ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations for the three and six months ended June
30, 2018 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report
on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the
Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,”
“target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our
Business
We
are a retailer of branded fashion apparel and leading global apparel supply chain solution provider based in China. We are listed
on the NASDAQ Global Market under the symbol of “EVK”.
We
classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made
principally to domestically and international recognized brands, and department stores located throughout Europe, the U.S., Japan
and the People’s Republic of China (“PRC”). We focus on well-known, middle-to-high end casual wear, sportswear,
and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located
throughout the PRC as well as sales via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc.
Although
we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part
of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility
while reducing capital expenditures and the costs of keeping skilled workers on production lines during slow seasons. We oversee
our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they
meet our high-quality control standards and timely delivery requirement.
Wholesale
Business
We
conduct our original design manufacturing (“ODM”) operations through seven wholly owned subsidiaries which are located
in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing,
Jiangsu province, China, Chuzhou, Anhui province, China and Samoa: Ever-Glory International Group Apparel Inc. (“Ever-Glory
Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited
(“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”), Chuzhou Huirui Garments Co., Ltd.
(“Huirui), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), Ever-Glory Supply Chain Service Co.,
Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”).
Retail
Business
We
conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), Jiangsu LA GO GO Fashion
Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai
Ya Lan Fashion Company Limited (“Ya Lan”), Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and
Xizang He Meida Trading Company Limited (“He Meida”).
Business
Objectives
Wholesale
Business
We
believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive
product designs that stand for exceptional styling and quality. We maintain long-term, satisfactory relationships with a portfolio
of well-known and mid-class global brands.
The
primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer
base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:
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Expanding
our global sourcing network;
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Expanding
our overseas low-cost manufacturing base (outside of mainland China);
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Focusing
on high value-added products and continuing our strategy to produce mid-to-high end apparel;
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●
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Continuing
to emphasize product design and technology utilization;
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Seeking
strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
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Maintaining
stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.
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Retail
Business
The
business objectives for our retail segment are to establish leading brands of women’s apparel and to build a nationwide
retail network in China. As of June 30, 2018, we had 1,417 stores (including store-in-stores), including 114stores opened and
97 stores closed in half year of 2018. We expect to open additional 200 to 250 stores in 2018.
We
believe that our growth opportunities and continued investment initiatives include:
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●
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Building
our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
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●
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Expanding
our retail network throughout China;
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Improving
our retail stores’ efficiency and increasing same-store sales;
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●
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Continuing
to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities;
and
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Becoming
a multi-brand operator.
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Seasonality
of Business
Our
business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail
sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday
periods in the retail segment.
Collection
Policy
Wholesale
business
For
our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers
with good payment track records, we generally provide payment terms between 30 to 180 days following the delivery of finished
goods.
Retail
business
For
store-in-store shops, we generally receive payments from the stores between 60 to 90 days following the date of the register receipt.
For our own flagship stores, we receive payments on the same day of the register receipt. For sales from e-commerce platforms
such as Tmall, Dangdang mall, JD.com, VIP.com and etc., we generally receive payments between 5 to 15 days following the date
of the register receipt.
Global
Economic Uncertainty
Our
business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and
the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products.
We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic
conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2018.
In
addition, economic conditions in the United States and other foreign markets in which we operate could substantially affect our
sales profitability, cash position and collection of accounts receivable. Global credit and capital markets have experienced
unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers
and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently
have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how
this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.
Despite
the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to
allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary
of Critical Accounting Policies
We
have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the
underlying accounting standards and operation involved could result in material changes to our financial position or results of
operations under different conditions or using different assumptions.
Revenue
Recognition
The Company recognizes revenue pursuant
to Accounting Standards Codification 606 (“ASC 606”)
Revenue from Contracts with Customers
, the standard applies
five step model (i) The standard applies to a company’s contracts with customers (ii) The unit of account for revenue recognition
under the new standard is a performance obligation (a good or service) and the performance obligations will be accounted for separately
if they are distinct (iii) The transaction price is determined based on the amount of consideration that a company expects to
be entitled to from a customer (iv) The transaction price is allocated to all the separate performance obligations in an arrangement,
and (v) Revenue will be recognized when an entity satisfies each performance obligation by transferring control of the promised
goods or services to the customer. Goods or services can transfer at a point in time.
The
Company operates in two segments – wholesale and retail.
The
Company recognizes wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment
of the products for export sales, at such time title passes to the customer.
The
Company recognizes retail sales net of promotional discounts, rebates, and return allowances. Retail store sales are recognized
at the time of the register receipt. Retail online sales are recognized when products are shipped and customers receive the products
because we retain a portion of the risk of loss on these sales during transit.
Estimates
and Assumptions
In
preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures.
Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are
inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to
differ from estimated amounts. Significant estimates in 2018 and 2017 include the assumptions used to value tax liabilities, derivative
financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance and inventory
slow-moving and obsolete write-offs.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
. Under the new guidance, lessees will be required to recognize a
lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The
ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently
assessing the impact of this ASU on its consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments”
which modifies the measurement of expected credit losses of certain financial
instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019.
The Company is currently assessing the impact of this ASU on its consolidated financial statements.
The
Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will
have a significant impact on the Company’s consolidated financial statements.
Results
of Operations for the three months ended June 30, 2018 and 2017
The
following table summarizes our results of operations for the three months ended June 30, 2018 and 2017. The table and the discussion
below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere
in this report.
