UNITED STATES
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCD.C. 20549
FORM 10-Q
x | þ | Quarterly report pursuant to SectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended September 30, 2008
|
For the quarterly period ended March 31, 2009
o | ¨ | Transition report pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from ___________ to ___________. |
For the transition period from ____________ to ____________
Commission File Numberfile number: 0-28806
Ever-Glory International Group Inc.
(Exact name of issuerregistrant as specified in its charter)
| Florida | | 65-0420146 | |
| (State or other jurisdiction of incorporation or organization) | 65-0420146
| (I.R.S. employerEmployer identification number)Identification No.)
| |
100 N. Barranca Ave. #810
West Covina, California 91791
(Address (Address of principal executive offices and zip code)offices)
(626) 839-9116
(Registrant’s (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| None
|
Securities registered pursuant to Section 12(g) of the Act:
| Common Stock, par value $0.001 per share
|
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 oþ No xo
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). oYes oNo
Indicate by check mark whether the registrant is a large accelerated filer,, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer”filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):Act. o
Large accelerated filer | Large o
| Accelerated Filer ofiler | Accelerated Filer o
|
| Non-accelerated filero | o | Smaller reporting companyþ | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No xþ
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 2008, the Registrant had 12,350,839 May 12, 2009, 13,548,498 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.
EVER-GLORY INTERNATIONAL GROUP, INC.
FORM 10-Q
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This document contains certainStatements contained in this Quaterly 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 a forward-looking nature.1995. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations andwhether expressed or implied, are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that couldwhich can cause actual results to differ materially from those projected orcurrently anticipated, includingdue to a number of factors, which include, but are not limited to the following, which are discussed in further detail on page 48 of this report:to:
| · | the ability to timely and accurately complete product orders;
Competition within our industry; |
| ·
|
the ability to coordinate product design with its customers;
| | ·
| its dependence on a limited number of larger customers;
|
| ·
| political and economic factors in the Peoples’ Republic of China;
|
| ·
| the ability of the Company’s internal production operations to increase production volumes on finished goods in a timely fashion in response to increasing demand, and to enable the Company to achieve timely delivery of finished goods to its customers;
|
| ·
| the Company’s ability to expand and grow its distribution channels;
|
| ·
| unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders;
|
| ·
| a weakening of economic conditions which would reduce demand for products sold by the Company and could adversely affect profitability;
|
| ·
| the effect of terrorist acts, or the threat thereof, on consumer confidence and spending, or the production and distribution of product and raw materials which could, as a result, adversely affect the Company’s operations and financial performance;
|
| ·
| the acceptance in the marketplace of the Company’s new products and changes in consumer preferences;
|
| ·
| reductions in sales of products, either as the result of economic or other conditions, or reduced consumer acceptance of a product, which could result in an unplanned buildup of inventory;
|
| ·
| the ability to source raw materials and finished products at favorable prices to the Company;
|
| ·
| the potential impact of power shortages on the Company’s operations including temporary blackouts at the Company’s facilities;
|
| ·
| foreign currency exchange rate fluctuations;
|
| ·
| earthquakes or other natural disasters;
|
| ·
| the Company’s ability to identify and successfully execute cost control initiatives (including management of the cost of labor);
|
| ·
| the impact of quotas, tariffs, or safeguards on the importation or exportation of the Company’s products; or
|
| · | other risks outlined above and in the Company’s other filings made periodically by the Company.Seasonality of our sales; |
| · | Success of our investments in new product development; |
| · | Our plans to open new retail stores; |
| · | Success of our acquired businesses; |
| · | Our relationships with our major customers; |
| · | The popularity of our products; |
| · | Relationships with suppliers and cost of supplies; |
| · | Financial and economic conditions in Asia, Japan, Europe and the U.S.; |
| · | Anticipated effective tax rates in future years; |
| · | Regulatory requirements affecting our business; |
| · | Currency exchange rate fluctuations; |
| · | Our future financing needs; and |
| · | Our ability to attract additional investment capital on attractive terms. |
Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar expressions are generally intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speakreflect management’s opinions only as of the date hereof. The Company undertakesWe undertake no obligation to update thisrevise or publicly release the results of any revision to these forward-looking information. Nonetheless,statements. Readers should carefully review the Company reservesfactors described in the right to make such updatesSection entitled “Risk Factors” on Form 10-K and other documents we file from time to time by press release, periodic report or other method of public disclosure withoutwith the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.Securities and Exchange Commission (‘SEC’).
| ITEM 1. FINANCIAL STATEMENTS. |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2008MARCH 31, 2009 (UNAUDITED) AND DECEMBER 31, 20072008
| | September 30, 2008 | | December 31, 2007 | |
| | (Unaudited) | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash and cash equivalents | | $ | 882,548 | | $ | 641,739 | |
Accounts receivable | | | 17,296,013 | | | 13,035,299 | |
Accounts receivable - related parties | | | — | | | 158,235 | |
Inventories | | | 2,633,859 | | | 1,897,023 | |
Other receivable | | | 621,866 | | | 150,855 | |
Other receivable - related parties | | | 38,596 | | | — | |
Advances on inventory purchase | | | 339,794 | | | — | |
Advances on inventory purchase - related parties | | | 6,882,463 | | | 2,568,040 | |
Refundable deposit and prepaid expenses | | | 182,008 | | | — | |
Total Current Assets | | | 28,877,147 | | | 18,451,191 | |
| | | | | | | |
DEFERRED FINANCING COSTS | | | 3,881 | | | 191,995 | |
LAND USE RIGHT, NET | | | 2,863,124 | | | 2,729,183 | |
PROPERTY AND EQUIPMENT, NET | | | 13,055,017 | | | 12,140,903 | |
INVESTMENT IN SUBSIDIARY | | | 1,463,000 | | | — | |
TOTAL ASSETS | | $ | 46,262,169 | | $ | 33,513,272 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Accounts payable | | $ | 5,910,711 | | $ | 1,796,655 | |
Accounts payable - related parties | | | 155,917 | | | 245,589 | |
Other payables - related party | | | 903,715 | | | 650,000 | |
Other payables and accrued liabilities | | | 1,582,121 | | | 1,069,682 | |
Trade notes payable | | | 419,967 | | | — | |
Value added tax payable | | | 589,078 | | | 378,898 | |
Income tax payable and other taxes payable | | | 429,856 | | | 146,226 | |
Bank loans | | | 5,793,480 | | | 4,798,500 | |
Convertible notes payable, net of unamortized discount of $40,469 and $1,974,497 at September 30, 2008 and December 31, 2007, respectively | | | 9,531 | | | 25,503 | |
Total Current Liabilities | | | 15,794,376 | | | 9,111,053 | |
| | | | | | | |
LONG-TERM LOAN FROM PARTY RELATED BY COMMON CONTROL | | | 2,630,821 | | | 4,474,985 | |
| | | | | | | |
Total Liabilities | | | 18,425,197 | | | 13,586,038 | |
| | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | — | | | — | |
MINORITY INTEREST | | | 551,623 | | | — | |
| | | | | | | |
STOCKHOLDERS' EQUITY | | | | | | | |
Preferred stock ($.001 par value, authorized 5,000,000 shares, 10,000 shares designated as "Series A Preferred Stock") | | | — | | | — | |
Series A Convertible Preferred Stock (no shares issued and outstanding as of September 30, 2008 and December 31, 2007 | | | — | | | — | |
Common stock ($.001 par value, authorized 50,000,000 shares, 12,350,839 and 11,379,309 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively) | | | 12,351 | | | 11,379 | |
Additional paid-in capital | | | 4,499,027 | | | 2,154,368 | |
Retained earnings | | | 15,441,526 | | | 12,247,748 | |
Statutory reserve | | | 3,437,379 | | | 3,437,379 | |
Accumulated other comprehensive income | | | 3,895,066 | | | 2,076,360 | |
Total Stockholders' Equity | | | 27,285,349 | | | 19,927,234 | |
| | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 46,262,169 | | $ | 33,513,272 | |
The accompanying notes are an integral part of these statements.
| | March 31, | | | December 31, | |
| | 2009 | | | 2008 | |
| | (unaudited) | | | | |
ASSETS | | | | | | |
| | | | | | |
CURRENT ASSETS | | | | | | |
Cash and cash equivalents | | $ | 3,833,600 | | | $ | 1,445,363 | |
Accounts receivable | | | 12,970,781 | | | | 9,485,338 | |
Accounts receivable - related parties | | | 73,900 | | | | - | |
Inventories | | | 2,856,073 | | | | 3,735,227 | |
Other receivables and prepaid expenses | | | 433,038 | | | | 945,191 | |
Advances on inventory purchases | | | 209,321 | | | | 288,256 | |
Amounts due from related party | | | 10,754,680 | | | | 11,565,574 | |
Total Current Assets | | | 31,131,393 | | | | 27,464,949 | |
| | | | | | | | |
LAND USE RIGHT, NET | | | 2,834,195 | | | | 2,854,508 | |
PROPERTY AND EQUIPMENT, NET | | | 12,799,944 | | | | 12,494,452 | |
INVESTMENT AT COST | | | 1,465,000 | | | | 1,467,000 | |
TOTAL ASSETS | | $ | 48,230,532 | | | $ | 44,280,909 | |
| | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Bank loans | | $ | 6,592,500 | | | $ | 6,542,820 | |
Accounts payable | | | 5,290,568 | | | | 3,620,543 | |
Other payables- related party | | | 903,416 | | | | 754,589 | |
Other payables and accrued liabilities | | | 1,813,614 | | | | 1,683,977 | |
Value added and other taxes payable | | | 656,583 | | | | 368,807 | |
Income tax payable | | | 207,550 | | | | 257,946 | |
Deferred tax liabilities | | | 176,086 | | | | 80,009 | |
Total Current Liabilities | | | 15,640,317 | | | | 13,308,691 | |
| | | | | | | | |
LONG-TERM LIABILITIES | | | | | | | | |
Loan from related party | | | 2,689,350 | | | | 2,660,085 | |
TOTAL LIABILITIES | | | 18,329,667 | | | | 15,968,776 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
EQUITY | | | | | | | | |
Stockholders' equity of the Company | | | | | | | | |
Preferred stock ($.001 par value, authorized 5,000,000 shares, no shares issued and outstanding) | | | - | | | | - | |
Common stock ($.001 par value, authorized 50,000,000 shares, 12,394,652 and 12,373,567 shares issued and outstanding as of March 31,2009 and December 31, 2008, respectively) | | | 12,395 | | | | 12,374 | |
Additional paid-in capital | | | 4,571,164 | | | | 4,549,004 | |
Retained earnings | | | 17,429,895 | | | | 15,807,539 | |
Statutory reserve | | | 3,437,379 | | | | 3,437,379 | |
Accumulated other comprehensive income | | | 3,912,652 | | | | 3,956,860 | |
Total Stockholders' Equity of the Company | | | 29,363,485 | | | | 27,763,156 | |
Noncontrolling interest | | | 537,380 | | | | 548,977 | |
Total Equity | | | 29,900,865 | | | | 28,312,133 | |
| | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | $ | 48,230,532 | | | $ | 44,280,909 | |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIESSUBSDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
| | Three months ended | | Nine months ended | |
| | September 30, | | September 30, | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
