NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(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
March 2019, the Company incorporated Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”) and it is the
Company’s wholly-owned PRC subsidiaries. Haian Tai Xin is engaged in the business of garments manufacturing.
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 March 31, 2019, the condensed consolidated statements of income (loss) and comprehensive income,
condensed consolidated statements of equity, and cash flows for the three months ended March 31, 2019 and 2018. 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 months ended March 31, 2019 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, 2018.
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
We
recognize 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. We recognize wholesale revenue from manufacturing fees charged
to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and
shipment of the products for export sales. Retail sales are recorded 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.
Our
revenue recognition policy is in compliance with ASC 606,
Revenue from Contracts with Customers
that revenue is recognized
when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect
to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration
that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:
|
(i)
|
identification
of the promised goods and services in the contract;
|
|
(ii)
|
determination
of whether the promised goods and services are performance obligations, including whether they are distinct in the context
of the contract;
|
|
(iii)
|
measurement
of the transaction price, including the constraint on variable consideration;
|
|
(iv)
|
allocation
of the transaction price to the performance obligations; and
|
|
(v)
|
recognition
of revenue when (or as) the Company satisfies each performance obligation.
|
We
only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange
for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract
inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations
are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation
when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to
customers at a point in time, typically upon delivery for local sales and upon shipment of the products for export sale.
For
all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts
with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Derivatives
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.
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. There was no bad debt expense for the three months period ended March 31, 2019 and 2018.
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
March 31, 2019 and 2018, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions
that management considers to be of a high quality.
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.
During
2018, the Company had entered into four foreign currency swap contracts with three banks. These contracts were expired and there
is no derivative asset or liability as of March 31, 2019. 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.
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, Taixin and Haian 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 Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, a new standard
on accounting for leases. Effective January 1, 2019, we adopted this standard. The ASU introduces a right-of-use (“ROU”)
model that requires a lease to record an ROU asset and lease liability on the balance sheet for all leases with terms longer
than twelve months, as well as disclose key information regarding leasing arrangements. Adoption of this standard resulted in
the recognition of right-of-use assets of $64.5 million and operating lease liabilities of $64.5 million. As of March 31, 2019,
the adoption of this standard did not have a material impact on the Company’s operating results or cash flows.
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 condensed consolidated financial statements.
In
October 2018, the FASB issued ASU No. 2018-17
“Consolidation (Topic 810): Targeted Improvements to Related Party
Guidance for Variable Interest Entities”
which could be improved in the following areas: 1. Applying the variable
interest entity (VIE) guidance to private companies under common control. 2. Considering indirect interests held through related
parties under common control for determining whether fees paid to decision makers and service providers are variable interests.
The Company is currently assessing the impact of this ASU on its condensed 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 condensed consolidated financial statements.
NOTE
3 INVENTORIES
Inventories
at March 31, 2019 and December 31, 2018 consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Raw materials
|
|
$
|
6,878
|
|
|
$
|
6,805
|
|
Work-in-progress
|
|
|
7,351
|
|
|
|
3,308
|
|
Finished goods
|
|
|
40,806
|
|
|
|
55,816
|
|
Total inventories
|
|
$
|
55,035
|
|
|
$
|
65,929
|
|
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 March 31, 2019 and December 31, 2018.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Bank
|
|
(In thousands of
U.S. Dollars)
|
|
Industrial and Commercial Bank of China
|
|
$
|
14,900
|
|
|
$
|
14,540
|
|
Nanjing Bank
|
|
|
3,725
|
|
|
|
5,089
|
|
China Minsheng Bank
|
|
|
2,980
|
|
|
|
2,908
|
|
Bank of Communications
|
|
|
2,965
|
|
|
|
2,893
|
|
Shanghai Pudong Development Bank
|
|
|
2,678
|
|
|
|
2,613
|
|
China Everbright Bank
|
|
|
1,490
|
|
|
|
1,454
|
|
HSBC
|
|
|
101
|
|
|
|
-
|
|
|
|
$
|
28,839
|
|
|
$
|
29,497
|
|
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 $8.9 million (RMB60.0 million). These loans are collateralized by the Company’s property
and equipment. As of March 31, 2019, Goldenway had borrowed $3.0 million (RMB 20.0 million) under this line of credit with an
annual interest rate of 3.92% and due on November 2019. As of March 31, 2019, approximately $5.9 million was unused and available
under this line of credit.
In
November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.9 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 March 31, 2019, Ever-Glory
Apparel had borrowed $11.8 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 4.57%
to 4.70% and due on July 2019. As of March 31, 2019, approximately $3.0 million was unused and available under this line of credit.
In
August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately
$7.5 million (RMB50.0 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 March 31, 2019, approximately $7.5 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 $8.9 million (RMB60.0 million) with
Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed
$1.5 million (RMB10.0 million) from Nanjing Bank with an annual interest rates 4.41% and due on September 2019. As of March 31,
2019, approximately $7.4 million was unused and available under this line of credit.
