UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from ____________ to ____________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
People’s
Republic of
(Address of principal executive offices)
(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.
Indicate
by check mark whether the registrant has submitted electronically, 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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
Securities registered under Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered under Section 12(g) of the Act: None.
As
of August 11, 2022, 14,818,006 and
EVER-GLORY INTERNATIONAL GROUP, INC.
FORM 10-Q
INDEX
i
Cautionary Note Regarding Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:
| ● | Competition within our industry; | |
| ● | The impact (including travel and entry restrictions and quarantine) of public health epidemics, including the COVID-19 pandemic in China and the rest of the world, on the market we operate in and our business, results of operations and financial condition; | |
| ● | 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 management of business through a U.S. publicly-traded and reporting company and the general reputation and potential scrutiny of U.S. publicly-traded companies with their principal operations in China; | |
| ● | 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”).
ii
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
| June 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trading securities | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Advances on inventory purchases | ||||||||
| Value added tax receivable | ||||||||
| Other receivables and prepaid expenses | ||||||||
| Amounts due from related parties | ||||||||
| Total Current Assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Equity security investment | ||||||||
| Intangible assets, net | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deferred tax assets | - | |||||||
| Other non-current assets | ||||||||
| Total Non-Current Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Bank loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Accounts payable and other payables – related parties | ||||||||
| Other payables and accrued liabilities | ||||||||
| Value added and other taxes payable | ||||||||
| Income tax payable | ||||||||
| Current operating lease liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Non-current operating lease liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock ($ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Statutory reserve | ||||||||
| Treasury stock (at cost, | ( | ) | ( | ) | ||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Total Equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See the accompanying notes to the condensed consolidated financial statements.
1
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| NET SALES | $ | $ | $ | $ | ||||||||||||
| COST OF SALES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Government subsidy | ||||||||||||||||
| Gain (loss) from changes in fair values of investments | ( | ) | ||||||||||||||
| Other income | ||||||||||||||||
| Total Other Income (Expenses), Net | ( | ) | ||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAX EXPENSE | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Foreign currency translation (loss) gain | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
See the accompanying notes to the condensed consolidated financial statements.
2
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
| Common Stock | Additional | Retained Earnings | Accumulated other |
Amounts due from |
|||||||||||||||||||||||||||||||||
| Shares | Amount | paid-in capital |
Treasury stock |
Unrestricted | Statutory reserve |
comprehensive income (loss) |
related party |
Total equity |
|||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Stock issued for compensation | |||||||||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Repurchase of 14,746 shares of common stock | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Net income | - | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( |
) | $ | $ | $ | ( |
) | - | $ | |||||||||||||||||||||||||
| Common Stock | Additional | Retained Earnings | Accumulated other |
Amounts due from |
|||||||||||||||||||||||||||||||||
| Shares | Amount | paid-in capital |
Treasury Stock |
Unrestricted | Statutory reserve |
Comprehensive income |
related party |
Total equity |
|||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||
| Stock issued for compensation | |||||||||||||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Net cash received from related party under counter guarantee agreement | - | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Transfer to reserve | - | ||||||||||||||||||||||||||||||||||||
| Net cash received from related party under counter guarantee agreement | - | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||
See the accompanying notes to the condensed consolidated financial statements.
3
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)
| Six Months Ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | ( | ) | |||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss from sale of property and equipment | ||||||||
| Provision of bad debt allowance | ||||||||
| Provision for obsolete inventories | ||||||||
| Changes in fair value of trading securities | ( | ) | ||||||
| Changes in fair value of investments | ( | ) | ( | ) | ||||
| Deferred income tax | ||||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Value added tax receivable | ( | ) | ( | ) | ||||
| Other receivables and prepaid expenses | ( | ) | ( | ) | ||||
| Advances on inventory purchases | ||||||||
| Amounts due from related parties | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accounts payable and other payables- related parties | ( | ) | ||||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Value added and other taxes payable | ( | ) | ( | ) | ||||
| Income tax payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment and intangible asset | ( | ) | ( | ) | ||||
| Net proceeds from sale (purchase) of trading securities | ( | ) | ||||||
| Investment payment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from bank loans | ||||||||
| Repayment of bank loans | ( | ) | ( | ) | ||||
| Repurchase of common stock | ( | ) | ||||||
| Net collection of amounts due from related party (equity) | ||||||||
| Net cash used in provided by financing activities | ( | ) | ( | ) | ||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | ( | ) | ||||||
| NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | $ | ||||||
| Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets: | ||||||||
| Cash and Cash Equivalents | ||||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See the accompanying notes to the condensed consolidated financial statements.
4
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(UNAUDITED)
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Ever-Glory International Group, Inc. (the “Company” or “We” or “Ours”), together with its subsidiaries, is an apparel manufacturer, supplier and retailer in The People’s Republic of China (“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”), Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”), Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), Chuzhou Huirui Garments Co. Ltd. (“Huirui”), and Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”), and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”) and the Company’s wholly-owned Hong Kong subsidiary, Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”). The Company’s retail operations are provided through its wholly-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”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”).
He Meida was closed in April 2021, which is not a strategic shift and does not have major effect on the Company’s operations or financial results and the disposal loss was immaterial to the financial statements.
Nanjing Rui Lian was closed in April 2022, which is not a strategic shift and does not have major effect on the Company’s operations or financial results and the disposal loss was immaterial to the financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of June 30, 2022, the condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated statements of equity, and condensed consolidated statements of cash flows for the three and six months ended June 30, 2022 and 2021. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.
Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the six months ended June 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC (“2021 Form 10-K.”)
5
Use of Estimates
In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates include the assumptions used to value tax liabilities, the estimates of the allowance for deferred tax assets, the accounts receivable allowance, impairment of long-lived assets, and inventory write off.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
NOTE 3 INVESTMENTS
Trading securities
Investments in equity securities of certain US and HK public companies are accounted for as trading securities and measured subsequently at fair value in the consolidated balance sheets. Net gains and losses recognized during the three and six months are summarized as follows (In thousands of U.S. Dollars).
