UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number: 0-28806

 

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

 

Florida		65-0420146
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

 

(8625) 5209-6875

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

 

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

 

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

 

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

 

As of August 8, 2014, 14,781,241 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.

 

 

 

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

INDEX

 

		Page Number
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		3
PART I.  FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.  OTHER INFORMATION		31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
SIGNATURES		32

 

 

Cautionary Note Regarding Forward-Looking Statements

 

Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:

 

	●	Competition within our industry;
	●	Seasonality of our sales;
	●	Success of our investments in new product development
	●	Our plans and ability to open new retail stores;
	●	Success of our acquired businesses;
	●	Our relationships with our major customers;
	●	The popularity of our products;
	●	Relationships with suppliers and cost of supplies;
	●	Financial and economic conditions in Asia, Japan, Europe and the U.S.;
	●	Anticipated effective tax rates in future years;
	●	Regulatory requirements affecting our business;
	●	Currency exchange rate fluctuations;
	●	Our future financing needs; and
	●	Our ability to attract additional investment capital on attractive terms.

 

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,”“will,”“should,”“could,”“expect,”“plan,”“anticipate,”“believe,”“estimate,”“predict,”“continue,” and similar expressions are generally intended to identify forward-looking statements.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the factors described in the Section entitled “Risk Factors” on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission (‘SEC’).

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013

 

ASSETS

 

		June 30, 2014				December 31, 2013
CURRENT ASSETS
Cash and cash equivalents		$	25,012,160			$	27,772,878
Accounts receivable			60,381,956				80,317,630
Inventories			76,619,104				75,190,197
Value added tax receivable			3,883,902				2,620,277
Other receivables and prepaid expenses			2,336,675				1,821,695
Advances on inventory purchases			6,369,531				6,010,027
Amounts due from related parties			1,502,946				1,896,376
Total Current Assets			176,106,274				195,629,080
LAND USE RIGHT, NET			2,778,380				2,821,471
PROPERTY AND EQUIPMENT, NET			18,993,507				18,370,327
TOTAL ASSETS		$	197,878,161			$	216,820,878
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Bank loans		$	55,379,699			$	53,338,748
Accounts payable			49,983,235				72,855,960
Accounts payable and other payables - related parties			3,020,292				4,102,456
Other payables and accrued liabilities			14,936,652				16,128,514
Value added and other taxes payable			4,746,910				5,399,187
Income tax payable			4,289,564				489,307
Deferred tax liabilities			4,933,685				7,391,029
Total Current Liabilities			137,290,037				159,705,201
COMMITMENTS AND CONTINGENCIES
EQUITY
Stockholders' equity of the Company:
Preferred stock ($.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)			-				-
Common stock ($.001 par value, authorized 50,000,000 shares, 14,781,241 and 14,781,241 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)			14,781				14,781
Additional paid-in capital			3,572,157				3,572,157
Retained earnings			61,537,898				53,618,026
Statutory reserve			10,212,268				10,212,268
Accumulated other comprehensive income			8,440,043				8,783,425
Amounts due from related party			(23,189,023	)			(19,084,980	)
Total Stockholders' Equity			60,588,124				57,115,677
TOTAL LIABILITIES AND EQUITY		$	197,878,161			$	216,820,878

 

See the accompanying notes to the consolidated financial statements.

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (UNAUDITED)

 

		Three months ended								Six months ended
		June 30,								June 30,
		2014				2013				2014				2013
NET SALES		$	85,667,780			$	59,129,485			$	191,682,949			$	137,440,975
COST OF SALES			56,317,989				39,650,917				136,552,201				97,669,484
GROSS PROFIT			29,349,791				19,478,568				55,130,748				39,771,491
OPERATING EXPENSES
Selling expenses			14,402,662				9,898,106				30,525,958				21,749,402
General and administrative expenses			7,539,418				5,513,105				13,934,406				9,985,552
Total Operating Expenses			21,942,080				15,411,211				44,460,364				31,734,954
INCOME FROM OPERATIONS			7,407,711				4,067,357				10,670,384				8,036,537
OTHER INCOME (EXPENSES)
Interest income			336,414				342,188				577,747				637,790
Interest expense			(774,693	)			(736,695	)			(1,481,808	)			(1,528,224	)
Change in fair value of derivative liability			-				2,000				-				294,000
Other income (expenses)			440,464				(179,098	)			912,223				(147,641	)
Total Other Income (Expenses)			2,185				(571,605	)			8,162				(744,075	)
INCOME BEFORE INCOME TAX EXPENSE			7,409,896				3,495,752				10,678,546				7,292,462
INCOME TAX EXPENSE			(1,879,752	)			(768,541	)			(2,758,674	)			(1,478,172	)
NET INCOME			5,530,144				2,727,211				7,919,872				5,814,290
OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation (loss) gain			356,044				850,550				(343,382	)			1,158,392
COMPREHENSIVE INCOME		$	5,886,188			$	3,577,761			$	7,576,490			$	6,972,682
EARNINGS PER SHARE
Basic and diluted		$	0.37			$	0.18			$	0.54			$	0.39
Weighted average number of shares outstanding
Basic and diluted			14,781,241				14,777,610				14,781,241				14,775,869

 

See the accompanying notes to the condensed consolidated financial statements.

 

  

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (UNAUDITED)

 

		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	7,919,872			$	5,814,290
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			3,462,128				3,690,891
Loss from sale of property and equipment			-				29,499
Change in fair value of derivative liability			-				(294,000	)
Deferred income tax			(2,409,053	)			555,716
Stock-based compensation			-				10,082
Changes in operating assets and liabilities
Accounts receivable			19,441,054				19,994,644
Inventories			(1,927,458	)			(9,730,652	)
Value added tax receivable			(1,286,005	)			(1,177,837	)
Other receivables and prepaid expenses			(529,644	)			307,455
Advances on inventory purchases			(404,581	)			(1,473,254	)
Amounts due from related parties			1,334,894				(2,760,288	)
Accounts payable			(22,393,350	)			(9,577,345	)
Accounts payable and other payables- related parties			(2,527,146	)			123,426
Other payables and accrued liabilities			(1,076,252	)			75,308
Value added and other taxes payable			(631,814	)			(77,745	)
Income tax payable			3,830,846				(389,778	)
Net cash provided by operating activities			2,803,491				5,120,412
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(4,185,207	)			(4,642,650	)
Proceeds from sale of property and equipment			-				13,583
Net cash used in investing activities			(4,185,207	)			(4,629,067	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans			73,693,038				42,227,892
Repayment of bank loans			(71,260,909	)			(45,290,965	)
Repayment of payable to officers and employees			-				(2,381,512	)
Repayment of advances to related party			-				18,781,438
Interest income received from related party			1,302,400				-
Advances to related party			(5,046,800	)			(7,244,771	)
Net cash (used in) provided by financing activities			(1,312,271	)			6,092,082
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(66,731	)			187,368
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(2,760,718	)			6,770,795
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			27,772,878				9,365,958
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	25,012,160			$	16,136,753
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	1,481,808			$	1,528,224
Income taxes		$	1,354,679			$	1,199,771

 

See the accompanying notes to the condensed consolidated financial statements.

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

 

(UNAUDITED)

 

NOTE 1 SUMMARY OF BUSINESS AND BASIS OF PRESENTATION

 

Organization and business

 

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

 

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

 

On June 26, 2014, Shanghai LA GO GO entered into a contract with Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) to acquire 78% of the shares of Shanghai Yiduo for $0.75 million (RMB4.6 million).  Shanghai Yiduo is currently owned by unrelated third parties and operates design and development of women’s apparel for Mecox Lane, one of China’s leading online platforms for apparel and apparel accessories. The acquisition price is to be paid as follows. 

 

Payment Date		Amount
Before July 8, 2014		$	0.45 million
Before September 28, 2014			0.22 million
Within 10 days after Shanghai Yiduo collects all the accounts receivable from Mecox Lane			0.08 million
TOTAL			0.75 million

 

The first $0.45 million installment was paid by the Company to Shanghai Yiduo in July 2014 and was financed by working capital. The completion of the acquisition is subject to the company’s final due dilligence and Shanghai Yiduo’s ability to collect certain account receivables. In the event Shanghai Yiduo is not able to collect the account receivables in accordance to the contract, the Company may reduce the purchase price or terminate the contract and get back the first install payment.   Management of the Company believes that the acquisition will improve the Company’s design and product development ability.

 

Basis of Presentation

 

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, 2014, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and Form 10-Q for the three and six months ended June 30, 2013.

