NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Jerash Holdings
(US), Inc. (“Jerash Holdings”) is a corporation established under the laws of the State of Delaware on January 20,
2016. Jerash Holdings is a parent holding company with no operations.
Global Trend Investment Limited (“GTI”)
was a limited company that was incorporated in the British Virgin Islands (“BVI”) on July 5, 2000 and was owned by
two individuals and a BVI corporation, Merlotte Enterprise Limited, which was wholly owned by the Chairman of the Board of Jerash
Holdings and Jerash Garments and Fashions Manufacturing Company Limited (“Jerash Garments”). Previously, GTI was wholly-owned
by Wealth Choice Limited (“WCL”), a BVI corporation, and the Chairman of the Board of Jerash Holdings was also one
of the beneficial owners of WCL and its subsidiaries. In September 2016, WCL transferred its ownership in GTI and its subsidiaries
to Merlotte Enterprise Limited and an individual shareholder, and in October 2016, the individual shareholder transferred approximately
22% of its shares to another individual shareholder.
Jerash Garments is a wholly owned subsidiary
of Jerash Holdings and was the wholly owned subsidiary of GTI prior to the Merger described below. Jerash Garments was established
in Amman, the Hashemite Kingdom of Jordan (“Jordan”) as a limited liability company on November 26, 2000 with declared
capital of 50,000 Jordanian Dinar (“JOD”) (approximately US$70,500). In February 2019, the Company increased its declared
capital to JOD 150,000 (approximately US$212,000).
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, with declared capital of JOD 50,000 each. Jerash Embroidery
and Chinese Garments were initially established under the name of Jerash Garments
’
nominated agent but were in fact controlled and fully funded by Jerash Garments. On January 1, 2015, the nominated agent
entered into an equity transfer agreement with Jerash Garments, in which the nominated agent agreed to transfer 100% ownership
interests of Jerash Embroidery and Chinese Garments to Jerash Garments (the
“
Equity
Transfer
”
). Subsequent to the Equity Transfer, Jerash Embroidery
and Chinese Garments became wholly owned subsidiaries of Jerash Garments. Jerash Garments, Jerash Embroidery and Chinese Garments
were effectively controlled by the same controlling shareholders before and after the Equity Transfer. Thus, this transaction
is considered a reorganization of entities under common control. The consolidations of Jerash Embroidery and Chinese Garments
have been accounted for at their carrying amounts as of the beginning of the first period presented in the accompanying consolidated
financial statements.
Victory Apparel
(Jordan) Manufacturing Company Limited (
“
Victory Apparel
”
)
was incorporated as a limited liability company in Amman, Jordan on September 18, 2005 with declared capital of JOD 50,000, as
a wholly owned subsidiary of WCL. Jerash Garments is the sole user of the land, building and equipment being held by Victory Apparel
and had a lease agreement with Victory Apparel related to the use of these assets before GTI and its subsidiaries were acquired
by WCL in March 2012. The land and building were not registered in Victory Apparel
’
s
name, and Jerash Garments continued to hold the land and building in its name in trust for Victory Apparel. The declaration of
trust was never registered with the Land Registry of Jordan, and on June 30, 2016, Victory Apparel and Jerash Garments dissolved
the sale agreement, resulting in the property and equipment being owned free and clear by Jerash Garments. Victory Apparel has
no other operating activities of its own and WCL intends to dissolve the entity.
NOTE 1 –
ORGANIZATION AND DESCRIPTION OF BUSINESS
(Continued)
Although Jerash
Garments does not own the equity interest of Victory Apparel, our president, chief executive officer, chairman and significant
shareholder, Mr. Choi, is also a director of Victory Apparel and controls all decision-making for Victory Apparel along with our
other significant shareholder, Mr. Lee Kian Tjiauw, who have 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 Mr. Choi. Based on these facts, we 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 Variable Interest Entity (“VIE”)
under Accounting Standards Codification (“ASC”) 810-10-05-08A. Accordingly, Jerash Garments consolidates Victory Apparel’s
operating results, assets and liabilities.
Treasure Success
International Limited (
“
Treasure Success
”
)
was incorporated on July 5, 2016 in Hong Kong, China, whose 100% equity interest is registered under the name of the Chairman
of the Board of Jerash Holdings, with the primary purpose to employ staff from China to support Jerash Garments' operations. On
October 31, 2016, the Chairman of the Board of Jerash Holdings transferred his 100% equity interest of Treasure Success to GTI.
Treasure Success was inactive until October 2016. Treasure Success was consolidated as a VIE before October 31, 2016. The transfer
was accounted for as a transfer between entities under common control.
On May 11,
2017, the shareholders of GTI contributed 100% of their outstanding capital stock in GTI to Jerash Holdings in exchange for an
aggregate of 8,787,500 shares of common stock of Jerash Holdings. Immediately prior to this transaction, Jerash Holdings had 712,500
shares of common stock outstanding with a par value of $0.001 per share. Immediately following this transaction, GTI merged with
and into Jerash Holdings, with Jerash Holdings being the surviving entity, as a result of which Jerash Holdings became the direct
parent of GTI
’
s wholly owned subsidiaries, Jerash Garments,
including its wholly owned subsidiaries, and Treasure Success. The transactions described above are collectively referred to as
the “Merger.”
