Ever-Glory International Group, Inc. - FORM 10-Q

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EX-32.2 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0917ex32-2_everglory.htm
EX-32.1 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0917ex32-1_everglory.htm
EX-31.2 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0917ex31-2_everglory.htm
EX-31.1 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0917ex31-1_everglory.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from ____________ to ____________

Commission file number: 0-28806

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

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

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

(8625) 5209-6831

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November 11, 2016, 14,795,992 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

INDEX

		Page Number

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	1

	Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	3

	Notes to the Condensed Consolidated Financial Statements (unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosure	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

SIGNATURES		30

Cautionary Note Regarding Forward-Looking Statements

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

	●	Competition within our industry;

	●	Seasonality of our sales;

	●	Success of our investments in new product development

	●	Our plans and ability to open new retail stores;

	●	Success of our acquired businesses;

	●	Our relationships with our major customers;

	●	The popularity of our products;

	●	Relationships with suppliers and cost of supplies;

	●	Financial and economic conditions in Asia, Japan, Europe and the U.S.;

	●	Anticipated effective tax rates in future years;

	●	Regulatory requirements affecting our business;

	●	Currency exchange rate fluctuations;

	●	Our future financing needs; and

	●	Our ability to obtain future financing on acceptable terms.

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

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

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

AS OF SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

	2017			2016

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	40,799		$	45,288
Accounts receivable, net		82,550			67,644
Inventories		50,116			49,630
Value added tax receivable		3,844			2,938
Other receivables and prepaid expenses		6,672			3,674
Advances on inventory purchases		4,927			3,139
Amounts due from related parties		934			486
Total Current Assets		189,842			172,799

INTANGIBLE ASSETS		5,881			5,769
PROPERTY AND EQUIPMENT, NET		23,815			22,694
TOTAL ASSETS	$	219,538		$	201,262

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Bank loans	$	44,937		$	29,232
Accounts payable		56,447			58,170
Accounts payable and other payables - related parties		4,660			4,337
Other payables and accrued liabilities		13,690			15,007
Value added and other taxes payable		2,728			5,118
Income tax payable		1,651			1,842
Total Current Liabilities		124,113			113,706

NONCURRENT LIABILITIES
Deferred tax liabilities		1,345			3,254
TOTAL LIABILITIES		125,458			116,960

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Stockholders’ equity:
Preferred stock ($.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)		-			-
Common stock ($.001 par value, authorized 50,000,000 shares, 14,792,836 and 14,787,940 shares issued and outstanding As of September 30, 2017 and December 31, 2016, respectively)		15			15
Additional paid-in capital		3,612			3,602
Retained earnings		90,318			83,423
Statutory reserve		17,107			17,107
Accumulated other comprehensive income		50			(3,297	)
Amounts due from related party		(15,999	)		(15,936	)
Total equity attributable to stockholders of the Company		95,103			84,914
Noncontrolling interest		(1,023	)		(612	)
Total Equity		94,080			84,302
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	219,538		$	201,262

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED)

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
NET SALES	$	120,257		$	109,926		$	285,148		$	282,295
COST OF SALES		87,007			80,312			192,740			197,623

GROSS PROFIT		33,250			29,614			92,408			84,672

OPERATING EXPENSES
Selling expenses		20,238			18,522			60,206			55,477
General and administrative expenses		10,167			9,862			24,900			24,128
Total Operating Expenses		30,405			28,384			85,106			79,605

INCOME FROM OPERATIONS		2,845			1,230			7,302			5,067

OTHER INCOME (EXPENSES)
Interest income		370			233			909			854
Interest expense		(562	)		(580	)		(1,207	)		(1,511	)
Other income		1,987			253			3,088			939
Total Other Income (Expenses)		1,795			(94	)		2,790			282

INCOME BEFORE INCOME TAX EXPENSE		4,640			1,136			10,092			5,349
Income tax expense		(1,522	)		(724	)		(3,573	)		(2,385	)

NET INCOME		3,118			412			6,519			2,964

Net loss attributable to the non-controlling interest		115			208			376			441
NET INCOME ATTRIBUTABLE TO THE COMPANY		3,233			620			6,895			3,405

NET INCOME	$	3,118		$	412		$	6,519		$	2,964

Foreign currency translation income(loss)		1,823			(471	)		3,345			(2,860	)
COMPREHENSIVE INCOME (LOSS)		4,941			(59	)		9,864			104

Comprehensive loss attributable to the non-controlling interest		133			205			411			434
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	5,074		$	146		$	10,275		$	538

EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS
Basic and diluted	$	0.22		$	0.04		$	0.47		$	0.23
Weighted average number of shares outstanding
Basic and diluted		14,792,836			14,787,940			14,791,778			14,787,044

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016 (UNAUDITED)

	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,519		$	2,964
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		5,066			5,337
Loss from sale of property and equipment		5			40
Provision of bad debt allowance		679			975
Inventory write-down		4,624			7,111
Deferred income tax		(2,004	)		(79	)
Stock-based compensation		10			5
Changes in operating assets and liabilities
Accounts receivable		(12,805	)		4,127
Inventories		(3,423	)		19,293
Value added tax receivable		(762	)		(2,452	)
Other receivables and prepaid expenses		(3,395	)		(638	)
Advances on inventory purchases		(1,619	)		1,618
Amounts due from related parties		(937	)		1,918
Accounts payable		(3,738	)		(14,467	)
Accounts payable and other payables- related parties		232			630
Other payables and accrued liabilities		(2,219	)		(3,289	)
Value added and other taxes payable		(2,561	)		(1,987	)
Income tax payable		(256	)		(2,460	)
Net cash used in (provided by) operating activities		(16,584	)		18,646

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(4,356	)		(8,577	)
Net cash used in investing activities		(4,356	)		(8,577	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans		47,570			75,263
Repayment of bank loans		(33,372	)		(69,125	)
Repayment of loans from related party		7,596			1,824
Advances to related party		(6,464	)		(1,216	)
Net cash provided by financing activities		15,330			6,746

EFFECT OF EXCHANGE RATE CHANGES ON CASH		1,121			(1,200	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(4,489	)		15,615

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		45,288			22,702

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	40,799		$	38,317

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest	$	1,207		$	1,511
Income taxes	$	4,521		$	5,362

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(UNAUDITED)

NOTE 1 BASIS OF PRESENTATION

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

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of income and comprehensive income (loss), and cash flows for the three and nine months ended September 30, 2017 and 2016. 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 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

We recognize wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. Retail sales are recorded net of promotional discounts, rebates, and return allowances. Retail store sales are recognized at the time of the register receipt. Retail online sales are recognized when products are shipped and customers receive the products because we retain a portion of the risk of loss on these sales during transit.