 

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

Financial Instruments

 

Management has estimated that the carrying amounts of non-related party financial instruments approximate their fair values due to their short-term maturities. The fair value of amounts due from (to) related parties is not practicable to estimate due to the related party nature of the underlying transactions.

 

 

 

Fair Value Accounting

 

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

 

Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2	Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

At June 30, 2014, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

 

At June 30, 2014 and December 31, 2013, the Company had an outstanding forward foreign exchange option contract subject to recurring fair value measurement (Level 3) with the change in fair value recognized in earnings (Note 5).

 

Foreign Currency Translation and Other Comprehensive Income

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company, Ever-Glory HK and Perfect Dream Limited, British Virgin Islands incorporated subsidiary of the Company (“Perfect Dream”) is the U.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel, Tai Xin, Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Ya Lan and He Meida is the Chinese RMB.

 

For subsidiaries whose functional currency is the RMB, all assets and liabilities were translated at the exchange rate at the balance sheet date; equity was translated at historical rates and items in the statement of comprehensive income were translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and must be applied retrospectively. Management is currently evaluating the potential impact of this ASU on the Company’s financial statements. 

 

NOTE 3 INVENTORIES

 

Inventories at June 30, 2014 and December 31, 2013 consisted of the following:

 

		June 30, 2014				December 31, 2013
Raw materials		$	2,273,209			$	5,658,519
Work-in-progress			30,661,653				25,862,185
Finished goods			54,087,608				55,664,077
			87,022,470				87,184,781
Less: allowance for obsolete inventories			(10,403,366	)			(11,994,584	)
Total inventories		$	76,619,104			$	75,190,197

 

 

NOTE 4 BANK LOANS

 

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Bank loans consisted of the following at June 30, 2014 and December 31, 2013:

 

		June 30,				December 31,
Bank		2014				2013
Industrial and Commercial Bank of China		$	12,956,145			$	1,799,600
Nanjing Bank			10,422,414				18,526,618
Bank of Communications			9,181,755				9,245,108
Bank of Everbright			6,233,984				3,272,000
The Hong Kong and Shanghai Bank			5,551,067				3,499,552
Bank of China			5,111,053				8,210,699
China Minsheng Banking			3,248,000				4,953,069
Pin An Bank			2,675,281				2,196,102
Huaxia Bank			-				1,636,000
		$	55,379,699			$	53,338,748

 

On January 1, 2014, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.50 million (RMB40 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2014, Goldenway had borrowed $6.50 million (RMB40 million) under this line of credit with an annual interest rate of 6.24% and due on various dates from March to April 2015.

 

On January 1, 2014, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.50 million (RMB40 million) with Industrial and Commercial Bank of China and guaranteed by Goldenway. As of June 30, 2014, Ever-Glory Apparel had borrowed $4.79 million (RMB 29.5 million) under this line of credit with an annual interest rate of 5.6% and due on various dates from November to December 2014. Ever-Glory Apparel had also borrowed $1.67 million from Industrial and Commercial Bank of China with annual interest rates ranging from 1.02% to 1.04% and due on various dates from July to October 2014, and collateralized by approximately $2.24 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $0.04 million was unused and available under this line of credit.  Approximately $0.44 million was repaid subsequent to June 30, 2014.

 

On June 14, 2013, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $8.12 million (RMB50 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2014, Goldenway had borrowed $4.06 (RMB25 million) under this line of credit from Nanjing Bank with an annual interest rate of 6.16% due on August 2014. At June 30, 2014, approximately $4.06 million was unused and available under this line of credit. Approximately $4.06 million was repaid subsequent to June 30, 2014.

 

On June 14, 2013 and renewed on July 6, 2014, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.74 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2014, Ever-Glory Apparel had borrowed $1.62 million (RMB 10 million) under this line of credit with an annual interest rate of 6.6% and due on September 2014. Ever-Glory Apparel had also borrowed $2.30 million from Nanjing Bank with annual interest rate of 3.1% and due on various dates from July to September 2014, and collateralized by approximately $3.16 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $5.82 million was unused and available under this line of credit.  Approximately $0.68 million was repaid subsequent to June 30, 2014.

 

On April 10, 2013, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.25 million (RMB20 million). The line of credit is guaranteed by Mr. Kang. As of June 30, 2014, LA GO GO had borrowed $2.44 million (RMB15 million) under this line of credit with an annual interest rate of 6.16% and due on various dates from July to October 2014. At June 30, 2014, approximately $0.81 million (RMB5 million) was unused and available under this line of credit. Approximately $0.81 million was repaid subsequent to June 30, 2014.

 

On January 29, 2014, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.44 million (RMB52 million) with the Bank of Communications and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank. As of June 30, 2014, Ever-Glory Apparel had borrowed $4.06 million (RMB25 million) with an annual interest rate of 6.9% and due on various dates from February to March 2015. Ever-Glory Apparel had also borrowed $1.87 million from the Bank of Communications with an annual interest rates ranging from 3.82% to 5.75% and due in February 2015, and collateralized by approximately $2.51 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $2.51 million was unused and available under this line of credit.

 

On July 16, 2013, LA GO GO entered into a line of credit agreement for approximately $3.57 million (RMB22 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of June 30, 2014, LA GO GO had borrowed $3.25 million (RMB20 million) from the Bank of Communications with an annual interest rate of 6.3% and due in June 2015. At June 30, 2014, approximately $0.32 million was unused and available under this line of credit.

 

 

On September 1, 2013, Ever-Glory Apparel entered into a line of credit agreement for approximately $11.37 million (RMB70 million) with Everbright Bank, and collateralized by assets of Jiangsu Ever-Glory, This loan is also guaranteed by Goldenway and Mr. Kang. As of June 30, 2014, Ever-Glory Apparel had borrowed $3.25 million (RMB20.0 million) from Everbright Bank, with an annual interest rate of 6.3% and due in October 2014. Ever-Glory Apparel had also borrowed $2.98 million from Everbright Bank with annual interest rate of 2.98% and due in August 2014, and collateralized by approximately $3.98 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $5.14 million was unused and available under this line of credit. Approximately $3.98 million was repaid subsequent to June 30, 2014.

 

On July 29, 2011, Ever-Glory Apparel and Perfect Dream collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $7.0 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 30, 2014, Ever-Glory Apparel had borrowed $5.55 million from HSBC with an annual interest rates ranging from 2.78% to 5.88%, due on various dates from July to September 2014, and collateralized by approximately $7.9 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2014, approximately $1.45 million was unused and available.

 

On November 11, 2013, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.68 million (RMB35 million) with the Bank of China and guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of June 30, 2014, Ever-Glory Apparel had borrowed $1.62 million (RMB10 million) with an annual interest rate of 6.05% and due in October 2014 under this line of credit. Ever-Glory Apparel had also borrowed $3.49 million ($1.6 million and RMB 11.6 million) from the Bank of China with annual interest rates ranging from 3.62% to 3.9% and due on various dates from July to August 2014, and collateralized by approximately $4.99 million of accounts receivable from wholesale customers. Approximately $1.60 million was repaid subsequent to June 30, 2014.  As of June 30, 2014, approximately $0.57 million was unused and available.

 

As of June 30, 2014, LA GO GO had borrowed $3.25 million (RMB 20 million) from China Minsheng Bank, with annual interest rate of 6.3% and due in August 2014. This loan is guaranteed by Ever-Glory Apparel and Mr. Kang.

 

As of June 30, 2014, Ever-Glory Apparel had borrowed $2.68 million from Ping An Bank, with annual interest rate of 3.9% and due on various dates from July to September 2014, and collateralized by approximately $3.83 million of accounts receivable from wholesale customers. Approximately $1.0 million was repaid subsequent to June 30, 2014.

 

Total interest expense on bank loans amounted to $774,693, $1,481,808, $736,695, and $1,528,224 for the three and six months ended June 30, 2014 and 2013, respectively.

 

NOTE 5 DERIVATIVES LIABILITY

 

At June 30, 2014, the Company had one outstanding forward foreign exchange option contract (sell US dollars for RMB), with a notional amount of US$3,000,000, that expires in September 2014. The fair value of this contract at June 30, 2014, as well as gains and losses realized on other foreign currency derivative activity during 2014 and 2013 were not significant.

 

Subsequent to June 30, 2014, we entered into another forward foreign exchange option contract (sell US dollars for RMB), with a notional amount of US $700,000, that expires in September 2015.

