JERASH (US): Discussion and analysis by management of the financial position and operating results. (form 10-K)
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. EXECUTIVE OVERVIEW Overview
Through our wholly-owned and VIE subsidiaries, we are primarily engaged in the manufacture and export of customized, ready-made sports and outerwear from knitwear and fabric. PPE produced in our facilities
We are an approved manufacturer of many well-known brands and retailers, such as Walmart, Costco, New Balance, G-III (which owns brands such as Calvin Klein,
Tommy Hilfiger, DKNY, and Guess), American Eagle, VF Corporation (which operates brands such as The North Face, Timberland, and JanSport). Our production facilities are made up of four factory units, one workshop, and four warehouses and currently employ approximately 4,300 people. The total annual capacity at our facilities is approximately 12.0 million pieces (average for product categories including t-shirts, polo shirts, pants, shorts, and jackets, and excluding PPE).
Impact of COVID-19 on our business
Admissibility of claims. We had accounts receivable from
Inventory. We had an inventory of
19 Investments. We acquired two pieces of land in fiscal 2020 for the construction of dormitory and production facility. Due to the COVID-19 pandemic, the management decided to hold off the construction in fiscal 2021. In
April 2021, we commenced the construction of a housing facility for our multi-national workforce on the land. See "Item 1. Business" Revenue. For fiscal 2021, annual sales was $90.2 million, which was $2.8 million, or approximately 3%, lower than $93.0 millionfor fiscal 2020. The decrease was mainly due to the loss in productivity in the gradual resumption of production in April 2020after the national lockdown, the limitation in overtime work, and the strengthened procedures in hygienic precautions. The aggregate sales in the first two quarters of fiscal 2021 decreased by $7.3 millionto $45.8from $53.1 millionin the same period in fiscal 2020. The decrease was mostly compensated by the increase in sales of $4.5 millionin the second half of fiscal 2021 to $44.4 millionfrom $39.9 millionin the same period in fiscal 2020. In addition, we managed to secure orders from new local customers that helped mitigate the impact of slower sales to the U.S. market. Liquidity/Going Concern. We had approximately $21.1 millionof cash and cash equivalent as of March 31, 2021. We had net current assets of approximately $50.1 millionwith a current ratio of 4.5 to 1. In addition, we had banking facilities with an aggregate limit of $26 millionand $612,703outstanding as of March 31, 2021. Given the above, we believe that we will have sufficient financial resources to maintain as a going concern in fiscal 2022. Seasonality of Sales A significant portion of our revenue is received during the first six months of our fiscal year. The majority of our VF Corporation orders are derived from winter season fashions, the sales of which occur in Spring and Summer and are merchandized by VF Corporation during the months of September through November. As such, the second half of our fiscal years reflect lower sales in anticipation of the spring and summer seasons. One of our strategies is to increase sales with other customers where clothing lines are stronger during the spring months. This strategy also reflects our current plan to increase our number of customers to mitigate our current concentration risk with VF Corporation. Results of Operations The following table presents certain information from our statement of income for fiscal years 2021 and 2020 and should be read, along with all of the information in this management's discussion and analysis, in conjunction with the consolidated financial statements and related notes included elsewhere in this filing. (All amounts, other than percentages, in thousands of U.S.dollars) Fiscal Years Ended March 31, 2021 2020 Year over Year
Statement of Income As % of As % of Data: Amount Sales Amount Sales Amount % Revenue
$ 90,213100 % $ 93,024100 % $ (2,811 )(3 )% Cost of goods sold 74,214 82 % 75,041 81 % (827 ) (1 )% Gross profit 15,999 18 % 17,983 19 % (1,984 ) (11 )% Selling, general and administrative expenses 10,614 12 % 10,318 11 % 296 3 % Other income (expense), net 109 0 % (21 ) 0 % 130 619 % Net income before taxation $ 5,4946 % $ 7,6448 % $ (2,150 )(28 )% Income tax expense 1,346 1 % 1,174 1 % 172 15 % Net income $ 4,1485 % $ 6,4707 % $ (2,322 )(36 )% Revenue. Revenue decreased by approximately $2.8 million, or 3%, to approximately $90.2 millionin fiscal 2021 from approximately $93.0 millionin fiscal 2020. The decrease was mainly the result of the loss in productivity in the resumption of production in April 2020after the national lockdown in Jordan, the restriction in overtime work, and strengthened hygienic precautions. Approximately 88% and 96% of our products were exported to the U.S.in fiscal 2021 and 2020, respectively. 20
The table below presents our revenue for fiscal years 2021 and 2020 by geographic region.
