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, 2021 should be read in conjunction with
the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions.
Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result
of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this
report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” “target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our Business
We are a retailer of branded fashion apparel and
leading global apparel supply chain solution provider based in China. We are listed on the NASDAQ Global Market under the symbol of “EVK”.
We classify our businesses into two segments:
Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to domestically and international recognized
brands, and department stores located throughout Europe, the U.S., Japan and the People’s Republic of China (“PRC”).
We focus on well-known, middle-to-high end casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel
sales directly to consumers through retail stores located throughout the PRC as well as sales via online stores at Tmall, Dangdang mall,
JD.com, VIP.com and etc.
Although we have our own manufacturing facilities,
we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing
allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled
workers on production lines during slow seasons. We oversee our long-term contractors with our advanced management solutions and inspect
products manufactured by them to ensure that they meet our high-quality control standards and timely delivery requirement.
Wholesale Business
We conduct our original design manufacturing (“ODM”)
operations through seven wholly owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone
and Shang Fang Town in the Jiangning District in Nanjing, Jiangsu province, China, Chuzhou, Anhui province, China and Samoa: Ever-Glory
International Group Apparel Inc. (“Ever-Glory Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”),
Nanjing New-Tailun Garments Company Limited (“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”),
Chuzhou Huirui Garments Co., Ltd. (“Huirui), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), Haian Tai
Xin Garments Trading Company Limited (“Haian Tai Xin”), Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”),
Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory
HK”).
Retail Business
We conduct our retail operations through Shanghai
LA GO GO Fashion Company Limited (“LA GO GO”), Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”),
Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”),
Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and Xizang He Meida Trading Company Limited (“He Meida”).
He Media was closed in April 2021.
Shanghai Yiduo Fashion Company Limited, the only
then subsidiary with non-controlling interests, was deconsolidated from the financial statements as of December 31, 2020 as a result of
bankruptcy liquidation.
Business Objectives
Wholesale Business
We believe the enduring strength of our wholesale
business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and
quality. We maintain long-term, satisfactory relationships with a portfolio of well-known and mid-class global brands.
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:
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Expanding our global sourcing network;
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Expanding our overseas low-cost manufacturing base (outside of mainland China);
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Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel;
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Continuing to emphasize product design and technology utilization;
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Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
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Maintaining stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.
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Retail Business
The business objectives for our retail segment
are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of June 30, 2021, we had
931 stores (including store-in-stores), which includes 52 stores that were opened and 57 stores that were closed in the first half year
of 2021. We expect to increase an additional 50 to 100 stores in 2021.
We believe that our growth opportunities and continued
investment initiatives include:
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Building our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
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Expanding our retail network throughout China;
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Improving our retail stores’ efficiency and increasing same-store sales;
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Continuing to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities; and
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Taking advantage of our position as a multi-brand operator.
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Partnership Investment
The Company had idle cash and cash equivalent
in operation. In order to realize the capital preservation and appreciation, Ever-Glory Apparel invested in a Partnership in August 2020.
As a limited partner of the Partnership, Ever-Glory Apparel does not have the right to kick-out and appointment of general manager. Therefore,
Ever-Glory does not have ability to exercise significant influence. In the meantime, the Company entered an agreement with the GP and
an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration
of the average net asset value ten days prior to the closing date, if the Company is not able to withdraw any part of the original investment
from the Partnership during the optional withdrawal period. If the Company opts to withdraw entire investment during the optional withdrawal
period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion
of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual.
The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the
GP and the individual is in place. In December 2020, the Partnership invested in a public company in China.
Seasonality of Business
Our business is affected by seasonal trends, with
higher levels of wholesale sales in our third and fourth quarters and higher retail sales in our first and fourth quarters. These trends
primarily result from the timing of seasonal wholesale shipments and holiday periods in the retail segment.
Collection Policy
Wholesale business
For our new customers, we generally require orders
placed to be backed by letters of credit. For our long-term and established customers with good payment track records, we generally provide
payment terms between 30 to 180 days following the delivery of finished goods.
Retail business
For store-in-store shops, we generally receive
payments from the stores between 60 to 90 days following the date of the register receipt. For our own flagship stores, we receive payments
on the same day of the register receipt. For sales from e-commerce platforms such as Tmall, Dangdang mall, JD.com, VIP.com and etc., we
generally receive payments between 5 to 15 days following the date of the register receipt.
Global Economic Uncertainty
Our business is dependent on consumer demand for
our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and
Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the
global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth
and operating margins in our wholesale segment in 2020 and 2021.
In addition, economic conditions in the United
States and other foreign markets in which we operate could substantially affect our sales profitability, cash position and collection
of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit
and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash
flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections
from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be
allowed for or written off in the coming quarters.