The Merger
was accounted for as a reverse recapitalization. Under reverse capitalization accounting, GTI is recognized as the accounting
acquirer, and Jerash Holdings is the legal acquirer or accounting acquiree. As such, following the Merger, the historical financial
statements of GTI and its subsidiaries are treated as the historical financial statements of the combined company.
Consequently,
the consolidated financial statements of Jerash Holdings reflect the operations of the accounting acquirer and a recapitalization
of the equity of the accounting acquirer.
Jerash Holdings,
its subsidiaries and VIE (herein collectively referred to as the “Company” are engaged in manufacturing customized
ready-made outerwear from knitted fabric and exporting produced apparel for large brand-name retailers. The Company is diversifying
the range of products to include additional pieces such as trousers and urban styling outerwear and different types of natural
and synthetic materials and is also expanding its workforce in Jordan with workers from other countries, including Bangladesh,
Sri Lanka, India, Myanmar and Nepal.
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”). 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.
In accordance
with accounting standards regarding the consolidation of variable interest entities, 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 the 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.
As described
in Note 1, management of the Company has concluded that Victory Apparel is a VIE, and that Jerash Garments is considered the primary
beneficiary because it absorbs the risks and rewards of Victory Apparel; therefore, Jerash Holdings consolidates Victory Apparel
for financial reporting purposes. Noncontrolling interests result from the consolidation of Victory Apparel, which is 100% owned
by WCL.
The following
table sets forth the carrying amounts of the assets and liabilities of the VIE, Victory Apparel, which was included in the Company’s
consolidated balance sheets:
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Current assets
|
|
$
|
1,316
|
|
|
$
|
2,069
|
|
Intercompany receivables*
|
|
|
307,687
|
|
|
|
311,527
|
|
Total assets
|
|
|
309,003
|
|
|
|
313,596
|
|
|
|
|
|
|
|
|
|
|
Third party current liabilities
|
|
|
-
|
|
|
|
(3,992
|
)
|
Total liabilities
|
|
|
-
|
|
|
|
(3,992
|
)
|
Net assets
|
|
$
|
309,003
|
|
|
$
|
309,604
|
|
* Receivables from Jerash
Garments are eliminated upon consolidation.
Victory Apparel
did not generate any income but incurred certain expenses for both years ended March 31, 2019 and 2018. The loss was $754 and
$6,838 for the fiscal years ended March 31, 2019 and 2018, respectively.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 revenues and expenses during the reporting period. The Company’s
most significant estimates include allowance for doubtful accounts, valuation of inventory reserve and useful lives of buildings
and other property. 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 March 31, 2019, and 2018, 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 non-current asset
since the Company has no intention to terminate these bank facilities within one year.
Accounts
Receivable
Accounts receivable
are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually
grants credit to customers with good credit standing for a maximum of 90 days 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 receivables balances, with a corresponding charge recorded in the consolidated statements
of income and comprehensive 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. No allowance was considered necessary as of March 31, 2019 and
2018.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 (
“
FIFO
”
)
method. The Company periodically reviews its inventories for excess or slow-moving items and makes provisions as necessary to
properly reflect inventory value.
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:
|
|
|
Useful
life
|
|
Land
|
|
|
Infinite
|
|
Property and buildings
|
|
|
15
years
|
|
Equipment and machinery
|
|
|
3-5
years
|
|
Office and electronic equipment
|
|
|
3-5
years
|
|
Automobiles
|
|
|
5
years
|
|
Leasehold improvements
|
|
|
Lesser
of useful life and lease term
|
|
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 years ended March 31,
2019 and 2018.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue
Recognition
The Company
adopted ASC 606 in the first quarter of fiscal year 2019 using the modified retrospective approach. ASC 606, Revenue from Contracts
with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and
cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity
to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that
it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The Company has assessed the impact of the
guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that
could result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer
payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there
was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore
there was no material change to the Company’s consolidated financial statements upon adoption of ASC 606.
The table below
presents the impact of applying the new revenue recognition standard to the components of total revenue within the consolidated
statement of income and comprehensive income for the year ended March 31, 2019. The Company evaluated its revenue recognition
policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new
guidance and concluded that there was no difference in the pattern of revenue recognition:
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
March
31, 2019
|
|
|
|
|
As
reported
|
|
|
|
Financial
Results
prior
to Adoption of
Revenue Recognition
Standard
|
|
|
|
Impact
of Adoption of
Revenue Recognition
Standard
|
|
Revenue:
|
|
$
|
84,983,661
|
|
|
$
|
84,983,661
|
|
|
$
|
-
|
|
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. 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 30 to 60 days of the invoice date, and the contracts
do not have significant financing components. Shipping and handling costs associated with outbound freight are not an obligation
of the Company.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
The contract
assets are recorded on the Consolidated Balance Sheet as accounts receivable as of March 31, 2019 and March 31, 2018, respectively.
For the year ended March 31, 2019 and 2018, there was no revenue recognized from performance obligations related to prior periods.
As of March 31, 2019, 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 12).
