NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
NOTE
1 BASIS OF PRESENTATION
Ever-Glory
International Group, Inc. (the “Company”), together with its subsidiaries, is an apparel manufacturer, supplier and
retailer in The People’s Republic of China (“China or “PRC”), with a wholesale segment and a retail segment.
The Company’s wholesale business consists of recognized brands for department and specialty stores located in China, Europe,
Japan and the United States. The Company’s retail business consists of flagship stores and store-in-stores for the Company’s
own-brand products.
The
Company’s wholesale operations are provided primarily through the Company’s wholly-owned PRC subsidiaries, Goldenway
Nanjing Garments Co. Ltd. (“Goldenway”), Nanjing Catch-Luck Garments Co. Ltd. (“Catch-Luck”), Nanjing
New-Tailun Garments Co. Ltd (“New-Tailun”), Ever-Glory International Group Apparel Inc.(“Ever-Glory Apparel”),
Chuzhou Huirui Garments Co. Ltd. (“Huirui”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”),
and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”)
and Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”). The Company’s retail
operations are provided through its wholly- owned subsidiaries, Shanghai LA GO Fashion Company Limited (“Shanghai LA GO
GO”), Jiangsu LA GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA 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”).
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries
contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed
consolidated balance sheet as of September 30, 2018, the condensed consolidated statements of income and comprehensive income
(loss) for the three and nine months ended September 30, 2018 and 2017, and condensed consolidated statements of cash flows for
the nine months ended September 30, 2018 and 2017. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission
(the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required
by GAAP for complete financial statements.
Wholesale
revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first
and fourth fiscal quarters. The results of operations for the three and nine months ended September 30, 2018 are not necessarily
indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
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.
Financial
Instruments
Management
has estimated that the carrying amounts of non-related party financial instruments approximate their fair values due to their
short-term maturities. The fair value of amounts due from (to) related parties is not practicable to estimate due to the related
party nature of the underlying transactions.
Accounts
Receivable, net
The
Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing
credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded
based on management’s assessment of the credit history of its customers and current relationships with them. The Company
writes off accounts receivable when amounts are deemed uncollectible.
Fair
Value Accounting
Accounting
Standards Codification (“ASC”) 820 “
Fair Value Measurements and Disclosures
”, establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
Level 1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
Level 2
|
Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the
full term of the asset or liability;
|
|
|
|
|
Level 3
|
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity).
|
The
fair value of forward exchange contracts is based on broker quotes, if available. If broker quotes are not available, then
fair value is estimated by discounting the difference between the contractual forward price and the current forward price at the
reporting date for the residual maturity of the contract using a risk-free interest rate based on government bonds.
At
September 30, 2018, except for derivative financial instruments, the Company’s financial assets (all Level 1) consist of
cash placed with financial institutions that management considers to be of a high quality.
At
September 30, 2018, the Company has the following derivative financial instruments measured at their fair value using Level 2
quoted prices provided by banks. The fair value of forward foreign exchange contracts is determined using forward exchange market
rates at the measurement date. The fair value of foreign currency swap contracts is determined by the variation of measurement
date foreign exchange market rates and contract closing date predetermined foreign exchange rates.
The
Company has adopted ASC 825-10 “
Financial Instruments
”, which allows an entity to choose to measure certain
financial instruments and liabilities at fair value on a contract-by-contract basis. Subsequent fair value measurement for the
financial instruments and liabilities an entity chooses to measure will be recognized in earnings.
Derivative
Financial Instruments
From
time to time, the Company uses derivative financial instruments to manage its exposure to foreign currency risks arising from
operational activities or on certain existing assets and liabilities. The Company does not hold or issue derivative instruments
for trading purposes. The Company may enter into forward foreign exchange contracts, foreign exchange options, or foreign exchange
currency swap contracts to manage exposure to certain foreign currency operating transactions. These instruments may offset a
portion of the foreign currency re-measurement gains or losses, or changes in fair value.
The
Company may also enter into above similar derivative instruments to hedge the exposure to variability in the expected cash flows
of forecasted transactions such as international sales or purchases that the Company expects to receive or commit to remit foreign
currencies. In these cases, the Company designates these instruments as the cash flow hedges.
