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

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EX-32.1 - CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTIO - Ever-Glory International Group, Inc.	f10q0618ex32-1_everglory.htm
EX-32.2 - CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTIO - Ever-Glory International Group, Inc.	f10q0618ex32-2_everglory.htm
EX-31.2 - CERTIFICATIONS PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCH - Ever-Glory International Group, Inc.	f10q0618ex31-2_everglory.htm
EX-31.1 - CERTIFICATIONS PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCH - Ever-Glory International Group, Inc.	f10q0618ex31-1_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 June 30, 2018

☐ 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	☒
(Do not check if 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 August 11, 2018, 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 June 30, 2018 (unaudited) and December 31, 2017	1

	Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017(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	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosure	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

SIGNATURES		33

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

CONDENSED CONSOLIDATED BALANCE SHEETS

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

AS OF JUNE 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

	2018			2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	36,439		$	62,876
Accounts receivable, net		61,072			81,859
Inventories		64,418			56,182
Value added tax receivable		3,037			3,757
Other receivables and prepaid expenses		13,771			5,139
Advances on inventory purchases		9,858			3,028
Amounts due from related parties		-			265
Total Current Assets		188,595			213,106

INTANGIBLE ASSETS		6,290			5,995
PROPERTY AND EQUIPMENT, NET		26,305			25,891
TOTAL ASSETS	$	221,190		$	244,992

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Bank loans	$	34,768		$	37,730
Accounts payable		58,745			73,788
Accounts payable and other payables - related parties		4,448			4,675
Other payables and accrued liabilities		23,440			16,454
Derivative financial instruments		469			-
Value added and other taxes payable		245			6,052
Income tax payable		777			1,712
Total Current Liabilities		122,892			140,411

NONCURRENT LIABILITIES
Deferred tax liabilities		1,039			1,883
TOTAL LIABILITIES		123,931			142,294

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Stockholders’ equity:
Common stock $0.001 par value, authorized 50,000,000 shares, 14,795,992 and 14,795,992 shares issued and outstanding As of June 30, 2018 and December 31, 2017, respectively)		15			15
Additional paid-in capital		3,620			3,620
Retained earnings		98,786			95,195
Statutory reserve		17,794			17,794
Accumulated other comprehensive income		(48	)		2,585
Amounts due from related party		(21,589	)		(15,449	)
Total equity attributable to stockholders of the Company		98,578			103,760
Noncontrolling interest		(1,319	)		(1,062	)
Total Equity		97,259			102,698
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	221,190		$	244,992

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONDENSED

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

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (UNAUDITED)

	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017
NET SALES	$	88,541		$	79,771		$	181,326		$	164,891
COST OF SALES		53,999			49,121			115,439			105,732

GROSS PROFIT		34,542			30,650			65,887			59,159

OPERATING EXPENSES
Selling expenses		22,590			20,223			44,817			39,968
General and administrative expenses		8,823			7,479			16,496			14,734
Total Operating Expenses		31,413			27,702			61,313			54,702

INCOME FROM OPERATIONS		3,129			2,948			4,574			4,457

OTHER INCOME (EXPENSES)
Interest income		370			282			696			539
Interest expense		(360	)		(318	)		(924	)		(645	)
Other income		865			523			1,001			1,100
Total Other Income, Net		875			487			773			994

INCOME BEFORE INCOME TAX EXPENSE		4,004			3,435			5,347			5,451
Income tax expense		(1,285	)		(833	)		(2,041	)		(2,050	)

NET INCOME		2,719			2,602			3,306			3,401

Net loss attributable to the non-controlling interest		57			86			285			261
NET INCOME ATTRIBUTABLE TO THE COMPANY		2,776			2,688			3,591			3,662

NET INCOME	$	2,719		$	2,602		$	3,306		$	3,401

Foreign currency translation (loss) gain		(6,091	)		1,063			(2,068	)		1,522
Unrealized gain (loss) of derivative contracts designated as cash flow hedge		(469	)		-			(469	)		-
COMPREHENSIVE INCOME (LOSS)		(3,841	)		3,665			769			4,923

Comprehensive income(loss) attributable to the non-controlling interest		(13	)		98			309			278
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	(3,854	)	$	3,763		$	1,078		$	5,201

EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS
Basic and diluted	$	0.19		$	0.18		$	0.24		$	0.25
Weighted average number of shares outstanding Basic and diluted		14,795,992			14,792,836			14,795,992			14,791,240

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (UNAUDITED)

	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,306		$	3,401
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		4,903			3,481
Loss from sale of property and equipment		6			5
Provision of bad debt allowance		-			688
Provision for obsolete inventories		1,626			4,105
Deferred income tax		(843	)		(1,744	)
Stock-based compensation		-			10
Changes in operating assets and liabilities
Accounts receivable		20,150			13,865
Inventories		(10,873	)		(11,750	)
Value added tax receivable		681			(1,446	)
Other receivables and prepaid expenses		(8,942	)		(673	)
Advances on inventory purchases		(7,145	)		(2,684	)
Amounts due from related parties		1,117			(161	)
Accounts payable		(14,296	)		(7,542	)
Accounts payable and other payables- related parties		(1,485	)		(818	)
Other payables and accrued liabilities		8,006			(1,353	)
Value added and other taxes payable		(5,924	)		(4,048	)
Income tax payable		(942	)		(753	)
Net cash used in operating activities		(10,655	)		(7,417	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(6,295	)		(2,220	)
Net Cash (used in) provided by investing activities		(6,295	)		(2,220	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans		28,111			25,664
Repayment of bank loans		(30,533	)		(17,821	)
Repayment of loans from related party		2,556			482
Advances to related party		(8,734	)		(6,433	)
Net cash used in financing activities		(8,600	)		1,892

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(887	)		310

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(26,437	)		(7,435	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		62,876			45,288

