UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-28806
Ever-Glory International Group Inc.
(Exact name of registrant as specified in its charter)
Florida | 65-0420146 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Ever-Glory Commercial Center,
509 Chengxin Road, Jiangning Development Zone,
Nanjing, Jiangsu Province,
People’s Republic of China
(Address of principal executive offices)
(8625) 5209-683186-25-5209-6831
(Registrant’s (Registrant’s telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ YesNo ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Act
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer | Smaller reporting company ☒ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)7(a)(2)(B) of the ExchangeSecurities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered under Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 | EVK | NASDAQ Global Market |
Securities registered under Section 12(g) of the Act: None.
As of November 11, 2016, 14,795,992August 8, 2021, 14,810,660 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.
EVER-GLORY INTERNATIONAL GROUP, INC.
FORM 10-Q
INDEX
Page Number | ||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | ii | |
PART I. FINANCIAL INFORMATION | ||
Financial Statements | 1 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosure | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
SIGNATURES |
i
Cautionary Note Regarding Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:
● | Competition within our industry; | |
● | The impact (including travel and entry restrictions and quarantine) of public health epidemics, including the COVID-19 pandemic in China and the rest of the world, on the market we operate in and our | |
● | Seasonality of our sales; | |
● | Success of our investments in new product development | |
● | Our plans and ability to open new retail stores; | |
● | Success of our acquired businesses; | |
● | Our relationships with our major customers; | |
● | The popularity of our products; | |
● | Relationships with suppliers and cost of supplies; | |
● | Financial and economic conditions in Asia, Japan, Europe and the U.S.; | |
● | Anticipated effective tax rates in future years; | |
● | Regulatory requirements affecting our business; | |
● | Currency exchange rate fluctuations; | |
● | Our | |
● | ||
● | ||
Our ability to obtain future financing on acceptable terms. |
Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar expressions are generally intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the factors described in the Section entitled “Risk Factors” on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission (’SEC’(“SEC”).
ii
PART I. FINANCIAL INFORMATION
ITEM 1.Financial Statements
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
AS OF SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016
2017 | 2016 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 40,799 | $ | 45,288 | ||||
Accounts receivable, net | 82,550 | 67,644 | ||||||
Inventories | 50,116 | 49,630 | ||||||
Value added tax receivable | 3,844 | 2,938 | ||||||
Other receivables and prepaid expenses | 6,672 | 3,674 | ||||||
Advances on inventory purchases | 4,927 | 3,139 | ||||||
Amounts due from related parties | 934 | 486 | ||||||
Total Current Assets | 189,842 | 172,799 | ||||||
INTANGIBLE ASSETS | 5,881 | 5,769 | ||||||
PROPERTY AND EQUIPMENT, NET | 23,815 | 22,694 | ||||||
TOTAL ASSETS | $ | 219,538 | $ | 201,262 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Bank loans | $ | 44,937 | $ | 29,232 | ||||
Accounts payable | 56,447 | 58,170 | ||||||
Accounts payable and other payables - related parties | 4,660 | 4,337 | ||||||
Other payables and accrued liabilities | 13,690 | 15,007 | ||||||
Value added and other taxes payable | 2,728 | 5,118 | ||||||
Income tax payable | 1,651 | 1,842 | ||||||
Total Current Liabilities | 124,113 | 113,706 | ||||||
NONCURRENT LIABILITIES | ||||||||
Deferred tax liabilities | 1,345 | 3,254 | ||||||
TOTAL LIABILITIES | 125,458 | 116,960 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock ($.001 par value, authorized 5,000,000 shares, no shares issued and outstanding) | - | - | ||||||
Common stock ($.001 par value, authorized 50,000,000 shares, 14,792,836 and 14,787,940 shares issued and outstanding As of September 30, 2017 and December 31, 2016, respectively) | 15 | 15 | ||||||
Additional paid-in capital | 3,612 | 3,602 | ||||||
Retained earnings | 90,318 | 83,423 | ||||||
Statutory reserve | 17,107 | 17,107 | ||||||
Accumulated other comprehensive income | 50 | (3,297 | ) | |||||
Amounts due from related party | (15,999 | ) | (15,936 | ) | ||||
Total equity attributable to stockholders of the Company | 95,103 | 84,914 | ||||||
Noncontrolling interest | (1,023 | ) | (612 | ) | ||||
Total Equity | 94,080 | 84,302 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 219,538 | $ | 201,262 |
June 30, 2021 | December 31, 2020 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 63,963 | $ | 81,865 | ||||
Restricted cash | 42,725 | 39,858 | ||||||
Trading securities | 3,581 | 1,792 | ||||||
Accounts receivable, net | 39,643 | 53,285 | ||||||
Inventories | 60,190 | 53,893 | ||||||
Advances on inventory purchases | 7,556 | 10,261 | ||||||
Value added tax receivable | 2,114 | 1,244 | ||||||
Other receivables and prepaid expenses | 6,255 | 5,479 | ||||||
Amounts due from related parties | 186 | 567 | ||||||
Total Current Assets | 226,213 | 248,244 | ||||||
NON-CURRENT ASSETS | ||||||||
Equity security investment | 5,929 | 3,932 | ||||||
Intangible assets, net | 4,750 | 4,794 | ||||||
Property and equipment, net | 33,414 | 32,164 | ||||||
Operating lease right-of-use assets | 49,725 | 41,690 | ||||||
Deferred tax assets | 306 | 902 | ||||||
Total Non-Current Assets | 94,124 | 83,482 | ||||||
TOTAL ASSETS | $ | 320,337 | $ | 331,726 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Bank loans | $ | 65,498 | $ | 65,919 | ||||
Accounts payable | 52,595 | 67,762 | ||||||
Accounts payable and other payables – related parties | 2,131 | 3,764 | ||||||
Other payables and accrued liabilities | 15,410 | 16,073 | ||||||
Value added and other taxes payable | - | 909 | ||||||
Income tax payable | 493 | 1,062 | ||||||
Current operating lease liabilities | 41,174 | 33,481 | ||||||
Total Current Liabilities | 177,301 | 188,970 | ||||||
NON-CURRENT LIABILITIES | ||||||||
Non-current operating lease liabilities | 8,676 | 8,307 | ||||||
TOTAL LIABILITIES | 185,977 | 197,277 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,810,660 and 14,809,160 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively) | 15 | 15 | ||||||
Additional paid-in capital | 3,655 | 3,650 | ||||||
Retained earnings | 106,230 | 109,171 | ||||||
Statutory reserve | 20,376 | 20,376 | ||||||
Accumulated other comprehensive income | 6,672 | 4,590 | ||||||
Amounts due from related party | (2,588 | ) | (3,353 | ) | ||||
Total equity | 134,360 | 134,449 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 320,337 | $ | 331,726 |
See the accompanying notes to the condensed consolidated financial statements.
1
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
NET SALES | $ | 60,555 | $ | 50,086 | $ | 131,369 | $ | 108,441 | ||||||||
COST OF SALES | 42,163 | 35,641 | 90,541 | 77,958 | ||||||||||||
GROSS PROFIT | 18,392 | 14,445 | 40,828 | 30,483 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Selling expenses | 14,503 | 12,626 | 30,052 | 26,105 | ||||||||||||
General and administrative expenses | 7,662 | 5,971 | 15,513 | 11,755 | ||||||||||||
Total Operating Expenses | 22,165 | 18,597 | 45,565 | 37,860 | ||||||||||||
LOSS FROM OPERATIONS | (3,773 | ) | (4,152 | ) | (4,737 | ) | (7,377 | ) | ||||||||
OTHER INCOME (EXPENSES) | ||||||||||||||||
Interest income | 527 | 339 | 752 | 616 | ||||||||||||
Interest expense | (200 | ) | (566 | ) | (692 | ) | (907 | ) | ||||||||
Government subsidy | 243 | 231 | 502 | 691 | ||||||||||||
Gain from changes in fair values of investments | 2,041 | 4 | 2,275 | 4 | ||||||||||||
Other income | 477 | 610 | 774 | 968 | ||||||||||||
Total Other Income, Net | 3,088 | 618 | 3,611 | 1,372 | ||||||||||||
LOSS BEFORE INCOME TAX EXPENSE | (685 | ) | (3,534 | ) | (1,126 | ) | (6,005 | ) | ||||||||
Income tax expense | (1,086 | ) | (266 | ) | (1,815 | ) | (493 | ) | ||||||||
NET LOSS | (1,771 | ) | (3,800 | ) | (2,941 | ) | (6,498 | ) | ||||||||
Net loss attributable to the non-controlling interest | - | 6 | - | 3 | ||||||||||||
NET LOSS ATTRIBUTABLE TO THE COMPANY | (1,771 | ) | (3,794 | ) | (2,941 | ) | (6,495 | ) | ||||||||
NET LOSS | $ | (1,771 | ) | $ | (3,800 | ) | $ | (2,941 | ) | $ | (6,498 | ) | ||||
Foreign currency translation gain (loss) | 3,434 | (263 | ) | 2,083 | (1,700 | ) | ||||||||||
COMPREHENSIVE INCOME (LOSS) | 1,663 | (4,063 | ) | (858 | ) | (8,198 | ) | |||||||||
Comprehensive loss attributable to the non-controlling interest | - | 8 | - | 2 | ||||||||||||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | $ | 1,663 | $ | (4,055 | ) | $ | (858 | ) | $ | (8,196 | ) | |||||
LOSS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS | ||||||||||||||||
Basic and diluted | $ | (0.12 | ) | $ | (0.26 | ) | $ | (0.20 | ) | $ | (0.44 | ) | ||||
Weighted average number of shares outstanding Basic and diluted | 14,810,660 | 14,804,832 | 14,810,330 | 14,804,595 |
See the accompanying notes to the condensed consolidated financial statements.
2
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
Additional | Retained Earnings | Accumulated other | Amounts due from | Total equity attributable to stockholders | Non- | |||||||||||||||||||||||||||||||||||
Common Stock | paid-in | Statutory | Comprehensive | related | of the | controlling | Total | |||||||||||||||||||||||||||||||||
Shares | Amount | capital | Unrestricted | reserve | loss | party | Company | Interest | equity | |||||||||||||||||||||||||||||||
Balance at January 1, 2021 | 14,809,160 | $ | 15 | $ | 3,650 | $ | 109,171 | $ | 20,376 | $ | 4,590 | $ | (3,353 | ) | $ | 134,449 | - | $ | 134,449 | |||||||||||||||||||||
Stock issued for compensation | 1,500 | - | 5 | - | - | - | - | 5 | 5 | |||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,170 | ) | - | - | - | (1,170 | ) | - | (1,170 | ) | |||||||||||||||||||||||||||
Net cash received from related party under counter guarantee agreement | - | - | - | - | - | - | 379 | 379 | - | 379 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | (1,352 | ) | - | (1,352 | ) | - | (1,352 | ) | ||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 14,810,660 | 15 | 3,655 | 108,001 | 20,376 | 3,238 | (2,974 | ) | 132,311 | - | 132,311 | |||||||||||||||||||||||||||||
Net income | - | - | - | (1,771 | ) | - | - | - | (1,771 | ) | - | (1,771 | ) | |||||||||||||||||||||||||||
Net cash received from related party under counter guarantee agreement | - | - | - | - | - | - | 386 | 386 | - | 386 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 3,434 | 3,434 | - | 3,434 | |||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 14,810,660 | $ | 15 | $ | 3,655 | $ | 106,230 | $ | 20,376 | $ | 6,672 | $ | (2,588 | ) | $ | 134,360 | - | $ | 134,360 | |||||||||||||||||||||
Additional | Retained Earnings | Accumulated other | Amounts due from | Total equity attributable to stockholders | Non- | |||||||||||||||||||||||||||||||||||
Common Stock | paid-in | Statutory | Comprehensive | related | of the | controlling | Total | |||||||||||||||||||||||||||||||||
Shares | Amount | capital | Unrestricted | reserve | loss | party | Company | Interest | equity | |||||||||||||||||||||||||||||||
Balance at January 1, 2020 | 14,801,770 | $ | 15 | $ | 3,640 | $ | 106,328 | $ | 19,939 | $ | (4,330 | ) | $ | (4,932 | ) | $ | 120,660 | (1,510 | ) | $ | 119,150 | |||||||||||||||||||
Stock issued for compensation | 3,062 | 0.003 | 5 | - | - | - | - | 5 | 5 | |||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | (2,701 | ) | - | - | - | (2,701 | ) | 3 | (2,698 | ) | |||||||||||||||||||||||||||
Net cash received from related party under counter guarantee agreement | - | - | - | - | - | - | 785 | 785 | - | 785 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | (1,440 | ) | - | (1,440 | ) | 3 | (1,437 | ) | ||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 14,804,832 | 15 | 3,645 | 103,627 | 19,939 | (5,770 | ) | (4,147 | ) | 117,309 | (1,504 | ) | 115,805 | |||||||||||||||||||||||||||
Net (loss) | (3,794 | ) | (3,794 | ) | (6 | ) | (3,800 | ) | ||||||||||||||||||||||||||||||||
Net cash received from related party under counter guarantee agreement | 151 | 151 | 151 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | (261 | ) | (261 | ) | (2 | ) | (263 | ) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 14,804,832 | $ | 15 | $ | 3,645 | $ | 99,833 | $ | 19,939 | $ | (6,031 | ) | $ | (3,996 | ) | $ | 113,405 | (1,512 | ) | $ | 111,893 |
See the accompanying notes to the condensed consolidated financial statements.
