EVK Ever Glory International Group Inc

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

NOTE 1 BASIS OF PRESENTATION

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

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

In March 2019, the Company incorporated Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”) and it is the Company’s wholly-owned PRC subsidiaries. Haian Tai Xin is engaged in the business of garments manufacturing.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of income (loss) and comprehensive income, condensed consolidated statements of equity, and cash flows for the three months ended March 31, 2019 and 2018. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three months ended March 31, 2019 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, 2018. 

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition  

We recognize wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales. Retail sales are recorded net of promotional discounts, rebates, and return allowances. Retail store sales are recognized at the time of the register receipt. Retail online sales are recognized when products are shipped and customers receive the products because we retain a portion of the risk of loss on these sales during transit.

Our revenue recognition policy is in compliance with ASC 606, Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:

We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery for local sales and upon shipment of the products for export sale.

For all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.

Derivatives financial instruments  

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

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

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

Accounts Receivable, net

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history of its customers and current relationships with them. The Company writes off accounts receivable when amounts are deemed uncollectible. There was no bad debt expense for the three months period ended March 31, 2019 and 2018.

Fair Value Accounting

Accounting Standards Codification (“ASC”) 820 “ Fair Value Measurements and Disclosures ”, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

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

At March 31, 2019 and 2018, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

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

During 2018, the Company had entered into four foreign currency swap contracts with three banks. These contracts were expired and there is no derivative asset or liability as of March 31, 2019. The fair value of foreign currency swap contracts is determined by the variation of measurement date foreign exchange market rates and contract closing date predetermined foreign exchange rates.

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

Foreign Currency Translation and Other Comprehensive Income

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

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

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, a new standard on accounting for leases. Effective January 1, 2019, we adopted this standard. The ASU introduces a right-of-use (“ROU”) model that requires a lease to record an ROU asset and lease liability on the balance sheet for all leases with terms longer than twelve months, as well as disclose key information regarding leasing arrangements. Adoption of this standard resulted in the recognition of right-of-use assets of $64.5 million and operating lease liabilities of $64.5 million. As of March 31, 2019, the adoption of this standard did not have a material impact on the Company’s operating results or cash flows.

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

In October 2018, the FASB issued ASU No. 2018-17  “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities”  which could be improved in the following areas: 1. Applying the variable interest entity (VIE) guidance to private companies under common control. 2. Considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements. 

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

NOTE 4 BANK LOANS

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short term bank loans consisted of the following as of March 31, 2019 and December 31, 2018.

In December 2016, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $8.9 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of March 31, 2019, Goldenway had borrowed $3.0 million (RMB 20.0 million) under this line of credit with an annual interest rate of 3.92% and due on November 2019. As of March 31, 2019, approximately $5.9 million was unused and available under this line of credit.  

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.9 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of March 31, 2019, Ever-Glory Apparel had borrowed $11.8 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 4.57% to 4.70% and due on July 2019. As of March 31, 2019, approximately $3.0 million was unused and available under this line of credit.

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of March 31, 2019, approximately $7.5 million was unused and available under this line of credit.

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.9 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from Nanjing Bank with an annual interest rates 4.41% and due on September 2019. As of March 31, 2019, approximately $7.4 million was unused and available under this line of credit.

In May 2018, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of March 31, 2019, LA GO GO had borrowed $2.2 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in June 2019. As of March 31, 2019, approximately $0.8 million was unused and available under this line of credit.

In June 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.79% and due in June 2019.  

In November 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from November 2019 to January 2020.

In July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed $2.7 million (RMB18.0 million) from the Shanghai Pudong Development Bank with an annual interest rate 4.57% and due on date November 2019. As of March 31, 2019, approximately $0.3 million was unused and available under this line of credit.

In March 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $7.2 million (RMB48.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of March 31, 2019, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from China Everbright Bank with an annual interest rate 4.57% and due on date April 2019. As of March 31, 2019, approximately $5.7 million was unused and available under this line of credit.

In March 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of March 2019, Ever-Glory Apparel had collateralized by approximately $0.1 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of March 31, 2019, approximately $2.4 million was unused and available under this line of credit.

All loans have been repaid before or at maturity date.

Total interest expense on bank loans amounted to $0.4 million and $0.6 million for the three months ended March 31, 2019 and 2018, respectively.

NOTE 5 LEASES

The adoption of the new lease guidance did not have a material impact on the Company’s results of operations or liquidity, but resulted in the recognition of operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The company has leases for land-use-rights, warehouses and logistics centers, flagship stores, and stores within shopping malls in the PRC, which are classified as operating leases. The leases include fixed and variable payments according to the sales generated from flagship stores and those stores with shopping malls. Options to extend or renew are recognized as part of the lease liabilities and recognized as right of use assets. There are no residual value guarantees and no restrictions or covenants imposed by the leases. In the three months ended March 31, 2019, the costs of the leases recognized in cost of revenues and general administrative expenses are $12.9 and $0.2 million, respectively. Cash paid for the operating leases including in the operating cash flows was $13.1 million. As of March 31, 2019, The Company has $64.5 million of right-of-use assets, $55.4 million in current operating lease liabilities and $9.1 million in non-current operating lease liabilities as of March 31, 2019.