Financial Instruments

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

Accounts Receivable

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

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 September 30, 2017, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

As of September 30, 2017, the Company has two derivative liability subjects to recurring fair value measurement (Level 3) with the change in fair value recognized in earnings (Note 5).

Foreign Currency Translation and Other Comprehensive Income

The reporting currency of the Company is the U.S. dollar. The functional currency of Ever-Glory, Perfect Dream and Ever-Glory HK is the U.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel, Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Shanghai Yiduo, YaLan, He Meida, Huirui and Taixin is the Chinese RMB.

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

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09, Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

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

NOTE 3 INVENTORIES

Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30, 2017		December 31, 2016
	(In thousands of U.S. Dollars)
Raw materials	$	1,750	$	1,604
Work-in-progress		17,572		9,347
Finished goods		30,794		38,679
Total inventories	$	50,116	$	49,630

NOTE 4 BANK LOANS

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short-term bank loans consisted of the following as of September 30, 2017 and December 31, 2016.

	September 30, 2017		December 31, 2016
Bank	(In thousands of U.S. Dollars)
Industrial and Commercial Bank of China	$	21,028	$	11,232
Nanjing Bank		8,272		9,360
HSBC		3,191		-
China Everbright Bank		3,004		2,880
Bank of Communications		3,004		2,880
China Minsheng Banking		3,004		2,880
Bank of China		2,082		-
China Citic Bank		1,352		-
	$	44,937	$	29,232

In January 2014, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $9.0 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of September 30, 2017, Goldenway had borrowed $6.0 million (RMB 40.0 million) under this line of credit with an annual interest rate of 4.6% and due on various dates from December 2017 to January 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.

In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.0 million (RMB120.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of September 30, 2017, Ever-Glory Apparel had borrowed $15.0 million (RMB 100.0 million) under this line of credit with annual interest rate of 4.6% and due on various dates from October 2017 to September 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.

In June 2016, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of September 30, 2017, approximately $7.5 million was unused and available under this line of credit.

In June 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.0 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2017, Ever-Glory Apparel had borrowed $6.0 million (RMB40.0 million) from Nanjing Bank with an annual interest rate of 4.4% and due on various dates from Jan to March 2018. Ever-Glory Apparel had also borrowed $0.8 million from Nanjing Bank with an annual interest rate of 2.4% and due in October 2017, and collateralized by approximately $0.9 million of accounts receivable from our wholesale customers. As of September 30, 2017, approximately $2.2 million was unused and available under this line of credit.

In March 2017, 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 September 30, 2017, LA GO GO had borrowed $1.5 million (RMB10.0 million) from Nanjing Bank under this line of credit with annual interest rate of 5.0% and due in May 2018. As of September 30, 2017, approximately $1.5 million (RMB10.0 million) was unused and available under this line of credit.

In January 2015, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $12.6 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.2 million from HSBC with an annual interest rate of 3.0% and due in August 2017, and collateralized by approximately $3.8 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $9.4 million was unused and available under this line of credit.

In July 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with an annual interest rates ranging from 2.8% to 3.0% and due in November 2017. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.

In June 2014, LA GO GO entered into a line of credit agreement for approximately $4.9 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 4.6% to 5.0% and due on various dates from November 2017 to September 2018. As of September 30, 2017, approximately $1.9 million was unused and available under this line of credit.

In December 2016, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.6% and due in December 2017.

In October 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.7 million (RMB25.0 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 September 30, 2017, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest rate of 4.8% and due in November 2017. Ever-Glory Apparel had also borrowed $0.6 million from Bank of China with an annual interest rate of 1.7% and due in October 2017, and collateralized by approximately $0.7 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $1.6 million was unused and available under this line of credit.

In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.4 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $1.4 million (RMB9.0 million) under this line of credit with an annual interest rate of 5.5% and due in December 2017. As of September 30, 2017, approximately $4.0 million was unused and available under this line of credit.

All loans have been repaid before or at maturity date.

Total interest expense on bank loans amounted to $0.6 million, $1.2 million, $0.6 million and $1.5 million for the three and nine months ended September 30, 2017 and 2016, respectively.

NOTE 5 DERIVATIVE LIABILITY

As of September 30, 2017, the Company had two outstanding forward foreign exchange contracts (sell EUR dollars for RMB) with total notional amount of EUR€0.39 million. As of December 31, 2016, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR€0.65 million. The fair value of these contracts as of September 30, 2017 and December 31, 2016, as well as realized gains and losses on these foreign currency derivative activities during 2016 and the nine months ended September 30, 2017 were not significant.

NOTE 6 INCOME TAX

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

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

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

Perfect Dream was incorporated in the British Virgin Islands (BVI), and under the current laws of the BVI dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes.

Ever-Glory HK was incorporated in Samoa, and under the current laws of Samoa has no liabilities for income taxes.

Although the Company’s parent entity is a U.S. entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating its tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.

The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million should be made by the Company prospectively over the next two to three years’ period. All $3.2 million was paid off as of December 31, 2016. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.

