Business Context and Reporting Period
Company: Jerash Holdings (US), Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017 (Six months ended September 30, 2017)
Business Overview: The Company is a holding company with no direct operations. Its primary operating subsidiary, Jerash Garments, manufactures customized ready-made outerwear from knitted fabric in Jordan for export to large brand-name retailers, primarily in the United States. The Company operates as a single segment focused on outerwear.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2017 | Six Months Ended Sep 30, 2016 | Three Months Ended Sep 30, 2017 | Three Months Ended Sep 30, 2016 |
|---|---|---|---|---|
| Net Revenue | $48,899,637 | $37,322,614 | $27,549,479 | $18,816,359 |
| Gross Profit | $12,067,384 | $7,523,537 | $7,214,840 | $3,732,518 |
| Gross Margin | 25% | 20% | 26% | 20% |
| Net Income | $9,180,803 | $5,552,995 | $5,752,131 | $2,726,130 |
| EPS (Basic & Diluted) | $0.96 | $0.63 | $0.60 | $0.31 |
| Cash & Cash Equivalents | $4,852,811 (as of Sep 30, 2017) | |||
| Restricted Cash | $3,476,281 (as of Sep 30, 2017) | |||
| Total Assets | $37,043,321 (as of Sep 30, 2017) | |||
| Total Liabilities | $4,169,131 (as of Sep 30, 2017) | |||
| Shareholders' Equity | $32,874,190 (as of Sep 30, 2017) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 31% year-over-year for the six-month period and 46% for the three-month period. This growth is attributed to expanded business with a major customer (VF Corporation) and increased manufacturing capacity.
- Margin Expansion: Gross profit margin improved from 20% to 25% (six months) and 20% to 26% (three months). This was driven by higher selling prices, economies of scale, and improved production efficiency.
- Profitability: Net income increased 65% for the six-month period and 111% for the three-month period compared to the prior year.
- Working Capital: Accounts receivable increased significantly ($10.1M increase in operating cash flow usage) due to higher sales volume in August and September. Conversely, inventory decreased by $13.7M, contributing positively to operating cash flow.
- Capital Structure: The Company completed a reverse recapitalization in May 2017 and conducted a private placement raising approximately $1.8 million in net proceeds during the period.
Guidance, Outlook, Risks, and Unusual Items
- Customer Concentration: The Company relies heavily on VF Corporation (The North Face brand), which accounted for approximately 84% of sales in the first six months of fiscal 2018. There are no long-term contracts with minimum purchase requirements.
- Related Party Transition: Prior to August 2016, sales were routed through a related party (Ford Glory International Limited). The Company has transitioned to selling directly to end customers, though a transition period for support services remains.
- Internal Controls: Management identified a material weakness in internal controls over financial reporting due to a lack of personnel with sufficient U.S. GAAP expertise. Remediation efforts are underway, but controls were deemed ineffective as of September 30, 2017.
- Liquidity: The Company maintains a strong current ratio of 7.3:1. It has secured a $20 million credit facility (import and factoring) with HSBC, collateralized by $3 million in restricted cash and personal guarantees from significant shareholders.
- Geopolitical Risks: Operations are concentrated in Jordan, exposing the Company to political instability, currency fluctuations (JOD vs. USD), and potential changes in free trade agreements (QIZ status).
- Tax Exemption: The Company benefits from a 100% income tax exemption on export sales in Jordan until December 31, 2018.
Key Facts for Investor Verification
- Customer Dependency: Verify the stability of the relationship with VF Corporation, which represents the vast majority of revenue.
- Internal Control Remediation: Monitor progress in hiring qualified accounting staff and remedying the material weakness in financial reporting.
- Related Party Transactions: Review the extent of remaining reliance on related parties for raw material sourcing and sales support.
- Cash Flow Quality: Assess the collection timeline for the significant increase in accounts receivable ($12.9M total receivables as of Sep 30, 2017).
- Debt Covenants: Review the terms of the HSBC credit facility, including the requirement to maintain $3 million in restricted cash and personal guarantees from key shareholders.