Derivative
financial instruments are recognized initially at fair value and transaction costs are expensed immediately. Subsequent to initial
recognition, derivative financial instruments are stated at fair value. The gain or loss on re-measurement to fair value is recognized
immediately in earnings when such instruments are designated as fair value hedges or ineffective portion of cash flow hedges. The
accumulated gain or loss from effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss)
(“AOCI”) until the hedged item is recognized in earnings. If the hedging instrument no longer meets the criteria for
hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively.
Foreign
Currency Translation and Other Comprehensive Income
The
reporting currency of the Company is the U.S. dollar. The functional currency of Ever-Glory, Perfect Dream, Ever-Glory HK and
Ever-Glory Supply Chain is the U.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel,
Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Shanghai Yiduo, Ya Lan, He Meida, Huirui and Taixin is the Chinese RMB.
For
subsidiaries whose functional currency is the RMB, all assets and liabilities were translated at the exchange rate at the balance
sheet date; equity was translated at historical rates and items in the statement of comprehensive income were translated at the
average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive
income. The resulting translation 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. Items in the cash flow statement
are translated at the average exchange rate for the period.
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.
NOTE
3 INVENTORIES
Inventories
at September 30, 2018 and December 31, 2017 consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Raw materials
|
|
$
|
20,791
|
|
|
$
|
2,148
|
|
Work-in-progress
|
|
|
2,556
|
|
|
|
8,852
|
|
Finished goods
|
|
|
59,896
|
|
|
|
45,182
|
|
Total inventories
|
|
$
|
83,243
|
|
|
$
|
56,182
|
|
NOTE
4 BANK LOANS
Bank
loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with
the banks. Short term bank loans consisted of the following as of September 30, 2018 and December 31, 2017.
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Bank
|
|
(In thousands of U.S. Dollars)
|
|
Industrial and Commercial Bank of China
|
|
$
|
20,384
|
|
|
$
|
21,504
|
|
Nanjing Bank
|
|
|
5,824
|
|
|
|
9,216
|
|
HSBC
|
|
|
4,993
|
|
|
|
2,402
|
|
China Minsheng Banking
|
|
|
2,912
|
|
|
|
3,072
|
|
Bank of Communications
|
|
|
1,449
|
|
|
|
1,536
|
|
|
|
$
|
35,562
|
|
|
$
|
37,730
|
|
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 $8.7 million (RMB60.0 million). These loans are collateralized by the Company’s property
and equipment. As of September 30, 2018, Goldenway had borrowed $5.8 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 September 30, 2018, approximately
$2.9 million was unused and available under this line of credit.
In
August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.6 million (RMB100.0 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 September 30, 2018, Ever-Glory
Apparel had borrowed $14.6 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 4.57%
to 4.70% and due on September 2019.
In
June 2016, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately
$7.3 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 September 30, 2018, Goldenway had borrowed $0.7 million (RMB 5.0 million)
under this line of credit with annual interest rate 4.37% due on October 2018. As of September 30, 2018, approximately $6.6 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 $8.7 million (RMB 60.0 million) with Nanjing
Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2018, Ever-Glory Apparel had borrowed $2.9
million (RMB 20.0 million) from Nanjing Bank with an annual interest rates ranging from 4.6% to 4.7% and due on various dates
from January to March 2019. As of September 30, 2018, approximately $5.8 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 $2.9 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of September 30,
2018, LA GO GO had borrowed $2.2 million (RMB15.0 million) from Nanjing Bank with an annual interest rate 5.0% and due on June
2019. As of September 30, 2018, approximately $0.7 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 $7.5
million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company
and Mr. Kang. As of September 30, 2018, Ever-Glory Apparel had borrowed $5.0 million from HSBC with an annual interest rate of
3.0% and due in November 2018, and collateralized by approximately $5.9 million of accounts receivable from our wholesale customers.
These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2018, approximately $2.5 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 $2.9 million (RMB 20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2018, LA GO GO had borrowed $2.9 million (RMB 20.0
million) from China Minsheng Bank with an annual interest rate of 4.6% and due in June 2019.