In
May 2018, 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 March 31, 2019,
LA GO GO had borrowed $2.2 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in
June 2019. As of March 31, 2019, approximately $0.8 million was unused and available under this line of credit.
In
June 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million)
from China Minsheng Bank with an annual interest rate of 4.79% and due in June 2019.
In
November 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Bank
of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of March 31, 2019, LA GO GO
had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable
dates from November 2019 to January 2020.
In
July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the
Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed $2.7 million
(RMB18.0 million) from the Shanghai Pudong Development Bank with an annual interest rate 4.57% and due on date November 2019.
As of March 31, 2019, approximately $0.3 million was unused and available under this line of credit.
In
March 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $7.2 million (RMB48.0 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 March 31, 2019, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from China Everbright Bank with an annual
interest rate 4.57% and due on date April 2019. As of March 31, 2019, approximately $5.7 million was unused and available under
this line of credit.
In
March 2019, 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 March 2019, Ever-Glory Apparel had collateralized by approximately $0.1 million of accounts receivable from our
wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of March 31, 2019, approximately
$2.4 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 $0.4 million and $0.6 million for the three months ended March 31, 2019 and 2018, respectively.
NOTE
5 LEASES
The adoption of the new lease guidance
did not have a material impact on the Company’s results of operations or liquidity, but resulted in the recognition of operating
lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use (“ROU”) assets represent
the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments
arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present
value of lease payments over the lease term. The company has leases for land-use-rights, warehouses and logistics centers, flagship
stores, and stores within shopping malls in the PRC, which are classified as operating leases. The leases include fixed and variable
payments according to the sales generated from flagship stores and those stores with shopping malls. Options to extend or renew
are recognized as part of the lease liabilities and recognized as right of use assets. There are no residual value guarantees and
no restrictions or covenants imposed by the leases. In the three months ended March 31, 2019, the costs of the leases recognized
in cost of revenues and general administrative expenses are $12.9 and $0.2 million, respectively. Cash paid for the operating leases
including in the operating cash flows was $13.1 million. As of March 31, 2019, The Company has $64.5 million of right-of-use assets,
$55.4 million in current operating lease liabilities and $9.1 million in non-current operating lease liabilities as of March 31,
2019.
Significant
assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains
a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset.
The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates
available to Registrant over terms similar to the lease terms.
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, 2019.
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.
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 months ended March 31, 2019 and 2018 was taxable in the following jurisdictions:
|
|
2019
|
|
|
2018
|
|
|
|
(In
thousands of
U.S. Dollars)
|
|
PRC
|
|
$
|
389
|
|
|
$
|
1,349
|
|
BVI
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Others
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
$
|
382
|
|
|
$
|
1,344
|
|
The
following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three months ended March
31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Net operating losses for which no deferred tax assets was recognized
|
|
|
198
|
|
|
|
31.3
|
|
Effective income tax rate
|
|
|
223.0
|
%
|
|
|
56.3
|
%
|
Income
tax expense for the three months ended March 31, 2019 and 2018 is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Current
|
|
$
|
495
|
|
|
$
|
925
|
|
Deferred
|
|
|
330
|
|
|
|
(168
|
)
|
Income tax expense
|
|
$
|
825
|
|
|
$
|
757
|
|
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 $105.0 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, no deferred tax expense (income)
relating to the Tax Act changes for the three months ended March 31, 2019.
NOTE
7 EARNINGS PER SHARE
The
following demonstrates the calculation for earnings per share for the three months ended March 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Weighted average number of common shares- Basic and diluted
|
|
|
14,800,140
|
|
|
|
14,795,992
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.06
|
|
NOTE
8 STOCKHOLDERS’ EQUITY
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.
On
January 31, 2019, the Company issued 1,942 shares of Company’s common stock to two of the Company’s independent directors
as compensation for their services rendered during the third and fourth quarter of 2018. The shares issued in 2019 were valued
at $3.8 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
JiangsuWubijia
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 months ended March 31, 2019 and 2018, the Company received $31,479 and $33,622 from the customers and paid $25,838 and
$19,188 to Wubijia through the consignment, respectively. The net profit of $5,641 and $14,435 was recorded as other income during
the three months ended March 31, 2019 and 2018, respectively.
Other
expenses due to Related Parties
Included
in other expenses for the three months ended March 31, 2019 and 2018 are rent costs due to entities controlled by Mr. Kang under
operating lease agreements as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Chuzhou Huarui
|
|
|
53
|
|
|
|
58
|
|
Kunshan Enjin
|
|
|
22
|
|
|
|
13
|
|
Total
|
|
$
|
75
|
|
|
$
|
71
|
|
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 $0.20 million and $0.33 million during the three months ended March
31, 2019 and 2018, respectively.
In
addition, the Company sub-contracted certain manufacturing work to related companies totaling $5.1 million and $3.7 million for
the three months ended March 31, 2019 and 2018, respectively. The Company provided raw materials to the sub-contractors and charged
a fixed fee for labor provided by the sub-contractors.