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

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for the three and nine months ended September 30, 2017 and 2016 was taxable in the following jurisdictions:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
	(In thousands of U.S. Dollars)
PRC	$	4,641		$	1,135		$	10,097		$	5,353
BVI		-			4			-			4
Others		(1	)		(3	)		(5	)		(8	)
	$	4,640		$	1,136		$	10,092		$	5,349

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and nine months ended September 30, 2017 and 2016:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
PRC statutory rate		25.0	%		25.0	%		25.0	%		25.0	%
Effect of foreign income tax rates		-			(0.1	)		-			-
Net operating losses for which no deferred tax assets was recognized		7.8			38.8			10.4			19.6
Other		-			-			-			-
Effective income tax rate		32.8	%		63.7	%		35.4	%		44.6	%

Income tax expense for the three and nine months ended September 30, 2017 and 2016 is as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
Current	$	1,752		$	799		$	5,482		$	2,543
Deferred		(230	)		(75	)		(1,909	)		(158	)
Income tax expense	$	1,522		$	724		$	3,573		$	2,385

The Company has not recorded U.S. deferred income taxes on approximately $90.3 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriated to the United States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted for foreign tax credits. Determination of the amount of any unrecognized deferred income tax liability on these earnings is not practicable.

NOTE 7 EARNINGS PER SHARE

The following demonstrates the calculation for earnings per share for the three and nine months ended September 30, 2017 and 2016:

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Weighted average number of common shares – Basic and diluted		14,792,836		14,787,940		14,791,778		14,787,044
Earnings per share – Basic and diluted	$	0.22	$	0.04	$	0.47	$	0.23

NOTE 8 STOCKHOLDERS’ EQUITY

On April 29, 2016, the Company issued an aggregate of 2,072 shares of its common stock to two of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2015. The shares were valued at $2.43 per share, which was the average market price of the common stock for the five days before the grant date.

On February 28, 2017, the Company issued an aggregate of 2,542 shares of its common stock to two of the Company’s independent directors as compensation for their services in the first and second quarters of 2016. The shares were valued at $1.96 per share, which was the average market price of the common stock for the five days before the grant date.

On February 28, 2017, the Company issued an aggregate of 2,354 shares of its common stock to two of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2016. The shares were valued at $2.14 per share, which was the average market price of the common stock for the five days before the grant date.

On October 19, 2017, the Company issued an aggregate of 3,156 shares of its common stock to two of the Company’s independent directors as compensation for their services in the first, second and third quarters of 2017. The shares were valued at $2.37 per share, which was the average market price of the common stock for the five days before the grant date.

NOTE 9 RELATED PARTY TRANSACTIONS

Mr. Kang is the Company’s Chairman and Chief Executive Officer. Ever-Glory Enterprises (HK) Ltd. (Ever-Glory Enterprises) is the Company’s major shareholder. Mr. Xiaodong Yan was Ever-Glory Enterprises’ sole shareholder and sole director. Mr. Huake Kang, Mr. Kang’s son, acquired 83% interest of Ever-Glory Enterprises and became its sole director in 2014. All transactions associated with the following companies controlled by Mr. Kang or his son are considered to be related party transactions, and it is possible that the terms of these transactions may not be the same as those that would result from transactions between unrelated parties. All related party outstanding balances are short-term in nature and are expected to be settled in cash.

Other income from Related Parties

Jiangsu Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter of 2014. During the three and nine months ended September 30, 2017 and 2016, the Company received $8,580, $26,063, $9,747 and $21,002 from the customers and paid $7,095, $20,651, $6,483 and $16,768 to Wubijia through the consignment, respectively. The net (loss) profit of $1,483, $5,411, $3,264 and $4,234 was recorded as other income (expenses) during the three and nine months ended September 30, 2017 and 2016, respectively.

Nanjing Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s retail stores since the third quarter of 2015. During the three and nine months ended September 30, 2017 and 2016, the Company received $30, $6,395, $21,944 and $122,783 from the customers and paid $1,041, $11,575, $16,085 and $101,531 to Nanjing Knitting through the consignment, respectively. The net (loss) profit of ($1,009), ($5,179), $5,859 and $21,252 was recorded as other income (expenses) during the three and nine months ended September 30, 2017 and 2016, respectively.

Included in other income for the three and nine months ended September 30, 2017 and 2016 is rent income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term though June 2017. The rent income is $0, $14,529, $16,022 and $48,455 for the three and nine months ended September 30, 2017 and 2016, respectively.

Other expenses due to Related Parties

Included in other expenses for the three and nine months ended September 30, 2017 and 2016 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
	(In thousands of U.S. Dollars)
Jiangsu Ever-Glory	$	12	$	12	$	35	$	36
Chuzhou Huarui		53		57		157		171
Kunshan Enjin		11		12		33		34
Total	$	76	$	81	$	225	$	241

The Company leases Jiangsu Ever-Glory’s factory as the factory is in a location where there is a good supply of experienced workers. The Company leases Chuzhou Huarui and Kunshan Enjin’s warehouse spaces because the locations are convenient for transportation and distribution.

Purchases from and Sub-contracts with Related Parties

The Company purchased raw materials from Nanjing Knitting totaling $0.36 million, $0.96 million, $0.11 million and $0.45 million during the three and nine months ended September 30, 2017 and 2016, respectively.

In addition, Sub-contracts with related parties included in cost of sales for the three and nine months ended September 30, 2017 and 2016 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In thousands of U.S. Dollars)
Chuzhou huarui	$	714	$	1,228	$	2,714	$	4,922
Fengyang huarui		4		344		855		846
Nanjing Ever-Kyowa		361		490		1,181		1,485
Ever-Glory Vietnam		6,773		6,196		12,504		11,253
Ever-Glory Cambodia		15		996		239		3,091
EsCeLav		1		-		5		5
Jiangsu Ever-Glory		-		22		3		73
	$	7,868	$	9,276	$	17,501	$	21,675

Accounts Payable – Related Parties

The accounts payable to related parties at September 30, 2017 and December 31, 2016 are as follows:

	September 30, 2017		December 31, 2016
	(In thousands of U.S. Dollars)
Ever-Glory Vietnam	$	2,448		1,938
Fengyang Huarui		478		709
Nanjing Ever-Kyowa		724		785
Chuzhou Huarui		473		643
Ever-Glory Cambodia		60		262
Jiangsu Ever-Glory		407		-
Nanjing Knitting		70		-
Total	$	4,660	$	4,337

Amounts Due From Related Parties-current assets

The amounts due from related parties as of September 30, 2017 and December 31, 2016 are as follows:

	September 30, 2017		December 31, 2016
	(In thousands of U.S. Dollars)
Jiangsu Ever-Glory	$	819	$	403
Nanjing Knitting		-		9
EsC’eLav		115		74
Total	$	934	$	486

