The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
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 GTI
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 Garments is 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).
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.
Although Jerash Garments does not own the equity
interest of Victory Apparel, our president, director 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 has
the ability to control Victory Apparel’s financial affairs. In addition, Victory Apparel's equity at risk is not sufficient
to permit it to operate without additional subordinated financial support from 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 was registered under the name of
the Chairman of the Board of Jerash Garments, 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 Garments transferred his 100% equity interest in 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.
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
(Continued)
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 and its subsidiaries (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..
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed
consolidated financial statements of the Company have been prepared and presented in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally
included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and
regulations. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto for the fiscal year ended March 31, 2018.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair presentation of the Company's financial position as of
June 30, 2018, its results of operations and its cash flows for the three months ended June 30, 2018 and 2017, as applicable, have
been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal
year or any future periods.
Principles of Consolidation
The unaudited condensed consolidated financial
statements include the financial statements of Jerash Holdings, its subsidiaries and VIE. All significant intercompany balances
and transactions have been eliminated upon consolidation.
In accordance with accounting standards regarding
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, GTI 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:
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Current assets
|
|
$
|
2,062
|
|
|
$
|
2,069
|
|
Intercompany receivables*
|
|
|
311,681
|
|
|
|
311,527
|
|
Total assets
|
|
|
313,743
|
|
|
|
313,596
|
|
|
|
|
|
|
|
|
|
|
Third party current liabilities
|
|
|
(3,994
|
)
|
|
|
(3,992
|
)
|
Total liabilities
|
|
|
(3,994
|
)
|
|
|
(3,992
|
)
|
Net assets
|
|
$
|
309,749
|
|
|
$
|
309,604
|
|
* Receivables from Jerash Garments are eliminated upon
consolidation.
Victory Apparel did not generate any income
but incurred certain expenses for each of the three-month periods ended June 30, 2018 and 2017. The loss was $8 and $2,818 for
the three months ended June 30, 2018 and 2017, respectively.
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Use of Estimates
The preparation of the unaudited condensed
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 unaudited
condensed 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
June 30, 2018 and March 31, 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 custom 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 unaudited condensed 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 June 30, 2018 and March 31, 2018.
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
|
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property, Plant and Equipment
(Continued)
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 unaudited
condensed 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
related 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 three months ended June 30, 2018 and 2017.
Revenue Recognition
The Company adopted Accounting Standards Codification
("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
will 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 changes 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 unaudited condensed consolidated statement of
income and comprehensive income for the three months ended June 30, 2018. 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 were no differences in the pattern of revenue recognition:
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition
(Continued)
|
|
Three Months Ended
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
|
|
(in millions of dollars)
|
|
|
|
|
|
|
As reported
|
|
|
Financial Results
prior to Adoption of
Revenue Recognition
Standard
|
|
|
Impact of
Adoption of
Revenue
Recognition
Standard
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,363,085
|
|
|
$
|
18,363,085
|
|
|
$
|
-
|
|
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.
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. The transaction price includes estimates of variable consideration that may result in allowances
or discounts that are reductions in revenue when the estimates are not fully realized upon completion of the performance
obligation. 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. Estimates for variable consideration are
reassessed each reporting period and are included in the transaction price to the extent it is probable that a significant
reversal of cumulative revenue recognized will not occur upon resolution of uncertainty associated with the variable
consideration.
The contract assets are recorded on the
Condensed Consolidated Balance Sheet as accounts receivable as of June 30, 2018 and March 31, 2018, respectively. For the three
months ended June 30, 2018 and 2017, there was no revenue recognized from performance obligations related to prior periods. As
of June 30, 2018, 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 $134,882 and $124,951
for the three months ended June 30, 2018 and 2017, respectively.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 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 are entitled
to a 100% income tax exemption for a period of 10 years commencing at the first day of production. This exemption has been extended
for 5 years until December 31, 2018. Jerash Garments can apply for further extension of the tax exemption upon expiration. The
estimated tax savings as a result of the tax exemption of Jerash Garments totaled $425,539 and $504,675 for the three months ended
June 30, 2018 and 2017, respectively. Per share effect of the tax exemption was $0.04 and $0.05 for the three months ended June
30, 2018 and 2017, respectively.
Local sales of Jerash Garments are subject
to income tax at a fixed rate of 14%. No tax provision was provided for the three months ended June 30, 2018 and 2017 since there
was no net income generated from local sales.
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 June 30, 2018 and March 31, 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.