Shipping
and Handling
Proceeds collected
from customers for shipping and handling costs are included in revenues. 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 $692,794 and $611,481 for the years ended March 31, 2019 and 2018, 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
was incorporated in the State of Delaware and is subject to Federal income tax in the United States of America. GTI was incorporated
in the BVI and is not subject to income taxes under the current laws of BVI. Treasure Success was registered in Hong Kong and has
no operating profit for current tax liabilities. Jerash Garments, Jerash Embroidery, Chinese Garments 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 Hashemite Kingdom of Jordan government
changed some features of its tax incentive programs and Jerash Garments and its subsidiaries are now qualified for incentives applicable
to a Development Zone, a change from the previous incentive program relating to Qualifying Industrial Zone (QIZ). In accordance
with Development Zone law, Jerash Garments and its subsidiaries are subject to corporate income tax in Jordan at a rate of 5%.
Jerash Garments and its subsidiaries 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 June 1, 2015 to June 1, 2018 that allowed Jerash Garments to make purchases with no sales tax charge. This exemption
has been extended to February 15, 2020, and the Company expects to apply to extend the exemption before the expiration date.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes
(Continued)
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. Deferred income taxes were immaterial, and accordingly, no
deferred tax assets or liabilities were recognized as of March 31, 2019 and 2018.
ASC
740 clarifies the accounting for uncertainty in tax positions. This interpretation requires that an entity recognizes 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. Jordan income tax returns prior
to 2015 are not subject to examination by any applicable tax authorities. No significant uncertainty in tax positions relating
to income taxes have been incurred during the years ended March 31, 2019 and 2018.
On December
22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted. Under the provisions of the Act, the U.S.
corporate tax rate decreased from 35% to 21%. Additionally, the Tax Act imposes a one-time transition tax on deemed repatriation
of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation under the new Global
Intangible Low-Taxed Income (GILTI) regime. Please see further discussion regarding the Company’s accounting for the Tax
Act in Note 14.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreign
Currency Translation
The reporting
currency of the Company is the U.S. dollar (“US$”) and the Company uses the Jordanian Dinar (“JOD”) as
its functional currency, except Treasure Success, which uses the Hong Kong Dollar (“HKD”) as its functional currency.
The assets and liabilities of the Company have been translated into U.S. dollars 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 U.S.
dollars 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 (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:
|
|
|
March
31, 2019
|
|
|
|
March
31, 2018
|
|
Period-end spot rate
|
|
|
US$1=JOD
0.7090
|
|
|
|
US$1=JOD 0.7094
|
|
|
|
|
US$1=HKD
7.8500
|
|
|
|
US$1=HKD
7.8490
|
|
Average rate
|
|
|
US$1=JOD
0.7091
|
|
|
|
US$1=JOD
0.7092
|
|
|
|
|
US$1=HKD
7.8420
|
|
|
|
US$1=HKD 7.8091
|
|
Share-based Compensation
The Company
measures compensation expense for share-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 fair value of awards to non-employees is then marked-to-market each reporting period until
vesting criteria are met.
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)
Share-Based Compensation
(Continued)
|
·
|
Expected
Term: the expected term of a warrant is the period of time that the warrant is expected
to be outstanding.
|
|
·
|
Risk-free
Interest Rate: the Company bases the risk-free interest rate used in the Black-Scholes
model on the implied yield at the grant date of the U.S. Treasury zero-coupon issued
with an equivalent term to the share-based award being valued. Where the expected term
of a share-based award does not correspond with the term for which a zero-coupon interest
rate is quoted, the Company uses the nearest interest rate from the available maturities.
|
|
·
|
Expected
Stock Price Volatility: the Company utilizes comparable public company volatility over
the same period of time as the life of the warrant.
|
|
·
|
Dividend
Yield: Until November 2018, the Board of Directors had not declared, and the Company
had not yet paid, any dividends. Accordingly, share-based compensation awards granted
prior to November 2018 assumed no dividend yield, while any subsequent share-based compensation
awards will be valued using the anticipated dividend yield.
|
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 11).
Comprehensive Income
Comprehensive
income consists of two components, net income and other comprehensive income (loss). The foreign currency translation gain or
loss resulting from translation of the financial statements expressed in JOD or HKD to U.S. dollar is reported in other comprehensive
income (loss) in the consolidated statements of income and comprehensive income.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(Continued)
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:
|
·
|
Level
1 - Quoted prices in active markets for identical assets and liabilities.
|
|
·
|
Level
2 - Quoted prices in active markets for similar assets and liabilities, or other inputs
that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument.
|
|
·
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets and liabilities. This includes certain pricing
models, discounted cash flow methodologies and similar techniques that use significant
unobservable inputs.
|
The
Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash, including restricted
cash, accounts receivable, other receivables, due from related parties, due from shareholders, accounts payable, accrued expenses,
other payables and short-term loan to approximate the fair value of the respective assets and liabilities at March 31, 2019 and
2018 based upon the short-term nature of these assets and liabilities.