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||||||
| Net gains recognized during the period on equity securities | ( | ) | ( | ) | ||||||||||||
| Less: Net gains recognized during the period on equity securities sold during the period | ||||||||||||||||
| Unrealized gains recognized during the reporting period on equity securities still held at the reporting date | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Equity security investment
In
August 2020, Ever-Glory Apparel invested approximately $
6
In December 2020, the Partnership invested in a public company in China. Since there is readily determinable fair value of the equity investment, the Company started to measure its equity investment at fair value using the public company’s stock price and the Company’s shares since December 31, 2020. At each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. There is no significant adverse change in the regulatory, economic, or technological environment of the investee. Therefore, the investment was not impaired at June 30, 2022.
Investment advances
In September 2021, Goldenway signed an agreement and promised to invest
approximately $
NOTE 4 INVENTORIES
Inventories at June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| (In thousands of U.S. Dollars) | ||||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
NOTE 5 RESTRICTED CASH
As of June 30, 2022 and December 31, 2021, restricted
cash of approximately $
NOTE 6 BANK LOANS
Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short term bank loans consisted of the following as of June 30, 2022 and December 31, 2021.
| June 30, 2022 | December 31, 2021 | |||||||
| Bank | (In thousands of U.S. Dollars) | |||||||
| Shanghai Pudong Development Bank | $ | $ | ||||||
| Industrial and Commercial Bank of China | ||||||||
| Nanjing Bank | ||||||||
| $ | $ | |||||||
7
From March 2020 to July 2020, Ever-Glory Apparel
entered into a certificate of three-year time deposit of approximately $
In December 2020, Goldenway entered into a certificate
of three-year time deposit of approximately $
In April 2020, Goldenway entered into a line of
credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $
In August 2019, Ever-Glory Apparel entered into
a line of credit agreement for approximately $
In April 2020, Goldenway entered into a line of
credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $
All bank loans are used to fund our daily operations. There were no loans in default as of June 30, 2022.
Total interest expense on bank loans amounted to approximately $
NOTE 7 INCOME TAX
The Company’s operating subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (“the Income Tax Laws”).
All
PRC subsidiaries are subject to income tax at the
8
Perfect Dream was incorporated in the British Virgin Islands (BVI), and under the current laws of the BVI dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes.
Ever-Glory HK was incorporated in Samoa, and under the current laws of Samoa has no liabilities for income taxes.
Ever-Glory
Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, its income tax rate is
The
PRC’s Enterprise Income Tax Law imposes a
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 (loss) for the three and six months ended June 30, 2022 and 2021 was taxable in the following jurisdictions:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||||||
| PRC | ( |
) | ( |
) | ( |
) | ||||||||||
| Others | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2022 and 2021:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| U.S. tax rate | % | % | % | % | ||||||||||||
| Valuation allowance recognized with respect to the loss | ( | )% | ( | )% | ( | )% | ( | )% | ||||||||
| Foreign tax rate differential | % | % | % | % | ||||||||||||
| Others | % | % | ( | )% | - | |||||||||||
| Effective income tax rate | % | ( | )% | ( | )% | ( | )% | |||||||||
Income tax expense for the three and six months ended June 30, 2022 and 2021 is as follows:
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Current | ||||||||||||||||
| U.S. Federal | ||||||||||||||||
| Foreign | $ | $ | $ | $ | ||||||||||||
| Total Current | $ | $ | $ | $ | ||||||||||||
| Deferred | ||||||||||||||||
| U.S. Federal | ||||||||||||||||
| Foreign | $ | $ | $ | $ | ||||||||||||
| Total Deferred | $ | $ | $ | $ | ||||||||||||
| Income tax expense | $ | $ | $ | $ | ||||||||||||
9
Deferred tax assets net of valuation allowance as of:
| June 30, 2022 | December 31, 2021 | |||||||
| (In thousands of U.S. Dollars) | ||||||||
| Inventories, net | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Deferred income | ||||||||
| Accrued expenses | ||||||||
| Depreciation | ||||||||
| Net operating loss carryforward | ||||||||
| Deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
NOTE 8 STOCKHOLDERS’ EQUITY
Common stock issued to independent directors
On
February 9, 2021, the Company issued
On
January 26, 2022, the Company issued
Treasury stock (after “stock issued to independent directors”)
In
August 2021, the Company’s Board of Directors authorized and the Company repurchased
10
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
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 some Company’s retail stores since the third quarter of 2014.
Other income from Wubijia for the three and six months ended June 30, 2022 and 2021 are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||||||
| The Company received from the customers | $ | $ | $ | $ | ||||||||||||
| The Company paid to Wubijia | ( | ) | ||||||||||||||
| The net income recorded as other income | $ | $ | $ | $ | ||||||||||||
Included in other income for the years ended June 30, 2022 and 2021
is rental income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term through 2022. The rental
income is $
Other expenses due to Related Parties
Included in other expenses for the three and six months ended June 30, 2022 and 2021 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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||||||
| Chuzhou Huarui | |
|
|
|
||||||||||||
| Kunshan Enjin | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company leases Chuzhou Huarui and Kunshan Enjin’s warehouse spaces because the locations are convenient for transportation and distribution.
11
Purchases from and sub-contracts with Related Parties
The
Company purchased raw materials from Nanjing Knitting totaling $
In
addition, the Company sub-contracted certain manufacturing work to related companies totaled $
Sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 2022 and 2021 are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||||||
| Chuzhou Huarui | $ | $ | $ | $ | ||||||||||||
| Fengyang Huarui | ||||||||||||||||
| Nanjing Ever-Kyowa | ||||||||||||||||
| Ever-Glory Vietnam | ||||||||||||||||
| Nanjing Knitting | ||||||||||||||||
| EsCeLav | ||||||||||||||||
| Jiangsu Ever-Glory | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Accounts Payable – Related Parties
The accounts payable to related parties at June 30, 2022 and December 31, 2021 are as follows:
| 2022 | 2021 | |||||||
| (In thousands of U.S. Dollars) | ||||||||
| Ever-Glory Vietnam | $ | |||||||
| Fengyang Huarui | ||||||||
| Nanjing Ever-Kyowa | ||||||||
| Chuzhou Huarui | ||||||||
| Nanjing Knitting | ||||||||
| Jiangsu Ever-Glory | ||||||||
| Total | $ | $ | ||||||
Amounts Due From Related Parties-current assets
The amounts due from related parties at June 30, 2022 and December 31, 2021 are as follows:
| 2022 | 2021 | |||||||
| (In thousands of U.S. Dollars) | ||||||||
| Jiangsu Ever-Glory | $ | $ | ||||||
| Fengyang Huarui | ||||||||
| Ever-Glory Vietnam | ||||||||
| Total | $ | $ | ||||||
12
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, 2022 and 2021, 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 $
NOTE 10 COMMITMENTS AND CONTINGENCIES
Operating Lease Commitment
The Company recognized operating lease liabilities and operating lease right-of-use (ROU) assets on its balance sheets. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company has leases with fixed payments for land-use-rights, warehouses and logistics centers, flagship stores, and leases with variable payments for stores within shopping malls (“shopping mall stores”) in the PRC, which are classified as operating leases. Options to extend or renew are recognized as part of the lease liabilities and recognized as right of use assets. There are no residual value guarantees and no restrictions or covenants imposed by the leases.