Revenue by Geographic Area (All amounts, other than percentages, in thousands of
U.S.dollars) Fiscal Years Ended March 31, 2021 2020 Year over Year Region Amount % Amount % Amount % United States $ 79,19088 % $ 89,12396 % $ (9,933 )(11 )% Jordan 5,703 6 % 3,738 4 % 1,965 53 % Others 5,320 6 % 163 0 % 5,157 3,164 % Total $ 90,213100 % $ 93,024100 % $ (2,811 )(3 )% Since January 2010, all apparel manufactured in Jordancan be exported to the U.S.without customs duty being imposed, pursuant to the United States- JordanFree Trade Agreement entered into in December 2001. This free trade agreement provides us with substantial competitiveness and benefit that allowed us to expand our garment export business in the U.S.Our sales to the U.S.decreased by approximately 11% in fiscal 2021 compared to fiscal 2020. According to the Major Shippers Report issued by the Office of Textiles and Apparelunder the U.S. Department of Commercedated May 4, 2021, U.S.apparel import from Jordandecreased by approximately 22% from $1.83 billionin the fiscal year ended March 31, 2020to approximately $1.43 billionin the fiscal year ended March 31, 2021. Our sales decrease ratio has been lower than the industrial average decrease ratio amid the COVID pandemic, and we expect we will still have plenty of room to expand our garment export business in the U.S.in the long run, as Jerashaccounted for only approximately 6% of the total Jordanian garment exports to the U.S.in fiscal 2021, according to data from the Major Shippers Report issued by the U.S. Department of Commerce. Cost of goods sold. Following the decrease in sales revenue, our cost of goods sold decreased by approximately $0.8 million, or 1%, to approximately $74.2 millionin fiscal 2021 from approximately $75.0 millionin fiscal 2020. As a percentage of revenue, the cost of goods sold increased by approximately 1% point to 82% in fiscal 2021 from 81% in fiscal 2020. The increase in cost of goods sold as a percentage of revenue was primarily attributable to the higher proportion of local orders that typically have a lower average profit margin. For the fiscal year ended March 31, 2021, we purchased approximately 13% of our garments from one major supplier. For the fiscal year ended March 31, 2020, we purchased approximately 22%, 16%, and 11% of our raw materials from three major suppliers, respectively. Gross profit margin. Gross profit margin was approximately 18% in fiscal 2021, which decreased by approximately 1% point from 19% in fiscal 2020. The decrease in gross profit margin was primarily driven by a higher proportion of local orders that typically have a lower gross margin, and the loss in productivity in April 2020due to the national lockdown in Jordan. Selling, general, and administrative expenses. Selling, general, and administrative expenses increased by approximately 3% from approximately $10.3 millionin fiscal 2020 to approximately $10.6 millionin fiscal 2021. The slight increase was mainly attributable to the increase in expenses for pandemic precaution and the increase in headcounts to cater for sales growth in the second half of the year. Other income (expense), net. Other income, net was approximately $109,000in fiscal 2021 and other expenses, net was approximately $21,000in fiscal 2020. The increase in other income was primarily due to a return from short-term investments that were realized during the year. Net income before taxation. Net income before taxation for fiscal 2021 decreased by approximately 28% from approximately $7.6 millionto approximately $5.5 million. The decrease was mainly attributable to the lower unit sales price due to higher proportion of local orders, the lower margin of local orders, the loss of productivity in the national lockdown in April 2020, the increase in expenses for pandemic precaution, and the increase in headcounts to cater for sales growth in the second half of the year discussed above. 21 U.S.taxation. Income tax expense for fiscal 2021 was approximately $1.3 millioncompared to income tax expense of $1.2 millionfor fiscal 2020. The effective tax rate was 24.5% and 15.4% for fiscal 2021 and 2020, respectively. The increase of effective tax rate was caused by the increase in local tax rate in Jordan, true up of Jordantax for fiscal year 2019, and higher proportion of losses in China, Hong Kong, and the U.S. Jordantaxation. Jerash Garments, Jerash Embroidery, Chinese Garments, Paramount, Jerash The First, and Victory Apparel are subject to the regulations of Income Tax Departmentin Jordan. The corporate income tax rate has been 16% for the industrial sector starting from January 1, 2021. In accordance with the Investment Encouragement Law, Jerash Garments' export sales to overseas customers are entitled to a 100% income tax exemption for a period of 10 years commencing at the first day of production. This exemption was extended for five years to December 31, 2018. Effective January 1, 2019, in accordance