On December 22, 2017, the Tax Cuts and
Jobs Act (the “Tax Act”) was enacted. Under the provisions of the Tax Act, the U.S. corporate tax rate decreased from
35% to 21%. As the Company has a March 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in
a U.S. statutory federal rate of approximately 31.55% for our fiscal year ended March 31, 2018, and 21% for subsequent fiscal
years. 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. The change has caused the Company to record one-time income tax payable
to be paid over 8 years.
The Company has evaluated the impacts of the new Global Intangible
Low-Taxed Income (GILTI) tax rules provision of the Tax Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the
Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income
related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts
into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has selected the period
cost method as its accounting policy with respect to the new GILTI tax rules.
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreign Currency Translation
The reporting currency of the Company is the U.S. dollar and
the Company and its subsidiaries use the Jordanian Dinar (“JOD”) as their functional currency, except for 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 into U.S. dollars 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 into U.S. dollars 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 the JOD against U.S. dollar and other currencies
may fluctuate and is affected by, among other things, changes in Jordan’s political and economic conditions. Any significant
revaluation of the JOD may materially affect the Company’s financial condition in terms of reporting in U.S. dollars. The
following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
|
June 30, 2018
|
March 31, 2018
|
June 30, 2017
|
Period-end spot rate
|
US$1=JOD 0.7090
|
US$1=JOD 0.7094
|
US$1=JOD 0.7096
|
|
US$1=HKD 7.8463
|
US$1=HKD 7.8490
|
US$1=HKD 7.8064
|
Average rate
|
US$1=JOD 0.7094
|
US$1=JOD 0.7092
|
US$1=JOD 0.7096
|
|
US$1=HKD 7.8480
|
US$1=HKD 7.8091
|
US$1=HKD7.7882
|
Stock-Based Compensation
The Company measures compensation expense
for stock-based awards to employees, 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 warrants using the 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
warrant, the expected risk-free rates of return, the expected volatility of the Company's common stock, and the expected dividend
yield, each of which is more fully described below. The assumptions for the expected term and the expected volatility are the two
assumptions that significantly affect the grant date fair value.
|
·
|
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 issue with an equivalent term to the stock-based award being valued. Where the expected term of a stock-based
award does not correspond with the term for which a zero-coupon interest rate is quoted, the Company's 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: Because
the Company does not expect to pay a dividend in the foreseeable future, a 0% dividend yield was used in valuing the stock-based
awards.
|
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings per Share
The Company
computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”).
ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income
divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the
dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they
had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation
of diluted EPS.
Comprehensive Income
Comprehensive income consists of two components,
net income and other comprehensive income (loss). The foreign currency translation gain or loss resulting from the translation
of the financial statements expressed in JOD or HKD to U.S. dollars is reported in other comprehensive income (loss) in the unaudited
condensed consolidated statements of income and comprehensive income.
Fair Value of Financial Instruments
ASC 825-10 requires certain disclosures regarding
the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy
prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
|
·
|
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, accounts payable, accrued expenses, other payables
, income
tax payable
and
credit facilities
to approximate the fair value of the respective
assets and liabilities at June 30, 2018 and March 31, 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 June 30, 2018 and March 31, 2018, $2,788,427
and $4,192,448 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 June 30, 2018 and March 31, 2018, $10,108,271 and $4,402,910 of the Company’s cash were 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 June
30, 2018 and March 31, 2018, $32,677 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.
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentrations and Credit Risk
(Continued)
Credit risk
(Continued)
Accounts receivable are typically unsecured
and derived from revenue earned from customers, and therefore are exposed to credit risk. The risk is mitigated by the Company's
assessment of its customers' creditworthiness and its ongoing monitoring of outstanding balances.
Customer and vendor concentration risk
Prior to August 2016, substantially all
of the Company’s sales were made to end-customers, which are located primarily in the United States (see Note 12) through
its affiliate (see Note 9). Thereafter, the Company began selling directly to its customers. The Company’s operating results
could be adversely affected by U.S. government 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 three months ended June 30, 2018, two end-customers accounted for 91% and 8%, respectively of total revenue. For the three
months ended June 30, 2017, two end-customers accounted for 82% and 11%, respectively of total revenue. As of June 30, 2018, two
customers accounted for 91% and 8% of the total accounts receivable balance, respectively. As of March 31, 2018, two customers
accounted for 57% and 22% of the total accounts receivable balance, respectively.
