Payment Terms

EVER-GLORY INTERNATIONAL GROUP, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

The following discussion and analysis of our financial condition and results of
operations for the three and nine months ended September 30, 2022 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 branded fashion apparel retailer and global apparel supply chain solutions provider based in China. We are listed on the NASDAQ Global Market under the symbol “EVK”.



We classify our businesses into two segments: Wholesale and Retail. Our
wholesale business consists of wholesale-channel sales made principally to
domestically and international recognized brands, and department stores located
throughout Europe, the U.S., Japan and the People's Republic of China ("PRC").
We focus on well-known, middle-to-high end casual wear, sportswear, and
outerwear brands. Our retail business consists of retail-channel sales directly
to consumers through retail stores located throughout the PRC as well as sales
via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc.



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



Wholesale Business



We conduct our original design manufacturing ("ODM") operations through seven
wholly owned subsidiaries which are located in the Nanjing Jiangning Economic
and Technological Development Zone and Shang Fang Town in the Jiangning District
in Nanjing, Jiangsu province, China, Chuzhou, Anhui province, China and Samoa:
Ever-Glory International Group Apparel Inc. ("Ever-Glory Apparel"), Goldenway
Nanjing Garments Company Limited ("Goldenway"), Nanjing New-Tailun Garments
Company Limited ("New Tailun"), Nanjing Catch-Luck Garments Co., Ltd.
("Catch-Luck"), Chuzhou Huirui Garments Co., Ltd. ("Huirui), Haian Tai Xin
Garments Trading Company Limited ("Haian Tai Xin"), Nanjing Rui Lian Technology
Company Limited ("Nanjing Rui Lian"), Shanghai Huarui Fashion Supply Chain
Management Group Co. Ltd. ("Shanghai Supply Chain"), Ever-Glory Supply Chain
Service Co., Limited ("Ever-Glory Supply Chain") and Ever-Glory International
Group (HK) Ltd. ("Ever-Glory HK"). Nanjing Rui Lian was closed in April 2022.



Retail Business


We conduct our retail operations through Shanghai LA GO GO Fashion Company
Limited ("LA GO GO"), Jiangsu LA GO GO Fashion Company Limited ("Jiangsu LA GO
GO"), Tianjin LA GO GO Fashion Company Limited ("Tianjin LA GO GO"), Shanghai Ya
Lan Fashion Company Limited ("Ya Lan"), Nanjing Tai Xin Garments Trading Company
Limited ("Tai Xin"), and Xizang He Meida Trading Company Limited ("He Meida").
He Media was closed in April 2021.



Business Objectives



Wholesale Business


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



                                       17




The main business objective of our wholesale segment is to expand our portfolio to premium brands, expand our customer base and improve our profits. We believe our growth opportunities and continued investment initiatives include:


  ? Expanding our global sourcing network;

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

? Focus on high value-added products and pursue our production strategy

    mid-to-high end apparel;

  ? Continuing to emphasize product design and technology utilization;

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

? Maintain a steady increase in market revenue while focusing on

    higher margin wholesale markets such as mainland China.




Retail Business



The business objectives for our retail segment are to establish leading brands
of women's apparel and to build a nationwide retail network in China. As of
September 30, 2022, we had 774 stores (including store-in-stores), which
includes 19 stores that were opened and 125 stores that were closed during the
nine months ended September 30, 2022.



We believe our growth opportunities and continued investment initiatives include:


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

  ? Expanding our retail network throughout China;

? Improve the efficiency of our retail stores and increase same-store sales;

? Continue to launch flagship stores in Tier 1 cities and increase

    our penetration and coverage in Tier-2 and Tier-3 cities; and

  ? Taking advantage of our position as a multi-brand operator.