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
Sales
|
|
$
|
88,541
|
|
|
|
100.0
|
%
|
|
$
|
79,771
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
$
|
34,542
|
|
|
|
39.0
|
%
|
|
$
|
30,650
|
|
|
|
38.4
|
%
|
Operating Expense
|
|
$
|
31,413
|
|
|
|
35.5
|
%
|
|
$
|
27,702
|
|
|
|
34.7
|
%
|
Income From Operations
|
|
$
|
3,129
|
|
|
|
3.5
|
%
|
|
$
|
2,948
|
|
|
|
3.7
|
%
|
Other Income (Expenses)
|
|
$
|
875
|
|
|
|
1.0
|
%
|
|
$
|
487
|
|
|
|
0.6
|
%
|
Income tax expense
|
|
$
|
1,285
|
|
|
|
1.5
|
%
|
|
$
|
833
|
|
|
|
1.0
|
%
|
Net Income
|
|
$
|
2,719
|
|
|
|
3.1
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%
|
|
$
|
2,602
|
|
|
|
3.3
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2018 and 2017.
|
|
2018
|
|
|
%
of
total sales
|
|
|
2017
|
|
|
%
of
total sales
|
|
|
Growth
(Decrease)
in
2018 compared
with 2017
|
|
Wholesale business
|
|
(In
thousands of U.S. dollars)
|
|
|
|
|
|
(In
thousands of U.S. dollars)
|
|
|
|
|
|
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|
Mainland China
|
|
$
|
9,131
|
|
|
|
10.3
|
%
|
|
$
|
3,525
|
|
|
|
4.4
|
%
|
|
|
159.0
|
%
|
Hong Kong China
|
|
|
7,418
|
|
|
|
8.4
|
|
|
|
7,795
|
|
|
|
9.8
|
|
|
|
(4.8
|
)
|
Germany
|
|
|
899
|
|
|
|
1.0
|
|
|
|
1,876
|
|
|
|
2.4
|
|
|
|
(52.1
|
)
|
United Kingdom
|
|
|
2,881
|
|
|
|
3.3
|
|
|
|
2,287
|
|
|
|
2.9
|
|
|
|
26.0
|
|
Europe-Other
|
|
|
5,833
|
|
|
|
6.6
|
|
|
|
8,640
|
|
|
|
10.8
|
|
|
|
(32.5
|
)
|
Japan
|
|
|
1,881
|
|
|
|
2.1
|
|
|
|
1,186
|
|
|
|
1.5
|
|
|
|
58.7
|
|
United States
|
|
|
10,771
|
|
|
|
12.1
|
|
|
|
7,696
|
|
|
|
9.6
|
|
|
|
40.0
|
|
Total Wholesale business
|
|
|
38,814
|
|
|
|
43.8
|
|
|
|
33,005
|
|
|
|
41.4
|
|
|
|
17.6
|
|
Retail business
|
|
|
49,727
|
|
|
|
56.2
|
|
|
|
46,766
|
|
|
|
58.6
|
|
|
|
6.3
|
|
Total
sales
|
|
$
|
88,541
|
|
|
|
100.0
|
%
|
|
$
|
79,771
|
|
|
|
100.0
|
%
|
|
|
11.0
|
%
|
Sales
for the three months ended June 30, 2018 were $88.5 million, an 11.0% increase compared with the three months ended June 30, 2017.
This increase was primarily attributable to a 17.6% increase in sales in our wholesale business partially and an 6.3% increase
in our retail business.
Sales
generated from our wholesale business contributed 43.8% or $38.8 million of our total sales for the three months ended June 30,
2018, an 17.6% increase compared with $33.0 million in the three months ended June 30, 2017. This increase was primarily attributable
to an increase in sales in Mainland China, United Kingdom, United States and Japan partially offset by a decrease in sales in
Hong Kong, Germany and Europe-Other.
Sales
generated from our retail business contributed 56.2% or $49.7 million of our total sales for the three months ended June 30, 2018,
a 6.3% increase compared with 58.6% or $46.8 million in the three months ended June 30, 2017. This increase was primarily due
to an increase in same store sales.
Costs
and Expenses
Cost
of Sales and Gross Margin
Cost
of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production
equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have
not been significant.