For the three months ended June 30, 2018,
the Company purchased approximately 30% and 13% of its raw materials from two major suppliers. For the three months ended June
30, 2017, the Company purchased approximately 92% of its raw materials from one supplier. As of June 30, 2018, accounts payable
to the two major suppliers accounted for 23% and 14% of the total accounts payable balance. As of March 31, 2018, there was a net
prepaid balance to the major supplier.
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.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
(Continued)
New Accounting Pronouncements Recently Adopted
(Continued)
In July 2015, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” ASU No. 2015-11
changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.
Net realizable value is defined as the estimated selling prices in the ordinary course of business; less reasonably predictable
costs of completion, disposal and transportation. For public business entities, the amendments in this ASU are effective for fiscal
years beginning after December 15, 2016, including interim reporting periods within those fiscal years. The Company adopted this
guidance in the first quarter of its fiscal year ended March 31, 2018 using a prospective application. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,
“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This
update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences
when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account
for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts on the statement of
cash flows. The Company adopted this guidance in the first quarter of its fiscal year ended March 31, 2018, which did not have
a material impact to the unaudited condensed consolidated financial statements and related disclosures. The amendments requiring
recognition of excess tax benefits and tax deficiencies in the income statement will be applied prospectively. The Company does
not expect the impact to be material to the consolidated results of operations; however, such determination is subject to change
based on facts and circumstances at the time when awards vest or settle.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,
"Leases” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet with a corresponding liability and disclosing key information about leasing arrangements. For public business
entities, the amendments in this ASU are effective for fiscal years 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 is evaluating the impact of the adoption of this revised guidance on its unaudited condensed consolidated
financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Scope
of Modification Accounting,” which amends the scope of modification accounting for share-based payment arrangements, provides
guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required
to apply modification accounting under ASC 718. For all entities, the ASU is effective for annual reporting periods, including
interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period. The Company does not expect that adoption of this guidance will have a material impact on its unaudited
condensed consolidated financial statements and related disclosures.
NOTE 4 – ACCOUNTS
RECEIVABLES, NET
The Company’s net accounts receivable is as follows:
|
|
As of
|
|
|
As of
|
|
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Trade accounts receivable
|
|
$
|
13,240,000
|
|
|
$
|
5,247,090
|
|
Less: allowances for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivables, Net
|
|
$
|
13,240,000
|
|
|
$
|
5,247,090
|
|
As of June 30, 2018 and March 31, 2018,
the balance of accounts receivable includes $25,015 and $470,659 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
|
|
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Raw materials
|
|
$
|
6,406,349
|
|
|
$
|
11,497,237
|
|
Work-in-progress
|
|
|
1,713,174
|
|
|
|
2,073,509
|
|
Finished goods
|
|
|
11,887,924
|
|
|
|
6,722,646
|
|
Total inventory
|
|
$
|
20,007,447
|
|
|
$
|
20,293,392
|
|
NOTE 6 – PROPERTY,
PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
|
|
As of
June 30, 2018
|
|
|
As of
March 31, 2018
|
|
Land
|
|
$
|
61,078
|
|
|
$
|
61,048
|
|
Property and buildings
|
|
|
432,562
|
|
|
|
432,347
|
|
Equipment and machinery
|
|
|
4,959,813
|
|
|
|
4,918,270
|
|
Office and electric equipment
|
|
|
510,794
|
|
|
|
505,356
|
|
Automobiles
|
|
|
372,268
|
|
|
|
372,084
|
|
Leasehold improvements
|
|
|
1,602,965
|
|
|
|
1,552,108
|
|
Subtotal
|
|
|
7,939,480
|
|
|
|
7,841,213
|
|
Construction in progress
|
|
|
605,276
|
|
|
|
217,494
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
(5,560,903
|
)
|
|
|
(5,238,992
|
)
|
Property, Plant and Equipment, Net
|
|
$
|
2,983,853
|
|
|
$
|
2,819,715
|
|
Depreciation and amortization expense was $319,310 and $287,784
for the three months ended June 30, 2018 and 2017, respectively.
The construction in progress account represents
costs incurred for constructing two new sewing workshops. The first one is a 450 square meter workshop in the Tafilah Governorate
of Jordan, which is expected to be completed by the end of calendar year 2018. The second one is a 5,000 square meter workshop
in Al-Hasa County in the Tafilah Governorate of Jordan, which is expected to be completed by the middle of calendar year 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 June 30, 2018 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.
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 June 30, 2018 and March 31, 2018, the consolidated balance
of the statutory reserve was $71,699.