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	36,439		$	37,853

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest	$	924		$	645
Income taxes	$	3,016		$	3,120

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(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”) and Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”). The Company’s retail operations are provided through its wholly- owned subsidiaries, Shanghai LA GO Fashion Company Limited (“Shanghai LA GO GO”), Jiangsu LA GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”), Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and Xizang He Meida Trading Company Limited (“He Meida”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of June 30, 2018, the condensed consolidated statements of income and comprehensive income (loss) for the three and six months ended June 30, 2018 and 2017, and condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017. 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 six months ended June 30, 2018 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, 2017.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company recognizes revenue pursuant to Accounting Standards Codification 606 (“ASC 606”) Revenue from Contracts with Customers, the standard applies five step model (i) The standard applies to a company’s contracts with customers (ii) The unit of account for revenue recognition under the new standard is a performance obligation (a good or service) and the performance obligations will be accounted for separately if they are distinct (iii) The transaction price is determined based on the amount of consideration that a company expects to be entitled to from a customer (iv) The transaction price is allocated to all the separate performance obligations in an arrangement, and (v) Revenue will be recognized when an entity satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time.

The Company operates in two segments – wholesale and retail.

The Company recognizes 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.

The Company recognizes retail sales 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, net

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).

The fair value of forward exchange contracts is based on broker quotes, if available. If broker quotes are not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price at the reporting date for the residual maturity of the contract using a risk-free interest rate based on government bonds.

At June 30, 2018, except for derivative financial instruments, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

At June 30, 2018, the Company has the following derivative financial instruments measured at their fair value using Level 2 quoted prices provided by banks. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the measurement date. The fair value of foreign currency swap contracts is determined by the variation of measurement date foreign exchange market rates and contract closing date predetermined foreign exchange rates.

The Company has adopted ASC 825-10 “Financial Instruments”, which allows an entity to choose to measure certain financial instruments and liabilities at fair value on a contract-by-contract basis. Subsequent fair value measurement for the financial instruments and liabilities an entity chooses to measure will be recognized in earnings.

Derivative Financial Instruments

From time to time, the Company uses derivative financial instruments to manage its exposure to foreign currency risks arising from operational activities or on certain existing assets and liabilities. The Company does not hold or issue derivative instruments for trading purposes. The Company may enter into forward foreign exchange contracts, foreign exchange options, or foreign exchange currency swap contracts to manage exposure to certain foreign currency operating transactions. These instruments may offset a portion of the foreign currency re-measurement gains or losses, or changes in fair value.

The Company may also enter into above similar derivative instruments to hedge the exposure to variability in the expected cash flows of forecasted transactions such as international sales or purchases that the Company expects to receive or commit to remit foreign currencies. In these cases, the Company designates these instruments as the cash flow hedges.

Derivative financial instruments are recognized initially at fair value and transaction costs are expensed immediately. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on re-measurement to fair value is recognized immediately in earnings when such instruments are designated as fair value hedges or ineffective portion of cash flow hedges. The accumulated gain or loss from effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively.

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, Ever-Glory HK and Ever-Glory Supply Chain is the U.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel, Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Shanghai Yiduo, Ya Lan, He Meida, Huirui and Taixin is the Chinese RMB.

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

Recently Issued Accounting Pronouncements

In 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 June 30, 2018 and December 31, 2017 consisted of the following:

	June 30, 2018		December 31, 2017
	(In thousands of U.S. Dollars)
Raw materials	$	4,655	$	2,148
Work-in-progress		21,226		8,852
Finished goods		38,537		45,182
Total inventories	$	64,418	$	56,182

NOTE 4 BANK LOANS

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short term bank loans consisted of the following as of June 30, 2018 and December 31, 2017.

	June 30, 2018		December 31, 2017
Bank	(In thousands of U.S. Dollars)
Industrial and Commercial Bank of China	$	16,610	$	21,504
Nanjing Bank		10,570		9,216
China Minsheng Banking		3,020		3,072
HSBC		1,548		2,402
Bank of China		1,510		-
Bank of Communications		1,510		1,536
	$	34,768	$	37,730

In December 2016, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $9.1 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2018, Goldenway had borrowed $6.0 million (RMB 40.0 million) under this line of credit with an annual interest rate of 4.7% and due on various dates from November 2018 to January 2019. As of June 30, 2018, approximately $3.1 million was unused and available under this line of credit.

In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.1 million (RMB120.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2018, Ever-Glory Apparel had borrowed $10.6 million (RMB 70.0 million) under this line of credit with annual interest rates ranging from 4.57% to 4.70% and due on September 2018. As of June 30, 2018, approximately $7.5 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 $7.6 million (RMB 50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2018, Goldenway had borrowed $0.8 million (RMB 5.0 million) under this line of credit with annual interest rates ranging from 4.37% to 4.54% and due on October 2018. As of June 30, 2018, approximately $6.8 million was unused and available under this line of credit.

In June 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.1 million (RMB 60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2018, Ever-Glory Apparel had borrowed $7.6 million (RMB 50.0 million) from Nanjing Bank with an annual interest rates ranging from 4.6% to 4.7% and due on various dates from July to September 2018. As of June 30, 2018, approximately $1.5 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 June 30, 2018, LA GO GO had borrowed $2.3 million (RMB15.0 million) from Nanjing Bank with an annual interest rate 5.0% and due on May 2019. As of June 30, 2018, approximately $0.7 million was unused and available under this line of credit.

In December 2017, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB 20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2018, LA GO GO had borrowed $3.0 million (RMB 20.0 million) from China Minsheng Bank with an annual interest rate of 4.6% and due in June 2019.

In October 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.5 million (RMB30.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of June 30, 2018, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest rate of 4.35% and due in August 2018. As of June 30, 2018, approximately $3.0 million was unused and available under this line of credit.

