Jerash Holdings (US), Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”).

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, 2024 and in subsequent reports that we file with 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, 2024, filed with the SEC on June 28, 2024. References to fiscal 2025 and fiscal 2024 in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to our fiscal year ending March 31, 2025, and fiscal year ended March 31, 2024, respectively.

Results of Operations

Three months ended June 30, 2024 and 2023

The following table summarizes the results of our operations during the three-month periods ended June 30, 2024 and 2023, 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)

23

Revenue. Revenue increased by approximately $6.2 million, or 18%, to $40.9 million, for the three months ended June 30, 2024, from approximately $34.7 million for the same period in fiscal 2024. The increase was mainly due to increases in sales to our major customer in the U.S. and growth in business with some customers we obtained during the past two years.

The following table outlines the dollar amount and percentage of total sales to our customers for the three months ended June 30, 2024 and 2023.

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

(1) A large portion of our products are sold under The North Face, Timberland, and Vans brands owned by VF Corporation.

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 provides us with substantial competitiveness and benefit that allowed us to expand our garment export business in the U.S.

The increase of approximately 13% in sales to the U.S. during the three months ended June 30, 2024, was mainly attributable to the increase in sales to our major customer in the U.S.

During the three months ended June 30, 2024, aggregate sales to Germany and other locations increased by 88% from $2.1 million to $3.9 million from the same period last year. This significant increase was mainly due to our expanded business relationships with customers we acquired in these regions over the past one to two years.

Cost of goods sold. Following the increase in sales revenue, our cost of goods sold increased by approximately $7.1 million, or 24%, to approximately $36.3 million, for the three months ended June 30, 2024, from approximately $29.2 million for the same period in fiscal 2024. As a percentage of revenue, the cost of goods sold increased by approximately 5 percentage points, from 84% for the same period in fiscal 2024 to 89% for the three months ended June 30, 2024. The increase in the cost of goods sold as a percentage of revenue was primarily attributable to the higher logistic costs for importing raw material amid the Red Sea turmoil. Furthermore, we incurred extra production costs to adhere to customers’ delivery schedules and mitigate the impact of delayed arrivals of raw materials caused by the aforementioned logistic disruption. During the three months ended June 30, 2024, we did not experience substantial delays in shipments of products to our customers.

For the three months ended June 30, 2024, we purchased 12% and 11% of our total purchase in garments and raw materials from two major suppliers, respectively.

For the three months ended June 30, 2023, we purchased 23%, 16%, and 10% of our total purchase in garments and raw materials from three major suppliers, respectively.

Gross profit margin. Gross profit margin was approximately 11% for the three months ended June 30, 2024, which decreased by 5 percentage points from 16% for the same period in fiscal 2024. The decrease in gross profit margin was primarily driven by the higher raw material import costs caused by the Red Sea shipping disruption and the additional costs incurred to catch up with garment delivery schedules to our customers.

Operating expenses. Operating expenses increased by 22%, or approximately $1 million, from approximately $4.5 million for the three months ended June 30, 2023, to approximately $5.5 million for the three months ended June 30, 2024. The increase was primarily due to (i) an increase in selling expenses of $0.3 million, which was resulted from the increase in shipments and change in customer mix, (ii) an increase in stock-based compensation expenses of $0.2 million, (iii) an increase in sampling supports of $0.2 million, and (iv) increases in payrolls and others of $0.3 million.

Other expenses, net. Other expenses, net were approximately $0.4 million for the three months ended June 30, 2024, as compared to other expenses, net of approximately $0.3 million for the same period in fiscal 2024. The increase was primarily due to higher interest expenses resulting from the supply chain financing programs introduced by our major customers. These programs allow us to receive fund early from invoices submitted to customers, and this arrangement typically incurs an interest expense in return for early receipt of payment.

Income tax expenses. Income tax expenses for the three months ended June 30, 2024, were approximately $0.1 million compared to income tax expenses of $0.3 million for the same period in fiscal 2024. The decrease in the income tax expenses was mainly due to the reduced operating profit derived from our Jordanian subsidiaries. The effective tax rate declined to (9%) for the three months ended June 30, 2024, as compared to 38% for the three months ended June 30, 2023.

Net loss/income. Net loss for the three months ended June 30, 2024, was approximately $1.4 million compared to net income of approximately $0.5 million for the same period in fiscal 2024. The decrease in net profit was mainly attributable to a decrease in profit margin due to the higher logistic costs amid the Red Sea turmoil and additional production costs to catch up with customers’ delivery schedules, as well as the higher stock-based compensation expenses during the period in fiscal 2025.

Liquidity and Capital Resources

Jerash Holdings is a holding company incorporated in Delaware. As a holding company, we rely on dividends and other distributions from our subsidiaries formed in Jordan and Hong Kong to satisfy our liquidity requirements. Current Jordanian regulations permit our Jordanian subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Jordanian accounting standards and regulations. In addition, our Jordanian subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. We have relied on direct payments of expenses by our subsidiaries to meet our obligations to date. The subsidiaries generate most of revenue in our group.