 

At December 31, 2012, the Company had warrants outstanding to purchase an aggregate of 840,454 shares of the Company’s common stock, which warrants required liability classification because of certain provisions that may have resulted in an adjustment to their exercise price. The warrants expired in June 2013. At the expiration date, the remaining value of the warrants not exercised ($2,000) was reduced to $0. The increase in other income resulting from the decrease in derivative warrant liability was $2,000 and $294,000 for the three and six months ended June 30, 2013, respectively.

 

NOTE 6 INCOME TAX

 

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

 

All PRC subsidiaries 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.

 

Although the Company’s parent entity is a US entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, sales are made globally, and the Company has other subsidiary operations in Hong Kong and Samoa. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3,186,000 as of December 31, 2013 based on the probability for such outcomes.

 

As of June 30, 2014, the local PRC Tax Bureau is in discussions with the Company to finalize the process of payment for the approximate tax liability of $ 3,186,000. The Company and the PRC Tax Bureau have tentatively agreed that payments on the tax liability will be made by the Company prospectively over the next two to three year period. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.  

The PRC’s Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise in PRC to its immediate holding company outside China, such distributions were exempted under the previous income tax law and regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting from January 1, 2008. Given that the undistributed profits of the Company's subsidiaries in China are intended to be retained in China for business development and expansion purposes, no withholding tax accrual has been made.

 

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC). PRC pre-tax income for the three and six months ended June 30, 2014 and 2013 was taxable in the following jurisdictions.

 

		Three months ended								Six months ended
		June 30,								June 30,
		2014				2013				2014				2013
PRC		$	7,439,468			$	4,136,050			$	10,713,481			$	8,473,628
Samoa			-				(636,295	)			-				(1,462,766	)
BVI			(24,572	)			(1,003	)			(24,935	)			(2,318	)
Others			(5,000	)			(3,000	)			(10,000	)			283,918
		$	7,409,896			$	3,495,752			$	10,678,546			$	7,292,462

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2014 and 2013, respectively:

 

		Three months ended								Six months ended
		June 30,								June 30,
		2014				2013				2014				2013
PRC statutory rate			25.0	%			25.0	%			25.0	%			25.0	%
Non-taxable items			-				-				-				(1.4	)
Effect of foreign income tax rates			0.1				(4.5	)			0.1				(5.0	)
Other			0.3				1.5				0.8				1.7
Effective income tax rate			25.4	%			22.0	%			25.8	%			20.3	%

 

Income tax expense for the three and six months ended June 30, 2014 and 2013 is as follows:

 

		Three months ended								Six months ended
		June 30,								June 30,
		2014				2013				2014				2013
Current		$	4,281,918			$	626,528			$	5,216,018			$	855,572
Deferred			(2,402,166	)			142,013				(2,457,344	)			622,600
Income tax expense		$	1,879,752			$	768,541			$	2,758,674			$	1,478,172

 

 

NOTE 7 EARNINGS PER SHARE

 

The following demonstrates the calculation for earnings per share for the three and six months ended June 30, 2014 and 2013:

 

		Three months ended								Six months ended
		June 30,								June 30,
		2014				2013				2014				2013
Net income		$	5,530,144			$	2,727,211			$	7,919,872			$	5,814,290
Weighted average number of common shares –Basic and diluted			14,781,241				14,777,610				14,781,241				14,775,869
Earnings per share –Basic and diluted		$	0.37			$	0.18			$	0.54			$	0.39

 

NOTE 8 STOCKHOLDERS’ EQUITY

 

On February 28, 2013, the Company issued an aggregate of 5,340 shares of its common stock to three of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2012. The shares were valued at $1.89 per share, which was the average market price of the common stock for the five days before the grant date.

 

On August 19, 2013, the Company issued an aggregate of 3,631 shares of its common stock to three of the Company’s independent directors as compensation for their services in the first and second quarters of 2013. The shares were valued at $2.73 per share, which was the average market price of the common stock for the five days before the grant date.

 

NOTE 9 RELATED PARTY TRANSACTIONS

 

Mr. Kang is the Company’s Chairman and Chief Executive Officer. All transactions associated with the following companies controlled by Mr. Kang are considered to be related party transactions, and it is possible that the terms of these transactions may not be the same as those that would result from transactions between unrelated parties. All related party outstanding balances are short-tem in nature and are expected to be settled in cash.

 

Other income from Related Parties

 

Included in other income for the three and six months ended June 30, 2013 is rent revenue from entities controlled by Mr. Kang under operating lease agreements as follows.  There were no such income in 2014.

 

		Three months ended				Six months ended
		June 30,				June 30,
		2013				2013
EsCeLav		$	3,056			$	6,038
Nanjing Eight-One-Five Hi-tech (M&E) Co., Ltd.			4,070				8,050
Total		$	7,126			$	14,088

 

Other expenses due to Related Parties

 

Included in other expenses for the three and six months ended June 30, 2014 and 2013 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,
		2014				2013				2014				2013
Jiangsu Ever-Glory		$	12,733			$	12,788			$	25,560			$	25,277
Kunshan Enjin			10,491				8,517				21,060				16,774
Total		$	23,224			$	21,305			$	46,620			$	42,051

 

 

Purchases from, and Sub-contracts with Related Parties

 

Shanghai Weiwen Fashion Company Ltd. (Shanghai Weiwen) was incorporated in the PRC in 2012. This company designs and sells women’s apparel utilizing the “Velwin” brand. Shanghai Weiwen is owned by Mr. Kang. Shanghai Ya Lan entered an agreement with Shanghai Weiwen in April 2014 to purchase the “Velwin” brand along with existing inventory of Shanghai Weiwen. No customer relationships, production facilities, or other operating assets were acquired. Management of the Company believes that this asset purchase will provide the Company with additional multi-brand advantages. The purchase price of the inventory and brand was approximately $2.44 million. The purchase price was based primarily on the estimated fair market value of the inventory.

 

Shanghai Sea to Sky Fashion Company Ltd. (Shanghai Sea to Sky) was incorporated in the PRC in 2012. This company designs and sells women’s apparel utilizing the “Sea to Sky” brand. Shanghai Sea to Sky is owned by Mr. Kang. Shanghai LA GO GO entered an agreement with Shanghai Sea to Sky in April 2014 to purchase the “Sea to Sky” brand along with existing inventory of Shanghai Sea to Sky. No customer relationships, production facilities, or other operating assets were acquired. Management of the Company believes that this asset purchase will provide the Company with additional multi-brand advantages. The purchase price of the inventory and brand was approximately $0.39 million. The purchase price was based primarily on the estimated fair market value of the inventory. 

 

For the three and six months ended June 30, 2014 and 2013, the Company purchased raw materials of $450,620, $884,070, $101,370, and $184,608, respectively, from Nanjing Knitting.

 

In addition, the Company sub-contracted certain manufacturing work to related parties totaling $4,401,992, $10,312,113, $5,102,919, and $9,088,426 for the three and six months ended June 30, 2014 and 2013, respectively. The Company provided raw materials to the sub-contractors and was charged a fixed fee for labor provided by the sub-contractors. Sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 2014 and 2013 are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Nanjing Knitting		$	-			$	211,296			$	-			$	232,602
Nanjing Ever-Kyowa			426,451				255,893				861,970				523,878
Ever-Glory Vietnam			1,776,620				3,175,681				4,964,884				5,094,787
Ever-Glory Cambodia			696,136				1,446,661				2,957,190				3,221,188
EsCeLav			-				1,775				-				4,358
Shanghai Weiwen			1,502,785				-				1,502,785				-
Shanghai Sea to Sky			377,793				-				377,793				-
Jiangsu Ever-Glory			-				11,613				25,284				11,613
		$	4,779,785			$	5,102,919			$	10,689,906			$	9,088,426

 

Accounts Payable – Related Parties

 

The Company purchases raw materials from and subcontracts some of its production to related parties. Accounts payable to related parties at June 30, 2014 and December 31, 2013 are as follows:

 

		June 30, 2014				December 31, 2013
Nanjing Knitting		$	-			$	784,777
Nanjing Ever-Kyowa			560,076				261,955
Ever-Glory Vietnam			677,078				2,473,271
Ever-Glory Cambodia			-				582,453
Shanghai Sea to Sky			377,793				-
Shanghai Weiwen			1,405,345				-
Total		$	3,020,292			$	4,102,456

 

Amounts Due From Related Parties

 

The amounts due from related parties at June 30, 2014 and December 31, 2013 are as follows:

 

		June 30, 2014				December 31, 2013
EsCeLav		$	31,439			$	12,291
Nanjing Eight-One-Five Hi-tech (M&E) Co.,Ltd.			20,546				145,206
Nanjing Knitting			324,984				-
Ever-Glory Cambodia			832,160				-
Jiangsu Ever-Glory			293,817				1,738,879
Total		$	1,502,946			$	1,896,376

 

 

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. Because of restrictions on its ability to directly import and export products, the Company had utilized Jiangsu Ever-Glory as its agent to assist the Company with its import and export transactions and its international transportation projects from 2005 through 2011. Import transactions primarily consisted of purchases of raw materials and accessories designated by the Company’s customers for use in garment manufacture. Export transactions consisted of the Company’s sales to foreign markets such as Japan, Europe and the United States. These transactions ceased at end of 2011. During six months ended June 30, 2014 and 2013, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices. The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at cost for $0 and $72,548 during the six month period ended June 30, 2014 and 2013, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $19,221 and $0 during the six months ended June 30, 2014 and 2013, respectively.