In September 2017, LA GO GO entered into a line of credit agreement for approximately $3.3 million (RMB22.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of June 30, 2018, LA GO GO had borrowed $1.5 million (RMB10.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on September 2018. As of June 30, 2018, approximately $1.8 million was unused and available under this line of credit.

In July 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of June 30, 2018, approximately $6.0 million was unused and available under this line of credit.

In December 2017, 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 $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 30 2018, Ever-Glory Apparel had borrowed $1.5 million from HSBC with an annual interest rate of 3.0% and due in October 2018, and collateralized by approximately $1.76 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2018, approximately $1.0 million was unused and available under this line of credit.

All loans have been repaid before or at maturity date.

Total interest expense on bank loans amounted to $0.3 million, $0.9 million, $0.3 million, $0.6 million for the three and six months ended June 30, 2018 and 2017, respectively.

NOTE 5 DERIVATIVE FINANCIAL INSTRUMENTS

Foreign currency swap contracts

The Company entered two foreign currency swap contracts with two banks during 2018. Due to the demand of financial management for daily operation, Ever-Glory Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB with Bank of China in May and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of principal amounts are included in other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance sheets, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is recognized in the income from operations.

Forward foreign exchange contracts

To avoid foreign currency fluctuation on forecasted international sales and secure the profits on such revenues, the Company entered several forward foreign exchange contracts with banks from time to time. According to ASC 815-20-25, the Company designated above contracts as cash flow hedges. As of June 30, 2018, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of €0.42 million and two outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional amount of $17.0 million according to the amounts of orders. These contracts have aggregate unrealized loss of $0.49 million in fair value recognized as derivatives financial instruments liabilities and accumulated other comprehensive income (loss) in the consolidated balance sheets.

As of December 31, 2017, the Company had five outstanding forward foreign exchange contracts (sell EUR dollars for RMB), with total notional amount of EUR€1.68 million (USD$2.0 million). The fair value of these contracts as of December 31, 2017 was loss of ($8,000), which is immaterial to the consolidated financial statements.

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, 2018.

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, off-shores income is exempted from income taxes.

Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, are subject to income tax at the 16.5% statutory rate.

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

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for the three and six months ended June 30, 2018 and 2017 was taxable in the following jurisdictions:

	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017
	(In thousands of U.S. Dollars)
PRC	$	4,010		$	3,438		$	5,359		$	5,456
Others		(6	)		(3	)		(12	)		(5	)
	$	4,004		$	3,435		$	5,347		$	5,451

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2018 and 2017:

	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017
PRC statutory rate		25.0	%		25.0	%		25.0	%		25.0	%
Net operating losses for which no deferred tax assets was recognized		9.1			-			13.2			12.6
Other		(2.0	)		(0.7	)		-			-
Effective income tax rate		32.1	%		24.3	%		38.2	%		37.6	%

Income tax expense for the three and six months ended June 30, 2018 and 2017 is as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017
Current	$	1,960		$	1,359		$	2,884		$	3,730
Deferred		(675	)		(526	)		(843	)		(1,680	)
Income tax expense	$	1,285		$	833		$	2,041		$	2,050

The Company’s deferred tax liabilities arise from differences between US GAAP and PRC tax accounting for certain revenue and expense items, including timing of deduction of losses from allowances.

The Company has not recorded U.S. deferred income taxes on approximately $98.1 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S. Tax Reform signed into law on December 22, 2017 significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax expense (benefits) relating to the Tax Act changes for the period ended June 30, 2018.

NOTE 7 EARNINGS PER SHARE

The following demonstrates the calculation for earnings per share for the three and six months ended June 30, 2018 and 2017:

	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Weighted average number of common shares – Basic and diluted		14,795,992		14,792,836		14,795,992		14,791,240
Earnings per share – Basic and diluted	$	0.19	$	0.18	$	0.24	$	0.25

NOTE 8 STOCKHOLDERS’ EQUITY

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 six months ended June 30, 2018 and 2017, the Company received $17,919, $51,541, $5,918 and $17,483 from the customers and paid $20,130, $39,318, $4,602 and $13,556 to Wubijia through the consignment, respectively. The net income (loss) of ($2,212), $12,223, $1,316 and $3,928 was recorded as other income (expenses) during the three and six months ended June 30, 2018 and 2017, respectively.

Nanjing Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s retail stores since the third quarter of 2015. During the three and six months ended June 30, 2018 and 2017, the Company received $0, $0, $984 and $6,365 from the customers and paid $0, $0, $1,575 and $10,534 to Nanjing Knitting through the consignment, respectively. The net income (loss) of $0, $0, ($591) and ($4,170) was recorded as other income during the three and six months ended June 30, 2018 and 2017, respectively.

Other expenses due to Related Parties

Included in other expenses for the three and six months ended June 30, 2018 and 2017 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
	In thousands of U.S. Dollars)
Jiangsu Ever-Glory	$	-	$	12	$	-	$	23
Chuzhou Huarui		51		52		109		104
Kunshan Enjin		14		11		27		22
Total	$	65	$	75	$	136	$	149

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 $1.52 million, $1.85 million, $0.44 million and $0.60 million during the three and six months ended June 30, 2018 and 2017, respectively.