Our results of operations could be adversely affected
by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety
concerns from the outbreak of COVID-19. The outbreak in China resulted in the reduction of customer traffic and temporary closures of
shopping malls as mandated by the provincial governments in various provinces of China from late January to March, which had adversely
affected our retail business with a decline in sales since February 2020. Our wholesale business was also significantly affected as we
were facing a sharp decline in our order quantities. Some of our wholesale clients had also cancelled or postponed existing orders. Due
to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions
in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions
from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences,
or restrictions on the shipment of our or our suppliers’ or customers’ products, could have adverse ripple effects on our
manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19
on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic,
and labor instability in the countries and localities in which we or our suppliers and customers operate.
Although China has already begun to recover from
the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China
in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19
may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing
our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction
resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. If our future sales continue
to decline significantly, we may risk facing bankruptcy due to our recurring fixed expenses. The extent to which COVID-19 impacts our
results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations
which may emerge to contain the virus, among others.
Despite the various risks and uncertainties associated
with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable
growth in revenue, net income and operating cash flow.
Summary of Critical Accounting Policies
We have identified critical accounting policies
that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved
could result in material changes to our financial position or results of operations under different conditions or using different assumptions.
The Company uses the same accounting policies
in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated
financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2020 filed with the SEC on March 30, 2021 (“2020 Form 10-K.”)
Estimates and Assumptions
In preparing our condensed consolidated financial
statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex
judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are
also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in
2021 and 2020 include the assumptions used to value tax liabilities, the estimates of the allowance for deferred tax assets, and
the accounts receivable allowance, and impairment of long-lived assets and inventory write-offs.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 ”Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB
issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”;
which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and
interim periods within those years beginning after December 15, 2022. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.
The Company reviews new accounting standards as
issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated
financial statements.
Results of Operations for the three months
ended June 30, 2021 and 2020
The following table summarizes our results of
operations for the three months ended June 30, 2021 and 2020. The table and the discussion below should be read in conjunction with our
condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.
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Three Months Ended June 30,
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2021
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2020
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(In
thousands of U.S. dollars, except for percentages)
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Sales
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$
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60,555
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100.0
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%
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$
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50,086
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100.0
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%
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|
Gross Profit
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$
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18,392
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30.4
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%
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$
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14,445
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28.8
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%
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Operating Expense
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$
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22,165
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36.6
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%
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$
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18,597
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37.1
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%
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Loss From Operations
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$
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(3,773
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)
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(6.2
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)%
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$
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(4,152
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)
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(8.3
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)%
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Other Income
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$
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3,088
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5.1
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%
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$
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618
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|
1.2
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%
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|
Income tax expense
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$
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1,086
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1.8
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%
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$
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266
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|
0.5
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%
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|
Net Loss
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$
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(1,771
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)
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(2.9
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)%
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$
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(3,800
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)
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(7.6
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)%
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Revenue
The following table sets forth a breakdown of
our total sales, by region, for the three months ended June 30, 2021 and 2020.
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2021
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2020
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Growth (Decrease)
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Wholesale business
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(In thousands of U.S. dollars)
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% of
total sales
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(In thousands of U.S. dollars)
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% of
total sales
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in 2021 compared
with 2020
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Mainland China
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$
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4,356
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7.2
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%
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|
$
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3,111
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6.2
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%
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40.1
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%
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|
Hong Kong China
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2,914
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|
4.8
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|
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|
2,054
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4.1
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|
|
|
41.9
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|
United Kingdom
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|
2,485
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|
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|
4.1
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|
|
|
471
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|
|
|
0.9
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|
|
|
427.6
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|
Europe-Other
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|
5,913
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|
|
|
9.8
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|
|
|
3,660
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|
|
|
7.3
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|
|
|
61.6
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|
Japan
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1,550
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|
|
|
2.6
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|
|
|
2,205
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|
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|
4.4
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|
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|
(29.7
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)
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|
United States
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|
|
9,209
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|
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|
15.2
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|
10,549
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|
21.1
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|
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|
(12.7
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)
|
|
Total Wholesale business
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|
26,427
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|
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|
43.6
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|
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|
22,049
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|
44.0
|
|
|
|
19.9
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|
|
Retail business
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|
34,128
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|
|
|
56.4
|
|
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|
28,037
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|
|
|
56.0
|
|
|
|
21.7
|
|
|
Total sales
|
|
$
|
60,555
|
|
|
|
100.0
|
%
|
|
$
|
50,086
|
|
|
|
100.0
|
%
|
|
|
20.9
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%
|
Sales for the three months ended June 30, 2021
were $60.6 million, a 20.9% increase compared with the three months ended June 30, 2020. This increase was primarily attributable to a
21.7% increase in sales in our retail business and a 19.9% increase in our wholesale business.
Sales generated from our wholesale business contributed
43.6% or $26.4 million of our total sales for the three months ended June 30, 2021, a 19.9% increase compared with 44.0% or $22.0 million
in the three months ended June 30, 2020. This increase was primarily attributable to an increase in sales in Mainland China, Hong Kong,
United Kingdom and Europe-Other partially offset by a decrease in sales in Japan and United States.
Sales generated from our retail business contributed
56.4% or $34.1 million of our total sales for the three months ended June 30, 2021, a 21.7% increase compared with 56.0% or $28.0 million
in the three months ended June 30, 2020. This increase was primarily due to the increased same store sales.