The
weighted average remaining lease term excluding stores in the shopping malls is
In
the six months ended June 30, 2022, the costs of the leases recognized in cost of revenues and general administrative expenses are $
The following table summarizes the maturity of operating lease liabilities:
| Year ending June 30, (In thousands of U.S. Dollars) | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payment | ||||
| Less: Interest | ||||
| Total | $ | |||
Legal Proceedings
We are not aware of any pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.
13
NOTE 11 RISKS AND UNCERTAINTIES
Economic and Political Risks
The Company’s results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of its control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China, which has adversely affected the company in the retail business with a decline in sales since February 2020. The Company’s wholesale business is also significantly affected as the Company is facing a sharp decline in its order quantities. Some of the Company’s wholesale clients have also cancelled or postponed existing orders. Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where the Company’s suppliers are located, The Company’s supply chain and business operations of its suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of the Company’s or its suppliers’ or customers’ products, could have adverse ripple effects on the Company’s manufacturing output and delivery schedule. The Company could also face difficulties in collecting its accounts receivables due to the effects of COVID-19 on its customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which the Company, its suppliers and customers operate.
Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect the Company’s liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of its common stock. If the Company’s future sales continue to decline significantly, it may risk facing financial difficulties due to its recurring fixed expenses. The extent to which COVID-19 impacts the Company’s operating is uncertain and cannot be predicted at this time, and it will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.
The majority of the Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
Credit risk
The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions of the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.
Concentration risk
For
the three months ended June 30, 2022, the Company had
For
the wholesale business, the Company did not rely on any raw material supplier that represented more than
14
For
the retail business, the Company relied on
For
the wholesale business, the Company relied on
For
the retail business, the Company did not rely on any supplier that represented more than
The Company’s revenues for the three and six months ended June 30, 2022 and 2021 were earned in the following geographic areas:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||||||
| The People’s Republic of China | $ | $ | $ | $ | ||||||||||||
| Hong Kong China | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Europe-Other | ||||||||||||||||
| Japan | ||||||||||||||||
| United States | ||||||||||||||||
| Total wholesale business | ||||||||||||||||
| Retail business | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
NOTE 12 SEGMENTS
The Company reports financial and operating information in the following two segments:
| (a) | Wholesale segment |
| (b) | Retail segment |
| Wholesale segment | Retail segment | Total | ||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||
| Six months ended June 30, 2022 | ||||||||||||
| Segment profit or loss: | ||||||||||||
| Net revenue from external customers | $ | |||||||||||
| Loss (Income) from operations | $ | ( | ) | ( | ) | |||||||
| Interest income | $ | |||||||||||
| Interest expense | $ | |||||||||||
| Depreciation and amortization | $ | |||||||||||
| Loss before income tax expense | ( | ) | ( | ) | ||||||||
| Income tax expense | $ | |||||||||||
| Segment assets: | ||||||||||||
| Additions to property, plant and equipment | ||||||||||||
| Inventory | ||||||||||||
| Total assets | ||||||||||||
15
| Wholesale segment | Retail segment | Total | ||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||
| Six months ended June 30, 2021 | ||||||||||||
| Segment profit or loss: | ||||||||||||
| Net revenue from external customers | $ | |||||||||||
| Loss from operations | $ | ( | ) | ( | ) | ( | ) | |||||
| Interest income | $ | |||||||||||
| Interest expense | $ | |||||||||||
| Depreciation and amortization | $ | |||||||||||
| Loss before income tax expense | ( | ) | ( | ) | ( | ) | ||||||
| Income tax expense | $ | |||||||||||
| Segment assets: | ||||||||||||
| Additions to property, plant and equipment | ||||||||||||
| Inventory | ||||||||||||
| Total assets | ||||||||||||
| Wholesale segment | Retail segment | Total | ||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||
| Three months ended June 30, 2022 | ||||||||||||
| Segment profit or loss: | ||||||||||||
| Net revenue from external customers | $ | |||||||||||
| Income(loss) from operations | $ | ( | ) | |||||||||
| Interest income | $ | |||||||||||
| Interest expense | $ | |||||||||||
| Depreciation and amortization | $ | |||||||||||
| Income before income tax expense | ( | ) | ||||||||||
| Income tax expense | $ | |||||||||||
| Wholesale segment | Retail segment | Total | ||||||||||
| (In thousands of U.S. Dollars) | ||||||||||||
| Three months ended June 30, 2021 | ||||||||||||
| Segment profit or loss: | ||||||||||||
| Net revenue from external customers | $ | |||||||||||
| Loss from operations | $ | ( | ) | ( | ) | ( | ) | |||||
| Interest income | $ | |||||||||||
| Interest expense | $ | |||||||||||
| Depreciation and amortization | $ | |||||||||||
| Loss before income tax expense | ( | ) | ( | ) | ( | ) | ||||||
| Income tax expense | $ | |||||||||||
NOTE 13 SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date which the consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2022 have been incorporated into these consolidated financial statements and there are no other significant subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”
16
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, 2022 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our Business
We are a retailer of branded fashion apparel and leading global apparel supply chain solution provider based in China. We are listed on the NASDAQ Global Market under the symbol of “EVK”.
We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to domestically and international recognized brands, and department stores located throughout Europe, the U.S., Japan and the People’s Republic of China (“PRC”). We focus on well-known, middle-to-high end casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC as well as sales via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc.
Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled workers on production lines during slow seasons. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high-quality control standards and timely delivery requirement.
Wholesale Business
We conduct our original design manufacturing (“ODM”) operations through seven wholly owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, Jiangsu province, China, Chuzhou, Anhui province, China and Samoa: Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited (“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”), Chuzhou Huirui Garments Co., Ltd. (“Huirui), Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”), Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”), Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”). Nanjing Rui Lian was closed in April 2022.
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”), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and Xizang He Meida Trading Company Limited (“He Meida”). He Media was closed in April 2021.
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.
17
The primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:
| ● | Expanding our global sourcing network; | |
| ● | Expanding our overseas low-cost manufacturing base (outside of mainland China); | |
| ● | Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel; |
| ● | Continuing to emphasize product design and technology utilization; | |
| ● | Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and | |
| ● | Maintaining stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China. |
Retail Business
The business objectives for our retail segment are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of June 30, 2022, we had 816 stores (including store-in-stores), which includes 11 stores that were opened and 75 stores that were closed in the first half year of 2022. We expect to increase an additional 50 to 100 stores in 2022.
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 | |
| ● | Taking advantage of our position as a multi-brand operator. |
Equity Investments
The Company had idle cash and cash equivalent in operation. In order to realize the capital preservation and appreciation, Ever-Glory Apparel invested in a Partnership in August 2020. As a limited partner of the Partnership, Ever-Glory Apparel does not have the right to kick-out and appointment of general manager. Therefore, Ever-Glory does not have ability to exercise significant influence. In the meantime, the Company entered an agreement with the GP and an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration of the average net asset value ten days prior to the closing date, if the Company is not able to withdraw any part of the original investment from the Partnership during the optional withdrawal period. If the Company opts to withdraw entire investment during the optional withdrawal period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual. The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the GP and the individual is in place. In December 2020, the Partnership invested in a public company in China.
18
In September 2021, Goldenway signed an agreement and promised to invest approximately $7.5 million (RMB 50.0 million) in a Chinese private company for 20% shares of the investee. As of June 30, 2022, Goldenway advanced approximately $3.0 million (RMB 20.0 million) to the investee. The investment advances were recorded as other non-current assets.
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 2021 and 2022.
In addition, economic conditions in the United States and other foreign markets in which we operate could substantially affect our sales profitability, cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.
Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China, which had adversely affected our retail business with a decline in sales since February 2020. Our wholesale business was also significantly affected as we were facing a sharp decline in our order quantities. Some of our wholesale clients had also cancelled or postponed existing orders. Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, could have adverse ripple effects on our manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19 on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate.
19
Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. If our future sales continue to decline significantly, we may risk facing bankruptcy due to our recurring fixed expenses. The extent to which COVID-19 impacts our results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.
Despite the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
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.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 12, 2022 (“2021 Form 10-K.”)
Estimates and Assumptions
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. There have been no material changes in our critical accounting policies and estimates from those disclosed in on the 2021 Form 10-K. Please refer to Part II, Item 7 of such a report for a discussion of our critical accounting policies and estimates.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
20
Results of Operations for the three months ended June 30, 2022 and 2021
The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021. 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, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (In thousands of U.S. dollars, except for percentages) | ||||||||||||||||
| Sales | $ | 63,812 | 100.0 | % | $ | 60,555 | 100.0 | % | ||||||||
| Gross Profit | $ | 20,409 | 32.0 | % | $ | 18,392 | 30.4 | % | ||||||||
| Operating Expense | $ | 17,196 | 26.9 | % | $ | 22,165 | 36.6 | % | ||||||||
| Income (Loss) From Operations | $ | 3,213 | 5.0 | % | $ | (3,773 | ) | (6.2 | )% | |||||||
| Other Income | $ | 113 | 0.2 | % | $ | 3,088 | 5.1 | % | ||||||||
| Income tax expense | $ | 926 | 1.5 | % | $ | 1,086 | 1.8 | % | ||||||||
| Net Income (Loss) | $ | 2,400 | 3.8 | % | $ | (1,771 | ) | (2.9 | )% | |||||||
Revenue
The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2022 and 2021.
| 2022 | 2021 | Growth (Decrease) | ||||||||||||||||||
| Wholesale business | (In thousands of U.S. dollars) | % of total sales | (In thousands of U.S. dollars) | % of total sales | in 2022 compared with 2021 | |||||||||||||||
| Mainland China | $ | 5,816 | 9.1 | % | $ | 4,356 | 7.2 | % | 33.5 | % | ||||||||||
| Hong Kong China | 3,659 | 5.7 | 2,914 | 4.8 | 25.6 | |||||||||||||||
| United Kingdom | 4,760 | 7.5 | 2,485 | 4.1 | 91.5 | |||||||||||||||
| Europe-Other | 7,985 | 12.5 | 5,913 | 9.8 | 35.0 | |||||||||||||||
| Japan | 1,493 | 2.3 | 1,550 | 2.6 | (3.7 | ) | ||||||||||||||
| United States | 18,716 | 29.3 | 9,209 | 15.2 | 103.2 | |||||||||||||||
| Total Wholesale business | 42,429 | 66.5 | 26,427 | 43.6 | 60.5 | |||||||||||||||
| Retail business | 21,383 | 33.5 | 34,128 | 56.4 | (37.3 | ) | ||||||||||||||
| Total sales | $ | 63,812 | 100.0 | % | $ | 60,555 | 100.0 | % | 5.4 | % | ||||||||||
Sales for the three months ended June 30, 2022 were $63.8 million, a 5.4% increase compared with the three months ended June 30, 2021. This increase was primarily attributable to a 60.5% ($16.0 million) increase in our wholesale business, offset by a 37.3% ($12.7 million) decrease in our retail business.
Sales generated from our wholesale business contributed 66.5% or $42.4 million of our total sales for the three months ended June 30, 2022, a 60.5% increase compared with 43.6% or $26.4 million in the three months ended June 30, 2021. This increase was primarily attributable to an increase in sales in Mainland China, Hong Kong, United Kingdom , Europe-Other and United States, partially offset by a decrease in sales in Japan.