3
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
NET SALES | $ | 120,257 | $ | 109,926 | $ | 285,148 | $ | 282,295 | ||||||||
COST OF SALES | 87,007 | 80,312 | 192,740 | 197,623 | ||||||||||||
GROSS PROFIT | 33,250 | 29,614 | 92,408 | 84,672 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Selling expenses | 20,238 | 18,522 | 60,206 | 55,477 | ||||||||||||
General and administrative expenses | 10,167 | 9,862 | 24,900 | 24,128 | ||||||||||||
Total Operating Expenses | 30,405 | 28,384 | 85,106 | 79,605 | ||||||||||||
INCOME FROM OPERATIONS | 2,845 | 1,230 | 7,302 | 5,067 | ||||||||||||
OTHER INCOME (EXPENSES) | ||||||||||||||||
Interest income | 370 | 233 | 909 | 854 | ||||||||||||
Interest expense | (562 | ) | (580 | ) | (1,207 | ) | (1,511 | ) | ||||||||
Other income | 1,987 | 253 | 3,088 | 939 | ||||||||||||
Total Other Income (Expenses) | 1,795 | (94 | ) | 2,790 | 282 | |||||||||||
INCOME BEFORE INCOME TAX EXPENSE | 4,640 | 1,136 | 10,092 | 5,349 | ||||||||||||
Income tax expense | (1,522 | ) | (724 | ) | (3,573 | ) | (2,385 | ) | ||||||||
NET INCOME | 3,118 | 412 | 6,519 | 2,964 | ||||||||||||
Net loss attributable to the non-controlling interest | 115 | 208 | 376 | 441 | ||||||||||||
NET INCOME ATTRIBUTABLE TO THE COMPANY | 3,233 | 620 | 6,895 | 3,405 | ||||||||||||
NET INCOME | $ | 3,118 | $ | 412 | $ | 6,519 | $ | 2,964 | ||||||||
Foreign currency translation income(loss) | 1,823 | (471 | ) | 3,345 | (2,860 | ) | ||||||||||
COMPREHENSIVE INCOME (LOSS) | 4,941 | (59 | ) | 9,864 | 104 | |||||||||||
Comprehensive loss attributable to the non-controlling interest | 133 | 205 | 411 | 434 | ||||||||||||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | $ | 5,074 | $ | 146 | $ | 10,275 | $ | 538 | ||||||||
EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS | ||||||||||||||||
Basic and diluted | $ | 0.22 | $ | 0.04 | $ | 0.47 | $ | 0.23 | ||||||||
Weighted average number of shares outstanding | ||||||||||||||||
Basic and diluted | 14,792,836 | 14,787,940 | 14,791,778 | 14,787,044 |
Six Months Ended | ||||||||
June 30, 2021 | June 30, 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (2,941 | ) | $ | (6,498 | ) | ||
Adjustments to reconcile net loss to cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,212 | 3,597 | ||||||
Loss from sale of property and equipment | 463 | 189 | ||||||
Provision of bad debt allowance | 652 | 969 | ||||||
Write off obsolete inventories | 5,530 | 3,681 | ||||||
Changes in fair value of investment | (2,275 | ) | - | |||||
Deferred income tax | 604 | 71 | ||||||
Stock-based compensation | 5 | 5 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 13,433 | 30,444 | ||||||
Inventories | (11,346 | ) | 11,659 | |||||
Value added tax receivable | (562 | ) | 1,076 | |||||
Other receivables and prepaid expenses | (632 | ) | 737 | |||||
Advances on inventory purchases | 2,928 | 3,845 | ||||||
Amounts due from related parties | 546 | (214 | ) | |||||
Accounts payable | (17,753 | ) | (22,522 | ) | ||||
Accounts payable and other payables- related parties | (1,763 | ) | (466 | ) | ||||
Other payables and accrued liabilities | 1,201 | (7,027 | ) | |||||
Value added and other taxes payable | (1,209 | ) | (1,593 | ) | ||||
Income tax payable | (581 | ) | (910 | ) | ||||
Net cash (used in) provided by operating activities | (10,488 | ) | 17,043 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (4,452 | ) | (1,018 | ) | ||||
Net (purchase) sale of trading securities | (1,468 | ) | (825 | ) | ||||
Net cash (used in) investing activities | (5,920 | ) | (1,843 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from bank loans | 12,841 | 31,995 | ||||||
Repayment of bank loans | (13,905 | ) | (21,173 | ) | ||||
Net collection (advance) of amounts due from related party (equity) | 798 | 898 | ||||||
Net cash (used in) provided by financing activities | (266 | ) | 11,720 | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 1,639 | (723 | ) | |||||
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (15,035 | ) | 26,197 | |||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | 121,723 | 50,755 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 106,688 | $ | 76,952 | ||||
Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets: | ||||||||
Cash and Cash Equivalents | 63,963 | 59,236 | ||||||
Restricted cash | 42,725 | 17,716 | ||||||
$ | 106,688 | $ | 76,952 | |||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 692 | $ | 907 | ||||
Income taxes | $ | 1,781 | $ | 493 |
See the accompanying notes to the condensed consolidated financial statements.
4
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED)
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 6,519 | $ | 2,964 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | 5,066 | 5,337 | ||||||
Loss from sale of property and equipment | 5 | 40 | ||||||
Provision of bad debt allowance | 679 | 975 | ||||||
Inventory write-down | 4,624 | 7,111 | ||||||
Deferred income tax | (2,004 | ) | (79 | ) | ||||
Stock-based compensation | 10 | 5 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (12,805 | ) | 4,127 | |||||
Inventories | (3,423 | ) | 19,293 | |||||
Value added tax receivable | (762 | ) | (2,452 | ) | ||||
Other receivables and prepaid expenses | (3,395 | ) | (638 | ) | ||||
Advances on inventory purchases | (1,619 | ) | 1,618 | |||||
Amounts due from related parties | (937 | ) | 1,918 | |||||
Accounts payable | (3,738 | ) | (14,467 | ) | ||||
Accounts payable and other payables- related parties | 232 | 630 | ||||||
Other payables and accrued liabilities | (2,219 | ) | (3,289 | ) | ||||
Value added and other taxes payable | (2,561 | ) | (1,987 | ) | ||||
Income tax payable | (256 | ) | (2,460 | ) | ||||
Net cash used in (provided by) operating activities | (16,584 | ) | 18,646 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (4,356 | ) | (8,577 | ) | ||||
Net cash used in investing activities | (4,356 | ) | (8,577 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from bank loans | 47,570 | 75,263 | ||||||
Repayment of bank loans | (33,372 | ) | (69,125 | ) | ||||
Repayment of loans from related party | 7,596 | 1,824 | ||||||
Advances to related party | (6,464 | ) | (1,216 | ) | ||||
Net cash provided by financing activities | 15,330 | 6,746 | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 1,121 | (1,200 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (4,489 | ) | 15,615 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 45,288 | 22,702 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 40,799 | $ | 38,317 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1,207 | $ | 1,511 | ||||
Income taxes | $ | 4,521 | $ | 5,362 |
See the accompanying notes to the condensed consolidated financial statements.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172021 AND 20162020
(UNAUDITED)
NOTE 1 Nature of Operations and Basis of Presentation
NOTE 1 BASIS OF PRESENTATION
Ever-Glory International Group, Inc. (the “Company” or “We” or “Ours”), together with its subsidiaries, is an apparel manufacturer, supplier and retailer in The People’s Republic of China (“ChinaChina” 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”), Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”), Ever-Glory International Group Apparel Inc.(“ (“Ever-Glory Apparel”), Chuzhou Huirui Garments Co. Ltd. (“Huirui”), and Nanjing Tai Xin Garments TradingRui Lian Technology Company Limited (“Tai Xin”Nanjing Rui Lian”), and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”) and the Company’s wholly-owned Hong Kong subsidiary, Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”). The Company’s retail operations are provided through its wholly- ownedwholly-owned subsidiaries, Shanghai LA GO GO Fashion Company Limited (“Shanghai 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 YaLanYa Lan Fashion Company Limited (“YaLan”Ya Lan”), and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”).
Shanghai Yiduo Fashion Company Limited, (“Shanghai Yiduo”) and Xizang the only then subsidiary with non-controlling interests, was deconsolidated from the financial statements as of December 31, 2020 as a result of bankruptcy liquidation.
He Meida Trading Company Limited (“He Meida”).was closed in April 2021, which is not a strategic shift and does not have major effect on the Company’s operations or financial results and the disposal loss was immaterial to the financial statements.
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 SeptemberJune 30, 2017,2021, the condensed consolidated statements of incomeoperations and comprehensive income (loss), condensed consolidated statements of equity, and condensed consolidated statements of cash flows for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.
Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172021 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, 2016.2020.
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 provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. 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, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. 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.
Financial Instruments
Management has estimated that the carrying amounts of non-related party financial instruments approximate their fair values due to their short-term maturities. The fair value of amounts due from (to) related parties is not practicable to estimate due to the related party nature of the underlying transactions.
Accounts Receivable
The Company extends unsecured credit to its customersuses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the ordinary courseannual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of business but mitigatesAmerica (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the associated risks by performing credit checksCompany’s audited consolidated financial statements and actively pursuing past due accounts. An allowancenotes thereto included in the Company’s Annual Report on Form 10-K for doubtful accounts is established and recorded based on management’s assessment of the credit history of its customers and current relationshipsyear ended December 31, 2020 filed with them. The Company writes off accounts receivable when amounts are deemed uncollectible.the SEC (“2020 Form 10-K.”)
5
Fair Value AccountingUse of Estimates
Accounting Standards Codification (“ASC”) 820 “Fair Value MeasurementsIn preparing our condensed consolidated financial statements, we use estimates and Disclosures”, establishes a fair value hierarchyassumptions that prioritizesaffect the inputsreported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to valuation techniquesbe 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 measure fair value. The hierarchy givesvalue tax liabilities, derivative financial instruments, the highest priority to unadjusted quoted prices in active marketsestimates of the allowance for identicaldeferred tax assets, or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levelsaccounts receivable allowance, and impairment of the fair value hierarchy under ASC 820 are described below:long-lived assets and inventory write off.
At September 30, 2017, 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 September 30, 2017, the Company has two derivative liability subjects to recurring fair value measurement (Level 3) with the change in fair value recognized in earnings (Note 5).
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 and Ever-Glory HK 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, YaLan, He Meida, Huirui and Taixin is the Chinese RMB.
For subsidiaries whose functional currency is the RMB, all assets and liabilities were translated at the exchange rate at the balance sheet date; equity was translated at historical rates and items in the statement of income and comprehensive income (loss) were translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, which supersedes the revenue recognition inRevenue Recognition(Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09,Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to 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, 2019.2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
NOTE 3 INVESTMENTS
NOTE 3 INVENTORIESTrading securities
Investments in equity securities of certain US and HK public companies are accounted for as trading securities and measured subsequently at fair value in the consolidated balance sheets. Net gains and losses recognized during the three months periods are summarized as follows (In thousands of U.S. Dollars).
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
Net gains recognized during the period on equity securities | 59 | 4 | 321 | 4 | ||||||||||||
Less: Net gains recognized during the period on equity securities sold during the period | - | - | 54 | - | ||||||||||||
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date | $ | 59 | $ | 4 | $ | 267 | $ | 4 |
Equity security investment
In August 2020, Ever-Glory Apparel invested $2.9 million (RMB 20.0 million) for 2.38% ownership in a partnership (“Partnership”). In December 2020, the Partnership invested in a public company in China. As a limited partner, the Company does not have ability to exercise significant influence due to lack of kick-out rights through voting interests. In the meantime, the Company entered an agreement with the general partner of the Partnership (GP) and an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration of the average net asset value ten trading days prior to the closing date, if the Company is not able to withdraw any part of the original investment from the Partnership in the twelve months period beginning the third year of the initial investment (“optional withdrawal period”). If the Company opts to withdraw entire investment during the optional withdrawal period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual. The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the GP and the individual is in place.
6
In December 2020, the Partnership invested in a public company in China. Since there is readily determinable fair value of the equity investment, the Company started to measure its equity investment at fair value using the public company’s stock price and the Company’s shares since December 31, 2020. At each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. There is no significant adverse change in the regulatory, economic, or technological environment of the investee. So the investment was not impaired at June 30, 2021.
NOTE 4 INVENTORIES
Inventories at SeptemberJune 30, 20172021 and December 31, 20162020 consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
(In thousands of U.S. Dollars) | ||||||||
Raw materials | $ | 1,750 | $ | 1,604 | ||||
Work-in-progress | 17,572 | 9,347 | ||||||
Finished goods | 30,794 | 38,679 | ||||||
Total inventories | $ | 50,116 | $ | 49,630 |
June 30, 2021 | December 31, 2020 | |||||||
(In thousands of U.S. Dollars) | ||||||||
Raw materials | $ | 2,071 | $ | 1,297 | ||||
Work-in-progress | 21,796 | 8,130 | ||||||
Finished goods | 36,323 | 44,466 | ||||||
Total inventories | $ | 60,190 | $ | 53,893 |
NOTE 4 BANK LOANS5 RESTRICTED CASH
As of June 30, 2021, restricted cash was $42.7 million (RMB276.0 million). Restricted cash $41.7 million (RMB 270.0 million) of time deposit was pledged for loans to Shanghai Pudong Development Bank. And $1.0 million (RMB6.0 million) was deposit for $4.6 million (RMB 30.0 million) loan received in July, 2021.
NOTE 6 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-termShort term bank loans consisted of the following as of SeptemberJune 30, 20172021 and December 31, 2016.2020.
September 30, 2017 | December 31, 2016 | |||||||
Bank | (In thousands of U.S. Dollars) | |||||||
Industrial and Commercial Bank of China | $ | 21,028 | $ | 11,232 | ||||
Nanjing Bank | 8,272 | 9,360 | ||||||
HSBC | 3,191 | - | ||||||
China Everbright Bank | 3,004 | 2,880 | ||||||
Bank of Communications | 3,004 | 2,880 | ||||||
China Minsheng Banking | 3,004 | 2,880 | ||||||
Bank of China | 2,082 | - | ||||||
China Citic Bank | 1,352 | - | ||||||
$ | 44,937 | $ | 29,232 |
June 30, 2021 | December 31, 2020 | |||||||
Bank | (In thousands of U.S. Dollars) | |||||||
Shanghai Pudong Development Bank | $ | 44,118 | $ | 42,157 | ||||
Industrial and Commercial Bank of China | 18,576 | 21,462 | ||||||
Nanjing Bank | 2,322 | 2,300 | ||||||
Bank of Ningbo | 482 | - | ||||||
$ | 65,498 | $ | 65,919 |
In January 2014,August 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2021, Ever-Glory Apparel had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual interest 3.01% and due on September 2021. As of June 30, 2021, approximately $0.7 million was unused and available under this line of credit.
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From March 2020 to July 2020, Ever-Glory Apparel entered into a deposit certificate of $27.8 million (RMB180.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.75% to 3.99%. From July to November 2020, Ever-Glory Apparel pledged the deposit certificate to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $27.8 million (RMB 180.0 million) under this line of certificate with an annual interest rate from 2.50% to 3.10% and due on between May 2021 and October 2021.
In December 2020, Goldenway entered into a deposit certificate of $13.9 million (RMB90.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of 3.85%. From November 2020 to February 2021, Goldenway pledged the deposit certificate to the Shanghai Pudong Development Bank and Goldenway had borrowed $13.9 million (RMB 90.0 million) under this line of certificate with annual interest rate of 2.90% and 3.4%, due between December 2021 and February 2022.
