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Ever-Glory International Group, Inc. - Quarter Report: 2016 June (Form 10-Q)

 

 

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 June 30, 2016

 

☐   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) 5209-6831

(Registrant’s telephone number, including area code)

 

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   ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   ☐

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐   No ☒

 

As of August 11, 2016, 14,787,940 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  
     
PART I.  FINANCIAL INFORMATION  
     
Item 1.   Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 1
     
  Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited) 2
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited) 3
     
  Notes to the Condensed Consolidated Financial Statements (unaudited) 4
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 28
     
Item 4.   Controls and Procedures 28
     
PART II.  OTHER INFORMATION  
     
Item 1.   Legal Proceedings 29
     
Item 1A. Risk Factors 29
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 3.   Defaults Upon Senior Securities 29
     
Item 4.   Mine Safety Disclosure 29
     
Item 5.   Other Information 29
     
Item 6.   Exhibits 29
     
SIGNATURES 30

 

 

 

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;
     
  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 future financing needs; and
     
  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’).

 

 

  

PART I.  FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

AS OF JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

 

   2016   2015 
ASSETS        
CURRENT ASSETS        
Cash and cash equivalents  $27,475   $22,702 
Accounts receivable   62,233    87,527 
Inventories   62,720    75,063 
Value added tax receivable   5,215    2,736 
Other receivables and prepaid expenses   4,899    3,840 
Advances on inventory purchases   3,658    6,193 
Amounts due from related parties   1,054    2,535 
Total Current Assets   167,254    200,596 
           
INTANGIBLE ASSETS   6,041    6,217 
PROPERTY AND EQUIPMENT, NET   23,791    21,906 
TOTAL ASSETS  $197,086   $228,719 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Bank loans  $43,675   $44,841 
Accounts payable   44,240    66,118 
Accounts payable and other payables - related parties   2,530    2,823 
Other payables and accrued liabilities   16,949    22,221 
Value added and other taxes payable   4,317    6,882 
Income tax payable   1,701    4,052 
Total Current Liabilities   113,412    146,937 
           
NONCURRENT LIABILITIES          
Deferred tax liabilities   2,910    2,992 
TOTAL LIABILITIES   116,322    149,929 
           
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, 14,787,940 and 14,785,868 shares issued and outstanding As of June 30, 2016 and December 31, 2015, respectively)   15    15 
Additional paid-in capital   3,602    3,597 
Retained earnings   81,223    78,439 
Statutory reserve   15,327    15,327 
Accumulated other comprehensive income   853    3,249 
Amounts due from related party   (19,967)   (21,776)
Total equity attributable to stockholders of the Company   81,053    78,851 
Noncontrolling interest   (289)   (61)
Total Equity   80,764    78,790 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $197,086   $228,719 

 

See the accompanying notes to the condensed consolidated financial statements. 

 

 1 

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015 (UNAUDITED)

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
NET SALES  $80,676   $75,727   $172,369   $173,630 
COST OF SALES   53,961    45,679    117,311    112,974 
                     
GROSS PROFIT   26,715    30,048    55,058    60,656 
                     
OPERATING EXPENSES                    
Selling expenses   16,043    17,583    36,956    37,838 
General and administrative expenses   7,316    7,606    14,265    14,520 
Total Operating Expenses   23,359    25,189    51,221    52,358 
                     
INCOME FROM OPERATIONS   3,356    4,859    3,837    8,298 
                     
OTHER INCOME (EXPENSES)                    
Interest income   237    215    621    539 
Interest expense   (334)   (716)   (931)   (1,492)
Other income   621    539    687    772 
Total Other Income (Expenses)   524    38    377    (181)
                     
INCOME BEFORE INCOME TAX EXPENSE   3,880    4,897    4,214    8,117 
Income tax expense   (828)   (1,379)   (1,662)   (2,204)
                     
NET INCOME   3,052    3,518    2,552    5,913 
                     
Net loss attributable to the non-controlling interest   93    80    233    81 
NET INCOME ATTRIBUTABLE TO THE COMPANY   3,145    3,598    2,785    5,994 
                     
NET INCOME  $3,052   $3,518   $2,552   $5,913 
                     
Foreign currency translation (loss) gain   (3,178)   (127)   (2,396)   329 
COMPREHENSIVE INCOME   (126)   3,391    156    6,242 
                     
Comprehensive loss attributable to the non-controlling interest   85    80    228    81 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY  $(41)  $3,471   $384   $6,323 
                     
EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS                    
Basic and diluted  $0.21   $0.24   $0.19   $0.41 
Weighted average number of shares outstanding                    
Basic and diluted   14,787,302    14,784,094    14,786,589    14,784,094 

 

See the accompanying notes to the condensed consolidated financial statements.

 

 2 

 

 

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 SIX MONTHS ENDED JUNE 30, 2016 AND 2015 (UNAUDITED)

 

   2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net  income  $2,552   $5,913 
Adjustments to reconcile net  income to cash provided by operating activities:          
Depreciation and amortization   3,331    4,678 
Recovering for doubtful accounts   -    (143)
Provision for obsolete inventories   7,111    - 
Deferred income tax   (14)   3 
Stock-based compensation   5    - 
Changes in operating assets and liabilities          
Accounts receivable   23,903    34,101 
Inventories   3,901    (7,266)
Value added tax receivable   (2,583)   (1,333)
Other receivables and prepaid expenses   (1,166)   865 
Advances on inventory purchases   2,434    1,055 
Amounts due from related parties   1,092    186 
Accounts payable   (20,847)   (13,416)
Accounts payable and other payables- related parties   (275)   (1,074)
Other payables and accrued liabilities   (4,852)   (1,987)
Value added and other taxes payable   (2,448)   (779)
Income tax payable   (2,297)   (1,099)
Net cash provided by operating activities   9,847    19,704 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (5,692)   (5,438)
Proceeds from sale of property and equipment   -    4 
Purchase of intangible assets   -    (1,732)
Acquisition of Yiduo net of cash acquired   -    (457)
Net cash (used in) investing activities   (5,692)   (7,623)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from bank loans   48,295    52,715 
Repayment of bank loans   (48,521)   (72,217)
Repayment of loans from related party   1,836    2,444 
Advances to related party   -    (815)
Net cash provided by (used in) financing activities   1,610    (17,873)
           
EFFECT OF EXCHANGE RATE CHANGES ON CASH   (992)   (91)
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   4,773    (5,883)
           
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   22,702    34,134 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $27,475   $28,251 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
           
Cash paid during the period for:          
           
Interest  $931   $1,492 
Income taxes  $4,442   $3,301 

SUPPLEMENTAL INFORMATION OF NONCASH INVESTING ACTIVITIES

       
Increase in intangible assets and non-controlling interests   -   $233 

 

See the accompanying notes to the condensed consolidated financial statements.