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and nine months ended September 30, 2017 and 2016, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices. The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at a cost of $0.7 million, $0.8 million, $0.2 million and $2.1 million during the three and nine months period ended September 30, 2017 and 2016, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.25 million, $0.3 million, $0.2 million and $0.5 million during the three and nine months ended September 30, 2017 and 2016, 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 September 30, 2017 and December 31, 2016, Jiangsu Ever-Glory has provided guarantees for approximately $54.7 million (RMB 364.0 million) and $52.4 million (RMB 364.0 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $30.9 million (RMB 205.5 million) and $29.6 million (RMB 205.5 million) as of September 30, 2017 and December 31, 2016, respectively. Mr. Kang has also provided a personal guarantee for $31.4 million (RMB 209.0 million) and $30.1 million (RMB 209.0 million) as of September 30, 2017 and December 31, 2016, respectively.

At December 31, 2016, $14.1 million (RMB 98.2 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the nine months ended September 30, 2017, an additional $6.5 million (RMB 44.0 million) was provided to and $7.6 million (RMB 51.7 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of September 30, 2017, the amount of the counter-guarantee was $13.6 million (RMB 98 million) (the difference represents currency exchange adjustment of $0.6 million), which was 24.9% of the aggregate amount of lines of credit. This amount plus accrued interest of $2.4 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At September 30, 2017 and December 31, 2016, the amount classified as a reduction of equity was $16.0 million and $15.9 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Interest income for the three and nine months ended September 30, 2017 and 2016 was approximately $0.2 million, $0.6 million, $0.2 million and $0.4 million, respectively.

NOTE 10 CONCENTRATIONS AND RISKS

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable. The allowance for doubtful accounts at September 30, 2017 and December 31, 2016 was $4.7 million and $3.1 million, respectively. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions 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 three and nine months ended September 30, 2017, the Company had two wholesale customers that represented approximately 20%, 21%, 12% and 13% of the Company’s revenues. For the nine-month period ended September 30, 2016, the Company had no wholesale customer that represented more than 10% of the Company’s revenues. For the three-month period ended September 30, 2016, the Company had one wholesale customer that represented approximately 12% of the Company’s revenues.

For the Company’s wholesale business during the three and nine months ended September 30, 2017 and 2016, no supplier represented more than 10% of the total raw materials purchased.

For the Company’s retail business, the Company had two suppliers that represented approximately 42% and 17% of raw materials purchases during the three months ended September 30, 2017. The Company had one supplier that represented approximately 23% of raw materials purchases during the three months ended September 30, 2016. The Company had five suppliers that represented approximately 26%, 20%, 12%, 11% and 10% of raw materials purchases during the nine months ended September 30, 2017. The Company had no supplier that represented more than 10% of raw materials purchases during the nine months ended September 30, 2016.

For the wholesale business, the Company relied on one manufacturers for 29.2% of purchased finished goods during the nine months ended September 30, 2017. The Company relied on two manufacturers for 26.6% and 11.6% of purchased finished goods during the nine months ended September 30, 2016. During the three months ended September 30, 2017, the Company relied on one manufacturer for 35.9% of purchased finished goods. During the three months ended September 30, 2016, the Company relied on one manufacturer for 29.2% of purchased finished goods.

For the retail business, the Company had no supplier that represented more than 10% of finished goods purchases during the three and nine months ended September 30, 2017 and 2016.

The Company’s revenues for the three and nine months ended September 30, 2017 and 2016 were earned in the following geographic areas:

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
	(In thousands of U.S. Dollars)
The People’s Republic of China	$	23,885	$	22,860	$	34,000	$	36,854
Hong Kong, China		20,520		10,245		33,738		22,314
Germany		2,239		3,517		7,007		5,760
United Kingdom		5,599		6,149		11,174		12,568
Europe-Other		10,899		14,724		25,288		32,999
Japan		232		2,562		2,863		9,181
United States		5,611		8,816		16,225		19,554
Total wholesale business		68,985		68,873		130,295		139,230
Retail business		51,272		41,053		154,853		143,065
Total	$	120,257	$	109,926	$	285,148	$	282,295

NOTE 11 SEGMENTS

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

(a) Wholesale segment

(b) Retail segment

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

	Wholesale segment		Retail segment			Total
	(In thousands of U.S. Dollars)
Nine months ended September 30, 2017
Segment profit or loss:
Net revenue from external customers	$	130,295		154,853			285,148
Income (Loss) from operations	$	5,050		2,252			7,302
Interest income	$	854		55			909
Interest expense	$	932		275			1,207
Depreciation and amortization	$	824		4,242			5,066
Income tax expense	$	1,443		2,130			3,573

Nine months ended September 30, 2016
Segment profit or loss:
Net revenue from external customers	$	139,231		143,064			282,295
Income from operations	$	5,959		(892	)		5,067
Interest income	$	807		47			854
Interest expense	$	1,170		341			1,511
Depreciation and amortization	$	758		4,579			5,337
Income tax expense	$	1,425		960			2,385

	Wholesale segment		Retail segment			Total
	(In thousands of U.S. Dollars)
Three months ended September 30, 2017
Segment profit or loss:
Net revenue from external customers	$	68,985		51,272			120,257
Income (Loss) from operations	$	2,388		457			2,845
Interest income	$	355		15			370
Interest expense	$	462		100			562
Depreciation and amortization	$	272		1,314			1,586
Income tax expense	$	686		836			1,522

Three months ended September 30, 2016
Segment profit or loss:
Net revenue from external customers	$	68,873		41,053			109,926
Income from operations	$	2,510		(1,280	)		1,230
Interest income	$	217		16			233
Interest expense	$	468		112			580
Depreciation and amortization	$	254		1,753			2,007
Income tax expense	$	584		140			724

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 nine months ended September 30, 2017 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”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”).

Retail Business

We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”), 78% owned subsidiary Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and Xizang He Meida Trading Company Limited (“He Meida”).