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 March 31, 2019, and 2018, respectively,
$7,121,161 and $4,793,527 of the Company’s cash were 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 March 31, 2019, and 2018, respectively, $20,614,581 and $7,400,111 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 March 31, 2019, and 2018, respectively, $98,726 and $2,472 of the Company’s cash was on deposit in the
United States and are insured by the Federal Deposit Insurance Corporation (“FDIC”) 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.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(Continued)
Concentrations
and Credit Risk
(Continued)
Customer and vendor concentration
risk
Prior to August 2016, substantially all of
the Company’s sales were made to end-customers, through its affiliate (see Note 9), that are located primarily in the United
States (see Note 12). Thereafter, the Company began selling directly to its customers. The Company’s operating results could
be adversely affected by the U.S. government’s policy on exporting business, foreign exchange rate fluctuations, and change
of local market conditions. The Company has a concentration of its revenues and purchases with specific customers and suppliers.
For the each of the fiscal years ended March 31, 2019 and 2018, one end-customer accounted for 79% of total revenue. Including
accounts receivable balances through the Company’s affiliates, as of March 31, 2019, one end-customer accounted for 96% of
the total accounts receivable balance. As of March 31, 2018, two end-customers separately accounted for 57% and 22% of the total
accounts receivable balance
For the fiscal year ended March 31, 2019,
the Company purchased approximately 19%, 12% and 11% of its raw materials from three major suppliers. For the fiscal year ended
March 31, 2018 the company purchased approximately 43% and 18% of its raw materials from two major suppliers. As of March 31,
2019, accounts payable to three major suppliers separately accounted for 40%, 20% and 14% of the total accounts payable balance.
As of March 31, 2018, there was a net prepaid balance to one major supplier totaling $874,591.
A loss
of any of these customers or suppliers could adversely affect the operating results or cash flows of the Company.
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.
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.
New Accounting Pronouncements
Recently Adopted
As disclosed
in Note 2 – Summary of Significant Accounting Policies – Revenue Recognition above, the Company adopted ASU 2014-09,
Revenue from Contracts with Customers (Topic 606) effective April 1, 2018 using the retrospective transition method. This new
accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers.
This standard supersedes existing revenue recognition requirements and eliminates most industry-specific guidance from U.S. GAAP.
The core principle of the new accounting standard is to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. In addition, the adoption of this new accounting standard resulted in increased disclosure, including qualitative
and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. Adoption of this standard did not result in significant changes to the Company’s accounting policies, business
processes, systems or controls, or have a material impact on the Company’s financial position, results of operations and
cash flows or related disclosures. As such, prior period financial statements were not recast.
On April 1,
2018, we adopted ASU 2016-18, Restricted Cash – A Consensus of the FASB Emerging Issues Task Force, (“ASU 2016-18”),
which amends ASC 230, Statement of Cash Flows, to clarify guidance on the classification and presentation of restricted cash in
the statement of cash flows using the full retrospective method. Adoption of this standard did not have a material impact on our
consolidated financial statements. See our consolidated statements of cash flows for the reconciliation of cash presented in the
statements of cash flows to the cash presented on the balance sheet.
In May 2017,
the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"),
which amends the scope of modification accounting for share-based payment arrangements such that an entity would not apply modification
accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the
modification. ASU 2017-09 became effective for the Company beginning April 1, 2018 for both interim and annual reporting periods.
The adoption of ASU 2017-09 did not have a material impact on the Company's condensed consolidated financial statements.
New Accounting
Pronouncements Not Yet Adopted
In June 2018,
the FASB issued ASU 2018-07, Compensation – Stock Compensation, which simplifies the accounting for share-based payments
granted to nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be
aligned with the requirements for share-based payments granted to employees. This ASU is effective for annual reporting periods
beginning after December 15, 2018. Early adoption of this ASU is permitted. The Company does not expect adoption of this ASU to
have a material impact on its Consolidated Financial Statements.
In February
2016, the FASB issued ASU 2018-20, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing
leases assets and lease liabilities on the balance sheet and disclosing key information about lease transactions. This ASU is
effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those fiscal
years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and
interim reporting periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company expects
to adopt this standard in the first quarter of the fiscal year ending March 31, 2020.
NOTE
4 – ACCOUNTS RECEIVABLE
The Company’s net accounts
receivable is as follows:
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Trade accounts receivable
|
|
$
|
4,020,369
|
|
|
$
|
5,247,090
|
|
Less: allowances for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable
|
|
$
|
4,020,369
|
|
|
$
|
5,247,090
|
|
As of March 31, 2019, and March 31, 2018 the
balance of accounts receivable includes $3 and $470,659, respectively, of factored accounts receivable to be received from Hong
Kong and Shanghai Banking Corporation (“HSBC”) under the Factoring Agreement (see Note 10).