 

 3 

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(UNAUDITED)

 

NOTE 1 BASIS OF PRESENTATION

  

Ever-Glory International Group, Inc. (the “Company”), together with its subsidiaries, is an apparel manufacturer, supplier and retailer in The People's Republic of China ("China or "PRC"), with a wholesale segment and a retail segment. The Company’s wholesale business consists of recognized brands for department and specialty stores located in China, Europe, Japan and the United States. The Company’s retail business consists of flagship stores and store-in-stores for the Company’s own-brand products.

 

The Company’s wholesale operations are provided primarily through the Company’s wholly-owned PRC subsidiaries, Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), Nanjing Catch-Luck Garments Co. Ltd. (“Catch-Luck”), Nanjing New-Tailun Garments Co. Ltd (“New-Tailun”), Ever-Glory International Group Apparel Inc.(“Ever-Glory Apparel”), Chuzhou Huirui Garments Co. Ltd. (“Huirui”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”).  The Company’s retail operations are provided through its wholly- 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 Ya Lan Fashion Company Limited (“Ya Lan”), Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and Xizang He Meida Trading Company Limited (“He Meida”).

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of June 30, 2016, the condensed consolidated statements of income and comprehensive income (loss), and cash flows for the three and six months ended June 30, 2016 and 2015. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 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 six months ended June 30, 2016 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, 2015. 

 

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

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 customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history of its customers and current relationships with them. The Company writes off accounts receivable when amounts are deemed uncollectible.

 

 4 

 

 

Fair Value Accounting

 

Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

 

  Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

  Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
     
  Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

   

At June 30, 2016, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

 

As of June 30, 2016, the Company has a derivative liability subject 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, Ya Lan, He Meida, Huirui and Taixin is the Chinese RMB.

 

For subsidiaries whose functional currency is the RMB, all assets and liabilities were translated at the exchange rate at the balance sheet date; equity was translated at historical rates and items in the statement of 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 in Revenue 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 July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the measurement of certain inventories. Under the new guidance, inventories are required to be measured at the lower of cost and net realizable value, the latter representing the estimated selling price in the ordinary course of business, reduced by costs of completion, disposal, and transportation. Under current guidance, inventories are required to be measured at the lower of cost or market, but depending upon specific circumstances, market could refer to replacement cost, net realizable value, or net realizable value reduced by a normal profit margin. The guidance is to be applied prospectively, is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Management is currently assessing the potential impact of this ASU on its consolidated financial statements.

 

In September 2015, FASB issued ASU No. 2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company assessed that there is no significant impact to the consolidated financial statements on this update.

 

 5 

 

 

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.

  

The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.

  

NOTE 3 INVENTORIES

 

Inventories at June 30, 2016 and December 31, 2015 consisted of the following:

 

   June 30,
2016
   December 31,
2015
 
   (In thousands of U.S. Dollars) 
Raw materials  $1,886   $2,819 
Work-in-progress   22,877    22,090 
Finished goods   57,089    69,692 
    81,852    94,601 
Less: allowance for obsolete inventories   (19,132)   (19,538)
Total inventories  $62,720   $75,063 

 

NOTE 4 BANK LOANS

 

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short term bank loans consisted of the following as of June 30, 2016 and December 31, 2015.

 

   June 30,
2016
   December 31,
2015
 
Bank  (In thousands of U.S. Dollars) 
Industrial and Commercial Bank of China  $17,759   $16,940 
Nanjing Bank   7,901    13,951 
China Everbright Bank   4,272    3,121 
HSBC   3,737    3,129 
Bank of Communications   3,010    3,080 
China Minsheng Banking   3,010    3,080 
Bank of China   2,631    - 
China Citic Bank   1,355    - 
Pin An Bank   -    1,540 
   $43,675   $44,841 

  

In January 2014, 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 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2016, Goldenway had borrowed $6.0 million (RMB40.0 million) under this line of credit with annual interest rates ranging from 4.4% - 4.5% and due on various dates from September to October 2016. As of June 30, 2016, approximately $3.0 million was unused and available under this line of credit.

 

In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.1 million (RMB120.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2016, Ever-Glory Apparel had borrowed $11.7 million (RMB 78.0 million) under this line of credit with annual interest rate at 4.4% and due on various dates from July to December 2016. As of June 30, 2016, approximately $6.4 million was unused and available under this line of credit.

  

In June 2016, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2016, approximately $7.5 million was unused and available under this line of credit.

 

 6 

 

 

In June 2015, 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 June 30, 2016, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with annual interest rate of 5.0% and due on various dates from July to September 2016. Ever-Glory Apparel had also borrowed $2.6 million from Nanjing Bank with an annual interest rates ranging from 3.5% to 4.0% and due in October 2016, and collateralized by approximately $3.0 million of accounts receivable from our wholesale customers. As of June 30, 2016, approximately $3.4 million was unused and available under this line of credit.

 

In October 2015, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2016, LA GO GO had borrowed $2.3 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.0% and due in January 2017. As of June 30, 2016, approximately $0.7 million (RMB5.0 million) was unused and available under this line of credit.

 

In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of June 30, 2016, Ever-Glory Apparel had borrowed $4.3 million under this line of credit with annual interest rates ranging from 2.8% - 3.8% and due on various dates from July to November 2016, and collateralized by approximately $5.2 million of accounts receivable from wholesale customers. As of June 30, 2016, approximately $1.7 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 June 30, 2016, Ever-Glory Apparel had borrowed $3.7 million from HSBC with an annual interest rates ranging from 1.1% - 3.0% and due in July 2016, and collateralized by approximately $4.3 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2016, approximately $8.9 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 $5.0 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of June 30, 2016, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 5.0% - 5.3% and due on various dates from August to November 2016. As of June 30, 2016, approximately $2.0 million was unused and available under this line of credit.

 

In December 2015, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Banking and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2016, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Banking with an annual interest rate of 4.6% and due in December 2016.

 

In March 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.8 million (RMB25.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory and Mr. Kang. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of June 30, 2016, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with annual interest rate at 4.8% and due in October 2016, Ever-Glory Apparel had borrowed $1.1 million from Bank of China with an annual interest rate at 2.5% and due in August 2016, and collateralized by approximately $1.4 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2016, approximately $1.2 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 June 30, 2016, LA GO GO had borrowed $1.4 million (RMB9.0 million) from the Bank of Communications with annual interest rate at 4.6% and due on December 2016. As of June 30, 2016, approximately $4.0 million was unused and available under this line of credit.

 

All loans have been repaid before or at maturity date.

 

Total interest expense on bank loans amounted to $0.3 million, $0.9 million, $0.7 million and $1.5 million for the three and six months ended June 30, 2016 and 2015, respectively.

 

 7 

 

 

NOTE 5 DERIVATIVE LIABILITY

 

As of June 30, 2016, the Company had three outstanding forward foreign exchange contracts (sell US dollars for RMB), with total notional amount of $9.5 million, and one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR0.65 million. As of December 31, 2015, the Company had four outstanding forward foreign exchange contracts (sell US dollars for RMB), with total notional amount of $11.1 million. The fair value of these contracts as of June 30, 2016 and December 31, 2015, as well as realized losses on these foreign currency derivative activities during 2015 and the six months ended June 30, 2016 were not significant.