Sub-contracts
with related parties included in cost of sales for the three months ended March 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
2,579
|
|
|
$
|
1,914
|
|
Chuzhou Huarui
|
|
|
1,507
|
|
|
|
867
|
|
Fengyang Huarui
|
|
|
106
|
|
|
|
484
|
|
Nanjing Ever-Kyowa
|
|
|
347
|
|
|
|
349
|
|
EsC’eLav
|
|
|
88
|
|
|
|
-
|
|
Jiangsu Ever-Glory
|
|
|
425
|
|
|
|
45
|
|
Total
|
|
$
|
5,052
|
|
|
$
|
3,659
|
|
Accounts
Payable – Related Parties
The
accounts payable to related parties at March 31, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
1,519
|
|
|
|
1,863
|
|
Fengyang Huarui
|
|
|
223
|
|
|
|
622
|
|
Nanjing Ever-Kyowa
|
|
|
593
|
|
|
|
580
|
|
Chuzhou Huarui
|
|
|
671
|
|
|
|
888
|
|
Nanjing Knitting
|
|
|
144
|
|
|
|
171
|
|
Jiangsu Ever-Glory
|
|
|
890
|
|
|
|
632
|
|
Total
|
|
$
|
4,040
|
|
|
$
|
4,756
|
|
Amounts
Due From Related Parties-current assets
The
amounts due from related parties at March 31, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Jiangsu Ever-Glory
|
|
$
|
63
|
|
|
$
|
122
|
|
Esc’elav
|
|
|
12
|
|
|
|
70
|
|
Total
|
|
$
|
75
|
|
|
$
|
192
|
|
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 months ended March 31, 2019 and 2018, 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 cost for $0 and $0.3 million during the three
month period ended March 31, 2019 and 2018, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s
behalf and sold to the Company at cost for $424,675 and $22,235 during the three months ended March 31, 2019 and 2018, 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 March
31, 2019 and December 31, 2018, Jiangsu Ever-Glory has provided guarantees for approximately $41.4 million (RMB 278 million)
and $33.4 million (RMB 230.0 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 $30.6 million
(RMB 205.5 million) and $29.9 million (RMB 205.5 million) as of March 31, 2019 and December 31, 2018, respectively. Mr. Kang
has also provided a personal guarantee for $24.6 million (RMB 164.8 million) and $14.5 million (RMB 100.0 million) as of March
31, 2019 and December 31, 2018, respectively.
At December 31, 2018, $9.9 million (RMB
68.2 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the three months ended
March 31, 2019, an additional $2.1 million (RMB 14.0 million) was provided to and repayment of $3.5 million (RMB23.5 million) was
received from Jiangsu Ever-Glory under the counter-guarantee. As of March 31, 2019, the amount of the counter-guarantee was $8.7
million (RMB 58.7 million) (the difference represents currency exchange adjustment of $0.2 million), which was 21.1% of the aggregate
amount of lines of credit. This amount plus accrued interest of $0.5 million have been classified as a reduction of equity, consistent
with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At March 31, 2019 and December 31, 2018, the amount classified as
a reduction of equity was $9.3 million and $10.4 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.
Since January 1, 2019, interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for
the three months ended March 31, 2019 and 2018 was approximately $0.1 million and $0.2 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 March 31, 2019 and December 31, 2018 was
$4.5 million and $5.9 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 of 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 three-month period ended March 31, 2019, the Company had two wholesale customers that represented approximately 26% and 11%
of the Company’s revenues. For the three-month period ended March 31, 2018, the Company had one wholesale customer that
represented approximately 18% of the Company’s revenues.
For
the wholesale business, the Company did not rely on any raw material supplier that represented more than 10% of the total raw material
purchases during the three months ended March 31, 2019 and 2018.
For
the retail business, the Company relied on three raw material suppliers that represented approximately 36%, 35% and 23% of raw
material purchases during the three months ended March 31, 2019.
For the retail business, the Company relied on two raw material
suppliers that represented approximately 30% and 23% of raw material purchases during the three months ended March 31, 2018.
For
the wholesale business, during the three months ended March 31, 2019, the Company relied on two manufacturers that represented
11% and 10% of finished goods purchases, and during the three months ended March 31, 2018, the Company relied on one manufacturer
that represented 14% of finished goods purchases.
For
the retail business, the Company did not rely on any supplier that represented more than 10% of the total finished goods purchases
during the three months ended March 31, 2019 and 2018.
