NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 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”), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”)
and Haian Tai Xin Garments Trading Company Limited (“Haian Taixin”), 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 June 30, 2019, the condensed consolidated statements of income and comprehensive income(loss)
and condensed consolidated statements of equity for the three and six months ended June 30, 2019 and 2018, and cash flows for
the six months ended June 30, 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 six months ended June 30, 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.
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.
As
of June 30, 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.
As
of June 30, 2019, the Company has one derivative liability subjects to recurring fair value measurement (Level 2) with the change
in fair value recognized in earnings (Note 5).
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.
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.
Lease
The Company determines
if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes, to account
for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating
a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard, the
Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive
covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure
a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide
an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value
of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would
pay to borrow on a collateralized basis over a similar term with similar payments.
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 the Company over terms similar to the lease terms. The
followings are lists of leases: (i) the terms of Shanghai LAGOGO land use right and buildings are 34 years; (ii) the terms of
Kunshan logistics center and Chuzhou logistics center are 5 years; (iii) the terms of flagship stores are 3 years. The terms
of stores within shopping mall are one year. The shopping malls sort the stores within shopping mall based on sales every
year and the stores within shopping mall of higher sales will be arrange to the better location. If the sales do not meet the
requirements of the shopping malls, the stores within shopping mall will be removed. The store within shopping mall is
different from flagship store. The shopping malls count the rent of counter according to the sale but the rent of flagship
store is fixed every year. The company estimates the terms of flagship store are three years according to the previous data.
The company calculates the Right-of-use (ROU) assets or Lease Obligation (Obligation) of the stores within shopping mall in
a floating manner because the rents of the stores within shopping mall will vary according to the sales. The rents of the
stores within shopping mall will be higher if the number and sales of counters is larger, so the ROU/Obligation of the
counter will be higher.
Recently
Issued Accounting Pronouncements
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.
In
April 2019, the FASB issued ASU No. 2019-04
“Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, 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.
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 June 30, 2019 and December 31, 2018 consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Raw materials
|
|
$
|
1,256
|
|
|
$
|
6,805
|
|
Work-in-progress
|
|
|
15,696
|
|
|
|
3,308
|
|
Finished goods
|
|
|
46,175
|
|
|
|
55,816
|
|
Total inventories
|
|
$
|
63,127
|
|
|
$
|
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 June 30, 2019 and December 31, 2018.
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Bank
|
|
(In thousands of
U.S. Dollars)
|
|
Industrial and Commercial Bank of China
|
|
$
|
11,648
|
|
|
$
|
14,540
|
|
Nanjing Bank
|
|
|
5,824
|
|
|
|
5,089
|
|
China Minsheng Bank
|
|
|
2,912
|
|
|
|
2,908
|
|
Bank of Communications
|
|
|
2,897
|
|
|
|
2,893
|
|
Shanghai Pudong Development Bank
|
|
|
2,617
|
|
|
|
2,613
|
|
China Everbright Bank
|
|
|
-
|
|
|
|
1,454
|
|
HSBC
|
|
|
101
|
|
|
|
-
|
|
|
|
$
|
25,999
|
|
|
$
|
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 $8.7 million (RMB60.0 million). These loans are collateralized by the Company’s property
and equipment. As of June 30, 2019, Goldenway had borrowed $5.8 million (RMB 40.0 million) under this line of credit with an annual
interest rate of 3.92% and due on November 2019. As of June 30, 2019, approximately $2.9 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 $14.6 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 June 30, 2019, Ever-Glory
Apparel had borrowed $5.8 million (RMB 40.0 million) under this line of credit with annual interest rates ranging from 4.57% to
4.70% and due on July 2019. As of June 30, 2019, approximately $8.8 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
$7.3 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 June 30, 2019, approximately $7.3 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 $8.7 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory,
Mr. Kang and Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $5.8 million (RMB40.0 million) from Nanjing Bank
with an annual interest rate 5.0% and due on variable dates from September 2019 to June 2020. As of June 30, 2019, approximately
$2.9 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 $2.9 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2019,
approximately $2.9 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 $2.9 million (RMB20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2019, LA GO GO had borrowed $2.9 million (RMB20.0 million)
from China Minsheng Bank with an annual interest rate of 4.79% and due in October 2019.
In
November 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB19.9 million) with the Bank
of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of June 30, 2019, LA GO GO had
borrowed $2.9 million (RMB19.9 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 $2.9 million (RMB20.0 million) with the
Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $2.6 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 June 30, 2019, approximately $0.3 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 June 2019, Ever-Glory Apparel had borrowed $0.2 million from HSBC with an annual interest rate of 3.2% and due
in September 2019, and 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 June 30, 2019, approximately $2.3 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 $0.8 million and $0.9 million for the six months ended June 30, 2019 and 2018,
respectively, and $0.4 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively.
NOTE
5 Derivative Financial Instruments
Foreign
currency swap contracts
The
Company entered two foreign currency swap contracts with two banks during 2018. Due to the demand of financial management for
daily operation, Ever-Glory Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB
with Bank of China in May and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial
and Commercial Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and
the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period,
the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the Company failed
to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in
RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of principal amounts are included in
other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance
sheets, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is recognized in the income from operations.
As of June 30, 2019, there are no currency swap contracts.
Forward
foreign exchange contracts
To
avoid foreign currency fluctuation on forecasted international sales and secure the profits on such revenues, the Company entered
several forward foreign exchange contracts with banks from time to time. According to ASC 815-20-25, the Company designated above
contracts as cash flow hedges. As of June 30, 2018, the Company had one outstanding forward foreign exchange contract (sell EUR
dollars for RMB), with total notional amount of €0.42 million and two outstanding forward foreign exchange contracts (sell
USD dollars for RMB), with total notional amount of $17.0 million according to the amounts of orders. These contracts have aggregate
unrealized loss of $0.49 million in fair value recognized as derivatives financial instruments liabilities and accumulated other
comprehensive income (loss) in the consolidated balance sheets.
As
of June 30, 2019, the Company had one outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional
amount of $10.0 million. The fair value of this contract at June 30, 2019 was not significant.
NOTE
6 LEASES
The Company recognized operating
lease liabilities and operating lease right-of-use assets on its balance sheets. 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 six months ended June 30, 2019, the costs of the leases recognized
in cost of revenues and general administrative expenses are $9.8 and $0.4 million, respectively. Cash paid for the operating leases
including in the operating cash flows was $10.2 million. As of June 30, 2019, the Company has $51.6 million of right-of-use assets,
$42.8 million in current operating lease liabilities and $8.8 million in non-current operating lease liabilities as of June 30,
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 the Company over terms similar to the lease terms.