 

Amounts Due From Related Party under Counter Guarantee Agreement

 

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of June 30, 2014 and December 31, 2013, Jiangsu Ever-Glory has provided guarantees for approximately $48.72 million (RMB 300 million) and $43.69 million (RMB 269 million) of lines of credit obtained by the Company. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $16.72 million (RMB 103 million) as of June 30, 2014 and December 31, 2013. Mr. Kang has also provided a personal guarantee for $30.5 million (RMB 188 million).

 

During the six months ended June 30, 2013, US$4.82 million (RMB30.25 million) was provided to Jiangsu Ever-Glory under the counter-guarantee. US$16.79 million (RMB103 million) was outstanding at December 31, 2013. During six months ended June 30, 2014, an additional $5.03 million (RMB 31 million) was provided and approximately $1.30 million (RMB 8 million) of interest income was received under the counter-guarantee agreement. As of June 30, 2014, the amount of the counter-guarantee was $21.7 million (RMB 134 million) (the difference represents currency exchange adjustment of $0.12 million), which was 44.54% of the aggregate amount of lines of credit. This amount plus accrued interest of $1.50 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At June 30, 2014 and 2013, the amount classified as a reduction of equity was $23.19 million and $19.08 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Interest income for the three and six months ended June 30, 2014 and 2013 was approximately $0.29 million, $0.5 million, $0.34 million and $0.64 million, respectively.

 

NOTE 10 CONCENTRATIONS AND RISKS

 

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable, management has concluded that no allowance for doubtful accounts is necessary at June 30, 2014 and December 31, 2013. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions in the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.

 

For the six-month period ended June 30, 2014, the Company had one wholesale customer that represented approximately 14% of the Company’s revenues. For the three-month period ended June 30, 2014, the Company had one wholesale customer that represented approximately 15% of the Company’s revenues. For the six-month period ended June 30, 2013, the Company had two wholesale customers that each represented approximately 11% of the Company’s revenues. For the three-month period ended June 30, 2013, the Company had two wholesale customers that represented approximately 14% and 10% of the Company’s revenues, respectively.

 

For the Company’s wholesale business during the three and six months ended June 30, 2014 and 2013, no supplier represented more than 10% of the total raw materials purchased.

 

For the Company’s retail business, the Company had no supplier that represented more than 10% of raw materials purchases during the three and six months ended June 30, 2014. For the Company’s retail business, the Company had no supplier that represented more than 10% of raw materials purchases during the six months ended June 30, 2013. The Company purchased 10% of its raw materials from one supplier during the three months ended June 30, 2013.

 

 

For the wholesale business, during the six months ended June 30, 2014, the Company relied on two manufacturers for 16% and 10% of purchased finished goods, respectively. During the six months ended June 30, 2013, the Company relied on two manufacturers for 15% and 13% of purchased finished goods, respectively. During the three months ended June 30, 2014, the Company relied on two manufacturers for 15% and 14% of purchased finished goods, respectively. During the three months ended June 30, 2013, the Company relied on two manufacturers for 17% and 16% of purchased finished goods, respectively.

 

For the retail business, the Company had no supplier that represented more than 10% of finished goods purchases during the six months ended June 30, 2014. The Company purchased 11% of its finished goods from one supplier during the three months ended June 30, 2014. The Company had no supplier that represented more than 10% of finished goods purchases during the three and six months ended June 30, 2013.

 

The Company’s revenues for the three and six months ended June 30, 2014 and 2013 were earned in the following geographic areas:

 

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
The People’s Republic of China		$	12,929,219			$	8,616,297			$	27,527,244			$	21,647,361
Germany			5,525,792				3,305,231				11,823,952				7,676,564
United Kingdom			9,018,214				4,961,895				11,642,361				7,826,529
Europe-Other			2,061,398				3,134,666				8,517,320				7,102,281
Japan			2,431,821				5,306,554				8,674,713				9,005,388
United States			4,428,137				1,726,825				7,650,480				5,453,800
Total wholesale business			36,394,581				27,051,468				75,836,070				58,711,923
Retail business			49,273,199				32,078,017				115,846,879				78,729,052
Total		$	85,667,780			$	59,129,485			$	191,682,949			$	137,440,975

 

 

NOTE 11 SEGMENTS

 

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

 

(a) Wholesale segment

 

(b) Retail segment

 

		Wholesale segment				Retail segment				Total
Six months ended June 30, 2014
Segment profit or loss:
Net revenue from external customers		$	75,836,070			$	115,846,879			$	191,682,949
Income from operations		$	3,954,431			$	6,715,953			$	10,670,384
Interest income		$	551,265			$	26,482			$	577,747
Interest expense		$	1,199,618			$	282,190			$	1,481,808
Depreciation and amortization		$	515,773			$	2,946,355			$	3,462,128
Income tax expense		$	946,118			$	1,812,556			$	2,758,674
Six months ended June 30, 2013
Segment profit or loss:
Net revenue from external customers		$	58,711,923			$	78,729,052			$	137,440,975
Income  from operations		$	5,339,873			$	2,696,664			$	8,036,537
Interest income		$	624,195			$	13,595			$	637,790
Interest expense		$	1,412,096			$	116,128			$	1,528,224
Depreciation and amortization		$	478,315			$	3,212,576			$	3,690,891
Income tax expense		$	828,834			$	649,338			$	1,478,172

 

		Wholesale segment				Retail segment				Total
Three months ended June 30, 2014
Segment profit or loss:
Net revenue from external customers		$	36,394,581			$	49,273,199			$	85,667,780
Income from operations		$	2,538,511			$	4,869,200			$	7,401,711
Interest income		$	324,638			$	11,776			$	336,414
Interest expense		$	633,051			$	141,642			$	774,693
Depreciation and amortization		$	251,227			$	1,319,974			$	1,571,201
Income tax expense		$	612,044			$	1,267,708			$	1,879,752
Three months ended June 30, 2013
Segment profit or loss:
Net revenue from external customers		$	27,051,468			$	32,078,017			$	59,129,485
Income from operations		$	2,547,245			$	1,520,112			$	4,067,357
Interest income		$	332,268			$	9,920			$	342,188
Interest expense		$	678,069			$	58,626			$	736,695
Depreciation and amortization		$	244,604			$	1,815,642			$	2,060,246
Income tax expense		$	400,680			$	367,861			$	768,541

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

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, 2014 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 leading apparel supply-chain manager and retailer in China. We are listed on the NYSE MKT 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 famous 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 grade casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC.

 

Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled workers on production lines during low seasons. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high quality control standards and timely delivery.

 

Wholesale Business

 

We conduct our original design manufacturing (“ODM”) operations through six 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, China: 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”), Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”), and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”).

 

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

 

 

Business Objectives

 

Wholesale Business

 

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

 

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

 

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

 

Retail Business

 

The business objective for our retail segment is to establish a leading brand of women’s apparel and to build a nationwide retail network in China. As of June 30, 2014, we have 1055 stores (including store-in-stores) which included 125 stores that were opened and 30 stores that were closed in first half of 2014.

 

On June 26, 2014, Shanghai LA GO GO entered into a contract with Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) to acquire 78% of the shares of Shanghai Yiduo for $0.75 million (RMB4.6 million).  Shanghai Yiduo is currently owned by unrelated third parties and operates design and development of women’s apparel for Mecox Lane, one of China’s leading online platforms for apparel accessories. The acquisition price is to be paid as follows. 

 

Payment Date		Amount
Before July 8, 2014		$	0.45 million
Before September 28, 2014			0.22 million
Within 10 days after Shanghai Yiduo collects all the accounts receivable from Mecox Lane			0.08 million
TOTAL			0.75 million

 

The first $0.45 million installment was paid by the Company to Shanghai Yiduo in July 2014 and was financed by working capital. The completion of the acquisition is subject to the company’s final due diligence and Shanghai Yiduo’s ability to collect certain account receivables. In the event Shanghai Yiduo is not able to collect the account receivables in accordance with the contract, the Company may reduce the purchase price or terminate the contract and get back the first installment payment.  Management of the Company believes that the acquisition will improve the Company’s design and product development ability.

