NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(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 located in China
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”), Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”),
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 2020, the Company incorporated Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”) and it is the
Company’s wholly-owned PRC subsidiaries. Nanjing Rui Lian is engaged in the business of garments trading.
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, 2020 the condensed consolidated statements of income (loss) and comprehensive income(loss),
condensed consolidated statements of equity, and cash flows for the three months ended March 31, 2020 and 2019. 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, 2020 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, 2019.
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
The
company recognizes wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment
of the products for export sales, at such time title passes to the customer. 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:
|
(i)
|
identification
of the promised goods and services in the contract;
|
|
(ii)
|
determination
of whether the promised goods and services are performance obligations, including whether they are distinct in the context
of the contract;
|
|
(iii)
|
measurement
of the transaction price, including the constraint on variable consideration;
|
|
(iv)
|
allocation
of the transaction price to the performance obligations; and
|
|
(v)
|
recognition
of revenue when (or as) the Company satisfies each performance obligation.
|
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.
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.
For
the three months ended March 31, 2020 and 2019, $0.26 million and $0 million of bad debt expenses have been provided in the consolidated
financial statements, respectively. The allowance for doubtful account balances as of March 31, 2020 and December 31, 2019 are
$5.6 million and $5.3 million, respectively.
Fair
Value Accounting
Accounting
Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”, establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
ASC 820 are described below:
|
Level 1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
Level 2
|
Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the
full term of the asset or liability;
|
|
|
|
|
Level 3
|
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity).
|
The
fair value of forward exchange contracts is based on broker quotes, if available. If broker quotes are not available, then fair
value is estimated by discounting the difference between the contractual forward price and the current forward price at the reporting
date for the residual maturity of the contract using a risk-free interest rate based on government bonds.
At
March 31, 2020 and December 31, 2019, 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.
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 (Loss)
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, Haian Taixin and Nanjing
Rui Lian 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.
Income
Taxes
ASC
740 states “Deferred tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than
not that some or all of the deferred tax assets will not be recognized.” A deferred tax asset is a tax reduction whose recognition
is delayed due to deductible temporary differences and loss carryforwards. This can result in a change in taxes payable or refundable
in future periods. A business should create a valuation allowance for a deferred tax asset if there is a more than 50% probability
that the company will not realize some portion of the asset. Any changes to this allowance are to be recorded within income from
continuing operations on the income statement. The need for a valuation allowance is especially likely if a business has a history
of letting various loss carryforwards expire unused, or it expects to incur losses in the next few years.
Lease
The
Company adopted ASC No. 842, Leases effective January 1, 2019 to account for all Company’s leases. All leases are recorded
in the balance sheets. The lease liability is measured at present value of outstanding lease payments, both at commencement date
and subsequently. The discount rate is generally the Company’s incremental borrowing rate as the lessor’s rate implicit
in the lease is not readily determinable. The right-of-use (ROU) asset costs at commencement date consist of initial lease liability,
any initial direct costs, and any lease payments made to the lessor at or before the commencement date, minus any lease incentives
received. Subsequently, the carrying amount of ROU asset is derived from the carrying amount of the lease liability, plus unamortized
direct costs and prepaid lease payments, and minus unamortized balance of lease incentives received. The annual amortization expenses
will be recorded in consolidated statement of operations and allocating between cost of sales and operating expenses.
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 reviews new accounting standards as issued. Management has not identified any other new standards that it believes will
have a significant impact on the Company’s consolidated financial statements.
NOTE
3 INVENTORIES
Inventories
at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Raw materials
|
|
$
|
1,137
|
|
|
$
|
1,468
|
|
Work-in-progress
|
|
|
10,081
|
|
|
|
8,025
|
|
Finished goods
|
|
|
40,934
|
|
|
|
57,862
|
|
Total inventories
|
|
$
|
52,152
|
|
|
$
|
67,355
|
|
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, 2020 and December 31, 2019.