NOTE
7 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 Hong Kong, and under the current laws of Hong Kong, 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 six months ended June 30, 2019 and 2018 was taxable in the following jurisdictions:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
PRC
|
|
$
|
3,228
|
|
|
$
|
4,010
|
|
|
$
|
3,605
|
|
|
$
|
5,359
|
|
Others
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
$
|
3,228
|
|
|
$
|
4,004
|
|
|
$
|
3,598
|
|
|
$
|
5,347
|
|
The
following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended
June 30, 2019 and 2018:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Net operating losses for which no deferred tax assets was recognized
|
|
|
24.5
|
|
|
|
9.1
|
|
|
|
46.7
|
|
|
|
13.2
|
|
Other
|
|
|
(4.4
|
)
|
|
|
(2.0
|
)
|
|
|
(8.3
|
)
|
|
|
-
|
|
Effective income tax rate
|
|
|
45.1
|
%
|
|
|
32.1
|
%
|
|
|
63.4
|
%
|
|
|
38.2
|
%
|
Income
tax expense for the three and six months ended June 30, 2019 and 2018 is as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
1,785
|
|
|
$
|
1,960
|
|
|
$
|
1,990
|
|
|
$
|
2,884
|
|
Deferred
|
|
|
(330
|
)
|
|
|
(675
|
)
|
|
|
290
|
|
|
|
(843
|
)
|
Income tax expense
|
|
$
|
1,455
|
|
|
$
|
1,285
|
|
|
$
|
2,280
|
|
|
$
|
2,041
|
|
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 $107.2 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 changed for the three and six months ended June 30, 2019.
NOTE
8 EARNINGS PER SHARE
The
following demonstrates the calculation for earnings per share for the three and six months ended June 30, 2019 and 2018:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average number of common shares – Basic and diluted
|
|
|
14,800,140
|
|
|
|
14,795,992
|
|
|
|
14,800,140
|
|
|
|
14,795,992
|
|
Earnings per share – Basic and diluted
|
|
$
|
0.13
|
|
|
$
|
0.19
|
|
|
$
|
0.09
|
|
|
$
|
0.24
|
|
NOTE
9 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
10 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 six months ended June 30, 2019 and 2018, the Company received $14,176, $45,655, $17,919 and $51,541
from the customers and paid $13,248, $39,086, $20,130 and $39,318 to Wubijia through the consignment, respectively. The net income
(loss) of $928, $6,570, ($2,212) and $12,223 was recorded as other income (expenses) during the three and six months ended June
30, 2019 and 2018, respectively.
Other
expenses due to Related Parties
Included
in other expenses for the three and six months ended June 30, 2019 and 2018 are rent costs due to entities controlled by Mr. Kang
under operating lease agreements as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Chuzhou Huarui
|
|
|
35
|
|
|
|
51
|
|
|
|
88
|
|
|
|
109
|
|
Kunshan Enjin
|
|
|
22
|
|
|
|
14
|
|
|
|
44
|
|
|
|
27
|
|
Total
|
|
$
|
57
|
|
|
$
|
65
|
|
|
$
|
132
|
|
|
$
|
136
|
|
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 $0.4 million, $0.6 million, $1.52 million and $1.85 million during
the three and six months ended June 30, 2019 and 2018, respectively.
In
addition, sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 2019 and 2018
are as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Chuzhou Huarui
|
|
$
|
1,960
|
|
|
$
|
1,006
|
|
|
$
|
3,467
|
|
|
$
|
1,873
|
|
Fengyang Huarui
|
|
|
442
|
|
|
|
567
|
|
|
|
548
|
|
|
|
1,051
|
|
Nanjing Ever-Kyowa
|
|
|
408
|
|
|
|
326
|
|
|
|
755
|
|
|
|
675
|
|
Ever-Glory Vietnam
|
|
|
2,469
|
|
|
|
3,260
|
|
|
|
5,048
|
|
|
|
5,174
|
|
Nanjing Knitting
|
|
|
600
|
|
|
|
-
|
|
|
|
600
|
|
|
|
-
|
|
EsCeLav
|
|
|
13
|
|
|
|
21
|
|
|
|
101
|
|
|
|
21
|
|
Jiangsu Ever-Glory
|
|
|
45
|
|
|
|
17
|
|
|
|
470
|
|
|
|
21
|
|
|
|
$
|
5,937
|
|
|
$
|
5,197
|
|
|
$
|
10,989
|
|
|
$
|
8,815
|
|
Accounts
Payable – Related Parties
The
accounts payable to related parties at June 30, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
1,769
|
|
|
|
1,863
|
|
Fengyang Huarui
|
|
|
34
|
|
|
|
622
|
|
Nanjing Ever-Kyowa
|
|
|
707
|
|
|
|
580
|
|
Chuzhou Huarui
|
|
|
1,062
|
|
|
|
888
|
|
Nanjing Knitting
|
|
|
283
|
|
|
|
171
|
|
Jiangsu Ever-Glory
|
|
|
941
|
|
|
|
632
|
|
Total
|
|
$
|
4,796
|
|
|
$
|
4,756
|
|
Amounts
Due From Related Parties-current assets
The
amounts due from related parties at June 30, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Jiangsu Ever-Glory
|
|
$
|
144
|
|
|
$
|
122
|
|
Esc’elav
|
|
|
-
|
|
|
|
70
|
|
Total
|
|
$
|
144
|
|
|
$
|
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 and six months ended June 30, 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 a cost of $0 million, $0 million,
$0 million and $0.3 million during the three and six months period ended June 30, 2019 and 2018, respectively. Jiangsu Ever-Glory
purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.1 million, $0.1 million, $0.1 million
and $0.1 million during the three and six months ended June 30, 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 June 30, 2019 and December 31, 2018, Jiangsu Ever-Glory has provided guarantees for
approximately $33.5 million (RMB 230 million) and $33.4 million (RMB 230 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 $29.9 million (RMB 205.5 million) as of June 30, 2019 and December
31, 2018, respectively. Mr. Kang has also provided a personal guarantee for $17.0 million (RMB 116.8 million) and $14.5 million
(RMB 100.0 million) as of June 30, 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 six months ended June 30, 2019, an additional $5.5 million (RMB 37.0 million) was provided to and $8.1 million (RMB
55.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2019, the amount of the counter-guarantee
was $7.3 million (RMB 50.0 million) (the difference represents currency exchange adjustment of $0.1 million), which was 21.7%
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 $0.6 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins
4E and 4G. At June 30, 2019 and December 31, 2018, the amount classified as a reduction of equity was $7.9 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 January 1, 2019,
interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for the three and six months
ended June 30, 2019 and 2018 was approximately $0.1 million, $0.2 million, $0.2 million and $0.4 million, respectively.