to Development Zonelaw, Jerash Garments and its subsidiaries and VIE began paying corporate income tax in Jordanat a rate of 10% plus a 1% social contribution. The income tax rate increased to 14% plus 1% social contribution effective from January 1, 2020. The tax income tax rate increased to 16% plus a 1% social contribution effective from January 1, 2021. For fiscal 2021, our income tax in Jordanwas approximately $1,342,000. Jerash Garments and its subsidiaries and VIE are subject to local sales tax of 16%. However, Jerash Garments was granted a sales tax exemption from the Jordanian Investment Commissionfor the period June 1, 2015to June 1, 2018that allowed Jerash Garments to make purchases with no sales tax charge. This exemption was extended to February 5, 2022. Hong Kongtaxation.Treasure Success is registered in Hong Kongwith an income tax rate of 8.25% on assessable profits up to HK$2,000,000and 16.5% on any part of assessable profits over HK$2,000,000. Treasure Success incurred no income tax expense for fiscal 2021 and 2020 due to its operating loss. In accordance with tax legislation in Hong Kong, the accumulated loss can be used to offset future profit for income tax purposes.
Taxation of the PRC. Jiangmen Treasure Success was established in the PRC and is subject to an income tax rate of 25%.
Net income. Net income for fiscal 2021 was approximately
$4.1 million, a 36% decrease from approximately $6.5 millionfor fiscal 2020. The decrease was mainly attributable to the decrease in sales revenue and the increase in cost of sales and selling and administration expenses discussed above. Liquidity and Capital Resources
Jerash Holdingsis a holding company incorporated in Delaware. As a holding company, we rely on dividends and other distributions from our Jordanian subsidiaries to satisfy our liquidity requirements. Current Jordanian regulations permit our Jordanian subsidiaries and VIE to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Jordanian accounting standards and regulations. In addition, our Jordanian subsidiaries and VIE are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. We have relied on direct payments of expenses by our subsidiaries and VIE (which generate revenue) to meet our obligations to date. To the extent payments are due in U.S.dollars, we have occasionally paid such amounts in JOD to an entity controlled by our management capable of paying such amounts in U.S.dollars. Such transactions have been made at prevailing exchange rates and have resulted in immaterial losses or gains on currency exchange but no other profit. As of March 31, 2021, we had cash of approximately $21.1 millionand restricted cash of approximately $1.7 millioncompared to cash of approximately $26.1 millionand restricted cash of approximately $0.8 millionas of March 31, 2020, which was mainly the security deposit supporting our duty-free import into Jordanat the customs and deposit supporting letter of credit to suppliers. Our current assets as of March 31, 2021were approximately $64.7 million, and our current liabilities were approximately $14.5 million, which resulted in a current ratio of approximately 4.5:1. Our current assets as of March 31, 2020were approximately $59.0 million, and our current liabilities were approximately $10.9 million, which resulted in a current ratio of approximately 5.4:1. Total equity as of March 31, 2021and 2020 was approximately $56.7 millionand $54.8 million, respectively. 22 We had net working capital of $50.1 millionand $48.1 millionas of March 31, 2021and 2020, respectively. Based on our current operating plan, we believe that cash on hand and cash generated from operation will be sufficient to support our working capital needs for the next 12 months after the date of
this annual report. We have funded our working capital needs from operations. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our sales contracts, the progress of execution on our customer contracts, and the timing of accounts receivable collections. Credit Facilities HSBC Facility On
May 29, 2017, our wholly owned subsidiary, Treasure Success, entered into a facility letter ("2017 Facility Letter") with HSBC to provide credit to us, which was first amended by an offer letter between HSBC, Treasure Success, and Jerash Garments dated June 19, 2018("2018 Facility Letter"), further amended on August 12, 2019("2019 Facility Letter"), and further amended pursuant to a letter agreement dated July 3, 2020(the "2020 Facility Letter," and together with the 2017 Facility Letter, 2018 Facility Letter, and 2019 Facility Letter, the "HSBC Facility"). The 2020 Facility Letter extended the term of the HSBC Facility indefinitely, subject to review at any time by HSBC. Pursuant to the HSBC Facility, we have a total credit limit of $11,000,000. The HSBC Facility currently provides us with various credit facilities for importing and settling payment for goods purchased from our suppliers. The