Business Objectives

Wholesale Business

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

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

	●	Expanding our global sourcing network;

	●	Expanding our overseas low-cost manufacturing base (outside of mainland China);

	●	Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel;

	●	Continuing to emphasize product design and technology utilization;

	●	Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and

	●	Maintaining stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.

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 September 30, 2017, we had 1,363 stores (including store-in-stores), including 174 stores were opened and 189 stores were closed during the nine months ended September 30, 2017.

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

	●	Building our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;

	●	Expanding our retail network throughout China;

	●	Improving our retail stores’ efficiency and increasing same-store sales;

	●	Continuing to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities; and

	●	Becoming a multi-brand operator.

Seasonality of Business

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

Collection Policy

Wholesale business

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

Retail business

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

Global Economic Uncertainty

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2017.

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

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

Summary of Critical Accounting Policies

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

Revenue Recognition

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 2017 and 2016 include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance and inventory reservation.

Recently Issued Accounting Pronouncements

Results of Operations for the three months ended September 30, 2017 and 2016

The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

	Three Months Ended September 30,
	2017				2016
	(In thousands of U.S. dollars, except for percentages)
Sales	$	120,257	100.0	%	$	109,926		100.0	%
Gross Profit	$	33,250	27.6	%	$	29,614		26.9	%
Operating Expense	$	30,405	25.3	%	$	28,384		25.8	%
Income From Operations	$	2,845	2.4	%	$	1,230		1.1	%
Other Income (Expenses)	$	1,795	1.5	%	$	(94	)	(0.1	)%
Income tax expense	$	1,522	1.3	%	$	724		0.7	%
Net Income	$	3,118	2.6	%	$	412		0.4	%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the three months ended September 30, 2017 and 2016.

	2017					2016					Growth (Decrease)
Wholesale business	(In thousands of U.S. dollars)		% of total sales			(In thousands of U.S. dollars)		% of total sales			in 2017 compared with 2016
Mainland China	$	23,885		19.9	%	$	22,860		20.8	%		4.5	%
Hong Kong, China		20,520		17.1			10,245		9.3			100.3
Germany		2,239		1.9			3,517		3.2			(36.3	)
United Kingdom		5,599		4.7			6,149		5.6			(8.9	)
Europe-Other		10,899		9.1			14,724		13.4			(26.0	)
Japan		232		0.2			2,562		2.4			(90.9	)
United States		5,611		4.7			8,816		8.0			(36.4	)
Total Wholesale business		68,985		57.4			68,873		62.7			0.2
Retail business		51,272		42.6			41,053		37.3			24.9
Total sales	$	120,257		100.0	%	$	109,926		100.0	%		9.4	%

Sales for the three months ended September 30, 2017 were $120.3 million, a 9.4% increase compared with the three months ended September 30, 2016. This increase was primarily attributable to a 0.2% increase in sales in our wholesale business and a 24.9% increase in our retail business.

Sales generated from our wholesale business contributed 57.4% or $69.0 million of our total sales for the three months ended September 30, 2017, a 0.2% increase compared with $68.9 million in the three months ended September 30, 2016. This increase was primarily attributable to an increase in sales in Mainland China and Hong Kong, China partially offset by a decrease in sales in Germany, the United Kingdom, Europe-Other, Japan and the United States.

Sales generated from our retail business contributed 42.6% or $51.3 million of our total sales for the three months ended September 30, 2017, an 24.9% increase compared with 37.3% or $41.1 million in the three months ended September 30, 2016. This increase was primarily due to an increase in same store sales.

Costs and Expenses

Cost of Sales and Gross Margin

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

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended September 30, 2017 and 2016.

									Growth
									(Decrease) in
	Three months ended September 30,								2017 Compared
	2017				2016				with 2016
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	68,985	100.0	%	$	68,873	100.0	%		0.2	%
Raw Materials		31,092	45.1			31,451	45.7			(1.1	)
Labor		1,468	2.1			1,310	1.9			12.1
Outsourced Production Costs		25,999	37.7			25,927	37.6			0.3
Other and Overhead		199	0.3			123	0.2			60.6
Total Cost of Sales for Wholesale		58,758	85.2			58,811	85.4			(0.1	)
Gross Profit for Wholesale		10,227	14.8			10,062	14.6			1.6
Net Sales for Retail		51,272	100.0			41,053	100.0			24.9
Production Costs		18,081	35.3			11,145	27.1			62.2
Rent		10,168	19.8			10,356	25.2			(1.8	)
Total Cost of Sales for Retail		28,249	55.1			21,501	52.4			31.4
Gross Profit for Retail		23,023	44.9			19,552	47.6			17.8
Total Cost of Sales		87,007	72.4			80,312	73.1			8.3
Gross Profit	$	33,250	27.6	%	$	29,614	26.9	%		12.3	%

Raw material costs for our wholesale business were 45.1% of our total wholesale business sales in the three months ended September 30, 2017, compared with 45.7% in the three months ended September 30, 2016. The decrease was mainly due to lower raw material prices.

Labor costs for our wholesale business were 2.1% of our total wholesale business sales in the three months ended September 30, 2017, compared with 1.9% in the three months ended September 30, 2016. The marginal increase was mainly due to a higher number of outsourced orders in 2016.

Outsourced production costs for our wholesale business for the three months ended September 30, 2017 increased 0.3% to $26.0 million from $25.9 million for the three months ended September 30, 2016. Outsourced production costs accounted for 37.7% of our total wholesale business sales in the three months ended September 30, 2017, a 0.1% increase from the three months ended September 30, 2016. This increase was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.

Overhead and other expenses for our wholesale business accounted for 0.3% of our total wholesale business sales for the three months ended September 30, 2017, compared with 0.2% of total wholesale business sales for the three months ended September 30, 2016.

Wholesale business gross profit for the three months ended September 30, 2017 was $10.2 million compared with $10.1 million for the three months ended September 30, 2016. Gross profit accounted for 14.8% of our total wholesale sales for the three months ended September 30, 2017, compared with 14.6% for the three months ended September 30, 2016. The increase was mainly due to a decrease in raw Materials costs.