Sales generated from our retail business contributed 33.5% or $21.4 million of our total sales for the three months ended June 30, 2022, a 37.3% decrease compared with 56.4% or $34.1 million in the three months ended June 30, 2021. This decrease was primarily due to outbreak of COVID-19 . The outbreak in China resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China, which had adversely affected our retail business with a decline in sales.
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Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.
The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended June 30, 2022 and 2021.
| Growth | ||||||||||||||||||||
| (Decrease) in | ||||||||||||||||||||
| Three months ended June 30, | 2022 | |||||||||||||||||||
| 2022 | 2021 | Compared | ||||||||||||||||||
| (In thousands of U.S. dollars, except for percentages) | with 2021 | |||||||||||||||||||
| Net Sales for Wholesale Sales | $ | 42,429 | 100.0 | % | $ | 26,427 | 100.0 | % | 60.5 | % | ||||||||||
| Raw Materials | 16,701 | 39.4 | 11,407 | 43.2 | 46.4 | |||||||||||||||
| Labor | 475 | 1.1 | 386 | 1.4 | 23.1 | |||||||||||||||
| Outsourced Production Costs | 17,117 | 40.3 | 10,943 | 41.4 | 56.4 | |||||||||||||||
| Other and Overhead | 149 | 0.4 | 95 | 0.4 | 56.8 | |||||||||||||||
| Total Cost of Sales for Wholesale | 34,442 | 81.2 | 22,831 | 86.4 | 50.9 | |||||||||||||||
| Gross Profit for Wholesale | 7,987 | 18.8 | 3,596 | 13.6 | 122.1 | |||||||||||||||
| Net Sales for Retail | 21,383 | 100.0 | 34,128 | 100.0 | (37.3 | ) | ||||||||||||||
| Production Costs | 6,075 | 28.4 | 13,390 | 39.2 | (54.6 | ) | ||||||||||||||
| Rent | 2,886 | 13.5 | 5,942 | 17.4 | (51.4 | ) | ||||||||||||||
| Total Cost of Sales for Retail | 8,961 | 41.9 | 19,332 | 56.6 | (53.6 | ) | ||||||||||||||
| Gross Profit for Retail | 12,422 | 58.1 | 14,796 | 43.4 | (16.0 | ) | ||||||||||||||
| Total Cost of Sales | 43,403 | 68.0 | 42,163 | 69.6 | 2.9 | |||||||||||||||
| Gross Profit | $ | 20,409 | 32.0 | % | $ | 18,392 | 30.4 | % | 11.0 | % | ||||||||||
Raw material costs for our wholesale business were 39.4% of our total wholesale business sales in the three months ended June 30, 2021, compared with 43.2% in the three months ended June 30, 2021. The decrease was mainly due to lower raw material prices.
Labor costs for our wholesale business were 1.1% (0.5 million) of our total wholesale business sales in the three months ended June 30, 2022, compared with 1.4%（0.4 million) in the three months ended June 30, 2021. There were no significant changes.
Outsourced production costs for our wholesale business for the three months ended June 30, 2022 increased by 56.4% to $17.1 million from $10.9 million for the three months ended June 30, 2021. Outsourced production costs accounted for 40.3% of our total wholesale business sales in the three months ended June 30, 2022, compare with 41.4% in the three months ended June 30, 2021. There were no significant changes in percentage of sales.
22
Overhead and other expenses for our wholesale business accounted for 0.4% of our total wholesale business sales for the three months ended June 30, 2022, compared with 0.4% of total wholesale business sales for the three months ended June 30, 2021.
Wholesale business gross profit for the three months ended June 30, 2022 was $8.0 million compared with $3.6 million for the three months ended June 30, 2021. Gross profit accounted for 18.8% of our total wholesale sales for the three months ended June 30, 2022, compared with 13.6% for the three months ended June 30, 2021. The increase was mainly due to purchase a large amount raw materials at lower prices.
Production costs for our retail business were $6.1 million for the three months ended June 30, 2022 compared with $13.4 million during the three months ended June 30, 2021. Retail production costs accounted for 28.4% of our total retail sales in the three months ended June 30, 2022, compared with 39.2% for the three months ended June 30, 2021. The decrease in amount was due to lower sales in 2022 because of COVID-19.
Rent costs for our retail business for the three months ended June 30, 2022 were $2.9 million compared with $5.9 million for the three months ended June 30, 2021. Rent costs for our retail business accounted for 13.5% of our total retail sales for the three months ended June 30, 2022, compared with 17.4% for the three months ended June 30, 2021. The decrease was primarily attributable to the rent reduction in 2022 for the influence of COVID-19.
Gross profit in our retail business for the three months ended June 30, 2022 was $12.4 million and gross margin was 58.1%. Gross profit in our retail business for the three months ended June 30, 2021 was $14.8 million and gross margin was 43.4%.
Total cost of sales for the three months ended June 30, 2022 was $43.4 million, a 2.9% increase from $42.2 million for the three months ended June 30, 2021. Total cost of sales as a percentage of total sales for the three months ended June 30, 2022 was 68.0%, compared with 69.6% for the three months ended June 30, 2021. Gross margin for the three months ended June 30, 2022 was 32.0% compared with 30.4% for the three months ended June 30, 2021.
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 2022 | |||||||||||||||||||
| 2022 | 2021 | Compared | ||||||||||||||||||
| (In thousands of U.S. dollars, except for percentages) | to 2021 | |||||||||||||||||||
| Gross Profit | $ | 20,409 | 32.0 | % | $ | 18,392 | 30.4 | % | 11.0 | % | ||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling Expenses | 11,675 | 18.3 | 14,503 | 24.0 | (19.5 | ) | ||||||||||||||
| General and Administrative Expenses | 5,521 | 8.7 | 7,662 | 12.7 | (27.9 | ) | ||||||||||||||
| Total | 17,196 | 26.9 | 22,165 | 36.6 | (22.4 | ) | ||||||||||||||
| Income (loss) from Operations | $ | 3,213 | 5.0 | % | $ | (3,773 | ) | (6.2 | )% | 185.1 | % | |||||||||
Selling expenses for the three months ended June 30, 2022 decreased by 19.5% to $11.7 million from $14.5 million for the three months ended June 30, 2021. The decrease was attributable to the decreased average salaries and decreased business trips.
