Business context and reporting period
Jerash Holdings (US), Inc. manufactures customized outerwear in Jordan and exports apparel for major brand-name retailers. This unaudited Form 10-Q covers the fiscal first quarter and three months ended June 30, 2018; comparisons are with the three months ended June 30, 2017 unless otherwise noted.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Prior-year period |
|---|---|---|
| Revenue | $18.36 million | $21.35 million |
| Gross profit / margin | $4.66 million / 25% | $4.85 million / 23% |
| Operating income (loss) | $(0.52) million | $3.43 million |
| Net income (loss) | $(0.89) million | $3.43 million |
| Diluted EPS | $(0.08) | $0.37 |
| Operating cash flow | $(10.11) million | $(4.25) million |
| Capital expenditures | $0.48 million | $0.18 million |
At June 30, 2018, cash was $12.93 million and restricted cash was $3.67 million. Current assets were $50.29 million and current liabilities $10.35 million, yielding working capital of approximately $40.0 million and a current ratio of about 4.8. Total assets were $56.95 million; total liabilities were $11.94 million; total equity was $45.01 million.
Credit-facility borrowings were $7.06 million, up from $0.98 million at March 31, 2018. The borrowings are due within 120 days of each borrowing or on demand. The facilities require $3 million in cash and other investment security collateral and are guaranteed by the company, a subsidiary, and two individuals.
Material changes versus the prior comparable period
- Revenue fell 14%. Management attributed the decrease mainly to approximately $2.5 million of shipments delayed until early July by Jordan’s Eid al-Fitr holiday and congestion at Aqaba port.
- Gross margin improved to approximately 25% from 23%, which management attributed to better production efficiency; gross profit nevertheless decreased 4% as revenue declined.
- SG&A rose to $5.18 million from $1.42 million. It included $3.21 million of stock-based compensation for immediately vested options, alongside increased Hong Kong marketing and support costs, banking and finance expenses, and IPO-related legal, professional, and compliance costs.
- The quarter included $0.37 million of income tax expense, versus none in the prior-year quarter. The filing describes a revised estimate of the U.S. transition tax, including a $0.492 million additional charge, partly offset by a tax benefit. The reported transition-tax payable was $1.892 million, with $0.175 million current and approximately $1.6 million noncurrent.
- Cash increased by $4.33 million, principally reflecting $8.93 million of net IPO proceeds and $6.08 million of short-term borrowing. These inflows more than offset operating and investing cash outflows.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management projected approximately $3.1 million of capital expenditures for fiscal 2019 and fiscal 2020 to expand production capacity. Two Jordan workshop projects were expected to be completed by the end of calendar 2018 and mid-2019, respectively.
- The company was negotiating extensions of its HSBC import-credit and factoring facilities on similar terms; HSBC retained discretion over renewal. The facilities had been subject to review by May 1, 2018.
- Customer concentration is substantial: two end customers represented 91% and 8% of quarterly revenue; VF Corporation alone represented 91%. Two customers also accounted for 91% and 8% of receivables at June 30. Management warns that loss of major customers or suppliers could adversely affect results or cash flows.
- Operating and currency risks include the company’s concentration of operations in Jordan, exposure to political, economic, legal, and social conditions there, and potential effects of Jordanian dinar exchange-rate movements. Nearly all sales are to the United States.
- The company leases manufacturing facilities and was evaluating lease renewals. Disclosed future minimum payments under non-cancelable operating leases totaled $0.68 million. Management did not expect ordinary-course legal matters to have a material adverse impact, while noting that adverse outcomes could be costly.
- Adoption of ASC 606 did not materially affect reported results or change revenue timing. Management stated disclosure controls were effective as of June 30, 2018; the filing did not include management’s internal-control assessment because of the transition period for newly public companies.
Important facts for investors to verify
- Whether the approximately $2.5 million delayed shipment amount was shipped and collected in early July, and whether shipment timing normalizes.
- Collections on the sharp increase in receivables to $13.24 million and the associated customer concentration and credit exposure.
- Renewal status, terms, maturity, collateral, guarantees, and availability of the HSBC facilities, including the $7.06 million outstanding balance.
- The final U.S. transition-tax liability and payment schedule, given the revised estimate and remaining tax-authority guidance.
- The effect of the immediately vested options and other potential dilution: 989,500 options were granted at $7.00 per share, and 264,410 warrants were outstanding at June 30, 2018.
- Execution, timing, and funding of planned capacity expansion, alongside operating cash use of $10.11 million in the quarter.