Equity Investments



The Company had idle cash and cash equivalent in operation. In order to realize
the capital preservation and appreciation, Ever-Glory Apparel invested in a
Partnership in August 2020. As a limited partner of the Partnership, Ever-Glory
Apparel does not have the right to kick-out and appointment of general manager.
Therefore, Ever-Glory does not have ability to exercise significant influence.
In the meantime, the Company entered an agreement with the GP and an individual
that the Company has the privilege to sell the ownership interests in the
Partnership to GP or the individual for the consideration of the average net
asset value ten days prior to the closing date, if the Company is not able to
withdraw any part of the original investment from the Partnership during the
optional withdrawal period. If the Company opts to withdraw entire investment
during the optional withdrawal period, the GP will compensate up to 8% of annual
return on investment. If the return on investment is in excess of 8% for any
portion of the investment withdrawn during the optional withdrawal period, then
20% of the return in excess of 8% will be shared with the individual. The
Company may also continue to invest in the Partnership beyond the optional
withdrawal period, but none of above agreement with the GP and the individual is
in place. In December 2020, the Partnership invested in a public company in
China.



In September 2021, Goldenway signed an agreement and promised to invest
approximately $7.0 million (RMB 50.0 million) in a Chinese private company for
20% shares of the investee. As of September 30, 2022, Goldenway advanced
approximately $3.5 million (RMB 25.0 million) to the investee. The investment
advances were recorded as other non-current assets.



                                       18





Seasonality of Business



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



Collection Policy



Wholesale business


For our new customers, we generally require orders placed to be supported by letters of credit. For our long-time and established customers with good payment history, we usually provide payment terms between 30 and 180 days after delivery of finished goods.


Retail business



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



Global Economic Uncertainty



Our business is dependent on consumer demand for our products. We believe that
the significant uncertainty in the global economy and the slowdown of economies
in the United States and Europe have increased our clients' sensitivity to the
cost of our products. We have experienced continued pricing pressure. If the
global economic environment continues to be weak, these worsening economic
conditions could have a negative impact on our sales growth and operating
margins in our wholesale segment in 2021 and 2022.



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



Our results of operations could be adversely affected by general conditions in
the global economy, including conditions that are outside of our control, such
as the impact of health and safety concerns from the outbreak of COVID-19. The
outbreak in China resulted in the reduction of customer traffic and temporary
closures of shopping malls as mandated by the provincial governments in various
provinces of China, which had adversely affected our retail business with a
decline in sales since February 2020. Our wholesale business was also
significantly affected as we were facing a sharp decline in our order
quantities. Some of our wholesale clients had also cancelled or postponed
existing orders.  Due to the Chinese factories' shutdowns and traffic
restrictions during the outbreak in China and potential shutdowns and traffic
restrictions in the countries where our suppliers are located, our supply chain
and business operations of our suppliers may be affected. Disruptions from the
closure of supplier and manufacturer facilities, interruptions in the supply of
raw materials and components, personnel absences, or restrictions on the
shipment of our or our suppliers' or customers' products, could have adverse
ripple effects on our manufacturing output and delivery schedule. We also face
difficulties in collecting our accounts receivables due to the effects of
COVID-19 on our customers and risk gaining a large amount of bad debt. Global
health concerns, such as COVID-19, could also result in social, economic, and
labor instability in the countries and localities in which we or our suppliers
and customers operate.


Although China has already begun to recover from the outbreak of COVID-19, the
epidemic continues to spread on a global scale and there is the risk of the
epidemic returning to China in the future, thereby causing further business
interruption. While the potential economic impact brought by and the duration of
COVID-19 may be difficult to assess or predict, a widespread pandemic could
result in significant disruption of global financial markets, reducing our
ability to access capital, which could in the future negatively affect our
liquidity. In addition, a recession or market correction resulting from the
spread of COVID-19 could materially affect our business and the value of our
common stock. If our future sales continue to decline significantly, we may risk
facing bankruptcy due to our recurring fixed expenses. The extent to which
COVID-19 impacts our results will depend on many factors and future
developments, including new information about COVID-19 and any new government
regulations which may emerge to contain the virus, among others.