| | | | | | | | | |
NET SALES | | | | | | | | | | | | | |
Related parties | | $ | 17,582 | | $ | 486,318 | | $ | 510,145 | | $ | 940,334 | |
Third parties | | | 31,867,994 | | | 18,991,475 | | | 75,191,036 | | | 49,060,893 | |
Total net sales | | | 31,885,576 | | | 19,477,793 | | | 75,701,181 | | | 50,001,227 | |
| | | | | | | | | | | | | |
COST OF SALES | | | | | | | | | | | | | |
Related parties | | | 10,989 | | | 456,689 | | | 472,373 | | | 878,673 | |
Third parties | | | 27,284,216 | | | 15,948,006 | | | 62,563,564 | | | 41,418,315 | |
Total cost of sales | | | 27,295,205 | | | 16,404,695 | | | 63,035,937 | | | 42,296,988 | |
| | | | | | | | | | | | | |
GROSS PROFIT | | | 4,590,371 | | | 3,073,098 | | | 12,665,244 | | | 7,704,239 | |
| | | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | | |
Selling expenses | | | 563,971 | | | 167,976 | | | 1,210,063 | | | 493,686 | |
General and administrative expenses | | | 1,626,375 | | | 852,424 | | | 4,625,257 | | | 2,558,587 | |
Total operating expenses | | | 2,190,346 | | | 1,020,400 | | | 5,835,320 | | | 3,052,273 | |
| | | | | | | | | | | | | |
INCOME FROM OPERATIONS | | | 2,400,025 | | | 2,052,698 | | | 6,829,924 | | | 4,651,966 | |
| | | | | | | | | | | | | |
OTHER INCOME (EXPENSES) | | | | | | | | | | | | | |
Interest expense | | | (1,468,592 | ) | | (680,644 | ) | | (2,677,546 | ) | | (942,534 | ) |
Other income (expense) | | | (15,715 | ) | | 21,891 | | | (118,167 | ) | | 31,555 | |
Total other income (expenses) | | | (1,484,307 | ) | | (658,753 | ) | | (2,795,713 | ) | | (910,979 | ) |
| | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST | | | 915,718 | | | 1,393,945 | | | 4,034,211 | | | 3,740,987 | |
| | | | | | | | | | | | | |
INCOME TAX EXPENSE | | | (273,203 | ) | | (72,880 | ) | | (841,850 | ) | | (155,203 | ) |
| | | | | | | | | | | | | |
INCOME BEFORE MINORITY INTEREST | | | 642,515 | | | 1,321,065 | | | 3,192,361 | | | 3,585,784 | |
| | | | | | | | | | | | | |
LESS MINORITY INTEREST | | | (4,666 | ) | | — | | | (1,417 | ) | | — | |
| | | | | | | | | | | | | |
NET INCOME | | | 647,181 | | | 1,321,065 | | | 3,193,778 | | | 3,585,784 | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME | | | | | | | | | | | | | |
Foreign currency translation gain | | | 107,469 | | | 269,424 | | | 1,818,706 | | | 720,130 | |
| | | | | | | | | | | | | |
COMPREHENSIVE INCOME | | $ | 754,650 | | $ | 1,590,489 | | $ | 5,012,484 | | $ | 4,305,914 | |
| | | | | | | | | | | | | |
EARNINGS PER SHARE | | | | | | | | | | | | | |
Net income per share | | | | | | | | | | | | | |
Basic | | $ | 0.05 | | $ | 0.25 | | $ | 0.27 | | $ | 0.67 | |
Diluted | | $ | 0.05 | | $ | 0.16 | | $ | 0.27 | | $ | 0.36 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding during the period | | | | | | | | | | | | | |
Basic | | | 11,914,825 | | | 5,388,201 | | | 11,692,604 | | | 5,388,201 | |
Diluted | | | 12,002,908 | | | 11,962,285 | | | 11,715,332 | | | 11,575,752 | |
The accompanying notes are an integral part of these statements. | | 2009 | | | 2008 | |
| | | | | | |
NET SALES | | | | | | |
Related parties | | $ | - | | | $ | 425,102 | |
Third parties | | | 20,507,822 | | | | 19,322,106 | |
Total net sales | | | 20,507,822 | | | | 19,747,208 | |
| | | | | | | | |
COST OF SALES | | | | | | | | |
Related parties | | | - | | | | 402,748 | |
Third parties | | | 15,793,667 | | | | 15,623,424 | |
Total cost of sales | | | 15,793,667 | | | | 16,026,172 | |
| | | | | | | | |
GROSS PROFIT | | | 4,714,155 | | | | 3,721,036 | |
| | | | | | | | |
OPERATING EXPENSES | | | | | | | | |
Selling expenses | | | 940,474 | | | | 277,528 | |
General and administrative expenses | | | 1,856,122 | | | | 1,412,654 | |
Total Operating Expenses | | | 2,796,596 | | | | 1,690,182 | |
| | | | | | | | |
INCOME FROM OPERATIONS | | | 1,917,559 | | | | 2,030,854 | |
| | | | | | | | |
OTHER INCOME (EXPENSES) | | | | | | | | |
Interest income | | | 103,547 | | | | 31,974 | |
Interest expense | | | (123,650 | ) | | | (577,828 | ) |
Other income | | | 2,373 | | | | - | |
Total Other Income (Expenses) | | | (17,730 | ) | | | (545,854 | ) |
| | | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | | | 1,899,829 | | | | 1,485,000 | |
| | | | | | | | |
INCOME TAX EXPENSE | | | (289,071 | ) | | | (283,838 | ) |
| | | | | | | | |
NET INCOME | | | 1,610,758 | | | | 1,201,162 | |
| | | | | | | | |
ADD(LESS): NET LOSS(INCOME) ATTRIBUTABLE TO THE NONCONTROLING INTEREST | | | 11,598 | | | | (3,869 | ) |
| | | | | | | | |
NET INCOME ATTRIBUTABLE TO THE COMPANY | | | 1,622,356 | | | | 1,197,293 | |
| | | | | | | | |
Foreign currency translation (loss) gain | | | (44,208 | ) | | | 1,099,884 | |
COMPREHENSIVE INCOME | | | 1,578,148 | | | | 2,297,177 | |
| | | | | | | | |
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO | | | | | | | | |
THE NONCONTROLING INTEREST | | | (12,392 | ) | | | 23,457 | |
| | | | | | | | |
COMPREHENSIVE INCOME ATTRIBUTABLE TO | | | | | | | | |
THE COMPANY | | $ | 1,590,540 | | | $ | 2,273,720 | |
| | | | | | | | |
| | | | | | | | |
NET INCOME PER SHARE | | | | | | | | |
Attributable to the Company's common stockholders | | | | | | | | |
Basic | | $ | 0.12 | | | $ | 0.10 | |
Diluted | | $ | 0.12 | | | $ | 0.10 | |
| | | | | | | | |
Weighted average number of shares outstanding | | | | | | | | |
Basic | | | 13,531,225 | | | | 11,449,682 | |
Diluted | | | 13,531,225 | | | | 12,204,363 | |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
| | Nine months ended September 30, | |
| | 2008 | | 2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net income | | $ | 3,193,778 | | $ | 3,585,784 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | |
Minority interest | | | (1,417 | ) | | — | |
Depreciation | | | 666,233 | | | 629,793 | |
Amortization | | | 48,213 | | | 38,926 | |
Beneficial conversion feature | | | — | | | 454,545 | |
Amortization of discount on convertible notes | | | 1,934,028 | | | 113,754 | |
Amortization of deferred financing costs | | | 318,196 | | | 20,210 | |
Common stock issued for interest | | | 2,155 | | | — | |
Stock Compensation | | | 12,855 | | | — | |
Changes in operating assets and liabilities | | | | | | | |
Accounts receivable | | | (3,306,125 | ) | | 89,336 | |
Accounts receivable - related parties | | | 153,420 | | | 1,476,411 | |
Inventories | | | (597,330 | ) | | 82,364 | |
Other receivable and prepaid expenses | | | (631,466 | ) | | (75,327 | ) |
Other receivable - related parties | | | (37,823 | ) | | — | |
Advance on inventory purchase | | | (332,988 | ) | | — | |
Advance on inventory purchase - related party | | | (4,059,141 | ) | | — | |
Accounts payable | | | 3,913,514 | | | 305,706 | |
Accounts payable - related companies | | | (104,027 | ) | | (1,522,087 | ) |
Trade notes payable | | | 411,556 | | | — | |
Other payables and accrued liabilities | | | 435,963 | | | (1,638,729 | ) |
Value added tax payables | | | 181,054 | | | (19,821 | ) |
Income tax and other tax payables | | | 268,334 | | | 52,964 | |
Net cash provided by operating activities | | | 2,468,982 | | | 3,593,829 | |
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Investment in New Tailun | | | — | | | (2,000,000 | ) |
Investment in La Chapelle | | | (1,397,700 | ) | | — | |
Purchase of property and equipment | | | (800,669 | ) | | (527,254 | ) |
Proceeds from sale of equipment | | | 37,019 | | | 714,213 | |
Net cash used in investing activities | | | (2,161,350 | ) | | (1,813,041 | ) |
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Proceed from sales of convertible notes, net | | | — | | | 1,757,480 | |
Advances from related parties | | | 453,715 | | | 980,544 | |
Repayment to related parties | | | (200,000 | ) | | (740,984 | ) |
Contribution from minority shareholders | | | 553,040 | | | — | |
Proceeds from bank loan | | | 11,354,904 | | | 5,211,183 | |
Repayment of bank loan | | | (10,695,402 | ) | | (7,165,377 | ) |
Repayment of long term loan - related party under common control | | | (1,844,164 | ) | | — | |
Exercise of warrants | | | 219,635 | | | — | |
Net cash (used in) provided by financing activities | | | (158,272 | ) | | 42,846 | |
| | | | | | | |
EFFECT OF EXCHANGE RATE ON CASH | | | 91,449 | | | (570,896 | ) |
| | | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 240,809 | | | 1,252,738 | |
| | | | | | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 641,739 | | | 897,093 | |
| | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 882,548 | | $ | 2,149,831 | |
| | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Cash paid during the period for: | | | | | | | |
Interest expense | | $ | 295,562 | | $ | 198,890 | |
Income taxes | | $ | 573,557 | | $ | 102,955 | |
The accompanying notes are an integral part of these statements.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
FOR THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
| | 2009 | | | 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 1,610,758 | | | $ | 1,201,162 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 484,005 | | | | 238,432 | |
Deferred income tax | | | 96,194 | | | | - | |
Amortization of discount on convertible notes | | | - | | | | 349,337 | |
Amortization of deferred financing costs | | | - | | | | 73,676 | |
Stock issued for interest | | | - | | | | 2,006 | |
Changes in operating assets and liabilities | | | | | | | | |
Accounts receivable | | | (3,488,612 | ) | | | 1,941,016 | |
Accounts receivable - related parties | | | (73,905 | ) | | | 161,317 | |
Inventories | | | 874,121 | | | | 121,586 | |
Other receivables and prepaid expenses | | | (227,276 | ) | | | (8,636 | ) |
Advances on inventory purchases | | | 78,547 | | | | (9,058 | ) |
Amounts due from related party | | | 795,181 | | | | (44,291 | ) |
Accounts payable | | | 1,675,077 | | | | 299,523 | |
Accounts payable - related parties | | | 148,837 | | | | (68,882 | ) |
Other payables and accrued liabilities | | | 151,499 | | | | (204,734 | ) |
Other payables-related parties | | | 2,327 | | | | - | |
Value added and other taxes payable | | | 288,298 | | | | 123,406 | |
Income tax payable | | | (50,047 | ) | | | 196,038 | |
Long term deferred expense | | | | | | | (56,406 | ) |
Net cash provided by operating activities | | | 2,365,004 | | | | 4,315,492 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| | | | | | | | |
Investment in La Chapelle | | | - | | | | (1,397,700 | ) |
Purchase of property and equipment | | | (65,719 | ) | | | (84,333 | ) |
Proceeds from sale of equipment | | | 3,778 | | | | 377 | |
Net cash used in investing activities | | | (61,941 | ) | | | (1,481,656 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Contribution from minority shareholders | | | - | | | | 553,040 | |
Proceeds from bank loans | | | 5,860,400 | | | | - | |
Repayment of bank loans | | | (5,801,796 | ) | | | (2,096,550 | ) |
Proceeds from related party loan | | | 29,265 | | | | 59,116 | |
Net cash provided by (used in) financing activities | | | 87,869 | | | | (1,484,394 | ) |
| | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | (2,695 | ) | | | 153,487 | |
| | | | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 2,388,237 | | | | 1,502,930 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 1,445,363 | | | | 641,739 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 3,833,600 | | | $ | 2,144,669 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 144,646 | | | $ | 68,859 | |
Income taxes | | $ | 242,924 | | | $ | 84,576 | |
EVER-GLORY INTERNATIONAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Ever-Glory International Group, Inc. (“Ever-Glory”(the “Company”) was incorporated in Florida on October 19, 1994. All of its businesses are operated through, together with its subsidiaries, is an apparel manufacturer, supplier and retailer in China, with a wholesale segment and a retail segment. The Company’s wholesale business consists of recognized brands for department and specialty stores located in Europe, Japan and the People’s RepublicUnited States. The Company’s newly established retail business consists of China (“PRC”).