 

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

 

	●	Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;
	●	Expand the LA GO GO retail network throughout China
	●	Improve the LA GO GO retail stores’ efficiency and increase same-store sales
	●	Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities
	●	Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.

 

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 a good payment track record, we generally provide payment terms between 30 to 180 days following 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 at the same time as the register receipt. For the sales in e-commerce platform such as Tmall, Dangdang mall, and Jingdong mall, we generally receive payments from these e-commerce companies 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 a slowdown in the United States and European economies 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 2014.

 

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

 

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

 

Summary of Critical Accounting Policies

 

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

 

Revenue Recognition

 

We recognize wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. Retail sales are recorded at the time of register receipt. Retail sales through e-commerce companies are recognized when products are delivered and payments from customers are received.

 

Estimates and Assumptions

 

In preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2014 and 2013 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and must be applied retrospectively. Management is currently evaluating the potential impact of this ASU on the Company’s financial statements. 

 

 

Results of Operations for the three months ended June 30, 2014 and 2013

 

The following table summarizes our results of operations for the three months ended June 30, 2014 and 2013. 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,
		2014								2013
		(in U.S. Dollars, except for percentages)
Sales		$	85,667,780				100.0	%		$	59,129,485				100.0	%
Gross Profit		$	29,349,791				34.3	%		$	19,478,568				32.9	%
Operating Expense		$	21,942,080				25.6	%		$	15,411,211				26.0	%
Income From Operations		$	7,407,711				8.6	%		$	4,067,357				6.9	%
Other Income (Expenses)		$	2,185				0.1	%		$	(571,605	)			(1.0	)%
Income tax expense		$	1,879,752				2.2	%		$	768,541				1.3	%
Net Income		$	5,530,144				6.5	%		$	2,727,211				4.6	%

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2014 and 2013.

 

		2014				% of total sales				2013				% of total sales				Growth in 2014 compared with 2013
Wholesales business
The People’s Republic of China		$	12,929,219				15.1	%		$	8,616,297				14.6	%			50.1	%
Germany			5,525,792				6.5				3,305,231				5.6				67.2
United Kingdom			9,018,214				10.5				4,961,895				8.4				81.7
Europe-Other			2,061,398				2.4				3,314,666				5.3				(34.2	)
Japan			2,431,821				2.8				5,306,554				9.0				(54.2	)
United States			4,428,137				5.2				1,726,825				2.9				156.4
Total wholesale business			36,394,581				42.5				27,051,468				45.7				34.5
Retail business			49,273,199				57.5				32,078,017				54.3				53.6
Total		$	85,667,780				100.0	%		$	59,129,485				100.0	%			44.9	%

 

Sales for the three months ended June 30, 2014 were $85.7 million, an increase of 44.9% from the three months ended June 30, 2013. This increase was primarily attributable to a 53.6% increased sales in our retail business as well as a 34.5% increased sales in wholesales business.

 

Sales generated from our wholesale business contributed 42.5% or $36.4 million of our total sales for the three months ended June 30, 2014, an increase of 34.5% compared to $27.1 million in the three months ended June 30, 2013. This increase was primarily attributable to increased sales in P.R.C, Germany, the United Kingdom and the United States.

 

Sales generated from our retail business contributed 57.5% or $49.3 million of our total sales for the three months ended June 30, 2014, an increase of 53.6% compared to 54.3% or $32.1 million in the three months ended June 30, 2013. This increase was primarily due to the increase in same store sales and new stores opened. We had 1055 retail stores as of June 30, 2014, compared to 831 retail stores at June 30, 2013.

 

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, 2014 and 2013.

 

																		Growth
																		(Decrease) in
		Three months ended June 30,																2014 Compared
		2014								2013								with 2013
		(in U.S. dollars, except for percentages)
Net Sales for Wholesale Sales		$	36,394,581				100.0	%		$	27,051,468				100.0	%			34.5	%
Raw Materials			16,454,991				45.2				12,038,807				44.5				36.7
Labor			1,211,243				3.3				1,231,609				4.6				(1.7	)
Outsourced Production Costs			10,059,316				27.6				6,942,002				25.7				44.9
Other and Overhead			131,151				0.4				140,929				0.5				(6.9	)
Total Cost of Sales for Wholesale			27,856,701				76.5				20,353,347				75.2				36.9
Gross Profit for Wholesale			8,537,880				23.5				6,698,121				24.8				27.5
Net Sales for Retail			49,273,199				100.0				32,078,017				100.0				53.6
Production Costs			13,193,339				26.8				9,455,948				29.5				39.5
Rent			15,267,949				31.0				9,841,622				30.7				55.1
Total Cost of Sales for Retail			28,461,288				57.8				19,297,570				60.2				47.5
Gross Profit for Retail			20,811,911				42.2				12,780,447				39.8				62.8
Total Cost of Sales			56,317,989				65.7				39,650,917				67.1				42.0
Gross Profit		$	29,349,791				34.3	%		$	19,478,568				32.9	%			50.7	%

 

Raw material costs for our wholesale business were 45.2% of our total wholesale business sales in the three months ended June 30, 2014, compared to 44.5% in the three months ended June 30, 2013. The increase was mainly due to increased raw materials prices.

 

Labor costs for our wholesale business were 3.3% of our total wholesale business sales in the three months ended June 30, 2014, compared to 4.6% in the three months ended June 30, 2013. The decrease was mainly due to the fact that we outsourced most of the new orders in 2014.

 

Outsourced manufacturing costs for our wholesale business were 27.6% of our total wholesale business sales in the three months ended June 30, 2014, compared to 25.7% in the three months ended June 30, 2013. This increase was primarily attributable to increased average salaries of the employees in our outsourced manufacturing factories.

 

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, 2014, compared to 0.5% of total sales for the three months ended June 30, 2013.

 

Wholesale business gross profit for the three months ended June 30, 2014 and 2013 was $8.5 and $6.7 million, respectively. As a percentage of wholesale sales, gross profit accounted for 23.5% of our total wholesale sales for the three months ended June 30, 2014, a decrease of 1.3% compared to 24.8% for the three months ended June 30, 2013. The decrease was mainly due to increased raw material prices and outsourced manufacturing costs.

 

Production costs for our retail business were $13.2 million during the three months ended June 30, 2014 compared to $9.5 million during the three months ended June 30, 2013. As a percentage of retail sales, retail production costs accounted for 26.8% of our total retail sales in the three months ended June 30, 2014, compared to 29.5% of total retail sales in the three months ended June 30, 2013. The decrease was due to our procurement cost controlling in the three months ended June 30, 2014 being better than the same period of the prior year.

 

Rent costs for our retail business were $15.3 million for the three months ended June 30, 2014 compared to $9.8 million for the three months ended June 30, 2013. As a percentage of sales, rent costs accounted for 31.0% of our total retail sales for the three months ended June 30, 2014, compared to 30.7% of total retail sales for the three months ended June 30, 2013.

 

Gross profit in our retail business for the three months ended June 30, 2014 was $20.8 million and gross margin was 42.2%. Gross profit in our retail business for the three months ended June 30, 2013 was $12.8 million and gross margin was 39.8%.

 

Total cost of sales for the three months ended June 30, 2014 was $56.3 million, compared to $39.7 million for the three months ended June 30, 2013, an increase of 42.0%. As a percentage of total sales, cost of sales decreased to 65.7% of total sales for the three months ended June 30, 2014, compared to 67.1% of total sales for the three months ended June 30, 2013. Consequently, gross margin increased to 34.3% for the three months ended June 30, 2014 from 32.9% for the three months ended June 30, 2013.

 

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,
		2014								2013								Increase
		(in U.S. Dollars, except for percentages)
Gross Profit		$	29,349,791				34.3	%		$	19,478,568				32.9	%			50.7	%
Operating Expenses:
Selling Expenses			14,402,662				16.8				9,898,106				16.7				45.5
General and Administrative Expenses			7,539,418				8.8				5,513,105				9.3				36.8
Total			21,942,080				25.6				15,411,211				26.0				42.4
Income from Operations		$	7,407,711				8.6	%		$	4,067,357				6.9	%			82.1	%

 

Selling expenses increased 45.5% to $14.4 million for the three months ended June 30, 2014 from $9.9 million for the three months ended June 30, 2013. The increase was attributable to the increased average salaries, and increased number of stores, leading to increased number of retail employees, as well as increased store decoration and marketing expenses associated with the promotion of the LA GO GO brand.