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



                                       19




Summary of Critical Accounting Policies



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



The Company uses the same accounting policies in preparing quarterly and annual
financial statements. Certain information and footnote disclosures normally
included in the annual consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2021, filed with the SEC on April 12, 2022 ("2021 Form 10-K.")



Estimates and Assumptions



The preparation of the condensed consolidated financial statements in conformity
with U.S. GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities, as of the date of the financial statements, and the reported
amounts of revenue and expenses during the reported period. If these estimates
differ significantly from actual results, the impact to the condensed
consolidated financial statements may be material. There have been no material
changes in our critical accounting policies and estimates from those disclosed
in on the 2021 Form 10-K. Please refer to Part II, Item 7 of such a report for a
discussion of our critical accounting policies and estimates.



Recently issued accounting pronouncements



In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"; In
November 2019, the FASB issued ASU No. 2019-10 "Financial Instruments-Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):
Effective Dates"; In March 2020, the FASB issued ASU No. 2020-03 "Codification
Improvements to Financial Instruments"; which modifies the measurement of
expected credit losses of certain financial instruments. This ASU is effective
for fiscal years and interim periods within those years beginning after December
15, 2022. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.



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


                                       20




Results of operations for the three months ended September 30, 2022 and 2021



The following table summarizes our results of operations for the three months
ended September 30, 2022 and 2021. The table and the discussion below should be
read in conjunction with our condensed consolidated financial statements and the
notes thereto appearing elsewhere in this report.



                                                             Three Months Ended September 30,
                                                         2022                                   2021
                                                  (In thousands of U.S. dollars, except for percentages)
Sales                                      $       106,437             100.0 %       $      94,406         100.0 %
Gross profit                               $        16,047              15.1 %       $      23,210          24.6 %
Operating expense                          $        22,098              20.8 %       $      23,910          25.3 %
Loss from operations                       $        (6,051 )            (5.7 )%      $        (700 )        (0.7 )%
Other expense                              $          (907 )            (0.9 )%      $        (572 )        (0.6 )%
Income tax (benefit) expense               $          (835 )            (0.8 )%      $       1,945           2.1 %
Net Loss                                   $        (6,123 )            (5.8 )%      $      (3,217 )        (3.4 )%




Revenue


The following table provides a breakdown of our total sales, by region, for the three months ended September 30, 2022 and 2021.



                                                                                                                             Growth
                                                                                                                           (Decrease)
                                               2022                                     2021                                in 2022
                                         (In thousands of          % of           (In thousands of          % of            compared
Wholesale business                         U.S. dollars)        total sales        U.S. dollars)         total sales       with 2021
Mainland China                           $          30,492              28.6 %   $           16,376              17.3 %           86.2 %
Hong Kong China                                     14,950              14.0                  9,153               9.7             63.3
United Kingdom                                       4,950               4.7                  2,020               2.1            145.1
Europe-Other                                        11,616              10.9                  8,846               9.4             31.3
Japan                                                5,198               4.9                  8,435               8.9            (38.4 )
United States                                       15,526              14.6                 17,372              18.5            (10.6 )
Total Wholesale business                            82,732              77.7                 62,202              65.9             33.0
Retail business                                     23,705              22.3                 32,204              34.1            (26.4 )
Total sales                              $         106,437             100.0 %   $           94,406             100.0 %           12.7 %



Sales for the three months ended September 30, 2022 were $106.4 million, a 12.7%
increase compared with the three months ended September 30, 2021. This increase
was primarily attributable to a 33.0% ($20.5 million) increase in our wholesale
business, offset by a 26.4% ($8.5 million) decrease in our retail business.