Perfect Dream Limited (“Perfect Dream”), a wholly owned subsidiary of Ever-Glory, was incorporated inflagship stores and store-in-stores for the British Virgin Islands on July 1, 2004.
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”), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on December 31, 1993. Goldenway is principally engaged in the manufacturingNanjing Catch-Luck Garments Co. Ltd. (“Catch-Luck”) and sale of garments.
Nanjing New-Tailun Garments Co. Ltd.Ltd (“New-Tailun’New-Tailun”), a wholly owned. The Company’s retail operations are provided through its 60%-owned subsidiary, of Perfect Dream, was incorporated in the PRC on March 27, 2006. New-Tailun is principally engaged in the manufacturing and sale of garments.
Nanjing Catch-Luck Garments Co, Ltd. (“Catch-Luck”), a wholly owned subsidiary of Perfect Dream, was incorporated in the PRC on December 21, 1995. On January 18, 2006, Catch-Luck became a wholly owned foreign enterprise after its acquisition by Perfect Dream. Catch-Luck is principally engaged in the manufacture and sale of garments to customers located in Europe and Japan.
Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), a joint venture.
In the opinion of Goldenway and Shanghai La Chapelle Garment and Accessories Company Limited (“La Chapelle”), was incorporated inmanagement, the PRC on January 24, 2008. Goldenway invested approximately $826,200 (RMB 6.0 million) in cash, and La Chapelle invested approximately $553,040 (RMB 4.0 million) in cash, for a 60% and 40% ownership interest, respectively, in the joint venture. The business objective of the joint venture is to establish and create a leading brand of ladies’ garments for the mainland Chinese market. As of September 30, 2008, LA GO GO opened 55 retail stores in China to sell its own brand clothing.
Ever-Glory, Perfect Dream, Goldenway, New-Tailun, Catch-Luck, and LA GO GO are hereinafter referred to as (the ”Company”).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Theaccompanying unaudited condensed consolidated financial statements include our parent companyof Ever-Glory International Group, Inc. and its subsidiaries contain all subsidiaries areadjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of March 31,2009, the condensed consolidated statements of income and comprehensive income for the three months ended March 31,2009 and 2008, and the condensed consolidated statements of cash flows for the three months ended March 31,2009 and 2008. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). All significant transactions among our businessesAccordingly, they have been eliminated.
Usecondensed and do not include all of Estimatesthe information and Assumptions
In preparingfootnotes required by GAAP for complete financial statements. The results of operations for the three months ended March 31,2009 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 31,2008. The Company has made certain reclassifications to the prior year’s consolidated financial statements to conform to classifications in conformity with GAAP, we use certain estimatesthe current year. These reclassifications had no impact on previously reported results of operations.
Ever-Glory International Group Apparel Inc.”(“Ever-Glory Apparel”) a wholly owned subsidiary of Goldenway, was incorporated in the PRC on January 6, 2009. Goldenway invested approximately $733,500 (RMB 5.0 million) in cash. Ever-Glory Apparel is principally engaged in the import and assumptions that affect the reported amountexport of apparel, fabric and disclosure. For example, the Company estimates accessories.
On March 23,2009 Goldenway transfered all of its potential losses on uncollectible receivables. ownership interest in LA GO GO to Ever-Glory Apparel.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Financial Instruments
Management believeshas estimated that the estimates utilizedcarrying amounts of non-related party financial instruments approximate their fair values due to their short-term maturities. The fair value of amounts due from (to) related parties is not practicable to estimate due to the related party nature of the underlying transactions.
Fair Value Accounting
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurements” (“FAS No.157”). SFAS No.157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The provisions of FAS No.157 were adopted January 1, 2008. In February 2008, the FASB staff issued FASB Staff Position (“FSP”) No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS No.157-2”). FSP FAS No.157-2 delayed the effective date of FAS No.157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in preparing itsthe financial statements are reasonableon a recurring basis (at least annually). The provisions of FSP FAS No.157-2 were effective for the Company’s consolidated financial statements beginning January 1, 2009, and prudent. Actual results could differ from these estimates.did not have a significant impact on the Company.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Management has included all normal recurring adjustments considered necessary to giveFAS No.157 establishes a fair presentation of operating resultsvalue 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 the periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2007 annual report filed on Form 10-K.
Cash and Cash Equivalents
For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with original maturities within three months.
Accounts Receivable
The Company extends unsecured credits 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 managements’ assessment of the credit history with the customer and current business relationships with them. The Company writes off accounts receivable when amounts are deemed uncollectible and will remove the receivableidentical assets or liabilities (Level 1 measurements) and the related reserve at that time.
As of September 30, 2008 and December 31, 2007, the Company considers all its accounts receivablelowest priority to be collectable and no provision for doubtful accounts has been made in the consolidated financial statements.
Inventories
Manufactured inventories are stated at lower of cost or market value, cost being determined on a specific identification method. The Company manufactures products upon receipt of orders from its customers. All the products must pass the customers’ quality assurance procedures before its delivery. Therefore, the products are rarely returned by our customers after delivery.
Retail merchandise inventories are stated at the lower of average cost or market The Company has a limited history of retail operations, but to date, returns have been insignificant. The Company will continue to evaluate the need for a returns reserve each reporting period.
Long-Lived Assets
The Company accounts for long-lived assets under the Statements of Financial Accounting Standards (“SFAS”) No. 142 “Accounting for Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets”unobservable inputs (Level 3 measurements). In accordance with SFAS No. 142 and SFAS No.144, long-lived assets, goodwill and certain identifiable intangible assets held and used by the Company are reviewed for impairment at least annually or more often whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. As of September 30, 2008, the Company expected these assets to be fully recoverable.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line basis, less an estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:
Property and plant | 15-20 Years |
Leasehold improvements | 10 Years |
Machinery & Equipment | 10 Years |
Office equipment and furniture | 5 Years |
Motor vehicles | 5 Years |
Intangible Assets
All land in the PRC is owned by the government and cannot be sold to any individual or company. However, the government may grant “land use rights” to occupy, develop and use land. The Company records the land use rights obtained as intangible assets.
Investment in Subsidiary
Investment in equity ownership lower than 20% is recorded using the cost method. The carrying value of the investments is reviewed periodically for impairment. As of September 30, 2008, the Company expected the long-term investment to be fully recoverable.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value Measurements, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for current assets and current liabilities qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of the fair value hierarchy under FAS No.157 are defined as follow:described below:
| · | |
| Level 1 - inputs to the valuation methodology are | Unadjusted quoted prices (unadjusted)in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities in active markets.liabilities; |
| · |
| Level 2 - inputs to the valuation methodology include quoted | Quoted prices for similar assets and liabilities in markets that are not active, markets, andor inputs that are observable, for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.asset or liability; |
| · |
| Level 3 - | Prices or valuation techniques that require inputs to the valuation methodologythat are unobservable andboth significant to the fair value.value measurement and unobservable (supported by little or no market activity). |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
The carrying valueAt March 31, 2009, the Company’s financial assets consist of cash and cash equivalents, accounts receivable (trade and others), accounts payable (trade and related party) and accrued liabilities approximate their fair value because of the short-term nature of these instruments. The Company places its cash and cash equivalentsplaced with what it believesfinancial institutions management considers to be of a high credit quality financial institutions. The Company has a diversified customer base, most of which are in Europe, Japan, the United States (U.S.) and the PRC. The Company controls credit risk related to accounts receivable through credit approvals, credit limit and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
The Company analyzes all financial instruments with features of both liabilities and equity under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” During 2007, the Company issued 6% secured convertible debentures in a face amount of $2,000,000 which are due and payable in full in 2 years from their issuance. As fixed prices are set for the conversion prices of such convertible debentures and the attached warrants, the Company is in a position to be sure it had adequate authorized shares for the future conversion of convertible debentures and warrants. Therefore, no embedded derivatives or warrants were required to be recorded at fair value and marked-to-market at each reporting period.quality.
Beneficial Conversion Feature of Convertible Notes
The Company accounted for the secured convertible notes issued pursuant to the subscription agreement discussed in Note 9 under EITF 00-27, ‘‘Application of Issue 98-5 to Certain Convertible Instruments’’. Based on EITF 00-27, the Company has determined that the convertible notes contained a beneficial conversion feature because at August 2, 2007, the effective conversion price of the convertible notes was $1.10 when the market value per share was $2.70.
A discount was recorded on the secured convertible notes. The amount of the discount was calculated to be the intrinsic value of the beneficial conversion feature and the fair value of the warrants issued pursuant to the terms of the subscription agreement discussed in Note 11.
Revenue and Cost Recognition
The Company recognizes revenue, net of value added taxes, upon delivery for local sales and upon shipment of the products for export sales, at which time title passes to the customer provided that there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable; and collectability is deemed probable.
Local transportation and unloading charges and product inspection charges are included in selling expenses and totaled $15,973 and $42,650 for the three month period ended September 30, 2008 and 2007, respectively, and $82,267 and $158,940 for the nine month period September 30, 2008 and 2007, respectively.
Cost of goods sold includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent consistent with the revenue earned.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Income Taxes
The Company accounts for income taxes under the SFAS No. 109, “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
China Income Tax
The Company’s 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).
BeginningEffective January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old lawsCompany also adopted SFAS No. 159, “The Fair Value Option for Domestic Enterprises (“DES”)Financial Assets and Foreign Invested Enterprises (“FIEs”).
The key changes are:
| a. | The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for High Tech companies that pay a reduced rate of 15%; |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
| b. | Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner. |
The Company”, which allows an entity to choose to measure certain financial instruments and its subsidiaries were established before March 16, 2007 and therefore are qualified to continue enjoying the reduced tax rate as described above.
Upon approval by the PRC tax authorities, FIEs' scheduled to operate forliabilities at fair value on a period of 10 years or more and engaged in manufacturing and production may by exempt from income taxes for two years, commencing with their first profitable year of operations, after taking into account any losses brought forward from prior years, and thereafter with a 50% reductioncontract-by-contract basis. Subsequent fair value measurement for the subsequent three years.financial instruments and liabilities an entity chooses to measure will be recognized in earnings. As of March 31, 2009, the Company did not elect such option for its financial instruments and liabilities.
Goldenway has profit for more than five years, so from this year its income tax rate is 25%.