 

NOTE 6 INCOME TAX

 

The Company’s operating subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (“the Income Tax Laws”).

 

All PRC subsidiaries, except for He Meida, are subject to income tax at the 25% statutory rate.

  

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented a income tax reduction from 15% to 9% valid through December 31, 2017.

 

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.

 

Although the Company’s parent entity is a U.S. entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide for 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 formed 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, 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.

  

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. Approximately $2.3 million has been paid as of June 30, 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. 

 

 8 

 

 

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for the three and six months ended June 30, 2016 and 2015 was taxable in the following jurisdictions:

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
   (In thousands of U.S. Dollars) 
PRC  $3,884   $4,900   $4,218   $8,213 
BVI   (1)   (1)   1    (91)
Others   (3)   (2)   (5)   (5)
   $3,880   $4,897   $4,214   $8,117 

   

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2016 and 2015:

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
PRC statutory rate   25.0%   25.0%   25.0%   25.0%
Preferential tax treatment   -    (0.3)   -    (0.7)
Effect of foreign income tax rates   -    -    -    0.3 
Net operating losses for which no deferred tax assets was recognized   -    -    14.4    - 
Other   (3.7)   3.5    -    2.6 
Effective income tax rate   21.3%   28.2%   39.4%   27.2%

 

Income tax expense for the three and six months ended June 30, 2016 and 2015 is as follows:

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Current  $640   $1,245   $1,744   $2,184 
Deferred   188    134    (82)   20 
Income tax expense  $828   $1,379   $1,662   $2,204 

 

The Company has not recorded U.S. deferred income taxes on approximately $81.2 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriated 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 share for the three and six months ended June 30, 2016 and 2015: 

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Weighted average number of common shares – Basic and diluted   14,787,302    14,784,094    14,786,589    14,784,094 
Earnings per share – Basic and diluted  $0.21   $0.24   $0.19   $0.41 

  

 9 

 

 

NOTE 8 STOCKHOLDERS’ EQUITY

 

On July 29, 2015, the Company issued an aggregate of 854 shares of its common stock to three of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2014. The shares were valued at $5.91 per share, which was the average market price of the common stock for the five days before the grant date.

 

On July 29, 2015, the Company issued an aggregate of 920 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 2015. The shares were valued at $5.39 per share, which was the average market price of the common stock for the five days before the grant date.

 

On April 29, 2016, the Company issued an aggregate of 2,072 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 2015. The shares 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.

 

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-tem in nature and are expected to be settled in cash.

 

Other income from Related Parties

  

Jiangsu Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter of 2014. During the three and six months ended June 30, 2016 and 2015, the Company received $4,720, $11,255, $2,026 and $9,786 from the customers and paid $5,675, $10,285, $2,480 and $9,100 to Wubijia through the consignment, respectively. The net (loss) profit of ($955), $970, ($454) and $686 was recorded as other income (expenses) during the three and six months ended June 30, 2016 and 2015, respectively.  

 

Nanjing Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s retail stores since the third quarter of 2015. During the three and six months ended June 30, 2016, the Company received $70,456 and $100,839 from the customers and paid $60,490 and $85,446 to Nanjing Knitting through the consignment, respectively. The net profit of $9,966 and $15,393 was recorded as other income during the three and six months ended June 30, 2016.

 

Included in other income for the three and six months ended June 30, 2016 and 2015 is rent income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term though 2016. The rent income is $16,647, $32,433, $17,596 and $35,105 for the three and six months ended June 30, 2016 and 2015, respectively.

 

Other expenses due to Related Parties

 

Included in other expenses for the three and six months ended June 30, 2016 and 2015 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

  

   Three months ended   Six months ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
   In thousands of U.S. Dollars) 
Jiangsu Ever-Glory  $12   $13   $24   $26 
Chuzhou Huarui   57    61    114    122 
Kunshan Enjin   11    12    22    24 
Total  $80   $86   $160   $172 

 

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.

  

 10 

 

 

Purchases from and Sub-contracts with Related Parties

 

The Company purchased raw materials from Nanjing Knitting totaling $0.14 million, $0.34 million, $0.51 million and $0.69 million during the three and six months ended June 30, 2016 and 2015, respectively.

 

In addition, Sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 2016 and 2015 are as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2016   2015   2016   2015 
   (In thousands of U.S. Dollars) 
Chuzhou huarui  $1,370   $1,461   $3,694   $2,493 
Fengyang huarui   299    327    502    736 
Nanjing Ever-Kyowa   522    314    995    587 
Ever-Glory Vietnam   3,018    3,852    5,057    4,888 
Ever-Glory Cambodia   757    68    2,095    372 
EsCeLav   5    -    5    2 
Shanghai Sea to Sky   -    1    -    259 
Jiangsu Ever-Glory   -    26    51    26 
   $5,971   $6,049   $12,399   $9,363 

 

Accounts Payable – Related Parties

 

The accounts payable to related parties at June 30, 2016 and December 31, 2015 are as follows:

 

   June 30,
2016
   December 31,
2015
 
   (In thousands of
U.S. Dollars)
 
Ever-Glory Vietnam  $1,109    2,003 
Fengyang Huarui   -    84 
Nanjing Ever-Kyowa   685    561 
Chuzhou Huarui   610    175 
Nanjing Knitting   126    - 
Total  $2,530   $2,823 

  

Amounts Due From Related Parties-current assets

 

The amounts due from related parties as of June30, 2016 and December 31, 2015 are as follows:

 

   June 30,
2016
   December 31,
2015
 
   (In thousands of
U.S. Dollars)
 
Jiangsu Ever-Glory  $628   $2,412 
Nanjing Knitting   -    106 
Fengyang Huarui   257    - 
Ever-Glory Cambodia   109    15 
EsC'eLav   60    2 
Total  $1,054   $2,535 

 

As of June 30, 2016, the Company prepaid $0.26 million and $0.11 million to the sub-contractors, Fengyang Huarui and Ever-Glory Cambodia, respectively, for the next period’s subcontracting fees.

 

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and six months ended June 30, 2016 and 2015, 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 $1.9 million and $3.0 million during the six-month period ended June 30, 2016 and 2015, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.3 million and $0.03 million during the six months ended June 30, 2016 and 2015, respectively.

  

 11 

 

 

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 more than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of June 30, 2016 and December 31, 2015, Jiangsu Ever-Glory has provided guarantees for approximately $54.8 million (RMB364 million) (2016) and $52.2 million (RMB339.0 million) (2015) of lines of credit obtained by the Company. Jiangsu Ever-Glory, Chuzhou Huarui 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 $31.0million (RMB206 million) (2016) and $22.8 million (RMB148.0 million) (2015) as of June 30, 2016 and December 31, 2015, respectively.  Mr. Kang has also provided a personal guarantee for $40.1 million (RMB266.3 million).