In April 2020, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $9.0$6.2 million (RMB60.0(RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of SeptemberJune 30, 2017,2021, Goldenway had borrowed $6.0$6.2 million (RMB 40.0(RMB40.0 million) under this linefrom Industrial and Commercial Bank of creditChina with an annual interest rate of 4.6%4.57% and due on various dates from December 2017 to January 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit. in August 2021.
In September 2015,July 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.0$15.5 million (RMB120.0(RMB100.0 million) with Industrial and Commercial Bank of China, andwhich is collateralized by assets of Jiangsu Ever-Glory’sNanjing Knitting, an equity investee Nanjing Knitting,of Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of SeptemberJune 30, 2017,2021, Ever-Glory Apparel had borrowed $15.0$12.4 million (RMB 100.080.0 million) under this line of credit with annual interest rate of 4.6%rates ranging from 3.95% to 4.35% and due on various dates from October 2017between August 2021 to September 2018.March 2022. As of SeptemberJune 30, 2017,2021, approximately $3.0$3.1 million was unused and available under this line of credit.
In June 2016,April 2020, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5$6.9 million (RMB50.0(RMB45.0 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 SeptemberJune 30, 2017,2021, approximately $7.5$6.9 million was unused and available under this line of credit.
In June 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.0 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2017, Ever-Glory Apparel had borrowed $6.0 million (RMB40.0 million) from Nanjing Bank with an annual interest rate of 4.4% and due on various dates from Jan to March 2018. Ever-Glory Apparel had also borrowed $0.8 million from Nanjing Bank with an annual interest rate of 2.4% and due in October 2017, and collateralized by approximately $0.9 million of accounts receivable from our wholesale customers. As of September 30, 2017, approximately $2.2 million was unused and available under this line of credit.
In March 2017,2020, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of SeptemberJune 30, 2017,2021, LA GO GO had borrowed $1.5$2.3 million (RMB10.0(RMB 15.0 million) from Nanjing Bank under this line of credit with annual interest rate of 5.0%4.55% and due in May 2018.September 2021. As of SeptemberJune 30, 2017,2021, approximately $1.5 million (RMB10.0 million) was unused and available under this line of credit.
In January 2015, 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 $12.6 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.2 million from HSBC with an annual interest rate of 3.0% and due in August 2017, and collateralized by approximately $3.8 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $9.4$0.7 million was unused and available under this line of credit.
In July 2016,September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0$9.3 million (RMB40.0(RMB60.0 million) with China EverbrightNanjing Bank and guaranteed by GoldenwayJiangsu Ever-Glory, Mr. Kang and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property.Goldenway. As of SeptemberJune 30, 2017, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with an annual interest rates ranging from 2.8% to 3.0% and due in November 2017. As of September 30, 2017,2021, approximately $3.0$9.3 million was unused and available under this line of credit.
In June 2014, LA GO GO entered into a line of credit agreement for approximately $4.9 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 4.6% to 5.0% and due on various dates from November 2017 to September 2018. As of September 30, 2017, approximately $1.9 million was unused and available under this line of credit.
In December 2016, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.6% and due in December 2017.
In October 2016,March 2021, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.7$4.6 million (RMB25.0(RMB30.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of SeptemberJune 30, 2017, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest rate of 4.8% and due in November 2017. Ever-Glory Apparel had also borrowed $0.6 million from Bank of China with an annual interest rate of 1.7% and due in October 2017, and collateralized by2021, approximately $0.7 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $1.6 million was unused and available under this line of credit.
In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.4 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $1.4 million (RMB9.0 million) under this line of credit with an annual interest rate of 5.5% and due in December 2017. As of September 30, 2017, approximately $4.0$4.6 million was unused and available under this line of credit.
In June 2021, Ever-Glory Apparel had borrowed $0.5 million from Bank of Ningbo with annual interest 0.31% and due in July 2021.
All bank loans are used to fund our daily operations. All loans have been repaid before or at maturity date.
Total interest expense on bank loans amounted to $0.6 million, $1.2 million, $0.6$0.7 million and $1.5$0.9 million for the six months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.6 million for the three and nine months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
NOTE 5 DERIVATIVE LIABILITY
As of September 30, 2017, the Company had two outstanding forward foreign exchange contracts (sell EUR dollars for RMB) with total notional amount of EUR€0.39 million. As of December 31, 2016, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR€0.65 million. The fair value of these contracts as of September 30, 2017 and December 31, 2016, as well as realized gains and losses on these foreign currency derivative activities during 2016 and the nine months ended September 30, 2017 were not significant.
8
NOTE 67 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, 2017.2020. He Meida was closed in April 2021.
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.
AlthoughEver-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the Company’s parent entitycurrent laws of Hongkong, its income tax rate is a U.S. entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing8.25% when its profit is performed outside of China in Southeast Asia,under HKD 2.0 million and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide forits income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formedrate is 16.5% when its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally,profit is over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating its tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.HKD 2.0 million.
The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million should be made by the Company prospectively over the next two to three years’ period. All $3.2 million was paid off as of December 31, 2016. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.
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 (loss) income for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 was taxable in the following jurisdictions:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
PRC | $ | 4,641 | $ | 1,135 | $ | 10,097 | $ | 5,353 | ||||||||
BVI | - | 4 | - | 4 | ||||||||||||
Others | (1 | ) | (3 | ) | (5 | ) | (8 | ) | ||||||||
$ | 4,640 | $ | 1,136 | $ | 10,092 | $ | 5,349 |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
Mainland China | $ | (28 | ) | $ | (3,531 | ) | $ | (467 | ) | $ | (6,000 | ) | ||||
Hongkong, PRC | (654 | ) | - | (654 | ) | - | ||||||||||
Others | (3 | ) | (3 | ) | (5 | ) | (5 | ) | ||||||||
$ | (685 | ) | $ | (3,534 | ) | $ | (1,126 | ) | $ | (6,005 | ) |
The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
PRC statutory rate | 25.0 | % | 25.0 | % | 25.0 | % | 25.0 | % | ||||||||
Effect of foreign income tax rates | - | (0.1 | ) | - | - | |||||||||||
Net operating losses for which no deferred tax assets was recognized | 7.8 | 38.8 | 10.4 | 19.6 | ||||||||||||
Other | - | - | - | - | ||||||||||||
Effective income tax rate | 32.8 | % | 63.7 | % | 35.4 | % | 44.6 | % |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
PRC statutory rate | 25.0 | % | 25.0 | % | 25.0 | % | 25.0 | % | ||||||||
Temporary difference between US GAAP and PRC tax accounting | (183.4 | ) | (32.5 | ) | (186.2 | ) | (33.2 | ) | ||||||||
Effective income tax rate | (158.4 | )% | (7.5 | )% | (161.2 | )% | (8.2 | )% |
9
Income tax expense for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 is as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Current | $ | 1,752 | $ | 799 | $ | 5,482 | $ | 2,543 | ||||||||
Deferred | (230 | ) | (75 | ) | (1,909 | ) | (158 | ) | ||||||||
Income tax expense | $ | 1,522 | $ | 724 | $ | 3,573 | $ | 2,385 |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Current | $ | 512 | $ | 195 | $ | 1,218 | $ | 304 | ||||||||
Deferred | 574 | 71 | 597 | 189 | ||||||||||||
Income tax expense | $ | 1,086 | $ | 266 | $ | 1,815 | $ | 493 |
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 $90.3$108.5 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If theseThe 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 were repatriatedof certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, there is no deferred tax expense (income) relating to the United States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted for foreign tax credits. Determination of the amount of any unrecognized deferred income tax liability on these earnings is not practicable.
NOTE 7 EARNINGS PER SHARE
The following demonstrates the calculation for earnings per shareTax Act changes for the three and nine monthsyear ended SeptemberJune 30, 2017 and 2016: 2021.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Weighted average number of common shares – Basic and diluted | 14,792,836 | 14,787,940 | 14,791,778 | 14,787,044 | ||||||||||||
Earnings per share – Basic and diluted | $ | 0.22 | $ | 0.04 | $ | 0.47 | $ | 0.23 |
NOTE 8 STOCKHOLDERS’ EQUITY
On April 29, 2016,January 15, 2020, the Company issued an aggregate of 2,0723,062 shares of itsCompany’s common stock to two2 of the Company’s independent directors as compensation for their services inrendered during the third and fourth quartersquarter of 2015.2019. The shares issued in 2020 were valued at $2.43 per share, which was the average market price of the common stock for the five days before the grant date.
On February 28, 2017, the Company issued an aggregate of 2,542 shares of its common stock to two of the Company’s independent directors as compensation for their services in the first and second quarters of 2016. The shares were valued at $1.96 per share, which was the average market price of the common stock for the five days before the grant date.
On February 28, 2017, the Company issued an aggregate of 2,354 shares of its common stock to two of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2016. The shares were valued at $2.14$1.41 per share, which was the average market price of the common stock for the five days before the grant date.
On October 19, 2017,February 9, 2021, the Company issued an aggregate of 3,1561,500 shares of itsthe Company’s common stock to two2 of the Company’s independent directors as compensation for their services inrendered during the first, secondthird and third quartersfourth quarter of 2017.2020. The shares issued in 2021 were valued at $2.37$3.34 per share, which was the average market price of the common stock for the five days before the grant date.
NOTE 9 RELATED PARTY TRANSACTIONS
Mr. Kang is the Company’s Chairman and Chief Executive Officer. Ever-Glory Enterprises (HK) Ltd. (Ever-Glory Enterprises) is the Company’s major shareholder. Mr. Xiaodong Yan was Ever-Glory Enterprises’ sole shareholder and sole director. Mr. Huake Kang, Mr. Kang’s son, acquired 83% interest of Ever-Glory Enterprises and became its sole director in 2014. All transactions associated with the following companies controlled by Mr. Kang or his son are considered to be related party transactions, and it is possible that the terms of these transactions may not be the same as those that would result from transactions between unrelated parties. All related party outstanding balances are short-term in nature and are expected to be settled in cash.
Other income from Related Parties
Jiangsu Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in certainsome Company’s retail stores since the third quarter of 2014. During
10
Other income from Wubijia for the three and ninesix months ended Septemberat June 30, 20172021 and 2016, the Company received $8,580, $26,063, $9,747 and $21,002 from the customers and paid $7,095, $20,651, $6,483 and $16,768 to Wubijia through the consignment, respectively. The net (loss) profit of $1,483, $5,411, $3,264 and $4,234 was recorded2020 are as other income (expenses) during the three and nine months ended September 30, 2017 and 2016, respectively. follows:
Nanjing Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s retail stores since the third quarter of 2015. During the three and nine months ended September 30, 2017 and 2016, the Company received $30, $6,395, $21,944 and $122,783 from the customers and paid $1,041, $11,575, $16,085 and $101,531 to Nanjing Knitting through the consignment, respectively. The net (loss) profit of ($1,009), ($5,179), $5,859 and $21,252 was recorded as other income (expenses) during the three and nine months ended September 30, 2017 and 2016, respectively.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
The Company received from the customers | $ | - | $ | - | $ | 3 | $ | 3 | ||||||||
The Company paid to Wubijia | - | - | (3 | ) | (3 | ) | ||||||||||
The net income recorded as other income | $ | - | $ | - | $ | - | $ | - |
Included in other income for the threeyears ended June 30, 2021 and nine months ended September 30, 2017 and 20162020 is rentrental income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term though June 2017.through 2021. The rentrental income is $0, $14,529, $16,022$6,391, $5,825, $12,757 and $48,455$11,741 for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
Other expenses due to Related Parties
Included in other expenses for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
Jiangsu Ever-Glory | $ | 12 | $ | 12 | $ | 35 | $ | 36 | ||||||||
Chuzhou Huarui | 53 | 57 | 157 | 171 | ||||||||||||
Kunshan Enjin | 11 | 12 | 33 | 34 | ||||||||||||
Total | $ | 76 | $ | 81 | $ | 225 | $ | 241 |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
Chuzhou Huarui | 55 | 52 | 110 | 102 | ||||||||||||
Kunshan Enjin | 24 | 21 | 47 | 43 | ||||||||||||
Total | $ | 79 | $ | 73 | $ | 157 | $ | 145 |
The Company leases Jiangsu Ever-Glory’s factory as the factory is in a location where there is a good supply of experienced workers. The Company leases Chuzhou Huarui and Kunshan Enjin’s warehouse spaces because the locations are convenient for transportation and distribution.
Purchases from and Sub-contracts with Related Parties
The Company purchased raw materials from Nanjing Knitting totaling $0.36$0.7 million, $0.96$0 million, $0.11$0.9 million and $0.45$0.4 million during the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
In addition, the Company sub-contracted certain manufacturing work to related companies totaled $5.1 million, $5.4 million, $10.1 million and $8.4 million for the three and six months ended June 30, 2021 and 2020, respectively. The Company provided raw materials to the sub-contractors and charged a fixed fee for labor provided by the sub-contractors.