General and administrative expenses for the three months ended June 30, 2022 decreased by 27.9% to $5.5 million from $7.7 million for the three months ended June 30, 2021. The decrease was attributable to the decreased publicity expense and the depreciation of RMB .
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Income(Loss) from Operations
Income from operations for the three months ended June 30, 2022 was $3.2 million, an increase of 185.1% from $3.8 million of loss for the three months ended June 30, 2021. Income from operations for the three months ended June 30, 2022 accounted for 5.0% of our total sales, while the three months ended June 30, 2021 accounted for 6.2% of our total sales.
Interest Expense
Interest expense for the three months ended June 30, 2022 was $0.3 million, while interest expense was $0.2 million for the three months ended June 30, 2021. The increase was due to the slightly increased bank loans.
Income Tax Expenses
Income tax expense was $0.9 million and $1.1 million for the three months ended June 30, 2022 and 2021, respectively.
The Company’s operating subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (“the Income Tax Laws”).
All PRC subsidiaries are subject to income tax at the 25% statutory rate.
Perfect Dream was incorporated in the British Virgin Islands (BVI), and under the current laws of the BVI, dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes.
Ever-Glory HK was incorporated in Samoa, and under the current laws of Samoa, has no liabilities for income taxes.
Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, are subject to income tax at the 16.5% statutory rate.
The PRC’s Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise in PRC to its immediate holding company outside China; such distributions were exempted under the previous income tax law and regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting from January 1, 2008. Given that the undistributed profits of the Company’s subsidiaries in China are intended to be retained in China for business development and expansion purposes, no withholding tax accrual has been made.
Net Income (Loss)
Net income for the three months ended June 30, 2022 was $2.4 million, and net loss for the three months ended June 30, 2021 was $1.8 million.
Results of Operations for the six months ended June 30, 2022 and 2021
The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021. 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, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (In thousands of U.S. Dollars, except for percentages) | ||||||||||||||||
| Sales | $ | 128,585 | 100.0 | % | $ | 131,369 | 100.0 | % | ||||||||
| Gross Profit | 37,781 | 29.4 | 40,828 | 31.1 | ||||||||||||
| Operating Expense | 37,876 | 29.5 | 45,565 | 34.7 | ||||||||||||
| Loss From Operations | (95 | ) | (0.1 | ) | (4,737 | ) | (3.6 | ) | ||||||||
| Other Expense(Income) | (556 | ) | (0.4 | ) | 3,611 | 2.7 | ||||||||||
| Income tax expense | 2,038 | 1.6 | 1,815 | 1.4 | ||||||||||||
| Net Loss | $ | (2,689 | ) | (2.1 | )% | $ | (2,941 | ) | (2.2 | )% | ||||||
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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, 2022 and 2021.
| 2022 | 2021 | Growth (Decrease) | ||||||||||||||||||
| Wholesale business | (In thousands of U.S. dollars) | % of total sales | (In thousands of U.S. dollars) | % of total sales | in 2022 compared with 2021 | |||||||||||||||
| Mainland China | $ | 14,991 | 11.7 | % | $ | 11,846 | 9.0 | % | 26.5 | % | ||||||||||
| Hong Kong China | 7,952 | 6.2 | 6,971 | 5.3 | 14.1 | |||||||||||||||
| United Kingdom | 5,519 | 4.3 | 3,538 | 2.7 | 56.0 | |||||||||||||||
| Europe-Other | 12,912 | 10.0 | 10,059 | 7.7 | 28.4 | |||||||||||||||
| Japan | 6,638 | 5.2 | 4,955 | 3.8 | 34.0 | |||||||||||||||
| United States | 24,294 | 18.8 | 12,277 | 9.3 | 97.9 | |||||||||||||||
| Total Wholesale business | 72,306 | 56.2 | 49,646 | 37.8 | 45.6 | |||||||||||||||
| Retail business | 56,279 | 43.8 | 81,723 | 62.2 | (31.1 | ) | ||||||||||||||
| Total sales | $ | 128,585 | 100.0 | % | $ | 131,369 | 100.0 | % | (2.1 | )% | ||||||||||
Sales for the six months ended June 30, 2022 were $128.6 million, a decrease of 2.1% from the six months ended June 30, 2021. This decrease was primarily attributable to a 45.6% (22.7million) increase in sales in our wholesale business and a 31.1% (25.4 million) decrease in our retail business.
Sales generated from our wholesale business contributed 56.2% or $72.3 million of our total sales for the six months ended June 30, 2022, an increase of 45.6% compared with 37.8% or $49.6 million in the six months ended June 30, 2021. This increase was primarily attributable to increased sales in all countries we have wholesale business with.
Sales generated from our retail business contributed 43.8% or $56.3 million of our total sales for the six months ended June 30, 2022, a decrease of 31.1% compared with 62.2% or $81.7 million in the six months ended June 30, 2021. This decrease was primarily due to a decrease in same store sales and outbreak of COVID-19. The outbreak in China resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China, which had adversely affected our retail business with a decline in sales.
Total retail store square footage and sales per square foot for the six months ended June 30, 2022 and 2021 are as follows:
| 2022 | 2021 | |||||||
| Total store square footage | 922,423 | 1,011,506 | ||||||
| Number of stores | 816 | 931 | ||||||
| Average store size, square feet | 1,130 | 1,086 | ||||||
| Total store sales (in thousands of U.S. dollars) | $ | 56,279 | $ | 81,723 | ||||
| Sales per square foot | $ | 61 | $ | 81 | ||||
Same store sales and newly opened store sales for the six months ended June 30, 2022 and 2021 are as follows:
| 2022 | 2021 | |||||||
| (In thousands of U.S. dollars) | ||||||||
| Sales from stores opened for a full year | $ | 45,514 | $ | 62,067 | ||||
| Sales from newly opened store sales | $ | 2,769 | $ | 7,566 | ||||
| Sales from e-commerce platform | $ | 5,838 | $ | 6,649 | ||||
| Other* | $ | 2,158 | $ | 5,441 | ||||
| Total | $ | 56,279 | $ | 81,723 | ||||
| * | Primarily sales from stores that were closed in the current reporting period. |
We remodeled or relocated 137 stores in year 2021, and 13 stores during the six months ended June 30, 2022. We plan to relocate or remodel 50 to 100 stores in 2022. 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 2022. Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.
