ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The
following discussion and analysis of our financial condition and results of operations for the three and six months ended
June 30, 2020 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report
on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the
Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,”
“target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our
Business
We
are a retailer of branded fashion apparel and leading global apparel supply chain solution provider based in China. We are listed
on the NASDAQ Global Market under the symbol of “EVK”.
We
classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made
principally to domestically and international recognized brands, and department stores located throughout Europe, the U.S., Japan
and the People’s Republic of China (“PRC”). We focus on well-known, middle-to-high end casual wear, sportswear,
and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located
throughout the PRC as well as sales via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc.
Although
we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part
of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility
while reducing capital expenditures and the costs of keeping skilled workers on production lines during slow seasons. We oversee
our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they
meet our high-quality control standards and timely delivery requirement.
Wholesale
Business
We
conduct our original design manufacturing (“ODM”) operations through seven wholly owned subsidiaries which are located
in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing,
Jiangsu province, China, Chuzhou, Anhui province, China and Samoa: Ever-Glory International Group Apparel Inc. (“Ever-Glory
Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited
(“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”), Chuzhou Huirui Garments Co., Ltd.
(“Huirui), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), Haian Tai Xin Garments Trading Company
Limited (“Haian Tai Xin”), Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”), Ever-Glory
Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory
HK”).
Retail
Business
We
conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), Jiangsu LA GO GO Fashion
Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai
Ya Lan Fashion Company Limited (“Ya Lan”), Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and
Xizang He Meida Trading Company Limited (“He Meida”).
Business
Objectives
Wholesale
Business
We
believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive
product designs that stand for exceptional styling and quality. We maintain long-term, satisfactory relationships with a portfolio
of well-known and mid-class global brands.
The
primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer
base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:
|
●
|
Expanding
our global sourcing network;
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|
|
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●
|
Expanding
our overseas low-cost manufacturing base (outside of mainland China);
|
|
|
|
|
●
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Focusing
on high value-added products and continuing our strategy to produce mid-to-high end apparel;
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●
|
Continuing
to emphasize product design and technology utilization;
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|
|
|
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●
|
Seeking
strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
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|
|
|
|
●
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Maintaining
stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.
|
Retail
Business
The business objectives for our retail segment
are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of June 30, 2020,
we had 935 stores (including store-in-stores), which includes 19 stores that were opened and 185 stores that were closed in the
first half year of 2020. We expect to open an additional 50 to 100 stores in 2020.
We
believe that our growth opportunities and continued investment initiatives include:
|
●
|
Building
our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
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|
|
|
|
●
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Expanding
our retail network throughout China;
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|
|
|
|
●
|
Improving
our retail stores’ efficiency and increasing same-store sales;
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|
|
|
|
●
|
Continuing
to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities;
and
|
|
|
|
|
●
|
Becoming
a multi-brand operator.
|
Seasonality
of Business
Our
business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail
sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday
periods in the retail segment.
Collection
Policy
Wholesale
business
For
our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers
with good payment track records, we generally provide payment terms between 30 to 180 days following the delivery of finished
goods.
Retail
business
For
store-in-store shops, we generally receive payments from the stores between 60 to 90 days following the date of the register receipt.
For our own flagship stores, we receive payments on the same day of the register receipt. For sales from e-commerce platforms
such as Tmall, Dangdang mall, JD.com, VIP.com and etc., we generally receive payments between 5 to 15 days following the date
of the register receipt.
Global
Economic Uncertainty
Our
business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and
the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products.
We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic
conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2020.
In
addition, economic conditions in the United States and other foreign markets in which we operate could substantially affect our
sales profitability, cash position and collection of accounts receivable. Global credit and capital markets have experienced
unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers
and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently
have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how
this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.
Our
results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside
of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China 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 our retail business with a decline in sales since
February 2020. Our wholesale business is also significantly affected as we are facing a sharp decline in our order quantities.
Some of our 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
our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure
of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions
on the shipment of our or our suppliers’ or customers’ products, could have adverse ripple effects on our manufacturing
output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19
on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social,
economic, and labor instability in the countries and localities in which we or our suppliers and customers operate.
Although
China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there
is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential
economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result
in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively
affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect
our business and the value of our common stock. If our future sales continue to decline significantly, we may risk facing bankruptcy
due to our recurring fixed expenses. The extent to which COVID-19 impacts our results will depend on many factors and future developments,
including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.