As of June 30, 2024, we had cash of approximately $11.4 million and restricted cash of approximately $1.6 million compared to cash of approximately $12.4 million and restricted cash of approximately $1.6 million as of March 31, 2024. The decrease in total cash was mainly a result of an operational loss of $1.4 million and a dividend payment of $0.6 million, offset by proceeds from short-term loans.

Our current assets as of June 30, 2024 were approximately $47.6 million and our current liabilities were approximately $13.1 million, which resulted in a ratio of approximately 3.6 to 1. Our current assets as of March 31, 2024 were approximately $50.9 million, and our current liabilities were approximately $14.8 million, which resulted in a current ratio of approximately 3.4 to 1.

The primary drivers in the decrease in current assets were a decrease in inventory of $6.5 million, which was only partially compensated by increases in accounts receivable of $4.0 million. The primary driver in the decrease in current liabilities was decreases in accounts payable and accrued expenses of $3.0 million and $0.7 million, respectively, which was only partially compensated by an increase in credit facilities of $2.1 million.

Total equity as of June 30, 2024 was approximately $62.9 million compared to $64.4 million as of March 31, 2024.

We had net working capital of $34.5 million and $36.1 million as of June 30, 2024 and March 31, 2024, 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 this Quarterly Report is released.

Since May and October 2021, we have participated in supply chain financing programs of two of our major customers, respectively. The programs allow us to receive early payments for approved sales invoices submitted by us through the bank the customer cooperates with. For any early payments received, we are subject to an early payment charge imposed by the customer’s bank, for which the rate is SOFR plus a spread. The arrangement allows us to have better liquidity without the need to incur administrative charges and handling fees as in bank financing. In March 2024, we participated in an additional supply chain financing program with one customer.

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

DBS Facility Letter

Pursuant to the DBS facility letter dated January 12, 2022, DBSHK provided a bank facility of up to $5.0 million to Treasure Success, which was amended pursuant to a facility letter dated January 4, 2024. Pursuant to the amended agreement, DBSHK agreed to finance cargo receipt, trust receipt, account payable financing, and certain type of import and export invoice financing up to an aggregate of $5.0 million, subject to certain financial covenants. The DBSHK facility bears interest at 1.5% per annum over HIBOR for HKD bills and 1.1% to 1.3% per annum over DBSHK’s cost of funds for foreign currency bills. The facility is guaranteed by Jerash Holdings and became available to the Company on June 17, 2022. As of June 30, 2024 and March 31, 2024, we had $2.1 million and $nil outstanding under this DBSHK facility, respectively.

Three months ended June 30, 2024 and 2023

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 used in operating activities was approximately $2.2 million for the three months ended June 30, 2024, compared to cash provided by operating activities of approximately $25,000 for the same period in fiscal 2024. The decrease in net cash provided by operating activities was primarily attributable to the following factors:

• a decrease in inventory of $6.5 million in the three months ended June 30, 2024, compared to a decrease of $8.9 million in the same period in fiscal 2024;
• an increase in accounts receivable of $4.0 million in the three months ended June 30, 2024, compared to an increase of $4.2 million in the same period in fiscal 2024;
• an increase of advance to suppliers of $81,000 compared to an increase of $1.7 million in the same period in fiscal 2024;
• a decrease of accounts payable of $3.0 million in the three months ended June 30, 2024, compared to a decrease of $2.2 million in the same period in fiscal 2024; and
• a net loss of $1.4 million in the three months ended June 30, 2024, from a net income of $0.5 million in the same period in fiscal 2024.

Investing Activities

Net cash used in investing activities was approximately $0.4 million for the three months ended June 30, 2024, compared to approximately $1.8 million in the same period in fiscal 2024. The net cash used in investing activities during the three months ended June 30, 2024 was mainly for purchases of property, plant, and equipment and deposits for fixed assets.

Financing Activities

Net cash provided by financing activities was approximately $1.5 million for the three months ended June 30, 2024, which was the net effect of net proceeds from short-term loans of approximately $2.1 million, offset by a dividend payment of $0.6 million. There was a net cash inflow of approximately $2.5 million in the same period in fiscal 2024 resulting from the dividend payments of approximately $0.6 million, and the net proceeds from short-term loans of approximately $3.1 million.

Statutory Reserves

In accordance with the corporate law in Jordan, subsidiaries of Jerash Holdings in Jordan are required to make appropriations to certain reserve funds, based on net income determined in accordance with generally accepted accounting principles of Jordan. Appropriations to the statutory reserve are required to be 10% of net income until the reserve is equal to 100% of the entity’s share capital. Jiangmen Treasure Success is required to set aside 10% of its net income as statutory surplus reserve until such reserve is equal to 50% of its registered capital. These reserves are not available for dividend distribution. The statutory reserve was $413,821 and $410,847 as of June 30, 2024 and 2023, respectively.

