 31, 2019, we purchased approximately 23% and 17% of our raw materials from two major suppliers, Dynamic Resources Ent. Ltd and Duck San Enterprise Co., Ltd, respectively. We have been actively seeking cooperation with various suppliers to diversify our supplier chain and to control the cost of raw materials.

Gross profit margin. Gross profit margin was approximately 17% for the nine months ended December 31, 2020, which decreased by 4% points from 21% for the same period in fiscal 2020. The decrease in gross profit margin was primarily driven by the higher proportion of local orders and shipments to non-U.S. customers which on average provide a lower profit margin.

Selling, general, and administrative expenses. Selling, general, and administrative expenses decreased by approximately 13% from approximately $8.1 million for the nine months ended December 31, 2019, to approximately $7.1 million for the nine months ended December 31, 2020. The decrease was primarily due to a decrease in travelling and recruitment expenses in relation to foreign workers and a decrease in payrolls in response to the pandemic.

Stock-based compensation expenses. Stock-based compensation expenses decreased by approximately 78%, or $152,000, to approximately $42,000 from $194,000 in the same period in fiscal 2020. The stock-based compensation expenses in fiscal 2021 were related to stock options issued to an employee.

Other income (expense), net. Other income, net was approximately $126,000 for the nine months ended December 31, 2020, as compared to other expense, net of approximately $4,000 for the same period in fiscal 2020. The increase in net other income was primarily due to returns from short-term investments which were realized by December 31, 2020.

Taxation. Income tax expense for the nine months ended December 31, 2020, was approximately $894,000 compared to income tax expense of approximately $1.2 million for the same period in fiscal 2020. The increase in the effective tax rate mainly resulted from a 4% point increase in the local tax rate to 14% plus a 1% social contribution. In addition, due to the higher operating loss in Jerash Holdings during the nine months ended December 31, 2020, which lowered the consolidated net income before taxation, the effective tax rate was up to 20.5% for the nine months ended December 31, 2020, compared to 14.1% for the nine months ended December 31, 2019.

Net income. Net income for the nine months ended December 31, 2020, was approximately $3.5 million compared to net income of approximately $7.2 million for the same period in fiscal 2020. The decrease was mainly attributable to a decrease in sales to one of our major customers in the U.S. and higher proportion of lower gross margin sales to Jordan and other destinations other than U.S.

Liquidity and Capital Resources

We are a holding company incorporated in the U.S. As a holding company, we rely on dividends and other distributions on equity from our Jordanian subsidiaries 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. We have relied on direct payments of expenses by our subsidiaries to meet our obligations to date. To the extent payments are due in US$, we have occasionally paid such amounts in JOD to an entity controlled by our management capable of paying such amounts in US$. Such transactions have been made at prevailing exchange rates and have resulted in immaterial losses or gains on currency exchange.

As of December 31, 2020, we had cash of approximately $25.6 million and restricted cash of approximately $3.6 million compared to cash of approximately $26.1 million and restricted cash of approximately $786,000 at March 31, 2020. The increase in total cash was mainly a result of cash generated in the nine-month period from operation and an increase in credit facilities of approximately $807,000.

Our current assets as of December 31, 2020 were approximately $64.5 million and our current liabilities were approximately $14.2 million, which resulted in a ratio of approximately 4.5 to 1. As of March 31, 2020, our current assets were approximately $59.0 million and our current liabilities were $10.9 million, resulting in a ratio of 5.4 to 1.

The primary driver in the increase in current assets was an increase in accounts receivable of approximately $5.0 million as more finished goods were shipped in December 2020 with credit period of typically 60 to 90 days, and an increase in advance to suppliers of approximately $2.0 million mainly due to raw material shipment changes in relation to adjustments in customer orders.

The primary driver in the increase in current liabilities was an increase in accounts payable of approximately $1.5 million due to increase in inventory, and an increase of approximately $807,000 of credit facilities for letters of credit issued to suppliers.

Total equity as of December 31, 2020 was approximately $56.6 million compared to $54.8 million as of March 31, 2020.

We had net working capital of $50.3 million and $48.1 million as of December 31, 2020, and March 31, 2020, respectively. Based on our current operating plan, we believe that cash on hand and cash generated from operating activities will be sufficient to support our working capital needs for the next 12 months from the date of this Quarterly Report.