Despite
the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to
allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary
of Critical Accounting Policies
We
have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the
underlying accounting standards and operation involved could result in material changes to our financial position or results of
operations under different conditions or using different assumptions.
The Company uses the same accounting policies
in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 (“2019 Form 10-K.”)
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:
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Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
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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.
As of June 30, 2020 and 2019, the Company’s
financial assets (all Level 1) consist of cash placed with financial institutions and trading securities 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.
As of June 30, 2020, the Company’s financial assets (all Level 1) consist of cash placed
with financial institutions and trading securities (nil at December 31, 2019) with brokerage accounts that management considers
to be high quality.
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, 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.
Use of Estimates
In
preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and
disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable,
but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual
results to differ from estimated amounts. Significant estimates include the assumptions used to value tax liabilities, derivative
financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment
of long-lived assets and inventory write off.
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.
Results
of Operations for the three months ended June 30, 2020 and 2019
The
following table summarizes our results of operations for the three months ended June 30, 2020 and 2019. The table and the discussion
below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere
in this report.
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of U.S. dollars, except for
percentages)
|
|
Sales
|
|
$
|
50,086
|
|
|
|
100.0
|
%
|
|
$
|
77,316
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
$
|
14,445
|
|
|
|
28.8
|
%
|
|
$
|
28,986
|
|
|
|
37.5
|
%
|
Operating Expense
|
|
$
|
18,597
|
|
|
|
37.1
|
%
|
|
$
|
27,036
|
|
|
|
35.0
|
%
|
(Loss) Income From Operations
|
|
$
|
(4,152
|
)
|
|
|
(8.3
|
)%
|
|
$
|
1,950
|
|
|
|
2.5
|
%
|
Other Income
|
|
$
|
618
|
|
|
|
1.2
|
%
|
|
$
|
1,278
|
|
|
|
1.7
|
%
|
Income tax expense
|
|
$
|
266
|
|
|
|
0.5
|
%
|
|
$
|
1,455
|
|
|
|
1.9
|
%
|
Net (Loss) Income
|
|
$
|
(3,800
|
)
|
|
|
(7.6
|
)%
|
|
$
|
1,773
|
|
|
|
2.3
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2020 and 2019.
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
Growth
(Decrease)
|
|
Wholesale business
|
|
(In thousands of U.S. dollars)
|
|
|
% of
total sales
|
|
|
(In thousands of U.S. dollars)
|
|
|
% of
total sales
|
|
|
in 2020 compared
with 2019
|
|
Mainland China
|
|
$
|
3,111
|
|
|
|
6.2
|
%
|
|
$
|
6,491
|
|
|
|
8.4
|
%
|
|
|
(52.1
|
)%
|
Hong Kong China
|
|
|
2,054
|
|
|
|
4.1
|
|
|
|
6,463
|
|
|
|
8.4
|
|
|
|
(68.2
|
)
|
Germany
|
|
|
48
|
|
|
|
0.1
|
|
|
|
877
|
|
|
|
1.1
|
|
|
|
(94.5
|
)
|
United Kingdom
|
|
|
471
|
|
|
|
0.9
|
|
|
|
2,038
|
|
|
|
2.6
|
|
|
|
(76.9
|
)
|
Europe-Other
|
|
|
3,612
|
|
|
|
7.2
|
|
|
|
4,224
|
|
|
|
5.5
|
|
|
|
(14.5
|
)
|
Japan
|
|
|
2,205
|
|
|
|
4.4
|
|
|
|
1,311
|
|
|
|
1.7
|
|
|
|
68.2
|
|
United States
|
|
|
10,549
|
|
|
|
21.1
|
|
|
|
15,847
|
|
|
|
20.5
|
|
|
|
(33.4
|
)
|
Total Wholesale business
|
|
|
22,049
|
|
|
|
44.0
|
|
|
|
37,251
|
|
|
|
48.2
|
|
|
|
(40.8
|
)
|
Retail business
|
|
|
28,037
|
|
|
|
56.0
|
|
|
|
40,065
|
|
|
|
51.8
|
|
|
|
(30.0
|
)
|
Total sales
|
|
$
|
50,086
|
|
|
|
100.0
|
%
|
|
$
|
77,316
|
|
|
|
100.0
|
%
|
|
|
(35.2
|
)%
|
Sales
for the three months ended June 30, 2020 were $50.1 million, a 35.2% decrease compared with the three months ended June 30, 2019.