The
Company’s revenues for the three months ended March 31, 2019 and 2018 were earned in the following geographic areas:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Mainland China
|
|
$
|
10,754
|
|
|
$
|
4,211
|
|
Hong Kong China
|
|
|
1,253
|
|
|
|
5,138
|
|
Germany
|
|
|
850
|
|
|
|
1,866
|
|
United Kingdom
|
|
|
800
|
|
|
|
2,218
|
|
Europe-Other
|
|
|
5,229
|
|
|
|
4,453
|
|
Japan
|
|
|
4,938
|
|
|
|
2,436
|
|
United States
|
|
|
4,278
|
|
|
|
4,934
|
|
Total wholesale business
|
|
|
28,102
|
|
|
|
25,256
|
|
Retail business
|
|
|
59,854
|
|
|
|
67,529
|
|
Total
|
|
$
|
87,956
|
|
|
$
|
92,785
|
|
NOTE
11 SEGMENTS
The
Company reports financial and operating information in the following two segments:
(a) Wholesale
segment
(b) Retail
segment
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
As of and for the period ended March 31, 2019
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
28,102
|
|
|
|
59,854
|
|
|
|
87,956
|
|
Income from operations
|
|
$
|
769
|
|
|
|
52
|
|
|
|
821
|
|
Interest income
|
|
$
|
199
|
|
|
|
8
|
|
|
|
207
|
|
Interest expense
|
|
$
|
262
|
|
|
|
101
|
|
|
|
363
|
|
Depreciation and amortization
|
|
$
|
290
|
|
|
|
1,935
|
|
|
|
2,225
|
|
Income tax expense
|
|
$
|
219
|
|
|
|
606
|
|
|
|
825
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
367
|
|
|
|
1,764
|
|
|
|
2,131
|
|
Total assets
|
|
|
78,419
|
|
|
|
204,573
|
|
|
|
282,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the period ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
25,256
|
|
|
|
67,529
|
|
|
|
92,785
|
|
Income from operations
|
|
$
|
1,096
|
|
|
|
350
|
|
|
|
1,446
|
|
Interest income
|
|
$
|
309
|
|
|
|
17
|
|
|
|
326
|
|
Interest expense
|
|
$
|
490
|
|
|
|
74
|
|
|
|
564
|
|
Depreciation and amortization
|
|
$
|
305
|
|
|
|
2,232
|
|
|
|
2,537
|
|
Income tax expense
|
|
$
|
234
|
|
|
|
523
|
|
|
|
757
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
482
|
|
|
|
2,070
|
|
|
|
2,552
|
|
Total assets
|
|
|
86,526
|
|
|
|
134,988
|
|
|
|
221,514
|
|
NOTE
12 SUBSEQUENT EVENTS
As
of May 14, 2019, there is no material subsequent event to be disclosed.
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 months ended March 31,
2019 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”), Haian Tai Xin Garments Trading Company
Limited (“Haian 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:
|
●
|
Expanding
our global sourcing network;
|
|
|
|
|
●
|
Expanding
our overseas low-cost manufacturing base (outside of mainland China);
|
|
|
|
|
●
|
Focusing
on high value-added products and continuing our strategy to produce mid-to-high end apparel;
|
|
●
|
Continuing
to emphasize product design and technology utilization;
|
|
|
|
|
●
|
Seeking
strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
|
|
|
|
|
●
|
Maintaining
stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.
|
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 March 31, 2019, we had 1,315 stores (including store-in-stores), including 12 stores were opened
and 78 stores were closed in first quarter of 2019. We expect to open additional 150 to 200 stores in 2019.
We
believe that our growth opportunities and continued investment initiatives include:
|
●
|
Building
our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
|
|
|
|
|
●
|
Expanding
our retail network throughout China;
|
|
|
|
|
●
|
Improving
our retail stores’ efficiency and increasing same-store sales;
|
|
|
|
|
●
|
Continuing
to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities;
and
|
|
|
|
|
●
|
Becoming
a multi-brand operator.
|
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 2019.
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
We
recognize 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. We recognize wholesale revenue from manufacturing fees charged
to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and
shipment of the products for export sales. Retail sales are recorded 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.
Our
revenue recognition policy is in compliance with ASC 606,
Revenue from Contracts with Customers
that revenue is recognized
when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect
to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration
that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:
|
(i)
|
identification
of the promised goods and services in the contract;
|
|
(ii)
|
determination
of whether the promised goods and services are performance obligations, including whether they are distinct in the context
of the contract;
|
|
(iii)
|
measurement
of the transaction price, including the constraint on variable consideration;
|
|
(iv)
|
allocation
of the transaction price to the performance obligations; and
|
|
(v)
|
recognition
of revenue when (or as) the Company satisfies each performance obligation.
|
We
only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange
for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract
inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations
are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation
when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to
customers at a point in time, typically upon delivery for local sales and upon shipment of the products for export sale.
For
all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts
with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Estimates
and Assumptions
In
preparing our condensed 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 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 impairment
of long-lived assets and inventory reservation.
Recently
Issued Accounting Pronouncements
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, a new standard
on accounting for leases. Effective January 1, 2019, we adopted this standard. The ASU introduces a right-of-use (“ROU”)
model that requires a leases to record an ROU asset and lease liability on the balance sheet for all leases with terms longer
than twelve months, as well as disclose key information regarding leasing arrangements. Adoption of this standard resulted in
the recognition of right-of-use assets of $64.5 million and operating lease liabilities of $64.5 million. As of March 31, 2019,
The adoption of this standard did not have a material impact on the Company’s operating results or cash flows.
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 condensed consolidated financial statements.