In
September 2017, LA GO GO entered into a line of credit agreement for approximately $3.2 million (RMB22.0 million) with the Bank
of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2018, LA GO GO had
borrowed $1.4 million (RMB10.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on January
2019. As of September 30, 2018, approximately $1.8 million was unused and available under this line of credit.
In
October 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.4 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 September 30, 2018, approximately $4.4 million was unused and available under this line of credit.
In
July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with the
Shanghai Pudong Development Bank and guaranteed by Goldenway. As of September 30, 2018, approximately $2.9 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 $5.8 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 September 30, 2018, approximately $5.8 million was unused and available under this line of credit.
All
loans have been repaid before or at maturity date.
Total
interest expense on bank loans amounted to $0.3 million, $1.2 million, $0.6 million, $1.2 million for the three and nine months
ended September 30, 2018 and 2017, respectively.
NOTE
5 DERIVATIVE FINANCIAL INSTRUMENTS
Foreign
currency swap contracts
During
2018, the Company had entered into four foreign currency swap contracts with three banks. Due to the increased demand of effective
control on financial management for daily operations, Ever-Glory Apparel had entered into different foreign currency swap contracts
to exchange $6.0 million for equivalent RMB with Bank of China in May, entered into a foreign currency swap contract to exchange
$3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June and entered into a foreign currency swap
contract to exchange $6.0 million and $4.0 million for equivalent RMB with Shanghai Pudong Development Bank in July. The terms
of three foreign currency contracts are both six months and the contract of $4.0 million with Shanghai Pudong Development Bank
is three 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 with the Bank of China and Industrial and Commercial Bank of China. The company pays annual interest of
0.98% for the RMB received and receives 0.0001% interest for the USD exchanged with Shanghai Pudong Development Bank. 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 September 30, 2018, the fair value of principal amounts are included
in other receivable ($19.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the condensed consolidated
balance sheets, and unrealized gain of $0.8 million for the nine months ended September 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 September 30, 2018, the Company had 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 $0.6 million and $1.1 million respectively in fair value recognized as derivatives financial instruments liabilities
and accumulated other comprehensive loss in the consolidated balance sheets for the three and nine months ended September 30,
2018.
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 a loss
of $8,000, which is immaterial to the consolidated financial statements.
NOTE
6 INCOME TAX
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, off-shores income is exempted from 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.
After
the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially
all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for
the three and nine months ended September 30, 2018 and 2017 was taxable in the following jurisdictions:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands of U.S. Dollars)
|
|
PRC
|
|
$
|
4,084
|
|
|
$
|
4,641
|
|
|
$
|
9,445
|
|
|
$
|
10,097
|
|
Others
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(14
|
)
|
|
|
(5
|
)
|
|
|
$
|
4,084
|
|
|
$
|
4,640
|
|
|
$
|
9,431
|
|
|
$
|
10,092
|
|
The
following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and nine months ended
September 30, 2018 and 2017:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Net operating losses for which no deferred tax assets was recognized
|
|
|
18.5
|
|
|
|
7.8
|
|
|
|
8.1
|
|
|
|
10.4
|
|
Other
|
|
|
(21.3
|
)
|
|
|
-
|
|
|
|
(1.8
|
)
|
|
|
-
|
|
Effective income tax rate
|
|
|
22.2
|
%
|
|
|
32.8
|
%
|
|
|
31.3
|
%
|
|
|
35.4
|
%
|
Income
tax expense for the three and nine months ended September 30, 2018 and 2017 is as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
$
|
1,853
|
|
|
$
|
1,752
|
|
|
$
|
4,737
|
|
|
$
|
5,482
|
|
Deferred
|
|
|
(945
|
)
|
|
|
(230
|
)
|
|
|
(1,788
|
)
|
|
|
(1,909
|
)
|
Income tax expense
|
|
$
|
908
|
|
|
$
|
1,522
|
|
|
$
|
2,949
|
|
|
$
|
3,573
|
|
The
Company’s deferred tax liabilities arise from differences between US GAAP and PRC tax accounting for certain revenue and
expense items, including timing of deduction of losses from allowances.