This decrease was primarily attributable to a 40.8% decrease in sales in our wholesale business and a 30.0% decrease in our retail
business.
Sales
generated from our wholesale business contributed 44.0% or $22.0 million of our total sales for the three months ended June 30,
2020, a 40.8% decrease compared with 48.2% or $37.3 million in the three months ended June 30, 2019. This decrease was primarily
attributable to a decrease in sales in Hong Kong, Germany, Europe-Other, Mainland China, United Kingdom and United States,
partially offset by an increase in sales in Japan.
Sales
generated from our retail business contributed 56.0% or $28.0 million of our total sales for the three months ended June 30, 2020,
a 30.0% decrease compared with 51.8% or $40.1 million in the three months ended June 30, 2019. This decrease was primarily due
to a decrease in the numbers of stores and same store sales.
Costs
and Expenses
Cost
of Sales and Gross Margin
Cost
of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production
equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have
not been significant.
The
following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales
for the three months ended June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
|
|
|
|
Three months ended June 30,
|
|
|
2020
|
|
|
|
2020
|
|
|
2019
|
|
|
Compared
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
with 2019
|
|
Net Sales for Wholesale Sales
|
|
$
|
22,049
|
|
|
|
100.0
|
%
|
|
$
|
37,251
|
|
|
|
100.0
|
%
|
|
|
(40.8
|
)%
|
Raw Materials
|
|
|
8,614
|
|
|
|
39.1
|
|
|
|
16,376
|
|
|
|
44.0
|
|
|
|
(47.4
|
)
|
Labor
|
|
|
299
|
|
|
|
1.4
|
|
|
|
398
|
|
|
|
1.1
|
|
|
|
(25.0
|
)
|
Outsourced Production Costs
|
|
|
8,623
|
|
|
|
39.1
|
|
|
|
14,409
|
|
|
|
38.7
|
|
|
|
(40.2
|
)
|
Other and Overhead
|
|
|
152
|
|
|
|
0.7
|
|
|
|
55
|
|
|
|
0.1
|
|
|
|
178.0
|
|
Total Cost of Sales for Wholesale
|
|
|
17,688
|
|
|
|
80.3
|
|
|
|
31,238
|
|
|
|
83.9
|
|
|
|
(43.4
|
)
|
Gross Profit for Wholesale
|
|
|
4,361
|
|
|
|
19.7
|
|
|
|
6,013
|
|
|
|
16.1
|
|
|
|
(27.5
|
)
|
Net Sales for Retail
|
|
|
28,037
|
|
|
|
100.0
|
|
|
|
40,065
|
|
|
|
100.0
|
|
|
|
(30.0
|
)
|
Production Costs
|
|
|
13,865
|
|
|
|
49.5
|
|
|
|
10,084
|
|
|
|
25.2
|
|
|
|
37.5
|
|
Rent
|
|
|
4,088
|
|
|
|
14.3
|
|
|
|
7,008
|
|
|
|
17.5
|
|
|
|
(41.7
|
)
|
Total Cost of Sales for Retail
|
|
|
17,953
|
|
|
|
63.8
|
|
|
|
17,092
|
|
|
|
42.7
|
|
|
|
5.0
|
|
Gross Profit for Retail
|
|
|
10,084
|
|
|
|
36.2
|
|
|
|
22,973
|
|
|
|
57.3
|
|
|
|
(56.1
|
)
|
Total Cost of Sales
|
|
|
35,641
|
|
|
|
71.2
|
|
|
|
48,330
|
|
|
|
62.5
|
|
|
|
(26.3
|
)
|
Gross Profit
|
|
$
|
14,445
|
|
|
|
28.8
|
%
|
|
$
|
28,986
|
|
|
|
37.5
|
%
|
|
|
(50.2
|
)%
|
Raw
material costs for our wholesale business were 39.1% of our total wholesale business sales in the three months ended June 30,
2020, compared with 44.0% in the three months ended June 30, 2019. The decrease was mainly due to lower raw material prices.
Labor
costs for our wholesale business were 1.4% of our total wholesale business sales in the three months ended June 30, 2020, compared
with 1.1% in the three months ended June 30, 2019. The marginal increase was mainly due to a higher average employee salaries
in 2020.
Outsourced
production costs for our wholesale business for the three months ended June 30, 2020 decreased 40.2% to $8.6 million from $14.4
million for the three months ended June 30, 2019. Outsourced production costs accounted for 39.1% of our total wholesale business
sales in the three months ended June 30, 2020, a 40.2% decrease from the three months ended June 30, 2019. This increase in percentage
was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.