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Bank
|
|
(In thousands of
U.S. Dollars)
|
|
Industrial and Commercial Bank of China
|
|
$
|
19,754
|
|
|
$
|
18,629
|
|
Nanjing Bank
|
|
|
3,528
|
|
|
|
6,449
|
|
China Minsheng Bank
|
|
|
2,822
|
|
|
|
2,866
|
|
Bank of Communications
|
|
|
-
|
|
|
|
1,426
|
|
HSBC
|
|
|
-
|
|
|
|
561
|
|
|
|
$
|
26,104
|
|
|
$
|
29,931
|
|
In
December 2019, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the
Company to borrow up to approximately $5.6 million (RMB40.0 million). These loans are collateralized by the Company’s property
and equipment. As of March 31, 2020, Goldenway had borrowed $5.6 million (RMB40.0 million) from Industrial and Commercial Bank
of China with an annual interest rate 4.57% and due on August 2020.
In
November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.1 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, 2020, Ever-Glory
Apparel had borrowed $14.1 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.92%
to 4.7% and due on from May 2020 to March 2021.
In
August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately
$7.1 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, 2020, approximately $7.1 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 $8.5 million (RMB60.0 million) with
Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2020, Ever-Glory Apparel had borrowed
$1.4 million (RMB10.0 million) from Nanjing Bank with an annual interest rate 5.0% and due on June 2020. As of March 31, 2020,
approximately $7.1 million was unused and available under this line of credit.
In
June 2019, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up
to approximately $2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of March 31, 2020,
LA GO GO had borrowed $2.1 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in
June 2020. As of March 31, 2020, approximately $0.7 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 $2.8 million (RMB20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2020, LA GO GO had borrowed $2.8 million (RMB20.0 million)
from China Minsheng Bank with an annual interest rate of 5.0% and due in November 2020.
In
September 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 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, 2020, approximately
$2.8 million was unused and available under this line of credit.
In
September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.6 million (RMB40.0 million) with
the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2020, approximately $5.6 million was unused
and available under this line of credit.
In
August 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 31, 2020, approximately $2.5 million was unused and available under this line of
credit.
All
bank loans are used to fund our daily operations. All loans have been repaid before or at maturity date.
Total
interest expense on bank loans amounted to $0.3 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively.
NOTE
5 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, 2020.
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, its income tax rate is
8.25% when its profit is under HKD 2.0 million and its income tax rate is 16.5% when its profit is over HKD 2.0 million.
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 years ended March 31, 2020 and 2019 was taxable in the following jurisdictions:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
PRC
|
|
$
|
(1,748
|
)
|
|
$
|
389
|
|
BVI
|
|
|
(720
|
)
|
|
|
(2
|
)
|
Others
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
$
|
(2,471
|
)
|
|
$
|
382
|
|
The
following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three months ended March
31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Temporary difference between US GAAP and PRC tax accounting
|
|
|
(34.2
|
)
|
|
|
198.0
|
|
Effective income tax rate
|
|
|
(9.2
|
)%
|
|
|
223.0
|
%
|
Income
tax expense for the three months ended March 31, 2020 and 2019 is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Current
|
|
$
|
345
|
|
|
$
|
495
|
|
Deferred
|
|
|
(118
|
)
|
|
|
330
|
|
Income tax expense
|
|
$
|
227
|
|
|
$
|
825
|
|
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 $103.6 million of its non-U.S. subsidiaries’ undistributed
earnings because such amounts are intended to be reinvested outside the United States indefinitely. On December 22, 2017 the U.S.
enacted the “Tax Cuts and Jobs Act” (“U.S. Tax Reform”) which made significant changes to corporate income
tax law. One significant change was to decrease the general corporate income tax rate from 34% to 21%. This reduction had no effect
on the Company’s income tax expense as the reduction in deferred tax assets was offset by an equivalent reduction in the
valuation allowance. Another significant change resulting from U.S. Tax Reform is that any future remittances to the parent company
from business income earned by its subsidiaries outside of the U.S. will no longer to taxable to the Company under U.S. tax law.
The Company would be liable for payment of income tax, or reduction of the net operating loss carryover, at a reduced rate for
any accumulated earnings and profits of its non-U.S. subsidiaries at December 31, 2017. U.S. Tax Reform includes provisions for
Global Intangible Low-Taxed Income (“GILTI”) under which taxes on foreign income are imposed on the excess of a deemed
return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (“BEAT”) under which
taxes are imposed on certain base eroding payments to affiliated foreign companies. Consistent with accounting guidance, we treat
BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes
in a similar manner. 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, 2020.