NOTE
5 – INVENTORIES
Inventories consisted of
the following:
|
|
As of
|
|
|
As of
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Raw materials
|
|
$
|
11,601,262
|
|
|
$
|
11,497,237
|
|
Work-in-progress
|
|
|
1,889,329
|
|
|
|
2,073,509
|
|
Finished goods
|
|
|
7,583,652
|
|
|
|
6,722,646
|
|
Total inventory
|
|
$
|
21,074,243
|
|
|
$
|
20,293,392
|
|
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net
consisted of the following:
|
|
As of
March 31, 2019
|
|
|
As of
March 31, 2018
|
|
Land
|
|
$
|
61,078
|
|
|
$
|
61,048
|
|
Property and buildings
|
|
|
432,562
|
|
|
|
432,347
|
|
Equipment and machinery
|
|
|
5,560,265
|
|
|
|
4,918,270
|
|
Office and electric equipment
|
|
|
550,738
|
|
|
|
505,356
|
|
Automobiles
|
|
|
367,332
|
|
|
|
372,084
|
|
Leasehold improvements
|
|
|
1,652,038
|
|
|
|
1,552,108
|
|
Subtotal
|
|
|
8,624,013
|
|
|
|
7,841,213
|
|
Construction in progress
|
|
|
200,042
|
|
|
|
217,494
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
(6,467,793
|
)
|
|
|
(5,238,992
|
)
|
Property and Equipment, Net
|
|
$
|
2,356,262
|
|
|
$
|
2,819,715
|
|
Depreciation
and amortization expense was $1,255,820 and $1,216,973 for the fiscal years ended March 31, 2019 and 2018, respectively.
The construction in progress account represents
costs incurred for constructing a dormitory, which was previously planned to be a sewing workshop. This dormitory is approximately
4,800 square feet, located in the Tafilah Governorate of Jordan, and is expected to be completed in September 2019.
NOTE
7
–
EQUITY
Preferred
Stock
The Company
has 500,000 authorized shares of preferred stock with a par value of $0.001 per share, and with none issued and outstanding as
of March 31, 2019 and March 31, 2018. The preferred stock can be issued by the Board of Directors of Jerash Holdings 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
Prior to September
17, 2018, the Company had 15,000,000 authorized shares of common stock with a par value of $0.001 per share. On September 17,
2018, following approval from its stockholders, the Company filed a certificate of amendment to its certificate of incorporation
with the State of Delaware to increase its authorized shares of common stock from 15,000,000 to 30,000,000. The Company had 11,325,000
shares and 9,895,000 shares of common stock outstanding as of March 31, 2019 and March 31, 2018, respectively.
Statutory
Reserve
In accordance
with the Corporate Law in Jordan, Jerash Garments, Jerash Embroidery, Chinese Garments 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. As of both March 31, 2019 and 2018,
the consolidated balance of the statutory reserve was $212,739 and $71,699, respectively.
Dividends
On November
1, 2018, the Board of Directors of Jerash Holdings declared a cash dividend of $0.05 per share of common stock, payable to shareholders
of record at the close of business on November 19, 2018. The dividend, equal to $566,250 in the aggregate, was paid on November
27, 2018.
On February
7, 2019, the Board of Directors of Jerash Holdings declared a cash dividend of $0.05 per share of common stock, payable to shareholders
of record at the close of business on February 19, 2019. The dividend, equal to $566,250 in the aggregate, was paid on February
27, 2019.
Initial Public Offering
The registration
statement on Form S-1 (File No. 333-222596) for the Company’s initial public offering (the “IPO”) was declared
effective on March 14, 2018. On May 2, 2018 the Company issued 1,430,000 shares of common stock at $7.00 per share and received
gross proceeds of $10,010,000. The Company incurred underwriting commissions of $477,341, underwriter offering expenses of $250,200
and additional underwriting expenses of $352,159, yielding net proceeds from the IPO of $8,930,300.
NOTE 8 – SHARE- BASED COMPENSATION
Warrants issued for services
From
time to time, the Company issues warrants to purchase its common stock. These warrants are valued using a 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.
NOTE
8
–
SHARE- BASED COMPENSATION
(Continued)
Warrants
issued for services
(Continued)
During the
year ended March 31, 2019, all of the outstanding warrants were fully vested and exercisable.
The fair value of these warrants was estimated
as of the grant date using the Black-Scholes model with the following assumptions:
|
|
Common Stock
Warrants
March 31, 2019
|
|
Expected term (in years)
|
|
|
5.0
|
|
Risk-free interest rate (%)
|
|
|
1.8-2.8
|
%
|
Expected volatility (%)
|
|
|
50.3%-52.2
|
%
|
Dividend yield (%)
|
|
|
0.0
|
%
|
Warrant activity
is summarized as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Warrants outstanding at March 31, 2018
|
|
|
207,210
|
|
|
$
|
5.69
|
|
Granted
|
|
|
57,200
|
|
|
$
|
8.75
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding at March 31, 2019
|
|
|
264,410
|
|
|
$
|
6.35
|
|
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 were reserved for issuance under
the Plan. On April 9, 2018, the Board of Directors approved the issuance of 989,500 nonqualified stock options under the Plan
in accordance with the Plan at an exercise price of $7.00 per share, and a term of five years. As of March 31, 2019, all of these
outstanding stock options were fully vested and exercisable.
NOTE 8
–
SHARE- BASED COMPENSATION
(Continued)
Stock Options
(Continued)
The fair value
of these options granted on April 9, 2018 was estimated as of the grant date using the Black-Scholes model with the following
assumptions.
|
|
Stock
Options
March 31, 2019
|
|
Expected term (in years)
|
|
|
5.0
|
|
Risk-free interest rate (%)
|
|
|
2.6
|
%
|
Expected volatility (%)
|
|
|
50.3
|
%
|
Dividend yield (%)
|
|
|
0.0
|
%
|
On August 3,
2018, the Board of Directors granted the Company’s 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 ten
years. The options vest in three equal six-month installments, with the first two-thirds having vested on August 3, 2018 and February
3, 2019 respectively, the remaining amounts vesting on and August 3, 2019.