The
Company has not recorded U.S. deferred income taxes on approximately $102.1 million of its non-U.S. subsidiaries’
undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S.
Tax Reform signed into law on December 22, 2017 significantly modified the U.S. Internal Revenue Code by, among other things,
reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31,
2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time
transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries;
subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and
providing for new taxes on certain foreign earnings. The Company measured the current and deferred taxes based on the
provisions of the Tax legislation. After the Company’s measurement, there was no deferred tax expense (benefits)
relating to the Tax Act changes for the period ended September 30, 2018.
NOTE
7 EARNINGS PER SHARE
The
following demonstrates the calculation for earnings per share for the three and nine months ended September 30, 2018 and 2017:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average number of common shares – Basic and diluted
|
|
|
14,798,198
|
|
|
|
14,792,836
|
|
|
|
14,796,527
|
|
|
|
14,791,778
|
|
Earnings per share – Basic and diluted
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
|
$
|
0.47
|
|
NOTE
8 STOCKHOLDERS’ EQUITY
On
February 28, 2017, the Company issued an aggregate of 2,542 shares of its common stock to two of the Company’s independent
directors as compensation for their services in the first and second quarters of 2016. The shares were valued at $1.96 per share,
which was the average market price of the common stock for the five days before the grant date.
On
February 28, 2017, the Company issued an aggregate of 2,354 shares of its common stock to two of the Company’s independent
directors as compensation for their services in the third and fourth quarters of 2016. The shares were valued at $2.14 per share,
which was the average market price of the common stock for the five days before the grant date.
On
October 19, 2017, the Company issued an aggregate of 3,156 shares of its common stock to two of the Company’s independent
directors as compensation for their services in the first, second and third quarters of 2017. The shares were valued at $2.37
per share, which was the average market price of the common stock for the five days before the grant date.
On July 26, 2018, the Company issued 2,206
shares of Company’s common stock to two of the Company’s independent directors as compensation for their services rendered
during the fourth quarter of 2017, and the first and second quarters of 2018 as directors. The shares issued in 2018 were valued
at $3.39 per share, which was the average market price of the common stock for the five days before the grant date.
NOTE
9 RELATED PARTY TRANSACTIONS
Mr.
Kang is the Company’s Chairman and Chief Executive Officer. Ever-Glory Enterprises (HK) Ltd. (Ever-Glory Enterprises) is
the Company’s major shareholder. Mr. Xiaodong Yan was Ever-Glory Enterprises’ sole shareholder and sole director.
Mr. Huake Kang, Mr. Kang’s son, acquired 83% interest of Ever-Glory Enterprises and became its sole director in 2014. All
transactions associated with the following companies controlled by Mr. Kang or his son are considered to be related party transactions,
and it is possible that the terms of these transactions may not be the same as those that would result from transactions between
unrelated parties. All related party outstanding balances are short-term in nature and are expected to be settled in cash.
Other
Income From Related Parties
Jiangsu
Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled
by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter
of 2014. During the three and nine months ended September 30, 2018 and 2017, the Company received $17,961, $69,502, $8,580 and
$26,063 from the customers and paid $18,077, $57,395, $7,095 and $20,651 to Wubijia through the consignment, respectively. The
net (loss) profit of ($117), $12,106, $1,483 and $5,411 was recorded as other income (expenses) during the three and nine months
ended September 30, 2018 and 2017, respectively.
Nanjing
Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear
sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s
retail stores since the third quarter of 2015. During the three and nine months ended September 30, 2018 and 2017, the Company
received $0, $0, $30 and $6,395 from the customers and paid $0, $0, $1,041 and $11,575 to Nanjing Knitting through the consignment,
respectively. The net (loss) profit of $0, $0, ($1,009) and ($5,179) was recorded as other income (expenses) during the three
and nine months ended September 30, 2018 and 2017, respectively.