NOTE 7
–
EQUITY
(Continued)
Private placement
On May 15, 2017, the Company conducted
the initial closing of a private placement for the sale of an aggregate of 540,000 shares of common stock and warrants
exercisable for up to 54,000 shares of common stock to ten accredited investors. Fifty percent of the shares (270,000 shares)
purchased in the initial closing were sold by one of the Company’s shareholders at $4.99 per share, the remaining fifty
percent of the shares (270,000 shares) were issued by Jerash Holdings. Each share was sold together with one warrant, with
each such warrant being immediately exercisable for one-tenth of one share of common stock. 540,000 five-year warrants were
issued at $0.01 per warrant to purchase up to 54,000 shares of Jerash Holdings’ common stock at an exercise price per
full share equal to $6.25. The Company received aggregate gross proceeds of $1,352,700 for the shares and warrants issued and
sold in the initial closing of the private placement and incurred direct expenses related to the offering of $379,828.
On August 18, 2017, the Company conducted the
second closing of a private placement, pursuant to which an aggregate of 200,000 shares of common stock and warrants exercisable
for up to 20,000 shares of common stock were sold to one accredited investor. Fifty percent of the shares (100,000 shares) purchased
in the closing were sold by one of the Company’s shareholders at $4.99 per share and the remaining fifty percent of the shares
(100,000 shares) were issued by Jerash Holdings. Each share was sold together with one warrant, with each such warrant being immediately
exercisable for one-tenth of one share of common stock. 200,000 five-year warrants were issued at $0.01 per warrant to purchase
up to 20,000 shares of Jerash Holdings’ common stock at an exercise price per full share equal to $6.25. The Company received
net proceeds of $450,910 for the shares and warrants issued and sold in the closing of this private placement.
On September 27, 2017, the Company conducted
the third and final closing of a private placement, pursuant to which an aggregate of 50,000 shares of common stock and warrants
exercisable for up to 5,000 shares of common stock were sold to two accredited investors. Fifty percent of the shares (25,000 shares)
purchased in the closing were sold by one of the Company’s shareholders at $4.99 per share and the remaining fifty percent
of the shares (25,000 shares) were issued by Jerash Holdings. Each share was sold together with one warrant, with each such warrant
being immediately exercisable for one-tenth of one share of common stock. 50,000 five-year warrants were issued at $0.01 per warrant
to purchase up to 5,000 shares of Jerash Holdings’ common stock at an exercise price per full share equal to $6.25. The Company
received net proceeds of $110,179 for the shares and warrants issued and sold in the closing of this private placement.
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.
Independent Board of Directors
Simultaneous with the closing of the IPO, the
Company increased the size of Board of Directors from two to five members and elected three new independent directors who will
hold office until the next annual meeting of stockholders. The Company approved an audit committee charter and formed an audit
committee of the Board of Directors, whose chair is an “audit committee financial expert.” The Company also approved a compensation committee charter and a nominating and corporate governance
committee charter and formed a compensation committee and a nominating and corporate governance committee.
NOTE 8 – STOCK BASED COMPENSATION
Warrants issued for services
From time to time, the Company issues warrants
to purchase its common stock. These warrants are valued using 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.
On May 15, 2017, Jerash Holdings issued warrants
to the designees of the placement agent in the above private placement to purchase 48,600 units, with each unit consisting of one
share of Jerash Holdings common stock and one warrant (with each such warrant being immediately exercisable for one-tenth of one
share of its common stock at an exercise price of $6.25 per share for a period of five years from the issuance date), at an exercise
price of $5.50 per unit. The fair value of these units was $107,990 and was included in offering costs of the private placement
in May 2017.
On May 15, 2017, Jerash Holdings also issued
a five-year warrant to purchase up to 50,000 shares of its common stock pursuant to a letter agreement with one of its board advisors.
The warrant has an exercise price of $5.00 per share and may be converted by means of “cashless” exercise during the
term of the warrant. This warrant may be exercised any time after issuance through and including the five year anniversary of the
issuance date. Stock-based compensation expense recognized for the quarters ended June 30, 2017 and 2016 was $116,578 and $0
respectively for this warrant.
On August 1, 2017, warrants to purchase 18,000
units became issuable by Jerash Holdings to the designees of the placement agent in the above private placement, with each unit
consisting of one share of Jerash Holdings common stock and one warrant (with each such warrant being immediately exercisable for
one-tenth of one share of its common stock at an exercise price of $6.25 per share for a period of five years from the issuance
date), at an exercise price of $5.50 per unit. The fair value of these units was $43,122 and was included in offering costs of
the private placement in August 2017.