Sales generated from our wholesale business contributed 77.7% or $82.7 million
of our total sales for the three months ended September 30, 2022, a 33.0%
increase compared with 65.9% or $62.2 million in the three months ended
September 30, 2021. This increase was primarily attributable to an increase in
sales in Mainland China, Hong Kong, United Kingdom and Europe-Other, partially
offset by a decrease in sales in Japan and United States.



Sales generated from our retail business contributed 22.3% or $23.7 million of
our total sales for the three months ended September 30, 2022, a 26.4% decrease
compared with 34.1% or $32.2 million in the three months ended September 30,
2021. This decrease was primarily due to outbreak of COVID-19. The outbreak in
China resulted in the reduction of customer traffic and temporary closures of
shopping malls as mandated by the provincial governments in various provinces of
China, which had adversely affected our retail business with a decline in sales.



                                       21





Costs and Expenses


Cost of sales and gross margin



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



The following table sets forth the components of our cost of sales and gross
profit both in amounts and as a percentage of total sales for the three months
ended September 30, 2022 and 2021.



                                                                                                                  Growth
                                                                                                               (Decrease) in
                                                      Three months ended September 30,                             2022
                                                  2022                                  2021                     Compared
                                           (In thousands of U.S. dollars, except for percentages)                with 2021
Net Sales for Wholesale Sales       $       82,732              100.0 %    
$       62,202          100.0 %              33.0 %
Raw Materials                               41,563               50.2               29,507           47.4                40.9
Labor                                          528                0.6                  422            0.7                25.1
Outsourced Production Costs                 29,651               35.8               20,967           33.7                41.4
Other and Overhead                             530                0.6                1,090            1.8               (51.4 )
Total Cost of Sales for Wholesale           72,272               87.4               51,986           83.6                39.0
Gross Profit for Wholesale                  10,461               12.6      
        10,217           16.4                 2.4
Net Sales for Retail                        23,705              100.0               32,204          100.0               (26.4 )
Production Costs                            12,476               52.6               12,632           39.2                (1.2 )
Rent                                         5,642               23.8                6,579           20.4               (14.2 )
Total Cost of Sales for Retail              18,118               76.4               19,210           59.7                (5.7 )
Gross Profit for Retail                      5,587               23.6      
        12,993           40.3               (57.0 )
Total Cost of Sales                         90,390               84.9               71,196           75.4                27.0
Gross Profit                        $       16,047               15.1 %     $       23,210           24.6 %             (30.9 )%




Raw material costs for our wholesale business were 50.2% of our total wholesale
business sales in the three months ended September 30, 2021, compared with 47.4%
in the three months ended September 30, 2021. The increase was mainly due to
higher raw material prices.


Labor costs for our wholesale business were 0.6% (0.5 million) of our total
wholesale business sales in the three months ended September 30, 2022, compared
with 0.7%(0.4 million) in the three months ended September 30, 2021. There
were
no significant changes.


Outsourced production costs for our wholesale business for the three months
ended September 30, 2022 increased by 41.4% to $29.7 million from $21.0 million
for the three months ended September 30, 2021. Outsourced production costs
accounted for 35.8% of our total wholesale business sales in the three months
ended September 30, 2022, compare with 33.7% in the three months ended September
30, 2021. This increase in percentage was primarily attributable to higher
labor
costs.



                                       22





Overhead and other expenses for our wholesale business accounted for 0.6% of our
total wholesale business sales for the three months ended September 30, 2022,
compared with 1.8% of total wholesale business sales for the three months ended
September 30, 2021.



Wholesale business gross profit for the three months ended September 30, 2022
was $10.5 million compared with $10.2 million for the three months ended
September 30, 2021. Gross profit accounted for 12.6% of our total wholesale
sales for the three months ended September 30, 2022, compared with 16.4% for the
three months ended September 30, 2021. The decrease was mainly due to an
increase in wholesale raw material prices and outsourced production costs.