The fair value
of the options granted on August 3, 2018 was estimated as of the grant date using the Black-Scholes model with the following
assumptions:
|
|
Stock
Options
March 31, 2019
|
|
Expected term (in years)
|
|
|
10.0
|
|
Risk-free interest rate (%)
|
|
|
2.95
|
%
|
Expected volatility (%)
|
|
|
50.3
|
%
|
Dividend yield (%)
|
|
|
0.0
|
%
|
Stock option activity is summarized as
follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Stock options outstanding at March 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,139,500
|
|
|
$
|
6.88
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Stock options outstanding at March 31, 2019
|
|
|
1,139,500
|
|
|
$
|
6.88
|
|
Total expense
related to the stock options issued was $3,593,888 for the year ended March 31, 2019. There were $193,955 of unrecognized compensation
costs at March 31, 2019 relating to unvested awards.
NOTE
9 – RELATED PARTY TRANSACTIONS
The relationship
and the nature of related party transactions are summarized as follow:
Name
of Related Party
|
|
Relationship
to the Company
|
|
Nature
of Transactions
|
Ford
Glory International Limited (“FGIL”)
|
|
Affiliate, subsidiary of Ford
Glory Holdings (“FGH”)
|
|
Sales / Purchases
Lease
|
Value Plus (Macao Commercial
Offshore) Limited (“VPMCO”)
|
|
Affiliate, subsidiary of FGH
|
|
Purchases
|
Yukwise Limited (“Yukwise”)
|
|
Wholly owned by our President,
Chief Executive Officer and Chairman, a significant stockholder
|
|
Consulting Services
|
Multi-Glory Corporation Limited (“Multi-Glory”)
|
|
Wholly owned by a significant
stockholder
|
|
Consulting Services
|
Pursuant to
the terms of a sale and purchase agreement between one of the Company’s current individual shareholders and Victory City
Investments Limited, the ultimate 51% shareholder of FGIL, dated July 13, 2016 (the “Sale and Purchase Agreement”),
and effective since August 1, 2016, all rights, interests and benefits of any contracts that FGIL had at that time with any of
the Company’s customers for products manufactured or to be manufactured by the Company, together with the costs and obligations
relating to those contracts were transferred to the Company. Thereafter, the Company has been selling directly to its end-customers
and no longer through its affiliate, FGIL.
Related
party balances:
|
a.
|
Accounts
receivable – related party:
|
Accounts
receivable from related party in connection with the collection of accounts receivable from end-customers on behalf of the Company
due to the support arrangement during the transition period as described below (see a. Sales to related party) consisted of the
following:
|
|
As of
March 31, 2019
|
|
|
As of
March 31, 2018
|
|
FGIL
|
|
$
|
-
|
|
|
$
|
50,027
|
|
NOTE
9 – RELATED PARTY TRANSACTIONS
(Continued)
Related
party transactions:
|
a.
|
Sales to related party:
|
Pursuant
to the Sale and Purchase Agreement, the Company has all rights, interests and benefits of the sales agreements signed with end-customers
since August 2016, together with the costs and obligations of those agreements. During the transition period, the Company’s
affiliate supported the Company to complete the transition with no additional fees charged. For the year ended March 31, 2019
and March 31, 2018, $0 and $43,997,617 of sales were made with the support from FGIL respectively.
Lease
from related party
On October 3, 2018, Treasure
Success and FGIL entered into a lease agreement pursuant to which Treasure Success leases its office space in Hong Kong from FGIL
by providing for rent in the amount of HK$119,540 (approximately $15,243) per month and having a one-year term with an option
to extend the term for an additional year at the same rent.
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. Total consulting fees under this agreement were $300,000
for the year ended March 31, 2019 and $75,000 for the year ended March 31, 2018.
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 a high level of advisory and general management services for $300,000 per annum, with automatic
renewal for one-month terms. This agreement became effective as of January 1, 2018. Total advisory and management expenses under
this agreement were $300,000 for the year ended March 31, 2019 and $75,000 for year ended March 31, 2018.
Borrowings under the Credit
Facility, as defined below, with HSBC are collateralized by the personal guarantees by Mr. Choi and Mr. Ng Tsze Lun.
NOTE 10 – CREDIT FACILITIES
Pursuant to a letter agreement dated May
29, 2017, Treasure Success entered into an $8,000,000 import credit facility with HSBC (the “2017 Facility Letter”),
which was amended pursuant to a letter agreement dated June 19, 2018 (the “2018 Facility Letter”, and together with
the 2017 Facility Letter, the “Facility Letter”). In addition, pursuant to an offer letter dated June 5, 2017, which
was amended pursuant to a letter agreement dated June 14, 2019, HSBC offered to provide Treasure Success with a $12,000,000 factoring
facility for certain debt purchase services related to accounts receivables (the “Factoring Agreement” and, together
with the Facility Letter, the “Credit Facilities”). The Credit Facilities are guaranteed by Jerash Holdings, Jerash
Garments and Treasure Success, as well as two of the Company’s individual shareholders. In addition, the Credit Facilities
required cash and other investment security collateral of $3,000,000. The Credit Facilities provide that drawings under the Credit
Facilities are charged interest at the Hong Kong Interbank Offered Rate (“HIBOR”) plus 1.5% for drawings in Hong Kong
dollars, and the London Interbank Offered Rate (“LIBOR”) plus 1.5% for drawings in other currencies. In addition, the
Credit Facilities also contain certain service charges and other commissions and fees. As of January 22, 2019, the security collateral
of $3,000,000 has been released.