available credit facilities as described in greater detail below includes an import facility, import facilities with loan against import, trust receipts, clean import loan, and advances to us against purchase orders. HSBC charges an interest rate of 1.5% per annum over LIBOR or HIBOR, as applicable, for credit related to the release of goods immediately on our documentary credit. LIBOR was 0.3% and HIBOR was 0.9% on June 24, 2020. HSBC charges a commission of: i) 0.25% for the first $50,000, ii) 0.125% for the balance in excess of $50,000and up to $100,000, and iii) 0.0625% for balance in excess of $100,000and 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 $50,000and up to $100,000, and iii) 0.0625% for balance in excess of $100,000and 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, JerashGarments, Treasure Success, and the personal guarantees of Mr. Choiand Mr. Ng. The personal guarantees were released by HSBC in August 2019. Jerash Garments is also required to maintain an account at HSBC for receiving payments from VF Sourcing Asia S.A.R.L. and its related companies. As of March 31, 2021, there was no amount outstanding under the HSBC Facility. Borrowings under the HSBC Facility are due upon demand by HSBC or within 120 days of each borrowing date. HSBC Factoring Agreement On June 5, 2017, Treasure Success entered into an Offer Letter-Invoice Discounting/Factoring Agreement, and on August 21, 2017, Treasure Success entered into the Invoice Discounting/Factoring Agreement (together, the "2017 Factoring Agreement") with HSBC for certain debt purchase services related to our accounts receivable. On June 14, 2018, Treasure Success and Jerash Garments entered into another Offer Letter-Invoice Discounting/Factoring Agreement with HSBC (the "2018 Factoring Agreement, and together with the 2017 Factoring Agreement, the "HSBC Factoring Agreement"), which amended the 2017 Factoring Agreement. The HSBC Factoring Agreement was effective through May 1, 2019. Under the current terms of the HSBC Factoring Agreement, we may borrow up to $12,000,000. In exchange for advances on eligible invoices from HSBC for our approved customers, HSBC charges a fee to advance such payments at a discounting charge of 1.5% per annum over 2-month LIBOR or HIBOR, as applicable. Such fee accrues on a daily basis on the amount of funds in use. HSBC has final determination of the percentage amount available for prepayment from each of our approved customers. We may not prepay an amount from a customer in excess of 85% of the funds available for borrowing. 23 HSBC also provides credit protection and debt services related to each of our preapproved customers. For any approved debts or collections assigned to HSBC, HSBC charges a flat fee of 0.35% on the face value of the invoice for such debt or collection. We may assign debtor payments that are to be paid to HSBC within 90 days, defined as the maximum terms of payment. We may receive advances on invoices that are due within 30 days of the delivery of our goods, defined as the maximum invoicing period. The advances made by HSBC were secured by collateral provided by us, JerashGarments, and Treasure Success, and the personal guarantees of Mr. Choiand 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 $3,000,000over our deposits. Following the effectiveness of the 2018 Factoring Agreement, the security collateral of $3,000,000was released as of January 22, 2019. HSBC released the personal guarantees of Mr. Choiand Mr. Ngin August 2019. The HSBC Factoring Agreement is subject to the review by HSBC at any time and HSBC has discretion on whether to renew the HSBC Factoring Agreement. Either party may terminate the agreement subject to a 30-day notice period. In fiscal 2021, Treasure Success had no transaction or balance in the invoice discounting/factoring facility granted by HSBC. In May 2021, Treasure Success received a letter from HSBC dated March 30, 2021that the debts purchase services under the HSBC Factoring Agreement between Treasure Success and HSBC were terminated with immediate effect. We had no outstanding balance under the HSBC Factoring Agreement as of March 31, 2021. SCBHK Facility Letter Pursuant to the SCBHK facility letter dated June 15, 2018, and issued to Treasure Success by SCBHK, SCBHK offered to provide an import facility of up to $3.0 millionto Treasure Success. The SCBHK facility covers import invoice financing and pre-shipment financing under export orders with a combined limit of $3 million. Borrowings under the SCBHK facility are due within 90 days of each invoice or financing date. SCBHK charges interest at 1.3% per annum over SCBHK's cost of funds. In consideration for arranging the SCBHK facility, Treasure Success paid SCBHK HKD50,000. We were informed by SCBHK on January 31, 2019that the SCBHK facility had been activated. As of March 31, 2021, there was approximately $0.6 millionoutstanding under the SCBHK facility.