Production costs for our retail business were $12.5 million for the three months
ended September 30, 2022 compared with $12.6 million during the three months
ended September 30, 2021. Retail production costs accounted for 52.6% of our
total retail sales in the three months ended September 30, 2022, compared with
39.2% for the three months ended September 30, 2021. The increase in percentage
was due to increased inventory write-off in 2022 because of COVID-19.



Rent costs for our retail business for the three months ended September 30, 2022
were $5.6 million compared with $6.6 million for the three months ended
September 30, 2021. Rent costs for our retail business accounted for 23.8% of
our total retail sales for the three months ended September 30, 2022, compared
with 20.4% for the three months ended September 30, 2021. The decrease in amount
was due to decrease in sales.



Gross profit in our retail business for the three months ended September 30,
2022 was $5.6 million and gross margin was 23.6%. Gross profit in our retail
business for the three months ended September 30, 2021 was $13.0 million and
gross margin was 40.3%. The decrease was primarily due to increased production
costs and write-off of obsolete inventories.



Total cost of sales for the three months ended September 30, 2022 was $90.4
million, a 27.0% increase from $71.2 million for the three months ended
September 30, 2021. Total cost of sales as a percentage of total sales for the
three months ended September 30, 2022 was 84.9%, compared with 75.4% for the
three months ended September 30, 2021. Gross margin for the three months ended
September 30, 2022 was 15.1% compared with 24.6% for the three months ended
September 30, 2021.



Selling, general and administrative expenses

Our selling expenses primarily include local transportation, unloading costs, product inspection costs, retail staff salaries, and decoration and marketing costs associated with our retail operations.



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



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



                                                                                                                     Increase
                                                                                                                   (Decrease) in
                                                         Three Months Ended September 30,                              2022
                                                    2022                                    2021                     Compared
                                              (In thousands of U.S. dollars, except for percentages)                  to 2021
Gross Profit                          $         16,047             15.1 %       $       23,210          24.6 %              (30.9 )%
Operating Expenses:
Selling Expenses                                12,792             12.0                 14,443          15.3                (11.4 )
General and Administrative Expenses              9,306              8.7    
             9,467          10.0                 (1.7 )
Total                                           22,098             20.8                 23,910          25.3                 (7.6 )
Loss from Operations                  $         (6,051 )           (5.7 )%      $         (700 )        (0.7 )%             764.4 %



Selling expenses for the three months ended September 30, 2022 decreased by
11.4% to $12.8 million from $14.4 million for the three months ended September
30, 2021. The decrease was attributable to the decreased average salaries and
decreased business trips.



General and administrative expenses for the three months ended September 30,
2022 decreased by 1.7% to $9.3million from $9.5 million for the three months
ended September 30, 2021. The decrease was attributable to the decreased
publicity expense and the depreciation of RMB.



                                       23





Loss from Operations


Loss from operations for the three months ended September 30, 2022 was $6.1
million, an increase of 764.8% from $0.7 million of loss for the three months
ended September 30, 2021. Loss from operations for the three months ended
September 30, 2022 accounted for 5.7% of our total sales, while the three months
ended September 30, 2021 accounted for 0.7% of our total sales.



Interest Expense



Interest expense for the three months ended September 30, 2022 was $0.5 million,
while interest expense was $1.2 million for the three months ended September 30,
2021. The decrease was due to the decreased bank loans.



Income tax expenses (benefits)

The income tax expense (benefits) has been ($0.8) million and $1.9 million for the three months ended September 30, 2022 and 2021, respectively.

The Company’s operating subsidiaries are governed by the PRC Income Tax Law with respect to Foreign investment companies and Foreign companies and various local income tax laws (“the Income Tax Laws”).

All RPC subsidiaries are subject to income tax at the statutory rate of 25%.

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

Ever-Glory HK was incorporated in Samoaand under the laws in force Samoahas no income tax liability.

Ever-Glory Supply Chain Service Co., Limited was incorporated in Hong Kong and, under Hong Kong law, is subject to income tax at the statutory rate of 16.5%.