Sub-contracts with related parties included in cost of sales for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
Chuzhou huarui | $ | 714 | $ | 1,228 | $ | 2,714 | $ | 4,922 | ||||||||
Fengyang huarui | 4 | 344 | 855 | 846 | ||||||||||||
Nanjing Ever-Kyowa | 361 | 490 | 1,181 | 1,485 | ||||||||||||
Ever-Glory Vietnam | 6,773 | 6,196 | 12,504 | 11,253 | ||||||||||||
Ever-Glory Cambodia | 15 | 996 | 239 | 3,091 | ||||||||||||
EsCeLav | 1 | - | 5 | 5 | ||||||||||||
Jiangsu Ever-Glory | - | 22 | 3 | 73 | ||||||||||||
$ | 7,868 | $ | 9,276 | $ | 17,501 | $ | 21,675 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
Chuzhou Huarui | $ | 370 | $ | 477 | $ | 861 | $ | 990 | ||||||||
Fengyang Huarui | 332 | 242 | 651 | 400 | ||||||||||||
Nanjing Ever-Kyowa | 319 | 188 | 710 | 442 | ||||||||||||
Ever-Glory Vietnam | 3,360 | 3,595 | 6,443 | 5,479 | ||||||||||||
Nanjing Knitting | 917 | 487 | 917 | 487 | ||||||||||||
EsCeLav | 31 | 14 | 37 | 24 | ||||||||||||
Jiangsu Ever-Glory | 7 | 381 | 464 | 627 | ||||||||||||
$ | 5,336 | $ | 5,384 | $ | 10,083 | $ | 8,449 |
11
Accounts Payable – Related Parties
The accounts payable to related parties at SeptemberJune 30, 20172021 and December 31, 20162020 are as follows:
September 30, 2017 | December 31, 2016 | |||||||
(In thousands of U.S. Dollars) | ||||||||
Ever-Glory Vietnam | $ | 2,448 | 1,938 | |||||
Fengyang Huarui | 478 | 709 | ||||||
Nanjing Ever-Kyowa | 724 | 785 | ||||||
Chuzhou Huarui | 473 | 643 | ||||||
Ever-Glory Cambodia | 60 | 262 | ||||||
Jiangsu Ever-Glory | 407 | - | ||||||
Nanjing Knitting | 70 | - | ||||||
Total | $ | 4,660 | $ | 4,337 |
2021 | 2020 | |||||||
(In thousands of U.S. Dollars) | ||||||||
Ever-Glory Vietnam | $ | 926 | 1,727 | |||||
Fengyang Huarui | - | 150 | ||||||
Nanjing Ever-Kyowa | 4 | 384 | ||||||
Chuzhou Huarui | 249 | 1,234 | ||||||
Nanjing Knitting | 573 | 257 | ||||||
Jiangsu Ever-Glory | 379 | 12 | ||||||
Total | $ | 2,131 | $ | 3,764 |
Amounts Due From Related Parties-current assets
The amounts due from related parties as of Septemberat June 30, 20172021 and December 31, 20162020 are as follows:
September 30, 2017 | December 31, 2016 | |||||||
(In thousands of U.S. Dollars) | ||||||||
Jiangsu Ever-Glory | $ | 819 | $ | 403 | ||||
Nanjing Knitting | - | 9 | ||||||
EsC’eLav | 115 | 74 | ||||||
Total | $ | 934 | $ | 486 |
2021 | 2020 | |||||||
(In thousands of U.S. Dollars) | ||||||||
Jiangsu Ever-Glory | $ | 29 | $ | 567 | ||||
Fengyang Huarui | 157 | - | ||||||
Total | $ | 186 | $ | 567 |
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 ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, 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 $0.7$1.0 million, $0.8$0 million, $0.2$2.8 million and $2.1$0.4 million during the three and ninesix months period ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.25$0 million, $0.3$0.1 million, $0.2$0.5 million and $0.5$0.4 million during the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, 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 SeptemberJune 30, 20172021 and December 31, 2016,2020, Jiangsu Ever-Glory has provided guarantees for approximately $54.7$36.3 million (RMB 364.0235 million) and $52.4$36 million (RMB 364.0235.0 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $30.9$27.5 million (RMB 205.5177.5 million) and $29.6$27.2 million (RMB 205.5177.5 million) as of SeptemberJune 30, 20172021 and December 31, 2016,2020 respectively. Mr. Kang has also provided a personal guarantee for $31.4$12.4 million (RMB 209.080.0 million) and $30.1$14.8 million (RMB 209.096.3 million) as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.
12
At December 31, 2016, $14.12020, $3.1 million (RMB 98.220.0 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the ninesix months ended SeptemberJune 30, 2017,2021, an additional $6.5$0.2 million (RMB 44.01.2 million) was provided to and $7.6repayment of $1.0 million (RMB 51.76.4 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of SeptemberJune 30, 2017,2021, the amount of the counter-guarantee was $13.6$2.3 million (RMB 9814.9 million) (the difference represents currency exchange adjustment of $0.6$0.02 million), which was 24.9%6.32% of the aggregate amount of lines of credit. This amount plus accrued interest of $2.4$0.3 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At SeptemberJune 30, 20172021 and December 31, 2016,2020, the amount classified as a reduction of equity was $16.0$2.6 million and $15.9$3.4 million, respectively. Interest of 0.5% iswas charged on net amounts due from Jiangsu Ever-Glory at each month end. Since AprilJanuary 1, 2015,2019, interest rate has changed to 0.41%0.3625% charged at each month end as the bank benchmark interest rate decreased. Interest income for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 was approximately $0 million, $0.01 million, $0 million and $0.1 million, respectively.
NOTE 10 COMMITMENTS AND CONTINGENCIES
Operating Lease Commitment
The Company recognized operating lease liabilities and operating lease right-of-use (ROU) 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 with fixed payments for land-use-rights, warehouses and logistics centers, flagship stores, and leases with variable payments for stores within shopping malls (“shopping mall stores”) in the PRC, which are classified as operating leases. 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.
The weighted average remaining lease term excluding stores in the shopping malls is 30 years and the weighted average discount rate is 4.35%. The lease term for shopping mall stores is commonly one year with options to extend or renew, and the rent is predetermined with a percentage of sales. The Company estimates the next 12 months rent for the shopping mall stores by annualizing current period rent calculated with the percentage of sales. Thus, the ROU assets and lease liabilities may vary significantly at different period ends. For stores closed before the lease end, we would incur insignificant amounts in net of loss on impairment of ROU assets and gain on extinguishment of lease liabilities, which are recorded in the current period statement of income (loss) and comprehensive income (loss).
In the six months ended June 30, 2021, the costs of the leases recognized in cost of revenues and general administrative expenses are $15.9 million and $0.2 million, $0.6 million,respectively. Cash paid for the operating leases including in the operating cash flows was $16.1 million. In the six months ended June 30, 2020, the costs of the leases recognized in cost of revenues and general administrative expenses are $12.0 and $0.2 million, and $0.4 million, respectively. Cash paid for the operating leases including in the operating cash flows was $12.2 million.
NOTE 10 CONCENTRATIONS AND RISKSThe following table summarizes the maturity of operating lease liabilities:
Year ending December 31, (In thousands of U.S. Dollars) | ||||
2021 | $ | 376 | ||
2022 | 753 | |||
2023 | 768 | |||
2024 | 433 | |||
2025 | 433 | |||
Thereafter | 12,908 | |||
Total lease payment | 15,671 | |||
Less: Interest | 6,995 | |||
Total | $ | 8,676 |
13
Legal Proceedings
We are not aware of any pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.
Lawsuits against Client A
In November 2020, the Company’s two subsidiaries, Ever-Glory International Group Apparel Inc. and Goldenway Nanjing Garments Company Limited filed a complaint against Client A (“Client A”) for unpaid goods worth RMB 70.15 million ($10.86 million) in the Tianjin No.1 Intermediate People’s Court based on processing contracts between the parties. The Company has applied for interim measures with the court and has frozen bank accounts of Client A for a total amount of RMB 68.12 million ($10.54 million). The Company has delivered goods worth RMB 62.06 million ($9.51 million) to Client A pursuant to the processing contracts. The Company also seeks Client A for the payment of the loss incurred from the cost of raw materials paid to suppliers in the amount of RMB 8.09 million ($1.25 million) in reliance on the processing contracts. The Company received RMB 71.4 million ($11.05 million) from Client A in April 2021 which settled the complaint amount.
NOTE 11 RISKS AND UNCERTAINTIES
Economic and Political Risks
The Company’s results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of its control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China from late January to March, which has adversely affected the company in the retail business with a decline in sales since February 2020. The Company’s wholesale business is also significantly affected as the Company is facing a sharp decline in its order quantities. Some of the Company’s wholesale clients have also cancelled or postponed existing orders. Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where the Company’s suppliers are located, The Company’s supply chain and business operations of its suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of the Company’s or its suppliers’ or customers’ products, could have adverse ripple effects on the Company’s manufacturing output and delivery schedule. The Company could also face difficulties in collecting its accounts receivables due to the effects of COVID-19 on its customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which the Company, its suppliers and customers operate.
Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect the Company’s liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of its common stock. If the Company’s future sales continue to decline significantly, it may risk facing financial difficulties due to its recurring fixed expenses. The extent to which COVID-19 impacts the Company’s operating is uncertain and cannot be predicted at this time, and it will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.
The majority of the Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
14
Credit risk
The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable. The allowance for doubtful accounts at September 30, 2017 and December 31, 2016 was $4.7 million and $3.1 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 inof 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.
Concentration risk
For the three and nine months ended SeptemberJune 30, 2017,2021, the Company had one wholesale customer that represented approximately 19% of the Company’s revenues. For the six months ended June 30, 2021, the Company had one wholesale customer that represented approximately 11% of the Company’s revenues. For the three months ended June 30, 2020, the Company had one wholesale customer that represented approximately 30% of the Company’s revenues. For the six months ended June 30, 2020, the Company had two wholesale customers that represented approximately 20%, 21%, 12% and 13% of the Company’s revenues. For the nine-month period ended September 30, 2016, the Company had no wholesale customer that represented more than 10% of the Company’s revenues. For the three-month period ended September 30, 2016, the Company had one wholesale customer that represented approximately 12%19% of the Company’s revenues.
For the Company’s wholesale business, during the three and nine months ended September 30, 2017 and 2016, noCompany did not rely on any raw material supplier that represented more than 10% of the total raw materials purchased.material purchases during the three and six months ended June 30, 2021 and 2020.
For the retail business, the Company relied on four raw material suppliers that represented approximately 33%, 27%, 16% and 11% of raw material purchases during the six months ended June 30, 2021. For the Company’s retail business, the Company had twothree suppliers that represented approximately 42%41%, 24% and 17%19% of raw materials purchases during the threesix months ended SeptemberJune 30, 2017. The Company had one supplier that represented approximately 23% of raw materials purchases during the three months ended September 30, 2016. The Company had five suppliers that represented approximately 26%, 20%, 12%, 11% and 10% of raw materials purchases during the nine months ended September 30, 2017. The Company had no supplier that represented more than 10% of raw materials purchases during the nine months ended September 30, 2016.2020.
For the wholesale business, the Company relied on one manufacturers for 29.2% of purchased finished goods supplier which is a related-party that represented 31.1% of the total raw material purchases during the ninesix months ended SeptemberJune 30, 2017. The2021. For the wholesale business, the Company relied on two manufacturers for 26.6% and 11.6% of purchased finished goods suppliers that represented approximately 20% and 11% of the total raw material purchases during the ninesix months ended SeptemberJune 30, 2016. During the three months ended September 30, 2017, the Company relied on one manufacturer for 35.9% of purchased finished goods. During the three months ended September 30, 2016, the Company relied on one manufacturer for 29.2% of purchased finished goods. 2020.
For the retail business, the Company had nodid not rely on any supplier that represented more than 10% of the total finished goods purchases during the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
The Company’s revenues for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 were earned in the following geographic areas:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
The People’s Republic of China | $ | 23,885 | $ | 22,860 | $ | 34,000 | $ | 36,854 | ||||||||
Hong Kong, China | 20,520 | 10,245 | 33,738 | 22,314 | ||||||||||||
Germany | 2,239 | 3,517 | 7,007 | 5,760 | ||||||||||||
United Kingdom | 5,599 | 6,149 | 11,174 | 12,568 | ||||||||||||
Europe-Other | 10,899 | 14,724 | 25,288 | 32,999 | ||||||||||||
Japan | 232 | 2,562 | 2,863 | 9,181 | ||||||||||||
United States | 5,611 | 8,816 | 16,225 | 19,554 | ||||||||||||
Total wholesale business | 68,985 | 68,873 | 130,295 | 139,230 | ||||||||||||
Retail business | 51,272 | 41,053 | 154,853 | 143,065 | ||||||||||||
Total | $ | 120,257 | $ | 109,926 | $ | 285,148 | $ | 282,295 |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
(In thousands of U.S. Dollars) | ||||||||||||||||
The People’s Republic of China | $ | 4,356 | $ | 3,111 | $ | 11,846 | $ | 7,764 | ||||||||
Hong Kong China | 2,914 | 2,054 | 6,971 | 5,045 | ||||||||||||
United Kingdom | 2,485 | 471 | 3,538 | 1,309 | ||||||||||||
Europe-Other | 5,913 | 3,660 | 10,059 | 7,754 | ||||||||||||
Japan | 1,550 | 2,205 | 4,955 | 6,589 | ||||||||||||
United States | 9,209 | 10,548 | 12,277 | 15,876 | ||||||||||||
Total wholesale business | 26,427 | 22,049 | 49,646 | 44,337 | ||||||||||||
Retail business | 34,128 | 28,037 | 81,723 | 64,104 | ||||||||||||
Total | $ | 60,555 | $ | 50,086 | $ | 131,369 | $ | 108,441 |
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NOTE 1112 SEGMENTS
The Company reports financial and operating information in the following two segments:
(a) Wholesale segment
(b) Retail segment
(a) | Wholesale segment |
(b) | Retail segment |
Wholesale segment | Retail segment | Total | ||||||||||
(In thousands of U.S. Dollars) | ||||||||||||
Six months ended June 30, 2021 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 49,646 | 81,723 | 131,369 | ||||||||
Loss from operations | $ | (3,371 | ) | (1,366 | ) | (4,737 | ) | |||||
Interest income | $ | 699 | 53 | 752 | ||||||||
Interest expense | $ | 639 | 53 | 692 | ||||||||
Depreciation and amortization | $ | 310 | 2,902 | 3,212 | ||||||||
Loss before income tax expense | (440 | ) | (686 | ) | (1,126 | ) | ||||||
Income tax expense | $ | 804 | 1,011 | 1,815 | ||||||||
Segment assets: | ||||||||||||
Additions to property, plant and equipment | 1,778 | 2,674 | 4,452 | |||||||||
Inventory | 26,931 | 33,259 | 60,190 | |||||||||
Total assets | 178,713 | 141,624 | 320,337 |
Wholesale segment | Retail segment | Total | ||||||||||
(In thousands of U.S. Dollars) | ||||||||||||
Six months ended June 30, 2020 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 44,337 | 64,104 | 108,441 | ||||||||
Income (Loss) from operations | $ | 1,001 | (8,378 | ) | (7,377 | ) | ||||||
Interest income | $ | 576 | 40 | 616 | ||||||||
Interest expense | $ | 719 | 188 | 907 | ||||||||
Depreciation and amortization | $ | 583 | 3,014 | 3,597 | ||||||||
Income (Loss) before income tax expense | 1,722 | (7,728 | ) | (6,005 | ) | |||||||
Income tax expense | $ | 468 | 25 | 493 | ||||||||
Segment assets: | ||||||||||||
Additions to property, plant and equipment | 185 | 833 | 1,018 | |||||||||
Inventory | 15,633 | 35,621 | 51,254 | |||||||||
Total assets | 96,192 | 156,096 | 252,288 |
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Wholesale segment | Retail segment | Total | ||||||||||
(In thousands of U.S. Dollars) | ||||||||||||
Three months ended June 30, 2021 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 26,427 | 34,128 | 60,555 | ||||||||
Loss from operations | $ | (2,666 | ) | (1,107 | ) | (3,773 | ) | |||||
Interest income | $ | 502 | 25 | 527 | ||||||||
Interest expense | $ | 173 | 27 | 200 | ||||||||
Depreciation and amortization | $ | 70 | 1,800 | 1,870 | ||||||||
Income (Loss)before income tax expense | (53 | ) | (632 | ) | (685 | ) | ||||||
Income tax expense | $ | 479 | 607 | 1,086 |
Wholesale segment | Retail segment | Total | ||||||||||
(In thousands of U.S. Dollars) | ||||||||||||
Three months ended June 30, 2020 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 22,049 | 28,037 | 50,086 | ||||||||
Income (Loss) from operations | $ | 1,675 | (5,827 | ) | (4,152 | ) | ||||||
Interest income | $ | 314 | 25 | 339 | ||||||||
Interest expense | $ | 501 | 65 | 566 | ||||||||
Depreciation and amortization | $ | 329 | 1,681 | 2,010 | ||||||||
Income (Loss) before income tax expense | 1,658 | (5,193 | ) | (3,535 | ) | |||||||
Income tax expense | $ | 281 | (16 | ) | 265 |
NOTE 13 SUBSEQUENT EVENTS
On July 30, 2021, the Company’s board of directors authorized a stock repurchase program to repurchase up to $5 million of the Company’s common stock from time to time until December 31, 2021 through various means, including open market transactions and privately negotiated transactions in accordance with applicable securities laws and regulations (the “2021 Repurchase Plan”). The Company cannot predict when or if it will repurchase any shares of common stock pursuant to the 2021 Repurchase Plan as such repurchases will depend on a number of factors, including constraints specified in agreement with the broker pursuant to Rule 10b5-1 of the Exchange Act, price, general business and market conditions.