 

As of December 31, 2015, $18.8 million (RMB122.0 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the six months ended June 30, 2016, repayment of $1.84 million (RMB12 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2016, the amount of the counter-guarantee was $16.6 million (RMB110 million) (the difference represents currency exchange adjustment of $0.4 million), which was 27.8% of the aggregate amount of lines of credit. This amount plus accrued interest of $3.38 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At June 30, 2016 and 2015, the amount classified as a reduction of equity was $19.97 million and $21.78 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Interest income for the three and six months ended June 30, 2016 and 2015 was approximately $0.2 million, $0.4 million , $0.2 million and $0.5 million, respectively.

   

NOTE 10 CONCENTRATIONS AND RISKS

 

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable. The allowance for doubtful accounts at June 30, 2016 and December 31, 2015 was $1.05 million and $2.18 million, respectively. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions in the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts.  If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.  

 

For the six-month period ended June 30, 2016, the Company had no wholesale customer that represented more than 10% of the Company’s revenues. For the three-month period ended June 30, 2016, the Company had two wholesale customers that represented approximately 12.4% and 10% of the Company’s revenues. For the six-month period ended June 30, 2015, the Company had two wholesale customers that represented approximately 13% and 11% of the Company’s revenues, respectively. For the three-month period ended June 30, 2015, the Company had one wholesale customer that represented approximately 10% of the Company’s revenues.

 

For the Company’s wholesale business during the three and six months ended June 30, 2016 and 2015, no supplier represented more than 10% of the total raw materials purchased.

 

For the Company’s retail business, the Company had one supplier that represented 11.9% and 10.5% of raw materials purchases during the three and six months ended June 30, 2016. The Company had no supplier that represented more than 10% of raw materials purchases during the three and six months ended June 30, 2015.

  

For the wholesale business, during the six months ended June 30, 2016, the Company relied on two manufacturers for 23.9% and 17.5% of purchased finished goods, respectively. For the wholesale business, during the six months ended June 30, 2015, the Company relied on two manufacturers for 23% and 12% of purchased finished goods, respectively. During the three months ended June 30, 2016, the Company relied on two manufacturers for 36.1% and 16.4% of purchased finished goods, respectively. During the three months ended June 30, 2015, the Company relied on two manufacturers for 35% and 13% of purchased finished goods, respectively.

 

For the retail business, the Company had no supplier that represented more than 10% of finished goods purchases during the three and six months ended June 30, 2016 and 2015.

 

 12 

 

 

The Company’s revenues for the three and six months ended June 30, 2016 and 2015 were earned in the following geographic areas:

 

   Three months ended
June 30,
   Six months ended
June 30,
 
   2016   2015   2016   2015 
   (In thousands of U.S. Dollars) 
The People’s Republic of China  $11,265   $9,374   $26,064   $28,307 
Germany   790    2,780    2,243    7,267 
United Kingdom   3,831    3,828    6,419    6,981 
Europe-Other   12,821    6,897    18,275    8,699 
Japan   1,807    2,934    6,619    5,864 
United States   7,294    3,979    10,738    5,948 
Total wholesale business   37,808    29,792    70,358    63,066 
Retail business   42,868    45,935    102,011    110,564 
Total  $80,676   $75,727   $172,369   $173,630 

 

NOTE 11 SEGMENTS

 

The Company reports financial and operating information in the following two segments:

 

(a)  Wholesale segment

  

(b)  Retail segment

 

The Company also provides general corporate services to its segments and these costs are reported as "corporate and others”:

  

   Wholesale
segment
   Retail
segment
   Total 
   (In thousands of U.S. Dollars) 
Six months ended June 30, 2016    
Segment profit or loss:            
Net revenue from external customers  $70,358    102,011    172,369 
Income from operations  $3,449    388    3,837 
Interest income  $589    32    621 
Interest expense  $702    229    931 
Depreciation and amortization  $504    2,827    3,331 
Income tax expense  $842    820    1,662 
                
Six months ended June 30, 2015               
Segment profit or loss:               
Net revenue from external customers  $63,066    110,564    173,630 
Income from operations  $3,585    4,713    8,298 
Interest income  $501    38    539 
Interest expense  $1,116    376    1,492 
Depreciation and amortization  $597    4,081    4,678 
Income tax expense  $871    1,333    2,204 

 

 13 

 

 

   Wholesale
segment
   Retail
segment
   Total 
   (In thousands of U.S. Dollars) 
Three months ended June 30, 2016    
Segment profit or loss:            
Net revenue from external customers  $37,808    42,868    80,676 
Income from operations  $1,644    1,712    3,356 
Interest income  $218    19    237 
Interest expense  $213    121    334 
Depreciation and amortization  $250    1,323    1,573 
Income tax expense  $417    411    828 
                
Three months ended June 30, 2015               
Segment profit or loss:               
Net revenue from external customers  $29,792    45,935    75,727 
Income from operations  $1,753    3,106    4,859 
Interest income  $193    22    215 
Interest expense  $522    194    716 
Depreciation and amortization  $255    1,913    2,168 
Income tax expense  $416    963    1,379 

 

 14 

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2016 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 low 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.

 

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”) 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 Fashion Company Limited (“Shanghai Yiduo”) and Xizang He Meida Trading Company Limited (“He Meida”).

 

Business Objectives

 

Wholesale Business

 

We believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality. We maintain long-term, satisfactory relationships with a portfolio of well-known and mid-class global brands.

  

The primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:

  

  Expanding our global sourcing network;
     
  Expanding our overseas low-cost manufacturing base (outside of mainland China);
     
  Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel;
     
  Continuing to emphasize product design and technology utilization;
     
  Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
     
  Maintaining stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.

 

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Retail Business

 

The business objectives for our retail segment are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of June 30, 2016, we had 1,275 stores (including store-in-stores), which included 145 stores that were opened and 29 stores that were closed in the first half of 2016.

 

We believe that our growth opportunities and continued investment initiatives include:

 

  Building our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
     
  Expanding our retail network throughout China;
     
  Improving our retail stores’ efficiency and increasing same-store sales;
     
  Continuing to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities; and
     
  Becoming a multi-brand operator.

 

Seasonality of Business

 

Our business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday periods in the retail segment.

 

Collection Policy

 

Wholesale business

 

For our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following the delivery of finished goods.

 

Retail business

 

For store-in-store shops, we generally receive payments from the stores between 60 to 90 days following the date of the register receipt. For our own flagship stores, we receive payments on the same day of the register receipt. For sales from e-commerce platforms such as Tmall, Dangdang mall, JD.com, VIP.com and etc., we generally receive payments between 5 to 15 days following the date of the register receipt.

 

Global Economic Uncertainty

 

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2016.

 

In addition, economic conditions in the United States and other foreign markets in which we operate could substantially affect our sales profitability, cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.