The
following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales
for the three months ended June 30, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
2018
|
|
|
|
Three
months ended June 30,
|
|
|
Compared
|
|
|
|
2018
|
|
|
2017
|
|
|
with
2017
|
|
|
|
(
In
thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Net Sales for Wholesale Sales
|
|
$
|
38,814
|
|
|
|
100.0
|
%
|
|
$
|
33,005
|
|
|
|
100.0
|
%
|
|
|
17.6
|
%
|
Raw Materials
|
|
|
16,456
|
|
|
|
42.5
|
|
|
|
14,465
|
|
|
|
43.8
|
|
|
|
13.8
|
|
Labor
|
|
|
396
|
|
|
|
1.0
|
|
|
|
806
|
|
|
|
2.4
|
|
|
|
(50.9
|
)
|
Outsourced Production Costs
|
|
|
14,722
|
|
|
|
37.9
|
|
|
|
11,802
|
|
|
|
35.8
|
|
|
|
24.8
|
|
Other and Overhead
|
|
|
84
|
|
|
|
0.2
|
|
|
|
35
|
|
|
|
0.1
|
|
|
|
138.8
|
|
Total Cost of Sales for Wholesale
|
|
|
31,658
|
|
|
|
81.6
|
|
|
|
27,108
|
|
|
|
82.1
|
|
|
|
16.8
|
|
Gross Profit for Wholesale
|
|
|
7,156
|
|
|
|
18.4
|
|
|
|
5,897
|
|
|
|
17.9
|
|
|
|
21.3
|
|
Net Sales for Retail
|
|
|
49,727
|
|
|
|
100.0
|
|
|
|
46,766
|
|
|
|
100.0
|
|
|
|
6.3
|
|
Production Costs
|
|
|
13,984
|
|
|
|
28.1
|
|
|
|
12,458
|
|
|
|
26.6
|
|
|
|
12.3
|
|
Rent
|
|
|
8,357
|
|
|
|
16.8
|
|
|
|
9,555
|
|
|
|
20.4
|
|
|
|
(12.5
|
)
|
Total Cost of Sales for Retail
|
|
|
22,341
|
|
|
|
44.9
|
|
|
|
22,013
|
|
|
|
47.1
|
|
|
|
1.5
|
|
Gross Profit for Retail
|
|
|
27,386
|
|
|
|
55.1
|
|
|
|
24,753
|
|
|
|
52.9
|
|
|
|
10.6
|
|
Total Cost of Sales
|
|
|
53,999
|
|
|
|
61.0
|
|
|
|
49,121
|
|
|
|
61.6
|
|
|
|
9.9
|
|
Gross Profit
|
|
$
|
34,542
|
|
|
|
39.0
|
%
|
|
$
|
30,650
|
|
|
|
38.4
|
%
|
|
|
12.7
|
%
|
Raw
material costs for our wholesale business were 42.5% of our total wholesale business sales in the three months ended June 30,
2018, compared with 43.8% in the three months ended June 30, 2017. The decrease was mainly due to lower raw material prices.
Labor
costs for our wholesale business were 1.0% of our total wholesale business sales in the three months ended June 30, 2018, compared
with 2.4% in the three months ended June 30, 2017. The marginal decrease was mainly due to a higher number of outsourced orders
in 2018.
Outsourced
production costs for our wholesale business for the three months ended June 30, 2018 increased 24.8% to $14.7 million from $11.8
million for the three months ended June 30, 2017. Outsourced production costs accounted for 37.9% of our total wholesale business
sales in the three months ended June 30, 2018, a 2.1% increase from the three months ended June 30, 2017. This increase was primarily
attributable to higher average employee salaries at our outsourced manufacturing factories.
Overhead
and other expenses for our wholesale business accounted for 0.2% of our total wholesale business sales for the three months ended
June 30, 2018, compared with 0.1% of total wholesale business sales for the three months ended June 30, 2017.
Wholesale
business gross profit for the three months ended June 30, 2018 was $7.2 million compared with $5.9 million for the three months
ended June 30, 2017. Gross profit accounted for 18.4% of our total wholesale sales for the three months ended June 30, 2018, compared
with 17.9% for the three months ended June 30, 2017. The increase was mainly due to a decrease in raw material costs.
Production
costs for our retail business were $14.0 million for the three months ended June 30, 2018 compared with $12.5 million during the
three months ended June 30, 2017. Retail production costs accounted for 28.1% of our total retail sales in the three months ended
June 30, 2018, compared with 26.6% for the three months ended June 30, 2017. The increase was due to increase in overall purchase
costs.
Rent
costs for our retail business for the three months ended June 30, 2018 were $8.4 million compared with $9.6 million for the three
months ended June 30, 2017. Rent costs for our retail business accounted for 16.8% of our total retail sales for the three months
ended June 30, 2018, compared with 20.4% for the three months ended June 30, 2017. The decrease was primarily attributable to
lower variable rent charged at certain locations.
Gross
profit in our retail business for the three months ended June 30, 2018 was $27.4 million and gross margin was 55.1%. Gross profit
in our retail business for the three months ended June 30, 2017 was $24.8 million and gross margin was 52.9%.
Total
cost of sales for the three months ended June 30, 2018 was $54.0 million, an 9.9% increase from $49.1 million for the three months
ended June 30, 2017. Total cost of sales as a percentage of total sales for the three months ended June 30, 2018 was 61.0%, compared
with 61.6% for the three months ended June 30, 2017. Gross margin for the three months ended June 30, 2018 was 39.0% compared
with 38.4% for the three months ended June 30, 2017.
Selling,
General and Administrative Expenses
Our
selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail
staff and decoration and marketing expenses associated with our retail business.
Our
general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges,
repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable
to our revenues.
Costs
of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges and product
inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these
amounts in cost of sales.
|
|
Three Months Ended June 30,
|
|
|
Increase (Decrease) in 2018 Compared
|
|
|
|
2018
|
|
|
2017
|
|
|
to 2017
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Gross Profit
|
|
$
|
34,542
|
|
|
|
39.0
|
%
|
|
$
|
30,650
|
|
|
|
38.4
|
%
|
|
|
12.7
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
22,590
|
|
|
|
25.5
|
|
|
|
20,223
|
|
|
|
25.3
|
|
|
|
11.7
|
|
General and Administrative Expenses
|
|
|
8,823
|
|
|
|
10.0
|
|
|
|
7,479
|
|
|
|
9.4
|
|
|
|
18.0
|
|
Total
|
|
|
31,413
|
|
|
|
35.5
|
|
|
|
27,702
|
|
|
|
34.7
|
|
|
|
13.4
|
|
Income from Operations
|
|
$
|
3,129
|
|
|
|
3.5
|
%
|
|
$
|
2,948
|
|
|
|
3.7
|
%
|
|
|
6.1
|
%
|
Selling
expenses for the three months ended June 30, 2018 increased 11.7% to $22.6 million from $20.2 million for the three months ended
June 30, 2017. The increase was attributable to the increased average salaries of retail employees, as well as increased store
decoration and marketing expenses associated with the promotion of the retail brand.