The Company also provides general corporate serviceshas evaluated subsequent events through the date which the consolidated financial statements were available to its segmentsbe issued. All subsequent events requiring recognition as of June 30, 2021 have been incorporated into these consolidated financial statements and these coststhere are reported as “corporate and others”:no other significant subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”
Wholesale segment | Retail segment | Total | ||||||||||
(In thousands of U.S. Dollars) | ||||||||||||
Nine months ended September 30, 2017 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 130,295 | 154,853 | 285,148 | ||||||||
Income (Loss) from operations | $ | 5,050 | 2,252 | 7,302 | ||||||||
Interest income | $ | 854 | 55 | 909 | ||||||||
Interest expense | $ | 932 | 275 | 1,207 | ||||||||
Depreciation and amortization | $ | 824 | 4,242 | 5,066 | ||||||||
Income tax expense | $ | 1,443 | 2,130 | 3,573 | ||||||||
Nine months ended September 30, 2016 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 139,231 | 143,064 | 282,295 | ||||||||
Income from operations | $ | 5,959 | (892 | ) | 5,067 | |||||||
Interest income | $ | 807 | 47 | 854 | ||||||||
Interest expense | $ | 1,170 | 341 | 1,511 | ||||||||
Depreciation and amortization | $ | 758 | 4,579 | 5,337 | ||||||||
Income tax expense | $ | 1,425 | 960 | 2,385 |
Wholesale segment | Retail segment | Total | ||||||||||
(In thousands of U.S. Dollars) | ||||||||||||
Three months ended September 30, 2017 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 68,985 | 51,272 | 120,257 | ||||||||
Income (Loss) from operations | $ | 2,388 | 457 | 2,845 | ||||||||
Interest income | $ | 355 | 15 | 370 | ||||||||
Interest expense | $ | 462 | 100 | 562 | ||||||||
Depreciation and amortization | $ | 272 | 1,314 | 1,586 | ||||||||
Income tax expense | $ | 686 | 836 | 1,522 | ||||||||
Three months ended September 30, 2016 | ||||||||||||
Segment profit or loss: | ||||||||||||
Net revenue from external customers | $ | 68,873 | 41,053 | 109,926 | ||||||||
Income from operations | $ | 2,510 | (1,280 | ) | 1,230 | |||||||
Interest income | $ | 217 | 16 | 233 | ||||||||
Interest expense | $ | 468 | 112 | 580 | ||||||||
Depreciation and amortization | $ | 254 | 1,753 | 2,007 | ||||||||
Income tax expense | $ | 584 | 140 | 724 |
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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 ninesix months ended SeptemberJune 30, 20172021 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”), Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”), 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”), 78% owned subsidiary Shanghai Yiduo FashionNanjing Tai Xin Garments Trading Company Limited (“Shanghai Yiduo”Tai Xin”), and Xizang He Meida Trading Company Limited (“He Meida”). He Media was closed in April 2021.
Shanghai Yiduo Fashion Company Limited, the only then subsidiary with non-controlling interests, was deconsolidated from the financial statements as of December 31, 2020 as a result of bankruptcy liquidation.
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.
18
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 SeptemberJune 30, 2017,2021, we had 1,363931 stores (including store-in-stores), including 174which includes 52 stores that were opened and 18957 stores that were closed duringin the nine months ended September 30, 2017.first half year of 2021. We expect to increase an additional 50 to 100 stores in 2021.
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 | |
● |
Partnership Investment
The Company had idle cash and cash equivalent in operation. In order to realize the capital preservation and appreciation, Ever-Glory Apparel invested in a Partnership in August 2020. As a limited partner of the Partnership, Ever-Glory Apparel does not have the right to kick-out and appointment of general manager. Therefore, Ever-Glory does not have ability to exercise significant influence. In the meantime, the Company entered an agreement with the GP and an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration of the average net asset value ten days prior to the closing date, if the Company is not able to withdraw any part of the original investment from the Partnership during the optional withdrawal period. If the Company opts to withdraw entire investment during the optional withdrawal period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual. The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the GP and the individual is in place. In December 2020, the Partnership invested in a public company in China.
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.
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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 2017.
2020 and 2021.
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.
Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China from late January to March, which had adversely affected our retail business with a decline in sales since February 2020. Our wholesale business was also significantly affected as we were facing a sharp decline in our order quantities. Some of our wholesale clients had also cancelled or postponed existing orders. Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, could have adverse ripple effects on our manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19 on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate.
Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. If our future sales continue to decline significantly, we may risk facing bankruptcy due to our recurring fixed expenses. The extent to which COVID-19 impacts our results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.
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.
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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, netThe Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of value-added taxes, upon delivery for local salesAmerica (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and upon shipment ofnotes thereto included in the products for export sales, at such time title passes to the customer provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. We recognize wholesale revenue from manufacturing fees charged to buyersCompany’s Annual Report on Form 10-K for the assembly of garments from materials provided byyear ended December 31, 2020 filed with the buyers upon completion of the manufacturing process and shipment of the products for export sales, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. 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 lossSEC on these sales during transit.March 30, 2021 (“2020 Form 10-K.”)
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 in 20172021 and 20162020 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.write-offs.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, which supersedes the revenue recognition inRevenue Recognition(Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09,Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13 “”Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to 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, 2019.2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
Results of Operations for the three months ended SeptemberJune 30, 20172021 and 20162020
The following table summarizes our results of operations for the three months ended SeptemberJune 30, 20172021 and 2016.2020. 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 September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(In thousands of U.S. dollars, except for percentages) | ||||||||||||||||
Sales | $ | 120,257 | 100.0 | % | $ | 109,926 | 100.0 | % | ||||||||
Gross Profit | $ | 33,250 | 27.6 | % | $ | 29,614 | 26.9 | % | ||||||||
Operating Expense | $ | 30,405 | 25.3 | % | $ | 28,384 | 25.8 | % | ||||||||
Income From Operations | $ | 2,845 | 2.4 | % | $ | 1,230 | 1.1 | % | ||||||||
Other Income (Expenses) | $ | 1,795 | 1.5 | % | $ | (94 | ) | (0.1 | )% | |||||||
Income tax expense | $ | 1,522 | 1.3 | % | $ | 724 | 0.7 | % | ||||||||
Net Income | $ | 3,118 | 2.6 | % | $ | 412 | 0.4 | % |
Three Months Ended June 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
(In thousands of U.S. dollars, except for percentages) | ||||||||||||||||
Sales | $ | 60,555 | 100.0 | % | $ | 50,086 | 100.0 | % | ||||||||
Gross Profit | $ | 18,392 | 30.4 | % | $ | 14,445 | 28.8 | % | ||||||||
Operating Expense | $ | 22,165 | 36.6 | % | $ | 18,597 | 37.1 | % | ||||||||
Loss From Operations | $ | (3,773 | ) | (6.2 | )% | $ | (4,152 | ) | (8.3 | )% | ||||||
Other Income | $ | 3,088 | 5.1 | % | $ | 618 | 1.2 | % | ||||||||
Income tax expense | $ | 1,086 | 1.8 | % | $ | 266 | 0.5 | % | ||||||||
Net Loss | $ | (1,771 | ) | (2.9 | )% | $ | (3,800 | ) | (7.6 | )% |
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Revenue
The following table sets forth a breakdown of our total sales, by region, for the three months ended SeptemberJune 30, 20172021 and 2016. 2020.
2017 | 2016 | Growth | ||||||||||||||||||
Wholesale business | (In thousands of U.S. dollars) | % of total sales | (In thousands of U.S. dollars) | % of total sales | in 2017 compared | |||||||||||||||
Mainland China | $ | 23,885 | 19.9 | % | $ | 22,860 | 20.8 | % | 4.5 | % | ||||||||||
Hong Kong, China | 20,520 | 17.1 | 10,245 | 9.3 | 100.3 | |||||||||||||||
Germany | 2,239 | 1.9 | 3,517 | 3.2 | (36.3 | ) | ||||||||||||||
United Kingdom | 5,599 | 4.7 | 6,149 | 5.6 | (8.9 | ) | ||||||||||||||
Europe-Other | 10,899 | 9.1 | 14,724 | 13.4 | (26.0 | ) | ||||||||||||||
Japan | 232 | 0.2 | 2,562 | 2.4 | (90.9 | ) | ||||||||||||||
United States | 5,611 | 4.7 | 8,816 | 8.0 | (36.4 | ) | ||||||||||||||
Total Wholesale business | 68,985 | 57.4 | 68,873 | 62.7 | 0.2 | |||||||||||||||
Retail business | 51,272 | 42.6 | 41,053 | 37.3 | 24.9 | |||||||||||||||
Total sales | $ | 120,257 | 100.0 | % | $ | 109,926 | 100.0 | % | 9.4 | % |
2021 | 2020 | Growth (Decrease) | ||||||||||||||||||
Wholesale business | (In thousands of U.S. dollars) | % of total sales | (In thousands of U.S. dollars) | % of total sales | in 2021 compared with 2020 | |||||||||||||||
Mainland China | $ | 4,356 | 7.2 | % | $ | 3,111 | 6.2 | % | 40.1 | % | ||||||||||
Hong Kong China | 2,914 | 4.8 | 2,054 | 4.1 | 41.9 | |||||||||||||||
United Kingdom | 2,485 | 4.1 | 471 | 0.9 | 427.6 | |||||||||||||||
Europe-Other | 5,913 | 9.8 | 3,660 | 7.3 | �� | 61.6 | ||||||||||||||
Japan | 1,550 | 2.6 | 2,205 | 4.4 | (29.7 | ) | ||||||||||||||
United States | 9,209 | 15.2 | 10,549 | 21.1 | (12.7 | ) | ||||||||||||||
Total Wholesale business | 26,427 | 43.6 | 22,049 | 44.0 | 19.9 | |||||||||||||||
Retail business | 34,128 | 56.4 | 28,037 | 56.0 | 21.7 | |||||||||||||||
Total sales | $ | 60,555 | 100.0 | % | $ | 50,086 | 100.0 | % | 20.9 | % |
Sales for the three months ended SeptemberJune 30, 20172021 were $120.3$60.6 million, a 9.4%20.9% increase compared with the three months ended SeptemberJune 30, 2016.2020. This increase was primarily attributable to a 0.2%21.7% increase in sales in our wholesaleretail business and a 24.9%19.9% increase in our retailwholesale business.
Sales generated from our wholesale business contributed 57.4%43.6% or $69.0$26.4 million of our total sales for the three months ended SeptemberJune 30, 2017,2021, a 0.2%19.9% increase compared with $68.944.0% or $22.0 million in the three months ended SeptemberJune 30, 2016.2020. This increase was primarily attributable to an increase in sales in Mainland China, and Hong Kong, ChinaUnited Kingdom and Europe-Other partially offset by a decrease in sales in Germany, the United Kingdom, Europe-Other, Japan and the United States.
Sales generated from our retail business contributed 42.6%56.4% or $51.3$34.1 million of our total sales for the three months ended SeptemberJune 30, 2017, an 24.9%2021, a 21.7% increase compared with 37.3%56.0% or $41.1$28.0 million in the three months ended SeptemberJune 30, 2016.2020. This increase was primarily due to an increase inthe increased 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 SeptemberJune 30, 20172021 and 2016.2020.