 

Despite the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.

  

Summary of Critical Accounting Policies

 

We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.

 

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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.

  

Estimates and Assumptions

 

In preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2016 and 2015 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.

 

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 in Revenue 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 July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the measurement of certain inventories. Under the new guidance, inventories are required to be measured at the lower of cost and net realizable value, the latter representing the estimated selling price in the ordinary course of business, reduced by costs of completion, disposal, and transportation. Under current guidance, inventories are required to be measured at the lower of cost or market, but depending upon specific circumstances, market could refer to replacement cost, net realizable value, or net realizable value reduced by a normal profit margin. The guidance is to be applied prospectively, is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Management is currently assessing the potential impact of this ASU on its consolidated financial statements.

 

In September 2015, FASB issued ASU No. 2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company assessed that there is no significant impact to the consolidated financial statements on this update.

 

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.

 

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Results of Operations for the three months ended June 30, 2016 and 2015

 

The following table summarizes our results of operations for the three months ended June 30, 2016 and 2015. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

   Three Months Ended June 30, 
   2016   2015 
   (In thousands of U.S. dollars, except for percentages) 
Sales  $80,676    100.0%  $75,727    100.0%
Gross Profit  $26,715    33.1%  $30,048    39.7%
Operating Expense  $23,359    29.0%  $25,189    33.3%
Income From Operations  $3,356    4.2%  $4,859    6.4%
Other Income (Expenses)  $524    0.6%  $38    0.1%
Income tax expense  $828    1.0%  $1,379    1.8%
Net Income  $3,052    3.8%  $3,518    4.6%

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2016 and 2015. 

 

   2016   % of total sales   2015   % of total sales  

Growth (Decrease)

in 2016 compared
with 2015

 
Wholesale business  (In thousands of U.S. dollars)       (In thousands of U.S. dollars)         
The People’s Republic of China  $11,265    14.0%  $9,374    12.4%   20.2%
Germany   790    1.0    2,780    3.7    (71.6)
United Kingdom   3,831    4.7    3,828    5.0    0.1 
Europe-Other   12,821    15.9    6,897    9.1    85.9 
Japan   1,807    2.2    2,934    3.9    (38.4)
United States   7,294    9.1    3,979    5.2    83.3 
Total Wholesale business   37,808    46.9    29,792    39.3    26.9 
Retail business   42,868    53.1    45,935    60.7    (6.7)
Total sales  $80,676    100.0%  $75,727    100.0%   6.5%

  

Sales for the three months ended June 30, 2016 were $80.7 million, a 6.5% increase compared with the three months ended June 30, 2015. This increase was primarily attributable to a 26.9% increase in sales in our wholesale business partially offset by a 6.7% decrease in our retail business.

 

Sales generated from our wholesale business contributed 46.9% or $37.8 million of our total sales for the three months ended June 30, 2016, a 26.9% increase compared with $29.8 million in the three months ended June 30, 2015. This increase was primarily attributable to an increase in sales in PRC, Europe-Other and United States partially offset by a decrease in sales in Germany and Japan. 

 

Sales generated from our retail business contributed 53.1% or $42.9 million of our total sales for the three months ended June 30, 2016, a 6.7% decrease compared with 60.7% or $45.9 million in the three months ended June 30, 2016. This decrease was primarily due to a decrease in same store sales.

 

Costs and Expenses

 

Cost of Sales and Gross Margin

 

Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.

 

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended June 30, 2016 and 2015.

 

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                   Growth 
                   (Decrease) in
2016
 
   Three months ended June 30,   Compared 
   2016   2015   with 2015 
   (In thousands of U.S. dollars, except for percentages)     
Net Sales for Wholesale Sales  $37,808    100.0%  $29,792    100.0%   26.9%
Raw Materials   16,852    44.6    13,501    45.3    24.8 
Labor   1,383    3.7    1,472    4.9    (6.0)
Outsourced Production Costs   13,363    35.3    8,433    28.3    58.5 
Other and Overhead   119    0.3    141    0.5    (15.6)
Total Cost of Sales for Wholesale   31,717    83.9    23,547    79.0    34.7 
Gross Profit for Wholesale   6,091    16.1    6,245    21.0    (2.5)
Net Sales for Retail   42,868    100.0    45,935    100.0    (6.7)
Production Costs   12,669    29.6    11,380    24.8    11.3 
Rent   9,575    22.3    10,752    23.4    (10.9)
Total Cost of Sales for Retail   22,244    51.9    22,132    48.2    0.5 
Gross Profit for Retail   20,624    48.1    23,803    51.8    (13.4)
Total Cost of Sales   53,961    66.9    45,679    60.3    18.1 
Gross Profit  $26,715    33.1%  $30,048    39.7%   (11.1)%

  

Raw material costs for our wholesale business were 44.6% of our total wholesale business sales in the three months ended June 30, 2016, compared with 45.3% in the three months ended June 30, 2015. The decrease was mainly due to lower raw material prices.

 

Labor costs for our wholesale business were 3.7% of our total wholesale business sales in the three months ended June 30, 2016, compared with 4.9% in the three months ended June 30, 2015. The marginal decrease was mainly due to a higher number of outsourced orders in 2016.

 

Outsourced production costs for our wholesale business for the three months ended June 30, 2016 increased 58.5% to $13.4 million from $8.4 million for the three months ended June 30, 2015. Outsourced production costs accounted for 35.3% of our total wholesale business sales in the three months ended June 30, 2016, a 7.0% increase from the three months ended June 30, 2015. This increase was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.3% of our total wholesale business sales for the three months ended June 30, 2016, compared with 0.5% of total wholesale business sales for the three months ended June 30, 2015.

 

Wholesale business gross profit for the three months ended June 30, 2016 was $6.1 million compared with $6.2 million for the three months ended June 30, 2015. Gross profit accounted for 16.1% of our total wholesale sales for the three months ended June 30, 2016, compared with 21.0% for the three months ended June 30, 2015. The decrease was mainly due to an increase in outsourced manufacturing costs.

 

Production costs for our retail business were $12.7 million for the three months ended June 30, 2016 compared with $11.4 million during the three months ended June 30, 2015. Retail production costs accounted for 29.6% of our total retail sales in the three months ended June 30, 2016, compared with 24.8% for the three months ended June 30, 2015. The increase was due to increased in discounts on our out-of-season products in the three months ended June 30, 2016 compared with the same period of the prior year.

 

Rent costs for our retail business for the three months ended June 30, 2016 were $9.6 million compared with $10.8 million for the three months ended June 30, 2015. Rent costs for our retail business accounted for 22.3% of our total retail sales for the three months ended June 30, 2016, compared with 23.4% for the three months ended June 30, 2015. The decrease was primarily attributable to lower variable rent charged at certain locations.

  

Gross profit in our retail business for the three months ended June 30, 2016 was $20.6 million and gross margin was 48.1%. Gross profit in our retail business for the three months ended June 30, 2015 was $23.8 million and gross margin was 51.8%.