General and administrative expenses for
the three months ended June 30, 2018 increased 18.0% to $8.8 million from $7.5 million for the three months ended June 30, 2017.
Income
from Operations
Income from operations for the three months
ended June 30, 2018 increased 6.1% to $3.1 million from $2.9 million for the three months ended June 30, 2017. Income from operations
for the three months ended June 30, 2018 accounted for 3.5% of our total sales, an 0.2% decrease compared with the three months
ended June 30, 2017.
Interest
Expense
Interest
expense for the three months ended June 30, 2018 was $0.3 million, a 13.2% increase compared with the same period in 2017. The
increase was due to the increased interest rate.
Income
Tax Expenses
Income
tax expense was $1.3 million and $0.8 million for the three months end June 30, 2018 and 2017, respectively.
The
Company’s operating subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises
and Foreign Enterprises and various local income tax laws (“the Income Tax Laws”).
All
PRC subsidiaries, except for He Meida, are subject to income tax at the 25% statutory rate.
He
Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has
implemented an income tax reduction from 15% to 9% valid through December 31, 2018.
Perfect
Dream was incorporated in the British Virgin Islands (BVI), and under the current laws of the BVI dividends and capital gains
arising from the Company’s investments in the BVI are not subject to income taxes.
Ever-Glory
HK was incorporated in Samoa, and under the current laws of Samoa has no liabilities for income taxes.
Ever-Glory
Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, are subject to income
tax at the 16.5% statutory rate.
The
PRC’s Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise
in PRC to its immediate holding company outside China; such distributions were exempted under the previous income tax law and
regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the
jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting from
January 1, 2008. Given that the undistributed profits of the Company’s subsidiaries in China are intended to be retained in China
for business development and expansion purposes, no withholding tax accrual has been made.
Net
Income
Net
income for the three months ended June 30, 2018 was $2.7 million, a 4.5% increase compared with the same period in 2017. Our
basic and diluted earnings per share were $0.19 and $0.18 for the three months ended June 30, 2018 and 2017,
respectively.
Results
of Operations for the six months ended June 30, 2018 and 2017
The
following table summarizes our results of operations for the six months ended June 30, 2018 and 2017. The table and the discussion
below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this
report.
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands of U.S. Dollars, except for percentages)
|
|
Sales
|
|
$
|
181,326
|
|
|
|
100.0
|
%
|
|
$
|
164,891
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
|
65,887
|
|
|
|
36.3
|
|
|
|
59,159
|
|
|
|
35.9
|
|
Operating Expense
|
|
|
61,313
|
|
|
|
33.8
|
|
|
|
54,702
|
|
|
|
33.2
|
|
Income From Operations
|
|
|
4,574
|
|
|
|
2.5
|
|
|
|
4,457
|
|
|
|
2.7
|
|
Other Income
|
|
|
773
|
|
|
|
0.4
|
|
|
|
994
|
|
|
|
0.6
|
|
Income tax expense
|
|
|
2,041
|
|
|
|
1.1
|
|
|
|
2,050
|
|
|
|
1.2
|
|
Net Income
|
|
$
|
3,306
|
|
|
|
1.8
|
%
|
|
$
|
3,401
|
|
|
|
2.1
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2018 and 2017.
|
|
2018
|
|
|
%
of total sales
|
|
|
2017
|
|
|
%
of total sales
|
|
|
Growth
(Decrease)
in
2018 compared
with
2017
|
|
Wholesale business
|
|
(In
thousands of U.S. dollars)
|
|
|
|
|
|
(In
thousands of U.S. dollars)
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
13,342
|
|
|
|
7.4
|
%
|
|
$
|
10,114
|
|
|
|
6.1
|
%
|
|
|
31.9
|
%
|
Hong Kong China
|
|
|
12,556
|
|
|
|
6.9
|
|
|
|
13,218
|
|
|
|
8.0
|
|
|
|
(5.0
|
)
|
Germany
|
|
|
2,765
|
|
|
|
1.5
|
|
|
|
4,769
|
|
|
|
2.9
|
|
|
|
(42.0
|
)
|
United Kingdom
|
|
|
5,099
|
|
|
|
2.8
|
|
|
|
5,575
|
|
|
|
3.4
|
|
|
|
(8.5
|
)
|
Europe-Other
|
|
|
10,286
|
|
|
|
5.7
|
|
|
|
14,389
|
|
|
|
8.7
|
|
|
|
(28.5
|
)
|
Japan
|
|
|
4,318
|
|
|
|
2.4
|
|
|
|
2,631
|
|
|
|
1.6
|
|
|
|
64.1
|
|
United States
|
|
|
15,704
|
|
|
|
8.6
|
|
|
|
10,614
|
|
|
|
6.4
|
|
|
|
48.0
|
|
Total Wholesale business
|
|
|
64,070
|
|
|
|
35.3
|
|
|
|
61,310
|
|
|
|
37.2
|
|
|
|
4.5
|
|
Retail business
|
|
|
117,256
|
|
|
|
64.7
|
|
|
|
103,581
|
|
|
|
62.8
|
|
|
|
13.2
|
|
Total sales
|
|
$
|
181,326
|
|
|
|
100.0
|
%
|
|
$
|
164,891
|
|
|
|
100.0
|
%
|
|
|
10.0
|
%
|
Sales
for the six months ended June 30, 2018 were $181.3 million, an increase of 10.0% from the six months ended June 30, 2017. This
increase was primarily attributable to an 4.5% increase in sales in our wholesale business and an 13.2% increase in our retail
business.