Overhead
and other expenses for our wholesale business accounted for 0.7% of our total wholesale business sales for the three months ended
June 30, 2020, compared with 0.1% of total wholesale business sales for the three months ended June 30, 2019.
Wholesale
business gross profit for the three months ended June 30, 2020 was $4.4 million compared with $6.0 million for the three months
ended June 30, 2019. Gross profit accounted for 19.7% of our total wholesale sales for the three months ended June 30, 2020, compared
with 16.1% for the three months ended June 30, 2019. The decrease was mainly due to higher average employee salaries.
Production
costs for our retail business were $13.9 million for the three months ended June 30, 2020 compared with $10.1 million during the
three months ended June 30, 2019. Retail production costs accounted for 49.5% of our total retail sales in the three months ended
June 30, 2020, compared with 25.21% for the three months ended June 30, 2019. The decrease in percentage was due to decrease in
overall purchase costs.
Rent
costs for our retail business for the three months ended June 30, 2020 were $4.1 million compared with $7.0 million for the three
months ended June 30, 2019. Rent costs for our retail business accounted for 14.3% of our total retail sales for the three months
ended June 30, 2020, compared with 17.5% for the three months ended June 30, 2019. The decrease was primarily attributable to
the decline in number of stores.
Gross
profit in our retail business for the three months ended June 30, 2020 was $10.1 million and gross margin was 36.2%. Gross profit
in our retail business for the three months ended June 30, 2019 was $23.0 million and gross margin was 57.3%.
Total
cost of sales for the three months ended June 30, 2020 was $35.6 million, a 26.3% decrease from $48.30 million for the three months
ended June 30, 2019. Total cost of sales as a percentage of total sales for the three months ended June 30, 2020 was 71.2%, compared
with 62.5% for the three months ended June 30, 2019. Gross margin for the three months ended June 30, 2020 was 28.8% compared
with 37.5% for the three months ended June 30, 2019.
Selling,
General and Administrative Expenses
Our
selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail
staff and decoration and marketing expenses associated with our retail business.
Our
general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges,
repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable
to our revenues.
Costs
of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges and product
inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these
amounts in cost of sales.
|
|
Three Months Ended June
30,
|
|
|
Increase (Decrease) in
2020
|
|
|
|
2020
|
|
|
2019
|
|
|
Compared
|
|
|
|
(In
thousands of U.S. dollars, except for percentages)
|
|
|
to 2019
|
|
Gross Profit
|
|
$
|
14,445
|
|
|
|
28.8
|
%
|
|
$
|
28,986
|
|
|
|
37.5
|
%
|
|
|
(50.2
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
12,626
|
|
|
|
25.2
|
|
|
|
19,699
|
|
|
|
25.5
|
|
|
|
(35.9
|
)
|
General and Administrative Expenses
|
|
|
5,971
|
|
|
|
11.9
|
|
|
|
7,337
|
|
|
|
9.5
|
|
|
|
(18.6
|
)
|
Total
|
|
|
18,597
|
|
|
|
37.1
|
|
|
|
27,036
|
|
|
|
35.0
|
|
|
|
(31.2
|
)
|
(Loss) Income from Operations
|
|
$
|
(4,152
|
)
|
|
|
(8.3
|
)%
|
|
$
|
1,950
|
|
|
|
2.5
|
%
|
|
|
(312.8
|
)%
|
Selling
expenses for the three months ended June 30, 2020 decreased 35.9% to $12.6 million from $19.7 million for the three months ended
June 30, 2019. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand.
General
and administrative expenses for the three months ended June 30, 2020 decreased 18.6% to $6.0 million from $7.3 million for the
three months ended June 30, 2019. The decrease was attributable to the decline in number of stores.
(Loss)
Income from Operations
Loss
from operations for the three months ended June 30, 2020 was $4.2 million, a decrease of 312.8% from $2.0 million of income for
the three months ended June 30, 2019. Loss from operations for the three months ended June 30, 2020 accounted for 8.3% of our
total sales, while income from operations for the three months ended June 30, 2019 accounted for 2.5% of our total sales.
Interest
Expense
Interest
expense for the three months ended June 30, 2020 was $0.6 million, a 38.7% increase compared with the same period in 2019. The
increase was due to the increased bank loans.
Income
Tax Expenses
Income
tax expense was $0.3 million and $1.5 million for the three months ended June 30, 2020 and 2019, respectively.