Growth | ||||||||||||||||||||
(Decrease) in | ||||||||||||||||||||
Three months ended September 30, | 2017 Compared | |||||||||||||||||||
2017 | 2016 | with 2016 | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | ||||||||||||||||||||
Net Sales for Wholesale Sales | $ | 68,985 | 100.0 | % | $ | 68,873 | 100.0 | % | 0.2 | % | ||||||||||
Raw Materials | 31,092 | 45.1 | 31,451 | 45.7 | (1.1 | ) | ||||||||||||||
Labor | 1,468 | 2.1 | 1,310 | 1.9 | 12.1 | |||||||||||||||
Outsourced Production Costs | 25,999 | 37.7 | 25,927 | 37.6 | 0.3 | |||||||||||||||
Other and Overhead | 199 | 0.3 | 123 | 0.2 | 60.6 | |||||||||||||||
Total Cost of Sales for Wholesale | 58,758 | 85.2 | 58,811 | 85.4 | (0.1 | ) | ||||||||||||||
Gross Profit for Wholesale | 10,227 | 14.8 | 10,062 | 14.6 | 1.6 | |||||||||||||||
Net Sales for Retail | 51,272 | 100.0 | 41,053 | 100.0 | 24.9 | |||||||||||||||
Production Costs | 18,081 | 35.3 | 11,145 | 27.1 | 62.2 | |||||||||||||||
Rent | 10,168 | 19.8 | 10,356 | 25.2 | (1.8 | ) | ||||||||||||||
Total Cost of Sales for Retail | 28,249 | 55.1 | 21,501 | 52.4 | 31.4 | |||||||||||||||
Gross Profit for Retail | 23,023 | 44.9 | 19,552 | 47.6 | 17.8 | |||||||||||||||
Total Cost of Sales | 87,007 | 72.4 | 80,312 | 73.1 | 8.3 | |||||||||||||||
Gross Profit | $ | 33,250 | 27.6 | % | $ | 29,614 | 26.9 | % | 12.3 | % |
Growth | ||||||||||||||||||||
(Decrease) in | ||||||||||||||||||||
Three months ended June 30, | 2021 | |||||||||||||||||||
2021 | 2020 | Compared | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | with 2020 | |||||||||||||||||||
Net Sales for Wholesale Sales | $ | 26,427 | 100.0 | % | $ | 22,049 | 100.0 | % | 19.9 | % | ||||||||||
Raw Materials | 11,407 | 43.2 | 8,614 | 39.1 | 32.4 | |||||||||||||||
Labor | 386 | 1.4 | 299 | 1.4 | 29.2 | |||||||||||||||
Outsourced Production Costs | 10,943 | 41.4 | 8,623 | 39.1 | 26.9 | |||||||||||||||
Other and Overhead | 95 | 0.4 | 152 | 0.7 | (37.5 | ) | ||||||||||||||
Total Cost of Sales for Wholesale | 22,831 | 86.4 | 17,688 | 80.3 | 29.1 | |||||||||||||||
Gross Profit for Wholesale | 3,596 | 13.6 | 4,361 | 19.7 | (17.5 | ) | ||||||||||||||
Net Sales for Retail | 34,128 | 100.0 | 28,037 | 100.0 | 21.7 | |||||||||||||||
Production Costs | 13,390 | 39.2 | 13,865 | 49.5 | (3.4 | ) | ||||||||||||||
Rent | 5,942 | 17.4 | 4,088 | 14.3 | 45.4 | |||||||||||||||
Total Cost of Sales for Retail | 19,332 | 56.6 | 17,953 | 63.8 | 7.7 | |||||||||||||||
Gross Profit for Retail | 14,796 | 43.4 | 10,084 | 36.2 | 46.7 | |||||||||||||||
Total Cost of Sales | 42,163 | 69.6 | 35,641 | 71.2 | 18.3 | |||||||||||||||
Gross Profit | $ | 18,392 | 30.4 | % | $ | 14,445 | 28.8 | % | 27.3 | % |
22
Raw material costs for our wholesale business were 45.1%43.2% of our total wholesale business sales in the three months ended SeptemberJune 30, 2017,2021, compared with 45.7%39.1% in the three months ended SeptemberJune 30, 2016.2020. The decreaseincrease was mainly due to lowerhigher raw material prices.
Labor costs for our wholesale business were 2.1%1.4% of our total wholesale business sales in the three months ended SeptemberJune 30, 2017,2021, compared with 1.9%1.4% in the three months ended SeptemberJune 30, 2016. The marginal increase was mainly due to a higher number of outsourced orders in 2016.2020.
Outsourced production costs for our wholesale business for the three months ended SeptemberJune 30, 20172021 increased 0.3%by 26.9% to $26.0$10.9 million from $25.9$8.6 million for the three months ended SeptemberJune 30, 2016.2020. Outsourced production costs accounted for 37.7%41.4% of our total wholesale business sales in the three months ended SeptemberJune 30, 2017, a 0.1% increase from2021, compare with 39.1% in the three months ended SeptemberJune 30, 2016.2020. 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 0.3%0.4% of our total wholesale business sales for the three months ended SeptemberJune 30, 2017,2021, compared with 0.2%0.7% of total wholesale business sales for the three months ended SeptemberJune 30, 2016.2020.
Wholesale business gross profit for the three months ended SeptemberJune 30, 20172021 was $10.2$3.6 million compared with $10.1$4.4 million for the three months ended SeptemberJune 30, 2016.2020. Gross profit accounted for 14.8%13.6% of our total wholesale sales for the three months ended SeptemberJune 30, 2017,2021, compared with 14.6%19.7% for the three months ended SeptemberJune 30, 2016.2020. The increasedecrease was mainly due to a decrease in raw Materialsmaterial price and higher outsourced production costs.
Production costs for our retail business were $18.1$13.4 million for the three months ended SeptemberJune 30, 20172021 compared with $11.1$13.9 million during the three months ended SeptemberJune 30, 2016.2020. Retail production costs accounted for 35.3%39.2% of our total retail sales in the three months ended SeptemberJune 30, 2017,2021, compared with 27.1%49.5% for the three months ended SeptemberJune 30, 2016.2020. The increasedecrease in percentage was due to higher discounts on our out-of-season productsdiscount rate in the three months ended September 30, 2017 compared with the same period2020 because of the prior year.COVID-19.
Rent costs for our retail business for the three months ended SeptemberJune 30, 20172021 were $10.2$5.9 million compared with $10.4$4.1 million for the three months ended SeptemberJune 30, 2016.2020. Rent costs for our retail business accounted for 19.8%17.4% of our total retail sales for the three months ended SeptemberJune 30, 2017,2021, compared with 25.2%14.3% for the three months ended SeptemberJune 30, 2016.2020. The decreaseincrease was primarily attributable to lower variablethe rent charged at certain locations.
reduction in 2020 for the influence of COVID-19.
Gross profit in our retail business for the three months ended SeptemberJune 30, 20172021 was $23.0$14.8 million and gross margin was 44.9%43.4%. Gross profit in our retail business for the three months ended SeptemberJune 30, 20162020 was $19.6$10.1 million and gross margin was 47.6%36.2%.
Total cost of sales for the three months ended SeptemberJune 30, 20172021 was $87.0$42.2 million, an 8.3%a 18.3% increase from $80.3$35.6 million for the three months ended SeptemberJune 30, 2016.2020. Total cost of sales as a percentage of total sales for the three months ended SeptemberJune 30, 20172021 was 72.4%69.6%, compared with 73.1%71.2% for the three months ended SeptemberJune 30, 2016.2020. Gross margin for the three months ended SeptemberJune 30, 20172021 was 27.6%30.4% compared with 26.9%28.8% for the three months ended SeptemberJune 30, 2016.2020.
23
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 September 30, | Increase (Decrease) in 2017 Compared | |||||||||||||||||||
2017 | 2016 | to 2016 | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | ||||||||||||||||||||
Gross Profit | $ | 33,250 | 27.6 | % | $ | 29,614 | 26.9 | % | 12.3 | % | ||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling Expenses | 20,238 | 16.8 | 18,522 | 16.8 | 9.3 | |||||||||||||||
General and Administrative Expenses | 10,167 | 8.5 | 9,862 | 9.0 | 3.1 | |||||||||||||||
Total | 30,405 | 25.3 | 28,384 | 25.8 | 7.1 | |||||||||||||||
Income from Operations | $ | 2,845 | 2.4 | % | $ | 1,230 | 1.1 | % | 131.3 | % |
Three Months Ended June 30, | Increase (Decrease) in 2021 | |||||||||||||||||||
2021 | 2020 | Compared | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | to 2020 | |||||||||||||||||||
Gross Profit | $ | 18,392 | 30.4 | % | $ | 14,445 | 28.8 | % | 27.3 | % | ||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling Expenses | 14,503 | 24.0 | 12,626 | 25.2 | 14.9 | |||||||||||||||
General and Administrative Expenses | 7,662 | 12.7 | 5,971 | 11.9 | 28.3 | |||||||||||||||
Total | 22,165 | 36.6 | 18,597 | 37.1 | 19.2 | |||||||||||||||
Loss from Operations | $ | (3,773 | ) | (6.2 | )% | $ | (4,152 | ) | (8.3 | )% | (9.1 | )% |
Selling expenses for the three months ended SeptemberJune 30, 20172021 increased 9.3%by 14.9% to $20.2$14.5 million from $18.5$12.6 million for the three months ended SeptemberJune 30, 2016.2020. The increase was attributable to higherthe increased marketing expenses associated with the promotion of the retail sales.brand.
General and administrative expenses for the three months ended SeptemberJune 30, 20172021 increased 3.1%by 28.3% to $10.2$7.7 million from $9.9$6.0 million for the three months ended SeptemberJune 30, 2016.2020. The increase was attributable to the decreased business trip and the exemption of social benefits by the PRC government in 2020.
IncomeLoss from Operations
IncomeLoss from operations for the three months ended SeptemberJune 30, 2017 increased 131.2% to $2.82021 was $3.7 million, a decrease of 9.1% from $1.2$4.2 million of income for the three months ended SeptemberJune 30, 2016. Income2020. Loss from operations for the three months ended SeptemberJune 30, 20172021 accounted for 2.4%6.2% of our total sales, a 1.3% increase compared withwhile the three months ended SeptemberJune 30, 2016 as a result2020 accounted for 8.3% of increased gross profit.our total sales.
Interest Expense
Interest expense for the three months ended SeptemberJune 30, 20172021 was $0.2 million, while interest expense was $0.6 million a 3.1% decrease compared with the same period in 2016.
Income Tax Expenses
Income tax expense for the three months ended SeptemberJune 30, 20172020. The decrease was $1.5 million, an increase of 110.7% compareddue to the same period of 2016. The increase was primarily due to increased profits of our business.decreased bank loans rate.
Our PRCIncome Tax Expenses
Income tax expense was $1.1 million and $0.3 million for the three months ended June 30, 2021 and 2020, 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. Each of our consolidated entities files its own separate income tax return.laws (“the Income Tax Laws”).
24
All PRC subsidiaries, except for He Meida, are subject to income tax at the 25% income taxstatutory rate.
He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at the 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2017.2020. He Meida was closed in April 2021.
Perfect Dream Limited 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 International Group (HK) LtdHK was incorporated in Samoa, on September 15, 2009, and under the current laws of Samoa, has no liabilities for income tax.taxes.
AlthoughEver-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the Company’s parent entitycurrent 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 US entity, the Company’s primary operations are through subsidiaries located intax treaty arrangement between mainland China certain apparel manufacturing is performed outside of China in Southeast Asia, sales are made globally, and the Company has other subsidiary operations in Hong Kong and Samoa. Therefore, the Company uses significant judgment to calculate and provide for income taxes in eachjurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax jurisdictions in which it operates. Instarting from January 1, 2008. Given that the ordinary courseundistributed profits of the Company’s subsidiaries in China are intended to be retained in China for business there are transactionsdevelopment and calculations undertaken whose ultimateexpansion purposes, no withholding tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory Hong Kong, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.
The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million will be made by the Company prospectively over two to three years’ period. All $3.2 million was paid off as of December 31, 2016. Beginning January 1, 2014, all net income generated from Ever-Glory HKaccrual has been reported as a taxable income at 25% tax rate in PRC.made.
Ever-Glory International Group Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes through September 30, 2017. The net operating loss carry forwards for the United States income taxes may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2035. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for the United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.Net Loss
Net Income
Net incomeloss for the three months ended SeptemberJune 30, 20172021 was $3.1$1.8 million, a 656.6% increase compared with the same period in 2016. Our basic and diluted earnings per share were $0.22 and $0.04net loss for the three months ended SeptemberJune 30, 2017 and 2016, respectively.2020 was $3.8 million.
Results of Operations for the ninesix months ended SeptemberJune 30, 20172021 and 20162020
The following table summarizes our results of operations for the ninesix months ended SeptemberJune 30, 20172021 and 2016.2020. 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.
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(in thousands of U.S. Dollars, except for percentages) | ||||||||||||||||
Sales | $ | 285,148 | 100.0 | % | $ | 282,295 | 100.0 | % | ||||||||
Gross Profit | 92,408 | 32.4 | 84,672 | 30.0 | ||||||||||||
Operating Expense | 85,106 | 29.8 | 79,605 | 28.2 | ||||||||||||
Income From Operations | 7,302 | 2.6 | 5,067 | 1.8 | ||||||||||||
Other Income (Expenses) | 2,790 | 1.0 | 282 | 0.1 | ||||||||||||
Income tax expense | 3,573 | 1.3 | 2,385 | 0.8 | ||||||||||||
Net Income | $ | 6,519 | 2.3 | % | $ | 2,964 | 1.1 | % |
Six Months Ended June 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
(In thousands of U.S. Dollars, except for percentages) | ||||||||||||||||
Sales | $ | 131,369 | 100.0 | % | $ | 108,441 | 100.0 | % | ||||||||
Gross Profit | 40,828 | 31.1 | 30,483 | 28.1 | ||||||||||||
Operating Expense | 45,565 | 34.7 | 37,860 | 34.9 | ||||||||||||
(Loss) Income From Operations | (4,737 | ) | (3.6 | ) | (7,377 | ) | (6.8 | ) | ||||||||
Other Income | 3,611 | 2.7 | 1,372 | 1.3 | ||||||||||||
Income tax expense | 1,815 | 1.4 | 493 | 0.5 | ||||||||||||
Net (Loss) Income | $ | (2,941 | ) | (2.2 | )% | $ | (6,498 | ) | (6.0 | )% |
25
Revenue
The following table sets forth a breakdown of our total sales, by region, for the ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
2017 | 2016 | Growth (Decrease) | ||||||||||||||||||
Wholesale business | (In thousands of U.S. dollars) | % of total sales | (In thousands of U.S. dollars) | % of total sales | in 2017 compared with 2016 | |||||||||||||||
Mainland China | $ | 34,000 | 11.9 | % | $ | 36,854 | 13.1 | % | (7.7 | )% | ||||||||||
Hong Kong China | 33,738 | 11.8 | 22,314 | 7.9 | 51.2 | |||||||||||||||
Germany | 7,007 | 2.5 | 5,760 | 2.0 | 21.7 | |||||||||||||||
United Kingdom | 11,174 | 3.9 | 12,568 | 4.5 | (11.1 | ) | ||||||||||||||
Europe-Other | 25,288 | 8.9 | 32,999 | 11.7 | (23.4 | ) | ||||||||||||||
Japan | 2,863 | 1.0 | 9,181 | 3.2 | (68.8 | ) | ||||||||||||||
United States | 16,225 | 5.7 | 19,554 | 6.9 | (17.0 | ) | ||||||||||||||
Total Wholesale business | 130,295 | 45.7 | 139,230 | 49.3 | (6.4 | ) | ||||||||||||||
Retail business | 154,853 | 54.3 | 143,065 | 50.7 | 8.2 | |||||||||||||||
Total sales | $ | 285,148 | 100.0 | % | $ | 282,295 | 100.0 | % | 1.0 | % |
2021 | 2020 | Growth (Decrease) | ||||||||||||||||||
Wholesale business | (In thousands of U.S. dollars) | % of total sales | (In thousands of U.S. dollars) | % of total sales | in 2021 compared with 2020 | |||||||||||||||
Mainland China | $ | 11,846 | 9.0 | % | $ | 7,764 | 7.2 | % | 52.6 | % | ||||||||||
Hong Kong China | 6,971 | 5.3 | 5,045 | 4.7 | 38.2 | |||||||||||||||
United Kingdom | 3,538 | 2.7 | 1,309 | 1.2 | 170.3 | |||||||||||||||
Europe-Other | 10,059 | 7.7 | 7,754 | 7.1 | 29.7 | |||||||||||||||
Japan | 4,955 | 3.8 | 6,589 | 6.1 | (24.8 | ) | ||||||||||||||
United States | 12,277 | 9.3 | 15,876 | 14.6 | (22.7 | ) | ||||||||||||||
Total Wholesale business | 49,646 | 37.8 | 44,337 | 40.9 | 12.0 | |||||||||||||||
Retail business | 81,723 | 62.2 | 64,104 | 59.1 | 27.5 | |||||||||||||||
Total sales | $ | 131,369 | 100.0 | % | $ | 108,441 | 100.0 | % | 21.1 | % |
Sales for the ninesix months ended SeptemberJune 30, 20172020 were $285.1$131.4 million, an increase of 1.0%21.1% from the ninesix months ended SeptemberJune 30, 2016.2020. This increase was primarily attributable to an 8.2%a 12.0% increase in sales in our retailwholesale business partially offset byand a 6.4% sales decrease27.5% increase in our wholesaleretail business.