Sales
generated from our wholesale business contributed 35.3% or $64.1 million of our total sales for the six months ended June 30,
2018, an increase of 4.5% compared with $61.3 million in the six months ended June 30, 2017. This increase was primarily attributable
to increased sales in Mainland China, Japan and the United States partially offset by decreased sales in Hong Kong China, Germany,
United Kingdom and Europe-Other.
Sales
generated from our retail business contributed 64.7% or $117.3 million of our total sales for the six months ended June 30, 2018,
an increase of 13.2% compared with $103.6 million in the six months ended June 30, 2017. This increase was primarily due to an
increase in same store sales.
Total
retail store square footage and sales per square foot for the six months ended June 30, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Total store square footage
|
|
|
1,421,156
|
|
|
|
1,357,746
|
|
Number of stores
|
|
|
1,417
|
|
|
|
1,362
|
|
Average store size, square feet
|
|
|
1,003
|
|
|
|
997
|
|
Total store sales (in thousands of U.S. dollars)
|
|
$
|
117,256
|
|
|
$
|
103,581
|
|
Sales per square foot
|
|
$
|
83
|
|
|
$
|
76
|
|
Same
store sales and newly opened store sales for the six months ended June 30, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Sales from stores opened for a full year
|
|
$
|
92,898
|
|
|
$
|
83,614
|
|
Sales from newly opened store sales
|
|
$
|
11,728
|
|
|
$
|
13,479
|
|
Sales from e-commerce platform
|
|
$
|
6,989
|
|
|
$
|
4,094
|
|
Other*
|
|
$
|
5,641
|
|
|
$
|
2,394
|
|
Total
|
|
$
|
117,256
|
|
|
$
|
103,581
|
|
*Primarily
sales from stores that were closed in the current reporting period.
We
remodeled or relocated 206 stores in 2018, and 69 stores during the three months ended June 30, 2018. We plan to relocate or remodel
200-300 stores in 2018. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results
in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue
to have opportunities for additional remodels and relocations beyond 2017. Same-store sales are calculated based upon
stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.
Costs
and Expenses
Cost
of Sales and Gross Margin
Cost
of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production
equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have
not been significant.
The
following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales
for the six months ended June 30, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
2018
|
|
|
|
Six
months ended June 30,
|
|
|
Compared
|
|
|
|
2018
|
|
|
2017
|
|
|
with
2017
|
|
|
|
(
In
thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Net Sales for Wholesale Sales
|
|
$
|
64,071
|
|
|
|
100.0
|
%
|
|
$
|
61,310
|
|
|
|
100.0
|
%
|
|
|
4.5
|
%
|
Raw Materials
|
|
|
26,724
|
|
|
|
41.7
|
|
|
|
25,674
|
|
|
|
41.9
|
|
|
|
4.1
|
|
Labor
|
|
|
781
|
|
|
|
1.2
|
|
|
|
1,768
|
|
|
|
2.9
|
|
|
|
(55.8
|
)
|
Outsourced Production Costs
|
|
|
23,447
|
|
|
|
36.6
|
|
|
|
21,542
|
|
|
|
35.1
|
|
|
|
8.8
|
|
Other and Overhead
|
|
|
157
|
|
|
|
0.3
|
|
|
|
126
|
|
|
|
0.2
|
|
|
|
24.1
|
|
Total Cost of Sales for Wholesale
|
|
|
51,109
|
|
|
|
79.8
|
|
|
|
49,110
|
|
|
|
80.1
|
|
|
|
4.1
|
|
Gross Profit for Wholesale
|
|
|
12,962
|
|
|
|
20.2
|
|
|
|
12,200
|
|
|
|
19.9
|
|
|
|
6.2
|
|
Net Sales for Retail
|
|
|
117,255
|
|
|
|
100.0
|
|
|
|
103,581
|
|
|
|
100.0
|
|
|
|
13.2
|
|
Production Costs
|
|
|
40,055
|
|
|
|
34.2
|
|
|
|
31,687
|
|
|
|
30.6
|
|
|
|
26.4
|
|
Rent
|
|
|
24,275
|
|
|
|
20.7
|
|
|
|
24,935
|
|
|
|
24.1
|
|
|
|
(2.6
|
)
|
Total Cost of Sales for Retail
|
|
|
64,330
|
|
|
|
54.9
|
|
|
|
56,622
|
|
|
|
54.7
|
|
|
|
13.6
|
|
Gross Profit for Retail
|
|
|
52,925
|
|
|
|
45.1
|
|
|
|
46,959
|
|
|
|
45.3
|
|
|
|
12.7
|
|
Total Cost of Sales
|
|
|
115,439
|
|
|
|
63.7
|
|
|
|
105,732
|
|
|
|
64.1
|
|
|
|
9.2
|
|
Gross Profit
|
|
$
|
65,887
|
|
|
|
36.3
|
%
|
|
$
|
59,159
|
|
|
|
35.9
|
%
|
|
|
11.4
|
%
|
Raw material costs for our wholesale business
were 41.7% of our total wholesale business sales in the six months ended June 30, 2018, compared with 41.9% in the six months
ended June 30, 2017. The decrease was mainly due to lower cost of raw materials.
Labor
costs for our wholesale business were 1.2% of our total wholesale business sales in the six months ended June 30, 2018, compared
with 2.9% in the six months ended June 30, 2017. The marginal decrease was mainly due to a higher number of outsourced orders
in 2018.