 

Total cost of sales for the three months ended June 30, 2016 was $54.0 million, an 18.1% increase from $45.7 million for the three months ended June 30, 2015. Total cost of sales as a percentage of total sales for the three months ended June 30, 2016 was 66.9%, compared with 60.3% for the three months ended June 30, 2015. Gross margin for the three months ended June 30, 2016 was 33.1% compared with 39.7% for the three months ended June 30, 2015.

 

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Selling, General and Administrative Expenses

 

Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.

 

Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.

 

Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges and product inspection charges. Accordingly our gross profit amounts may not be comparable to those of other companies who include these amounts in cost of sales.

 

   Three Months Ended June 30,   Increase (Decrease) in 2016 Compared 
   2016   2015   to 2015 
   (In thousands of U.S. dollars, except for percentages)     
Gross Profit  $26,715    33.1%  $30,048    39.7%   (11.1)%
Operating Expenses:                         
Selling Expenses   16,043    19.9    17,583    23.2    (8.8)
General and Administrative Expenses   7,316    9.1    7,606    10.0    (3.8)
Total   23,359    29.0    25,189    33.3    (7.3)
Income from Operations  $3,356    4.2%  $4,859    6.4%   (30.9)%

 

Selling expenses for the three months ended June 30, 2016 decreased 8.8% to $16.0 million from $17.6 million for the three months ended June 30, 2015. The decrease was attributable to lower retail sales and a decrease in store management expense. 

 

General and administrative expenses for the three months ended June 30, 2016 decreased 3.8% to $7.3 million from $7.6 million for the three months ended June 30, 2015.

 

Income from Operations

 

Income from operations for the three months ended June 30, 2016 decreased 30.9% to $3.4 million from $4.9 million for the three months ended June 30, 2015. Income from operations for the three months ended June 30, 2016 accounted for 4.2% of our total sales, a 2.3% decrease compared with the three months ended June 30, 2015 as a result of decreased gross profit.

 

Interest Expense

 

Interest expense for the three months ended June 30, 2016 was $0.3 million, a 53.4% decrease compared with the same period in 2015. The decrease was due to the decreased interest rate.

 

Income Tax Expenses

 

Income tax expense for the three months ended June 30, 2016 was $0.8 million, a decrease of 40% compared to the same period of 2015. The decrease was primarily due to decreased profits of our business.

 

Our PRC 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.

 

All PRC subsidiaries, except for He Meida, are subject to the 25% income tax 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.

 

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Perfect Dream Limited was incorporated in the British Virgin Islands (BVI), and under the current laws of 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) Ltd was incorporated in Samoa on September 15, 2009, and has no liabilities for income tax.

 

Although the Company’s parent entity is a US entity, the Company’s primary operations are through subsidiaries located in 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 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 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 should be made by the Company prospectively over the next two to three years period. Approximately $2.3 million has been paid as of June 30, 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.  

  

Ever-Glory International Group Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes through June 30, 2016. 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 Income

 

Net income for the three months ended June 30, 2016 was $3.1 million, a 13.2% decrease compared with the same period in 2015. Our basic and diluted earnings per share were $0.21 and $0.24 for the three months ended June 30, 2016 and 2015, respectively.

  

Results of Operations for the six months ended June 30, 2016 and 2015

 

The following table summarizes our results of operations for the six months ended June 30, 2016 and 2015. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

   Six Months Ended June 30, 
   2016   2015 
   (in thousands of U.S. Dollars, except for percentages) 
Sales  $172,369    100.0%  $173,630    100.0%
Gross Profit   55,058    31.9    60,656    34.9 
Operating Expense   51,221    29.7    52,358    30.2 
Income From Operations   3,837    2.2    8,298    4.8 
Other Income (Expenses)   377    0.2    (181)   (0.1)
Income tax expense   1,662    1.0    2,204    1.3 
Net Income  $2,552    1.5%  $5,913    3.4%

 

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Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2016 and 2015.

 

   2016   % of total sales   2015   % of total sales  

Growth (Decrease)

in 2016 compared
with 2015

 
Wholesale business  (In thousands of U.S. dollars)       (In thousands of U.S. dollars)         
The People’s Republic of China  $26,064    15.1%  $28,307    16.3%   (7.9)%
Germany   2,243    1.3    7,267    4.2    (69.1)
United Kingdom   6,419    3.7    6,981    4.0    (8.0)
Europe-Other   18,275    10.6    8,699    5.0    110.1 
Japan   6,619    3.8    5,864    3.4    12.9 
United States   10,738    6.2    5,948    3.4    80.5 
Total Wholesale business   70,358    40.8    63,066    36.3    11.6 
Retail business   102,011    59.2    110,564    63.7    (7.7)
Total sales  $172,369    100.0%  $173,630    100.0%   (0.7)%

  

Sales for the six months ended June 30, 2016 were $172.4 million, a decrease of 0.7% from the six months ended June 30, 2015. This decrease was primarily attributable to a 7.7% decrease in sales in our retail business partially offset for an 11.6% sales increase in our wholesale business.

 

Sales generated from our wholesale business contributed 40.8% or $70.4 million of our total sales for the six months ended June 30, 2016, an increase of 11.6% compared with $63.1 million in the six months ended June 30, 2015. This increase was primarily attributable to increased sales in Europe-Other, Japan and the United States partially offset by decreased sales in PRC, Germany and United Kingdom. 

 

Sales generated from our retail business contributed 59.2% or $102.0 million of our total sales for the six months ended June 30, 2016, a decrease of 7.7% compared with $110.6 million in the six months ended June 30, 2015. This decrease was primarily due to a decrease in same store sales.

 

Total retail store square footage and sales per square foot for the six months ended June 30, 2016 and 2015 are as follows:

 

   2016   2015 
Total store square footage   1,262,879    1,175,825 
Number of stores   1,275    1,204 
Average store size, square feet   990    977 
Total store sales (in thousands of U.S. dollars)  $102,011   $110,564 
Sales per square foot  $81   $94 

  

Same store sales and newly opened store sales for the six months ended June 30, 2016 and 2015 are as follows:

 

   2016   2015 
   (In thousands of U.S. dollars) 
Sales from stores opened for a full year  $78,133   $68,237 
Sales from newly opened store sales  $12,276   $34,010 
Sales from e-commerce platform  $6,749   $5,274 
Other*  $4,853   $3,043 
Total  $102,011   $110,564 

  

*Primarily sales from stores that were closed in the current reporting period.

 

We remodeled or relocated 216 stores in 2015, and 97 stores during the six months ended June 30, 2016.We plan to relocate or remodel an aggregate of 150-200 stores in 2016. 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 2015.  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.

 

 22 

 

 

Costs and Expenses

 

Cost of Sales and Gross Margin

 

Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.

 

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the six months ended June 30, 2016 and 2015.