On September 27, 2017, warrants to purchase
4,500 units became issuable by Jerash Holdings to the designees of the placement agent in the above private placement, with each
unit consisting of one share of Jerash Holdings common stock and one warrant (with each such warrant being immediately exercisable
for one-tenth of one share of its common stock at an exercise price of $6.25 per share for a period of five years from the issuance
date), at an exercise price of $5.50 per unit. The fair value of these units was $10,814 and was included in offering costs of
the private placement in September 2017.
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 are subject to a 180-day lock-up.
During the period ended June 30, 2018, all
of the outstanding warrants were fully vested and exercisable other than the 57,200 Underwriter Warrants noted above subject to
a 180-day lock-up.
The fair value of these warrants granted was
estimated as of the grant date using the Black-Scholes model with the following assumptions:
|
|
Common Stock Warrants June
30, 2018
|
|
Expected term (in years)
|
|
|
5.0
|
|
Risk-free interest rate (%)
|
|
|
2.8
|
%
|
Expected volatility (%)
|
|
|
52.2
|
%
|
Dividend yield (%)
|
|
|
0.0
|
%
|
NOTE 8 – STOCK BASED COMPENSATION
(Continued)
Warrants issued for services
(Continued)
Warrant activity is summarized as follows:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Warrants outstanding at March 31, 2018
|
|
|
207,210
|
|
|
$
|
5.69
|
|
Granted (Underwriter Warrants for the IPO)
|
|
|
57,200
|
|
|
$
|
8.75
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding at June 30, 2018
|
|
|
264,410
|
|
|
$
|
6.35
|
|
Stock Options
On March 21, 2018 the board of directors
(the “board”) of Jerash Holdings 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 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.
During the period ended June 30, 2018, all
of the outstanding options were fully vested and exercisable.
The fair value of these options granted was
estimated as of the grant date using the Black-Scholes model with the following assumptions:
|
|
Stock Options
June 30, 2018
|
|
Expected term (in years)
|
|
|
5.0
|
|
Risk-free interest rate (%)
|
|
|
2.6
|
%
|
Expected volatility (%)
|
|
|
52.2
|
%
|
Dividend yield (%)
|
|
|
0.0
|
%
|
The fair value of each option is $3.24.
Stock option activity is summarized as follows:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Stock options outstanding at March 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
989,500
|
|
|
$
|
7.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Stock options outstanding at June 30, 2018
|
|
|
989,500
|
|
|
$
|
7.00
|
|
Total expense related to the stock options issued was $3,205,980
during the quarter ended June 30, 2018. There were no unrecognized compensation costs at June 30, 2018.
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 FGH
|
|
Sales / Purchases
|
Value Plus (Macao Commercial Offshore) Limited (“VPMCO”)
|
|
Affiliate, subsidiary of FGH
|
|
Purchases
|
Yukwise Limited (“Yukwise”)
|
|
Common Shareholder
|
|
Consulting Services
|
Multi-Glory Corporation Limited (“Multi-Glory”)
|
|
Common Shareholder
|
|
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 the 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
June 30, 2018
|
|
|
As of
March 31, 2018
|
|
FGIL
|
|
$
|
-
|
|
|
$
|
50,027
|
|
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 three months ended June 30, 2018 and 2017, $0
and $18,771,969 of sales was made with the support from FGIL.
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
sales services to the Company for $300,000 per annum. The agreement renews automatically for one-month terms. This agreement became
effective as of January 1, 2018. Total consulting fees under this agreement were $75,000 for the three months ended June 30, 2018.
On January 12, 2018, Treasure
Success and Yukwise entered into a consulting agreement, pursuant to which Mr. Choi, who wholly owns Yukwise, serves as Chief
Executive Officer (CEO) and provides high-level of advisory and general management services for $300,000 per annum. The agreement
renews automatically for one-month terms. This agreement became effective as of January 1, 2018. Total advisory and management
expenses under this agreement were $75,000 for the three months ended June 30, 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 “Facility Letter”). In
addition, pursuant to an offer letter dated June 5, 2017, HSBC offered to provide Treasure Success with a $12,000,000 factoring
facility for certain debt purchase services related to our accounts receivables (the “Factoring Agreement” and together
with the Facility Letter, the “Credit Facilities”). The Credit Facilities are guaranteed by Jerash Holdings, Jerash
Garments, as well as two of the Company’s individual shareholders. In addition, the Credit Facilities require 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.