NOTE
11 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 June 30, 2019 and December 31, 2018 was $5.1
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 six months ended June 30, 2019, the Company had two wholesale customers that represented approximately 16% and 10% of the
Company’s revenues. For the three months ended June 30, 2019, the Company had two wholesale customers that represented approximately
8% and 14% of the Company’s revenues. For the six months ended June 30, 2018, the Company had one wholesale customer that
represented approximately 8.97% of the Company’s revenues. For the three months ended June 30, 2018, the Company had two
wholesale customers that represented approximately 9.68% and 6.60% 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 and six months ended June 30, 2019 and 2018.
For
the retail business, the Company relied on three raw material suppliers that represented approximately 32%, 31% and 21% of raw
material purchases during the six months ended June 30, 2019. For the Company’s retail business, the Company had two suppliers
that represented 31.4% and 31.2% of raw materials purchases during the three and six months ended June 30, 2018.
For
the wholesale business, the Company did not rely on any finished goods supplier that represented more than 10% of the total raw material
purchases during the three and six months ended June 30, 2019 and 2018.
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 and six months ended June 30, 2019 and 2018.
The
Company’s revenues for the three and six months ended June 30, 2019 and 2018 were earned in the following geographic areas:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
The People’s Republic of China
|
|
$
|
6,491
|
|
|
$
|
9,131
|
|
|
$
|
17,246
|
|
|
$
|
13,342
|
|
Hong Kong China
|
|
|
6,463
|
|
|
|
7,418
|
|
|
|
7,717
|
|
|
|
12,556
|
|
Germany
|
|
|
877
|
|
|
|
899
|
|
|
|
1,726
|
|
|
|
2,765
|
|
United Kingdom
|
|
|
2,038
|
|
|
|
2,881
|
|
|
|
2,838
|
|
|
|
5,099
|
|
Europe-Other
|
|
|
4,224
|
|
|
|
5,833
|
|
|
|
9,453
|
|
|
|
10,285
|
|
Japan
|
|
|
1,311
|
|
|
|
1,881
|
|
|
|
6,248
|
|
|
|
4,318
|
|
United States
|
|
|
15,847
|
|
|
|
10,771
|
|
|
|
20,125
|
|
|
|
15,705
|
|
Total wholesale business
|
|
|
37,251
|
|
|
|
38,814
|
|
|
|
65,353
|
|
|
|
64,070
|
|
Retail business
|
|
|
40,065
|
|
|
|
49,727
|
|
|
|
99,919
|
|
|
|
117,256
|
|
Total
|
|
$
|
77,316
|
|
|
$
|
88,541
|
|
|
$
|
165,272
|
|
|
$
|
181,326
|
|
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)
|
|
Six months ended June 30, 2019
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
65,353
|
|
|
|
99,919
|
|
|
|
165,272
|
|
Income from operations
|
|
$
|
2,374
|
|
|
|
397
|
|
|
|
2,771
|
|
Interest income
|
|
$
|
466
|
|
|
|
18
|
|
|
|
484
|
|
Interest expense
|
|
$
|
572
|
|
|
|
199
|
|
|
|
771
|
|
Depreciation and amortization
|
|
$
|
473
|
|
|
|
8,740
|
|
|
|
9,213
|
|
Income tax expense
|
|
$
|
1,475
|
|
|
|
805
|
|
|
|
2,280
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
549
|
|
|
|
3,533
|
|
|
|
4,082
|
|
Total assets
|
|
|
77,218
|
|
|
|
188,541
|
|
|
|
265,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
64,070
|
|
|
|
117,256
|
|
|
|
181,326
|
|
Income from operations
|
|
$
|
2,634
|
|
|
|
1,940
|
|
|
|
4,574
|
|
Interest income
|
|
$
|
663
|
|
|
|
33
|
|
|
|
696
|
|
Interest expense
|
|
$
|
782
|
|
|
|
142
|
|
|
|
924
|
|
Depreciation and amortization
|
|
$
|
602
|
|
|
|
4,301
|
|
|
|
4,903
|
|
Income tax expense
|
|
$
|
714
|
|
|
|
1,327
|
|
|
|
2,041
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
556
|
|
|
|
5,739
|
|
|
|
6,295
|
|
Total assets
|
|
|
91,483
|
|
|
|
129,707
|
|
|
|
221,190
|
|
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Three months ended June 30, 2019
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
37,251
|
|
|
|
40,065
|
|
|
|
77,316
|
|
Income from operations
|
|
$
|
1,605
|
|
|
|
345
|
|
|
|
1,950
|
|
Interest income
|
|
$
|
268
|
|
|
|
9
|
|
|
|
277
|
|
Interest expense
|
|
$
|
310
|
|
|
|
98
|
|
|
|
408
|
|
Depreciation and amortization
|
|
$
|
182
|
|
|
|
2,084
|
|
|
|
2,266
|
|
Income tax expense
|
|
$
|
1,255
|
|
|
|
200
|
|
|
|
1,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
38,814
|
|
|
|
49,727
|
|
|
|
88,541
|
|
Income from operations
|
|
$
|
1,538
|
|
|
|
1,591
|
|
|
|
3,129
|
|
Interest income
|
|
$
|
354
|
|
|
|
16
|
|
|
|
370
|
|
Interest expense
|
|
$
|
291
|
|
|
|
69
|
|
|
|
360
|
|
Depreciation and amortization
|
|
$
|
297
|
|
|
|
2,069
|
|
|
|
2,366
|
|
Income tax expense
|
|
$
|
481
|
|
|
|
804
|
|
|
|
1,285
|
|
NOTE
12 SUBSEQUENT EVENTS
As
of August 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 and six months ended
June 30, 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 June 30, 2019, we had 1,235 stores (including store-in-stores), including 40 stores were opened
and 186 stores were closed in first half year of 2019. We expect to open additional 100 to 150 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.
Lease
The Company
determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes,
to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than
allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard,
the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive
covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure
a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide
an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value
of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would
pay to borrow on a collateralized basis over a similar term with similar payments.
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 the company over terms similar to the lease terms. The followings are lists of leases: (i) the terms of Shanghai
LAGOGO land use right and buildings are 34 years; (ii) the terms of Kunshan logistics center and Chuzhou logistics center are 5
years; (iii) the terms of flagship stores are 3 years. The terms of stores within shopping mall are one year. The shopping malls
sort the stores within shopping mall based on sales every year and the stores within shopping mall of higher sales will be arrange
to the better location. If the sales do not meet the requirements of the shopping malls, the stores within shopping mall will be
removed. The store within shopping mall is different from flagship store. The shopping malls count the rent of counter according
to the sale but the rent of flagship store is fixed every year. The company estimates the terms of flagship store are three years
according to the previous data. The company calculates the Right-Of-Use (ROU) or Lease Obligation (Obligation) of the stores within
shopping mall in a floating manner because the rents of the stores within shopping mall will vary according to the sales. The rents
of the stores within shopping mall will be higher if the number and sales of counters is larger, so the ROU/Obligation of the counter
will be higher .