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, 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.
Net
(Loss) Income
Net
loss for the three months ended June 30, 2020 was ($3.8 million), a 304.3% decrease compared with the same period in 2019. Our
basic and diluted (loss) earnings per share were ($0.26) and $0.13 for the three months ended June 30, 2020 and 2019, respectively.
Results
of Operations for the six months ended June 30, 2020 and 2019
The
following table summarizes our results of operations for the six months ended June 30, 2020 and 2019. The table and the discussion
below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this
report.
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of U.S. Dollars, except for percentages)
|
|
Sales
|
|
$
|
108,441
|
|
|
|
100.0
|
%
|
|
$
|
165,272
|
|
|
|
100.0
|
%
|
Gross Profit
|
|
|
30,483
|
|
|
|
28.1
|
|
|
|
58,344
|
|
|
|
35.3
|
|
Operating Expense
|
|
|
37,860
|
|
|
|
34.9
|
|
|
|
55,573
|
|
|
|
33.6
|
|
(Loss) Income From Operations
|
|
|
(7,377
|
)
|
|
|
(6.8
|
)
|
|
|
2,771
|
|
|
|
1.7
|
|
Other Income
|
|
|
1,372
|
|
|
|
1.3
|
|
|
|
827
|
|
|
|
0.5
|
|
Income tax expense
|
|
|
493
|
|
|
|
0.5
|
|
|
|
2,280
|
|
|
|
1.4
|
|
Net (Loss) Income
|
|
$
|
(6,498
|
)
|
|
|
(6.0
|
)%
|
|
$
|
1,318
|
|
|
|
0.8
|
%
|
Revenue
The
following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2020 and 2019.
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
Growth (Decrease)
|
|
Wholesale business
|
|
(In thousands of U.S. dollars)
|
|
|
% of total sales
|
|
|
(In thousands of U.S. dollars)
|
|
|
% of total sales
|
|
|
in 2020 compared
with 2019
|
|
Mainland China
|
|
$
|
7,764
|
|
|
|
7.2
|
%
|
|
$
|
17,246
|
|
|
|
10.4
|
%
|
|
|
(55.0
|
)%
|
Hong Kong China
|
|
|
5,045
|
|
|
|
4.7
|
|
|
|
7,717
|
|
|
|
4.7
|
|
|
|
(34.6
|
)
|
Germany
|
|
|
243
|
|
|
|
0.2
|
|
|
|
1,726
|
|
|
|
1.0
|
|
|
|
(85.9
|
)
|
United Kingdom
|
|
|
1,309
|
|
|
|
1.2
|
|
|
|
2,838
|
|
|
|
1.7
|
|
|
|
(53.9
|
)
|
Europe-Other
|
|
|
7,511
|
|
|
|
6.9
|
|
|
|
9,453
|
|
|
|
5.7
|
|
|
|
(20.5
|
)
|
Japan
|
|
|
6,589
|
|
|
|
6.1
|
|
|
|
6,248
|
|
|
|
3.8
|
|
|
|
5.5
|
|
United States
|
|
|
15,876
|
|
|
|
14.6
|
|
|
|
20,125
|
|
|
|
12.2
|
|
|
|
(21.1
|
)
|
Total Wholesale business
|
|
|
44,337
|
|
|
|
40.9
|
|
|
|
65,353
|
|
|
|
39.5
|
|
|
|
(32.2
|
)
|
Retail business
|
|
|
64,104
|
|
|
|
59.1
|
|
|
|
99,919
|
|
|
|
60.5
|
|
|
|
(35.8
|
)
|
Total sales
|
|
$
|
108,441
|
|
|
|
100.0
|
%
|
|
$
|
165,272
|
|
|
|
100.0
|
%
|
|
|
(34.4
|
)%
|
Sales
for the six months ended June 30, 2020 were $108.4 million, a decrease of 34.4% from the six months ended June 30, 2019. This
decrease was primarily attributable to a 32.2% decrease in sales in our wholesale business and a 35.8% decrease in our retail
business.
Sales
generated from our wholesale business contributed 40.9% or $44.3 million of our total sales for the six months ended June 30,
2020, a decrease of 32.2% compared with 39.5% or $65.4 million in the six months ended June 30, 2019. This decrease was primarily
attributable to decreased sales in Hong Kong China, Germany, Mainland China, United Kingdom, the United States and Europe-Other,
partially offset by increased sales in Japan.