In
October 2018, the FASB issued ASU No. 2018-17
“Consolidation (Topic 810): Targeted Improvements to Related Party
Guidance for Variable Interest Entities”
which could be improved in the following areas: 1. Applying the variable
interest entity (VIE) guidance to private companies under common control. 2. Considering indirect interests held through related
parties under common control for determining whether fees paid to decision makers and service providers are variable interests.
The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.
Results
of Operations
The
following table summarizes our results of operations for the three months ended March 31, 2019 and 2018. The table and the discussion
below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere
in this report.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
Sales
|
|
$
|
87,956
|
|
|
|
100.0
|
%
|
|
$
|
92,785
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
|
29,358
|
|
|
|
33.4
|
|
|
|
31,345
|
|
|
|
33.8
|
|
Operating Expenses
|
|
|
28,537
|
|
|
|
32.4
|
|
|
|
29,899
|
|
|
|
32.2
|
|
Income From Operations
|
|
|
821
|
|
|
|
0.9
|
|
|
|
1,446
|
|
|
|
1.6
|
|
Other Expenses
|
|
|
(451
|
)
|
|
|
(0.5
|
)
|
|
|
(102
|
)
|
|
|
(0.1
|
)
|
Income Tax Expense
|
|
|
825
|
|
|
|
0.9
|
|
|
|
757
|
|
|
|
0.8
|
|
Net (Loss) Income
|
|
$
|
(455
|
)
|
|
|
(0.5
|
)%
|
|
$
|
587
|
|
|
|
0.6
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the three months ended March 31, 2019 and 2018.
|
|
2019
|
|
|
%
of total sales
|
|
|
2018
|
|
|
%
of total sales
|
|
|
Growth
in 2019 compared
with 2018
|
|
Wholesale
business
|
|
(In
thousands of U.S. dollars)
|
|
|
|
|
|
(In
thousands of U.S. dollars)
|
|
|
|
|
|
|
|
Mainland
China
|
|
$
|
10,754
|
|
|
|
12.2
|
%
|
|
$
|
4,211
|
|
|
|
4.6
|
%
|
|
|
155.4
|
%
|
Hong
Kong
|
|
|
1,253
|
|
|
|
1.4
|
|
|
|
5,138
|
|
|
|
5.5
|
|
|
|
(75.6
|
)
|
Germany
|
|
|
850
|
|
|
|
1.0
|
|
|
|
1,866
|
|
|
|
2.0
|
|
|
|
(54.5
|
)
|
United
Kingdom
|
|
|
800
|
|
|
|
0.9
|
|
|
|
2,218
|
|
|
|
2.4
|
|
|
|
(63.9
|
)
|
Europe-Other
|
|
|
5,229
|
|
|
|
5.9
|
|
|
|
4,453
|
|
|
|
4.8
|
|
|
|
17.4
|
|
Japan
|
|
|
4,938
|
|
|
|
5.7
|
|
|
|
2,436
|
|
|
|
2.6
|
|
|
|
102.7
|
|
United
States
|
|
|
4,278
|
|
|
|
4.9
|
|
|
|
4,934
|
|
|
|
5.3
|
|
|
|
(13.3
|
)
|
Total
Wholesale business
|
|
|
28,102
|
|
|
|
32.0
|
|
|
|
25,256
|
|
|
|
27.2
|
|
|
|
11.3
|
|
Retail
business
|
|
|
59,854
|
|
|
|
68.0
|
|
|
|
67,529
|
|
|
|
72.8
|
|
|
|
(11.4
|
)
|
Total
sales
|
|
$
|
87,956
|
|
|
|
100.0
|
%
|
|
$
|
92,785
|
|
|
|
100.0
|
%
|
|
|
(5.2
|
)%
|
Total
sales for the three months ended March 31, 2019 were $88.0 million, a decrease of 5.2% from the three months ended March 31, 2018.
This decrease was primarily attributable to an 11.4% decrease in our retail business partially offset by an 11.3% increase in our
wholesale business.
Sales
generated from our wholesale business contributed 32.0% or $28.1 million of our total sales for the three months ended March 31,
2019, an increase of 11.3% compared to $25.3 million in the three months ended March 31, 2018. This increase was primarily attributable
to increased sales in Mainland China, other European markets and Japan partially offset for decreased sales in Hong Kong, the
United States, the United Kingdom and Germany.
Sales
generated from our retail business contributed 68.0% or $59.9 million of our total sales for the three months ended March 31,
2019, a decrease of 11.4% compared to 72.8% or $67.5 million in the three months ended March 31, 2018. This decrease was primarily
due to the decrease in same-store sales.