NOTE
6 EARNINGS PER SHARE
The
following demonstrates the calculation for earnings per share for the three months ended March 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Weighted average number of common shares- Basic and diluted
|
|
|
14,804,832
|
|
|
|
14,800,140
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.04
|
)
|
NOTE
7 STOCKHOLDERS’ EQUITY
On
January 31, 2019, the Company issued 1,942 shares of the 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.
On
January 15, 2020, the Company issued 3,062 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 2019. The shares issued in 2020 were valued
at $1.41 per share, which was the average market price of the common stock for the five days before the grant date.
NOTE
8 RELATED PARTY TRANSACTIONS
Mr.
Kang is the Company’s Chairman and Chief Executive Officer. Ever-Glory Enterprises (HK) Ltd. (Ever-Glory Enterprises) is
the Company’s major shareholder. Mr. Xiaodong Yan was Ever-Glory Enterprises’ sole shareholder and sole director.
Mr. Huake Kang, Mr. Kang’s son, acquired 83% interest of Ever-Glory Enterprises and became its sole director in 2014. All
transactions associated with the following companies controlled by Mr. Kang or his son are considered to be related party transactions,
and it is possible that the terms of these transactions may not be the same as those that would result from transactions between
unrelated parties. All related party outstanding balances are short-term in nature and are expected to be settled in cash.
Other
income from Related Parties
Jiangsu
Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled
by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter
of 2014. During the three months ended March 31, 2020 and 2019, the Company received $2,517 and $31,479 from the customers and
paid $2,517 and $25,838 to Wubijia through the consignment, respectively. The net profit of $0 and $5,641 was recorded as other
income during the three months ended March 31, 2020 and 2019, respectively.
Other
expenses due to Related Parties
Included
in other expenses for the three months ended March 31, 2020 and 2019 are rent due to entities controlled by Mr. Kang under operating
lease agreements as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Chuzhou Huarui
|
|
|
50
|
|
|
|
53
|
|
Kunshan Enjin
|
|
|
22
|
|
|
|
22
|
|
Total
|
|
$
|
72
|
|
|
$
|
75
|
|
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 totaled $0 million and $0.20 million during the three months ended March
31, 2020 and 2019, respectively.
In
addition, the Company sub-contracted certain manufacturing work to related companies totaled $3.1 million and $5.1 million for
the three months ended March 31, 2020 and 2019, 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, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
1,884
|
|
|
$
|
2,579
|
|
Chuzhou Huarui
|
|
|
513
|
|
|
|
1,507
|
|
Fengyang Huarui
|
|
|
158
|
|
|
|
106
|
|
Nanjing Ever-Kyowa
|
|
|
254
|
|
|
|
347
|
|
EsC’eLav
|
|
|
10
|
|
|
|
88
|
|
Jiangsu Ever-Glory
|
|
|
246
|
|
|
|
425
|
|
Total
|
|
$
|
3,065
|
|
|
$
|
5,052
|
|
Accounts
Payable – Related Parties
The
accounts payable to related parties at March 31, 2020 and December 31, 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
1,561
|
|
|
|
2,260
|
|
Fengyang Huarui
|
|
|
351
|
|
|
|
414
|
|
Nanjing Ever-Kyowa
|
|
|
380
|
|
|
|
386
|
|
Chuzhou Huarui
|
|
|
1,360
|
|
|
|
1,064
|
|
Nanjing Knitting
|
|
|
171
|
|
|
|
186
|
|
Jiangsu Ever-Glory
|
|
|
66
|
|
|
|
501
|
|
Total
|
|
$
|
3,889
|
|
|
$
|
4,811
|
|
Amounts
Due From Related Parties-current assets
The
amounts due from related parties at March 31, 2020 and December 31, 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Jiangsu Ever-Glory
|
|
$
|
102
|
|
|
$
|
123
|
|
Esc’elav
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
102
|
|
|
$
|
123
|
|
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, 2020 and 2019, 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 $0.2 million
and $0 during the three month period ended March 31, 2020 and 2019, respectively. Jiangsu Ever-Glory
purchased raw materials on the Company’s behalf and sold to the Company at cost for $0.7 million and $0.4 million
during the three months ended March 31, 2020 and 2019, 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, 2020 and December 31, 2019, Jiangsu Ever-Glory has provided guarantees for
approximately $33.0 million (RMB 230 million) and $33 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 $29.4 million (RMB 205.5 million) and $29.4 million (RMB 205.5 million) as of March 31, 2020 and December
31, 2019 respectively. Mr. Kang has also provided a personal guarantee for $14.3 million (RMB 100.0 million) and $14.5 million
(RMB 100.0 million) as of March 31, 2020 and December 31, 2019, respectively.