Production costs for our retail business were $18.1 million for the three months ended September 30, 2017 compared with $11.1 million during the three months ended September 30, 2016. Retail production costs accounted for 35.3% of our total retail sales in the three months ended September 30, 2017, compared with 27.1% for the three months ended September 30, 2016. The increase was due to higher discounts on our out-of-season products in the three months ended September 30, 2017 compared with the same period of the prior year.

Rent costs for our retail business for the three months ended September 30, 2017 were $10.2 million compared with $10.4 million for the three months ended September 30, 2016. Rent costs for our retail business accounted for 19.8% of our total retail sales for the three months ended September 30, 2017, compared with 25.2% for the three months ended September 30, 2016. The decrease was primarily attributable to lower variable rent charged at certain locations.

Gross profit in our retail business for the three months ended September 30, 2017 was $23.0 million and gross margin was 44.9%. Gross profit in our retail business for the three months ended September 30, 2016 was $19.6 million and gross margin was 47.6%.

Total cost of sales for the three months ended September 30, 2017 was $87.0 million, an 8.3% increase from $80.3 million for the three months ended September 30, 2016. Total cost of sales as a percentage of total sales for the three months ended September 30, 2017 was 72.4%, compared with 73.1% for the three months ended September 30, 2016. Gross margin for the three months ended September 30, 2017 was 27.6% compared with 26.9% for the three months ended September 30, 2016.

Selling, General and Administrative Expenses

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

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

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

	Three Months Ended September 30,								Increase (Decrease) in 2017 Compared
	2017				2016				to 2016
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	33,250	27.6	%	$	29,614	26.9	%		12.3	%
Operating Expenses:
Selling Expenses		20,238	16.8			18,522	16.8			9.3
General and Administrative Expenses		10,167	8.5			9,862	9.0			3.1
Total		30,405	25.3			28,384	25.8			7.1
Income from Operations	$	2,845	2.4	%	$	1,230	1.1	%		131.3	%

Selling expenses for the three months ended September 30, 2017 increased 9.3% to $20.2 million from $18.5 million for the three months ended September 30, 2016. The increase was attributable to higher retail sales.

General and administrative expenses for the three months ended September 30, 2017 increased 3.1% to $10.2 million from $9.9 million for the three months ended September 30, 2016.

Income from Operations

Income from operations for the three months ended September 30, 2017 increased 131.2% to $2.8 million from $1.2 million for the three months ended September 30, 2016. Income from operations for the three months ended September 30, 2017 accounted for 2.4% of our total sales, a 1.3% increase compared with the three months ended September 30, 2016 as a result of increased gross profit.

Interest Expense

Interest expense for the three months ended September 30, 2017 was $0.6 million, a 3.1% decrease compared with the same period in 2016.

Income Tax Expenses

Income tax expense for the three months ended September 30, 2017 was $1.5 million, an increase of 110.7% compared to the same period of 2016. The increase was primarily due to increased profits of our business.

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

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

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

Perfect Dream Limited was incorporated in the British Virgin Islands (BVI), and under the current laws of BVI dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes.

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

Although the Company’s parent entity is a US entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, sales are made globally, and the Company has other subsidiary operations in Hong Kong and Samoa. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory Hong Kong, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.

The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million will be made by the Company prospectively over two to three years’ period. All $3.2 million was paid off as of December 31, 2016. Beginning January 1, 2014, all net income generated from Ever-Glory 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 September 30, 2017. The net operating loss carry forwards for the United States income taxes may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2035. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for the United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.

Net Income

Net income for the three months ended September 30, 2017 was $3.1 million, a 656.6% increase compared with the same period in 2016. Our basic and diluted earnings per share were $0.22 and $0.04 for the three months ended September 30, 2017 and 2016, respectively.

Results of Operations for the nine months ended September 30, 2017 and 2016

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.

	Nine Months Ended September 30,
	2017				2016
	(in thousands of U.S. Dollars, except for percentages)
Sales	$	285,148	100.0	%	$	282,295	100.0	%
Gross Profit		92,408	32.4			84,672	30.0
Operating Expense		85,106	29.8			79,605	28.2
Income From Operations		7,302	2.6			5,067	1.8
Other Income (Expenses)		2,790	1.0			282	0.1
Income tax expense		3,573	1.3			2,385	0.8
Net Income	$	6,519	2.3	%	$	2,964	1.1	%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the nine months ended September 30, 2017 and 2016.

	2017					2016					Growth (Decrease)
Wholesale business	(In thousands of U.S. dollars)		% of total sales			(In thousands of U.S. dollars)		% of total sales			in 2017 compared with 2016
Mainland China	$	34,000		11.9	%	$	36,854		13.1	%		(7.7	)%
Hong Kong China		33,738		11.8			22,314		7.9			51.2
Germany		7,007		2.5			5,760		2.0			21.7
United Kingdom		11,174		3.9			12,568		4.5			(11.1	)
Europe-Other		25,288		8.9			32,999		11.7			(23.4	)
Japan		2,863		1.0			9,181		3.2			(68.8	)
United States		16,225		5.7			19,554		6.9			(17.0	)
Total Wholesale business		130,295		45.7			139,230		49.3			(6.4	)
Retail business		154,853		54.3			143,065		50.7			8.2
Total sales	$	285,148		100.0	%	$	282,295		100.0	%		1.0	%

Sales for the nine months ended September 30, 2017 were $285.1 million, an increase of 1.0% from the nine months ended September 30, 2016. This increase was primarily attributable to an 8.2% increase in sales in our retail business partially offset by a 6.4% sales decrease in our wholesale business.

Sales generated from our wholesale business contributed 45.7% or $130.3 million of our total sales for the nine months ended September 30, 2017, a decrease of 6.4% compared with $139.2 million in the nine months ended September 30, 2016. This decrease was primarily attributable to decreased sales in Mainland China, the United Kingdom, Europe-Other, Japan and the United States partially offset by increased sales in Hong Kong, China and Germany.

Sales generated from our retail business contributed 54.3% or $154.9 million of our total sales for the nine months ended September 30, 2017, an increase of 8.2% compared with $143.1 million in the nine months ended September 30, 2016. This increase was primarily due to an increase in same store sales.