Outsourced
production costs for our wholesale business were 36.6% of our total sales in the six months ended June 30, 2018, compared with
35.1% in the six months ended June 30, 2017.
Overhead
and other expenses for our wholesale business accounted for 0.3% and 0.2% of our total sales for the six months ended June 30,
2018 and 2017, respectively.
Gross
profit for our wholesale business for the six months ended June 30, 2018 was $13.0 million, an 6.2% increase compared with the
six months ended June 30, 2017. As a percentage of total wholesale business sales, gross profit was 20.2% of our total wholesale
business sales for the six months ended June 30, 2018, compared with 19.9% for the six months ended June 30, 2017. The increase
was mainly due to decreased raw materials costs.
Production costs for our retail business
for the six months ended June 30, 2018 were $40.1 million compared with $31.7 million for the six months ended June 30, 2017.
As a percentage of our total retail sales, production costs were 34.2% of our total retail sales for the six months ended June
30, 2018, compared with 30.6% for the six months ended June 30, 2017. The increase was due to increase in overall purchase costs.
Rent
costs for our retail business for the six months ended June 30, 2018 were $24.3 million compared with $24.9 million for the six
months ended June 30, 2017. As a percentage of total retail sales, rent costs were 20.7% of our total retail sales for the six
months ended June 30, 2018 compared with 24.1% for the six months ended June 30, 2017. The decrease was primarily attributable
to lower rent at certain locations.
Gross
profit for our retail business for the six months ended June 30, 2018 was $52.9 million compared with $47.0 million for the six
months ended June 30, 2017. Gross margin for our retail business for the six months ended June 30, 2018 was 45.1% compared with
45.3% for the six months ended June 30, 2017.
Total
cost of sales for the six months ended June 30, 2018 was $115.4 million, an 9.2% increase compared with the six months ended June
30, 2017. As a percentage of total sales, total costs were 63.7% of total sales for the six months ended June 30, 2018, compared
with 64.1% for the six months ended June 30, 2016. Total gross margin for the six months ended June 30, 2018 was 36.3% compared
with 35.9% for the six months ended June 30, 2017.
We
purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business,
purchases from our five largest suppliers represented approximately 16.5% and 18.4% of raw material purchases for the six months
ended June 30, 2018 and 2017, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six
months ended June 30, 2018 and 2017. For our retail business, purchases from our two largest suppliers represented approximately
55.1% and 32.2% of raw material purchases for the six months ended June 30, 2018 and 2017, respectively. One supplier provided
approximately 31.2% and 22.8% of our total purchases for the six months ended June 30, 2018 and 2017, respectively. We have not
experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with
our suppliers.
We
also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract
manufacturers represented approximately 28.9% and 45.6% of finished goods purchases for the six months ended June 30, 2018 and
2017, respectively. One contract manufacturer provided approximately 9.3% of our finished goods purchases for the six months ended
June 30, 2018. One contract manufacturer provided approximately 23.9% of our finished goods purchases for the six months ended
June 30, 2017, respectively. For our retail business, our five largest contract manufacturers represented approximately 16.4%
and 10.7% of finished goods purchases for the six months ended June 30, 2018 and 2017, respectively. No manufacturer provided
more than 10% of our finished goods purchases for the six months ended June 30, 2018 and 2017. We have not experienced difficulty
in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract
manufacturers.
Selling,
General and Administrative Expenses
Our
selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail
staff and decoration and marketing expenses associated with our retail business.
Our
general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges,
repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable
to our revenues.
Costs
of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product
inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these
amounts in costs of sales.
|
|
Six
months ended June 30,
|
|
|
Increase
(Decrease) in 2018 Compared
|
|
|
|
2018
|
|
|
2017
|
|
|
to
2017
|
|
|
|
(
In
thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Gross Profit
|
|
$
|
65,887
|
|
|
|
36.3
|
%
|
|
$
|
59,159
|
|
|
|
35.9
|
%
|
|
|
11.4
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
44,817
|
|
|
|
24.7
|
|
|
|
39,968
|
|
|
|
24.2
|
|
|
|
12.1
|
|
General and Administrative Expenses
|
|
|
16,496
|
|
|
|
9.1
|
|
|
|
14,734
|
|
|
|
8.9
|
|
|
|
12.0
|
|
Total
|
|
|
61,313
|
|
|
|
33.8
|
|
|
|
54,702
|
|
|
|
33.2
|
|
|
|
12.1
|
|
Income from Operations
|
|
$
|
4,574
|
|
|
|
2.5
|
%
|
|
$
|
4,457
|
|
|
|
2.7
|
%
|
|
|
2.6
|
%
|
Selling expenses for the six months ended
June 30, 2018 were $44.8 million, an 12.1% increase compared with the six months ended June 30, 2017. The increase was attributable
to the increased bonus of retail employees, as well as increased store decoration and marketing expenses associated with the promotion
of the retail brand.
General and administrative expenses for
the six months ended June 30, 2018 were $16.5 million an 12.0% increase compared with the six months ended June 30, 2017. As a
percentage of total sales, general and administrative expenses accounted for 9.1% of total sales for the six months ended June
30, 2018, compared with 8.9% of total sales for the six months ended June 30, 2017. The increase was mainly attributable to the
increased average salaries.
Income
from Operations
Income
from operations for the six months ended June 30, 2018 was $4.6 million, an 2.6% increase from $4.5 million for the six months
ended June 30, 2017. This decrease was due to increased expenses.