We have funded our working capital needs from our 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 International Limited (“Treasure Success”), entered into a facility letter (“2017 Facility Letter”) with Hong Kong and Shanghai Banking Corporation (“HSBC”) to provide credit to us, which was later amended by an offer letter between HSBC, Treasure Success, and Jerash Garments and Fashions Manufacturing Company Limited (“Jerash Garments”) dated June 19, 2018 (“2018 Facility Letter”), and further amended pursuant to a letter agreement dated August 12, 2019 (the “2019 Facility Letter”), which was amended pursuant to a letter agreement dated July 3, 2020 (the “2020 Facility Letter,” and together with the 2017 Facility Letter, the 2018 Facility Letter, and the 2019 Facility Letter, the “HSBC Facility”). The 2020 Facility Letter extends the term of the HSBC Facility indefinitely. 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 0.19% and HIBOR was 0.24% at February 8, 2021. 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 Lin Hung, our Chief Executive Officer, and Mr. Ng Tsze Lun, one of our significant stockholders. 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 December 31, 2020, approximately $807,000 was 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. We anticipate amending the HSBC Factoring Agreement to extend the term of the facility with substantially similar terms and that we will continue to be able to use the borrowings under the HSBC Factoring Agreement through any negotiation period. 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. As of December 31, 2020, there were no outstanding amounts under the HSBC Factoring Agreement. 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.

SCBHK Facility Letter

Pursuant to the Standard Chartered Hong Kong (“SCBHK”) facility letter dated June 15, 2018, and issued to Treasure Success by SCBHK, on January 31, 2019, 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. As of December 31, 2020, there were no outstanding amounts under the SCBHK facility.

Nine months ended December 31, 2020 and 2019

The following table sets forth a summary of our cash flows for the periods indicated:

(All amounts in thousands of U.S. dollars)

Operating Activities

Net cash provided by operating activities was approximately $3.7 million for the nine months ended December 31, 2020, compared to cash provided by operating activities of approximately $6.0 million for the same period in fiscal 2020. The decrease in net cash provided by operating activities was primarily attributable to the following factors:

Investing Activities

Net cash used in investing activities was approximately $519,000 for the nine months ended December 31, 2020, compared to approximately $3.8 million in the same period in fiscal 2020. The net cash used in investing activities in the nine-month period ended December 31, 2020, was mainly used in acquisition of plant and machineries.

Financing Activities

Net cash used in financing activities was approximately $892,000 for the nine months ended December 31, 2020, for dividend payments of approximately $1.7 million with proceeds of short-term loans of approximately $807,000 in the nine-month period. There was a net cash outflow of $2.3 million in the same period in fiscal 2020 resulting from dividend payments and net repayment of short-term loans.

Statutory Reserves

In accordance with the Corporate Laws in Jordan, our subsidiaries and variable interest entity (“VIE”) in Jordan are required to make appropriations to certain reserve funds, based on net income determined in accordance with generally accepted accounting principles in 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. This reserve is not available for dividend distribution. In addition, PRC companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to us and can be used to make up cumulative prior year losses. As our subsidiaries and VIE had already reserved the maximum required by law, they did not reserve any additional amounts during the nine months ended December 31, 2020 and 2019.

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 December 31, 2020 and 2019.

(All amounts, other than percentages, in thousands of U.S. dollars)

Total restricted net assets accounted for approximately 0.38% of our consolidated net assets as of December 31, 2020. As discussed above, our subsidiaries and VIE in Jordan are required to reserve 10% of net profits until the reserve is equal to 100% of the subsidiary’s share capital. Our subsidiaries and VIE have already reserved the maximum amount required. We believe the potential impact of such restricted net assets on our liquidity is limited.

Capital Expenditures

We had capital expenditures of approximately $553,000 and $3.8 million for the nine months ended December 31, 2020 and 2019, respectively, including investment related to the Paramount acquisition in fiscal 2020. Additions in plant and machinery amounted to approximately $502,000 for the nine months ended December 31, 2020, while additions in land amounted to approximately $1.3 million and additions in plant and machinery amounted to approximately $1.6 million for the nine months ended December 31, 2019. Additions to leasehold improvements amounted to approximately $1,000 and $0.9 million for the nine months ended December 31, 2020 and 2019 respectively.

In 2015, we commenced a project to build a 4,800 square foot facility 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. This dormitory is expected to be operational in fiscal 2022 and is expected to house workers 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 200 workers. Provided that we satisfy certain employment requirements over certain time periods, we do not anticipate incurring any significant costs for the project, which is being 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.

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 in aggregate 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 3 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. 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).

Due to the ongoing COVID-19 outbreak, management previously decided to put on hold the construction project 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. As the COVID-19 outbreak seems to be gradually under control in Jordan, management has decided to restart the preparation work for the construction of the dormitory. Management is still reviewing the construction plan for the production facilities. We expect to pay approximately $6 million in capital expenditures to build the dormitory.

We project that there will be an aggregate of approximately $4 million of capital expenditures in both the fiscal years ending March 31, 2021 and 2022 for further enhancement of business and production capacity to meet expected 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 shareholders’ equity, or that are not reflected in our consolidated financial statements.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“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 three 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 our accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, the policies 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 unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements

See “Note 3—Recent Accounting Pronouncements” in the notes to our unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.