Total retail store square footage and sales per square foot for the nine months ended September 30, 2017 and 2016 are as follows:

	2017		2016
Total store square footage		1,370,117		1,329,708
Number of stores		1,363		1,345
Average store size, square foot		1,005		989
Total store sales (in thousands of U.S. dollars)	$	154,853	$	143,065
Sales per square foot	$	113	$	108

Same-store sales and newly opened store sales for the nine months ended September 30, 2017 and 2016 are as follows:

	2017		2016
	(In thousands of U.S. dollars)
Sales from stores opened for a full year	$	130,790	$	113,734
Sales from newly opened store sales	$	12,944	$	14,137
Sales from e-commerce platform	$	7,716	$	9,368
Other*	$	3,403	$	5,826
Total	$	154,853	$	143,065

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

We remodeled or relocated 200 stores in 2016, and 195 stores during the nine months ended September 30, 2017.We plan to relocate or remodel an aggregate of 150-200 stores in 2017. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2017. 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

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 nine months ended September 30, 2017 and 2016.

									Growth
									(Decrease) in
	Nine months ended September 30,								2017 Compared
	2017				2016				with 2016
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	130,295	100.0	%	$	139,230	100.0	%		(6.4	)%
Raw Materials		56,766	43.6			61,935	44.5			(8.3	)
Labor		3,236	2.5			3,932	2.8			(17.7	)
Outsourced Production Costs		47,542	36.5			50,603	36.3			(6.1	)
Other and Overhead		325	0.2			370	0.3			(12.2	)
Total Cost of Sales for Wholesale		107,869	82.8			116,840	83.9			(7.7	)
Gross Profit for Wholesale		22,426	17.2			22,390	16.1			0.2
Net Sales for Retail		154,853	100.0			143,065	100.0			8.2
Production Costs		49,769	32.1			45,172	31.6			10.2
Rent		35,102	22.7			35,611	24.9			(1.4	)
Total Cost of Sales for Retail		84,871	54.8			80,783	56.5			5.1
Gross Profit for Retail		69,982	45.2			62,282	43.5			12.4
Total Cost of Sales		192,740	67.6			197,623	70.0			(2.5	)
Gross Profit	$	92,408	32.4	%	$	84,672	30.0	%		9.1	%

Raw material costs for our wholesale business were 43.6% of our total wholesale business sales in the nine months ended September 30, 2017, compared with 44.5% in the nine months ended September 30, 2016. The decrease was mainly due to lower raw materials prices.

Labor costs for our wholesale business were 2.5% of our total wholesale business sales in the nine months ended September 30, 2017, compared with 2.8% in the nine months ended September 30, 2016. The marginal decrease was mainly due to a higher number of outsourced orders in the nine months ended September 30, 2017.

Outsourced manufacturing costs for our wholesale business were 36.5% of our total wholesale sales in the nine months ended September 30, 2017, compared with 36.3% in the nine months ended September 30, 2016. This increase was primarily attributable to increased average salaries of the employees at our outsourced manufacturing factories.

Overhead and other expenses for our wholesale business accounted for 0.2% and 0.3% of our total wholesale sales for the nine months ended September 30, 2017 and 2016, respectively.

Gross profit for our wholesale business for the nine months ended September 30, 2017 was $22.4 million, a 0.2% increase compared with the nine months ended September 30, 2016. As a percentage of total wholesale business sales, gross profit was 17.2% of our total wholesale business sales for the nine months ended September 30, 2017, compared with 16.1% for the nine months ended September 30, 2016. The increase was mainly due to decreased raw material costs.

Production costs for our retail business for the nine months ended September 30, 2017 were $49.8 million compared with $45.2 million for the nine months ended September 30, 2016. As a percentage of our total retail sales, production costs were 32.1% of our total retail sales for the nine months ended September 30, 2017, compared with 31.6% for the nine months ended September 30, 2016. The increase was due to higher discounts on our out-of-season products in the nine months ended September 30, 2017 compared with the same period of the prior year.

Rent costs for our retail business for the nine months ended September 30, 2017 were $35.1 million compared with $35.6 million for the nine months ended September 30, 2016. As a percentage of total retail sales, rent costs were 22.7% of our total retail sales for the nine months ended September 30, 2017 compared with 24.9% for the nine months ended September 30, 2016. The decrease was primarily attributable to lower rent at certain locations.

Gross profit for our retail business for the nine months ended September 30, 2017 was $70.0 million compared with $62.3 million for the nine months ended September 30, 2016. Gross margin for our retail business for the nine months ended September 30, 2017 was 45.2% compared with 43.5% for the nine months ended September 30, 2016.

Total cost of sales for the nine months ended September 30, 2017 was $192.7 million, a 2.5% decrease compared with the nine months ended September 30, 2016. As a percentage of total sales, total costs were 67.6% of total sales for the nine months ended September 30, 2017, compared with 70.0% for the nine months ended September 30, 2016. Total gross margin for the nine months ended September 30, 2017 was 32.4% compared with 30.0% for the nine months ended September 30, 2016.

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 14.9% and 14.8% of raw material purchases for the nine months ended September 30, 2017 and 2016, respectively. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2017 and 2016. For our retail business, purchases from our five largest suppliers represented approximately 79.8% and 33.0% of raw material purchases for the nine months ended September 30, 2017 and 2016, respectively. Five suppliers provided approximately 25.9%, 20.4%, 11.7%, 11.0 and 10.8% of our raw material purchases for the nine months ended September 30, 2017. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2016. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 49.2% and 54.4% of finished goods purchases for the nine months ended September 30, 2017 and 2016, respectively. One contract manufacturer provided approximately 29.2% of our finished goods purchases for the nine months ended September 30, 2017. Two contract manufacturers provided approximately 26.6% and 11.6% of our finished goods purchases for the nine months ended September 30, 2016. For our retail business, our five largest contract manufacturers represented approximately 16.7% and 14.8% of finished goods purchases for the nine months ended September 30, 2017 and 2016, respectively. No contract manufacturer provided more than 10% of our retail finished goods purchases for the nine months ended September 30, 2017 and 2016. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

Selling, General and Administrative Expenses

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

	Nine months ended September 30,								Increase (Decrease) in 2017 Compared
	2017				2016				to 2016
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	92,408	32.4	%	$	84,672	30.0	%		9.1	%
Operating Expenses:
Selling Expenses		60,206	21.1			55,477	19.7			8.5
General and Administrative Expenses		24,900	8.7			24,128	8.5			3.2
Total		85,106	29.8			79,605	28.2			6.9
Income from Operations	$	7,302	2.6	%	$	5,067	1.8	%		44.1	%

Selling expenses for the nine months ended September 30, 2017 were $60.2 million, an 8.5% increase compared with the nine months ended September 30, 2016. The increase was attributable to higher retail sales.