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Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.
The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the six months ended June 30, 2022 and 2021.
| Growth | ||||||||||||||||||||
| (Decrease) in | ||||||||||||||||||||
| Six months ended June 30, | 2022 | |||||||||||||||||||
| 2022 | 2021 | Compared | ||||||||||||||||||
| (In thousands of U.S. dollars, except for percentages) | with 2021 | |||||||||||||||||||
| Net Sales for Wholesale Sales | $ | 72,306 | 100.0 | % | $ | 49,646 | 100.0 | % | 45.6 | % | ||||||||||
| Raw Materials | 30,075 | 41.6 | 21,793 | 43.9 | 38.0 | |||||||||||||||
| Labor | 920 | 1.3 | 719 | 1.4 | 28.0 | |||||||||||||||
| Outsourced Production Costs | 27,322 | 37.8 | 18,776 | 37.8 | 45.5 | |||||||||||||||
| Other and Overhead | 290 | 0.4 | 200 | 0.4 | 45.0 | |||||||||||||||
| Total Cost of Sales for Wholesale | 58,608 | 81.1 | 41,488 | 83.6 | 41.3 | |||||||||||||||
| Gross Profit for Wholesale | 13,698 | 18.9 | 8,158 | 16.4 | 67.9 | |||||||||||||||
| Net Sales for Retail | 56,279 | 100.0 | 81,723 | 100.0 | (31.1 | ) | ||||||||||||||
| Production Costs | 22,125 | 39.3 | 33,151 | 40.6 | (33.3 | ) | ||||||||||||||
| Rent | 10,071 | 17.9 | 15,902 | 19.5 | (36.7 | ) | ||||||||||||||
| Total Cost of Sales for Retail | 32,196 | 57.2 | 49,053 | 60.0 | (34.4 | ) | ||||||||||||||
| Gross Profit for Retail | 24,083 | 42.8 | 32,670 | 40.0 | (26.3 | ) | ||||||||||||||
| Total Cost of Sales | 90,804 | 70.6 | 90,541 | 68.9 | 0.3 | |||||||||||||||
| Gross Profit | $ | 37,781 | 29.4 | % | $ | 40,828 | 31.1 | % | (7.5 | )% | ||||||||||
Raw material costs for our wholesale business were 41.6% of our total wholesale business sales in the six months ended June 30, 2022, compared with 43.9% in the six months ended June 30, 2021. The decrease was mainly due to lower cost of raw materials.
Labor costs for our wholesale business were 1.3% of our total wholesale business sales in the six months ended June 30, 2022, compared with 1.4% in the six months ended June 30, 2021. There were no significant changes.
Outsourced production costs for our wholesale business were 37.8% of our total sales in the six months ended June 30, 2022, compared with 37.8% in the six months ended June 30, 2021. There were no significant changes.
Overhead and other expenses for our wholesale business accounted for 0.4% and 0.4% of our total sales for the six months ended June 30, 2022 and 2021, respectively.
Gross profit for our wholesale business for the six months ended June 30, 2022 was $13.7 million, a 67.9% increase compared with the six months ended June 30, 2021. As a percentage of total wholesale business sales, gross profit was 18.9% of our total wholesale business sales for the six months ended June 30, 2022, compared with 16.4% for the six months ended June 30, 2021. The increase was mainly due to lower cost of raw materials.
Production costs for our retail business for the six months ended June 30, 2022 were $22.1 million compared with $33.2 million for the six months ended June 30, 2021. As a percentage of our total retail sales, production costs were 39.3% of our total retail sales for the six months ended June 30, 2022, compared with 40.6% for the six months ended June 30, 2021.There were no significant changes.
Rent costs for our retail business for the six months ended June 30, 2022 were $10.1 million compared with $15.9 million for the six months ended June 30, 2021. As a percentage of total retail sales, rent costs were 17.9% of our total retail sales for the six months ended June 30, 2022 compared with 19.5% for the six months ended June 30, 2021. The decrease in percentage was primarily attributable to the rent reduction in 2022 due to outbreak of COVID-19 in China.
26
Gross profit for our retail business for the six months ended June 30, 2022 was $24.1 million compared with $32.7 million for the six months ended June 30, 2021. Gross margin for our retail business for the six months ended June 30, 2022 was 42.8% compared with 40.0% for the six months ended June 30, 2021.
Total cost of sales for the six months ended June 30, 2022 was $90.8 million, a 0.3% increase compared with the six months ended June 30, 2021. As a percentage of total sales, total costs were 70.6% of total sales for the six months ended June 30, 2022, compared with 68.9% for the six months ended June 30, 2021. Total gross margin for the six months ended June 30, 2022 was 29.4% compared with 31.1% for the six months ended June 30, 2021.
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 2022 | |||||||||||||||||||
| 2022 | 2021 | Compared | ||||||||||||||||||
| (In thousands of U.S. dollars, except for percentages) | to 2021 | |||||||||||||||||||
| Gross Profit | $ | 37,781 | 29.4 | % | $ | 40,828 | 31.1 | % | (7.5 | )% | ||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling Expenses | 25,361 | 19.7 | 30,052 | 22.9 | (15.6 | ) | ||||||||||||||
| General and Administrative Expenses | 12,515 | 9.7 | 15,513 | 11.8 | (19.3 | ) | ||||||||||||||
| Total | 37,876 | 29.5 | 45,565 | 34.7 | (16.9 | ) | ||||||||||||||
| Loss from Operations | $ | (95 | ) | (0.1 | )% | $ | (4,737 | ) | (3.6 | )% | (98.0 | )% | ||||||||
Selling expenses for the six months ended June 30, 2022 were $25.4 million, a 15.6% decrease compared with $30.1 million in the six months ended June 30, 2021. The decrease was attributable to the decreased average salaries and the marketing expenses associated with the promotion of the retail brand.
General and administrative expenses for the six months ended June 30, 2022 were $12.5 million a 19.3% decrease compared with the six months ended June 30, 2021. As a percentage of total sales, general and administrative expenses accounted for 9.7% of total sales for the six months ended June 30, 2022, compared with 11.8% of total sales for the six months ended June 30, 2021. The decrease was attributable to the decreased publicity expense and the depreciation of RMB .