The following table presents a summary of our cash flows for the years ended.
(All amounts in thousands of U.S. dollars) For the fiscal years ended March 31, 2021 2020 Net cash (used in) provided by operating activities
$ (1,500 ) $ 6,913Net cash used in investing activities (894 ) (4,932 ) Net cash used in financing activities (1,653 ) (2,913 ) Effect of exchange rate changes on cash (8 ) 15 Net decrease in cash (4,055 ) (917 ) Cash and restricted cash, beginning of year 26,917 27,834 Cash and restricted cash, end of year $ 22,862 $ 26,917Supplemental disclosure information Cash paid for interest $ - $ 6 Income tax paid $ 773 $ 1,484Non-cash financing activities Right of use assets obtained in exchange for operating lease obligations $ 1,352 $ 1,62424 Operating Activities Net cash used in operating activities was approximately $1.5 millionin fiscal 2021, compared to net cash provided by operating activities of approximately $6.9 millionin fiscal 2020. The increase in net cash used in operating activities was primarily attributable to the following factors: ? accounts receivable increased by approximately $6.7 millionin fiscal 2021, compared to an increase of accounts receivable of
$1.3 millionin fiscal 2020, due to more shipments shipped out in March 2021and the extended credit terms to some major customers by 20 days to 30 days; ? inventory increased by approximately $2.4 millionin fiscal 2021, compared to an increase of approximately $1.6 millionin fiscal 2020, due to the preparation for additional sales in fiscal 2022; and
? accounts payable increased by approximately
an increase of approximately
$3.0 millionin fiscal 2020; Investing Activities Net cash used in investing activities was approximately $0.9 millionand $4.9 millionfor fiscal 2021 and 2020, respectively. The decrease in net cash used in investing activities was mainly attributable to the deferred investment in expansion due to the pandemic and short-term investment income. Financing Activities Net cash used in financing activities was approximately $1.7 millionfor fiscal 2021 compared to net cash used of $2.9 millionin fiscal 2020. The net cash outflow in fiscal 2021 resulted from payments of dividend and partially offset by the proceeds from bank borrowings. Net cash used in fiscal 2020 was primarily for payments of dividend and repayment of bank borrowings. Non-cash Financing Activities There was approximately $1.4 millionand $1.6 millionof rights of use assets obtained in exchange for operating lease obligations in fiscal 2021 and 2020, respectively, pursuant to new financial reporting requirements. Statutory Reserves In accordance with the Corporate Law in Jordan, Jerash Holdings'subsidiaries and VIE in Jordanare required to make appropriations to certain reserve funds, based on net income determined in accordance with generally accepted accounting principles of Jordan. Appropriations to the statutory reserve are required to be 10% of net income until the reserve is equal to 100% of the entity's share capital. Jiangmen Treasure Success is required to set aside 10% of its net income as statutory surplus reserve until such reserve is equal to 50% of its registered capital. These reserves are not available for dividend distribution. The statutory reserve was $346,315and $212,739in fiscal 2021 and 2020, respectively. The following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and the amount of restricted net assets as a percentage of consolidated net assets, as of March 31, 2021and 2020. (All amounts, other than percentages, in thousands of U.S.dollars) As of March 31, 2021 2020 Statutory Reserves $ 346 $ 213Total Restricted Net Assets $ 346 $ 213Consolidated Net Assets $ 56,693
Restricted net assets as a percentage of consolidated net assets 0.61% 0.39%
25 Total restricted net assets accounted for approximately 0.61% of our consolidated net assets as of
March 31, 2021. As our subsidiaries and VIE in Jordanare only required to set aside 10% of net profits to fund the statutory reserves, it has reached the maximum amount. We believe the potential impact of such restricted net assets on our liquidity is limited. Capital Expenditures
We had capital expenditures of approximately