In addition, sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 2018 and 2017 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In thousands of U.S. Dollars)
Chuzhou huarui	$	1,006	$	990	$	1,873	$	2,000
Fengyang huarui		567		387		1,051		851
Nanjing Ever-Kyowa		326		77		675		820
Ever-Glory Vietnam		3,260		4,309		5,174		5,731
Ever-Glory Cambodia		-		188		-		224
EsCeLav		21		-		21		4
Jiangsu Ever-Glory		17		-		21		3
	$	5,197	$	5,951	$	8,815	$	9,633

Accounts Payable – Related Parties

The accounts payable to related parties at June 30, 2018 and December 31, 2017 are as follows:

	June 30, 2018		December 31, 2017
	(In thousands of U.S. Dollars)
Ever-Glory Vietnam	$	1,423		1,934
Fengyang Huarui		196		459
Nanjing Ever-Kyowa		1,017		900
Chuzhou Huarui		847		1,152
Esc’elav		-		6
Jiangsu Ever-Glory		28		110
Nanjing Knitting		937		114
Total	$	4,448	$	4,675

Amounts Due From Related Parties-current assets

The amounts due from related parties as of June 30, 2018 and December 31, 2017 are as follows:

	June 30, 2018		December 31, 2017
	(In thousands of U.S. Dollars)
Jiangsu Ever-Glory	$	-	$	265
Total	$	-	$	265

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and six months ended June 30, 2018 and 2017, 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, $0.3 million, $0.02 million and $0.1 million during the three and six months period ended June 30, 2018 and 2017, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.1 million, $0.1 million, $0.05 million and $0.05 million during the three and six months ended June 30, 2018 and 2017, respectively.

Amounts Due From Related Party under Counter Guarantee Agreement

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of June 30, 2018 and December 31, 2017, Jiangsu Ever-Glory has provided guarantees for approximately $48.6 million (RMB 322 million) and $49.5 million (RMB 322.0 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 $31.0 million (RMB 205.5 million) and $31.6 million (RMB 205.5 million) as of June 30, 2018 and December 31, 2017, respectively. Mr. Kang has also provided a personal guarantee for $42.3 million (RMB 280.0 million) and $21.5 million (RMB 140.0 million) as of June 30, 2018 and December 31, 2017, respectively.

At December 31, 2017, $12.8 million (RMB 83.6 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the six months ended June 30, 2018, an additional $8.4 million (RMB 55.7 million) was provided to and $2.5 million (RMB 16.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2018, the amount of the counter-guarantee was $18.6 million (RMB 123.0 million) (the difference represents currency exchange adjustment of $0.1 million), which was 38.2% of the aggregate amount of lines of credit. The increase of the percentage in this quarter was mainly due to China’s credit tightening policy. Obtaining bank loan requires a higher guarantee deposit in this quarter. This amount plus accrued interest of $3.0 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At June 30, 2018 and December 31, 2017, the amount classified as a reduction of equity was $21.6 million and $15.4 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Interest income for the three and six months ended June 30, 2018 and 2017 was approximately $0.2 million, $0.4 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 June 30, 2018 and December 31, 2017 was $5.0 million and $5.2 million, respectively. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions in the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.

For the six months period ended June 30, 2018, the Company had one wholesale customer that represented approximately 8.97% of the Company’s revenues. For the three months periods ended June 30, 2018, the Company had two wholesale customers that represented approximately 9.68% and 6.60% of the Company’s revenues. For the six months periods ended June 30, 2017, the Company had one wholesale customer that represented approximately 11.3% of the Company’s revenues. For the three months periods ended June 30, 2017, the Company had two wholesale customers that represented approximately 11.0% and 10.6% of the Company’s revenues.

For the Company’s wholesale business during the three and six months ended June 30, 2018 and 2017, no supplier represented more than 10% of the total raw materials purchased.

For the Company’s retail business, the Company had one supplier that represented 31.4% and 31.2% of raw materials purchases during the three and six months ended June 30, 2018. For the Company’s retail business, the Company had one supplier that represented 22.8% and 29.0% of raw materials purchases during the three and six months ended June 30, 2017.

For the wholesale business, the Company relied on one manufacturer for 21.7% of purchased finished goods during the three months ended June 30, 2018 and relied on no manufacturer of purchased finished goods during the six months ended June 30, 2018. For the wholesale business, during the three months ended June 30, 2017, the Company relied on one manufactures for 36.9% of purchased finished goods. The Company relied on one manufacturer for 23.9% of purchased finished goods during the six months ended June 30, 2017.

For the retail business, the Company had no supplier that represented more than 10% of finished goods purchases during the three and six months ended June 30, 2018 and 2017.

The Company’s revenues for the three and six months ended June 30, 2018 and 2017 were earned in the following geographic areas:

	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
	(In thousands of U.S. Dollars)
The People’s Republic of China	$	9,131	$	3,525	$	13,342	$	10,114
Hong Kong China		7,418		7,795		12,556		13,218
Germany		899		1,876		2,765		4,769
United Kingdom		2,881		2,287		5,099		5,575
Europe-Other		5,833		8,640		10,285		14,389
Japan		1,881		1,186		4,318		2,631
United States		10,771		7,696		15,705		10,614
Total wholesale business		38,814		33,005		64,070		61,310
Retail business		49,727		46,766		117,256		103,581
Total	$	88,541	$	79,771	$	181,326	$	164,891

NOTE 11 SEGMENTS

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

(a)

Wholesale segment

(b)

Retail segment

	Wholesale segment		Retail segment		Total
	(In thousands of U.S. Dollars)
Six months ended June 30, 2018
Segment profit or loss:
Net revenue from external customers	$	64,070		117,256		181,326
Income from operations	$	2,634		1,940		4,574
Interest income	$	663		33		696
Interest expense	$	782		142		924
Depreciation and amortization	$	602		4,301		4,903
Income tax expense	$	714		1,327		2,041
Segment assets:
Additions to property, plant and equipment		556		5,739		6,295
Total assets		91,483		129,707		221,190

Six months ended June 30, 2017
Segment profit or loss:
Net revenue from external customers	$	61,310		103,581		164,891
Income from operations	$	2,663		1,794		4,457
Interest income	$	498		41		539
Interest expense	$	470		175		645
Depreciation and amortization	$	552		2,929		3,481
Income tax expense	$	756		1,294		2,050
Segment assets:
Additions to property, plant and equipment		314		1,906		2,220
Total assets		87,294		107,013		194,307

	Wholesale segment		Retail segment		Total
	(In thousands of U.S. Dollars)
Three months ended June 30, 2018
Segment profit or loss:
Net revenue from external customers	$	38,814		49,727		88,541
Income from operations	$	1,538		1,591		3,129
Interest income	$	354		16		370
Interest expense	$	291		69		360
Depreciation and amortization	$	297		2,069		2,366
Income tax expense	$	481		804		1,285

Three months ended June 30, 2017
Segment profit or loss:
Net revenue from external customers	$	33,006		46,765		79,771
Income from operations	$	912		2,036		2,948
Interest income	$	263		19		282
Interest expense	$	226		92		318
Depreciation and amortization	$	285		955		1,240
Income tax expense	$	292		541		833

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

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2018 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”), Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”).