Sales generated from our wholesale business contributed 45.7%37.8% or $130.3$49.6 million of our total sales for the ninesix months ended SeptemberJune 30, 2017, a decrease2021, an increase of 6.4%12.0% compared with $139.240.9% or $44.3 million in the ninesix months ended SeptemberJune 30, 2016.2020. This decreaseincrease was primarily attributable to decreasedincreased sales in Mainland China, theHong Kong China, United Kingdom Europe-Other, Japan and the United StatesEurope-Other, partially offset by increaseddecreased sales in Hong Kong, ChinaJapan and Germany. United States.
Sales generated from our retail business contributed 54.3%62.2% or $154.9$81.7 million of our total sales for the ninesix months ended SeptemberJune 30, 2017,2021, an increase of 8.2%27.5% compared with $143.159.1% or $64.1 million in the ninesix months ended SeptemberJune 30, 2016.2020. This increase was primarily due to an increase in same store sales.
Total retail store square footage and sales per square foot for the ninesix months ended SeptemberJune 30, 20172021 and 20162020 are as follows:
2017 | 2016 | |||||||
Total store square footage | 1,370,117 | 1,329,708 | ||||||
Number of stores | 1,363 | 1,345 | ||||||
Average store size, square foot | 1,005 | 989 | ||||||
Total store sales (in thousands of U.S. dollars) | $ | 154,853 | $ | 143,065 | ||||
Sales per square foot | $ | 113 | $ | 108 |
2021 | 2020 | |||||||
Total store square footage | 1,011,506 | 989,034 | ||||||
Number of stores | 931 | 935 | ||||||
Average store size, square feet | 1,086 | 1,058 | ||||||
Total store sales (in thousands of U.S. dollars) | $ | 81,723 | $ | 64,104 | ||||
Sales per square foot | $ | 81 | $ | 65 |
Same-storeSame store sales and newly opened store sales for the ninesix months ended SeptemberJune 30, 20172021 and 20162020 are as follows:
2017 | 2016 | |||||||
(In thousands of U.S. dollars) | ||||||||
Sales from stores opened for a full year | $ | 130,790 | $ | 113,734 | ||||
Sales from newly opened store sales | $ | 12,944 | $ | 14,137 | ||||
Sales from e-commerce platform | $ | 7,716 | $ | 9,368 | ||||
Other* | $ | 3,403 | $ | 5,826 | ||||
Total | $ | 154,853 | $ | 143,065 |
2021 | 2020 | |||||||
(In thousands of U.S. dollars) | ||||||||
Sales from stores opened for a full year | $ | 62,067 | $ | 43,678 | ||||
Sales from newly opened store sales | $ | 7,566 | $ | 4,636 | ||||
Sales from e-commerce platform | $ | 6,649 | $ | 7,822 | ||||
Other* | $ | 5,441 | $ | 7,968 | ||||
Total | $ | 81,723 | $ | 64,104 |
*Primarily sales from stores that were closed in the current reporting period.
Primarily sales from stores that were closed in the current reporting period. |
We remodeled or relocated 20054 stores in 2016,year 2020, and 19566 stores during the ninesix months ended SeptemberJune 30, 2017.We2021. We plan to relocate or remodel an aggregate of 150-20050 to 100 stores in 2017.2021. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2017.2021. 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.
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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 ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
�� | Growth | |||||||||||||||||||
(Decrease) in | ||||||||||||||||||||
Nine months ended September 30, | 2017 Compared | |||||||||||||||||||
2017 | 2016 | with 2016 | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | ||||||||||||||||||||
Net Sales for Wholesale Sales | $ | 130,295 | 100.0 | % | $ | 139,230 | 100.0 | % | (6.4 | )% | ||||||||||
Raw Materials | 56,766 | 43.6 | 61,935 | 44.5 | (8.3 | ) | ||||||||||||||
Labor | 3,236 | 2.5 | 3,932 | 2.8 | (17.7 | ) | ||||||||||||||
Outsourced Production Costs | 47,542 | 36.5 | 50,603 | 36.3 | (6.1 | ) | ||||||||||||||
Other and Overhead | 325 | 0.2 | 370 | 0.3 | (12.2 | ) | ||||||||||||||
Total Cost of Sales for Wholesale | 107,869 | 82.8 | 116,840 | 83.9 | (7.7 | ) | ||||||||||||||
Gross Profit for Wholesale | 22,426 | 17.2 | 22,390 | 16.1 | 0.2 | |||||||||||||||
Net Sales for Retail | 154,853 | 100.0 | 143,065 | 100.0 | 8.2 | |||||||||||||||
Production Costs | 49,769 | 32.1 | 45,172 | 31.6 | 10.2 | |||||||||||||||
Rent | 35,102 | 22.7 | 35,611 | 24.9 | (1.4 | ) | ||||||||||||||
Total Cost of Sales for Retail | 84,871 | 54.8 | 80,783 | 56.5 | 5.1 | |||||||||||||||
Gross Profit for Retail | 69,982 | 45.2 | 62,282 | 43.5 | 12.4 | |||||||||||||||
Total Cost of Sales | 192,740 | 67.6 | 197,623 | 70.0 | (2.5 | ) | ||||||||||||||
Gross Profit | $ | 92,408 | 32.4 | % | $ | 84,672 | 30.0 | % | 9.1 | % |
Growth | ||||||||||||||||||||
(Decrease) in | ||||||||||||||||||||
Six months ended June 30, | 2021 | |||||||||||||||||||
2021 | 2020 | Compared | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | with 2020 | |||||||||||||||||||
Net Sales for Wholesale Sales | $ | 49,646 | 100.0 | % | $ | 44,337 | 100.0 | % | 12.0 | % | ||||||||||
Raw Materials | 21,793 | 43.9 | 18,704 | 42.2 | 16.5 | |||||||||||||||
Labor | 719 | 1.4 | 544 | 1.2 | 32.3 | |||||||||||||||
Outsourced Production Costs | 18,776 | 37.8 | 16,993 | 38.3 | 10.5 | |||||||||||||||
Other and Overhead | 200 | 0.4 | 238 | 0.5 | (16.1 | ) | ||||||||||||||
Total Cost of Sales for Wholesale | 41,488 | 83.6 | 36,479 | 82.2 | 13.7 | |||||||||||||||
Gross Profit for Wholesale | 8,158 | 16.4 | 7,858 | 17.8 | 3.8 | |||||||||||||||
Net Sales for Retail | 81,723 | 100.0 | 64,104 | 100.0 | 27.5 | |||||||||||||||
Production Costs | 33,151 | 40.6 | 29,712 | 46.3 | 11.6 | |||||||||||||||
Rent | 15,902 | 19.5 | 11,767 | 18.4 | 35.1 | |||||||||||||||
Total Cost of Sales for Retail | 49,053 | 60.0 | 41,479 | 64.7 | 18.3 | |||||||||||||||
Gross Profit for Retail | 32,670 | 40.0 | 22,625 | 35.3 | 44.4 | |||||||||||||||
Total Cost of Sales | 90,541 | 68.9 | 77,958 | 71.9 | 16.1 | |||||||||||||||
Gross Profit | $ | 40,828 | 31.1 | % | $ | 30,483 | 28.1 | % | 33.9 | % |
Raw material costs for our wholesale business were 43.6%43.9% of our total wholesale business sales in the ninesix months ended SeptemberJune 30, 2017,2021, compared with 44.5%42.2% in the ninesix months ended SeptemberJune 30, 2016.2020. The decreaseincrease was mainly due to lowerhigher cost of raw materials prices.materials.
Labor costs for our wholesale business were 2.5%1.4% of our total wholesale business sales in the ninesix months ended SeptemberJune 30, 2017,2021, compared with 2.8%1.2% in the ninesix months ended SeptemberJune 30, 2016.2020. The marginal decreaseincrease was mainly due to a higher number of outsourced ordersaverage employee salaries in the nine months ended September 30, 2017.2021.
Outsourced manufacturingproduction costs for our wholesale business were 36.5%37.8% of our total wholesale sales in the ninesix months ended SeptemberJune 30, 2017,2021, compared with 36.3%38.3% in the ninesix months ended SeptemberJune 30, 2016. This2020. The increase in amounts was primarily attributable to increasedhigher average employee salaries of the employees at our outsourced manufacturing factories.
Overhead and other expenses for our wholesale business accounted for 0.2%0.4% and 0.3%0.5% of our total wholesale sales for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
Gross profit for our wholesale business for the ninesix months ended SeptemberJune 30, 20172021 was $22.4$8.2 million, a 0.2%3.8% increase compared with the ninesix months ended SeptemberJune 30, 2016.2020. As a percentage of total wholesale business sales, gross profit was 17.2%16.4% of our total wholesale business sales for the ninesix months ended SeptemberJune 30, 2017,2021, compared with 16.1%17.8% for the ninesix months ended SeptemberJune 30, 2016.2020. The increasedecrease in percentage was mainly due to decreased raw material costs.higher average employee salaries.
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Production costs for our retail business for the ninesix months ended SeptemberJune 30, 20172021 were $49.8$33.2 million compared with $45.2$29.7 million for the ninesix months ended SeptemberJune 30, 2016.2020. As a percentage of our total retail sales, production costs were 32.1%40.6% of our total retail sales for the ninesix months ended SeptemberJune 30, 2017,2021, compared with 31.6%46.3% for the ninesix months ended SeptemberJune 30, 2016.2020. The increasedecrease in percentage was due to higher discounts on our out-of-season productsdiscount rate in the nine months ended September 30, 2017 compared with the same period2020 because of the prior year.
COVID-19.
Rent costs for our retail business for the ninesix months ended SeptemberJune 30, 20172021 were $35.1$15.9 million compared with $35.6$11.8 million for the ninesix months ended SeptemberJune 30, 2016.2020. As a percentage of total retail sales, rent costs were 22.7%19.5% of our total retail sales for the ninesix months ended SeptemberJune 30, 20172021 compared with 24.9%18.4% for the ninesix months ended SeptemberJune 30, 2016.2020. The decreaseincrease in percentage was primarily attributable to lowerthe rent at certain locations.reduction in 2020 for the influence of COVID-19.
Gross profit for our retail business for the ninesix months ended SeptemberJune 30, 20172021 was $70.0$32.7 million compared with $62.3$22.6 million for the ninesix months ended SeptemberJune 30, 2016.2020. Gross margin for our retail business for the ninesix months ended SeptemberJune 30, 20172021 was 45.2%40.0% compared with 43.5%35.3% for the ninesix months ended SeptemberJune 30, 2016.2020.
Total cost of sales for the ninesix months ended SeptemberJune 30, 20172021 was $192.7$90.5 million, a 2.5% decrease16.1% increase compared with the ninesix months ended SeptemberJune 30, 2016.2020. As a percentage of total sales, total costs were 67.6%68.9% of total sales for the ninesix months ended SeptemberJune 30, 2017,2021, compared with 70.0%71.9% for the ninesix months ended SeptemberJune 30, 2016.2020. Total gross margin for the ninesix months ended SeptemberJune 30, 20172021 was 32.4%31.1% compared with 30.0%28.1% for the ninesix months ended SeptemberJune 30, 2016.2020.
We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 14.9% and 14.8% of raw material purchases for the nine months ended September 30, 2017 and 2016, respectively. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2017 and 2016. For our retail business, purchases from our five largest suppliers represented approximately 79.8% and 33.0% of raw material purchases for the nine months ended September 30, 2017 and 2016, respectively. Five suppliers provided approximately 25.9%, 20.4%, 11.7%, 11.0 and 10.8% of our raw material purchases for the nine months ended September 30, 2017. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2016. 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 49.2% and 54.4% of finished goods purchases for the nine months ended September 30, 2017 and 2016, respectively. One contract manufacturer provided approximately 29.2% of our finished goods purchases for the nine months ended September 30, 2017. Two contract manufacturers provided approximately 26.6% and 11.6% of our finished goods purchases for the nine months ended September 30, 2016. For our retail business, our five largest contract manufacturers represented approximately 16.7% and 14.8% of finished goods purchases for the nine months ended September 30, 2017 and 2016, respectively. No contract manufacturer provided more than 10% of our retail finished goods purchases for the nine months ended September 30, 2017 and 2016. 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.
Nine months ended September 30, | Increase (Decrease) in 2017 Compared | |||||||||||||||||||
2017 | �� | 2016 | to 2016 | |||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | ||||||||||||||||||||
Gross Profit | $ | 92,408 | 32.4 | % | $ | 84,672 | 30.0 | % | 9.1 | % | ||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling Expenses | 60,206 | 21.1 | 55,477 | 19.7 | 8.5 | |||||||||||||||
General and Administrative Expenses | 24,900 | 8.7 | 24,128 | 8.5 | 3.2 | |||||||||||||||
Total | 85,106 | 29.8 | 79,605 | 28.2 | 6.9 | |||||||||||||||
Income from Operations | $ | 7,302 | 2.6 | % | $ | 5,067 | 1.8 | % | 44.1 | % |
Six months ended June 30, | Increase (Decrease) in 2021 | |||||||||||||||||||
2021 | 2020 | Compared | ||||||||||||||||||
(In thousands of U.S. dollars, except for percentages) | to 2020 | |||||||||||||||||||
Gross Profit | $ | 40,828 | 31.1 | % | $ | 30,483 | 28.1 | % | 33.9 | % | ||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling Expenses | 30,052 | 22.9 | 26,105 | 24.1 | 15.1 | |||||||||||||||
General and Administrative Expenses | 15,513 | 11.8 | 11,755 | 10.8 | 32.0 | |||||||||||||||
Total | 45,565 | 34.7 | 37,860 | 34.9 | 20.3 | |||||||||||||||
Loss from Operations | $ | (4,737 | ) | (3.6 | )% | $ | (7,377 | ) | (6.8 | )% | (35.8 | )% |
Selling expenses for the ninesix months ended SeptemberJune 30, 20172021 were $60.2$30.1 million, an 8.5%a 15.1% increase compared with the ninesix months ended SeptemberJune 30, 2016.2020. The increase was attributable to higherthe marketing expenses associated with the promotion of the retail sales.brand.