Loss from Operations
Loss from operations for the six months ended June 30, 2022 was $0.1 million, a 98.0% decrease from $4.7 million of loss for the six months ended June 30, 2021.
Interest Expense
Interest expense was $0.9 million and $0.7 million for the six months ended June 30, 2022 and 2021, respectively. The increase was due to the increased bank loans.
Income Tax Expense
Income tax expense for the six months ended June 30, 2022 was $2.0 million, a 12.3% increase compared to the same period of 2021. The increase was primarily due to the higher PRC income which resulted in a higher income tax expense.
27
Net Loss
Net loss for the six months ended June 30, 2022 was $2.7 million, a decrease of 8.7% compared with $2.9 million of net loss from the same period in 2021. Basic and diluted loss per share was $0.18 and $0.20 for the six months ended June 30, 2022 and 2021, respectively.
Summary of Cash Flows
Summary cash flows information for the six months ended June 30, 2022 and 2021 is as follows:
| 2022 | 2021 | |||||||
| (In thousands of U.S. dollars) | ||||||||
| Net cash used in operating activities | $ | (9,706 | ) | $ | (10,488 | ) | ||
| Net cash used in investing activities | $ | (5,242 | ) | $ | (5,920 | ) | ||
| Net cash used in financing activities | $ | (37 | ) | $ | (266 | ) | ||
Net cash used in operating activities was $9.7 million for the six months ended June 30, 2022, compared with $10.5 million used during the six months ended June 30, 2021. The decrease was primarily due to a decrease in accounts payable and other payable payments.
Net cash used in investing activities was $5.2 million for the six months ended June 30, 2022, compared with $5.9 million used during the six months ended June 30, 2021. This decrease was mainly due to that we purchased less properties and equipment than the same period last year.
Net cash used in financing activities was $0.04 million for the six months ended June 30, 2022, compared with $0.3 million net cash used during the six months ended June 30, 2021. This increase was primarily due to repayment of the bank loans. During the six months ended June 30, 2022, we repaid the same amount of bank loans as we received bank loan proceeds. During the same period last year, we repaid more bank loans than we received additional bank loan proceeds.
Liquidity and Capital Resources
As of June 30, 2022, we had cash and cash equivalents of $32.9 million, other current assets of $185.2 million and current liabilities of $166.7 million. We presently finance our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue to be our primary source of funds to finance our short-term cash needs.
Bank Loans
From March 2020 to July 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $28.3 million (RMB190.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.75% to 3.99%. From August to November 2021, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $26.8 million (RMB 180.0 million) under this line of certificate with an annual interest rate from 2.60% to 2.65% and due between August to November 2022.
In December 2020, Goldenway entered into a certificate of three-year time deposit of $16.4 million (RMB110.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of 3.85%. From February to June 2022, Goldenway pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Goldenway had borrowed $14.9 million (RMB100.0 million) under this line of certificate with annual interest rate from 2.15% to 2.60%, due between February to April 2023.
28
In April 2020, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.0 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2022, Goldenway had borrowed $6.0 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due in August 2022.
In August 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.9 million (RMB100.0 million) with Industrial and Commercial Bank of China, which is collateralized by assets of Jiangsu LA GO GO, Tianjin LA GO GO and Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer, under a collateral agreement executed among Ever-Glory Apparel, Jiangsu LA GO GO , Tianjin LA GO GO, Jiangsu Ever-Glory and the bank. As of June 30, 2022, Ever-Glory Apparel had borrowed $14.9 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.92% to 4.35% and due between August 2022 to June 2023.
In April 2020, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $6.7 million (RMB45.0 million). In May 2021,Goldenway pledged $0.6 million (RMB4.0 million) to Nanjing Bank, and the maximum amount available from this line of credit increased to $7.3 million (RMB49.0 million).These loans are collateralized by the Company’s property and equipment and guaranteed by Jiangsu Ever-Glory. In September 2021, Goldenway borrowed $3.0 million (RMB 20.0 million) with an annual interest rate 3.44% and due in September 2022. As of June 30, 2022, approximately $4.3 million (RMB 29.0 million) was unused and available under this line of credit.
All bank loans are used to fund our daily operations. There were no loans in default as of June 30, 2022.
Capital Commitments
We have a continuing program for the purpose of improving our manufacturing facilities and extending our retail stores. We anticipate that cash flows from operations and borrowings from banks will be used to pay for these capital commitments.
Uses of Liquidity
Our cash requirements for the next year will be primarily to fund daily operations and the growth of our business, some of this being used to fund new stores.
Sources of Liquidity
Our primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, and cash equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.
We believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our needs for working capital, capital expenditure and other commitments for the next year. No assurance can be made that additional financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our own cash flows from operations.
As of June 30, 2022, we had access to approximately $28.2 million in lines of credit, of which approximately $4.3 million was unused and available. These credit facilities do not include any covenants.
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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, 2022, the market foreign exchange rate had increased to RMB 6.71 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.
In addition, the financial statements of subsidiaries located in China (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation (loss) gain for the three and six months ended June 30, 2022 and 2021 was ($7.7) million, $3.4 million, ($8.6) million and $2.1 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
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Disclosure Controls. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the period ended June 30, 2022. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were operating effectively.
Changes in Internal Control Over Financial Reporting
Other than described above, during the second quarter of 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
As of the date of this report and except as set forth below, there have been no material changes to the risk factors disclosed in our annual report on Form 10-K filed with the SEC on April 12, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Securities Authorized for Issuance under Equity Incentive Plans
The following table presents information regarding equity instruments outstanding under our 2014 Equity Incentive Plan as of June 30, 2022:
| Equity Incentive Plan Information | ||||||||||||
| Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
| Equity incentive plans approved by security holders | - | $ | - | 1,500,000 | ||||||||
| Total | - | $ | - | 1,500,000 | ||||||||
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| August 12, 2022 | EVER-GLORY INTERNATIONAL GROUP, INC. | |
| By: | /s/ Edward Yihua Kang | |
| Edward Yihua Kang | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Jiansong Wang | |
| Jiansong Wang | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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