Interest
Expense
Interest
expense was $0.9 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. The increase was due
to the increased interest rate.
Income
Tax Expenses
Income
tax expense for the six months ended June 30, 2018 was $2.0 million, a 0.4% decrease compared to the same period of 2017. The
decrease was primarily due to lower income before income tax expense.
Net
Income
Net income for the six months ended June
30, 2018 was $3.3 million, a decrease of 2.8% compared with the same period in 2017. Basic and diluted earnings per share were
$0.24 and $0.25 for the six months ended June 30, 2018 and 2017, respectively.
Summary
of Cash Flows
Summary
cash flows information for the six months ended June 30, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Net cash used in operating activities
|
|
$
|
(10,655
|
)
|
|
$
|
(7,417
|
)
|
Net cash used in investing activities
|
|
$
|
(6,295
|
)
|
|
$
|
(2,220
|
)
|
Net cash provided by (used in)
financing activities
|
|
$
|
(8,600
|
)
|
|
$
|
1,892
|
|
Net cash used in operating activities
was $10.7 million for the six months ended June 30, 2018, compared with $7.4 million net cash used in operating activities during
the six months ended June 30, 2017. The increase was primarily due to increase in inventory and decrease in accounts receivable.
Net cash used in investing activities was
$6.3 million for the six months ended June 30, 2018, compared with $2.2 million used during the six months ended June 30, 2017.
This increase was mainly due to the increased in purchase of property and equipment and remodeling expenditure in 2018.
Net cash used in financing activities was
$8.6 million for the six months ended June 30, 2018, compared with $1.9 million net cash provided during the six months ended June
30, 2017. During the six months ended June 30, 2018, we repaid $30.5 million of bank loans and received bank loan proceeds of $28.1
million. Also, under the counter-guarantee agreement, we received $2.6 million from and $8.7 million paid to the related party
during the six months ended June 30, 2018.
Liquidity and Capital Resources
As of June 30, 2018, we had cash and cash
equivalents of $36.4 million, other current assets of $152.2 million and current liabilities of $122.9 million. We presently finance
our operations primarily from cash flows from operations and bank loans and we anticipate that these will continue to be our primary
sources of funds to finance our short-term cash needs.
Bank Loans
In December 2016, Goldenway entered into
a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately
$9.1 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2018,
Goldenway had borrowed $6.0 million (RMB 40.0 million) under this line of credit with an annual interest rate of 4.7% and due on
various dates from November 2018 to January 2019. As of June 30, 2018, approximately $3.1 million was unused and available under
this line of credit.
In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.1
million (RMB120.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s
equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank.
As of June 30, 2018, Ever-Glory Apparel had borrowed $10.6 million (RMB 70.0 million) under this line of credit with annual interest
rates ranging from 4.57% to 4.70% and due on September 2018. As of June 30, 2018, approximately $7.5 million was unused and available
under this line of credit.
In
June 2016, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately
$7.6 million (RMB 50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”),
an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized
by the Company’s property and equipment. As of June 30, 2018, Goldenway had borrowed $0.8 million (RMB 5.0 million) under
this line of credit with annual interest rates ranging from 4.37% to 4.54% and due on October 2018. As of June 30, 2018, approximately
$6.8 million was unused and available under this line of credit.
In
June 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.1 million (RMB 60.0 million) with Nanjing
Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2018, Ever-Glory Apparel had borrowed $7.6 million
(RMB 50.0 million) from Nanjing Bank with an annual interest rates ranging from 4.6% to 4.7% and due on various dates from July
to September 2018. As of June 30, 2018, approximately $1.5 million was unused and available under this line of credit.
In
March 2017, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up
to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2018,
LA GO GO had borrowed $2.3 million (RMB15.0 million) from Nanjing Bank with an annual interest rate 5.0% and due on May 2019.
As of June 30, 2018, approximately $0.7 million was unused and available under this line of credit.
In
December 2017, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB 20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2018, LA GO GO had borrowed $3.0 million (RMB 20.0 million)
from China Minsheng Bank with an annual interest rate of 4.6% and due in June 2019.
In
October 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.5 million (RMB30.0 million) with
Bank of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s
equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China.
As of June 30, 2018, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest
rate of 4.35% and due in August 2018. As of June 30, 2018, approximately $3.0 million was unused and available under this line
of credit.
In
September 2017, LA GO GO entered into a line of credit agreement for approximately $3.3 million (RMB22.0 million) with the Bank
of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of June 30, 2018, LA GO GO had borrowed
$1.5 million (RMB10.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on September 2018. As
of June 30, 2018, approximately $1.8 million was unused and available under this line of credit.
In
July 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China
Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property.
As of June 30, 2018, approximately $6.0 million was unused and available under this line of credit.
In
December 2017, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined
revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5
million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company
and Mr. Kang. As of June 30 2018, Ever-Glory Apparel had borrowed $1.5 million from HSBC with an annual interest rate of 3.0%
and due in October 2018, and collateralized by approximately $1.76 million of accounts receivable from our wholesale customers.
These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2018, approximately $1.0 million was
unused and available under this line of credit.
All loans have been repaid before or at
maturity date.
Derivative Financial Instruments
Foreign currency swap contracts
The Company entered two foreign
currency swap contracts with two banks during 2018. Due to the demand of financial management for daily operation, Ever-Glory
Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB with Bank of China in May
and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial
Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and the banks
swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the
Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the
Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then
the difference in RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of
principal amounts are included in other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB
payables) in the consolidated balance sheet, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is
recognized in the income from operations.