 

                   Growth 
                   (Decrease) in
2016
 
   Six months ended June 30,   Compared 
   2016   2015   with 2015 
   (In thousands of U.S. dollars, except for percentages)     
Net Sales for Wholesale Sales  $70,358    100.0%  $63,066    100.0%   11.6%
Raw Materials   30,484    43.3    27,566    43.7    10.6 
Labor   2,622    3.7    2,855    4.5    (8.2)
Outsourced Production Costs   24,677    35.1    18,964    30.1    30.1 
Other and Overhead   246    0.3    280    0.4    (12.1)
Total Cost of Sales for Wholesale   58,029    82.5    49,666    78.8    16.8 
Gross Profit for Wholesale   12,329    17.5    13,400    21.2    (8.0)
Net Sales for Retail   102,011    100.0    110,564    100.0    (7.7)
Production Costs   34,026    33.4    30,550    27.6    11.4 
Rent   25,256    24.8    32,758    29.6    (22.9)
Total Cost of Sales for Retail   59,282    58.1    63,309    57.3    (6.4)
Gross Profit for Retail   42,729    41.9    47,255    42.7    (9.6)
Total Cost of Sales   117,311    68.1    112,974    65.1    3.8 
Gross Profit  $55,058    31.9%  $60,656    34.9%   (9.2)%

 

Raw material costs for our wholesale business were 43.3% of our total wholesale business sales in the six months ended June 30, 2016, compared with 43.7% in the six months ended June 30, 2015. The decrease was mainly due to lower raw materials prices.

 

Labor costs for our wholesale business were 3.7% of our total wholesale business sales in the six months ended June 30, 2016, compared with 4.5% in the six months ended June 30, 2015. The marginal decrease was mainly due to a higher number of outsourced orders in 2016.

 

Outsourced manufacturing costs for our wholesale business were 35.1% of our total sales in the six months ended June 30, 2016, compared with 30.1% in the six months ended June 30, 2015. This increase was primarily attributable to increased average salaries of the employees at our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.3% and 0.4% of our total sales for the six months ended June 30, 2016 and 2015, respectively.

 

Gross profit for our wholesale business for the six months ended June 30, 2016 was $12.3 million, an 8.0% decrease compared with the six months ended June 30, 2015. As a percentage of total wholesale business sales, gross profit was 17.5% of our total wholesale business sales for the six months ended June 30, 2016, compared with 21.2% for the six months ended June 30, 2015. The decrease was mainly due to increased outsourced manufacturing costs.

 

Production costs for our retail business for the six months ended June 30, 2016 were $34.0 million compared with $30.6 million for the six months ended June 30, 2015. As a percentage of our total retail sales, production costs were 33.4% of our total retail sales for the six months ended June 30, 2016, compared with 27.6% for the six months ended June 30, 2015. The increase was due to the increased discounts on our out-of-season products in the three months ended June 30, 2016 compared with the same period of the prior year.

 

 23 

 

 

Rent costs for our retail business for the six months ended June 30, 2016 were $25.3 million compared with $32.8 million for the six months ended June 30, 2015. As a percentage of total retail sales, rent costs were 24.8% of our total retail sales for the six month ended June 30, 2016 compared with 29.6% for the six months ended June 30, 2015. The decrease was primarily attributable to lower rent at certain locations.

 

Gross profit for our retail business for the six months ended June 30, 2016 was $42.7 million compared with $47.3 million for the six months ended June 30, 2015. Gross margin for our retail business for the six months ended June 30, 2016 was 41.9% compared with 42.7% for the six months ended June 30, 2015

 

Total cost of sales for the six months ended June 30, 2016 was $117.3 million, a 3.8% increase compared with the six months ended June 30, 2015. As a percentage of total sales, total costs were 68.1% of total sales for the six months ended June 30, 2016, compared with 65.1% for the six months ended June 30, 2015. Total gross margin for the six months ended June 30, 2016 was 31.9% compared with 34.9% for the six months ended June 30, 2015.

 

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 16.7% and 16.0% of raw material purchases for the six months ended June 30, 2016 and 2015, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six months ended June 30, 2016 and 2015. For our retail business, purchases from our five largest suppliers represented approximately 33.7% and 26.8% of raw material purchases for the six months ended June 30, 2016 and 2015, respectively. One supplier provided approximately 10.5% of our total purchases for the six months ended June 30, 2016. No one supplier provided more than 10% of our total purchases for the six months ended June 30, 2015. 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 64.1 and 49.8% of finished goods purchases for the six months ended June 30, 2016 and 2015, respectively. Two contract manufacturers provided approximately 23.9% and 17.5% of our finished goods purchases for the six months ended June 30, 2016, respectively. Two contract manufacturers provided approximately 23.1% and 11.8% of our finished goods purchases for the six months ended June 30, 2015, respectively. For our retail business, our five largest contract manufacturers represented approximately 16.2% and 19.5% of finished goods purchases for the six months ended June 30, 2016 and 2015, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2016 and 2015. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

 

Selling, General and Administrative Expenses

 

Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.

 

Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.

 

Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly our gross profit amounts may not be comparable to those of other companies who include these amounts in costs of sales.

 

   Six months ended June 30,   Increase (Decrease) in 2016 Compared 
   2016   2015     to 2015 
   (In thousands of U.S. dollars, except for percentages)     
Gross Profit  $55,058    31.9%  $60,656    34.9%   (9.2)%
Operating Expenses:                         
Selling Expenses   36,956    21.4    37,838    21.8    (2.3)
General and Administrative Expenses   14,265    8.3    14,520    8.4    (1.8)
Total   51,221    29.7    52,358    30.2    (2.2)
Income from Operations  $3,837    2.2%  $8,298    4.8%   (53.8)%

  

 24 

 

 

Selling expenses for the six months ended June 30, 2016 were $37.0 million, a 2.3% decrease compared with the six months ended June 30, 2015. The decrease was attributable to lower retail sales and a decrease in store management expense.

 

General and administrative expenses for the six months ended June 30, 2016 were $14.3 million a 1.8% decrease compared with the six months ended June 30, 2015. As a percentage of total sales, general and administrative expenses accounted for 8.3% of total sales for the six months ended June 30, 2016, compared with 8.4% of total sales for the six months ended June 30, 2015.

 

Income from Operations

 

Income from operations for the six months ended June 30, 2016 was $3.8 million, a 53.8% decrease from $8.3 million for the six months ended June 30, 2015. This decrease was due to decreased gross profit.

 

Interest Expense

 

Interest expense was $0.9 million and $1.5 million for the six months ended June 30, 2016 and 2015, respectively. The decrease was due to the decreased bank loans and interest rate.

 

Income Tax Expenses

 

Income tax expense for the six months ended June 30, 2016 was $1.7 million, a 24.6% decrease compared to the same period of 2015. The decrease was primarily due to lower business profits.