At
December 31, 2019, $4.7 million (RMB 32.8 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee
agreement. During the three months ended March 31, 2020, no advance was provided to and repayment of $0.7 million (RMB5.2
million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of March 31, 2020, the amount of the
counter-guarantee was $3.9 million (RMB 27.5 million) (the difference represents currency exchange adjustment of $0.07 million),
which was 11.97% of the aggregate amount of lines of credit. This amount plus accrued interest of $0.3 million have been
classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At March 31,
2020 and December 31, 2019, the amount classified as a reduction of equity was $4.1 million and $5 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, 2020 and 2019 was
approximately $0.02 million and $0.1 million, respectively.
NOTE
9 COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitment
The
Company recognized operating lease liabilities and operating lease right-of-use assets on its balance sheets. 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 with fixed payments for land-use-rights, warehouses and logistics
centers, flagship stores, and leases with variable payments for stores within shopping malls (“shopping mall stores”)
in the PRC, which are classified as operating leases. 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.
The
weighted average remaining lease term excluding stores in the shopping malls is 31 years and the weighted average discount rate
is 4.35%. The lease term for shopping mall stores is commonly one year with options to extend or renew, and the rent is predetermined
with a percentage of sales. The Company estimates the next 12 months rent for the shopping mall stores by annualizing current
period rent calculated with the percentage of sales. Thus, the ROU assets and lease liabilities may vary significantly at different
period ends.
In
the three months ended March 31, 2020, the costs of the leases recognized in cost of revenues and general administrative expenses
are $6.0 and $0.2 million, respectively. Cash paid for the operating leases including in the operating cash flows was $6.2 million.
Future
minimum lease payments for leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
Year ending December 31, (In thousands of U.S. Dollars)
|
|
|
|
2020
|
|
|
387
|
|
2021
|
|
|
387
|
|
2022
|
|
|
387
|
|
2023
|
|
|
401
|
|
2024
|
|
|
401
|
|
Thereafter
|
|
|
12,374
|
|
|
|
$
|
14,337
|
|
Legal
Proceedings
On March 2019, Shanghai La Go Go Fashion Company Limited (“LA
GO GO”) filed a complaint against Shanghai Chijing Investment Management Co., Ltd. (“Shanghai Chijing”) for unpaid
rent of RMB2.45 million ($0.36 million) in the Shanghai People’s Court (the “Court”). On July 2019, Shanghai
Chijing filed a counterclaim against LA GO GO for RMB15.38 million ($2.17 million), alleging that LA GO GO had not fulfilled its
corresponding obligations as a landlord. As a result, the Court has frozen the bank accounts of both Shanghai Chijing and LA GO
GO. As of December 31, 2019, a total balance of RMB15.38 million ($2.2 million) was frozen in the bank accounts of LA GO GO. LA
GO GO believes that Shanghai Chijing’s counterclaim is frivolous and without merit, and is rigorously defending against the
counterclaim. As of December 31, 2019, the company had booked this restricted cash in other receivables. On March 10, 2020, the
Court entered a judgment in favor of LA GO GO and dismissed Shanghai Chijing’s counterclaim. LA GO GO believes that
the damages awarded by the Court in favor of LA GO GO were insufficient. As of the date of this report, both LA GO GO and Shanghai
Chijing have appealed the decision of the Court entered on March 10, 2020 and the date of the appeal hearing has not been determined
yet.
In
addition to the foregoing, we may become subject to other legal proceedings that arise in the ordinary course of business and
have not been finally adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results
of operations, cash flows or our financial condition.