Forward foreign exchange contracts
To avoid foreign currency fluctuation on
forecasted international sales and secure the profits on such revenues, the Company entered several forward foreign exchange contracts
with banks from time to time. According to ASC 815-20-25, the Company designated above contracts as cash flow hedges. As of June
30, 2018, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount
of €0.42 million and two outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional amount
of $17.0 million according to the amounts of orders. These contracts have aggregate unrealized loss of $0.49 million in fair value
recognized as derivatives financial instruments liabilities and accumulated other comprehensive income (loss) in the consolidated
balance sheets.
As of December 31, 2017, the Company
had five outstanding forward foreign exchange contracts (sell EUR dollars for RMB), with total notional amount of
EUR€1.68 million (USD$2.0 million). The fair value of these contracts as of December 31, 2017 was loss of
($8,000), which is immaterial to the consolidated financial statements.
Capital
Commitments
We
have a continuing program for the purpose of improving our manufacturing facilities and extending our retail stores. We anticipate
that cash flows from operations and borrowings from banks will be used to pay for these capital commitments.
Uses
of Liquidity
Our
cash requirements for the next year will be primarily to fund daily operations and the growth of our business, some of this being
used to fund new stores.
Sources
of Liquidity
Our
primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, and cash
equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.
We
believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet
our needs for working capital, capital expenditure and other commitments for the next year. No assurance can be made that additional
financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is
insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our
own cash flows from operations.
As
of June 30, 2018, we had access to approximately $66.2 million in lines of credit, of which approximately $31.4 million was unused
and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee
of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized
by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company,
Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately
$48.6 million (RMB 322.0 million) and approximately $18.6 million (RMB 123.0 million) was provided to Jiangsu Ever-Glory
as the counter guarantee as of June 30, 2018.
Foreign
Currency Translation Risk
Our
operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations
and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales
are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July
21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued
to appreciate against the U.S. dollar. As of June 30, 2018, the market foreign exchange rate had increased to RMB 6.62 to one
U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange
rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased
cost to our customers.
In addition, the financial statements
of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo,
Tianjin LA GO GO and Jiangsu LA GO GO (whose functional currency is RMB) are translated into US dollars using the closing
rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates.
The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while
income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included
in accumulated other comprehensive income in the statement of equity.
The
foreign currency translation gain (loss) for the three and six months ended June 30, 2018 and 2017 was ($6.09) million, ($2.07)
million, $1.06 million and $1.52 million, respectively.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to our investors.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not
applicable.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including its chief executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Evaluation
of Disclosure Controls and Procedures. As of June 30, 2018, the end of the fiscal quarter covered by this report, we carried
out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and
our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of June 30, 2018. Our
disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s
Annual Report on Internal Control over Financial Reporting” section in Item 9 of our annual report for fiscal year ended
December 31, 2017. As of June 30, 2018, we had not completed the remediation of these material weaknesses.
Limitations
on the Effectiveness of Disclosure Controls. Readers are cautioned that our management does not expect that our disclosure
controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An
internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.
Changes
in Internal Control over Financial Reporting
Our
management has worked, and will continue to work to improve our internal controls over financial reporting. During the six months
ended June 30, 2018, there were no changes in our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS
|
We
know of no pending legal proceedings to which we are a party which is material or potentially material, either individually or
in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation
claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse
effect on our financial position, results of operations or liquidity.
There has been no material change in the
information provided in Item 1A of Form 10-K Annual Report for the year ended December 31, 2017 filed with the SEC on March
28, 2018.
The proposed tariffs by the U.S. government
and the potential of a trade war between the U.S. and China, and on a larger scale, internationally, may dampen global growth.
If the U.S. government, in the future, subjects the services that we provide to proposed tariffs, our business operations and revenues
may be negatively impacted.
The U.S. government has recently proposed,
among other actions, imposing new or higher tariffs on specified products imported from China to penalize China for what it characterizes
as unfair trade practices and China has responded by proposing new or higher tariffs on specified products imported from the United
States. On July 6, 2018, the United States imposed 25% tariffs on $34 billion worth of Chinese goods as part of U.S. President
Donald Trump's new tariffs policy, which then led China to respond with similar sized tariffs on U.S. products. Soon after on July
10, following an order from U.S. President Donald Trump, the U.S. Trade Representative (USTR) Office published a list of $200 billion
in Chinese products to be subject to a newly proposed 10% tariff. China quickly responded to the announcement by blasting the proposed
tariffs as “irrational” and “completely unacceptable. As such, we may have access to fewer business opportunities
and our operation may be negatively impacted. Export to customers based in the U.S. accounts for approximately 6.0% of our revenue
during the previous two fiscal years. We may suffer loss due to such trade war. In addition, future actions or escalations by either
the United States or China that affect trade relations may cause global economic turmoil and potentially have a negative impact
on our business and we cannot provide any assurances as to whether such actions will occur or the form that they may take.
Sustained tension between the United States
and China over trade policies could significantly undermine the stability of the global and Chinese economy. Any prolonged slowdown
in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition, and
continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity
needs.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
MINE
SAFETY DISCLOSURE
|
Not
applicable.
ITEM
5.
|
OTHER
INFORMATION
|
None.
The
following exhibits are filed herewith:
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
August
13, 2018
|
EVER-GLORY
INTERNATIONAL GROUP, INC.
|
|
|
|
By:
|
/s/
Edward Yihua Kang
|
|
|
Edward
Yihua Kang
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
By:
|
/s/
Jiansong Wang
|
|
|
Jiansong
Wang
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|