 

General and administrative expenses increased 36.8% to $7.5 million for the three months ended June 30, 2014 from $5.5 million for the three months ended June 30, 2013. The increase was attributable to an increase in payroll for additional management and design and marketing staff as a result of our business expansion. As a percentage of total sales, general and administrative expenses decreased to 8.8% of total sales for the three months ended June 30, 2014, compared to 9.3% of total sales for the three months ended June 30, 2013.  The percentage decrease was attributable to the increase in our sales.

 

Income from Operations

 

Income from operations increased 82.1% to $7.4 million for the three months ended June 30, 2014 from $4.1 million for the three months ended June 30, 2013. As a percentage of sales, income from operations accounted for 8.6% of our total sales for the three months ended June 30, 2014, an increase of 1.7% compared to the three months ended June 30, 2013 as a result of increasing gross profit.

 

Interest Expense

 

Interest expense was $0.7 million for the three months ended June 30, 2014, an increase of 2.3% compared to the same period in 2013.

 

Change in fair value of derivative liability

 

Change in fair value of derivative liability was a gain of $0.002 million and $0.2 million, based on the Binnomial Lattice model, for the three months ended June 30, 2013.

 

Income Tax Expenses

 

Income tax expense for the three months ended June 30, 2014 was $1.9 million, an increase of 145% compared to the same period of 2013. The increase was primarily due to increased profits of LA GO GO.

 

Our PRC subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws. Each of our consolidated entities files its own separate income tax return.

 

All PRC subsidiaries are subject to the 25% income tax rate.

 

Perfect Dream Limited was incorporated in the British Virgin Islands on July 1, 2004, and has no income tax.

 

Ever-Glory International Group (HK) Ltd was incorporated in Samoa on September 15, 2009, and has no liabilities for income tax.

 

 

Although our parent entity is a US entity, our primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, sales are made globally, and we have other subsidiary operations in Hong Kong and Samoa. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions our subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, we formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, we considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in our estimate of exposure to potential unfavorable outcomes related to these uncertainties, and we recorded a tax liability of approximately $3,186,000 as of December 31, 2013 based on the probability for such outcomes.

 

As of June 30, 2014, the local PRC Tax Bureau is in discussions with the Company to finalize the process of payment for the approximate tax liability of $ 3,186,000. The Company and the PRC Tax Bureau have tentatively agreed that payments on the tax liability will be made by the Company prospectively over the next two to three year period. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.

Ever-Glory International Group Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes through June 30, 2014. The net operating loss carry forwards for United States income taxes may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.

 

Net Income

 

Net income for the three months ended June 30, 2014 was $5.5 million, an increase of 103% compared to the same period in 2013. Our basic and diluted earnings per share were $0.37 and $0.18 for the three months ended June 30, 2014 and 2013, respectively.

 

Results of Operations for the six months ended June 30, 2014 and 2013

 

The following table summarizes our results of operations for the six months ended June 30, 2014 and 2013. 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,
		2014								2013
		(in U.S. Dollars, except for percentages)
Sales		$	191,682,949				100.0	%		$	137,440,975				100.0	%
Gross Profit			55,130,748				28.8				39,771,491				28.9
Operating Expense			44,460,364				23.2				31,734,954				23.1
Income From Operations			10,670,384				5.6				8,036,537				5.8
Other Income (Expenses)			8,162				0				(744,075	)			(0.5	)
Income tax expense			2,758,674				1.4				1,478,172				1.1
Net Income		$	7,919,872				4.1	%		$	5,814,290				4.2	%

 

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2014 and 2013.

 

		2014				% of total sales				2013				% of total sales				Growth in 2014 compared with 2013
Wholesales business
The People’s Republic of China		$	27,527,244				14.4	%		$	21,647,361				15.8	%			27.2	%
Germany			11,823,952				6.2				7,676,564				5.6				54.0
United Kingdom			11,642,361				6.1				7,826,529				5.7				48.8
Europe-Other			8,517,320				4.4				7,102,281				5.2				19.9
Japan			8,674,713				4.5				9,005,388				6.6				(3.7	)
United States			7,650,480				4.0				5,453,800				4.0				40.3
Total wholesale business			75,836,070				39.6				58,711,923				42.7				29.2
Retail business			115,846,879				60.4				78,729,052				57.3				47.1
Total		$	191,682,949				100.0	%		$	137,440,975				100.0	%			39.5	%

 

Sales for the six months ended June 30, 2014 were $191.7 million, an increase of 39.5% from the six months ended June 30, 2013. This increase was primarily attributable to a 47.1% increased sales in our retail business as well as a 29.2% increased sales in wholesale business.

 

Sales generated from our wholesale business contributed 39.6% or $75.8 million of our total sales for the six months ended June 30, 2014, an increase of 29.2% compared to $58.7 million in the six months ended June 30, 2013. This increase was primarily attributable to increased sales in PRC, Germany, the United Kingdom and the United States.

 

Sales generated from our retail business contributed 60.4% or $115.8 million of our total sales for the six months ended June 30, 2014, an increase of 47.1% compared to $78.7 million in the six months ended June 30, 2013. This increase was primarily due to the increase in same store sales and new stores opened. We had 1055 retail stores as of June 30, 2014, compared to 831 retail stores at June 30, 2013.

 

Total retail store square footage and sales per square foot for the six months ended June 30, 2014 and 2013 are as follows:

 

		2014				2013
Total store square footage			956,436				754,870
Number of stores			1,055				831
Average store size, square feet			907				908
Total store sales		$	115,846,879			$	78,729,052
Sales per square foot		$	121			$	104

 

Same store sales and newly opened store sales for the six months ended June 30, 2014 and 2013 are as follows:

 

		2014				2013
Sales from stores open a full year		$	81,508,931			$	49,510,906
Newly opened store sales			31,877,375				26,054,394
Other*			2,460,573				3,163,752
Total		$	115,846,879			$	78,729,052

 

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

 

We remodeled or relocated 123 stores in 2014, and we plan to relocate or remodel 150 stores in 2014. 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 2014. Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

 

Costs and Expenses

 

Cost of Sales and Gross Margin

 

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

 

 

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the six months ended June 30, 2014 and 2013.

 

																		Growth in
		Six months ended June 30,																2014 compared
		2014								2013								with 2013
		(in U.S. dollars, except for percentages)
Net Sales for Wholesale Sales		$	75,836,070				100.0	%		$	58,711,923				100.0	%			29.2	%
Raw Materials			36,052,958				47.5				26,041,183				44.4				38.4
Labor			2,411,739				3.2				2,287,662				3.9				5.4
Outsourced Production Costs			22,414,004				29.6				16,896,224				28.8				32.7
Other and Overhead			279,240				0.4				271,514				0.5				2.8
Total Cost of Sales for Wholesale			61,157,941				80.6				45,496,583				77.5				34.4
Gross Profit for Wholesale			14,678,129				19.4				13,215,340				22.5				11.1
Net Sales for Retail			115,846,879				100.0				78,729,052				100.0				47.1
Production Costs			33,835,880				29.2				24,512,666				31.1				38.0
Rent			41,558,380				35.9				27,660,235				35.1				50.2
Total Cost of Sales for Retail			75,394,260				65.1				52,172,901				66.3				44.5
Gross Profit for Retail			40,452,619				34.9				26,556,151				33.7				52.3
Total Cost of Sales			136,552,201				71.2				97,669,484				71.1				39.8
Gross Profit		$	55,130,748				28.8	%		$	39,771,491				28.9	%			38.6	%

 

Raw material costs for our wholesale business were 47.5% of our total wholesale business sales in the six months ended June 30, 2014, compared to 44.4% in the six months ended June 30, 2013. The increase was mainly due to increased raw materials prices.

 

Labor costs for our wholesale business were 3.2% of our total wholesale business sales in the six months ended June 30, 2014, compared to 3.9% in the six months ended June 30, 2013. The decrease was mainly due to the fact that we outsourced most of the new orders in 2014.

 

Outsourced manufacturing costs for our wholesale business were 29.6% of our total sales in the six months ended June 30, 2014, compared to 28.8% in the six months ended June 30, 2013. This increase was primarily attributable to increased average salaries of the employees in our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.4% and 0.5% of our total sales for the six months ended June 30, 2014 and 2013 respectively.