Under the Factoring Agreement, HSBC also
provides credit protection and debt services related to each of our preapproved customers. For any approved debts or collections
assigned to HSBC, HSBC charges a flat fee of 0.35% on the face value of the invoice for such debt or collection. We may assign
debtor payments that are to be paid to HSBC within 90 days, defined as the maximum terms of payment. We may receive advances on
invoices that are due within 30 days of the delivery of our goods, defined as the maximum invoicing period.
The Credit Facilities are subject to review
at any time and, in any event by May 1, 2018. HSBC has discretion on whether to renew the Facility Letter prior to expiration and
the Company is currently negotiating an extension of the Facility Letter on similar terms. Either party may terminate the Factoring
Agreement subject to a 30-day notice period. The Company is in the process of negotiating an extension to the Factoring Agreement
on similar terms.
As of June 30, 2018 and March 31, 2018,
the Company had made $7,059,533 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 June 30, 2018, $6,345,846 was outstanding under the Facility Letter
and $713,687 was outstanding under the Factoring Agreement.
NOTE 11 – EARNINGS (LOSS) PER SHARE
The following table
sets forth the computation of basic and diluted earnings per share for the three months ended June 30, 2018 and 2017:
|
|
Three Months Ended
June 30,
(in $000s except share and
per share information)
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(885
|
)
|
|
$
|
3,429
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share (weighted-average shares)
|
|
|
10,822,143
|
|
|
|
9,315,467
|
|
Denominator for diluted earnings per share (adjusted weighted average shares)
|
|
|
10,822,143
|
|
|
|
9,315,467
|
|
Basic (loss) earnings per share
|
|
$
|
(0.08
|
)
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.08
|
)
|
|
$
|
0.37
|
|
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 three-month periods ended June 30, 2018 and 2017, outerwear
accounted for approximately 99.3% and 99.7% of total revenue, respectively. Based on management's assessment, the Company determined
that it has only one operating segment as defined by ASC 280.
NOTE 12 – SEGMENT REPORTING
(Continued)
The following table summarizes sales by geographic
areas for the three months ended June 30, 2018 and 2017, respectively.
|
|
For the three months ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
United States
|
|
$
|
17,809,361
|
|
|
$
|
21,064,500
|
|
Jordan
|
|
|
130,213
|
|
|
|
57,358
|
|
Other countries
|
|
|
423,511
|
|
|
|
228,300
|
|
Total
|
|
$
|
18,363,085
|
|
|
$
|
21,350,158
|
|
All long-lived assets were located in Jordan
as of June 30, 2018 and March 31, 2018.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Rent Commitment
The Company leases two manufacturing facilities
under operating leases. Operating lease expense amounted to $342,343 and $316,742 for the three months ended June 30, 2018 and
2017, respectively. The Company is currently evaluating the renewal of these leases.
Future minimum lease payments under non-cancelable operating leases
are as follows:
Twelve months ended June 30,
|
|
|
|
2019
|
|
$
|
664,956
|
|
2020
|
|
|
17,971
|
|
2021 and thereafter
|
|
|
-
|
|
Total
|
|
$
|
682,927
|
|
The Company has twenty-five operating leases
for its facilities that require monthly payments ranging between $247 and $26,939 and are renewable on an annual basis.
Contingencies
From time to time, the Company is a party to
various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when
they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred. The Company’s management does not expect any liability from the disposition of such claims and litigation
individually or in the aggregate would not have a material adverse impact on the Company’s consolidated financial position,
results of operations and cash flows.
NOTE 14 – INCOME
TAX
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.
The change has caused the Company to record a one-time income tax payable to be paid over 8 years. The one-time transition tax
was calculated using the Company’s total post-1986 overseas earnings and profits based on a rate of 15.5% for the Company’s
cash and cash equivalents and a rate of 8% for its other assets. The Company previously booked a provisional charge of $1.4 million
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 beginning in 2018. The Company revised its estimate of the impact of the transition tax, which resulted in $1,892,000 of
transition tax due. Accordingly, the Company booked a current charge to income tax expense of $492,000. At June 30, 2018, $175,000
is reflected as Income tax payable in current liabilities while a noncurrent income tax payable of approximately $1.6 million
attributable to the transition tax is reflected in "other liabilities" of the Consolidated Balance Sheet.
The Tax Act has significant complexity
and our final tax liability may materially differ from provisional estimates due to additional guidance and regulations that may
be issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”) and state and local tax authorities,
and for the Company’s finalization of the relevant calculations required by the new tax legislation.