Under the Factoring Agreement, HSBC also
provides credit protection and debt services related to each preapproved customer. 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 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 Credit
Facilities are subject to review at any time, and HSBC has discretion on whether to renew the Facility Letter. Either party may
terminate the Factoring Agreement subject to a 30-day notice period.
As of March 31, 2019, and March 31, 2018,
the Company had made $360,401 and $980,195 in withdrawals, respectively, under the Credit Facilities, which are due within 120
days of each borrowing date or upon demand by HSBC. As of March 31, 2019, $85,421 was outstanding under the Factoring Agreement
and $274,980 outstanding under the Facility Letter.
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 March 31, 2019, the Company had an outstanding amount of $288,310
in import invoice financing.
NOTE 11 – EARNINGS PER
SHARE
The following table sets forth the computation
of basic and diluted earnings per share for the fiscal years ended March 31, 2019 and 2018. 57,200 IPO Underwriter Warrants were
anti-dilutive for the year ended March 31, 2019 and excluded from the EPS calculation.
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
|
(in $000s except share and
|
|
|
|
per share information)
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to Jerash
Holdings (US), Inc.'s Common Shareholders
|
|
$
|
5,112
|
|
|
$
|
10,410
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share (weighted-average shares)
|
|
|
11,199,630
|
|
|
|
9,735,651
|
|
Dilutive securities – unexercised warrants
and options
|
|
|
130,680
|
|
|
|
-
|
|
Denominator for diluted earnings per share
(adjusted weighted-average shares)
|
|
|
11,330,310
|
|
|
|
9,735,651
|
|
Basic earnings per share
|
|
$
|
0.46
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.45
|
|
|
$
|
1.07
|
|
NOTE 12 – 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 years ended March 31, 2019 and 2018, outerwear accounted for
approximately 88.3% and 89.5% of total revenue. 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 years ended March 31, 2019 and 2018, respectively.
|
|
For the years ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
United States
|
|
$
|
70,092,992
|
|
|
$
|
61,238,605
|
|
Jordan
|
|
|
13,693,020
|
|
|
|
7,267,732
|
|
Other countries
|
|
|
1,197,649
|
|
|
|
789,361
|
|
Total
|
|
$
|
84,983,661
|
|
|
$
|
69,295,698
|
|
All long-lived assets were located in
Jordan as of March 31, 2019 and 2018.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Rent Commitment
The Company leases four manufacturing facilities
under operating leases. Operating lease expense amounted to $1,528,500 and $1,274,606 for the years ended March 31, 2019 and 2018,
respectively.
Future minimum lease payments under non-cancelable operating
leases are as follows:
Twelve months ended March 31,
|
|
|
|
2020
|
|
$
|
867,837
|
|
2021
|
|
|
242,836
|
|
2022
|
|
|
220,657
|
|
2023 and thereafter
|
|
|
176,300
|
|
Total
|
|
$
|
1,507,630
|
|
The Company has thirty operating leases
for its facilities that require monthly payments ranging between $247 and $15,303. Twenty-five operating leases are renewable on
an annual basis.
In addition, in connection with a transaction
accounted for as an asset purchase, as further described in Footnote 15 - Subsequent Events of the financial statements, the Company
entered into a lease for the primary factory facility and housing accommodations and expects to lease the satellite facility space.
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 to have a material adverse impact on the Company’s consolidated financial position, results
of operations and cash flows.
NOTE 14 – INCOME TAX
|
|
As of
March 31, 2019
|
|
|
As of
March 31, 2018
|
|
Corporate income tax payable
|
|
$
|
2,567,325
|
|
|
$
|
1,400,000
|
|
Jerash Garments, Jerash Embroidery, Chinese
Garments 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 at the first day of production. This
exemption had been extended for 5 years until December 31, 2018. Effective January 1, 2019, the Hashemite Kingdom of Jordan government
has changed some features of Jerash Garments and its subsidiaries area to a Development Zone. In accordance with Development Zone
law, Jerash Garments and its subsidiaries began paying corporate income tax in Jordan at a rate of 5%. The effect of the tax exemption
on the Company’s 2019 fiscal results is a tax savings of approximately $1,623,717, or $0.14 per share.
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Under the
provisions of the Tax Act, the U.S. corporate tax rate decreased from 35% to 21%. The Tax Act imposes a one-time transition tax
on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation.