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



Net Loss



Net loss for the three months ended September 30, 2022 was $6.1 million, and net
loss for the three months ended September 30, 2021 was $3.2 million. Our basic
and diluted loss per share were $0.41 and $0.22 for the three months ended
September 30, 2022 and 2021, respectively.



Results of Operations for the nine months ended September 30, 2022 and 2021



The following table summarizes our results of operations for the nine months
ended September 30, 2022 and 2021. The table and the discussion below should be
read in conjunction with the consolidated financial statements and the notes
thereto appearing elsewhere in this report.



                                           Nine Months Ended September 30,
                                       2022                                  2021
                               (In thousands of U.S. Dollars, except for percentages)
Sales                    $      235,022             100.0 %       $      225,776       100.0 %
Gross Profit                     53,828              22.9                 64,038        28.4
Operating Expense                59,974              25.5                 69,475        30.8
Loss From Operations             (6,146 )            (2.6 )               (5,437 )      (2.4 )
Other (Expense) Income           (1,464 )            (0.6 )                3,039         1.3
Income tax expense                1,202               0.5                  3,760         1.7
Net Loss                 $       (8,812 )            (3.7 )%      $       (6,158 )      (2.7 )%




                                       24





Revenue


The following table provides a breakdown of our total sales, by region, for the nine months ended September 30, 2022 and 2021.



                                                                                                                            Growth
                                                                                                                          (Decrease)
                                               2022                                    2021                                in 2022
                                         (In thousands of          % of          (In thousands of          % of            compared
Wholesale business                         U.S. dollars)        total sales        U.S. dollars)        total sales       with 2021
Mainland China                           $          45,483              19.4 %   $          28,222              12.5 %           61.2 %
Hong Kong China                                     22,902               9.7                16,124               7.1             42.0
United Kingdom                                      10,469               4.5                 5,558               2.5             88.4
Europe-Other                                        24,528              10.4                18,905               8.4             29.7
Japan                                               11,836               5.0                13,390               5.9            (11.6 )
United States                                       39,820              17.0                29,650              13.1             34.3
Total Wholesale business                           155,038              66.0               111,849              49.5             38.6
Retail business                                     79,984              34.0               113,927              50.5            (29.8 )
Total sales                              $         235,022             100.0 %   $         225,776             100.0 %            4.1 %



Sales for the nine months ended September 30, 2022 were $235.0 million, an
increase of 4.1% from the nine months ended September 30, 2021. This increase
was primarily attributable to a 38.6% (43.2 million) increase in sales in our
wholesale business and a 29.8% (33.9 million) decrease in our retail business.



Sales generated from our wholesale business contributed 66.0% or $155.0 million
of our total sales for the nine months ended September 30, 2022, an increase of
38.6% compared with 49.5% or $111.8 million in the nine months ended September
30, 2021. This increase was primarily attributable to increased sales in
Mainland China, Hong Kong China, United Kingdom, Europe-Other and the United
States, partially offset by decreased sales in Japan.



Sales generated from our retail business contributed 34.0% or $80.0 million of
our total sales for the nine months ended September 30, 2022, a decrease of
29.8% compared with 50.5% or $113.9 million in the nine months ended September
30, 2021. This decrease was primarily due to a decrease in same store sales and
outbreak of COVID-19. The outbreak in China resulted in the reduction of
customer traffic and temporary closures of shopping malls as mandated by the
provincial governments in various provinces of China, which had adversely
affected our retail business with a decline in sales.



