Jerash Holdings (US), Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended December 31, 2017; fiscal year ends March 31. Financial statements are unaudited. Jerash manufactures customized apparel, primarily outerwear, in Jordan for large brand-name retailers. The May 2017 merger was accounted for as a reverse recapitalization.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Year-over-year | Nine months ended Dec. 31, 2017 | Year-over-year |
|---|---|---|---|---|
| Revenue | $11.54 million | Down 8% | $60.44 million | Up 21% |
| Gross profit / margin | $3.75 million / 32.5% | Margin up from 29.7% | $15.82 million / 26.2% | Margin up from 22.4% |
| Operating income | $2.19 million | Down from $2.39 million | $11.39 million | Up from $7.90 million |
| Net income | $2.21 million | Down 8% | $11.39 million | Up 45% |
| Basic and diluted EPS | $0.23 | Down from $0.27 | $1.18 | Up from $0.90 |
Quarterly revenue declined because Fall/Winter shipments were accelerated into August and September; management reported revenue for the September quarter rose approximately 31% year over year. For the nine months, growth reflected expansion with a major customer and stronger U.S. sales. Improved production efficiency, higher production volume, selling prices and a greater share of local consignment orders supported gross-margin improvement. SG&A rose 16% in the quarter and 35% for the nine months, reflecting Hong Kong merchandising operations, banking and finance functions, offering-related costs, compliance and potential public-offering preparation.
Cash, liquidity and capital
- At December 31, cash was $14.35 million, restricted cash $3.47 million, and current assets $32.48 million against current liabilities of $3.92 million. Working capital was approximately $28.6 million and the current ratio approximately 8.3:1.
- Nine-month operating cash flow was $10.68 million, versus $6.55 million a year earlier. Investing cash outflow was $0.39 million; financing cash inflow was $0.42 million. Cash increased by $10.69 million to $14.35 million.
- Inventory fell to $6.72 million from $19.15 million at March 31, 2017. Accounts payable fell to $1.47 million from $10.25 million. Accounts receivable increased to $6.76 million from $2.78 million, and the company reported $3.36 million in supplier advances.
- Reported balance-sheet credit facilities were $0.95 million. The company had secured HSBC facilities comprising an $8 million import credit facility and a $12 million factoring facility, with cash collateral and company, subsidiary and shareholder guarantees. Facility borrowings are short-term, due within 120 days or on demand; the facilities were subject to review and scheduled to remain valid until May 1, 2018.
- Equity was $35.03 million, compared with $22.02 million at March 31, 2017. A private placement raised net proceeds of approximately $1.8 million; common shares outstanding increased to 9,895,000 from 8,787,500. No dividend was paid in the current nine-month period; the prior-year period included a $5.31 million distribution.
Outlook, commentary and material risks
- Management said cash on hand and operating cash generation should fund working-capital needs for current operations over the next 12 months. It projected approximately $3.1 million of capital expenditures for fiscal 2018 and 2019 to expand capacity. A 450-square-meter sewing workshop in Jordan was expected to be completed around mid-2018.
- The Jordanian income-tax exemption on Jerash Garments’ export income was extended through December 31, 2018. The filing estimates the exemption’s effect at $1.68 million, or $0.17 per share, for the nine months ended December 31, 2017. Continued exemption after that date is not assured.
- Customer concentration is substantial: two customers represented 81% and 8% of nine-month revenue; the risk-factor discussion separately says VF Corporation represented 77% of sales in the first nine months of fiscal 2018. Two customers accounted for 77% and 11% of period-end receivables. Loss or reduced orders from major customers could materially affect results.
- Supplier concentration is also significant: one supplier accounted for approximately 87% of nine-month raw-material purchases. The company cautions that supplier disruption, seasonality, apparel-market cycles, execution and delivery issues, and reliance on a limited outerwear product range could affect operations.
- Operations and long-lived assets are concentrated in Jordan. Risks include political and regulatory developments, currency movements, labor and compliance matters, and possible changes to U.S.–Jordan trade preferences. The company also depends on transfers from operating subsidiaries to meet parent-company obligations.
- Management reported disclosure controls were effective as of December 31, 2017. The filing notes a previously identified material weakness involving insufficient U.S. GAAP and financial-reporting expertise; management also described plans to add accounting personnel and consultants. The company was preparing for a potential public offering and had filed a Nasdaq listing application, but stated that listing and an active market were not assured.
- Legal proceedings: none reported. Management did not expect ordinary-course claims or litigation to have a material adverse effect. The filing provides no formal revenue or earnings guidance.
Important facts for investors to verify
- Reconcile the reported $0.95 million balance-sheet borrowing with the MD&A’s separate figures of $0.95 million under the facility letter and $0.60 million outstanding under factoring; the filing text does not clearly explain the difference.
- Confirm major-customer concentration and the relationship between the reported customer shares and VF Corporation’s stated 77% share of nine-month sales.
- Assess sustainability of customer demand, the accelerated shipment timing, and reliance on one principal raw-material supplier.
- Review collection of the sharply higher accounts receivable, supplier advances and concentration of deposits in Jordan and Hong Kong, including restricted cash securing HSBC facilities.
- Evaluate the effect of the December 2018 tax-exemption expiry, capacity-expansion spending, facility renewal terms, and the company’s plans to strengthen financial-reporting controls.