Costs and Expenses
Cost of Sales and Gross Margin
Cost of goods sold includes the direct raw material
cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue
earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.
The following table sets forth the components
of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended June 30, 2021 and
2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
|
|
|
|
|
Three months ended June 30,
|
|
|
2021
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Compared
|
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
with 2020
|
|
|
Net Sales for Wholesale Sales
|
|
$
|
26,427
|
|
|
|
100.0
|
%
|
|
$
|
22,049
|
|
|
|
100.0
|
%
|
|
|
19.9
|
%
|
|
Raw Materials
|
|
|
11,407
|
|
|
|
43.2
|
|
|
|
8,614
|
|
|
|
39.1
|
|
|
|
32.4
|
|
|
Labor
|
|
|
386
|
|
|
|
1.4
|
|
|
|
299
|
|
|
|
1.4
|
|
|
|
29.2
|
|
|
Outsourced Production Costs
|
|
|
10,943
|
|
|
|
41.4
|
|
|
|
8,623
|
|
|
|
39.1
|
|
|
|
26.9
|
|
|
Other and Overhead
|
|
|
95
|
|
|
|
0.4
|
|
|
|
152
|
|
|
|
0.7
|
|
|
|
(37.5
|
)
|
|
Total Cost of Sales for Wholesale
|
|
|
22,831
|
|
|
|
86.4
|
|
|
|
17,688
|
|
|
|
80.3
|
|
|
|
29.1
|
|
|
Gross Profit for Wholesale
|
|
|
3,596
|
|
|
|
13.6
|
|
|
|
4,361
|
|
|
|
19.7
|
|
|
|
(17.5
|
)
|
|
Net Sales for Retail
|
|
|
34,128
|
|
|
|
100.0
|
|
|
|
28,037
|
|
|
|
100.0
|
|
|
|
21.7
|
|
|
Production Costs
|
|
|
13,390
|
|
|
|
39.2
|
|
|
|
13,865
|
|
|
|
49.5
|
|
|
|
(3.4
|
)
|
|
Rent
|
|
|
5,942
|
|
|
|
17.4
|
|
|
|
4,088
|
|
|
|
14.3
|
|
|
|
45.4
|
|
|
Total Cost of Sales for Retail
|
|
|
19,332
|
|
|
|
56.6
|
|
|
|
17,953
|
|
|
|
63.8
|
|
|
|
7.7
|
|
|
Gross Profit for Retail
|
|
|
14,796
|
|
|
|
43.4
|
|
|
|
10,084
|
|
|
|
36.2
|
|
|
|
46.7
|
|
|
Total Cost of Sales
|
|
|
42,163
|
|
|
|
69.6
|
|
|
|
35,641
|
|
|
|
71.2
|
|
|
|
18.3
|
|
|
Gross Profit
|
|
$
|
18,392
|
|
|
|
30.4
|
%
|
|
$
|
14,445
|
|
|
|
28.8
|
%
|
|
|
27.3
|
%
|
Raw material costs for our wholesale business
were 43.2% of our total wholesale business sales in the three months ended June 30, 2021, compared with 39.1% in the three months ended
June 30, 2020. The increase was mainly due to higher raw material prices.
Labor costs for our wholesale business were 1.4%
of our total wholesale business sales in the three months ended June 30, 2021, compared with 1.4% in the three months ended June 30, 2020.
Outsourced production costs for our
wholesale business for the three months ended June 30, 2021 increased by 26.9% to $10.9 million from $8.6 million for the three
months ended June 30, 2020. Outsourced production costs accounted for 41.4% of our total wholesale business sales in the three
months ended June 30, 2021, compare with 39.1% in the three months ended June 30, 2020. This increase in percentage was primarily
attributable to higher average employee salaries at our outsourced manufacturing factories.
Overhead and other expenses for our wholesale
business accounted for 0.4% of our total wholesale business sales for the three months ended June 30, 2021, compared with 0.7% of total
wholesale business sales for the three months ended June 30, 2020.
Wholesale business gross profit for the three
months ended June 30, 2021 was $3.6 million compared with $4.4 million for the three months ended June 30, 2020. Gross profit accounted
for 13.6% of our total wholesale sales for the three months ended June 30, 2021, compared with 19.7% for the three months ended June 30,
2020. The decrease was mainly due to raw material price and higher outsourced production costs.
Production costs for our retail business were
$13.4 million for the three months ended June 30, 2021 compared with $13.9 million during the three months ended June 30, 2020. Retail
production costs accounted for 39.2% of our total retail sales in the three months ended June 30, 2021, compared with 49.5% for the three
months ended June 30, 2020. The decrease in percentage was due to higher discount rate in 2020 because of COVID-19.
Rent costs for our retail business for the three
months ended June 30, 2021 were $5.9 million compared with $4.1 million for the three months ended June 30, 2020. Rent costs for our retail
business accounted for 17.4% of our total retail sales for the three months ended June 30, 2021, compared with 14.3% for the three months
ended June 30, 2020. The increase was primarily attributable to the rent reduction in 2020 for the influence of COVID-19.