Total retail store square footage and sales per square foot for the nine months ended September 30, 2022 and 2021 are as follows:


                                                     2022          2021
Total store square footage                           879,108       982,683
Number of stores                                         774           893
Average store size, square feet                        1,136         1,100

Total store sales (thousands of WE dollars) $79,984 $113,927
Sales per square foot

                              $      91     $     116




Comparable store sales and newly opened store sales for the nine months ended
September 30, 2022 and 2021 are as follows:


                                                2022                  2021
                                              (In thousands of U.S. dollars)
Sales from stores opened for a full year   $       65,840       $         89,478
Sales from newly opened store sales        $        2,245       $          6,950
Sales from e-commerce platform             $        8,683       $         
9,725
Other*                                     $        3,216       $          7,774
Total                                      $       79,984       $        113,927


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

We remodeled or relocated 137 stores in year 2021, and 29 stores during the six
months ended September 30, 2022. We plan to relocate or remodel 0 to 50 stores
in 2022. Remodels and relocations typically drive incremental same-store sales
growth. A relocation typically results in an improved, more visible and
accessible location, and usually includes increased square footage. We believe
we will continue to have opportunities for additional remodels and relocations
beyond 2022. Same-store sales are calculated based upon stores that were open at
least 12 full fiscal months in each reporting period and remain open at the
end
of each reporting period.



                                       25





Costs and Expenses


Cost of sales and gross margin



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



The following table sets forth the components of our cost of sales and gross
profit both in amounts and as a percentage of total sales for the nine months
ended September 30, 2022 and 2021.



                                                                                                                 Growth
                                                                                                               (Decrease)
                                                       Nine months ended September 30,                          in 2022
                                                  2022                                  2021                    Compared
                                           (In thousands of U.S. dollars, except for percentages)              with 2021
Net Sales for Wholesale Sales       $       155,038             100.0 %    
$       111,849         100.0 %           38.6 %
Raw Materials                                71,638              46.2                51,299          45.9             39.6
Labor                                         1,448               0.9                 1,141           1.0             26.9
Outsourced Production Costs                  56,973              36.7                39,744          35.5             43.4
Other and Overhead                              820               0.5                 1,290           1.2            (36.4 )
Total Cost of Sales for Wholesale           130,879              84.4                93,474          83.6             40.0
Gross Profit for Wholesale                   24,158              15.6      
         18,375          16.4             31.5
Net Sales for Retail                         79,984             100.0               113,927         100.0            (29.8 )
Production Costs                             34,601              43.3                45,784          40.2            (24.4 )
Rent                                         15,713              19.6                22,480          19.7            (30.1 )
Total Cost of Sales for Retail               50,315              62.9                68,264          59.9            (26.3 )
Gross Profit for Retail                      29,670              37.1      
         45,663          40.1            (35.0 )
Total Cost of Sales                         181,194              77.1               161,738          71.6             12.0
Gross Profit                        $        53,828              22.9 %     $        64,038          28.4 %          (15.9 )%




Raw material costs for our wholesale business were 46.2% of our total wholesale
business sales in the nine months ended September 30, 2022, compared with 45.9%
in the nine months ended September 30, 2021. The increase was mainly due to
higher raw material purchase prices.



Labor costs for our wholesale business were 0.9% of our total wholesale business
sales in the nine months ended September 30, 2022, compared with 1.0% in the
nine months ended September 30, 2021. There were no significant changes.



Outsourced production costs for our wholesale business were 36.7% of our total
sales in the nine months ended September 30, 2022, compared with 35.5% in the
nine months ended September 30, 2021. This increase in percentage was primarily
attributable to higher labor costs.



Overhead and other expenses for our wholesale business accounted for 0.5% and
1.2% of our total sales for the nine months ended September 30, 2022 and 2021,
respectively.


Gross profit for our wholesale business for the nine months ended September 30,
2022 was $24.2 million, a 31.5% increase compared with the nine months ended
September 30, 2021. As a percentage of total wholesale business sales, gross
profit was 15.6% of our total wholesale business sales for the nine months ended
September 30, 2022, compared with 16.4% for the nine months ended September 30,
2021. The decrease in gross margin was mainly due to an increase in raw material
prices.