 

Net Income

 

Net income for the six months ended June 30, 2016 was $2.6 million, a decrease of 56.8% compared with the same period in 2015. Our diluted earnings per share were $0.19 and $0.41 for the six months ended June 30, 2016 and 2015, respectively.

 

Summary of Cash Flows

 

 

Summary cash flows information for the six months ended June 30, 2016 and 2015 is as follows:

 

   2016   2015 
   (In thousands of U.S. dollars) 
Net cash provided by operating activities  $9,847   $19,704 
Net cash used in investing activities  $(5,692)  $(7,623)
Net cash provided by (used in) financing activities  $1,610  $(17,873)

  

Net cash provided by operating activities was $9.85 million for the six months ended June 30, 2016, compared with $19.70 million during the six months ended June 30, 2015. The decrease was primarily due to decrease in inventory and net income.

 

Net cash used in investing activities was $5.7 million for the six months ended June 30, 2016, compared with $7.6 million during the six months ended June 30, 2015. This decrease was mainly due to the purchase of land use right for our retail logistics center in the six months ended June 30, 2015 and no such activities in the same period of 2016.

 

Net cash provided by financing activities was $1.61 million for the six months ended June 30, 2016, compared with $17.9 million net cash used during the six months ended June 30, 2015. During the six months ended June 30, 2016, we repaid $48.5 million of bank loans and received bank loan proceeds of $48.3 million. Also, under the counter-guarantee agreement, we received $1.8 million from the related party during the six months ended June 30, 2016.

 

Liquidity and Capital Resources

 

As of June 30, 2016, we had cash and cash equivalents of $27.5 million, other current assets of $139.8 million and current liabilities of $113.4 million. We presently finance our operations primarily from cash flows from operations and bank loans and we anticipate that these will continue to be our primary sources of funds to finance our short-term cash needs.

  

 25 

 

 

Bank Loans

 

In January 2014, 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 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2016, Goldenway had borrowed $6.0 million (RMB40.0 million) under this line of credit with annual interest rates ranging from 4.4% - 4.5% and due on various dates from September to October 2016. As of June 30, 2016, approximately $3.0 million was unused and available under this line of credit.

 

In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.1 million (RMB120.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2016, Ever-Glory Apparel had borrowed $11.7 million (RMB 78.0 million) under this line of credit with annual interest rate at 4.4% and due on various dates from July to December 2016. As of June 30, 2016, approximately $6.4 million was unused and available under this line of credit.

  

In June 2016, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2016, approximately $7.5 million was unused and available under this line of credit.

 

In June 2015, 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 June 30, 2016, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with annual interest rate of 5.0% and due on various dates from July to September 2016. Ever-Glory Apparel had also borrowed $2.6 million from Nanjing Bank with an annual interest rates ranging from 3.5% to 4.0% and due in October 2016, and collateralized by approximately $3.0 million of accounts receivable from our wholesale customers. As of June 30, 2016, approximately $3.4 million was unused and available under this line of credit.

 

In October 2015, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2016, LA GO GO had borrowed $2.3 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.0% and due in January 2017. As of June 30, 2016, approximately $0.7 million (RMB5.0 million) was unused and available under this line of credit.

 

In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of June 30, 2016, Ever-Glory Apparel had borrowed $4.3 million under this line of credit with annual interest rates ranging from 2.8% - 3.8% and due on various dates from July to November 2016, and collateralized by approximately $5.2 million of accounts receivable from wholesale customers. As of June 30, 2016, approximately $1.7 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 June 30, 2016, Ever-Glory Apparel had borrowed $3.7 million from HSBC with an annual interest rates ranging from 1.1% - 3.0% and due in July 2016, and collateralized by approximately $4.3 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2016, approximately $8.9 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 $5.0 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of June 30, 2016, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 5.0% - 5.3% and due on various dates from August to November 2016. As of June 30, 2016, approximately $2.0 million was unused and available under this line of credit.

  

In December 2015, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Banking and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2016, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Banking with an annual interest rate of 4.6% and due in December 2016.

 

In March 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.8 million (RMB25.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory and Mr. Kang. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of June 30, 2016, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with annual interest rate at 4.8% and due in October 2016, Ever-Glory Apparel had borrowed $1.1 million from Bank of China with an annual interest rate at 2.5% and due in August 2016, and collateralized by approximately $1.4 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2016, approximately $1.2 million was unused and available under this line of credit.

 

 26 

 

 

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 June 30, 2016, LA GO GO had borrowed $1.4 million (RMB9.0 million) from the Bank of Communications with annual interest rate at 4.6% and due on December 2016. As of June 30, 2016, approximately $4.0 million was unused and available under this line of credit.

 

All bank loans are used to fund our daily operations.

 

DERIVATIVE LIABILITY

 

As of June 30, 2016, the Company had three outstanding forward foreign exchange contracts (sell US dollars for RMB), with total notional amount of $9.5 million, and one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR0.65 million. As of December 31, 2015, the Company had four outstanding forward foreign exchange contracts (sell US dollars for RMB), with total notional amount of $11.1 million. The fair value of these contracts as of June 30, 2016 and December 31, 2015, as well as realized losses on these foreign currency derivative activities during 2015 and the six months ended June 30, 2016 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 months 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. No assurance can be made that additional financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our own cash flows from operations.

 

As of June 30, 2016, we had access to approximately $82.4 million in lines of credit, of which approximately $38.8 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 more 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 under agreements executed between the Company, Jiangsu Ever-Glory and the banks. The maximum aggregate lines of credit and available borrowings was approximately $54.8 million (RMB364 million) and approximately $16.6 (RMB110 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of June 30, 2016.

 

Foreign Currency Translation Risk

 

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2016, the market foreign exchange rate had increased to RMB 6.64 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.

 

 27 

 

 

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GO (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain (loss) for the three and six months ended June 30, 2016 and 2015 was ($3.17) million, ($2.39) million, ($0.13) million and $0.33 million, respectively. 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 June 30, 2016, we had $27.5 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 June 30, 2016, the exchange rate between the RMB and U.S. Dollar was RMB 6.64 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, 2015. 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures 

  

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”)  is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Evaluation of Disclosure Controls and Procedures. As of  June 30, 2016, the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of June 30, 2016. 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, 2015.  As of June 30, 2016, we had not completed the remediation of these material weaknesses.

 

 28 

 

 

Limitations on the Effectiveness of Disclosure Controls.  Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.

   

Changes in Internal Control over Financial Reporting

 

Our management has worked, and will continue to work to improve our internal controls over financial reporting. During the six months ended June 30, 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We know of no pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.

 

ITEM 1A. RISK FACTORS

 

There has been no material change in the information provided in Item 1A of Form 10-K Annual Report for the year ended December 31, 2015 filed with the SEC on March 28, 2016.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

Exhibit No.    Description
     
31.1   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document 
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 29 

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

August 15, 2016 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)

 

 30 

 

 

EXHIBIT INDEX

 

Exhibit No.    Description
     
31.1   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document 
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

31