Retail Business

We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”), 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 June 30, 2018, we had 1,417 stores (including store-in-stores), including 114stores opened and 97 stores closed in half year of 2018. We expect to open additional 200 to 250 stores in 2018.

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 2018.

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

The Company operates in two segments – wholesale and retail.

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 2018 and 2017 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 slow-moving and obsolete write-offs.

Recently Issued Accounting Pronouncements

Results of Operations for the three months ended June 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

	Three Months Ended June 30,
	2018				2017
	(In thousands of U.S. dollars, except for percentages)
Sales	$	88,541	100.0	%	$	79,771	100.0	%
Gross Profit	$	34,542	39.0	%	$	30,650	38.4	%
Operating Expense	$	31,413	35.5	%	$	27,702	34.7	%
Income From Operations	$	3,129	3.5	%	$	2,948	3.7	%
Other Income (Expenses)	$	875	1.0	%	$	487	0.6	%
Income tax expense	$	1,285	1.5	%	$	833	1.0	%
Net Income	$	2,719	3.1	%	$	2,602	3.3	%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2018 and 2017.

	2018		% of total sales			2017		% of total sales			Growth (Decrease) in 2018 compared with 2017
Wholesale business	(In thousands of U.S. dollars)					(In thousands of U.S. dollars)
Mainland China	$	9,131		10.3	%	$	3,525		4.4	%		159.0	%
Hong Kong China		7,418		8.4			7,795		9.8			(4.8	)
Germany		899		1.0			1,876		2.4			(52.1	)
United Kingdom		2,881		3.3			2,287		2.9			26.0
Europe-Other		5,833		6.6			8,640		10.8			(32.5	)
Japan		1,881		2.1			1,186		1.5			58.7
United States		10,771		12.1			7,696		9.6			40.0
Total Wholesale business		38,814		43.8			33,005		41.4			17.6
Retail business		49,727		56.2			46,766		58.6			6.3
Total sales	$	88,541		100.0	%	$	79,771		100.0	%		11.0	%

Sales for the three months ended June 30, 2018 were $88.5 million, an 11.0% increase compared with the three months ended June 30, 2017. This increase was primarily attributable to a 17.6% increase in sales in our wholesale business partially and an 6.3% increase in our retail business.

Sales generated from our wholesale business contributed 43.8% or $38.8 million of our total sales for the three months ended June 30, 2018, an 17.6% increase compared with $33.0 million in the three months ended June 30, 2017. This increase was primarily attributable to an increase in sales in Mainland China, United Kingdom, United States and Japan partially offset by a decrease in sales in Hong Kong, Germany and Europe-Other.

Sales generated from our retail business contributed 56.2% or $49.7 million of our total sales for the three months ended June 30, 2018, a 6.3% increase compared with 58.6% or $46.8 million in the three months ended June 30, 2017. 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 June 30, 2018 and 2017.

									Growth
									(Decrease) in 2018
	Three months ended June 30,								Compared
	2018				2017				with 2017
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	38,814	100.0	%	$	33,005	100.0	%		17.6	%
Raw Materials		16,456	42.5			14,465	43.8			13.8
Labor		396	1.0			806	2.4			(50.9	)
Outsourced Production Costs		14,722	37.9			11,802	35.8			24.8
Other and Overhead		84	0.2			35	0.1			138.8
Total Cost of Sales for Wholesale		31,658	81.6			27,108	82.1			16.8
Gross Profit for Wholesale		7,156	18.4			5,897	17.9			21.3
Net Sales for Retail		49,727	100.0			46,766	100.0			6.3
Production Costs		13,984	28.1			12,458	26.6			12.3
Rent		8,357	16.8			9,555	20.4			(12.5	)
Total Cost of Sales for Retail		22,341	44.9			22,013	47.1			1.5
Gross Profit for Retail		27,386	55.1			24,753	52.9			10.6
Total Cost of Sales		53,999	61.0			49,121	61.6			9.9
Gross Profit	$	34,542	39.0	%	$	30,650	38.4	%		12.7	%

Raw material costs for our wholesale business were 42.5% of our total wholesale business sales in the three months ended June 30, 2018, compared with 43.8% in the three months ended June 30, 2017. The decrease was mainly due to lower raw material prices.

Labor costs for our wholesale business were 1.0% of our total wholesale business sales in the three months ended June 30, 2018, compared with 2.4% in the three months ended June 30, 2017. The marginal decrease was mainly due to a higher number of outsourced orders in 2018.

Outsourced production costs for our wholesale business for the three months ended June 30, 2018 increased 24.8% to $14.7 million from $11.8 million for the three months ended June 30, 2017. Outsourced production costs accounted for 37.9% of our total wholesale business sales in the three months ended June 30, 2018, a 2.1% increase from the three months ended June 30, 2017. 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 0.2% of our total wholesale business sales for the three months ended June 30, 2018, compared with 0.1% of total wholesale business sales for the three months ended June 30, 2017.