Recently
Issued Accounting Pronouncements
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.
In
April 2019, the FASB issued ASU No. 2019-04
“Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, 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.
Results
of Operations for the three months ended June 30, 2019 and 2018
The
following table summarizes our results of operations for the three months ended June 30, 2019 and 2018. The table and the discussion
below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere
in this report.
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
Sales
|
|
$
|
77,316
|
|
|
|
100.0
|
%
|
|
$
|
88,541
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
$
|
28,986
|
|
|
|
39.0
|
%
|
|
$
|
34,542
|
|
|
|
39.0
|
%
|
Operating Expense
|
|
$
|
27,036
|
|
|
|
35.5
|
%
|
|
$
|
31,413
|
|
|
|
35.5
|
%
|
Income From Operations
|
|
$
|
1,950
|
|
|
|
3.5
|
%
|
|
$
|
3,129
|
|
|
|
3.5
|
%
|
Other Income (Expenses)
|
|
$
|
1,278
|
|
|
|
1.0
|
%
|
|
$
|
875
|
|
|
|
1.0
|
%
|
Income tax expense
|
|
$
|
1,455
|
|
|
|
1.5
|
%
|
|
$
|
1,285
|
|
|
|
1.5
|
%
|
Net Income
|
|
$
|
1,773
|
|
|
|
3.1
|
%
|
|
$
|
2,719
|
|
|
|
3.1
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2019 and 2018.
|
|
2019
|
|
|
% of
total sales
|
|
|
2018
|
|
|
% of
total sales
|
|
|
Growth (Decrease)
in 2019 compared
with 2018
|
|
Wholesale business
|
|
(In thousands of U.S. dollars)
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
6,491
|
|
|
|
8.4
|
%
|
|
$
|
9,131
|
|
|
|
10.3
|
%
|
|
|
(28.9
|
)%
|
Hong Kong China
|
|
|
6,463
|
|
|
|
8.4
|
|
|
|
7,418
|
|
|
|
8.4
|
|
|
|
(12.9
|
)
|
Germany
|
|
|
877
|
|
|
|
1.1
|
|
|
|
899
|
|
|
|
1.0
|
|
|
|
(2.5
|
)
|
United Kingdom
|
|
|
2,038
|
|
|
|
2.6
|
|
|
|
2,881
|
|
|
|
3.3
|
|
|
|
(29.3
|
)
|
Europe-Other
|
|
|
4,224
|
|
|
|
5.5
|
|
|
|
5,833
|
|
|
|
6.6
|
|
|
|
(27.6
|
)
|
Japan
|
|
|
1,311
|
|
|
|
1.7
|
|
|
|
1,881
|
|
|
|
2.1
|
|
|
|
(30.3
|
)
|
United States
|
|
|
15,847
|
|
|
|
20.5
|
|
|
|
10,771
|
|
|
|
12.1
|
|
|
|
47.1
|
|
Total Wholesale business
|
|
|
37,251
|
|
|
|
48.2
|
|
|
|
38,814
|
|
|
|
43.8
|
|
|
|
(4.0
|
)
|
Retail business
|
|
|
40,065
|
|
|
|
51.8
|
|
|
|
49,727
|
|
|
|
56.2
|
|
|
|
(19.4
|
)
|
Total sales
|
|
$
|
77,316
|
|
|
|
100.0
|
%
|
|
$
|
88,541
|
|
|
|
100.0
|
%
|
|
|
(12.7
|
)%
|
Sales
for the three months ended June 30, 2019 were $77.3 million, a 12.7% decrease compared with the three months ended June 30, 2018.
This decrease was primarily attributable to a 4.0% decrease in sales in our wholesale business partially and a 19.4% decrease
in our retail business.
Sales
generated from our wholesale business contributed 48.2% or $37.3 million of our total sales for the three months ended June 30,
2019, a 4.0% decrease compared with 43.8% or $38.8 million in the three months ended June 30, 2018. This decrease was primarily
attributable to an increase in sales in United States partially offset by a decrease in sales in Hong Kong, Germany, Europe-Other, Mainland
China, United Kingdom and Japan.
Sales
generated from our retail business contributed 51.8% or $40.1 million of our total sales for the three months ended June 30, 2019,
a 19.4% decrease compared with 56.2% or $49.7 million in the three months ended June 30, 2018. This decrease was primarily due
to a decrease in the amounts of stores and same store sales.
Costs
and Expenses
Cost
of Sales and Gross Margin
Cost
of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production
equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have
not been significant.
The
following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales
for the three months ended June 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
2019
|
|
|
|
Three months ended June 30,
|
|
|
Compared
|
|
|
|
2019
|
|
|
2018
|
|
|
with 2018
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Net Sales for Wholesale Sales
|
|
$
|
37,251
|
|
|
|
100.0
|
%
|
|
$
|
38,814
|
|
|
|
100.0
|
%
|
|
|
(4.0
|
)%
|
Raw Materials
|
|
|
16,376
|
|
|
|
44.0
|
|
|
|
16,456
|
|
|
|
42.5
|
|
|
|
(0.5
|
)
|
Labor
|
|
|
398
|
|
|
|
1.1
|
|
|
|
396
|
|
|
|
1.0
|
|
|
|
0.6
|
|
Outsourced Production Costs
|
|
|
14,409
|
|
|
|
38.7
|
|
|
|
14,722
|
|
|
|
37.9
|
|
|
|
(2.1
|
)
|
Other and Overhead
|
|
|
55
|
|
|
|
0.1
|
|
|
|
84
|
|
|
|
0.2
|
|
|
|
(35.2
|
)
|
Total Cost of Sales for Wholesale
|
|
|
31,238
|
|
|
|
83.9
|
|
|
|
31,658
|
|
|
|
81.6
|
|
|
|
(1.3
|
)
|
Gross Profit for Wholesale
|
|
|
6,013
|
|
|
|
16.1
|
|
|
|
7,156
|
|
|
|
18.4
|
|
|
|
(16.0
|
)
|
Net Sales for Retail
|
|
|
40,065
|
|
|
|
100.0
|
|
|
|
49,727
|
|
|
|
100.0
|
|
|
|
(19.4
|
)
|
Production Costs
|
|
|
10,084
|
|
|
|
25.2
|
|
|
|
13,984
|
|
|
|
28.1
|
|
|
|
(27.9
|
)
|
Rent
|
|
|
7,008
|
|
|
|
17.5
|
|
|
|
8,357
|
|
|
|
16.8
|
|
|
|
(16.1
|
)
|
Total Cost of Sales for Retail
|
|
|
17,092
|
|
|
|
42.7
|
|
|
|
22,341
|
|
|
|
44.9
|
|
|
|
(23.5
|
)
|
Gross Profit for Retail
|
|
|
22,973
|
|
|
|
57.3
|
|
|
|
27,386
|
|
|
|
55.1
|
|
|
|
(16.1
|
)
|
Total Cost of Sales
|
|
|
48,330
|
|
|
|
62.5
|
|
|
|
53,999
|
|
|
|
61.0
|
|
|
|
(10.5
|
)
|
Gross Profit
|
|
$
|
28,986
|
|
|
|
37.5
|
%
|
|
$
|
34,542
|
|
|
|
39.0
|
%
|
|
|
(16.1
|
)%
|
Raw
material costs for our wholesale business were 44.0% of our total wholesale business sales in the three months ended June 30,
2019, compared with 42.5% in the three months ended June 30, 2018. The increase was mainly due to higher raw material prices.