 

Gross profit in our wholesale business for the six months ended June 30, 2014 was $14.7 million, an increase of 11.1% compared to the six months ended June 30, 2013. As a percentage of wholesale sales, gross profit accounted for 19.4% of our total wholesale sales for the six months ended June 30, 2014, a decrease of 3.1% compared to 22.5% for the six months ended June 30, 2013. The decrease was mainly due to increased raw materials prices and outsourced manufacturing costs.

 

Production costs for our retail business were $33.8 million during the six months ended June 30, 2014 versus $24.5 million during the six months ended June 30, 2013. As a percentage of total retail sales, Production costs for our retail business were 29.2% of our total retail sales during the six months ended June 30, 2014, a decreased of 1.9% compared to 31.1% during the six months ended June 30, 2013. The decrease was due to our procurement cost controlling in the six months ended June 30, 2014 being better than the same period of the prior year.

 

Rent costs for our retail business were $41.6 million or 35.9% of our total retail sales during the six months ended June 30, 2014 versus $27.7 million or 35.1% during the six months ended June 30, 2013.

 

Gross profit in our retail business for the six months ended June 30, 2014 was $40.5 million and gross margin was 34.9%. Gross profit in our retail business for the six months ended June 30, 2013 was $26.6 million and gross margin was 33.7%.

 

Total cost of sales for the six months ended June 30, 2014 was $136.6 million, an increase of 39.8% compared to the six months ended June 30, 2013. As a percentage of total sales, cost of sales increased to 71.2% for the six months ended June 30, 2014, compared to 71.1% for the six months ended June 30, 2013. Consequently, gross margin decreased to 28.8% for the six months ended June 30, 2014 from 28.9% for the six months ended June 30, 2013.

 

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 20.9% and 22.9% of raw material purchases for the six months ended June 30, 2014 and 2013, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six months ended June 30, 2014 and 2013. For our retail business, purchases from our five largest suppliers represented approximately 29.8% and 31.0% of raw material purchases for the six months ended June 30, 2014 and 2013 respectively. No one supplier provided more than 10% of our total purchases for the six months ended June 30, 2014 and 2013. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

 

 

We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 46.8 and 46.6% of finished goods purchases for the six months ended June 30, 2014 and 2013 respectively. Two contract manufacturers provided approximately 16.0% and 10.3% of our finished goods purchases for the six months ended June 30, 2014. Two contract manufacturers provided approximately 15.4% and 13.1% of our finished goods purchases for the six months ended June 30, 2013. For our retail business, our five largest contract manufacturers represented approximately 20% and 16.0% of finished goods purchases for the six months ended June 30, 2014 and 2013, respectively. One manufacturer provided approximately 11.0% of our finished goods purchases for the six months ended June 30, 2014. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2013. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

 

Selling, General and Administrative Expenses

 

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

 

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

 

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

 

		Six months ended June 30,
		2014								2013								Increase %
		(in U.S. Dollars, except for percentages)
Gross Profit		$	55,130,748				28.8	%		$	39,771,491				28.9	%			38.6	%
Operating Expenses:
Selling Expenses			30,525,958				15.9				21,749,402				15.8				40.4
General and Administrative Expenses			13,934,406				7.3				9,985,552				7.3				39.5
Total			44,460,364				23.2				31,734,954				23.1				40.1
Income from Operations		$	10,670,384				5.6	%		$	8,036,537				5.8	%			32.8	%

 

Selling expenses were $30.5 million in the six months ended June 30, 2014, an increase of 40.4% or $8.8 million compared to the six months ended June 30, 2013. The increase was attributable to increased average salaries, and increased number of stores, leading to increased number of retail employees, as well as increased store decoration and marketing expenses associated with the promotion of LA GO GO brand.

 

General and administrative expenses were $13.9 million in the six months ended June 30, 2014, an increase of 39.5% compared to the six months ended June 30, 2013. As a percentage of total sales, general and administrative expenses were 7.3% of total sales for the six months ended June 30, 2014 and 2013.

 

Income from Operations

 

Income from operations increased 32.8% to $10.7 million for the six months ended June 30, 2014 from $8.0 million for the six months ended June 30, 2013. This increase was due to our increased gross profit.

 

Interest Expense

 

Interest expense was $1.5 million for the six months ended June 30, 2014 and 2013 respectively.

 

Change in fair value of derivative liability

 

Change in fair value of derivative liability was a gain of $0.29 million, based on the Binnomial Lattice model, for the six months ended June 30, 2013. This related to outstanding warrants, which expired in June 2013 (described in Note 5 to the financial statements).

 

 

Income Tax Expenses

 

Income tax expense for the six months ended June 30, 2014 was $2.8 million, an increase of 87.0% compared to the same period of 2013. This increase was primarily due to increased profits of LA GO GO.

 

Net Income

 

Net income for the six months ended June 30, 2014 was $7.9 million, an increase of 36.5% compared to the same period in 2013. Our diluted earnings per share were $0.54 and $0.39 for the six months ended June 30, 2014 and 2013, respectively.

 

Summary of Cash Flows

 

Net cash provided by operating activities was $2.80 million for the six months ended June 30, 2014, compared with $5.12 million during the six months ended June 30, 2013. The decrease was primarily due to a decrease in Accounts payable.

 

Net cash used in investing activities was $4.2 million for the six months ended June 30, 2014, compared with $4.6 million during the six months ended June 30, 2013. The decrease was mainly due to decreased equipment purchases.

 

Net cash used in financing activities was $1.3 million for the six months ended June 30, 2014, compared with net cash provided by financing activities of $6.1 million during the six months ended June 30, 2013. During the six months ended June 30, 2014, we repaid $71.3 million of bank loans and received bank loan proceeds of $73.7 million. Also, under the counter-guarantee agreement, we advanced $5.1 million to the related party and received $1.3 million Interest income from the related party during the six months ended June 30, 2014.

 

Liquidity and Capital Resources

 

As of June 30, 2014, we had cash and cash equivalents of $25.0 million, other current assets of $151.1 million and current liabilities of $137.3 million. We presently finance our operations primarily from cash flows from operations and bank loans and we anticipate that these will continue to be our primary sources of funds to finance our short-term cash needs.

 

Bank Loans

 

On January 1, 2014, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.50 million (RMB40 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2014, Goldenway had borrowed $6.50 million (RMB40 million) under this line of credit with an annual interest rate of 6.24% and due on various dates from March to April 2015.

 

On January 1, 2014, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.50 million (RMB40 million) with Industrial and Commercial Bank of China and guaranteed by Goldenway. As of June 30, 2014, Ever-Glory Apparel had borrowed $4.79 million (RMB 29.5 million) under this line of credit with an annual interest rate of 5.6% and due on various dates from November to December 2014. Ever-Glory Apparel had also borrowed $1.67 million from Industrial and Commercial Bank of China with annual interest rates ranging from 1.02% to 1.04% and due on various dates from July to October 2014, and collateralized by approximately $2.24 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $0.04 million was unused and available under this line of credit.  Approximately $0.44 million was repaid subsequent to June 30, 2014.

 

On June 14, 2013, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $8.12 million (RMB50 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2014, Goldenway had borrowed $4.06 (RMB25 million) under this line of credit from Nanjing Bank with an annual interest rate of 6.16% due on August 2014. At June 30, 2014, approximately $4.06 million was unused and available under this line of credit. Approximately $4.06 million was repaid subsequent to June 30, 2014.

 

On June 14, 2013 and renewed on July 6, 2014, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.74 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2014, Ever-Glory Apparel had borrowed $1.62 million (RMB 10 million) under this line of credit with an annual interest rate of 6.6% and due on September 2014. Ever-Glory Apparel had also borrowed $2.30 million from Nanjing Bank with annual interest rate of 3.1% and due on various dates from July to September 2014, and collateralized by approximately $3.16 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $5.82 million was unused and available under this line of credit.  Approximately $0.68 million was repaid subsequent to June 30, 2014.

 

 

On April 10, 2013, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.25 million (RMB20 million). The line of credit is guaranteed by Mr. Kang. As of June 30, 2014, LA GO GO had borrowed $2.44 million (RMB15 million) under this line of credit with an annual interest rate of 6.16% and due on various dates from July to October 2014. At June 30, 2014, approximately $0.81 million (RMB5 million) was unused and available under this line of credit. Approximately $0.81 million was repaid subsequent to June 30, 2014.

 

On January 29, 2014, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.44 million (RMB52 million) with the Bank of Communications and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank. As of June 30, 2014, Ever-Glory Apparel had borrowed $4.06 million (RMB25 million) with an annual interest rate of 6.9% and due on various dates from February to March 2015. Ever-Glory Apparel had also borrowed $1.87 million from the Bank of Communications with an annual interest rates ranging from 3.82% to 5.75% and due in February 2015, and collateralized by approximately $2.51 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $2.51 million was unused and available under this line of credit.