Significant assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to Registrant over terms similar to the lease terms.

NOTE 6 INCOME TAX

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

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

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2019.

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

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

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

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

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for the three months ended March 31, 2019 and 2018 was taxable in the following jurisdictions: 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three months ended March 31, 2019 and 2018:

Income tax expense for the three months ended March 31, 2019 and 2018 is as follows:

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

The Company has not recorded U.S. deferred income taxes on approximately $105.0 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S. Tax Reform signed into law on December 22, 2017 significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax expense (income) relating to the Tax Act changes for the three months ended March 31, 2019.

NOTE 8 STOCKHOLDERS’ EQUITY

On July 26, 2018, the Company issued 2,206 shares of Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the fourth quarter of 2017, and the first and second quarters of 2018 as directors. The shares issued in 2018 were valued at $3.39 per share, which was the average market price of the common stock for the five days before the grant date. 

On January 31, 2019, the Company issued 1,942 shares of Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the third and fourth quarter of 2018. The shares issued in 2019 were valued at $3.8 per share, which was the average market price of the common stock for the five days before the grant date. 

NOTE 9 RELATED PARTY TRANSACTIONS

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

Other income from Related Parties

JiangsuWubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter of 2014. During the three months ended March 31, 2019 and 2018, the Company received $31,479 and $33,622 from the customers and paid $25,838 and $19,188 to Wubijia through the consignment, respectively. The net profit of $5,641 and $14,435 was recorded as other income during the three months ended March 31, 2019 and 2018, respectively.

Other expenses due to Related Parties

Included in other expenses for the three months ended March 31, 2019 and 2018 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

The Company leases Chuzhou Huarui and Kunshan Enjin’s warehouse spaces because the locations are convenient for transportation and distribution.

Purchases from and Sub-contracts with Related Parties

The Company purchased raw materials from Nanjing Knitting totaling $0.20 million and $0.33 million during the three months ended March 31, 2019 and 2018, respectively.

In addition, the Company sub-contracted certain manufacturing work to related companies totaling $5.1 million and $3.7 million for the three months ended March 31, 2019 and 2018, respectively. The Company provided raw materials to the sub-contractors and charged a fixed fee for labor provided by the sub-contractors.

Sub-contracts with related parties included in cost of sales for the three months ended March 31, 2019 and 2018 are as follows:

Accounts Payable – Related Parties

The accounts payable to related parties at March 31, 2019 and December 31, 2018 are as follows:

Amounts Due From Related Parties-current assets

The amounts due from related parties at March 31, 2019 and December 31, 2018 are as follows:

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three months ended March 31, 2019 and 2018, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices.  The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at cost for $0 and $0.3 million during the three month period ended March 31, 2019 and 2018, respectively.  Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $424,675 and $22,235 during the three months ended March 31, 2019 and 2018, respectively.  

Amounts Due From Related Party under Counter Guarantee Agreement

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of March 31, 2019 and December 31, 2018, Jiangsu Ever-Glory has provided guarantees for approximately $41.4 million (RMB 278 million) and $33.4 million (RMB 230.0 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $30.6 million (RMB 205.5 million) and $29.9 million (RMB 205.5 million) as of March 31, 2019 and December 31, 2018, respectively. Mr. Kang has also provided a personal guarantee for $24.6 million (RMB 164.8 million) and $14.5 million (RMB 100.0 million) as of March 31, 2019 and December 31, 2018, respectively.

At December 31, 2018, $9.9 million (RMB 68.2 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the three months ended March 31, 2019, an additional $2.1 million (RMB 14.0 million) was provided to and repayment of $3.5 million (RMB23.5 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of March 31, 2019, the amount of the counter-guarantee was $8.7 million (RMB 58.7 million) (the difference represents currency exchange adjustment of $0.2 million), which was 21.1% of the aggregate amount of lines of credit. This amount plus accrued interest of $0.5 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At March 31, 2019 and December 31, 2018, the amount classified as a reduction of equity was $9.3 million and $10.4 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Since January 1, 2019, interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for the three months ended March 31, 2019 and 2018 was approximately $0.1 million and $0.2 million, respectively.

NOTE 10 CONCENTRATIONS AND RISKS

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable, the allowance for doubtful accounts at March 31, 2019 and December 31, 2018 was $4.5 million and $5.9 million, respectively. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions 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 future allowance for doubtful accounts.  If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.  

For the three-month period ended March 31, 2019, the Company had two wholesale customers that represented approximately 26% and 11% of the Company’s revenues. For the three-month period ended March 31, 2018, the Company had one wholesale customer that represented approximately 18% of the Company’s revenues.

For the wholesale business, the Company did not rely on any raw material supplier that represented more than 10% of the total raw material purchases during the three months ended March 31, 2019 and 2018.