Labor
costs for our wholesale business were 1.1% of our total wholesale business sales in the three months ended June 30, 2019, compared
with 1.0% in the three months ended June 30, 2018. The marginal increase was mainly due to a higher average employee salaries
in 2019.
Outsourced
production costs for our wholesale business for the three months ended June 30, 2019 decreased 2.1% to $14.4 million from
$14.7 million for the three months ended June 30, 2018. Outsourced production costs accounted for 38.7% of our total
wholesale business sales in the three months ended June 30, 2019, a 0.8% increase from the three months ended June 30, 2018.
This increase in percentage was primarily attributable to higher average employee salaries at our outsourced manufacturing
factories.
Overhead
and other expenses for our wholesale business accounted for 0.1% of our total wholesale business sales for the three months ended
June 30, 2019, compared with 0.2% of total wholesale business sales for the three months ended June 30, 2018.
Wholesale
business gross profit for the three months ended June 30, 2019 was $6.0 million compared with $7.2 million for the three months
ended June 30, 2018. Gross profit accounted for 16.1% of our total wholesale sales for the three months ended June 30, 2019, compared
with 18.4% for the three months ended June 30, 2018. The decrease was mainly due to an increase in raw material costs and higher
average employee salaries.
Production
costs for our retail business were $10.1 million for the three months ended June 30, 2019 compared with $14.0 million during the
three months ended June 30, 2018. Retail production costs accounted for 25.2% of our total retail sales in the three months ended
June 30, 2019, compared with 28.1% for the three months ended June 30, 2018. The decrease was due to decrease in overall purchase
costs.
Rent
costs for our retail business for the three months ended June 30, 2019 were $7.0 million compared with $8.4 million for the three
months ended June 30, 2018. Rent costs for our retail business accounted for 17.5% of our total retail sales for the three months
ended June 30, 2019, compared with 16.8% for the three months ended June 30, 2018. The decrease was primarily attributable to
the decline in number of stores.
Gross
profit in our retail business for the three months ended June 30, 2019 was $23.0 million and gross margin was 57.3%. Gross profit
in our retail business for the three months ended June 30, 2018 was $27.4 million and gross margin was 55.1%.
Total
cost of sales for the three months ended June 30, 2019 was $48.3 million, a 10.5% decrease from $54.0 million for the three months
ended June 30, 2018. Total cost of sales as a percentage of total sales for the three months ended June 30, 2019 was 62.5%, compared
with 61.0% for the three months ended June 30, 2018. Gross margin for the three months ended June 30, 2019 was 37.5% compared
with 39.0% for the three months ended June 30, 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 June 30,
|
|
|
Increase (Decrease) in 2019 Compared
|
|
|
|
2019
|
|
|
2018
|
|
|
to 2018
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Gross Profit
|
|
$
|
28,986
|
|
|
|
37.5
|
%
|
|
$
|
34,542
|
|
|
|
39.0
|
%
|
|
|
(16.1
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
19,699
|
|
|
|
25.5
|
|
|
|
22,590
|
|
|
|
25.5
|
|
|
|
(12.8
|
)
|
General and Administrative Expenses
|
|
|
7,337
|
|
|
|
9.5
|
|
|
|
8,823
|
|
|
|
10.0
|
|
|
|
(16.8
|
)
|
Total
|
|
|
27,036
|
|
|
|
35.0
|
|
|
|
31,413
|
|
|
|
35.5
|
|
|
|
(13.9
|
)
|
Income from Operations
|
|
$
|
1,950
|
|
|
|
2.5
|
%
|
|
$
|
3,129
|
|
|
|
3.5
|
%
|
|
|
(37.7
|
)%
|
Selling
expenses for the three months ended June 30, 2019 decreased 12.8% to $19.7 million from $22.6 million for the three months ended
June 30, 2018. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand.
General
and administrative expenses for the three months ended June 30, 2019 decreased 16.8% to $7.3 million from $8.8 million for the
three months ended June 30, 2018. The decrease was attributable to the decline in number of stores.
Income
from Operations
Income
from operations for the three months ended June 30, 2019 decreased 37.6% to $2.0 million from $3.1 million for the three months
ended June 30, 2018. Income from operations for the three months ended June 30, 2019 accounted for 2.5% of our total sales, a
1.0% decrease compared with the three months ended June 30, 2018.
Interest
Expense
Interest
expense for the three months ended June 30, 2019 was $0.4 million, a 13.3% increase compared with the same period in 2018. The
increase was due to the increase in interest rate.
Income
Tax Expenses
Income
tax expense was $0.7 million and $1.3 million for the three months end June 30, 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
Net
income for the three months ended June 30, 2019 was $1.8 million, a 34.8% decrease compared with the same period in 2018. Our
basic and diluted earnings per share were $0.13 and $0.19 for the three months ended June 30, 2019 and 2018, respectively.
Results
of Operations for the six months ended June 30, 2019 and 2018
The
following table summarizes our results of operations for the six months ended June 30, 2019 and 2018. The table and the discussion
below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this
report.