Production costs for our retail business for the nine months ended September 30,
2022 were $34.6 million compared with $45.8 million for the nine months ended
September 30, 2021. As a percentage of our total retail sales, production costs
were 43.3% of our total retail sales for the nine months ended September 30,
2022, compared with 40.2% for the nine months ended September 30, 2021.The
increase of percentage was due to higher discounts on our past season products
in the nine months ended September 30, 2022 compared with the same period of the
prior year of sales.


Rent costs for our retail business for the nine months ended September 30, 2022
were $15.7 million compared with $22.5 million for the nine months ended
September 30, 2021. As a percentage of total retail sales, rent costs were 19.6%
of our total retail sales for the nine months ended September 30, 2022 compared
with 19.7% for the nine months ended September 30, 2021. There were no
significant changes in percentage.



Gross profit for our retail business for the nine months ended September 30,
2022 was $29.7 million compared with $45.7 million for the nine months ended
September 30, 2021. Gross margin for our retail business for the nine months
ended September 30, 2022 was 37.1% compared with 40.1% for the nine months
ended
September 30, 2021.


Total cost of sales for the nine months ended September 30, 2022 was $181.2
million, a 12.0% increase compared with the nine months ended September 30,
2021. As a percentage of total sales, total costs were 77.1% of total sales for
the nine months ended September 30, 2022, compared with 71.6% for the nine
months ended September 30, 2021. Total gross margin for the nine months ended
September 30, 2022 was 22.9% compared with 28.4% for the nine months ended
September 30, 2021.



                                       26




Selling, general and administrative expenses

Our selling expenses primarily include local transportation, unloading costs, product inspection costs, retail staff salaries, and decoration and marketing costs associated with our retail operations.



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



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



                                                                                                                    Increase
                                                                                                                   (Decrease)
                                                         Nine months ended September 30,                            in 2022
                                                   2022                                    2021                     Compared
                                              (In thousands of U.S. dollars, except for percentages)                to 2021
Gross Profit                          $       53,828             22.9 %       $       64,038            28.4 %           (15.9 )%
Operating Expenses:
Selling Expenses                              38,153             16.2                 44,495            19.7             (14.3 )
General and Administrative Expenses           21,821              9.3      
          24,980            11.1             (12.6 )
Total                                         59,974             25.5                 69,475            30.8             (13.7 )
Loss from Operations                  $       (6,146 )           (2.6 )%      $       (5,437 )          (2.4 )%           13.0 %




Selling expenses for the nine months ended September 30, 2022 were $38.2
million, a 14.3% decrease compared with $44.5 million in the nine months ended
September 30, 2021. The decrease was attributable to the decreased average
salaries and the marketing expenses associated with the promotion of the retail
brand.


General and administrative expenses for the nine months ended September 30, 2022
were $21.8 million a 12.6% decrease compared with the nine months ended
September 30, 2021. As a percentage of total sales, general and administrative
expenses accounted for 9.3% of total sales for the nine months ended September
30, 2022, compared with 11.1% of total sales for the nine months ended September
30, 2021. The decrease was attributable to the decreased publicity expense
and
the depreciation of RMB.



Loss from Operations


Operating loss for the nine months ended September 30, 2022 has been $6.1 millionan increase of 13.0% over $5.4 million loss for the nine months ended
September 30, 2021.


Interest Expense



Interest expense was $1.5 million and $1.9 million for the nine months ended
September 30, 2022 and 2021, respectively. The decrease was due to the decreased
bank loans.



Income Tax Expense


Income tax expense for the nine months ended September 30, 2022 has been $1.2 milliona decrease of 68.0% compared to the same period of 2021. The decrease is mainly due to lower revenues from the PRC, which led to lower income tax expense.


                                       27





Net Loss



The net loss was $8.8 million and $6.2 million in the nine months ended
September 30, 2022 and 2021. The basic and diluted loss per share was $0.59 and
$0.42 for the nine months ended September 30, 2022 and 2021, respectively.

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