$1.0 millionand $4.7 millionin fiscal 2021 and 2020, respectively, for purchases of equipment in connection with our business activities and to increase capacity. Additions in plant and machinery amounted to approximately $0.8 millionand $1.9 millionin fiscal 2021 and 2020, respectively, and additions to leasehold improvements amounted to approximately $0.2 millionand $1.1 millionin fiscal 2021 and 2020, respectively. In fiscal 2020, we acquired two pieces of land for an aggregate purchase price of approximately $1.7 million. In 2015, we commenced a project to build a 4,800 square foot workshop in the Tafilah Governorate of Jordan, which was initially intended to be used as a sewing workshop for Jerash Garments, but which we now intend to use as a dormitory. Construction has been temporarily suspended since March 2020due to the COVID-19 pandemic. This dormitory is expected to be operational in fiscal 2022 to house management and supervisory staff for the 54,000 square foot workshop in Al-Hasa County. This project is expected to cost approximately $200,000upon 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 2019with approximately 240 workers. Provided that we satisfy certain employment requirements over certain time periods, we do not anticipate incurring any significant costs for the project, which was constructed in conjunction with the Jordanian Ministry of Laborand the Jordanian Education and Training Department. In the event we breach our agreement with these government agencies, we will have to pay such agencies JOD250,000 or approximately $353,000. See "Item 2. Properties" above for more information regarding this workshop.
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 $980,000as of the closing date of the transaction on June 18, 2019. On August 7, 2019, we completed a transaction to acquire 12,340 square meters (approximately three acres) of land in Al Tajamouat Industrial City, Jordan, from a third party to construct a dormitory for our employees with aggregate purchase price JOD863,800 (approximately $1,218,303). Management has revised the plan to construct both dormitory and production facilities on the land in order to capture the increasing demand for our capacity. We are conducting engineering design and study on this project and we plan to begin construction in late 2021. On February 6, 2020, we completed a transaction to acquire 4,516 square meters (approximately 48,608 square feet) of land in Al Tajamouat Industrial City, Jordan, from a third party to construct a dormitory for our employee with aggregate purchase price JOD313,501 (approximately $442,162). We expect to spend approximately $8.2 millionin capital expenditures to build the dormitory. Due to the ongoing COVID-19 pandemic, management decided to put on hold the construction project in fiscal 2021 to retain financial resources to support our operations, and also to wait and see how the global economy and customer demand recover after the outbreak. The preparation work resumed in early 2021 and construction work commenced in April 2021. We projected that there will be an aggregate of approximately $27 millionof capital expenditures in both the fiscal years ending March 31, 2022and 2023 for further enhancement of production capacity to meet future sales growth. We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used cash generated from operations of our subsidiaries and VIE to fund our capital commitments in the past and anticipate using such funds to fund capital expenditure commitments in the
Off-balance sheet commitments and arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as stockholders' equity, or that are not reflected in our consolidated financial statements. For Management's Discussion and Analysis of the fiscal years ended
March 31, 2020and 2019, please see our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SECon June 29, 2020. Critical Accounting Policies We prepare our financial statements in conformity with U.S.GAAP, which require us to make judgments, estimates, and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past two years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience, and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. We believe that certain accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The policies that we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations are summarized in "Note 2-Summary of Significant Accounting Policies" in the notes to our audited financial statements.
Recent accounting positions
Refer to “Note 3- Recent accounting pronouncements” in the notes to our audited financial statements for a discussion of recent accounting pronouncements.
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