Wholesale business gross profit for the three months ended June 30, 2018 was $7.2 million compared with $5.9 million for the three months ended June 30, 2017. Gross profit accounted for 18.4% of our total wholesale sales for the three months ended June 30, 2018, compared with 17.9% for the three months ended June 30, 2017. The increase was mainly due to a decrease in raw material costs.

Production costs for our retail business were $14.0 million for the three months ended June 30, 2018 compared with $12.5 million during the three months ended June 30, 2017. Retail production costs accounted for 28.1% of our total retail sales in the three months ended June 30, 2018, compared with 26.6% for the three months ended June 30, 2017. The increase was due to increase in overall purchase costs.

Rent costs for our retail business for the three months ended June 30, 2018 were $8.4 million compared with $9.6 million for the three months ended June 30, 2017. Rent costs for our retail business accounted for 16.8% of our total retail sales for the three months ended June 30, 2018, compared with 20.4% for the three months ended June 30, 2017. The decrease was primarily attributable to lower variable rent charged at certain locations.

Gross profit in our retail business for the three months ended June 30, 2018 was $27.4 million and gross margin was 55.1%. Gross profit in our retail business for the three months ended June 30, 2017 was $24.8 million and gross margin was 52.9%.

Total cost of sales for the three months ended June 30, 2018 was $54.0 million, an 9.9% increase from $49.1 million for the three months ended June 30, 2017. Total cost of sales as a percentage of total sales for the three months ended June 30, 2018 was 61.0%, compared with 61.6% for the three months ended June 30, 2017. Gross margin for the three months ended June 30, 2018 was 39.0% compared with 38.4% for the three months ended June 30, 2017.

Selling, General and Administrative Expenses

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

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

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

	Three Months Ended June 30,								Increase (Decrease) in 2018 Compared
	2018				2017				to 2017
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	34,542	39.0	%	$	30,650	38.4	%		12.7	%
Operating Expenses:
Selling Expenses		22,590	25.5			20,223	25.3			11.7
General and Administrative Expenses		8,823	10.0			7,479	9.4			18.0
Total		31,413	35.5			27,702	34.7			13.4
Income from Operations	$	3,129	3.5	%	$	2,948	3.7	%		6.1	%

Selling expenses for the three months ended June 30, 2018 increased 11.7% to $22.6 million from $20.2 million for the three months ended June 30, 2017. The increase was attributable to the increased average salaries of retail employees, as well as increased store decoration and marketing expenses associated with the promotion of the retail brand.

General and administrative expenses for the three months ended June 30, 2018 increased 18.0% to $8.8 million from $7.5 million for the three months ended June 30, 2017.

Income from Operations

Income from operations for the three months ended June 30, 2018 increased 6.1% to $3.1 million from $2.9 million for the three months ended June 30, 2017. Income from operations for the three months ended June 30, 2018 accounted for 3.5% of our total sales, an 0.2% decrease compared with the three months ended June 30, 2017.

Interest Expense

Interest expense for the three months ended June 30, 2018 was $0.3 million, a 13.2% increase compared with the same period in 2017. The increase was due to the increased interest rate.

Income Tax Expenses

Income tax expense was $1.3 million and $0.8 million for the three months end June 30, 2018 and 2017, respectively.

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

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

Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, are subject to income tax at the 16.5% statutory rate.

Net Income

Net income for the three months ended June 30, 2018 was $2.7 million, a 4.5% increase compared with the same period in 2017. Our basic and diluted earnings per share were $0.19 and $0.18 for the three months ended June 30, 2018 and 2017, respectively.

Results of Operations for the six months ended June 30, 2018 and 2017

The following table summarizes our results of operations for the six months ended June 30, 2018 and 2017. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.

	Six Months Ended June 30,
	2018				2017
	(In thousands of U.S. Dollars, except for percentages)
Sales	$	181,326	100.0	%	$	164,891	100.0	%
Gross Profit		65,887	36.3			59,159	35.9
Operating Expense		61,313	33.8			54,702	33.2
Income From Operations		4,574	2.5			4,457	2.7
Other Income		773	0.4			994	0.6
Income tax expense		2,041	1.1			2,050	1.2
Net Income	$	3,306	1.8	%	$	3,401	2.1	%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2018 and 2017.

	2018		% of total sales			2017		% of total sales			Growth (Decrease) in 2018 compared with 2017
Wholesale business	(In thousands of U.S. dollars)					(In thousands of U.S. dollars)
Mainland China	$	13,342		7.4	%	$	10,114		6.1	%		31.9	%
Hong Kong China		12,556		6.9			13,218		8.0			(5.0	)
Germany		2,765		1.5			4,769		2.9			(42.0	)
United Kingdom		5,099		2.8			5,575		3.4			(8.5	)
Europe-Other		10,286		5.7			14,389		8.7			(28.5	)
Japan		4,318		2.4			2,631		1.6			64.1
United States		15,704		8.6			10,614		6.4			48.0
Total Wholesale business		64,070		35.3			61,310		37.2			4.5
Retail business		117,256		64.7			103,581		62.8			13.2
Total sales	$	181,326		100.0	%	$	164,891		100.0	%		10.0	%

Sales for the six months ended June 30, 2018 were $181.3 million, an increase of 10.0% from the six months ended June 30, 2017. This increase was primarily attributable to an 4.5% increase in sales in our wholesale business and an 13.2% increase in our retail business.

Sales generated from our wholesale business contributed 35.3% or $64.1 million of our total sales for the six months ended June 30, 2018, an increase of 4.5% compared with $61.3 million in the six months ended June 30, 2017. This increase was primarily attributable to increased sales in Mainland China, Japan and the United States partially offset by decreased sales in Hong Kong China, Germany, United Kingdom and Europe-Other.

Sales generated from our retail business contributed 64.7% or $117.3 million of our total sales for the six months ended June 30, 2018, an increase of 13.2% compared with $103.6 million in the six months ended June 30, 2017. This increase was primarily due to an increase in same store sales.