Other
Expenses Due to Related Parties
Included
in other expenses for the three and nine months ended September 30, 2018 and 2017 are rent costs due to entities controlled by
Mr. Kang under operating lease agreements as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Jiangsu Ever-Glory
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
35
|
|
Chuzhou Huarui
|
|
|
48
|
|
|
|
53
|
|
|
|
157
|
|
|
|
157
|
|
Kunshan Enjin
|
|
|
11
|
|
|
|
11
|
|
|
|
38
|
|
|
|
33
|
|
Total
|
|
$
|
59
|
|
|
$
|
76
|
|
|
$
|
195
|
|
|
$
|
225
|
|
The
Company leases Jiangsu Ever-Glory’s factory as the factory is in a location where there is a good supply of experienced
workers. The Company leases Chuzhou Huarui and Kunshan Enjin’s warehouse spaces because the locations are convenient for
transportation and distribution.
Purchases
From and Sub-contracts With Related Parties
The
Company purchased raw materials from Nanjing Knitting totaling $0 million, $0 million, $0.36 million and $0.96 million during
the three and nine months ended September 30, 2018 and 2017, respectively.
In
addition, Sub-contracts with related parties included in cost of sales for the three and nine months ended September 30, 2018
and 2017 are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Chuzhou huarui
|
|
$
|
653
|
|
|
$
|
714
|
|
|
$
|
2,526
|
|
|
$
|
2,714
|
|
Fengyang huarui
|
|
|
911
|
|
|
|
4
|
|
|
|
1,962
|
|
|
|
855
|
|
Nanjing Ever-Kyowa
|
|
|
392
|
|
|
|
361
|
|
|
|
1,067
|
|
|
|
1,181
|
|
Ever-Glory Vietnam
|
|
|
6,754
|
|
|
|
6,773
|
|
|
|
11,928
|
|
|
|
12,504
|
|
Ever-Glory Cambodia
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
239
|
|
EsCeLav
|
|
|
10
|
|
|
|
1
|
|
|
|
31
|
|
|
|
5
|
|
Jiangsu Ever-Glory
|
|
|
664
|
|
|
|
-
|
|
|
|
685
|
|
|
|
3
|
|
|
|
$
|
9,384
|
|
|
$
|
7,868
|
|
|
$
|
18,199
|
|
|
$
|
17,501
|
|
Accounts
Payable – Related Parties
The
accounts payable to related parties at September 30, 2018 and December 31, 2017 are as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
2,070
|
|
|
$
|
1,934
|
|
Fengyang Huarui
|
|
|
450
|
|
|
|
459
|
|
Nanjing Ever-Kyowa
|
|
|
857
|
|
|
|
900
|
|
Chuzhou Huarui
|
|
|
686
|
|
|
|
1,152
|
|
Esc’elav
|
|
|
-
|
|
|
|
6
|
|
Jiangsu Ever-Glory
|
|
|
534
|
|
|
|
110
|
|
Nanjing Knitting
|
|
|
571
|
|
|
|
114
|
|
Total
|
|
$
|
5,168
|
|
|
$
|
4,675
|
|
Amounts
Due From Related Parties-current Assets
The
amounts due from related parties as of September 30, 2018 and December 31, 2017 are as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Jiangsu Ever-Glory
|
|
$
|
25
|
|
|
$
|
265
|
|
Total
|
|
$
|
25
|
|
|
$
|
265
|
|
Jiangsu
Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities.
Jiangsu Ever-Glory is controlled by Mr. Kang. During three and nine months ended September 30, 2018 and 2017, the Company and
Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices. The
Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at a cost of $0.4 million,
$0.7 million, $0.7 million and $0.8 million during the three and nine months periods ended September 30, 2018 and 2017, respectively.
Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.3 million, $0.4
million, $0.25 million and $0.3 million during the three and nine months ended September 30, 2018 and 2017, respectively.
Amounts
Due From Related Party under Counter Guarantee Agreement
In
March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company
agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate
lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee
funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at
the rate of 6.0% of amounts provided. As of September 30, 2018 and December 31, 2017, Jiangsu Ever-Glory has provided guarantees
for approximately $44.0 million (RMB 302 million) and $49.5 million (RMB 322.0 million) of lines of credit obtained
by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain
of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines
of credit is approximately $29.9 million (RMB 205.5 million) and $31.6 million (RMB 205.5 million) as of September 30, 2018 and
December 31, 2017, respectively. Mr. Kang has also provided a personal guarantee for $20.4 million (RMB 140.0 million) and
$21.5 million (RMB 140.0 million) as of September 30, 2018 and December 31, 2017, respectively.