New-TailunForeign Currency Translation and Catch-Luck were approved as wholly foreign-owned enterprises in 2006. This entity status allows New-Tailun and Catch-Luck a two-year income tax exemption beginning from the first year of profitability, and a 50% income tax reduction for the three years thereafter. New Tailun and Catch-Luck are entitled to the income tax exemptions for 2006 and 2007 and 50% income tax reduction that is 12.50% for the calendar years ended December 31, 2008, 2009 and 2010.
LA GO GO was established on January 24, 2008, its income tax rate is 25%.
Other Comprehensive Income
The reporting currency of the Company is the U.S. dollar. The functional currency of Ever-Glory and Perfect Dream is the USU.S. dollar. The functional currency of Goldenway, New-Tailun Catch-Luck andNew Tailun, Catch-luck, LA GO GO and Ever-Glory Apparel is the Chinese RMB.
For the subsidiaries withwhose functional currencies are the functional currency of RMB, all assets and liabilities accounts were translated at the exchange rate on the balance sheet date; stockholder'sstockholders’ equity are translated at the historical rates and items in the statement of operations items are translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statementstatements of stockholders’ equity. 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.incurred and amounted to ($184) and $190,218 for the three month periods ended March 31, 2009 and 2008, respectively. Items in the cash flow statement are translated at the average exchange rate for the period.
Translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statement of stockholders’ equity amounted to $3,895,066 and $2,076,360 as of September 30, 2008 and December 31, 2007, respectively. Assets and liabilities at September 30, 2008 and December 31, 2007 were translated at 6.84 RMB and 7.29 RMB to $1.00, respectively. The average translation rates applied to income statement accounts and statement of cash flows for the three months ended September 30, 2008 and 2007 were 6.83 RMB and 7.57 RMB to $1.00, respectively, and for the nine months ended September 30, 2008 and 2007 were 6.97 RMB and 7.68 RMB to $1.00, respectively. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Earnings Per Share
The Company reports earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, according to SFAS 128, if the number of common shares outstanding increase as a result of a stock dividend or stock split or decrease as a result of a reverse stock split, the computations of a basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure.
Minority Interest
Minority interest consists of Shanghai La Chapelle Garment and Accessories Company Limited’s (“La Chapelle”) 40% interest in LA GO GO. As of September 30, 2008 and December 31, 2007, minority interest amounted to $551,623 and $0, respectively.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The SFAS 159 became effective for us on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interestsin subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective forfiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 willhave on its consolidated financial statements.
In December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. This statement replaces FASB Statement No. 141 and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. The Company believes that adoption of the SFAS 141R will have a material effect on future acquisitions.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). This Statement will not have any impact on the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have any impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the functional currency of the operating entity in China (Renminbi). The Company is currently evaluating the impact of adoptionAdoption of EITF No. 07-5 on the Company’s consolidated financial statements.
In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the convertible notes and related warrants transactions.
On October 10, 2008, the FASB issued FASB Staff Position (FSP) No.157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective October 10, 2008, and its adoption did not have a material impact on the Company’s condensed consolidated financial positionstatements.
In December 2007, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”), which addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. In April 2009, FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), which amended certain provisions of SFAS 141(R) related to the recognition, measurement, and disclosure of assets acquired and liabilities assumed in a business combination that arise from contingencies. The Company adopted SFAS 141(R) and FSP FAS 141(R)-1 on January 1, 2009. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements, as the Company did not enter into a business combination during the three months ended March 31,2009.
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments", or resultsFSP 107-1, which will require that the fair value disclosures required for all financial instruments within the scope of SFAS 107, "Disclosures about Fair Value of Financial Instruments", be included in interim financial statements. This FSP also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and to highlight any changes from prior periods. FSP 107-1 will be effective for interim periods ending after June 15, 2009, with early adoption permitted. The Company elected early adoption of FSP 107-1 which did not have a material impact on the Company’s condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which addresses the accounting and reporting framework for noncontrolling interests by a parent company. SFAS 160 also addresses disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary. SFAS 160 became effective in the first quarter of 2009, which resulted in reporting noncontrolling interest as a component of equity in the condensed consolidated balance sheet and below income tax expense in the condensed consolidated statements of operations. In addition, the provisions of SFAS 160 require that minority interest be renamed noncontrolling interests and that a company present a consolidated net income measure that includes the amount attributable to such noncontrolling interests for all periods presented. The Company adopted SFAS 160 on January 1, 2009. As a result, the Company has reclassified financial statement line items within the Company’s condensed consolidated balance sheet and statement of operations and comprehensive income for the quarter ended September 30, 2008.prior period to conform with this standard.
NOTE 3 INVENTORIES
Inventories at March, 31 2009 and December 31, 2008 consisted of the following:
| | 2009 | | | 2008 | |
Raw materials | | $ | 185,348 | | | $ | 328,607 | |
Work-in-progress | | | 226,517 | | | | 342,303 | |
Finished goods | | | 2,444,208 | | | | 3,064,317 | |
Total inventories | | $ | 2,856,073 | | | $ | 3,735,227 | |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not have a material effect on the accompanying financial statements.
Note 3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW
The Company prepares its statements of cash flows using the indirect method as defined under the SFAS 95. The following information relates to non-cash investing and financing activities for the nine months ended September 2008 and 2007.
During the nine months ended September 30, 2008, investors of the convertible notes (See Note 11 for details) converted $1,950,000 of principal plus accrued interest of $2,155 into 887,348 shares of common stock of the Company. The Company issued warrants valued at $130,082 to the private placement agent in January 2008 in conjunction with the convertible notes.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2008 and December 31, 2007 consisted of the following:
| | 2008 | | 2007 | |
| | (unaudited) | | | |
Accounts receivable | | $ | 17,296,013 | | $ | 13,035,299 | |
Less: allowance for doubtful accounts | | | — | | | — | |
Accounts receivable | | $ | 17,296,013 | | $ | 13,035,299 | |
As of September 30, 2008 and December 31, 2007, the Company considered all accounts receivable collectable and did not record a provision for doubtful accounts.
NOTE 5 - INVENTORIES
Inventories at September, 30 2008 and December 31, 2007 consisted of the following:
| | 2008 | | 2007 | |
| | (unaudited) | | | |
Raw materials | | $ | 192,173 | | $ | 304,178 | |
Work-in-progress | | | 311,824 | | | 338,599 | |
Finished goods | | | 2,129,862 | | | 1,254,246 | |
Inventories | | $ | 2,633,859 | | $ | 1,897,023 | |
NOTE 6 –INVESTMENT IN SUBSIDIARY
On January 9, 2008, Goldenway entered into a Capital Contribution Agreement (“Capital Contribution Agreement”) with La Chapelle, a Shanghai-based garment maker, and several shareholders of La Chapelle. Under the terms of the Capital Contribution Agreement, Goldenway agreed to invest approximately $1.46 million in cash (10 million RMB) for a 10% ownership interest in La Chapelle. This investment is accounted for using the cost method.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 7 - LAND USE RIGHTS
On September 24, 2006, the Company obtained a fifty-year land use right on 112,442 square meters of land in the Nanjing Jiangning Economic and Technological Development Zone.
Land use rights at September 30, 2008 and December 31, 2007 consisted of the following:
| | 2008 | | 2007 | |
| | (Unaudited) | | | |
Land use rights | | $ | 3,060,445 | | $ | 2,867,991 | |
Less: accumulated amortization | | | (197,321 | ) | | (138,808 | ) |
Land use rights, net | | $ | 2,863,124 | | $ | 2,729,183 | |
Amortization expense was $16,414 and $11,669 for the three months ended September 30, 2008 and 2007 respectively, and $48,213 and $38,926 for the nine months ended September 30, 2008 and 2007, respectively.
NOTE 8 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 2008 and December 31, 2007:
| | 2008 | | 2007 | |
| | (Unaudited) | | | |
Property and plant | | $ | 11,824,887 | | $ | 11,354,623 | |
Equipment and machinery | | | 4,065,134 | | | 3,128,928 | |
Office equipment and furniture | | | 275,092 | | | 208,327 | |
Motor vehicles | | | 208,728 | | | 165,393 | |
Leasehold improvement | | | 362,107 | | | — | |
Construction in progress | | | 18,386 | | | 3,519 | |
| | | 16,754,334 | | | 14,860,790 | |
Less: accumulated depreciation | | | 3,699,317 | | | 2,719,887 | |
Property and equipment, net | | $ | 13,055,017 | | $ | 12,140,903 | |
Depreciation expense was $212,033 and $219,858 for the three months ended September 30, 2008 and 2007 respectively and $666,233 and $629,793 for the nine months ended September 30, 2008 and 2007 respectively. For the three and nine months ended September 30, 2008 and 2007, no interest was capitalized.
NOTE 9 - OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities at September 30, 2008 and December 31, 2007 consisted of the following:
| | 2008 | | 2007 | |
| | (Unaudited) | | | |
Building construction costs payable | | $ | 672,244 | | $ | 390,207 | |
Accrued professional fees | | | 291,277 | | | 252,495 | |
Accrued wages and welfare | | | 468,296 | | | 337,995 | |
Other payables | | | 150,304 | | | 88,985 | |
Other payables and accrued liabilities | | $ | 1,582,121 | | $ | 1,069,682 | |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 10 -4 BANK LOANS
Bank loans represent amounts due to various banks and are due on demand or normally within one year. These loans generally can be renewed with the banks. As of September 30, 2008March 31, 2009 and December 31, 2007, Short2008, short term bank loans consisted of the following:
| | 2008 | | 2007 | |
| | (Unaudited) | | | |
Bank loan, interest rate at 0.5442% per month | | | | | | | |
due February 9, 2008; paid in full, January 2008. | | $ | — | | $ | 1,371,000 | |
Bank loan, interest rate at 0.58482% per month | | | | | | | |
due May 11, 2008 | | | — | | | 685,500 | |
Bank loan, interest rate at 0.58482% per month | | | | | | | |
due June 2, 2008 | | | — | | | 1,371,000 | |
Bank loan, interest rate at 0.58482% per month | | | | | | | |
due June 12, 2008 | | | — | | | 1,371,000 | |
Bank loan, interest rate at 0.60225% per month | | | | | | | |
due Feb 18, 2009 | | | 5,793,480 | | | — | |
Total bank loans | | $ | 5,793,480 | | $ | 4,798,500 | |
| | 2009 | | | 2008 | |
Bank loan, interest rate at 0.60225% per month, paid in full, February 2009 | | | | | | $ | 5,809,320 | |
Bank loan, interest rate at 0.4455% per month, paid in full, April 2009 | | $ | 732,500 | | | | | |
Bank loan, interest rate at 0.4455% per month, due July 12, 2009 | | | 1,465,000 | | | | | |
Bank loan, interest rate at 0.4455% per month, due July 15, 2009 | | | 732,500 | | | | | |
Bank loan, interest rate at 0.4455% per month, due July 18, 2009 | | | 1,904,500 | | | | | |
Bank loan, interest rate at 0.4455% per month, due August 15, 2009 | | | 1,025,500 | | | | | |
Bank loan, interest rate at 0.48825% per month, due December 8.2009. paid in full, April 2009 | | | 732,500 | | | | 733,500 | |
Total bank loans | | $ | 6,592,500 | | | $ | 6,542,820 | |
On July 31, 2008, Goldenway entered into a two-year revolving line of credit agreement with a PRC Bank, which allows the Company to borrow up to approximately $7.3 million (RMB 50 million). These borrowings are guaranteed by Jiangsu Ever-Glory, an entity controlled by Mr. Kang, the Company’s Chief Executive Officer. These borrowings are also collateralized by the Company’s property and plant. As of March 31, 2009, bank loans are with Nanjing Bank,include approximately $5.9 million borrowed under this agreement and are all$1.4 million was unused and available. The $732,500 was repaid in April 2009. Also in April 2009 the Company borrowed an additional $732,500 under this agreement.