General and administrative expenses for the nine months ended September 30, 2017 were $24.9 million a 3.2% increase compared with the nine months ended September 30, 2016. As a percentage of total sales, general and administrative expenses accounted for 8.7% of total sales for the nine months ended September 30, 2017, compared with 8.5% of total sales for the nine months ended September 30, 2016. The increase was mainly attributable to the increased average salaries.

Income from Operations

Income from operations for the nine months ended September 30, 2017 was $7.3 million, a 44.1% increase from $5.1 million for the nine months ended September 30, 2016. This increase was due to increased gross profit.

Interest Expense

Interest expense was $1.2 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease was due to the decreased bank loans.

Income Tax Expenses

Income tax expense for the nine months ended September 30, 2017 was $3.6 million, a 49.8% increase compared to the same period of 2016. The increase was primarily due to higher business profits.

Net Income

Net income for the nine months ended September 30, 2017 was $6.5 million, an increase of 119.9% compared with the same period in 2016. Our diluted earnings per share were $0.47 and $0.23 for the nine months ended September 30, 2017 and 2016, respectively.

Summary of Cash Flows

Summary cash flows information for the nine months ended September 30, 2017 and 2016 is as follows:

	2017			2016
	(In thousands of U.S. dollars)
Net cash used in (provided by) operating activities	$	(16,584	)		18,646
Net cash used in investing activities	$	(4,356	)		(8,577	)
Net cash provided by financing activities	$	15,330		$	6,746

Net cash used in operating activities was $16.6 million for the nine months ended September 30, 2017, compared with net cash provided by $18.6 million during the nine months ended September 30, 2016. The decrease was primarily due to increase in accounts receivable.

Net cash used in investing activities was $4.4 million for the nine months ended September 30, 2017, compared with $8.5 million during the nine months ended September 30, 2016. This decrease was mainly due to the decreased in purchase of property and equipment and remodeling expenditure in 2017.

Net cash provided by financing activities was $15.3 million for the nine months ended September 30, 2017 compared with $6.7 million net cash used during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we repaid $33.4 million of bank loans and received bank loan proceeds of $47.6 million. Also, under the counter-guarantee agreement, we received $7.6 million from and paid $6.5 million to the related party during the nine months ended September 30, 2017.

Liquidity and Capital Resources

As of September 30, 2017, we had cash and cash equivalents of $40.8 million, other current assets of $149.0 million and current liabilities of $124.1 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

All bank loans are used to fund our daily operations.

DERIVATIVE LIABILITY

Capital Commitments

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

Uses of Liquidity

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

Sources of Liquidity

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

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

As of September 30, 2017, we had access to approximately $82.1 million in lines of credit, of which approximately $37.1 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not more than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory under agreements executed between the Company, Jiangsu Ever-Glory and the banks. The maximum aggregate lines of credit and available borrowings was approximately $54.7 million (RMB364 million) and approximately $13.6 million (RMB90.5 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of September 30, 2017.

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 September 30, 2017, the market foreign exchange rate had increased to RMB 6.66 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future, and will pass some of the increased cost to our customers.

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GO (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain (loss) for the three and nine months ended September 30, 2017 and 2016 was $1.8 million, $3.3 million, ($0.5) million and ($2.9) million, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rates: Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. On September 30, 2017, we had $40.8 million in cash and cash equivalents. A hypothetical 5% increase or decrease in either the short term or long term interest rates would not have any material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

Foreign Exchange Rates: We pay our suppliers and employees in Chinese RMB, however, most of our wholesale customers are located in the U.S., Japan and Europe and we generate sales from them in U.S. Dollars, Euros and British Pounds. Accordingly, our business has substantial exposure to changes in exchange rates between and among the Chinese RMB, the U.S. Dollar, the Euro and the British Pound. In the last decade, the RMB was initially pegged at RMB 8.26 to one U.S. Dollar. On July 21, 2005 it was revalued to 8.09 per U.S. Dollar. Following the removal of the peg to the U.S. Dollar and pressure from the United States, the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. Dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. Dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. Dollar and the Euro. On September 30, 2017, the exchange rate between the RMB and U.S. Dollar was RMB6.66 to one U.S. Dollar. For additional discussion regarding our foreign currency risk, see the section titled Risk Factors in the Annual Report on Form 10-K for our fiscal year ended December 31, 2016. Fluctuation in the value of Chinese RMB relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.

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 September 30, 2017, 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 September 30, 2017. Our disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting” section in Item 9 of our annual report for fiscal year ended December 31, 2016. As of September 30, 2017, we had not completed the remediation of these material weaknesses.

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 nine months ended September 30, 2017, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

There has been no material change in the information provided in Item 1A of Form 10-K Annual Report for the year ended December 31, 2016 filed with the SEC on March 30, 2017.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On October 31, 2017, we issued 1,578 shares of Company’s common stock to Jianhua Wang, a director of the Company. The shares were issued as compensation for his services rendered during the first, second, and third quarters of 2017 as a director.

On October 31, 2017, we issued 1,578 shares of Company’s common stock to Zhixue Zhang, a director of the Company. The shares were issued as compensation for his services rendered during the first, second, and third quarters of 2017 as a director.

The securities issued in the abovementioned transactions were issued in connection with transactions which were exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, pursuant to the terms of Section 4(2) of that Act.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The following exhibits are filed herewith:

Exhibit No.		Description

31.1		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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.

November 13, 2017	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)

Ever-Glory International Group, Inc. - FORM 10-Q - November 13, 2017

Attached files

Ever-Glory International Group, Inc. Reports