At
December 31, 2017, $12.8 million (RMB 83.6 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement.
During the nine months ended September 30, 2018, an additional $8.1 million (RMB 55.7 million) was provided to and $3.2 million
(RMB 22.0 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of September 30, 2018, the amount of the
counter-guarantee was $17.0 million (RMB 117.0 million) (the difference represents currency exchange adjustment of $0.7 million),
which was 38.9% of the aggregate amount of lines of credit. The increase of the percentage in this quarter was mainly due to China’s
credit tightening policy. Obtaining bank loan requires a higher guarantee deposit in this quarter. This amount plus accrued interest
of $3.2 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins
4E and 4G. At September 30, 2018 and December 31, 2017, the amount classified as a reduction of equity was $20.3 million and $15.4
million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since April 1,
2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Interest income for the three and nine
months ended September 30, 2018 and 2017 was approximately $0.3 million, $1.0 million, $0.2 million and $0.4 million, respectively.
NOTE
10 CONCENTRATIONS AND RISKS
The
Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral.
As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses
based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses,
if any, in existing accounts receivable. The allowance for doubtful accounts at September 30, 2018 and December 31, 2017
was $5.0 million and $5.2 million, respectively. Management reviews the allowance for doubtful accounts each reporting period
based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s
receivable and also considers the credit worthiness of the customer, the economic conditions in the customer’s industry,
and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its
original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If
judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which
would reduce profitability.
For
the nine-month period ended September 30, 2018, the Company had two wholesale customers that represented more than 11% and 12%
of the Company’s revenues. For the three-month period ended September 30, 2018, the Company had two wholesale customers that
represented approximately 7% and 7% of the Company’s revenues. For the nine-month period ended September 30, 2017, the Company
had two wholesale customers that represented approximately 12% and 13% of the Company’s revenues. For the three-month period
ended September 30, 2017, the Company had two wholesale customers that represented approximately 20% and 21% of the Company’s
revenues.
For
the Company’s wholesale business during the three and nine months ended September 30, 2018 and 2017, no supplier represented
more than 10% of the total raw materials purchased.
For
the Company’s retail business, the Company had two suppliers that represented approximately 22% and 19% of raw materials
purchases during the three months ended September 30, 2018. The Company had two suppliers that represented approximately 42% and
17% of raw materials purchases during the three months ended September 30, 2017. The Company had no supplier that represented
more than 10% of raw materials purchases during the nine months ended September 30, 2018. The Company had five suppliers that
represented approximately 26%, 20%, 12%, 11% and 10% of raw materials purchases during the nine months ended September 30, 2017.
For
the wholesale business, the Company relied on no manufacturer more than 10% of purchased finished goods during the nine months
ended September 30, 2018. For the wholesale business, the Company relied on one manufacturer or 29.2% of purchased finished goods
during the nine months ended September 30, 2017. During the three months ended September 30, 2018, the Company relied on no manufacturer
more than 10% of purchased finished goods. During the three months ended September 30, 2017, the Company relied on one manufacturer
for 35.9% of purchased finished goods.
For
the retail business, the Company had no supplier that represented more than 10% of finished goods purchases during the three and
nine months ended September 30, 2018 and 2017.