The bank loan for $732,500 that is due in December 2009 is collateralized by land use rights and buildingspersonal property of Mr. Kang, the Company.Company’s Chief Executive Officer. This loan was repaid in April 2009.
Total interest expense on the bank loans was $76,481 and $49,761 for the three months ended September 30, 2008 and 2007, respectively, and $220,827 and $177,822 for the nine months ended September 30, 2008 and 2007, respectively.
NOTE 11 - CONVERTIBLE NOTES PAYABLE
On August 2, 2007, the Company consummated a private placement of $2,000,000 principal amount of 6% secured convertible notes with five-year common stock warrants to six accredited investors. Financing cost of $242,520 was paid out of the gross proceeds. Pursuant to APB 21, financing cost is amortized over the life of the notes to interest expense using the effective interest method. For the three and nine months ended September 30, 2008, the Company amortized $128,839 and $189,469 of financing costs to interest expense.
The secured convertible notes are due August 2,March 31, 2009 and were originally convertible into 9,090,909 shares of common stock of the Company at a conversion price of $0.22 per share. In November 2007, a 10:1 reverse stock split was made effective on its common stock. Accordingly, the number of shares of common stock convertible from the notes was adjusted2008 amounted to 909,091 at a conversion price of $2.20 per share.
$94,385 and $68,859, respectively.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIESNOTE 5 INCOME TAX
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
The secured convertible notes are subject to full-ratchet anti-dilution protection, i.e. if the Company issues shares at an average per-share price below $2.20 per share, the conversion price of the notes shall be adjusted downward to match the lower per-share price. Under the terms of the notes, the full-ratchet anti-dilution adjustments do not apply to (i) shares issued upon conversion of options underPRC Pre-tax income for a future stock option plan (ii) shares issued to third parties for acquisitions valued above $8 million; (iii) shares issued to non-affiliates for services rendered to the Company. The holders of the notes may convert the unpaid principal amount of the notes into common stock of the Company at any time prior to maturity, at the applicable conversion price. The Company may at any time at its option, redeem the notes by paying 125% of the unpaid principal and accrued interest.
The Company issued warrants to the investors in the note financing, for the purchase of up to a total of 909,091 shares of common stock at an exercise price of $3.20. The warrants are exercisable through September 29, 2013. The warrants are also subject to full-ratchet anti-dilution protection in the event that the Company issues shares (with certain exceptions) at an average per-share price below $3.20 per share, same as the notes. The registration statement was effective June 6, 2008. As of September 30, 2008, 68,636 shares of common stock were issued for exercise of warrants.
The secured convertible notes are secured by all of the assets of the Company, excluding its subsidiaries. Pursuant to a security agreement, the Company’s performance of the notes and other obligations in connection with the financing is also secured by a pledge of 390 shares Preferred Stock (was converted into 2,961,720 shares of common stock on November 30, 2007) personally held by the current CEO of the Company pursuant to a stock pledge agreement. Upon any event of default (as defined in the notes, the security agreement and the stock pledge agreement), the investors will be entitled to exercise their respective rights under the security agreement and stock pledge agreement. In addition, the subsidiaries of the Company, Perfect Dream and Goldenway, each guaranteed the performance of the Company’s obligations under the notes and the subscription agreement under a guaranty agreement.
On the issuance date, the Company recorded a discount on the note related to the intrinsic value of the beneficial conversion feature totaling $943,797 and $1,056,203 for the fair value of the warrants issued. The fair value of warrants was calculated using the Binomial model with the following assumptions: (i) risk-free interest rate of 4.62%; (ii) expected life (in years) of 6; (iii) expected volatility of 112%; (iv) expected dividend yield of 0.00%; and (v) stock market price of $2.70. The discount on notes payable is amortized using effective interest method over 2 years. For the three months ended March 31 2009 and nine months ended September 30, 2008 the Company recorded amortization of $1,152,227 and $1,934,028 as interest expense and for the three and nine months ended September 30, 2007, the Company recorded amortization of $568,299 and $568,299 as interest expensewas taxable in the statement of operations.following jurisdictions:
As of September 30, 2008, | | 2009 | | | 2008 | |
PRC | | $ | 1,938,897 | | | $ | 2,131,086 | |
Others | | | (39,068 | ) | | | (646,086 | ) |
| | $ | 1,899,829 | | | $ | 1,485,000 | |
The Company’s operating subsidiaries are governed by the note holders had converted $1,950,000 of principal plus accrued interest of $2,155 into 887,348 shares of common stockIncome Tax Law of the Company. Due to PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (“the conversion, the Company recorded $1,152,227 of unamortized discount as interest expense for the period ended September 30, 2008.Income Tax Laws”).
The secured convertible notes bear a 6% annual interest rate payable in arrears on the last business day of each calendar quarter thereafter and on the maturity date. For the three and nine months ended September 30, 2008, $12,674 and $58,659 were recorded as interest expense,and for the three and nine months ended September 30, 2007, $19,068 and $19,068 were recorded as interest expense respectively.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
OnBeginning January 4, 2008, the Company issued 72,728 warrants to the placement agent with an exercise price of $3.20 per share (“Warrants”). The Warrants expire January 4, 2011. These warrants were issued in connection with the private placement described above. The warrants were valued at $130,082 using the Black Scholes Model and will be amortized to interest expense over the life of the convertible notes. For the three months and nine months ended September 30, 2008, the Company recorded $69,106 and $128,727 for amortization of the debt issuance costs as interest expense in the statement of operations, respectively.
On October 1, 2008, the last convertible notes holder converted $50,000 ofnew Enterprise Income Tax (“EIT”) law replaced the notes into 22,728 shares of common stock.old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
NOTE 12 - INCOME TAX The key changes are:
Ever-Glory was incorporated in the U.S. | a. | The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for High Tech companies that pay a reduced rate of 15%; |
| b. | Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local governments for a grace period of either the next 5 years, or until the tax holiday term is completed, whichever is sooner. |
In 2009 and has incurred net operating losses for income tax purposes for 2008 and 2007. As of September 30, 2008, the net operating loss carry forwards for U.S. income taxes was $526,131 which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2028. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’ limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance at September 30, 2008 was approximately $179,000. Management will review this valuation allowance periodically and make adjustments as warranted.
Perfect Dream was incorporated in the British Virgin Islands and under the current laws of the British Virgin Islands, is not subject to tax on income or on capital.
Goldenway was incorporated in the PRC and is subject to PRC income tax laws and regulations. The applicable tax rate has been 24%. In 2007, Goldenway is entitled to a refund of 50% of any income taxes paid for achieving export sales in excess of 70% of the total sales in a calendar year. In 2008, Goldenway’s income tax rate iswas 25%.
New-Tailun and Catch-Luck were incorporated in the PRC and are subject to PRC income tax laws and regulations. According to the relevant laws and regulations in the PRC, enterprises with foreign investment in the PRC are entitled to full exemption from income tax for two years beginning from the first year the enterprises become profitable and has accumulated profits and a 50% income tax reduction for the subsequent three years. New-Tailun and Catch-Luck were approved as wholly foreign-owned enterprises in 2006 and are entitled to the income tax exemptions in 2006 and 2007. In 2007, no income tax was recorded by New-TailunFor 2008, 2009 and Catch-Luck as these entities were entitled to full exemption from income tax. Starting from 2008 to 2010, New-Tailun and Catch-Luck are entitled to a 50% reduction ofto the income tax rate of 25%. Therefore these two subsidiaries are taxed at 12.5% for the years of 2008,these three years.
In 2009 and 2010.
2008, LA GO GO was established on January 24, 2008, itsGO’s income tax rate iswas 25%.
Provision for incomeIncome tax expense was $289,071 and $283,838 for the ninethree months ended SeptemberMarch 31, 20082009 and 2007 amounted to $841,850 and $155,203,2008, respectively.
The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the ninethree months ended September 30, 2008March 31, 2009 and 2007:2008:
| | 2009 | | | 2008 | |
PRC Statutory Rate | | | 25.0 | % | | | 25.0 | % |
Income tax exemption | | | (14.2 | ) | | | (11.7 | ) |
Other | | | 4.1 | | | | | |
Effective income tax rate | | | 14.9 | % | | | 13.3 | % |
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
| | 2008 | | 2007 | |
U.S. Statutory rate | | | 34.0 | % | | 34.0 | % |
Foreign income not recognized in USA | | | (34.0 | ) | | (34.0 | ) |
China income taxes | | | 25.0 | | | 33.0 | |
China income tax exemption | | | (12.4 | ) | | (29.0 | ) |
Effective income tax rate | | | 12.6 | % | | 4.0 | % |
Value Added Tax
Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value addedIncome tax VAT, in accordance with Chinese laws. The VAT standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product.
VAT on sales and VAT on purchases amounted to $5,499,390 and $4,803,033expense for the three months ended September 30,March 31,2009 and 2008 and $3,502,331 and $3,041,517 for the three months ended September 30, 2007, respectively.is as follows:
VAT on sales and VAT on purchases amounted to $12,151,375 and $10,496,886 for the nine months ended September 30, 2008 and $7,634,927 and $6,814,646 for the nine months ended September 30, 2007, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent because the VAT taxes are not impacted by the income tax holiday.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES | | 2009 | | | 2008 | |
| | | | | | |
Current | | $ | 192,877 | | | $ | 283,838 | |
Deferred | | | 96,194 | | | | | |
Income tax expense | | $ | 289,071 | | | $ | 283,838 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 13 -6 EARNINGS PER SHARE
As discussed in Note 2, all share and per share amounts used in the Company's consolidated financial statements and notes thereto have been retroactively restated to reflect the 10-for-1 reverse stock split, which occurred on November 20, 2007.
The following demonstrates the calculation for earnings per share for the three months and nine months ended September 30:
March 31:
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Net income | | $ | 647,181 | | $ | 1,321,065 | | $ | 3,193,778 | | $ | 3,585,784 | |
Add: interest expense related to convertible notes | | | 756 | | | 587,367 | | | 2,252 | | | 587,367 | |
Subtract: Unamortized issuance costs and discount on convertible notes | | | (44,350 | ) | | — | | | (44,350 | ) | | — | |
Adjusted net income (loss) for calculating EPS-diluted | | $ | 603,587 | | $ | 1,908,432 | | $ | 3,151,680 | | $ | 4,173,151 | |
| | | | | | | | | | | | | |
Weighted average number of common stock – Basic | | | 11,914,825 | | | 5,388,201 | | | 11,692,604 | | | 5,388,201 | |
Effect of dilutive securities: | | | | | | | | | | | | | |
Convertible notes | | | 88,083 | | | 583,004 | | | 22,728 | | | 196,471 | |
Series A Convertible preferred stock | | | — | | | 5,991,080 | | | — | | | 5,991,080 | |
Weighted average number of common stock – Diluted | | | 12,002,908 | | | 11,962,285 | | | 11,715,332 | | | 11,575,752 | |
| | | | | | | | | | | | | |
Earnings per share - basic | | $ | 0.05 | | $ | 0.25 | | $ | 0.27 | | $ | 0.67 | |
Earnings per share -diluted | | $ | 0.05 | | $ | 0.16 | | $ | 0.27 | | $ | 0.36 | |
| | 2009 | | | 2008 | |
Net income | | $ | 1,622,356 | | | $ | 1,197,293 | |
Add: interest expense related to convertible notes | | | | | | | 26,842 | |
Adjusted net income for calculating EPS-diluted | | $ | 1,622,356 | | | $ | 1,224,135 | |
| | | | | | | | |
Weighted average number of common stock – Basic | | | 13,531,225 | | | | 11,449,682 | |
Effect of dilutive securities: | | | | | | | | |
Convertible notes | | | | | | | 754,681 | |
Weighted average number of common stock – Diluted | | | 13,531,225 | | | | 12,204,363 | |
| | | | | | | | |
Earnings per share - basic | | $ | 0.12 | | | $ | 0.10 | |
Earnings per share - diluted | | $ | 0.12 | | | $ | 0.10 | |
Included in basic earnings per share at March 31, 2009 are 1,153,846 shares that were issued in April 2009 in conjunction with the Company's 2006 acquisition of Catch-Luck. The shares were issued as a result of Catch-Luck's achievement of earnings targets in 2008.