 

On July 16, 2013, LA GO GO entered into a line of credit agreement for approximately $3.57 million (RMB22 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of June 30, 2014, LA GO GO had borrowed $3.25 million (RMB20 million) from the Bank of Communications with an annual interest rate of 6.3% and due in June 2015. At June 30, 2014, approximately $0.32 million was unused and available under this line of credit.

 

On September 1, 2013, Ever-Glory Apparel entered into a line of credit agreement for approximately $11.37 million (RMB70 million) with Everbright Bank, and collateralized by assets of Jiangsu Ever-Glory, This loan is also guaranteed by Goldenway and Mr. Kang. As of June 30, 2014, Ever-Glory Apparel had borrowed $3.25 million (RMB20.0 million) from Everbright Bank, with an annual interest rate of 6.3% and due in October 2014. Ever-Glory Apparel had also borrowed $2.98 million from Everbright Bank with annual interest rate of 2.98% and due in August 2014, and collateralized by approximately $3.98 million of accounts receivable from wholesale customers. At June 30, 2014, approximately $5.14 million was unused and available under this line of credit. Approximately $3.98 million was repaid subsequent to June 30, 2014.

 

On July 29, 2011, Ever-Glory Apparel and Perfect Dream collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $7.0 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 30, 2014, Ever-Glory Apparel had borrowed $5.55 million from HSBC with an annual interest rates ranging from 2.78% to 5.88%, due on various dates from July to September 2014, and collateralized by approximately $7.9 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2014, approximately $1.45 million was unused and available.

 

On November 11, 2013, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.68 million (RMB35 million) with the Bank of China and guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of June 30, 2014, Ever-Glory Apparel had borrowed $1.62 million (RMB10 million) with an annual interest rate of 6.05% and due in October 2014 under this line of credit. Ever-Glory Apparel had also borrowed $3.49 million ($1.6 million and RMB 11.6 million) from the Bank of China with annual interest rates ranging from 3.62% to 3.9% and due on various dates from July to August 2014, and collateralized by approximately $4.99 million of accounts receivable from wholesale customers. Approximately $1.60 million was repaid subsequent to June 30, 2014.  As of June 30, 2014, approximately $0.57 million was unused and available.

 

As of June 30, 2014, LA GO GO had borrowed $3.25 million (RMB 20 million) from China Minsheng Bank, with annual interest rate of 6.3% and due in August 2014. This loan is guaranteed by Ever-Glory Apparel and Mr. Kang.

 

As of June 30, 2014, Ever-Glory Apparel had borrowed $2.68 million from Ping An Bank, with annual interest rate of 3.9% and due on various dates from July to September 2014, and collateralized by approximately $3.83 million of accounts receivable from wholesale customers. Approximately $1.0 million was repaid subsequent to June 30, 2014.

 

All bank loans are used to fund our daily operations.

 

 

Amounts due from related party

 

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of June 30, 2014 and December 31, 2013, Jiangsu Ever-Glory has provided guarantees for approximately $48.72 million (RMB 300 million) and $43.69 million (RMB 269 million) of lines of credit obtained by the Company. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $16.72 million (RMB 103 million) as of June 30, 2014 and December 31, 2013. Mr. Kang has also provided a personal guarantee for $30.5 million (RMB 188 million). During six months ended June 30, 2014, an additional $5.03 million (RMB 31 million) was provided and approximately $1.30 million (RMB 8 million) of interest income was received under the counter-guarantee agreement. As of June 30, 2014, the amount of the counter-guarantee was $21.7 million (RMB 134 million) (the difference represents currency exchange adjustment of $0.12 million), which was 44.54% of the aggregate amount of lines of credit. This amount plus accrued interest of $1.50 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G.

 

Shanghai Weiwen Fashion Company Ltd. (Shanghai Weiwen) was incorporated in the PRC in 2012. This company designs and sells women’s apparel utilizing the “Velwin” brand. Shanghai Weiwen is owned by Mr. Kang. Shanghai Ya Lan entered an agreement with Shanghai Weiwen in April 2014 to purchase the “Velwin” brand along with existing inventory of Shanghai Weiwen. No customer relationships, production facilities or other operating assets were acquired. Management of the Company believes that this asset purchase will provide the Company with additional multi-brand advantages. The purchase price of the inventory and brand was approximately $2.44 million. The purchase price was based primarily on the estimated fair market value of the inventory.

Shanghai Sea to Sky Fashion Company Ltd. (Shanghai Sea to Sky) was incorporated in the PRC in 2012. This company designs and sells women’s apparel utilizing the “Sea to Sky” brand. Shanghai Sea to Sky is owned by Mr. Kang. Shanghai LA GO GO entered an agreement with Shanghai Sea to Sky in April 2014 to purchase the “Sea to Sky” brand along with existing inventory of Shanghai Sea to Sky. No customer relationships, production facilities or other operating assets were acquired. Management of the Company believes that this asset purchase will provide the Company with additional multi-brand advantage. The purchase price of the inventory and brand was approximately $0.39 million. The purchase price was based primarily on the estimated fair market value of the inventory. 

Capital Commitments

 

We have a continuing program for the purpose of improving our manufacturing facilities and extending our LA GO GO stores. We anticipate that cash flows from operations and borrowings from banks will be used to pay for these capital commitments.

 

Uses of Liquidity

 

Our cash requirements for the next twelve months will be primarily to fund daily operations and the growth of our business, some of this being used to fund new stores.

 

Sources of Liquidity

 

Our primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, and cash equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.

 

We believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our needs for working capital, capital expenditure and other commitments for the next twelve months. No assurance can be made that additional financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our own cash flows from operations.

 

As of June 30, 2014, we had access to $70.2 million in lines of credit, of which $20.7 million was unused and is currently available. These credit facilities do not include any covenants.

 

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 of foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in United States (U.S.) dollars. During 2003 and 2004 the exchange rate of RMB to the U.S. dollar remained constant at 8.26 RMB to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from 8.26 to 8.09 RMB to the U.S. dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2014, the foreign exchange rate had increased to 6.16 RMB 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 we will pass some of the increased cost to our customers.

 

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, Shanghai LA GO GO, Tianjin LA GO GO, Shanghai Yalan, He meida and Jiangsu LA GO GO (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expense items are translated at the average exchange rate for the period. All exchange differences are recorded within equity. The foreign currency translation gain (loss) for the three and six months ended June 30, 2014 and 2013 was $356,057, $(343,382), $850,555, $1,158,392, respectively.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, bank loans and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less from the date of purchase to be cash equivalents.

 

Interest Rates: Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. On June 30, 2014, we had $25.0 million in cash and cash equivalents. A hypothetical 5% increase or decrease in either the short term or long term interest rates would not have any material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

 

Foreign Exchange Rates: We pay our suppliers and employees in Chinese RMB, however, most of our wholesales customers are located in the U.S., Japan and Europe and we generate sales from them in U.S. Dollars, Euros and British Pounds. Accordingly, our business has substantial exposure to changes in exchange rates between and among the Chinese RMB, the U.S. Dollar, the Euro and the British Pound. In the last decade, the RMB has been pegged at 8.26 RMB to one U.S. Dollar. On July 21, 2005 it was revalued to 8.09 per U.S. Dollar. Following the removal of the peg to the U.S. Dollar and pressure from the United States, the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. Dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. Dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. Dollar and the Euro. On June 30, 2014, the exchange rate between the RMB and U.S. Dollar was 6.16 RMB to one U.S. Dollar. For additional discussion regarding our foreign currency risk, see the section titled Risk Factors in the Annual Report on Form 10-K for fiscal year ended on December 31, 2013. Fluctuation in the value of Chinese RMB relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Evaluation of Disclosure Controls and Procedures. As of June 30, 2014, the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of June 30, 2014. Our disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting” section in Item 9 of our annual report for fiscal year ended December 31, 2013. As of June 30, 2014, we had not completed the remediation of these material weaknesses.

 

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

 

Changes in Internal Control over Financial Reporting

 

Our management has worked, and will continue to work to improve our internal controls over financial reporting. During the three months ended June 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

There has been no material change in the information provided in Item 1A of Form 10-K Annual Report for the year ended December 31, 2013 filed with the SEC on April 14, 2014.

 

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

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

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

 

* Filed herein

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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 14, 2014	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)

 

 

32