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars, except for percentages)
|
|
Sales
|
|
$
|
165,272
|
|
|
|
100.0
|
%
|
|
$
|
181,326
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
|
58,344
|
|
|
|
35.3
|
|
|
|
65,887
|
|
|
|
36.3
|
|
Operating Expense
|
|
|
55,573
|
|
|
|
33.6
|
|
|
|
61,313
|
|
|
|
33.8
|
|
Income From Operations
|
|
|
2,771
|
|
|
|
1.7
|
|
|
|
4,574
|
|
|
|
2.5
|
|
Other Income
|
|
|
827
|
|
|
|
0.5
|
|
|
|
773
|
|
|
|
0.4
|
|
Income tax expense
|
|
|
2,280
|
|
|
|
1.4
|
|
|
|
2,041
|
|
|
|
1.1
|
|
Net Income
|
|
$
|
1,318
|
|
|
|
0.8
|
%
|
|
$
|
3,306
|
|
|
|
1.8
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2019 and 2018.
|
|
2019
|
|
|
% of total sales
|
|
|
2018
|
|
|
% of total sales
|
|
|
Growth (Decrease)
in 2019 compared
with 2018
|
|
Wholesale business
|
|
(In thousands of U.S. dollars)
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
17,246
|
|
|
|
10.4
|
%
|
|
$
|
13,342
|
|
|
|
7.4
|
%
|
|
|
29.3
|
%
|
Hong Kong China
|
|
|
7,717
|
|
|
|
4.7
|
|
|
|
12,556
|
|
|
|
6.9
|
|
|
|
(38.5
|
)
|
Germany
|
|
|
1,726
|
|
|
|
1.0
|
|
|
|
2,765
|
|
|
|
1.5
|
|
|
|
(37.6
|
)
|
United Kingdom
|
|
|
2,838
|
|
|
|
1.7
|
|
|
|
5,099
|
|
|
|
2.8
|
|
|
|
(44.3
|
)
|
Europe-Other
|
|
|
9,453
|
|
|
|
5.7
|
|
|
|
10,286
|
|
|
|
5.7
|
|
|
|
(8.1
|
)
|
Japan
|
|
|
6,248
|
|
|
|
3.8
|
|
|
|
4,318
|
|
|
|
2.4
|
|
|
|
44.7
|
|
United States
|
|
|
20,125
|
|
|
|
12.2
|
|
|
|
15,704
|
|
|
|
8.6
|
|
|
|
28.1
|
|
Total Wholesale business
|
|
|
65,353
|
|
|
|
39.5
|
|
|
|
64,070
|
|
|
|
35.3
|
|
|
|
2.0
|
|
Retail business
|
|
|
99,919
|
|
|
|
60.5
|
|
|
|
117,256
|
|
|
|
64.7
|
|
|
|
(14.8
|
)
|
Total sales
|
|
$
|
165,272
|
|
|
|
100.0
|
%
|
|
$
|
181,326
|
|
|
|
100.0
|
%
|
|
|
(8.9
|
)%
|
Sales
for the six months ended June 30, 2019 were $165.3 million, a decrease of 8.9% from the six months ended June 30, 2018. This decrease
was primarily attributable to a 2.0% increase in sales in our wholesale business and a 14.8% decrease in our retail business.
Sales
generated from our wholesale business contributed 39.5% or $65.4 million of our total sales for the six months ended June 30,
2019, an increase of 2.0% compared with 35.3% or $64.1 million in the six months ended June 30, 2018. This increase was primarily
attributable to increased sales in Mainland China, Japan and the United States partially offset by decreased sales in Hong Kong
China, Germany, United Kingdom and Europe-Other.
Sales
generated from our retail business contributed 60.5% or $99.9 million of our total sales for the six months ended June 30, 2019,
a decrease of 14.8% compared with 64.7% or $117.3 million in the six months ended June 30, 2018. This decrease was primarily due
to a decrease in same store sales.
Total
retail store square footage and sales per square foot for the six months ended June 30, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Total store square footage
|
|
|
1,274,661
|
|
|
|
1,421,156
|
|
Number of stores
|
|
|
1,235
|
|
|
|
1,417
|
|
Average store size, square feet
|
|
|
1,032
|
|
|
|
1,003
|
|
Total store sales (in thousands of U.S. dollars)
|
|
$
|
99,919
|
|
|
$
|
117,256
|
|
Sales per square foot
|
|
$
|
78
|
|
|
$
|
83
|
|
Same
store sales and newly opened store sales for the six months ended June 30, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. dollars)
|
|
Sales from stores opened for a full year
|
|
$
|
77,984
|
|
|
$
|
92,898
|
|
Sales from newly opened store sales
|
|
$
|
7,417
|
|
|
$
|
11,728
|
|
Sales from e-commerce platform
|
|
$
|
6,197
|
|
|
$
|
6,989
|
|
Other*
|
|
$
|
8,321
|
|
|
$
|
5,641
|
|
Total
|
|
$
|
99,919
|
|
|
$
|
117,256
|
|
|
*
|
Primarily
sales from stores that were closed in the current reporting period.
|
We
remodeled or relocated 250 stores in 2018, and 39 stores during the six months ended June 30, 2019. We plan to relocate or remodel
100-150 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 six months ended June 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
2019
|
|
|
|
Six months ended June 30,
|
|
|
Compared
|
|
|
|
2019
|
|
|
2018
|
|
|
with 2018
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Net Sales for Wholesale Sales
|
|
$
|
65,353
|
|
|
|
100.0
|
%
|
|
$
|
64,071
|
|
|
|
100.0
|
%
|
|
|
2.0
|
%
|
Raw Materials
|
|
|
27,685
|
|
|
|
42.3
|
|
|
|
26,724
|
|
|
|
41.7
|
|
|
|
3.6
|
|
Labor
|
|
|
705
|
|
|
|
1.1
|
|
|
|
781
|
|
|
|
1.2
|
|
|
|
(9.7
|
)
|
Outsourced Production Costs
|
|
|
24,279
|
|
|
|
37.2
|
|
|
|
23,447
|
|
|
|
36.6
|
|
|
|
3.6
|
|
Other and Overhead
|
|
|
113
|
|
|
|
0.2
|
|
|
|
157
|
|
|
|
0.3
|
|
|
|
(27.5
|
)
|
Total Cost of Sales for Wholesale
|
|
|
52,782
|
|
|
|
80.8
|
|
|
|
51,109
|
|
|
|
79.8
|
|
|
|
3.3
|
|
Gross Profit for Wholesale
|
|
|
12,571
|
|
|
|
19.2
|
|
|
|
12,962
|
|
|
|
20.2
|
|
|
|
(3.0
|
)
|
Net Sales for Retail
|
|
|
99,919
|
|
|
|
100.0
|
|
|
|
117,255
|
|
|
|
100.0
|
|
|
|
(14.8
|
)
|
Production Costs
|
|
|
34,286
|
|
|
|
34.3
|
|
|
|
40,055
|
|
|
|
34.2
|
|
|
|
(14.4
|
)
|
Rent
|
|
|
19,860
|
|
|
|
19.9
|
|
|
|
24,275
|
|
|
|
20.7
|
|
|
|
(18.2
|
)
|
Total Cost of Sales for Retail
|
|
|
54,146
|
|
|
|
54.2
|
|
|
|
64,330
|
|
|
|
54.9
|
|
|
|
(15.8
|
)
|
Gross Profit for Retail
|
|
|
45,773
|
|
|
|
45.8
|
|
|
|
52,925
|
|
|
|
45.1
|
|
|
|
(13.5
|
)
|
Total Cost of Sales
|
|
|
106,928
|
|
|
|
64.7
|
|
|
|
115,439
|
|
|
|
63.7
|
|
|
|
(7.4
|
)
|
Gross Profit
|
|
$
|
58,344
|
|
|
|
35.3
|
%
|
|
$
|
65,887
|
|
|
|
36.3
|
%
|
|
|
(11.4
|
)%
|
Raw
material costs for our wholesale business were 42.3% of our total wholesale business sales in the six months ended June 30, 2019,
compared with 41.7% in the six months ended June 30, 2018. The increase was mainly due to higher cost of raw materials.