Gross profit in our retail business for the three
months ended June 30, 2021 was $14.8 million and gross margin was 43.4%. Gross profit in our retail business for the three months ended
June 30, 2020 was $10.1 million and gross margin was 36.2%.
Total cost of sales for the three months ended
June 30, 2021 was $42.2 million, a 18.3% increase from $35.6 million for the three months ended June 30, 2020. Total cost of sales as
a percentage of total sales for the three months ended June 30, 2021 was 69.6%, compared with 71.2% for the three months ended June 30,
2020. Gross margin for the three months ended June 30, 2021 was 30.4% compared with 28.8% for the three months ended June 30, 2020.
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local
transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated
with our retail business.
Our general and administrative expenses include
administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional
fees, warehousing costs and other expenses that are not directly attributable to our revenues.
Costs of our distribution network that are excluded
from cost of sales consist of local transportation and unloading charges and product inspection charges. Accordingly, our gross profit
amounts may not be comparable to those of other companies who include these amounts in cost of sales.
|
|
|
Three Months Ended June 30,
|
|
|
Increase (Decrease) in 2021
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Compared
|
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
to 2020
|
|
|
Gross Profit
|
|
$
|
18,392
|
|
|
|
30.4
|
%
|
|
$
|
14,445
|
|
|
|
28.8
|
%
|
|
|
27.3
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
14,503
|
|
|
|
24.0
|
|
|
|
12,626
|
|
|
|
25.2
|
|
|
|
14.9
|
|
|
General and Administrative Expenses
|
|
|
7,662
|
|
|
|
12.7
|
|
|
|
5,971
|
|
|
|
11.9
|
|
|
|
28.3
|
|
|
Total
|
|
|
22,165
|
|
|
|
36.6
|
|
|
|
18,597
|
|
|
|
37.1
|
|
|
|
19.2
|
|
|
Loss from Operations
|
|
$
|
(3,773
|
)
|
|
|
(6.2
|
)%
|
|
$
|
(4,152
|
)
|
|
|
(8.3
|
)%
|
|
|
(9.1
|
)%
|
Selling expenses for the three months ended
June 30, 2021 increased by 14.9% to $14.5 million from $12.6 million for the three months ended June 30, 2020. The increase was
attributable to the increased marketing expenses associated with the promotion of the retail brand.
General and administrative expenses for the
three months ended June 30, 2021 increased by 28.3% to $7.7 million from $6.0 million for the three months ended June 30, 2020. The
increase was attributable to the decreased
business trip and the exemption of social benefits by the PRC government in 2020.
Loss from Operations
Loss from operations for the three months ended
June 30, 2021 was $3.7 million, a decrease of 9.1% from $4.2 million of income for the three months ended June 30, 2020. Loss from operations
for the three months ended June 30, 2021 accounted for 6.2% of our total sales, while the three months ended June 30, 2020 accounted for
8.3% of our total sales.
Interest Expense
Interest expense for the three months ended June
30, 2021 was $0.2 million, while interest expense was $0.6 million for the three months ended June 30, 2020. The decrease was due to the
decreased bank loans rate.
Income Tax Expenses
Income tax expense was $1.1 million and $0.3 million
for the three months ended June 30, 2021 and 2020, respectively.
The Company’s operating subsidiaries are
governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax
laws (“the Income Tax Laws”).
All PRC subsidiaries, except for He Meida, are
subject to income tax at the 25% statutory rate.
He Meida incorporated in Xizang (Tibet) Autonomous
Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid
through December 31, 2020. He Meida was closed in April 2021.
Perfect Dream was incorporated in the British
Virgin Islands (BVI), and under the current laws of the BVI, dividends and capital gains arising from the Company’s investments
in the BVI are not subject to income taxes.
Ever-Glory HK was incorporated in Samoa, and under
the current laws of Samoa, has no liabilities for income taxes.
Ever-Glory Supply Chain Service Co., Limited was
incorporated in Hongkong, and under the current laws of Hongkong, are subject to income tax at the 16.5% statutory rate.
The PRC’s Enterprise Income Tax Law imposes
a 10% withholding income tax for dividends distributed by a foreign invested enterprise in PRC to its immediate holding company outside
China; such distributions were exempted under the previous income tax law and regulations. A lower withholding tax rate will be applied
if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. The foreign invested
enterprise became subject to the withholding tax starting from January 1, 2008. Given that the undistributed profits of the Company’s
subsidiaries in China are intended to be retained in China for business development and expansion purposes, no withholding tax accrual
has been made.
Net Loss
Net loss for the three months ended June 30, 2021
was $1.8 million, and net loss for the three months ended June 30, 2020 was $3.8 million.
Results of Operations for the six months ended
June 30, 2021 and 2020
The following table summarizes our results of
operations for the six months ended June 30, 2021 and 2020. The table and the discussion below should be read in conjunction with the
consolidated financial statements and the notes thereto appearing elsewhere in this report.