As of September 30,March 31, 2009, the Company excluded 913,182 warrants outstanding from diluted earnings per share because the exercise price of $3.20 exceeded the average trading price of $1.88 for the three months ended March 31, 2009, making these warrant anti-dilutive. As of March 31, 2008, the Company includedexcluded all shares issuable upon conversion of the convertible notes and981,819 warrants inoutstanding from diluted earnings per share.share because the exercise price of $3.20 exceeded the average trading price of $3.06 for the three months ended March 31, 2008, making these warrant anti-dilutive.
NOTE 14 -7 STOCKHOLDERS’ EQUITY
Stock Issued for Acquisitions Under Common Control
In September 2007,On March 13, 2009 and March 25, 2009, the Company issued 2,083,333 shares of restricted common stock at a market price of $4.80 per share totaling $10,000,000 as part of the consideration to a related company in the acquisition of New-Tailun.
In September 2007, the Company issued 1,307,693 shares of restricted common stock at a market price of $2.6 per share totaling $3,400,000 as part of the consideration to a related company in the acquisition of Catch-Luck.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Conversion of Convertible Notes to Common Stock
On January 16, 2008, January 22, 2008 and February 6, 2008, the Company issued 12,47821,085 shares of common stock to paythe Company’s three independent directors as compensation for their services in the third and fourth quarter interestquarters of 2007 to six investors in connection with2008. The shares were valued at $1.05 per share, which was the senior convertible notes dated August 2, 2007.
During the nine months ended September 30, 2008, five investors converted $1,950,000average market price of the convertible notes and $2,155 in accrued interest expense, into 887,348 shares of common stock.
Stock Issued for Salary
On September 2, 2008, the Company issued 3,068 shares of common stock to pay the salaries for second quarter of 2008 to the three independent directors.
Statutory Reserve
The Company’s PRC subsidiaries are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 10% of the after tax net income determined in accordance with PRC GAAP. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits tofive days before the employees and is non-distributable other than in liquidation. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, such contributions not to exceed 50% of the respective companies’ registered capital.
As of September 30, 2008, New Tailun and Catch-Luck had fulfilled the 50% statutory reserve contribution requirement; therefore no further transfers are required for those entities. Goldenway and LA GO GO did not generate material net income in the current period; therefore no funds were transferred.
As of September 30, 2008 and December 31, 2007, the Company recorded $3,437,379 and $3,437,379, respectively, in the statutory reserve.grant date.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Warrants
Following is a summary of the warrant activity:
| | Number of Shares | |
Outstanding as of January 1, 2007 | | | — | |
Granted | | | 909,091 | |
Forfeited | | | — | |
Exercised | | | — | |
Outstanding as of December 31, 2007 | | | 909,091 | |
Granted | | | 72,728 | |
Forfeited | | | — | |
Exercised | | | (68,636 | ) |
Outstanding as of September 30, 2008 | | | 913,183 | |
Following is a summary of the status of warrants outstanding at September 30, 2008:
Outstanding Warrants | | Exercisable Warrants | |
Exercise Price | | Number of Shares | | Average Remaining Contractual Life | | Average Exercise Price | | Number of Shares | | Average Remaining Contractual Life | |
$3.20 | | | 840,455 | | | 4.68 | | $ | 3.20 | | | 840,455 | | | 4.68 | |
$3.20 | | | 72,728 | | | 2.26 | | $ | 3.20 | | | 72,728 | | | 2.26 | |
Total | | | 913,183 | | | | | | | | | 913,183 | | | | |
NOTE 15 -8 RELATED PARTY TRANSACTIONS
Mr. Edward Yihua Kang is the Company’s Chairman and Chief Executive Officer. The Company purchased materials, sub-contracted certain manufacturing work, and sold products toEver-Glory Hong Kong is the Company’s major shareholder. All transactions associated with the following companies under the control ofcontrolled by Mr. Kang and the detail is listed below.Ever-Glory Hong Kong are considered to be related party transactions. All related party outstanding balances are short-tem in nature and are expected to be settled in cash.
Sales and Cost of Sales to Related Parties
The Company sells products to Nanjing High-Tech Knitting & Weaving Technology Development Co., Ltd (“Nanjing Knitting”), a company controlled by Ever-Glory Hong Kong.
For the three months ended September 30, 2008, salesSales and related cost of sales in connection with Nanjing Knitting amounted to $17,582were $425,102 and $10,989, respectively. For$402,748 for the same period of 2007, sales and related cost of sales in connection with Nanjing Knitting was $486,318 and $456,689, respectively.three months ended March 31, 2008.
For the nine months ended September 30, 2008, sales and related cost of sales in connection with Nanjing Knitting amounted $510,145 and $472,372, respectively. For the same period of 2007, sales and related cost of sales in connection with Nanjing Knitting was $940,334 and $878,673, respectively.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
Purchases from and Sub-contracts with Related Parties
The Company purchased raw materials from Nanjing Knitting. For the three months ended September 30,March 31, 2009 and 2008, and 2007,the Company purchased raw materials amounted to $1,212,491of $253,645 and $212,874,$670,545, respectively, were purchased. For the nine months ended September 30, 2008 and 2007, $1,903,440 and $500,005, respectively, were purchased. The Company provided raw materials to the sub-contractors who charged the Company a fixed labor charge for the sub-contracting work.from Nanjing Knitting.
In addition, the Company sub-contracted certain manufacturing work valued at $291,122to related companies totaling $226,651 and $102,483$12,418 for the nine months ended September 30,March 31, 2009 and 2008, respectively. The Company provided raw materials to the sub-contractors and 2007, respectively, to Nanjing Knitting.was charged a fixed fee for labor provided by the sub-contractors.
Accounts Receivable – Related Parties
As of September 30, 2008 and 2007, accounts receivable fromSub-contracts with related parties amounted to $0 and $158,235, respectively, for sub-contracting services provided. Account receivables – related parties were as follows:
Receivable from | | September 30, 2008 | | December 31, 2007 | |
| | (Unaudited) | | | |
Ever-Glory Enterprises (Chuzhou) Co., Ltd | | $ | — | | $ | 12,052 | |
Nanjing High-Tech Knitting & Woving Technology Development Co., Ltd | | | — | | | 146,183 | |
Total accounts receivable – related parties | | $ | — | | $ | 158,235 | |
Other Receivable – Related Parties
Asincluded in cost of September 30, 2008 and 2007, other receivable from related parties amounted to $38,596 and $0, respectively, for products sold. Other receivables – related parties were as follows:
Receivable from | | September 30,
2008
| | December 31,
2007
| |
| | (Unaudited) | | | |
Shanghai La Chapelle Garment and Accessories Company Limited | | $
| 38,596
| | $ | — | |
Advance on Inventory Purchase – Related Party
As of September 30, 2008, the Company advanced funds to Jiangsu Ever-Glory International Group Corp. to purchase raw material inventory in amount of $6,882,463. Interest is charged at 0.5% per month according to the balance at the end of each month. Interest income earnedsales for the three months ended September 30,March 31, 2009 and 2008 are as follows:
| | 2009 | | | 2008 | |
Nanjing High-Tech Knitting & Weaving Technology Development Co., Ltd | | $ | 74,580 | | | $ | 12,418 | |
| | | | | | | | |
Nanjing Ever-Kyowa Garment Washing Co., Ltd., | | | 152,071 | | | | | |
Total | | $ | 226,651 | | | $ | 12,418 | |
Accounts Receivable – Related Parties
Accounts receivable from related parties were $73,900 for products sold and 2007, was $37,752 and $43,267, respectively, andsub-contracting services provided for the ninethree months ended September 30, 2008 and 2007 was $113,216 and $82,597, respectively.March 31, 2009.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIESAmounts Due From Related Party
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Jiangsu Ever-Glory International Group Corp., (“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 the Company’s Chief Executive Officer. Because of restrictions on its ability to directly import and export products, the Company utilizes Jiangsu Ever-Glory as its agent, to assist the Company with its import and export transactions and its international transportation projects. Import transactions primarily consist of purchases of raw materials and accessories designated by the Company’s customers for use in garment manufacture. Export transactions consist of the Company’s sales to foreign markets such as Japan, Europe and the United States. As the Company’s agent, Jiangsu Ever-Glory’s responsibilities include managing customs, inspection, transportation, insurance and collections on behalf of the Company. Jiangsu Ever-Glory also manages transactions denominated in currencies other than the Chinese RMB at rates of exchange agreed between the Company and Jiangsu Ever-Glory and based upon rates of exchange quoted by the People’s Bank of China. In return for these services, Jiangsu Ever-Glory charges the Company a fee of approximately 3% of export sales. For import transactions, the Company may make advance payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu Ever-Glory may make advance payments on the Company’s behalf. For export transactions, accounts receivable for export sales are remitted by the Company’s customers through Jiangsu Ever-Glory, who forwards the payments to the Company. The Company and Jiangsu Ever-Glory have agreed that balances from import and export transactions may be offset. Amounts due to (from) Jiangsu Ever-Glory are typically settled within 60-90 days. Interest at 0.5% per month is charged on net amounts due at each month end when the amounts are outstanding more than 60 days. Interest income for the three months ended March 31, 2009 and 2008 was $102,579 and $30,267, respectively. Following is a summary of import and export transactions for the three months ended March 31, 2009:
SEPTEMBER 30, 2008 (UNAUDITED)
Accounts Payable | | Accounts Receivable | | | Accounts Payable | | | Net | |
As of January 1,2009 | | $ | 17,938,281 | | | $ | 6,372,707 | | | $ | 11,565,574 | |
Sales/Purchase | | $ | 17,966,841 | | | $ | 7,943,492 | | | | | |
Payment Received/Made | | $ | 21,712,129 | | | $ | 10,877,887 | | | | | |
As of March 31,2009 | | $ | 14,192,993 | | | $ | 3,438,312 | | | $ | 10,754,680 | |
Approximately 54% of the receivable balance at March 31, 2009 was settled by May 11, 2009.
Other Payables – Related PartiesParty
The Company purchases raw material fromAs of March 31, 2009 and subcontracts some of its productionDecember 31, 2008, other payables to related parties whichwere $903,416 and $754,589, respectively. The details are under control of Mr. Kang.as follows:
| | 2009 | | | 2008 | |
Ever-Glory Enterprise HK Limited | | $ | 756,916 | | | $ | 754,589 | |
| | | | | | | | |
Shanghai La Chapelle Garment and Accessories Company Limited | | | 146,500 | | | | | |
Total | | $ | 903,416 | | | $ | 754,589 | |
As of September 30, 2008 and DecemberMarch 31, 2007, the Company owed $155,917 and $245,589 to the related parties
Due to | | September 30, 2008 | | December 31, 2007 | |
| | (Unaudited) | | | |
Kunshan Enjin Fashion Co.,Ltd. | | $ | — | | $ | 245,589 | |
Nanjing Ever-Kyowa Garment Washing Co., | | | 71,179 | | | — | |
Nanjing High-Tech Knitting & Woving Technology Development Co., Ltd | | | 84,738 | | | — | |
Accounts payable – related parties | | $ | 155,917 | | $ | 245,589 | |
Other Payables – Related Parties
As of September 30, 2008 and December 31, 2007, amounts due to Ever-Glory Enterprises (HK) Ltd. were $903,715 and $650,000, respectively.