NOTE
10 RISKS AND UNCERTAINTIES
Economic
and Political Risks
The
Company’s results of operations could be adversely affected by general conditions in the global economy, including conditions
that are outside of its control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in
China has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial
governments in various provinces of China from late January to March, which has adversely affected the company is the retail business
with a decline in sales since February 2020. The Company’s wholesale business is also significantly affected as the Company
is facing a sharp decline in its order quantities. Some of the Company’s wholesale clients have 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 the
Company’s suppliers are located, The Company’s supply chain and business operations of its 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 the Company’s or its suppliers’ or customers’ products,
could have adverse ripple effects on the Company’s manufacturing output and delivery schedule. The Company could also face
difficulties in collecting its accounts receivables due to the effects of COVID-19 on its 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 the Company, its 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 the Company’s liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could
materially affect the Company’s business and the value of its common stock. If the Company’s future sales continue
to decline significantly, it may risk facing financial difficulties due to its recurring fixed expenses. The extent to which COVID-19
impacts the Company’s operating is uncertain and cannot be predicted at this time, and it 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.
The
majority of the Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition
and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state
of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not
typically associated with companies in North America and Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected
by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
Credit
risk
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. 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.
Concentration
risk
For
the three-month period ended March 31, 2020, the Company had four wholesale customers that represented approximately 20%, 10%,
10% and 10% of the Company’s revenues. 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 wholesale business, the Company relied on one raw material supplier that represented 11% of the total raw material purchases
during the three months ended March 31, 2020. 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.
For
the retail business, the Company relied on two raw material suppliers that represented approximately 60% and 34% of raw material
purchases during the three months ended March 31, 2020. 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 wholesale business, during the three months ended March 31, 2020, the Company relied on one manufacturer that represented
11% of finished goods purchases, and during the three months ended March 31, 2019, the Company relied on two manufacturers that
represented 11% and 10% of finished goods purchases.
The
Company’s revenues for the three months ended March 31, 2020 and 2019 were earned in the following geographic areas:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Mainland China
|
|
$
|
4,653
|
|
|
$
|
10,754
|
|
Hong Kong China
|
|
|
2,992
|
|
|
|
1,253
|
|
Germany
|
|
|
195
|
|
|
|
850
|
|
United Kingdom
|
|
|
837
|
|
|
|
800
|
|
Europe-Other
|
|
|
3,898
|
|
|
|
5,229
|
|
Japan
|
|
|
4,385
|
|
|
|
4,938
|
|
United States
|
|
|
5,328
|
|
|
|
4,278
|
|
Total wholesale business
|
|
|
22,288
|
|
|
|
28,102
|
|
Retail business
|
|
|
36,067
|
|
|
|
59,854
|
|
Total
|
|
$
|
58,355
|
|
|
$
|
87,956
|
|
NOTE
11 SEGMENTS
The
Company reports financial and operating information in the following two segments:
(a) Wholesale
segment
(b) Retail
segment
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
As of and for the period ended March 31, 2020
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
22,288
|
|
|
|
36,067
|
|
|
|
58,355
|
|
Income from operations
|
|
$
|
(674
|
)
|
|
|
(2,551
|
)
|
|
|
(3,225
|
)
|
Interest income
|
|
$
|
262
|
|
|
|
15
|
|
|
|
277
|
|
Interest expense
|
|
$
|
218
|
|
|
|
123
|
|
|
|
341
|
|
Depreciation and amortization
|
|
$
|
254
|
|
|
|
1,333
|
|
|
|
1,587
|
|
Income tax expense
|
|
$
|
186
|
|
|
|
41
|
|
|
|
227
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
419
|
|
|
|
(341
|
)
|
|
|
78
|
|
Total assets
|
|
|
82,846
|
|
|
|
171,517
|
|
|
|
254,363
|
|
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
As of and for the period ended March 31, 2019
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
28,102
|
|
|
|
59,854
|
|
|
|
87,956
|
|
Income from operations
|
|
$
|
769
|
|
|
|
52
|
|
|
|
821
|
|
Interest income
|
|
$
|
199
|
|
|
|
8
|
|
|
|
207
|
|
Interest expense
|
|
$
|
262
|
|
|
|
101
|
|
|
|
363
|
|
Depreciation and amortization
|
|
$
|
290
|
|
|
|
1,935
|
|
|
|
2,225
|
|
Income tax expense
|
|
$
|
219
|
|
|
|
606
|
|
|
|
825
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
367
|
|
|
|
1,764
|
|
|
|
2,131
|
|
Total assets
|
|
|
78,419
|
|
|
|
204,573
|
|
|
|
282,992
|
|
NOTE
12 SUBSEQUENT EVENTS
As
of May 14, 2020, there is no material subsequent event to be disclosed.