Total retail store square footage and sales per square foot for the six months ended June 30, 2018 and 2017 are as follows:

	2018		2017
Total store square footage		1,421,156		1,357,746
Number of stores		1,417		1,362
Average store size, square feet		1,003		997
Total store sales (in thousands of U.S. dollars)	$	117,256	$	103,581
Sales per square foot	$	83	$	76

Same store sales and newly opened store sales for the six months ended June 30, 2018 and 2017 are as follows:

	2018		2017
	(In thousands of U.S. dollars)
Sales from stores opened for a full year	$	92,898	$	83,614
Sales from newly opened store sales	$	11,728	$	13,479
Sales from e-commerce platform	$	6,989	$	4,094
Other*	$	5,641	$	2,394
Total	$	117,256	$	103,581

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

We remodeled or relocated 206 stores in 2018, and 69 stores during the three months ended June 30, 2018. We plan to relocate or remodel 200-300 stores in 2018. 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 six months ended June 30, 2018 and 2017.

									Growth
									(Decrease) in 2018
	Six months ended June 30,								Compared
	2018				2017				with 2017
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	64,071	100.0	%	$	61,310	100.0	%		4.5	%
Raw Materials		26,724	41.7			25,674	41.9			4.1
Labor		781	1.2			1,768	2.9			(55.8	)
Outsourced Production Costs		23,447	36.6			21,542	35.1			8.8
Other and Overhead		157	0.3			126	0.2			24.1
Total Cost of Sales for Wholesale		51,109	79.8			49,110	80.1			4.1
Gross Profit for Wholesale		12,962	20.2			12,200	19.9			6.2
Net Sales for Retail		117,255	100.0			103,581	100.0			13.2
Production Costs		40,055	34.2			31,687	30.6			26.4
Rent		24,275	20.7			24,935	24.1			(2.6	)
Total Cost of Sales for Retail		64,330	54.9			56,622	54.7			13.6
Gross Profit for Retail		52,925	45.1			46,959	45.3			12.7
Total Cost of Sales		115,439	63.7			105,732	64.1			9.2
Gross Profit	$	65,887	36.3	%	$	59,159	35.9	%		11.4	%

Raw material costs for our wholesale business were 41.7% of our total wholesale business sales in the six months ended June 30, 2018, compared with 41.9% in the six months ended June 30, 2017. The decrease was mainly due to lower cost of raw materials.

Labor costs for our wholesale business were 1.2% of our total wholesale business sales in the six months ended June 30, 2018, compared with 2.9% in the six months ended June 30, 2017. The marginal decrease was mainly due to a higher number of outsourced orders in 2018.

Outsourced production costs for our wholesale business were 36.6% of our total sales in the six months ended June 30, 2018, compared with 35.1% in the six months ended June 30, 2017.

Overhead and other expenses for our wholesale business accounted for 0.3% and 0.2% of our total sales for the six months ended June 30, 2018 and 2017, respectively.

Gross profit for our wholesale business for the six months ended June 30, 2018 was $13.0 million, an 6.2% increase compared with the six months ended June 30, 2017. As a percentage of total wholesale business sales, gross profit was 20.2% of our total wholesale business sales for the six months ended June 30, 2018, compared with 19.9% for the six months ended June 30, 2017. The increase was mainly due to decreased raw materials costs.

Production costs for our retail business for the six months ended June 30, 2018 were $40.1 million compared with $31.7 million for the six months ended June 30, 2017. As a percentage of our total retail sales, production costs were 34.2% of our total retail sales for the six months ended June 30, 2018, compared with 30.6% for the six months ended June 30, 2017. The increase was due to increase in overall purchase costs.

Rent costs for our retail business for the six months ended June 30, 2018 were $24.3 million compared with $24.9 million for the six months ended June 30, 2017. As a percentage of total retail sales, rent costs were 20.7% of our total retail sales for the six months ended June 30, 2018 compared with 24.1% for the six months ended June 30, 2017. The decrease was primarily attributable to lower rent at certain locations.

Gross profit for our retail business for the six months ended June 30, 2018 was $52.9 million compared with $47.0 million for the six months ended June 30, 2017. Gross margin for our retail business for the six months ended June 30, 2018 was 45.1% compared with 45.3% for the six months ended June 30, 2017.

Total cost of sales for the six months ended June 30, 2018 was $115.4 million, an 9.2% increase compared with the six months ended June 30, 2017. As a percentage of total sales, total costs were 63.7% of total sales for the six months ended June 30, 2018, compared with 64.1% for the six months ended June 30, 2016. Total gross margin for the six months ended June 30, 2018 was 36.3% compared with 35.9% for the six months ended June 30, 2017.

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 16.5% and 18.4% of raw material purchases for the six months ended June 30, 2018 and 2017, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six months ended June 30, 2018 and 2017. For our retail business, purchases from our two largest suppliers represented approximately 55.1% and 32.2% of raw material purchases for the six months ended June 30, 2018 and 2017, respectively. One supplier provided approximately 31.2% and 22.8% of our total purchases for the six months ended June 30, 2018 and 2017, respectively. 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 28.9% and 45.6% of finished goods purchases for the six months ended June 30, 2018 and 2017, respectively. One contract manufacturer provided approximately 9.3% of our finished goods purchases for the six months ended June 30, 2018. One contract manufacturer provided approximately 23.9% of our finished goods purchases for the six months ended June 30, 2017, respectively. For our retail business, our five largest contract manufacturers represented approximately 16.4% and 10.7% of finished goods purchases for the six months ended June 30, 2018 and 2017, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2018 and 2017. 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.