Total
retail store square footage and sales per square foot for the three months ended March 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Total store square footage
|
|
|
1,340,174
|
|
|
|
1,414,181
|
|
Number of stores
|
|
|
1,315
|
|
|
|
1,409
|
|
Average store size, square feet
|
|
|
1,019
|
|
|
|
1,033
|
|
Total store sales (in thousands of U.S. dollars)
|
|
$
|
59,854
|
|
|
$
|
67,529
|
|
Sales per square foot
|
|
$
|
45
|
|
|
$
|
48
|
|
Same-store
sales and newly opened store sales for the three months ended March 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. dollars)
|
|
Sales from stores opened for a full year
|
|
$
|
45,955
|
|
|
$
|
52,826
|
|
Sales from newly opened store sales
|
|
$
|
6,310
|
|
|
$
|
7,935
|
|
Sales from e-commerce platform
|
|
$
|
3,701
|
|
|
$
|
3,731
|
|
Other*
|
|
$
|
3,888
|
|
|
$
|
3,037
|
|
Total
|
|
$
|
59,854
|
|
|
$
|
67,529
|
|
|
*
|
Primarily
sales from stores that were closed in the current reporting period.
|
We
remodeled or relocated 250 stores in year 2018, and 7 stores during the three months ended March 31, 2019. We plan to relocate
or remodel 150-200 stores in 2019. 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 2018. 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 three months ended March 31, 2019 and 2018.
|
|
Three Months Ended March 31,
|
|
|
Growth
(Decrease)
in 2019
|
|
|
|
2019
|
|
|
2018
|
|
|
compared
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
with 2018
|
|
Wholesale Sales
|
|
$
|
28,102
|
|
|
|
100.0
|
%
|
|
$
|
25,256
|
|
|
|
100.0
|
%
|
|
|
11.3
|
%
|
Raw Materials
|
|
|
11,308
|
|
|
|
40.2
|
|
|
|
10,269
|
|
|
|
40.7
|
|
|
|
10.1
|
|
Labor
|
|
|
307
|
|
|
|
1.1
|
|
|
|
386
|
|
|
|
1.5
|
|
|
|
(20.4
|
)
|
Outsourced Production Costs
|
|
|
9,871
|
|
|
|
35.1
|
|
|
|
8,724
|
|
|
|
34.5
|
|
|
|
13.1
|
|
Other and Overhead
|
|
|
58
|
|
|
|
0.3
|
|
|
|
71
|
|
|
|
0.3
|
|
|
|
(18.6
|
)
|
Total Cost of Sales for Wholesale
|
|
|
21,544
|
|
|
|
76.7
|
|
|
|
19,450
|
|
|
|
77.0
|
|
|
|
10.8
|
|
Gross Profit for Wholesale
|
|
|
6,558
|
|
|
|
23.3
|
|
|
|
5,806
|
|
|
|
23.0
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for Retail
|
|
|
59,854
|
|
|
|
100.0
|
|
|
|
67,529
|
|
|
|
100.0
|
|
|
|
(11.4
|
)
|
Production Costs
|
|
|
24,203
|
|
|
|
40.4
|
|
|
|
26,071
|
|
|
|
38.6
|
|
|
|
(7.2
|
)
|
Rent
|
|
|
12,851
|
|
|
|
21.5
|
|
|
|
15,919
|
|
|
|
23.6
|
|
|
|
(19.3
|
)
|
Total Cost of Sales for Retail
|
|
|
37,054
|
|
|
|
61.9
|
|
|
|
41,990
|
|
|
|
62.2
|
|
|
|
(11.8
|
)
|
Gross Profit for Retail
|
|
|
22,800
|
|
|
|
38.1
|
|
|
|
25,539
|
|
|
|
37.8
|
|
|
|
(10.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
58,598
|
|
|
|
66.6
|
|
|
|
61,440
|
|
|
|
66.2
|
|
|
|
(4.6
|
)
|
Gross Profit
|
|
$
|
29,358
|
|
|
|
33.4
|
%
|
|
$
|
31,345
|
|
|
|
33.8
|
%
|
|
|
(6.3
|
)%
|
Raw
material costs for our wholesale business were 40.2% of our total wholesale business sales in the three months ended March 31,
2019, an increase of 10.1% compared to 40.7% in the three months ended March 31, 2018. The increase was mainly due
to the higher raw material prices.
Labor
costs for our wholesale business were 1.1% of our total wholesale business sales in the three months ended March 31, 2019, a decrease
of 20.4% compared to 1.5% in the three months ended March 31, 2018. The marginal decrease was mainly due to the fact that we outsourced
most of the new orders in 2019.
Outsourced
production costs for our wholesale business increased by 13.1% to $9.9 million in the three months ended March 31, 2019 from $8.7
million in the three months ended March 31, 2018. As a percentage of total wholesale sales, outsourced production costs were 35.1%
of our total wholesale sales in the three months ended March 31, 2019, an increase of 0.6% from the three months ended March 31,
2018. This increase was primarily attributable to decreased outsourced orders to our related entities in Vietnam, which have lower
labor costs compared to orders outsourced to Chinese factories.
Overhead
and other expenses for our wholesale business accounted for 0.3% and 0.3% of our total wholesale business sales for the three
months ended March 31, 2019 and 2018, respectively.
Gross
profit for our wholesale business for the three months ended March 31, 2018 was $6.6 million, an increase of 13.0% compared to
the three months ended March 31, 2018. Gross margin was 23.3% for the three months ended March 31, 2019, an increase of 0.3% compared
to 23.0% for the three months ended March 31, 2018. The decrease was mainly due to decreased labor costs.