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands of U.S. Dollars, except for percentages)
|
|
|
Sales
|
|
$
|
131,369
|
|
|
|
100.0
|
%
|
|
$
|
108,441
|
|
|
|
100.0
|
%
|
|
Gross Profit
|
|
|
40,828
|
|
|
|
31.1
|
|
|
|
30,483
|
|
|
|
28.1
|
|
|
Operating Expense
|
|
|
45,565
|
|
|
|
34.7
|
|
|
|
37,860
|
|
|
|
34.9
|
|
|
(Loss) Income From Operations
|
|
|
(4,737
|
)
|
|
|
(3.6
|
)
|
|
|
(7,377
|
)
|
|
|
(6.8
|
)
|
|
Other Income
|
|
|
3,611
|
|
|
|
2.7
|
|
|
|
1,372
|
|
|
|
1.3
|
|
|
Income tax expense
|
|
|
1,815
|
|
|
|
1.4
|
|
|
|
493
|
|
|
|
0.5
|
|
|
Net (Loss) Income
|
|
$
|
(2,941
|
)
|
|
|
(2.2
|
)%
|
|
$
|
(6,498
|
)
|
|
|
(6.0
|
)%
|
Revenue
The following table sets forth a breakdown of
our total sales, by region, for the six months ended June 30, 2021 and 2020.
|
|
|
2021
|
|
|
|
|
|
2020
|
|
|
|
|
|
Growth (Decrease)
|
|
|
Wholesale business
|
|
(In thousands of U.S. dollars)
|
|
|
% of total sales
|
|
|
(In thousands of U.S. dollars)
|
|
|
% of total sales
|
|
|
in 2021 compared
with 2020
|
|
|
Mainland China
|
|
$
|
11,846
|
|
|
|
9.0
|
%
|
|
$
|
7,764
|
|
|
|
7.2
|
%
|
|
|
52.6
|
%
|
|
Hong Kong China
|
|
|
6,971
|
|
|
|
5.3
|
|
|
|
5,045
|
|
|
|
4.7
|
|
|
|
38.2
|
|
|
United Kingdom
|
|
|
3,538
|
|
|
|
2.7
|
|
|
|
1,309
|
|
|
|
1.2
|
|
|
|
170.3
|
|
|
Europe-Other
|
|
|
10,059
|
|
|
|
7.7
|
|
|
|
7,754
|
|
|
|
7.1
|
|
|
|
29.7
|
|
|
Japan
|
|
|
4,955
|
|
|
|
3.8
|
|
|
|
6,589
|
|
|
|
6.1
|
|
|
|
(24.8
|
)
|
|
United States
|
|
|
12,277
|
|
|
|
9.3
|
|
|
|
15,876
|
|
|
|
14.6
|
|
|
|
(22.7
|
)
|
|
Total Wholesale business
|
|
|
49,646
|
|
|
|
37.8
|
|
|
|
44,337
|
|
|
|
40.9
|
|
|
|
12.0
|
|
|
Retail business
|
|
|
81,723
|
|
|
|
62.2
|
|
|
|
64,104
|
|
|
|
59.1
|
|
|
|
27.5
|
|
|
Total sales
|
|
$
|
131,369
|
|
|
|
100.0
|
%
|
|
$
|
108,441
|
|
|
|
100.0
|
%
|
|
|
21.1
|
%
|
Sales for the six months ended June 30, 2020 were
$131.4 million, an increase of 21.1% from the six months ended June 30, 2020. This increase was primarily attributable to a 12.0% increase
in sales in our wholesale business and a 27.5% increase in our retail business.
Sales generated from our wholesale business contributed
37.8% or $49.6 million of our total sales for the six months ended June 30, 2021, an increase of 12.0% compared with 40.9% or $44.3 million
in the six months ended June 30, 2020. This increase was primarily attributable to increased sales in Mainland China, Hong Kong China,
United Kingdom and Europe-Other, partially offset by decreased sales in Japan and United States.
Sales generated from our retail business contributed
62.2% or $81.7 million of our total sales for the six months ended June 30, 2021, an increase of 27.5% compared with 59.1% or $64.1 million
in the six months ended June 30, 2020. This increase was primarily due to an increase in same store sales.
Total retail store square footage and sales per
square foot for the six months ended June 30, 2021 and 2020 are as follows:
|
|
|
2021
|
|
|
2020
|
|
|
Total store square footage
|
|
|
1,011,506
|
|
|
|
989,034
|
|
|
Number of stores
|
|
|
931
|
|
|
|
935
|
|
|
Average store size, square feet
|
|
|
1,086
|
|
|
|
1,058
|
|
|
Total store sales (in thousands of U.S. dollars)
|
|
$
|
81,723
|
|
|
$
|
64,104
|
|
|
Sales per square foot
|
|
$
|
81
|
|
|
$
|
65
|
|
Same store sales and newly opened store sales
for the six months ended June 30, 2021 and 2020 are as follows:
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Sales from stores opened for a full year
|
|
$
|
62,067
|
|
|
$
|
43,678
|
|
|
Sales from newly opened store sales
|
|
$
|
7,566
|
|
|
$
|
4,636
|
|
|
Sales from e-commerce platform
|
|
$
|
6,649
|
|
|
$
|
7,822
|
|
|
Other*
|
|
$
|
5,441
|
|
|
$
|
7,968
|
|
|
Total
|
|
$
|
81,723
|
|
|
$
|
64,104
|
|
|
|
*
|
Primarily sales from stores that were closed in the current reporting period.
|
We remodeled or relocated 54 stores in year 2020,
and 66 stores during the six months ended June 30, 2021. We plan to relocate or remodel 50 to 100 stores in 2021. Remodels and relocations
typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location,
and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations
beyond 2021. Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting
period and remain open at the end of each reporting period.