In the amount of $903,715 due to Ever-Glory Enterprises (HK) Ltd. as of September 30, 2008, $600,0002009, $200,000 was due for the purchase of Catch-Luck and $303,715$556,916 was due for the Company’s going publiclegal and professional fees paid by Ever-Glory Enterprises (HK) Ltd..Hong Kong on behalf of the Company.
In the amount of $650,000 due to Ever-Glory Enterprises (HK) Ltd. asAs of December 31, 2007, $600,0002008, $200,000 was due for the purchase of Catch-Luck and $50,000$554,589 was due for the Company’s going publiclegal and professional fees paid by Ever-Glory Enterprises (HK) Ltd..Hong Kong on behalf of the Company.
Long TermIn February 2009, LA GO GO borrowed $146,500 (RMB 1 million) from La Chapelle for operations. This loan is interest free and has no stated repayment terms. Management expects to repay this loan with cash flow from operations within the next twelve months.
Long-Term Liability – Related Party
As of September 30, 2008March 31, 2009 and December 31, 20072008 the Company owed $2,630,821$2,689,350 and $4,474,985,$2,660,085, respectively to Blue Power Holdings Limited., a company controlled by the Company’s CEO Mr. Kang before December 31, 2007, for various advances received.Chief Executive Officer. Interest is charged at 6% per annum on the amounts due. The loans are due between July 2010 and April 2011. For the ninethree months ended Sep 30,March 31,2009 and 2008, and 2007, the Company accruedincurred interest expense of $145,836$29,265 and $177,344,$59,115, respectively. The accrued interest is included in the carrying amount of the loan in the accompanying balance sheets. On June 26, 2008, the Company repaid $1,990,000 to Blue Power Holdings Limited.
Lease from a Related PartyNOTE 9 CONCENTRATIONS AND RISKS
The Company leased factoryextends unsecured credit to its customers in the normal course of business and office space from Jiangsu Ever-Glory International Group Corp.,generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an entity controlled byallowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable, management has concluded that no allowance for doubtful accounts is necessary at March 31, 2009 and December 31, 2008 . Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions of the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s CEO Mr. Kang. See Note 16future allowance for doubtful accounts. If judgments regarding the operating lease commitment.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Capital Commitment
Accordingaccounts receivables were incorrect, adjustments to the Articlesallowance may be required, which would reduce profitability.
For the three-month period ended March 31, 2009, the Company had two wholesale customers that represented approximately 37% and 10% of Associationthe Company’s revenues. At March 31, 2009, approximately 46% of Goldenway, Goldenway has to fulfill its registered capital requirements of $17,487,894 within three yearsaccounts receivable were due from February 2, 2005. As of September 30,these two customers. For the three-month period ended March 31, 2008, the Company had fulfilled $5,630,000one customer that represented approximately 29% of its registered capital requirements and had a registered capital commitment of $11,857,894 payable by February 1, 2008. In July 2008, the Company obtained an extension to April 25, 2009 to fulfill the remaining capital contribution of $11,857,894.Company’s revenues.
Operating Lease Commitment
The Company leases factory and office space from Jiangsu Ever-Glory International Group Corp. under an operating lease which expired on March 31, 2008 at an annual rental of $26,056 and an operating lease which expires on December 31, 2009 at an annual rental of $50,180.
For the wholesale business, during the three months ended September 30,March 31, 2009 and 2008, and 2007,one supplier represented 13% of the Company’s raw material purchases, in each period.
For the retail business, the Company recognized rental expense of $12,813 and $6,412, respectively. $37,635 and $19,541 were recorded as rental expense forprincipally relied on three raw material suppliers during the ninethree months ended September 30, 2008March 31 2009 as follows:
| | Supplier A | | | Supplier B | | | Supplier C | |
| | | 14 | % | | | 12 | % | | | 12 | % |
For the wholesale business, during the three months ended March 31, 2009 and 2007, respectively.
As of September 30, 2008, the outstanding commitmentsCompany relied on one manufacturer for 22% and 13% of this non-cancelable lease forpurchased finished goods, respectively. For the years ended December 31, 2008 and 2009 are $50,180 and $100,360, respectively.
Contingent Shares to be Issued
Pursuant to the terms of the purchase agreement on acquisition of Catch-Luck, the Company will issue additional common shares to the original shareholder as follows:
o | At the end of the first full fiscal year ending December 31, 2008 in which Catch-Luck generates gross revenues of at least $19,000,000 and net profit of $1,500,000, Perfect Dream will issue 1,153,846 shares of the Company’s restricted common stock having a value of $3,000,000; and |
o | At the end of the next full fiscal year ending December 31, 2009 in which Catch-Luck generates gross revenues of at least $19,000,000 and net profit of $1,500,000, Perfect Dream will issue 1,153,846 shares of the Company’s restricted common stock having a value of $3,000,000. |
Legal Proceedings
The Company was named as a defendant in an action pending in the U.S. District Court for the Northern District of Ohio. The action was filed on February 22, 2006 by Plaintiff Douglas G. Furth. The other principal parties are named defendants John Zanic, Wilson-Davis & Co., and Godwin, Pappas, Longley & Ronquillo, LLP. The action alleges that the Company breached an agreement to provide 1,000,000 shares of common stock in exchange for certain assistance in marketing and financial public relations services. The action seeks an award of damages in excess of $75,000. The Company denies they we were a party to such an agreement, or were are otherwise liable. The Company intends to vigorously defend its position. The complaint was dismissed without prejudice from an action pending in the U.S. District Court for the Northern District of Ohio. In May 2007, Plaintiff Douglas G. Furth filed a Second Amended Complaint asserting claims against the Company. The Company denies all the claims, filed objections and asked for dismissal with prejudice. No payment was made to plaintiff and no settlement has been discussed between us and the Plaintiff. On November 29, 2007, we made a motion to dismiss the action for lack of personal jurisdiction, and a decision on this matter is pending.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (UNAUDITED)
NOTE 17 - CONCENTRATIONS AND RISKS
Cash includes cash on hand and demand deposits in accounts maintained with stateowned banks within the PRC and Hong Kong. Total cash deposited with these banks at September 30, 2008 and December 31, 2007 amounted to $882,548 and $641,739, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
During the three and nine months ended September 30, 2008 and 2007,retail business, the Company did not rely on any single raw material supplier. For the three months ended September 30, 2008 and 2007, the Company relied on one manufacturer for 19.0% and 9.8%supplier of purchased finished goods. For the nine months ended September 30, 2008 and 2007, respectively, this largest contract manufacturer represented approximately 17% and 14%goods in excess of purchased finished goods. The Company does not have long-term written agreements with this manufacturer and does not anticipate entering into any such agreements in the near future. However, the Company always executes a written agreement for each order placed. Management does not believe that the loss10% of this manufacturer would have a material adverse effect on the Company’s ability to obtain finished goods manufacturer essential to the business because the management believes that the Company can locate other manufacturers in a timely manner.total purchases during 2009.
The Company has one major customer which represents approximately 25.7% and 29.9% of the Company’s total salesrevenues for the three months ended September 30,March 31,2009 and 2008 were earned in the following geographic areas:
| | 2009 | | | 2008 | |
| | | | | | |
The People’s Republic of China | | $ | 3,349,050 | | | $ | 1,914,785 | |
Europe | | | 11,237,458 | | | | 12,974,613 | |
Japan | | | 4,689,704 | | | | 2,499,972 | |
United States | | | 1,231,610 | | | | 2,357,838 | |
Total | | $ | 20,507,822 | | | $ | 19,747,208 | |
NOTE 10 SEGMENTS
The Company reports financial and 2007, respectively. Foroperating information in the nine months ended September 30, 2008following two segments:
(a) Wholesale segment
(b) Retail segment
The Company also provides general corporate services to its segments and 2007, this major customer represent approximately 29.4%these costs are reported as "corporate and 33.9% of the Company’s total Sales, respectively. This customer accounted for 2.5% of total accounts receivable as of September 30, 2008.others."
| | Wholesale segment | | | Retail segment | | | Corporate and others | | | Total | |
March 31,2009 | | | | | | | | | | | | |
Segment profit or loss: | | | | | | | | | | | | |
Net revenue from external customers | | $ | 17,975,623 | | | $ | 2,532,199 | | | $ | - | | | $ | 20,507,822 | |
Net revenue from related parties | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Income from operations | | $ | 1,959,048 | | | $ | (31,685 | ) | | $ | (9,804 | ) | | $ | 1,917,559 | |
Interest income | | $ | 103,228 | | | $ | 319 | | | $ | - | | | $ | 103,547 | |
Interest expense | | $ | 94,385 | | | $ | - | | | $ | 29,265 | | | $ | 123,650 | |
Depreciation and amortization | | $ | 197,352 | | | $ | 233,129 | | | $ | - | | | $ | 430,481 | |
Income tax expense | | $ | 289,071 | | | $ | - | | | $ | - | | | $ | 289,071 | |
Segment assets: | | | | | | | | | | | | | | | | |
Additions to property, plant and equipment | | $ | 52,725 | | | $ | 12,994 | | | $ | - | | | $ | 65,719 | |
Total assets | | $ | 47,766,068 | | | $ | 4,364,528 | | | $ | 40,054,976 | | | $ | 92,185,572 | |
| | | | | | | | | | | | | | | | |
March 31,2008 | | | | | | | | | | | | | | | | |
Segment profit or loss: | | | | | | | | | | | | | | | | |
Net revenue from external customers | | $ | 19,300,006 | | | $ | 120,198 | | | $ | - | | | $ | 19,420,204 | |
Net revenue from related parties | | $ | 425,102 | | | $ | - | | | $ | - | | | $ | 425,102 | |
Income from operations | | $ | 2,155,168 | | | $ | 12,898 | | | $ | (137,212 | ) | | $ | 2,030,854 | |
Interest income | | $ | 31,881 | | | $ | - | | | $ | 93 | | | $ | 31,974 | |
Interest expense | | $ | 68,858 | | | $ | - | | | $ | 508,970 | | | $ | 577,828 | |
Depreciation and amortization | | $ | 186,448 | | | $ | - | | | $ | - | | | $ | 186,448 | |
Income tax expense | | $ | 280,614 | | | $ | 3,224 | | | $ | - | | | $ | 283,838 | |
Segment assets: | | | | | | | | | | | | | | | | |
Additions to property, plant and equipment | | $ | 79,160 | | | $ | 5,173 | | | $ | - | | | $ | 84,333 | |
Total assets | | $ | 35,626,041 | | | $ | 1,745,688 | | | $ | 38,200,718 | | | $ | 75,572,447 | |
The following is geographicreconciliation of segment information ofto the Company’s revenue for the three and nine months ended September 30:
| | (Unaudited) | | (Unaudited) | |
| | Three months September, 30 | | Nine months September, 30 | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
China | | $ | 2,897,857 | | $ | 1,669,649 | | $ | 6,594,818 | | $ | 3,464,453 | |
Europe | | | 14,923,858 | | | 10,813,012 | | | 42,178,290 | | | 29,365,688 | |
Japan | | | 6,925,551 | | | 2,962,062 | | | 12,739,050 | | | 6,543,188 | |
United States | | | 6,056,882 | | | 4,033,070 | | | 12,734,839 | | | 10,627,898 | |
Others | | | 43,284 | | | — | | | 43,284 | | | — | |
Revenue from Original design manufacturing | | | 30,847,432 | | | 19,477,793 | | | 74,290,281 | | | 50,001,227 | |
Revenue from retail sales-China | | | 1,038,144 | | | — | | | 1,410,900 | | | — | |
Total revenue | | $ | 31,885,576 | | $ | 19,477,793 | | $ | 75,701,181 | | $ | 50,001,227 | |
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the economy in the regions where the Company’s customers are located. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.consolidated totals is as follows:
| | March 31, 2009 | | | March 31, 2008 | |
Revenues: | | | | | | |
Total reportable segments | | $ | 20,507,822 | | | $ | 19,845,306 | |
Elimination of intersegment revenues | | | - | | | $ | (98,098 | ) |
Total consolidated | | $ | 20,507,822 | | | $ | 19,747,208 | |
Income from operations: | | | | | | | | |
Total segments | | $ | 1,917,559 | | | $ | 2,030,854 | |
Total consolidated | | $ | 1,917,559 | | | $ | 2,030,854 | |
Total assets: | | | | | | | | |
Total segments | | $ | 92,185,572 | | | $ | 75,572,447 | |
Elimination of intersegment receivables | | $ | (43,955,040 | ) | | $ | (39,928,489 | ) |
Total consolidated | | $ | 48,230,532 | | | $ | 35,643,958 | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2008March 31, 2009 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our Business
We are a leading apparel manufacturersupplier and supplierretailer in China, and the first Chinese apparel company listed on the American Stock Exchange.NYSE Amex LLC.