General and administrative expenses for the ninesix months ended SeptemberJune 30, 20172021 were $24.9$15.5 million a 3.2%32.0% increase compared with the ninesix months ended SeptemberJune 30, 2016.2020. As a percentage of total sales, general and administrative expenses accounted for 8.7%11.8% of total sales for the ninesix months ended SeptemberJune 30, 2017,2021, compared with 8.5%10.8% of total sales for the ninesix months ended SeptemberJune 30, 2016.2020. The increase in amounts was mainly attributable to the increased average salaries.decreased business trip and the exemption of social benefits by the PRC government in 2020.
Income
28
Loss from Operations
IncomeLoss from operations for the ninesix months ended SeptemberJune 30, 20172021 was $7.3$4.7 million, a 44.1% increase35.8% decrease from $5.1$7.4 million of loss for the six months ended June 30, 2020.
Interest Expense
Interest expense was $0.7 million and $0.9 million for the ninesix months ended SeptemberJune 30, 2016. This increase was due to increased gross profit.
Interest Expense
Interest expense was $1.2 million2021 and $1.5 million for the nine months ended September 30, 2017 and 2016,2020, respectively. The decrease was due to the decreased bank loans.loans rate.
Income Tax ExpensesExpense
Income tax expense for the ninesix months ended SeptemberJune 30, 20172021 was $3.6$1.8 million, a 49.8%268.5% increase compared to the same period of 2016.2020. The increase was primarily due to the higher business profits.PRC income which resulted in a higher income tax expense.
Net IncomeLoss
Net incomeloss for the ninesix months ended SeptemberJune 30, 20172021 was $2.9 million, a decrease of 54.7% compared with $6.5 million an increase of 119.9% compared withnet loss from the same period in 2016. Our2020. Basic and diluted earningsloss per share were $0.47was $0.20 and $0.23$0.44 for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
Summary of Cash Flows
Summary cash flows information for the ninesix months ended SeptemberJune 30, 20172021 and 20162020 is as follows:
2017 | 2016 | |||||||
(In thousands of U.S. dollars) | ||||||||
Net cash used in (provided by) operating activities | $ | (16,584 | ) | 18,646 | ||||
Net cash used in investing activities | $ | (4,356 | ) | (8,577 | ) | |||
Net cash provided by financing activities | $ | 15,330 | $ | 6,746 |
2021 | 2020 | |||||||
(In thousands of U.S. dollars) | ||||||||
Net cash (used in) provided by operating activities | $ | (10,488 | ) | $ | 17,041 | |||
Net cash used in investing activities | $ | (5,920 | ) | $ | (1,843 | ) | ||
Net cash (used in) provided by financing activities | $ | (266 | ) | $ | 11,720 |
Net cash used in operating activities was $16.6$10.5 million for the ninesix months ended SeptemberJune 30, 2017,2021, compared with $17.0 million net cash provided by $18.6 millionoperating activities during the ninesix months ended SeptemberJune 30, 2016.2020. The decrease was primarily due to increasea decrease in accounts receivable.payable.
Net cash used in investing activities was $4.4$5.9 million for the ninesix months ended SeptemberJune 30, 2017,2021, compared with $8.5$1.8 million used during the ninesix months ended SeptemberJune 30, 2016.2020. This decreaseincrease was mainly due to the decreased in purchase ofpurchased more trading securities, and property and equipment and remodeling expenditure in 2017.equipment.
Net cash provided byused in financing activities was $15.3$0.3 million for the ninesix months ended SeptemberJune 30, 20172021, compared with $6.7$11.7 million net cash usedprovided during the ninesix months ended SeptemberJune 30, 2016.2020. During the ninesix months ended SeptemberJune 30, 2017,2021, we repaid $33.4$13.9 million of bank loans and received additional bank loan proceeds of $47.6$12.8 million. Also, under the counter-guarantee agreement, we received $7.6 million from and paid $6.5 million to the related party during the nine months ended September 30, 2017.
Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2021, we had cash and cash equivalents of $40.8$64.0 million, other current assets of $149.0$162.2 million and current liabilities of $124.1$177.3 million. We presently finance our operations primarily from cash flows from operations and bank loansborrowings from banks, and we anticipate that these will continue to be our primary sourcessource of funds to finance our short-term cash needs.
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Bank Loans
In January 2014,August 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2021, Ever-Glory Apparel had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual interest 3.01% and due on September 2021. As of June 30, 2021, approximately $0.7 million was unused and available under this line of credit.
From March 2020 to July 2020, Ever-Glory Apparel entered into a deposit certificate of $27.8 million (RMB180.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.75% to 3.99%. From July to November 2020, Ever-Glory Apparel pledged the deposit certificate to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $27.8 million (RMB 180.0 million) under this line of certificate with an annual interest rate from 2.50% to 3.10% and due on between May 2021 and October 2021.
In December 2020, Goldenway entered into a deposit certificate of $13.9 million (RMB90.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of 3.85%. From November 2020 to February 2021, Goldenway pledged the deposit certificate to the Shanghai Pudong Development Bank and Goldenway had borrowed $13.9 million (RMB 90.0 million) under this line of certificate with annual interest rate of 2.90% and 3.4%, due between December 2021 and February 2022.
In April 2020, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $9.0$6.2 million (RMB60.0(RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of SeptemberJune 30, 2017,2021, Goldenway had borrowed $6.0$6.2 million (RMB 40.0(RMB40.0 million) under this linefrom Industrial and Commercial Bank of creditChina with an annual interest rate of 4.6%4.57% and due on various dates from December 2017 to January 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit. in August 2021.
In September 2015,July 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.0$15.5 million (RMB120.0(RMB100.0 million) with Industrial and Commercial Bank of China, andwhich is collateralized by assets of Jiangsu Ever-Glory’sNanjing Knitting, an equity investee Nanjing Knitting,of Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of SeptemberJune 30, 2017,2021, Ever-Glory Apparel had borrowed $15.0$12.4 million (RMB 100.080.0 million) under this line of credit with annual interest rate of 4.6%rates ranging from 3.95% to 4.35% and due on various dates from October 2017between August 2021 to September 2018.March 2022. As of SeptemberJune 30, 2017,2021, approximately $3.0$3.1 million was unused and available under this line of credit.
In June 2016,April 2020, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5$6.9 million (RMB50.0(RMB45.0 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 SeptemberJune 30, 2017,2021, approximately $7.5$6.9 million was unused and available under this line of credit.
In June 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.0 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2017, Ever-Glory Apparel had borrowed $6.0 million (RMB40.0 million) from Nanjing Bank with an annual interest rate of 4.4% and due on various dates from Jan to March 2018. Ever-Glory Apparel had also borrowed $0.8 million from Nanjing Bank with an annual interest rate of 2.4% and due in October 2017, and collateralized by approximately $0.9 million of accounts receivable from our wholesale customers. As of September 30, 2017, approximately $2.2 million was unused and available under this line of credit.
In March 2017,2020, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of SeptemberJune 30, 2017,2021, LA GO GO had borrowed $1.5$2.3 million (RMB10.0(RMB 15.0 million) from Nanjing Bank under this line of credit with annual interest rate of 5.0%4.55% and due in May 2018.September 2021. As of SeptemberJune 30, 2017,2021, approximately $1.5 million (RMB10.0 million) was unused and available under this line of credit.
In January 2015, 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 $12.6 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.2 million from HSBC with an annual interest rate of 3.0% and due in August 2017, and collateralized by approximately $3.8 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $9.4$0.7 million was unused and available under this line of credit.
In July 2016,September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0$9.3 million (RMB40.0(RMB60.0 million) with China EverbrightNanjing Bank and guaranteed by GoldenwayJiangsu Ever-Glory, Mr. Kang and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property.Goldenway. As of SeptemberJune 30, 2017, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with an annual interest rates ranging from 2.8% to 3.0% and due in November 2017. As of September 30, 2017,2021, approximately $3.0$9.3 million was unused and available under this line of credit.
In June 2014, LA GO GO entered into a line of credit agreement for approximately $4.9 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 4.6% to 5.0% and due on various dates from November 2017 to September 2018. As of September 30, 2017, approximately $1.9 million was unused and available under this line of credit.
In December 2016, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.6% and due in December 2017.
In October 2016,March 2021, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.7$4.6 million (RMB25.0(RMB30.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of SeptemberJune 30, 2017, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest rate of 4.8% and due in November 2017. Ever-Glory Apparel had also borrowed $0.6 million from Bank of China with an annual interest rate of 1.7% and due in October 2017, and collateralized by2021, approximately $0.7 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $1.6$4.6 million was unused and available under this line of credit.
30
In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.4 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory,June 2021, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $1.4$0.5 million (RMB9.0 million) under this linefrom Bank of creditNingbo with an annual interest rate of 5.5%0.31% and due in December 2017. As of September 30, 2017, approximately $4.0 million was unused and available under this line of credit.July 2021.
All bank loans are used to fund our daily operations. All loans have been repaid before or at maturity date.
DERIVATIVE LIABILITYCapital Commitments
As of September 30, 2017, the Company had two outstanding forward foreign exchange contracts (sell EUR dollars for RMB) with total notional amount of EUR€0.39 million. As of December 31, 2016, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR€0.65 million. The fair value of these contracts as of September 30, 2017 and December 31, 2016, as well as realized gains and losses on these foreign currency derivative activities during 2016 and the nine months ended September 30, 2017 were 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 twelve monthsyear 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 twelve months.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 SeptemberJune 30, 2017,2021, we had access to approximately $82.1$48 million in lines of credit, of which approximately $37.1$25.5 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 moreless 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 $54.7$36.4 million (RMB364(RMB 235 million) and approximately $13.6$2.3 million (RMB90.5(RMB 14.9 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of SeptemberJune 30, 2017.2021.
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 SeptemberJune 30, 2017,2021, the market foreign exchange rate had increased to RMB 6.666.46 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.
In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GOsubsidiaries located in China (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 ninesix months ended SeptemberJune 30, 20172021 and 20162020 was $1.8$3.4 million, $3.3($0.3) million, ($0.5)$2.1 million and ($2.9)1.7) million, respectively.
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OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, bank loans and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less from the date of purchase to be cash equivalents.
Interest Rates: Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. On September 30, 2017, we had $40.8 million in cash and cash equivalents. A hypothetical 5% increase or decrease in either the short term or long term interest rates would not have any material impact on our earnings or loss, or the fair market value or cash flows of these instruments.
Foreign Exchange Rates: We pay our suppliers and employees in Chinese RMB, however, most of our wholesale customers are located in the U.S., Japan and Europe and we generate sales from them in U.S. Dollars, Euros and British Pounds. Accordingly, our business has substantial exposure to changes in exchange rates between and among the Chinese RMB, the U.S. Dollar, the Euro and the British Pound. In the last decade, the RMB was initially pegged at RMB 8.26 to one U.S. Dollar. On July 21, 2005 it was revalued to 8.09 per U.S. Dollar. Following the removal of the peg to the U.S. Dollar and pressure from the United States, the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. Dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. Dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. Dollar and the Euro. On September 30, 2017, the exchange rate between the RMB and U.S. Dollar was RMB6.66 to one U.S. Dollar. For additional discussion regarding our foreign currency risk, see the section titled Risk Factors in the Annual Report on Form 10-K for our fiscal year ended December 31, 2016. Fluctuation in the value of Chinese RMB relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.
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(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 our Chief Executive Officerits chief executive officer and Chief Financial Officer,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. As of September 30, 2017, the end of the fiscal quarter covered by this report, we carried out an evaluation, underProcedures. 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.procedures for the period ended June 30, 2020. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of September 30, 2017. Our disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting” section in Item 9 of our annual report for fiscal year ended December 31, 2016. As of September 30, 2017, we had not completed the remediation of these material weaknesses.effectively.
Limitations on the Effectiveness of Disclosure Controls. Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control overOver Financial Reporting
Our management has worked, and will continue to work to improve our internal controls over financial reporting. DuringOther than described above, during the nine months ended September 30, 2017,second quarter of 2021, 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We knoware not aware of noany pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.
Lawsuits against Client A
In November 2020, the Company’s two subsidiaries, Ever-Glory International Group Apparel Inc. and Goldenway Nanjing Garments Company Limited filed a complaint against Client A (“Client A”) for unpaid goods worth RMB 70.15 million ($10.86 million) in the Tianjin No.1 Intermediate People’s Court based on processing contracts between the parties. The Company has applied for interim measures with the court and has frozen bank accounts of Client A for a total amount of RMB 68.12 million ($10.54 million). The Company has delivered goods worth RMB 62.06 million ($9.51 million) to Client A pursuant to the processing contracts. The Company also seeks Client A for the payment of the loss incurred from the cost of raw materials paid to suppliers in the amount of RMB 8.09 million ($1.25 million) in reliance on the processing contracts. The Company received RMB 71.4 million ($11.05 million) from Client A in April 2021 which settled the complaint amount.
ITEM 1A. RISK FACTORS
There hasAs of the date of this report and except as set forth below, there have been no material changechanges to the risk factors disclosed in the information provided in Item 1A ofour annual report on Form 10-K Annual Report for the year ended December 31, 2016 filed with the SEC on March 30, 2017.2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
On October 31, 2017, we issued 1,578 shares of Company’s common stock to Jianhua Wang, a director of the Company. The shares were issued as compensation for his services rendered during the first, second, and third quarters of 2017 as a director.
On October 31, 2017, we issued 1,578 shares of Company’s common stock to Zhixue Zhang, a director of the Company. The shares were issued as compensation for his services rendered during the first, second, and third quarters of 2017 as a director.
The securities issued in the abovementioned transactions were issued in connection with transactions which were exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, pursuant to the terms of Section 4(2) of that Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. 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, 2021:
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 |
None.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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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.
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) |
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