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, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
|
|
|
|
|
Six months ended June 30,
|
|
|
2021
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Compared
|
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
with 2020
|
|
|
Net Sales for Wholesale Sales
|
|
$
|
49,646
|
|
|
|
100.0
|
%
|
|
$
|
44,337
|
|
|
|
100.0
|
%
|
|
|
12.0
|
%
|
|
Raw Materials
|
|
|
21,793
|
|
|
|
43.9
|
|
|
|
18,704
|
|
|
|
42.2
|
|
|
|
16.5
|
|
|
Labor
|
|
|
719
|
|
|
|
1.4
|
|
|
|
544
|
|
|
|
1.2
|
|
|
|
32.3
|
|
|
Outsourced Production Costs
|
|
|
18,776
|
|
|
|
37.8
|
|
|
|
16,993
|
|
|
|
38.3
|
|
|
|
10.5
|
|
|
Other and Overhead
|
|
|
200
|
|
|
|
0.4
|
|
|
|
238
|
|
|
|
0.5
|
|
|
|
(16.1
|
)
|
|
Total Cost of Sales for Wholesale
|
|
|
41,488
|
|
|
|
83.6
|
|
|
|
36,479
|
|
|
|
82.2
|
|
|
|
13.7
|
|
|
Gross Profit for Wholesale
|
|
|
8,158
|
|
|
|
16.4
|
|
|
|
7,858
|
|
|
|
17.8
|
|
|
|
3.8
|
|
|
Net Sales for Retail
|
|
|
81,723
|
|
|
|
100.0
|
|
|
|
64,104
|
|
|
|
100.0
|
|
|
|
27.5
|
|
|
Production Costs
|
|
|
33,151
|
|
|
|
40.6
|
|
|
|
29,712
|
|
|
|
46.3
|
|
|
|
11.6
|
|
|
Rent
|
|
|
15,902
|
|
|
|
19.5
|
|
|
|
11,767
|
|
|
|
18.4
|
|
|
|
35.1
|
|
|
Total Cost of Sales for Retail
|
|
|
49,053
|
|
|
|
60.0
|
|
|
|
41,479
|
|
|
|
64.7
|
|
|
|
18.3
|
|
|
Gross Profit for Retail
|
|
|
32,670
|
|
|
|
40.0
|
|
|
|
22,625
|
|
|
|
35.3
|
|
|
|
44.4
|
|
|
Total Cost of Sales
|
|
|
90,541
|
|
|
|
68.9
|
|
|
|
77,958
|
|
|
|
71.9
|
|
|
|
16.1
|
|
|
Gross Profit
|
|
$
|
40,828
|
|
|
|
31.1
|
%
|
|
$
|
30,483
|
|
|
|
28.1
|
%
|
|
|
33.9
|
%
|
Raw material costs for our wholesale business
were 43.9% of our total wholesale business sales in the six months ended June 30, 2021, compared with 42.2% in the six months ended June
30, 2020. The increase was mainly due to higher cost of raw materials.
Labor costs for our wholesale business were 1.4%
of our total wholesale business sales in the six months ended June 30, 2021, compared with 1.2% in the six months ended June 30, 2020.
The marginal increase was mainly due to a higher average employee salaries in 2021.
Outsourced production costs for our wholesale
business were 37.8% of our total sales in the six months ended June 30, 2021, compared with 38.3% in the six months ended June 30, 2020.
The increase in amounts was primarily attributable to higher average employee salaries at 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, 2021 and 2020, respectively.
Gross profit for our wholesale business for the
six months ended June 30, 2021 was $8.2 million, a 3.8% increase compared with the six months ended June 30, 2020. As a percentage of
total wholesale business sales, gross profit was 16.4% of our total wholesale business sales for the six months ended June 30, 2021, compared
with 17.8% for the six months ended June 30, 2020. The decrease in percentage was mainly due to higher average employee salaries.
Production costs for our retail business for the
six months ended June 30, 2021 were $33.2 million compared with $29.7 million for the six months ended June 30, 2020. As a percentage
of our total retail sales, production costs were 40.6% of our total retail sales for the six months ended June 30, 2021, compared with
46.3% for the six months ended June 30, 2020. The decrease in percentage was due to higher discount rate in 2020 because of COVID-19.