Production
costs for our retail business were $24.2 million during the three months ended March 31, 2019 compared to $26.1 million during
the three months ended March 31, 2018. As a percentage of retail sales, retail production costs accounted for 40.4% of our total
retail sales in the three months ended March 31, 2018, compared to 38.6% of total retail sales in the three months ended March
31, 2018. The increase was due to higher discounts on our out-of-season products ended March 31, 2019 compared with the same period
of the prior year.
Rent
costs for our retail business were $12.9 million for the three months ended March 31, 2019 compared to $15.9 million for the three
months ended March 31, 2018. As a percentage of retail sales, rent costs accounted for 21.5% of our total retail sales for the
three months ended March 31, 2019, compared to 23.6% of total retail sales for the three months ended March 31, 2018. The decrease
was primarily attributable to lower rent at certain locations.
Gross profit in our retail business for
the three months ended March 31, 2019 was $22.8 million and gross margin was 38.1%. Gross profit in our retail business for the
three months ended March 31, 2018 was $25.5 million and gross margin was 37.8%. The increase in gross margin was attributable to
decreased rent costs offset by an increase in production costs.
Total
cost of sales for the three months ended March 31, 2019 was $58.6 million, compared to $61.4 million for the three months ended
March 31, 2018, a decrease of 4.6%. As a percentage of total sales, cost of sales increased to 66.6% of total sales for the three
months ended March 31, 2019, compared to 66.2% of total sales for the three months ended March 31, 2018. Consequently, gross margin
decreased to 33.4% for the three months ended March 31, 2019 from 33.8% for the three months ended March 31, 2018.
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 March 31,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Increase
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
|
|
Gross Profit
|
|
$
|
29,358
|
|
|
|
33.4
|
%
|
|
$
|
31,345
|
|
|
|
33.8
|
%
|
|
|
(6.3
|
)%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
21,008
|
|
|
|
23.9
|
|
|
|
22,225
|
|
|
|
24.0
|
|
|
|
(5.5
|
)
|
General and Administrative Expenses
|
|
|
7,529
|
|
|
|
8.6
|
|
|
|
7,674
|
|
|
|
8.3
|
|
|
|
(1.9
|
)
|
Total Operating Expenses
|
|
|
28,537
|
|
|
|
32.4
|
|
|
|
29,899
|
|
|
|
32.3
|
|
|
|
(9.3
|
)
|
Income from Operations
|
|
$
|
821
|
|
|
|
0.9
|
%
|
|
$
|
1,446
|
|
|
|
1.6
|
%
|
|
|
(43.2
|
)%
|
Selling
expenses decreased 5.5% to $21.0 million for the three months ended March 31, 2019 from $22.2 million for the three months ended
March 31, 2018. The decrease was attributable to the decreased sales.
General and administrative expenses decreased
1.9% to $7.5 million for the three months ended March 31, 2019 from $7.7 million for the three months ended March 31, 2018. As
a percentage of total sales, general and administrative expenses increased to 8.6% of total sales for the three months ended March
31, 2019, compared to 8.3% of total sales for the three months ended March 31, 2018. The decrease was mainly attributable to the
decreased office expenses.
Income from Operations
Income from operations decreased 43.2%
to $0.8 million for the three months ended March 31, 2019 from $1.4 million for the three months ended March 31, 2018. As
a percentage of sales, income from operations accounted for 0.9% of our total sales for the three months ended March 31, 2019,
a decrease of 0.5% compared to the three months ended March 31, 2018 as a result of decreased gross profit and operating expense.
Interest
Expense
Interest
expense was $0.4 million for the three months ended March 31, 2019, a decrease of 35.7% compared to the same period in 2018. The
decrease was due to the decreased bank loans borrowed.
Income
Tax Expenses
Income
tax expense was $0.8 million and $0.8 million for the three months end March 31, 2019 and 2018, 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, 2019.
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 (Loss)
Net
income (loss) for the three months ended March 31, 2019 and 2018 was ($0.4) million and $0.6 million, respectively. Our basic
and diluted earnings (loss) per share were ($0.04) and $0.06 for the three months ended March 31, 2019 and 2018, respectively.
Summary
of Cash Flows
Summary
cash flows information for the three months ended March 31, 2019 and 2018 is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. dollars)
|
|
Net cash provided by operating activities
|
|
$
|
11,141
|
|
|
$
|
7,807
|
|
Net cash used in investing activities
|
|
$
|
(2,131
|
)
|
|
$
|
(2,552
|
)
|
Net cash used in financing activities
|
|
$
|
(54
|
)
|
|
$
|
(5,126
|
)
|
Net cash provided by operating activities
was $11.1 million and $7.8 million for the three months ended March 31, 2019 and 2018, respectively. This increase was mainly due
to increased accounts receivable and inventories, offset by decreased accounts payable.