Labor
costs for our wholesale business were 1.1% of our total wholesale business sales in the six months ended June 30, 2019, compared
with 1.2% in the six months ended June 30, 2018. The marginal decrease was mainly due to a lower number of outsourced orders in
first half of 2019.
Outsourced
production costs for our wholesale business were 37.2% of our total sales in the six months ended June 30, 2019, compared with
36.6% in the six months ended June 30, 2018. This increase was primarily attributable to higher average employee salaries at our
outsourced manufacturing factories.
Overhead
and other expenses for our wholesale business accounted for 0.2% and 0.3% of our total sales for the six months ended June 30,
2019 and 2018, respectively.
Gross
profit for our wholesale business for the six months ended June 30, 2019 was $12.6 million, a 3.0% decrease compared with the
six months ended June 30, 2018. As a percentage of total wholesale business sales, gross profit was 19.2% of our total wholesale
business sales for the six months ended June 30, 2019, compared with 20.2% for the six months ended June 30, 2018. The decrease
was mainly due to increased raw materials costs and higher average employee salaries.
Production
costs for our retail business for the six months ended June 30, 2019 were $34.3 million compared with $40.1 million for the six
months ended June 30, 2018. As a percentage of our total retail sales, production costs were 34.3% of our total retail sales for
the six months ended June 30, 2019, compared with 34.2% for the six months ended June 30, 2018. The decrease was due to decrease
in overall purchase costs.
Rent
costs for our retail business for the six months ended June 30, 2019 were $19.9 million compared with $24.3 million for the six
months ended June 30, 2018. As a percentage of total retail sales, rent costs were 19.9% of our total retail sales for the six
months ended June 30, 2019 compared with 20.7% for the six months ended June 30, 2018. The decrease was primarily attributable
to decline in number of stores.
Gross
profit for our retail business for the six months ended June 30, 2019 was $45.8 million compared with $52.9 million for the six
months ended June 30, 2018. Gross margin for our retail business for the six months ended June 30, 2019 was 45.8% compared with
45.1% for the six months ended June 30, 2018.
Total
cost of sales for the six months ended June 30, 2019 was $106.9 million, a 7.4% decrease compared with the six months ended June
30, 2018. As a percentage of total sales, total costs were 64.7% of total sales for the six months ended June 30, 2019, compared
with 63.7% for the six months ended June 30, 2018. Total gross margin for the six months ended June 30, 2019 was 35.3% compared
with 36.3% for the six months ended June 30, 2018.
We
purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business,
purchases from our two largest suppliers represented approximately 15.7% and 16.5% of raw material purchases for the six months
ended June 30, 2019 and 2018, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six
months ended June 30, 2019 and 2018. For our retail business, purchases from our two largest suppliers represented approximately
63.3% and 55.1% of raw material purchases for the six months ended June 30, 2019 and 2018, respectively. One supplier provided
approximately 32.2% and 31.2% of our total purchases for the six months ended June 30, 2019 and 2018, respectively. We have not
experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with
our suppliers.
We
also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract
manufacturers represented approximately 29.4% and 28.9% of finished goods purchases for the six months ended June 30, 2019 and
2018, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2019
and 2018. For our retail business, our five largest contract manufacturers represented approximately 23.2% and 16.4% of finished
goods purchases for the six months ended June 30, 2019 and 2018, respectively. No manufacturer provided more than 10% of our finished
goods purchases for the six months ended June 30, 2019 and 2018. We have not experienced difficulty in obtaining finished products
from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.
Selling,
General and Administrative Expenses
Our
selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail
staff and decoration and marketing expenses associated with our retail business.
Our
general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges,
repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable
to our revenues.
Costs
of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product
inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these
amounts in costs of sales.
|
|
Six months ended June 30,
|
|
|
Increase (Decrease) in 2019 Compared
|
|
|
|
2019
|
|
|
2018
|
|
|
to 2018
|
|
|
|
(
In thousands of U.S. dollars, except for percentages
)
|
|
|
|
|
Gross Profit
|
|
$
|
58,344
|
|
|
|
35.3
|
%
|
|
$
|
65,887
|
|
|
|
36.3
|
%
|
|
|
(11.4
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
40,706
|
|
|
|
24.6
|
|
|
|
44,817
|
|
|
|
24.7
|
|
|
|
(9.2
|
)
|
General and Administrative Expenses
|
|
|
14,867
|
|
|
|
9.0
|
|
|
|
16,496
|
|
|
|
9.1
|
|
|
|
(9.9
|
)
|
Total
|
|
|
55,573
|
|
|
|
33.6
|
|
|
|
61,313
|
|
|
|
33.8
|
|
|
|
(9.4
|
)
|
Income from Operations
|
|
$
|
2,771
|
|
|
|
1.7
|
%
|
|
$
|
4,574
|
|
|
|
2.5
|
%
|
|
|
(39.4
|
)%
|
Selling
expenses for the six months ended June 30, 2019 were $40.7 million, a 9.2% decrease compared with the six months ended June 30,
2018. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand.
General
and administrative expenses for the six months ended June 30, 2019 were $14.9 million a 9.9% decrease compared with the six months
ended June 30, 2018. As a percentage of total sales, general and administrative expenses accounted for 9.0% of total sales for
the six months ended June 30, 2019, compared with 9.1% of total sales for the six months ended June 30, 2018. The decrease was
attributable to the decline in number of stores.
Income
from Operations
Income
from operations for the six months ended June 30, 2019 was $2.8 million, a 39.4% decrease from $4.6 million for the six months
ended June 30, 2018. This decrease was due to increased expenses.