	Six months ended June 30,								Increase (Decrease) in 2018 Compared
	2018				2017				to 2017
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	65,887	36.3	%	$	59,159	35.9	%		11.4	%
Operating Expenses:
Selling Expenses		44,817	24.7			39,968	24.2			12.1
General and Administrative Expenses		16,496	9.1			14,734	8.9			12.0
Total		61,313	33.8			54,702	33.2			12.1
Income from Operations	$	4,574	2.5	%	$	4,457	2.7	%		2.6	%

Selling expenses for the six months ended June 30, 2018 were $44.8 million, an 12.1% increase compared with the six months ended June 30, 2017. The increase was attributable to the increased bonus of retail employees, as well as increased store decoration and marketing expenses associated with the promotion of the retail brand.

General and administrative expenses for the six months ended June 30, 2018 were $16.5 million an 12.0% increase compared with the six months ended June 30, 2017. As a percentage of total sales, general and administrative expenses accounted for 9.1% of total sales for the six months ended June 30, 2018, compared with 8.9% of total sales for the six months ended June 30, 2017. The increase was mainly attributable to the increased average salaries.

Income from Operations

Income from operations for the six months ended June 30, 2018 was $4.6 million, an 2.6% increase from $4.5 million for the six months ended June 30, 2017. This decrease was due to increased expenses.

Interest Expense

Interest expense was $0.9 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. The increase was due to the increased interest rate.

Income Tax Expenses

Income tax expense for the six months ended June 30, 2018 was $2.0 million, a 0.4% decrease compared to the same period of 2017. The decrease was primarily due to lower income before income tax expense.

Net Income

Net income for the six months ended June 30, 2018 was $3.3 million, a decrease of 2.8% compared with the same period in 2017. Basic and diluted earnings per share were $0.24 and $0.25 for the six months ended June 30, 2018 and 2017, respectively.

Summary of Cash Flows

Summary cash flows information for the six months ended June 30, 2018 and 2017 is as follows:

	2018			2017
	(In thousands of U.S. dollars)
Net cash used in operating activities	$	(10,655	)	$	(7,417	)
Net cash used in investing activities	$	(6,295	)	$	(2,220	)
Net cash provided by (used in) financing activities	$	(8,600	)	$	1,892

Net cash used in operating activities was $10.7 million for the six months ended June 30, 2018, compared with $7.4 million net cash used in operating activities during the six months ended June 30, 2017. The increase was primarily due to increase in inventory and decrease in accounts receivable.

Net cash used in investing activities was $6.3 million for the six months ended June 30, 2018, compared with $2.2 million used during the six months ended June 30, 2017. This increase was mainly due to the increased in purchase of property and equipment and remodeling expenditure in 2018.

Net cash used in financing activities was $8.6 million for the six months ended June 30, 2018, compared with $1.9 million net cash provided during the six months ended June 30, 2017. During the six months ended June 30, 2018, we repaid $30.5 million of bank loans and received bank loan proceeds of $28.1 million. Also, under the counter-guarantee agreement, we received $2.6 million from and $8.7 million paid to the related party during the six months ended June 30, 2018.

Liquidity and Capital Resources

As of June 30, 2018, we had cash and cash equivalents of $36.4 million, other current assets of $152.2 million and current liabilities of $122.9 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 loans have been repaid before or at maturity date.

Derivative Financial Instruments

Foreign currency swap contracts

The Company entered two foreign currency swap contracts with two banks during 2018. Due to the demand of financial management for daily operation, Ever-Glory Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB with Bank of China in May and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of principal amounts are included in other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance sheet, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is recognized in the income from operations.

Forward foreign exchange contracts

Capital Commitments

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

Uses of Liquidity

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

Sources of Liquidity

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

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

As of June 30, 2018, we had access to approximately $66.2 million in lines of credit, of which approximately $31.4 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately $48.6 million (RMB 322.0 million) and approximately $18.6 million (RMB 123.0 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of June 30, 2018.

Foreign Currency Translation Risk

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2018, the market foreign exchange rate had increased to RMB 6.62 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 six months ended June 30, 2018 and 2017 was ($6.09) million, ($2.07) million, $1.06 million and $1.52 million, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Evaluation of Disclosure Controls and Procedures. As of June 30, 2018, the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of June 30, 2018. 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, 2017. As of June 30, 2018, 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 six months ended June 30, 2018, 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, 2017 filed with the SEC on March 28, 2018.

The proposed tariffs by the U.S. government and the potential of a trade war between the U.S. and China, and on a larger scale, internationally, may dampen global growth. If the U.S. government, in the future, subjects the services that we provide to proposed tariffs, our business operations and revenues may be negatively impacted.

The U.S. government has recently proposed, among other actions, imposing new or higher tariffs on specified products imported from China to penalize China for what it characterizes as unfair trade practices and China has responded by proposing new or higher tariffs on specified products imported from the United States. On July 6, 2018, the United States imposed 25% tariffs on $34 billion worth of Chinese goods as part of U.S. President Donald Trump's new tariffs policy, which then led China to respond with similar sized tariffs on U.S. products. Soon after on July 10, following an order from U.S. President Donald Trump, the U.S. Trade Representative (USTR) Office published a list of $200 billion in Chinese products to be subject to a newly proposed 10% tariff. China quickly responded to the announcement by blasting the proposed tariffs as “irrational” and “completely unacceptable. As such, we may have access to fewer business opportunities and our operation may be negatively impacted. Export to customers based in the U.S. accounts for approximately 6.0% of our revenue during the previous two fiscal years. We may suffer loss due to such trade war. In addition, future actions or escalations by either the United States or China that affect trade relations may cause global economic turmoil and potentially have a negative impact on our business and we cannot provide any assurances as to whether such actions will occur or the form that they may take.

Sustained tension between the United States and China over trade policies could significantly undermine the stability of the global and Chinese economy. Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The following exhibits are filed herewith:

Exhibit No.		Description

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

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

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

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

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

SIGNATURES

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

August 13, 2018	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 - August 13, 2018

Attached files

Ever-Glory International Group, Inc. Reports