We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to famous brands, department stores and specialty stores located throughout Europe, the U.S., Japan and the People’s Republic of China (PRC). We have a focus on well-known, middle-to-high grade casual wear, sportswear, and outerwear brands. Our retail business which consists of retail-channel sales directly to consumers through full-price retail stores located throughout the PRC.
Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our strategic alliances as part of our overall business strategy. We have global strategic business partnersaim to increase our outsourcing manufacturing and expect it to generate over 70% of the total revenues in Europe, the United States (“U.S.”), Japanwholesale sector. Outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the People’s Republiccosts of China (PRC), including famous brandskeeping skilled workers on production lines during low season. We oversee our long-term contractors with our advanced management solutions and retail chain stores. We also manufacture, marketinspect products manufactured by them to ensure that they meet our high quality control standards and distribute our own branded productstimely delivery.
On January 6, 2009, we set up Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”) a wholly owned subsidiary of Goldenway. Ever-Glory Apparel is principally engaged in the PRC domestic market.import and export of apparel, fabric and accessories.
On March 23, 2009, Goldenway transferred all of its ownership interest in LA GO GO to Ever-Glory Apparel.
As of March 31, 2009, we had approximately 2,220 employees, with an annual production capacity including outsourcing orders in excess of 12 million pieces.
Wholesale Business
We manufacture our products in the PRC, includingin our three factories located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing. We conduct our original design manufacturing (ODM) operations through three wholly-owned subsidiaries: Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited (“New Tailun”), and Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”).
Retail Business
We incorporatedconduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), a joint venture of GoldenwayEver-Glory Apparel and Shanghai La Chapelle Garment and Accessories Company Limited, (“La Chapelle”)located in the PRC on January 24, 2008.Shanghai, China. The business objective of the joint venture is to establish and create a leading brand of ladies’ garments and to build a retail and wholesale distribution channel for the mainland Chinese market.
Below is a summary of our store statistics
| | | 2Q2008 | | | | 3Q2008 | | | FY2008 | | | | 1Q2009 | |
Total stores | | | 39 | | | | 55 | | | | 93 | | | | 102 | |
Total square meters | | | 3207 | | | | 5513 | | | | 7876 | | | | 9032 | |
Business Objectives
We believe the enduring strength of our wholesale business is due mainly to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality. We maintain long-term, satisfactory relationships with a portfolio of well-known, mid-class global brands, a strong and experienced management team, and a proven ability to design, market and distribute our own brand through fast-growing retail channels in a highly populated country.
Wholesale Business
The primary business objective for our wholesale segment is to expand our portfolio into higher class brands, expand our customer base and improve margins. Opportunities and continued investment initiatives include:
| · | Expand the global sourcing network; |
| · | Invest in the overseas low-cost manufacturing base; |
| · | Focus on value and continue the Average Selling Price uptrend; |
| · | Emphasize product design and technology application; and |
| · | Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network |
Retail Business
The business objective for our retail segment is to establish and create a leading brand of women’s apparel and to build a nationwide retail distribution channel in China. As of March 31, 2009, we have 102 stores including 9 new stores in 2009. We expect to open between 80-100 stores in 2009. Opportunities and continued investment initiatives include:
| · | Expand to a multi-brand operator; |
| · | Build LA GO GO to become a major Chinese mid-end mass market women's wear brand; |
| · | Seek opportunities for long-term cooperation with reputable international brands; |
| · | Facilitate the entry of international brands into the PRC market; |
| · | Expand LA GO GO retail network; |
| · | Improve LA GO GO retail store efficiency and increase same store sales; |
| · | Strengthen LA GO GO brand promotion; and |
| · | Launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities |
Although we have our own manufacturing facilities, we currently outsource most of our manufacturing to contract manufacturers as part of our overall business strategy. Outsourcing allows us to maximize our production capacityDespite the various risks and maintain production flexibility while reducing capital expenditures and costsuncertainties associated with keeping skilled workers on production lines during seasonal slowdowns. We inspect products manufactured by our long-term contractors to ensure that they meet our high quality control standards.
For the nine months ended September 30, 2008, approximately 56% of our net sales came from Europe, 17% from the U.S., 17% from Japan, and 10% from the PRC. For the nine months ending September 30, 2007, approximately 59% of our net sales came from Europe, 21% from the U.S, 13% from Japan, and 7% from the PRC. We believe our Company maintains a good relationship with our customers.
We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. Wealso purchase finished goods from contract manufacturers. For the nine months ended September 2008 and 2007, purchases from our five largest suppliers accounted for 21% and 24% of total purchases, respectively. For the nine months ended September 30, 2008 and 2007, no single supplier provided more than 10% of our total purchases. We have not experienced difficulty in obtaining raw materials essential to our business, andcurrent global economy, we believe our Company has maintained a good relationshipcore strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of wholesale sales in our suppliers.
Asthird and fourth quarters and higher retail sales in our first and fourth quarters. These trends result primarily from the timing of September 30, 2008, our three manufacturing facilities in Nanjing had over 1,800 employees, with an annual production capacity of over 12 million pieces. As of September 30, 2008, our new LA GO GO joint venture had approximately 230 employees. We consider our relationship with our employees to be excellent.
We hold a fifty-year land use right on 112,442 square meters of landseasonal wholesale shipments and holiday periods in the Nanjing Jiangning Economic and Technological Development Zone until April 2056. The land contains an existing facility of 26,629 square meters, which includes the manufacturing facility and office space. By the end of 2006, we completed the construction of our new office building and adjoining factory. We moved our headquarters into our new office building and consolidated part of our operation into our new manufacturing facility in January 2007. The new manufacturing facility occupies an area of 10,000 square meters and is equipped with state-of-the-art equipment.
Our four operating subsidiaries, all of which are incorporated in the PRC, are governed by the PRC income tax laws and are subject to the PRC enterprise income tax. Each of our consolidating entities files its own separate tax return. In addition, in 2007, Goldenway enjoyed a 50% reduction in its income tax as a foreign invested enterprise that exports over 70% of its output, and was entitled a lowered income tax rate of 12%. In 2008, the income tax rate for Goldenway was 25%. New-Tailun and Catch-Luck were entitled to two-year income tax exemptions effective for the 2006 and 2007 tax years, and for the three years thereafter (2008, 2009 and 2010) based on current income tax laws these entities will be entitled to a 50% reduction in enterprise income tax rate of 25%. LA GO GO was incorporated on January 24, 2008, and its income tax rate is 25%. All of our income before income taxes, and the income taxes we pay are related to our operations in the PRC.
Private Placement Financing
On August 2, 2007, we completed a $2 million private placement involving the issuance of our secured convertible notes and warrants pursuant to subscription agreements (“Subscription Agreements”) with six accredited investors. This private placement financing closed on August 6, 2007. Under the terms of the financing, we issued and sold two-year secured convertible notes in the principal amount of $2,000,000 to investors, secured by all of the assets of Ever-Glory excluding its subsidiaries. As of September 30, 2008, the note holders had converted the entire principal amount of these notes, plus accrued interest, into an aggregate of 909,091 shares of common stock of the Company.
Recent Events
On July 16, 2008, our shares of common stock began trading on the American Stock Exchange (“AMEX”) under the trading symbol “EVK.” We are the first Chinese apparel company to have its securities listed on AMEX.Collection Policy
According to the Articles of Association of Goldenway, Goldenway had to fulfill registered capital requirements of $17,487,894 within three years from February 2, 2005. As of February 1, 2008, the Company fulfilled $3,630,000 of its registered capital requirements and had a registered capital commitment of $13,857,894 payable by February 1, 2008. In April 2008, we obtained approval from the government granting an extension to make the required capital contribution by July 25, 2008. As of July 10, 2008, the Company fulfilled $5,630,000 of its registered capital requirements and had a registered capital commitment of $11,857,894 payable by July 25, 2008. In July 2008, the Company obtained the approval from the government granting a further extension to make the required capital contribution until April 25, 2009.Wholesale business
In July 2008, we renewed our credit facility with Nanjing Bank, which provides us with short-term lending of up to $7.3 million for a two year term. The credit facility is used to fund daily operations, and is available until July 31, 2010. As of September 30, 2008, we had an outstanding balance of $5.8 million, on which we pay interest at the rate of 7.22%. The loans with Nanjing Bank are secured by our land use rights and buildings.
Sales and Expenses
We market and sell our products through a combination of international distributors and direct sales to brands and retail chain stores primarily in Europe, the United States and Japan. We also manufacture, market, and distribute our own branded products in our domestic market through our LA GO GO joint venture.
For our new customers, we ordinarily acceptgenerally require orders placed to be backed by a letterletters of credit. For our long-term and established customers with a good payment track record, we generally acceptprovide payment withinterms between 30 to 120 days following delivery of finished goods togoods.
Retail business
For store-in-store shops, we generally receive payments from the customer.stores between 60-90 days following the time of register receipt. For our own stores, we receive payments at the same time of register receipt.
Cost of goods sold includes direct material cost, direct labor cost and manufacturing overheads, including depreciation of production equipment consistent with the revenue earned, and rent paid by our retail business.Global Economic Uncertainty
Our selling expenses consist primarilybusiness is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and a slowdown in the U.S. and EU economy have increased our clients’ sensitivity to the cost of transportationour products. We have experienced continued pricing pressure this year. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and unloading chargesoperating margins in our wholesale segment in 2009.
In addition, economic conditions in the United States and product inspection charges.in foreign markets in which we operate could substantially affect our sales and profitability and our cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this point in time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.
Our general and administrative expenses consist primarilySummary of executive, finance, accounting, facilities and human resources personnel, office expenses and professional fees.Critical Accounting Policies
CRITICAL ACCOUNTING POLICIES
We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.
Revenue Recognition
We recognize revenue, net of Contents
Details regarding our use of these policies and the related estimates are described in the accompanying notes to ourthe Consolidated Financial Statements as of and for the three months and nine months ended September 30, 2008.Statements. There have been no material changes to our critical accounting policies that impacted our consolidated financial condition or results of operations.
The following table summarizes our results of operations for the three months ended September 30, 2008March 31, 2009 and 2007.2008. The table and the discussion below should be read in conjunction with the unauditedconsolidated financial statements and the notes thereto appearing elsewhere in this report.