For the retail business, the Company relied on three raw material suppliers that represented approximately 36%, 35% and 23% of raw material purchases during the three months ended March 31, 2019.

For the retail business, the Company relied on two raw material suppliers that represented approximately 30% and 23% of raw material purchases during the three months ended March 31, 2018.

For the wholesale business, during the three months ended March 31, 2019, the Company relied on two manufacturers that represented 11% and 10% of finished goods purchases, and during the three months ended March 31, 2018, the Company relied on one manufacturer that represented 14% of finished goods purchases.

For the retail business, the Company did not rely on any supplier that represented more than 10% of the total finished goods purchases during the three months ended March 31, 2019 and 2018.

The Company’s revenues for the three months ended March 31, 2019 and 2018 were earned in the following geographic areas:

NOTE 11 SEGMENTS

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

(a)  Wholesale segment

(b)  Retail segment

Net cash provided by operating activities was $11.1 million and $7.8 million for the three months ended March 31, 2019 and 2018, respectively. This increase was mainly due to increased accounts receivable and inventories, offset by decreased accounts payable.

Net cash used in investing activities was $2.1 million and $2.6 million for the three months ended March 31, 2019 and 2018. This decrease was mainly due to we purchased property and equipment in the three months ended March 31, 2019 less than the same period of 2018.

Net cash used in financing activities were $0.05 million and $5.1 million for the three months ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019, we received new bank loans of $6.0 million and repaid the bank loans of $7.4 million.

Liquidity and Capital Resources

As of March 31, 2019, we had cash and cash equivalents of $57.9 million, other current assets of $126.4 million and current liabilities of $155.7 million. We presently finance our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue to be our primary source of funds to finance our short-term cash needs.

Bank Loans

In December 2016, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $8.9 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of March 31, 2019, Goldenway had borrowed $3.0 million (RMB 20.0 million) under this line of credit with an annual interest rate of 3.92% and due on November 2019. As of March 31, 2019, approximately $5.9 million was unused and available under this line of credit.  

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.9 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of March 31, 2019, Ever-Glory Apparel had borrowed $11.8 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 4.57% to 4.70% and due on July 2019. As of March 31, 2019, approximately $3.0 million was unused and available under this line of credit.

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of March 31, 2019, approximately $7.5 million was unused and available under this line of credit.

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.9 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from Nanjing Bank with an annual interest rates 4.41% and due on September 2019. As of March 31, 2019, approximately $7.4 million was unused and available under this line of credit.

In May 2018, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of March 31, 2019, LA GO GO had borrowed $2.2 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in June 2019. As of March 31, 2019, approximately $0.8 million was unused and available under this line of credit.

In June 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.79% and due in June 2019.

In November 2018, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of March 31, 2019, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from November 2019 to January 2020.

In July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2019, Ever-Glory Apparel had borrowed $2.7 million (RMB18.0 million) from the Shanghai Pudong Development Bank with an annual interest rate 4.57% and due on date November 2019. As of March 31, 2019, approximately $0.3 million was unused and available under this line of credit.

In March 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $7.2 million (RMB48.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of March 31, 2019, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from China Everbright Bank with an annual interest rate 4.57% and due on date April 2019. As of March 31, 2019, approximately $5.7 million was unused and available under this line of credit.

In March 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of March 2019, Ever-Glory Apparel had collateralized by approximately $0.1 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of March 31, 2019, approximately $2.4 million was unused and available under this line of credit.   

All loans have been repaid before or at maturity date.

DERIVATIVE LIABILITY

During 2018, the Company had entered into four foreign currency swap contracts with three banks. As of March 31, 2019, there is no derivative liability.

Capital Commitments

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

Uses of Liquidity

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

Sources of Liquidity

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

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

As of March 31, 2019, we had access to approximately $61.9 million in lines of credit, of which approximately $33.0 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately $41.4 million (RMB 278.0 million) and approximately $8.7 million (RMB 58.7 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of March 31, 2019.

Foreign Currency Translation Risk

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of March 31, 2019, the market foreign exchange rate had increased to RMB 6.71 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GO (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain for the 3 months ended March 31, 2019 and 2018 was $4.0 million and $4.0 million, respectively. 

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 2A. RISK FACTORS

Changes to United States tax, tariff and import/export regulations may have a negative effect on global economic conditions, financial markets and our business.  

The current political climate has introduced greater uncertainty with respect to trade policies, tariffs and government regulations affecting trade between the U.S. and other countries, especially to trade between U.S. and China. Our products are sold to many countries including the U.S.  Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported products or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity. 

Not applicable.

Evaluation of Disclosure Controls and Procedures

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

Limitations on the Effectiveness of Disclosure Controls .   In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Evaluation of Disclosure Controls and Procedures .   Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the period ended March 31, 2019. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were operating effectively. 

Changes in Internal Control Over Financial Reporting

Other than described above, during the first quarter of 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following exhibits are filed herewith:

SIGNATURES

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

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