Rent costs for our retail business for the six
months ended June 30, 2021 were $15.9 million compared with $11.8 million for the six months ended June 30, 2020. As a percentage of total
retail sales, rent costs were 19.5% of our total retail sales for the six months ended June 30, 2021 compared with 18.4% for the six months
ended June 30, 2020. The increase in percentage was primarily attributable to the rent reduction in 2020 for the influence of COVID-19.
Gross profit for our retail business for the six
months ended June 30, 2021 was $32.7 million compared with $22.6 million for the six months ended June 30, 2020. Gross margin for our
retail business for the six months ended June 30, 2021 was 40.0% compared with 35.3% for the six months ended June 30, 2020.
Total cost of sales for the six months ended June
30, 2021 was $90.5 million, a 16.1% increase compared with the six months ended June 30, 2020. As a percentage of total sales, total costs
were 68.9% of total sales for the six months ended June 30, 2021, compared with 71.9% for the six months ended June 30, 2020. Total gross
margin for the six months ended June 30, 2021 was 31.1% compared with 28.1% for the six months ended June 30, 2020.
Selling, General and Administrative Expenses
Our selling expenses consist primarily of local
transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated
with our retail business.
Our general and administrative expenses include
administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional
fees, warehousing costs and other expenses that are not directly attributable to our revenues.
Costs of our distribution network that are excluded
from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly, our gross profit
amounts may not be comparable to those of other companies who include these amounts in costs of sales.
|
|
|
Six months ended June 30,
|
|
|
Increase (Decrease) in 2021
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Compared
|
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
to 2020
|
|
|
Gross Profit
|
|
$
|
40,828
|
|
|
|
31.1
|
%
|
|
$
|
30,483
|
|
|
|
28.1
|
%
|
|
|
33.9
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
30,052
|
|
|
|
22.9
|
|
|
|
26,105
|
|
|
|
24.1
|
|
|
|
15.1
|
|
|
General and Administrative Expenses
|
|
|
15,513
|
|
|
|
11.8
|
|
|
|
11,755
|
|
|
|
10.8
|
|
|
|
32.0
|
|
|
Total
|
|
|
45,565
|
|
|
|
34.7
|
|
|
|
37,860
|
|
|
|
34.9
|
|
|
|
20.3
|
|
|
Loss from Operations
|
|
$
|
(4,737
|
)
|
|
|
(3.6
|
)%
|
|
$
|
(7,377
|
)
|
|
|
(6.8
|
)%
|
|
|
(35.8
|
)%
|
Selling expenses for the six months ended June
30, 2021 were $30.1 million, a 15.1% increase compared with the six months ended June 30, 2020. The increase was attributable to the marketing
expenses associated with the promotion of the retail brand.
General and administrative expenses for the
six months ended June 30, 2021 were $15.5 million a 32.0% increase compared with the six months ended June 30, 2020. As a percentage
of total sales, general and administrative expenses accounted for 11.8% of total sales for the six months ended June 30, 2021,
compared with 10.8% of total sales for the six months ended June 30, 2020. The increase in amounts was attributable to the decreased
business trip and the exemption of social benefits by the PRC government in 2020.
Loss from Operations
Loss from operations for the six months ended
June 30, 2021 was $4.7 million, a 35.8% decrease from $7.4 million of loss for the six months ended June 30, 2020.
Interest Expense
Interest expense was $0.7 million and $0.9 million
for the six months ended June 30, 2021 and 2020, respectively. The decrease was due to the decreased bank loans rate.
Income Tax Expense
Income tax expense for the six months ended June
30, 2021 was $1.8 million, a 268.5% increase compared to the same period of 2020. The increase was primarily due to the higher PRC income
which resulted in a higher income tax expense.
Net Loss
Net loss for the six months ended June 30, 2021
was $2.9 million, a decrease of 54.7% compared with $6.5 million of net loss from the same period in 2020. Basic and diluted loss per
share was $0.20 and $0.44 for the six months ended June 30, 2021 and 2020, respectively.
Summary of Cash Flows
Summary cash flows information for the
six months ended June 30, 2021 and 2020 is as follows:
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(10,488
|
)
|
|
$
|
17,041
|
|
|
Net cash used in investing activities
|
|
$
|
(5,920
|
)
|
|
$
|
(1,843
|
)
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(266
|
)
|
|
$
|
11,720
|
|
Net cash used in operating activities was $10.5
million for the six months ended June 30, 2021, compared with $17.0 million net cash provided by operating activities during the six months
ended June 30, 2020. The decrease was primarily due to a decrease in accounts payable.
Net cash used in investing activities was $5.9
million for the six months ended June 30, 2021, compared with $1.8 million used during the six months ended June 30, 2020. This increase
was mainly due to purchased more trading securities, and property and equipment.
Net cash used in financing activities was $0.3
million for the six months ended June 30, 2021, compared with $11.7 million net cash provided during the six months ended June 30, 2020.
During the six months ended June 30, 2021, we repaid $13.9 million of bank loans and received additional bank loan proceeds of $12.8 million.
Liquidity and Capital Resources
As of June 30, 2021, we had cash and cash equivalents
of $64.0 million, other current assets of $162.2 million and current liabilities of $177.3 million. We presently finance our operations
primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue to be our primary source
of funds to finance our short-term cash needs.