While ASC 740, Income Taxes, requires companies
to recognize the effect of tax law changes in the period of enactment, the SEC staff issued Staff Accounting Bulletin 118, which
allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when
accounting for business combinations. The Company recorded reasonable estimates when possible during the third quarter of the 2018
fiscal year, with the understanding that provisional amounts would be finalized during the measurement period. The Company has
completed its accounting for the provisions of the Tax Act as follows:
|
A.
|
Transition tax: The Company recorded a provisional amount of $1.4 million in fiscal 2018 related to the transition tax for all of its foreign subsidiaries, resulting in an increase in income tax expense of approximately $1.4 million for the year ended March 31, 2018. The income tax payable attributable to the transition tax is due over an 8-year period and began in 2018. During the third quarter of its 2019 fiscal year, the Company completed its accounting for the impact of the transition tax with the finalization of its fiscal year 2018 tax returns, and we determined that the transition tax liability is approximately $1.7 million. Accordingly, the Company recorded a measurement period adjustment with respect to the transition tax of approximately $0.3 million, which had an impact on our effective income tax rate of approximately 4%.
|
|
B.
|
During the 2019 fiscal year, the Company made a policy election with respect to the new global intangible low-taxed income (“GILTI”) to account for taxes on GILTI as incurred.
|
NOTE 14 – INCOME TAX
(Continued)
The provision for income taxes
for the Company’s 2019 and 2018 fiscal years consists of the following:
|
|
3/31/2019
|
|
|
3/31/2018
|
|
Domestic and foreign components of income (loss) before income taxes are as follows:
|
|
|
|
|
|
|
Domestic
|
|
$
|
(5,205,168
|
)
|
|
$
|
(594,594
|
)
|
Foreign
|
|
|
11,577,544
|
|
|
|
12,397,873
|
|
Total
|
|
$
|
6,372,376
|
|
|
$
|
11,803,279
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
Current tax:
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
1,302,022
|
|
|
$
|
1,400.000
|
|
U.S. state and local
|
|
|
40
|
|
|
|
-
|
|
Foreign
|
|
|
40,260
|
|
|
|
-
|
|
Total Current Tax
|
|
|
1,342,322
|
|
|
|
1,400,000
|
|
Deferred tax:
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(81,461
|
)
|
|
|
-
|
|
U.S. state and local
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax
|
|
|
(81,461
|
)
|
|
|
-
|
|
Total tax
|
|
$
|
1,260,861
|
|
|
$
|
1,400,000
|
|
Effective tax rates
|
|
|
19.8
|
%
|
|
|
11.9
|
%
|
A reconciliation of the effective
tax rate is as follows:
|
|
3/31/2019
|
|
|
3/31/2018
|
|
Tax at statutory rate
|
|
$
|
1,338,199
|
|
|
$
|
3,723,692
|
|
State tax, net of federal benefit
|
|
|
40
|
|
|
|
-
|
|
Non-deductible expenses
|
|
|
692,749
|
|
|
|
36,778
|
|
Transition tax
|
|
|
-
|
|
|
|
1,400,000
|
|
Global Intangible Low-Taxed Income
|
|
|
1,381,950
|
|
|
|
-
|
|
Tax Credits
|
|
|
(31,307
|
)
|
|
|
-
|
|
Foreign tax rate differential
|
|
|
(2,391,024
|
)
|
|
|
(3,760,470
|
)
|
Provision to return adjustments
|
|
|
270,254
|
|
|
|
-
|
|
Total
|
|
$
|
1,260,861
|
|
|
$
|
1,400,000
|
|
The Company’s deferred
tax assets and liabilities at March 31, 2019 and March 31, 2018 consist of the following:
Assets
|
|
3/31/2019
|
|
|
3/31/2018
|
|
Stock based compensation
|
|
$
|
81,461
|
|
|
$
|
-
|
|
Deferred tax assets, net
|
|
$
|
81,461
|
|
|
$
|
-
|
|
As of March 31, 2019, the Company
has cumulative book-tax basis differences in its foreign subsidiaries of approximately $20.2 million. The Company has not recorded
a U.S. deferred tax liability for the book-tax basis in its foreign subsidiaries as these amounts continue to be indefinitely reinvested
in foreign operations. The reversal of this temporary difference would occur upon the sale or liquidation of the Company’s
foreign subsidiaries, and the estimated impact of the reversal of this temporary difference is approximately $4.2 million.
NOTE 14 – INCOME TAX
(Continued)
The Company files income tax returns
in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to December 31,
2016.
At March 31, 2019, the Company
believes it has adequately provided for its tax-related liabilities, and that no reserve for unrecognized tax benefits is necessary.
No significant change in the total amount of unrecognized tax benefits is expected within the next twelve months. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits (if any) in tax expense, as applicable. At March
31, 2019, the Company had no accrual for the payment of interest and penalties.
NOTE 15 – SUBSEQUENT EVENTS
On May 17, 2019, our Board of Directors
approved the payment of a dividend of $0.05 per share payable on June 5, 2019 to shareholders of record on May 28, 2019.
On June 18, 2019, the Company closed on
a transaction whereby it acquired all of the outstanding shares of Al-Mutafaweq Co. for Garments Manufacturing Ltd. (“Paramount”),
a contract garment manufacturer based in Amman, Jordan pursuant to an agreement between Jerash Garments and the shareholder of
Paramount dated December 11, 2018. As a result, Paramount became a subsidiary of Jerash Garments, and the Company 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 as the time of this acquisition, so this transaction was accounted for as an asset acquisition. $380,000
was prepaid to Paramount as an acquisition deposit as of March 31, 2019, and $600,000 was paid subsequently at the closing of this
transaction.