The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of June 30, 2024 and 2023.

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

Total restricted net assets accounted for approximately 0.66% of our consolidated net assets as of June 30, 2024. As our subsidiaries in Jordan are only required to set aside 10% of net profits to fund the statutory reserves, we believe the potential impact of such restricted net assets on our liquidity is limited.

Capital Expenditures

We had capital expenditures of approximately $0.4 million and $1.8 million for the three months ended June 30, 2024 and 2023, for plant and machinery and the construction of a dormitory in both periods. For the three months ended June 30, 2024, payments for additional plant and machinery amounted to approximately $0.4 million. For the three months ended June 30, 2023, payments for additional plant and machinery, and construction of a dormitory and factory expansion, amounted to approximately $338,000 and $1.4 million, respectively.

On August 7, 2019, we completed a transaction to acquire 12,340 square meters (approximately three acres) of land in Al Tajamouat Industrial City, Jordan, from a third party to construct a dormitory for our employees with aggregate purchase price JOD863,800 (approximately $1,218,303). Management has revised the plan to construct both dormitory and production facilities on the land in order to capture the increasing demand for our capacity. We are conducting engineering design and study on this project with the business growth potential brought about by the new business collaboration with Busana Apparel Group. 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). The dormitory is expected to be fully completed in second quarter of fiscal year 2025. We have spent approximately $9.3 million in capital expenditures to build the dormitory. The dormitory’s kitchen is under construction at an estimated cost of approximately $0.9 million.

We project that there will be an aggregate of approximately $4.1 million and $8.8 million of capital expenditures in the fiscal years ending March 31, 2025 and 2026, respectively, for further enhancement of production capacity to meet future sales growth. The realization of these investments depends on the progress of our business development, including expanding our client base and securing increased commitments from existing customers. We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from operations of our subsidiaries to fund our capital commitments in the past and anticipate using such funds to fund capital expenditure commitments in the future.

Off-balance Sheet Commitments and Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as stockholders’ equity, or that are not reflected in our consolidated financial statements.

Critical Accounting Estimates

We prepare our consolidated 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 have not identified any critical accounting estimates.

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.

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rule 15d-15(e)) are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), based on their evaluation of our disclosure controls and procedures as of March 31, 2024, concluded that our disclosure controls and procedures were ineffective as of that date based on reasons set forth below.

In the annual report for fiscal 2024 filed on June 28, 2024, the management concluded that, as of March 31, 2024, our internal control over financial reporting was not effective due to certain control deficiencies that are deemed as material weaknesses, including:

• We failed to maintain effective controls over period-end financial reporting, specifically related to income taxes and the reconciliation of account level balances that resulted in errors; and
• There were ineffective information technology general controls in the areas of privileged user access and the review of user access over certain information technology systems that support our financial reporting processes.

Remedial actions have then been implemented to address some of the issues. However, in the assessment in fiscal 2024, the management still concluded that, as of March 31, 2024, our internal control over financial reporting was not effective due to certain material control weaknesses particularly that we failed to maintain effective controls over period-end financial reporting related to income taxes and the reconciliation of account level balances that resulted in errors.

The Company has put in more resources to strengthen the internal control environment and plans to enhance the communication with external consultants who are assisting the Company in taxation and management information systems. As of the date of this report, we have implemented measures to address the weaknesses by:

• Enhanced communication with the U.S. GAAP advisor to strengthen compliance including but not limited to new promulgations. A review of the manpower structure and workflows is also undergoing to ensure sufficient resources are available to implement identified improvement actions;
• Improved communication with external professional consultants to strengthen our work and review both U.S. tax and local issues in Jordan; and
• Conducting a comprehensive review and strengthened processes on user authorization, access log control, password control mechanism, and documentation of control procedures for the information technology systems supporting our financial reporting processes.

While we believe the Company’s remediation efforts to-date have improved and will continue to improve our disclosure controls and procedures, remediation of the material weaknesses will require validation and testing of the operating effectiveness of our disclosure controls over a sustained period of financial reporting cycles. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine additional measures are necessary to address control deficiencies or determine that it is necessary to modify the remediation plan described above. Management cannot provide assurance as to when the Company will remediate such weaknesses, nor can management be certain of whether additional actions will be required or the costs of any such actions.

Our remediation efforts are ongoing and are subject to continued management review supported by ongoing design and testing. Notwithstanding the material weaknesses, our management has concluded that the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.

Changes in Internal Control Over Financial Reporting

Other than our ongoing remediation efforts with respect to our disclosure controls and procedures, which extend to our internal control over financial reporting, there were no changes in our internal control over financial reporting (as the term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

JERASH HOLDINGS (US), INC.