Net cash used in investing activities was
$2.1 million and $2.6 million for the three months ended March 31, 2019 and 2018. This decrease was mainly due to we purchased
property and equipment in the three months ended March 31, 2019 less than the same period of 2018.
Net cash used in financing activities
were $0.05 million and $5.1 million for the three months ended March 31, 2019 and 2018, respectively. During the three months
ended March 31, 2019, we received new bank loans of $6.0 million and repaid the bank loans of $7.4 million.
Liquidity and Capital Resources
As of March 31, 2019, we had cash and cash
equivalents of $57.9 million, other current assets of $126.4 million and current liabilities of $155.7 million. We presently finance
our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue
to be our primary source 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 $8.9 million (RMB60.0 million). These loans are collateralized by the Company’s property
and equipment. As of March 31, 2019, Goldenway had borrowed $3.0 million (RMB 20.0 million) under this line of credit with an
annual interest rate of 3.92% and due on November 2019. As of March 31, 2019, approximately $5.9 million was unused and available
under this line of credit.
In
November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.9 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 March 31, 2019, Ever-Glory
Apparel had borrowed $11.8 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 4.57%
to 4.70% and due on July 2019. As of March 31, 2019, approximately $3.0 million was unused and available under this line of credit.
In
August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately
$7.5 million (RMB50.0 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 March 31, 2019, approximately $7.5 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 $8.9 million (RMB60.0 million) with
Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed
$1.5 million (RMB10.0 million) from Nanjing Bank with an annual interest rates 4.41% and due on September 2019. As of March 31,
2019, approximately $7.4 million was unused and available under this line of credit.
In
May 2018, 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 March 31, 2019,
LA GO GO had borrowed $2.2 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in
June 2019. As of March 31, 2019, approximately $0.8 million was unused and available under this line of credit.
In
June 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million)
from China Minsheng Bank with an annual interest rate of 4.79% and due in June 2019.
In November 2018, LA GO GO entered into a
line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu
Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million)
from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from November 2019 to January 2020.
In
July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the
Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed $2.7 million
(RMB18.0 million) from the Shanghai Pudong Development Bank with an annual interest rate 4.57% and due on date November 2019.
As of March 31, 2019, approximately $0.3 million was unused and available under this line of credit.
In
March 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $7.2 million (RMB48.0 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 March 31, 2019, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from China Everbright Bank with an annual
interest rate 4.57% and due on date April 2019. As of March 31, 2019, approximately $5.7 million was unused and available under
this line of credit.
In
March 2019, 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 March 2019, Ever-Glory Apparel had collateralized by approximately $0.1 million of accounts receivable from our
wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of March 31, 2019, approximately
$2.4 million was unused and available under this line of credit.
All
loans have been repaid before or at maturity date.
DERIVATIVE
LIABILITY
During
2018, the Company had entered into four foreign currency swap contracts with three banks. As of March 31, 2019, there is no derivative
liability.
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 March 31, 2019, we had access to approximately $61.9 million in lines of credit, of which approximately $33.0 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
$41.4 million (RMB 278.0 million) and approximately $8.7 million (RMB 58.7 million) was provided to Jiangsu Ever-Glory as
the counter guarantee as of March 31, 2019.
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 March 31, 2019, the market foreign exchange rate had increased to RMB 6.71 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 for the 3 months ended March 31, 2019 and 2018 was $4.0 million and $4.0 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
2A. RISK FACTORS
Changes
to United States tax, tariff and import/export regulations may have a negative effect on global economic conditions, financial
markets and our business.
The
current political climate has introduced greater uncertainty with respect to trade policies, tariffs and government
regulations affecting trade between the U.S. and other countries, especially to trade between U.S. and China. Our products are
sold to many countries including the U.S. Major developments in tax policy or trade relations, such as the disallowance
of tax deductions for imported products or the imposition of unilateral tariffs on imported products, could have a material
adverse effect on our business, results of operations and liquidity.
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.
Limitations on the Effectiveness of Disclosure Controls
.
In
designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Evaluation
of Disclosure Controls and Procedures
.
Under the supervision and with the participation of our management,
including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures for the period ended March 31, 2019. 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 operating effectively.
Changes
in Internal Control Over Financial Reporting
Other
than described above, during the first quarter of 2019, 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
Securities Authorized for Issuance under Equity Incentive
Plans
The following table presents information
regarding equity instruments outstanding under our 2014 Equity Incentive Plan as of March 31, 2019:
|
|
Equity Incentive Plan Information
|
|
|
|
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
|
|
|
Weighted-
average exercise price of outstanding options,
warrants and rights
|
|
|
Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity incentive plans approved by security holders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,500,000
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,500,000
|
|
The
following exhibits are filed herewith:
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Annual Report on Form 10-KSB, filed March 29, 2006);
|
|
|
|
3.2
|
|
Articles of Amendment as filed with the Department of State of Florida, effective November 20, 2007 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed November 29, 2007);
|
|
|
|
3.3
|
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of our Current Report Form 8-K filed on April 22, 2008);
|
|
|
|
31.1
|
|
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
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.
May
14, 2019
|
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)
|
29