Interest
Expense
Interest
expense was $0.8 million and $0.9 million for the six months ended June 30, 2019 and 2018, respectively. The decrease was due
to the decreased bank loans.
Income
Tax Expense
Income
tax expense for the six months ended June 30, 2019 was $2.3 million, an 11.7% increase compared to the same period of
2018. The increase was primarily due to deferred tax asset valuation allowance which resulted in a slightly higher income tax
expense.
Net
Income
Net
income for the six months ended June 30, 2019 was $1.3 million, a decrease of 60.1% compared with the same period in 2018. Basic
and diluted earnings per share were $0.09 and $0.24 for the six months ended June 30, 2019 and 2018, respectively.
Summary
of Cash Flows
Summary
cash flows information for the six months ended June 30, 2019 and 2018 is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. dollars)
|
|
Net cash used in operating activities
|
|
$
|
(9,785
|
)
|
|
$
|
(10,655
|
)
|
Net cash used in investing activities
|
|
$
|
(4,082
|
)
|
|
$
|
(6,295
|
)
|
Net cash used in financing activities
|
|
$
|
(889
|
)
|
|
$
|
(8,600
|
)
|
Net
cash used in operating activities was $9.8 million for the six months ended June 30, 2019, compared with $10.7 million net cash
used in operating activities during the six months ended June 30, 2018. The decrease was primarily due to decrease in inventory
and decrease in accounts receivable.
Net
cash used in investing activities was $4.1 million for the six months ended June 30, 2019, compared with $6.3 million used during
the six months ended June 30, 2018. This decrease was mainly due to the decreased in purchase of property and equipment and
remodeling expenditure in 2019.
Net
cash used in financing activities was $0.9 million for the six months ended June 30, 2019, compared with $8.6 million net cash
provided during the six months ended June 30, 2018. During the six months ended June 30, 2019, we repaid $19.9 million of bank
loans and received bank loan proceeds of $16.3 million. Also, under the counter-guarantee agreement, we received $8.1 million
from and $5.5 million paid to the related party during the six months ended June 30, 2019.
Liquidity
and Capital Resources
As
of June 30, 2019, we had cash and cash equivalents of $34.5 million, other current assets of $146.5 million and current liabilities
of $138.4 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 $8.7 million (RMB60.0 million). These loans are collateralized by the Company’s property
and equipment. As of June 30, 2019, Goldenway had borrowed $5.8 million (RMB 40.0 million) under this line of credit with an annual
interest rate of 3.92% and due on November 2019. As of June 30, 2019, approximately $2.9 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 $14.6 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 June 30, 2019, Ever-Glory
Apparel had borrowed $5.8 million (RMB 40.0 million) under this line of credit with annual interest rates ranging from 4.57% to
4.70% and due on July 2019. As of June 30, 2019, approximately $8.8 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
$7.3 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 June 30, 2019, approximately $7.3 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 $8.7 million (RMB60.0 million) with
Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed
$5.8 million (RMB40.0 million) from Nanjing Bank with an annual interest rates 5.0% and due on variable dates from September 2019
to June 2020. As of June 30, 2019, approximately $2.9 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 $2.9 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2019,
approximately $2.9 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 $2.9 million (RMB20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2019, LA GO GO had borrowed $2.9 million (RMB20.0 million)
from China Minsheng Bank with an annual interest rate of 4.79% and due in October 2019.
In
November 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB19.9 million) with the Bank
of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of June 30, 2019, LA GO GO had
borrowed $2.9 million (RMB19.9 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 $2.9 million (RMB20.0 million) with the
Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $2.6 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 June 30, 2019, approximately $0.3 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 June 2019, Ever-Glory Apparel had borrowed $0.2 million from HSBC with an annual interest rate of 3.2% and due
in September 2019, and 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 June 30, 2019, approximately $2.3 million was unused
and available under this line of credit.
All
loans have been repaid before or at maturity date.
Derivative
Financial Instruments
Foreign
currency swap contracts
The
Company entered two foreign currency swap contracts with two banks during 2018. Due to the demand of financial management for
daily operation, Ever-Glory Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB
with Bank of China in May and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial
and Commercial Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and
the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period,
the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the Company failed
to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in
RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of principal amounts are included in
other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance
sheets, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is recognized in the income from operations.
As of June 30, 2019, there are no currency swap contracts.
Forward
foreign exchange contracts
To
avoid foreign currency fluctuation on forecasted international sales and secure the profits on such revenues, the Company entered
several forward foreign exchange contracts with banks from time to time. According to ASC 815-20-25, the Company designated above
contracts as cash flow hedges. As of June 30, 2018, the Company had one outstanding forward foreign exchange contract (sell EUR
dollars for RMB), with total notional amount of €0.42 million and two outstanding forward foreign exchange contracts (sell
USD dollars for RMB), with total notional amount of $17.0 million according to the amounts of orders. These contracts have aggregate
unrealized loss of $0.49 million in fair value recognized as derivatives financial instruments liabilities and accumulated other
comprehensive income (loss) in the consolidated balance sheets.
As
of June 30, 2019, the Company had one outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional
amount of $10.0 million. The fair value of this contract at June 30, 2019 was not significant.
Capital
Commitments
We
have a continuing program for the purpose of improving our manufacturing facilities and extending our retail stores. We anticipate
that cash flows from operations and borrowings from banks will be used to pay for these capital commitments.
Uses
of Liquidity
Our
cash requirements for the next year will be primarily to fund daily operations and the growth of our business, some of this being
used to fund new stores.
Sources
of Liquidity
Our
primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, and cash
equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.
We
believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet
our needs for working capital, capital expenditure and other commitments for the next year. No assurance can be made that additional
financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is
insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our
own cash flows from operations.
As
of June 30, 2019, we had access to approximately $53.4 million in lines of credit, of which approximately $27.4 million was unused
and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee
of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized
by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company,
Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately
$33.5 million (RMB 230.0 million) and approximately $7.3 million (RMB 50.0 million) was provided to Jiangsu Ever-Glory as
the counter guarantee as of June 30, 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 June 30, 2019, the market foreign exchange rate had increased to RMB 6.87 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, Haian Taixin, Ever-Glory Apparel, Taixin, He Meida, Huirui,
Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GO (whose functional currency is RMB) are translated
into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates
at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing
at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All
translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency
translation gain (loss) for the three and six months ended June 30, 2019 and 2018 was ($2.49) million, $1.49 million, ($6.09)
million and ($2.07) 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.
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 June 30, 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 second 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 June
30, 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.
August
13, 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)
|
36