Bank Loans
In August 2020, Ever-Glory Apparel entered into
a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by
Goldenway. As of June 30, 2021, Ever-Glory Apparel had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual
interest 3.01% and due on September 2021. As of June 30, 2021, approximately $0.7 million was unused and available under this line of
credit.
From March 2020 to July 2020, Ever-Glory Apparel
entered into a deposit certificate of $27.8 million (RMB180.0 million) with the Shanghai Pudong Development Bank with
annual interest rates ranging from 3.75% to 3.99%. From July to November 2020, Ever-Glory Apparel pledged the deposit certificate to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $27.8 million (RMB 180.0 million) under this
line of certificate with an annual interest rate from 2.50% to 3.10% and due on between May 2021 and October 2021.
In December 2020, Goldenway entered into a deposit certificate of $13.9 million (RMB90.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of
3.85%. From November 2020 to February 2021, Goldenway pledged the deposit certificate to the Shanghai Pudong Development
Bank and Goldenway had borrowed $13.9 million (RMB 90.0 million) under this line of certificate with annual interest rate of 2.90% and
3.4%, due between December 2021 and February 2022.
In April 2020, Goldenway entered into a line of
credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.2 million (RMB40.0
million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2021, Goldenway had borrowed $6.2
million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due in August 2021.
In July 2019, Ever-Glory Apparel entered
into a line of credit agreement for approximately $15.5 million (RMB100.0 million) with Industrial and Commercial Bank of China,
which is collateralized by assets of Nanjing Knitting, an equity investee of Jiangsu Ever-Glory International Group Corp.
(“Jiangsu Ever-Glory”), under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank.
As of June 30, 2021, Ever-Glory Apparel had borrowed $12.4 million (RMB 80.0 million) under this line of credit with annual interest
rates ranging from 3.95% to 4.35% and due between August 2021 to March 2022. As of June 30, 2021, approximately $3.1 million was
unused and available under this line of credit.
In April 2020, Goldenway entered into a line of
credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $6.9 million (RMB45.0 million). These loans
are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the
Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment.
As of June 30, 2021, approximately $6.9 million was unused and available under this line of credit.
In June 2020, LA GO GO entered into a revolving
line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The
line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2021, LA GO GO had borrowed $2.3 million (RMB 15.0 million) under
this line of credit with annual interest 4.55% and due in September 2021. As of June 30, 2021, approximately $0.7 million was unused and
available under this line of credit.
In September 2019, Ever-Glory Apparel entered
into a line of credit agreement for approximately $9.3 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory,
Mr. Kang and Goldenway. As of June 30, 2021, approximately $9.3 million was unused and available under this line of credit.
In March 2021, Ever-Glory Apparel entered into
a line of credit agreement for approximately $4.6 million (RMB30.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory. These
loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed
by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of June 30, 2021, approximately $4.6 million was unused and available under
this line of credit.
In June 2021, Ever-Glory Apparel had borrowed
$0.5 million from Bank of Ningbo with annual interest 0.31% and due in July 2021.
All bank loans are used to fund our daily operations.
All loans have been repaid before or at maturity date.
Capital Commitments
We have a continuing program for the purpose of
improving our manufacturing facilities and extending our retail stores. We anticipate that cash flows from operations and borrowings from
banks will be used to pay for these capital commitments.
Uses of Liquidity
Our cash requirements for the next year will be
primarily to fund daily operations and the growth of our business, some of this being used to fund new stores.
Sources of Liquidity
Our primary sources of liquidity for our short-term
cash needs are expected to be from cash flows generated from operations, and cash equivalents currently on hand. We believe that we will
be able to borrow additional funds if necessary.
We believe our cash flows from operations together
with our cash and cash equivalents currently on hand will be sufficient to meet our needs for working capital, capital expenditure and
other commitments for the next year. No assurance can be made that additional financing will be available to us if required, and adequate
funds may not be available on terms acceptable to us. If funding is insufficient at any time in the future, we will develop or enhance
our products or services and expand our business through our own cash flows from operations.
As of June 30, 2021, we had access to approximately
$48 million in lines of credit, of which approximately $25.5 million was unused and available. These credit facilities do not include
any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of
credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee,
Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum
aggregate lines of credit and available borrowings was approximately $36.4 million (RMB 235 million) and approximately $2.3 million
(RMB 14.9 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of June 30, 2021.
Foreign Currency Translation Risk
Our operations are, for the most part, located
in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange
rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate
of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate
from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2021, the
market foreign exchange rate had increased to RMB 6.46 to one U.S. dollar. We are continuously negotiating price adjustments with most
of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations
in the future and will pass some of the increased cost to our customers.
In addition, the financial statements of subsidiaries
located in China (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items
are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated
at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average
exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity.
The foreign currency translation gain (loss) for the three and six months ended June 30, 2021 and 2020 was $3.4 million, ($0.3) million,
$2.1 million and ($1.7) million, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