The
Company’s revenues for the three and nine months ended September 30, 2018 and 2017 were earned in the following geographic
areas:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands of U.S. Dollars)
|
|
The People’s Republic of China
|
|
$
|
25,853
|
|
|
$
|
23,885
|
|
|
$
|
39,195
|
|
|
$
|
34,000
|
|
Hong Kong, China
|
|
|
18,427
|
|
|
|
20,520
|
|
|
|
30,982
|
|
|
|
33,738
|
|
Germany
|
|
|
2,750
|
|
|
|
2,239
|
|
|
|
5,515
|
|
|
|
7,007
|
|
United Kingdom
|
|
|
8,254
|
|
|
|
5,599
|
|
|
|
13,353
|
|
|
|
11,174
|
|
Europe-Other
|
|
|
19,707
|
|
|
|
10,899
|
|
|
|
29,993
|
|
|
|
25,288
|
|
Japan
|
|
|
2,371
|
|
|
|
232
|
|
|
|
6,689
|
|
|
|
2,863
|
|
United States
|
|
|
8,321
|
|
|
|
5,611
|
|
|
|
24,026
|
|
|
|
16,225
|
|
Total wholesale business
|
|
|
85,683
|
|
|
|
68,985
|
|
|
|
149,753
|
|
|
|
130,295
|
|
Retail business
|
|
|
39,797
|
|
|
|
51,272
|
|
|
|
157,053
|
|
|
|
154,853
|
|
Total
|
|
$
|
125,480
|
|
|
$
|
120,257
|
|
|
$
|
306,806
|
|
|
$
|
285,148
|
|
NOTE
11 SEGMENTS
The
Company reports financial and operating information in the following two segments:
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Nine months ended September 30, 2018
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
149,753
|
|
|
|
157,053
|
|
|
|
306,806
|
|
Income from operations
|
|
$
|
6,935
|
|
|
|
1,593
|
|
|
|
8,528
|
|
Interest income
|
|
$
|
968
|
|
|
|
35
|
|
|
|
1,003
|
|
Interest expense
|
|
$
|
976
|
|
|
|
226
|
|
|
|
1,202
|
|
Depreciation and amortization
|
|
$
|
834
|
|
|
|
5,689
|
|
|
|
6,523
|
|
Income tax expense
|
|
$
|
1,800
|
|
|
|
1,149
|
|
|
|
2,949
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
1,322
|
|
|
|
7,822
|
|
|
|
9,144
|
|
Total assets
|
|
|
121,951
|
|
|
|
150,334
|
|
|
|
272,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
130,295
|
|
|
|
154,853
|
|
|
|
285,148
|
|
Income from operations
|
|
$
|
5,050
|
|
|
|
2,252
|
|
|
|
7,302
|
|
Interest income
|
|
$
|
854
|
|
|
|
55
|
|
|
|
909
|
|
Interest expense
|
|
$
|
932
|
|
|
|
275
|
|
|
|
1,207
|
|
Depreciation and amortization
|
|
$
|
824
|
|
|
|
4,242
|
|
|
|
5,066
|
|
Income tax expense
|
|
$
|
1,443
|
|
|
|
2,130
|
|
|
|
3,573
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
2,366
|
|
|
|
1,990
|
|
|
|
4,356
|
|
Total assets
|
|
|
106,333
|
|
|
|
113,205
|
|
|
|
219,538
|
|
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Three months ended September 30, 2018
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
85,683
|
|
|
|
39,797
|
|
|
|
125,480
|
|
Income from operations
|
|
$
|
4,302
|
|
|
|
(348
|
)
|
|
|
3,954
|
|
Interest income
|
|
$
|
304
|
|
|
|
3
|
|
|
|
307
|
|
Interest expense
|
|
$
|
194
|
|
|
|
84
|
|
|
|
278
|
|
Depreciation and amortization
|
|
$
|
233
|
|
|
|
1,387
|
|
|
|
1,620
|
|
Income tax expense
|
|
$
|
1,085
|
|
|
|
(177
|
)
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
68,985
|
|
|
|
51,272
|
|
|
|
120,257
|
|
Income from operations
|
|
$
|
2,388
|
|
|
|
457
|
|
|
|
2,845
|
|
Interest income
|
|
$
|
355
|
|
|
|
15
|
|
|
|
370
|
|
Interest expense
|
|
$
|
462
|
|
|
|
100
|
|
|
|
562
|
|
Depreciation and amortization
|
|
$
|
272
|
|
|
|
1,314
|
|
|
|
1,586
|
|
Income tax expense
|
|
$
|
686
|
|
|
|
836
|
|
|
|
1,522
|
|