Sales
generated from our retail business contributed 59.1% or $64.1 million of our total sales for the six months ended June 30, 2020,
a decrease of 35.8% compared with 60.5% or $99.9 million in the six months ended June 30, 2019. This decrease was primarily due
to a decrease in same store sales.
Total
retail store square footage and sales per square foot for the six months ended June 30, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Total store square footage
|
|
|
989,034
|
|
|
|
1,274,661
|
|
Number of stores
|
|
|
935
|
|
|
|
1,235
|
|
Average store size, square feet
|
|
|
1,058
|
|
|
|
1,032
|
|
Total store sales (in thousands of U.S. dollars)
|
|
$
|
64,104
|
|
|
$
|
99,919
|
|
Sales per square foot
|
|
$
|
65
|
|
|
$
|
78
|
|
Same
store sales and newly opened store sales for the six months ended June 30, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of U.S. dollars)
|
|
Sales from stores opened for a full year
|
|
$
|
43,678
|
|
|
$
|
77,984
|
|
Sales from newly opened store sales
|
|
$
|
4,636
|
|
|
$
|
7,417
|
|
Sales from e-commerce platform
|
|
$
|
7,822
|
|
|
$
|
6,197
|
|
Other*
|
|
$
|
7,968
|
|
|
$
|
8,321
|
|
Total
|
|
$
|
64,104
|
|
|
$
|
99,919
|
|
|
*
|
Primarily
sales from stores that were closed in the current reporting period.
|
We
remodeled or relocated 117 stores in 2019, and 9 stores during the six months ended June 30, 2020. We plan to relocate or remodel
50-100 stores in 2020. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results
in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue
to have opportunities for additional remodels and relocations beyond 2020. Same-store sales are calculated based upon
stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.
Costs
and Expenses
Cost
of Sales and Gross Margin
Cost
of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production
equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have
not been significant.
The
following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales
for the six months ended June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in
2020
|
|
|
|
Six months ended June 30,
|
|
|
2020
|
|
|
|
2020
|
|
|
2019
|
|
|
Compared
|
|
|
|
(In
thousands of U.S. dollars, except for percentages)
|
|
|
with 2019
|
|
Net Sales for Wholesale Sales
|
|
$
|
44,337
|
|
|
|
100.0
|
%
|
|
$
|
65,353
|
|
|
|
100.0
|
%
|
|
|
(32.2
|
)%
|
Raw Materials
|
|
|
18,704
|
|
|
|
42.2
|
|
|
|
27,685
|
|
|
|
42.3
|
|
|
|
(32.4
|
)
|
Labor
|
|
|
544
|
|
|
|
1.2
|
|
|
|
705
|
|
|
|
1.1
|
|
|
|
(22.9
|
)
|
Outsourced Production Costs
|
|
|
16,993
|
|
|
|
38.3
|
|
|
|
24,279
|
|
|
|
37.2
|
|
|
|
(30.0
|
)
|
Other and Overhead
|
|
|
238
|
|
|
|
0.5
|
|
|
|
113
|
|
|
|
0.2
|
|
|
|
110.6
|
|
Total Cost of Sales for Wholesale
|
|
|
36,479
|
|
|
|
82.2
|
|
|
|
52,782
|
|
|
|
80.8
|
|
|
|
(30.9
|
)
|
Gross Profit for Wholesale
|
|
|
7,858
|
|
|
|
17.8
|
|
|
|
12,571
|
|
|
|
19.2
|
|
|
|
(37.5
|
)
|
Net Sales for Retail
|
|
|
64,104
|
|
|
|
100.0
|
|
|
|
99,919
|
|
|
|
100.0
|
|
|
|
(35.8
|
)
|
Production Costs
|
|
|
29,712
|
|
|
|
46.3
|
|
|
|
34,286
|
|
|
|
34.3
|
|
|
|
(13.3
|
)
|
Rent
|
|
|
11,767
|
|
|
|
18.4
|
|
|
|
19,860
|
|
|
|
19.9
|
|
|
|
(40.7
|
)
|
Total Cost of Sales for Retail
|
|
|
41,479
|
|
|
|
64.7
|
|
|
|
54,146
|
|
|
|
54.2
|
|
|
|
(23.4
|
)
|
Gross Profit for Retail
|
|
|
22,625
|
|
|
|
35.3
|
|
|
|
45,773
|
|
|
|
45.8
|
|
|
|
(50.6
|
)
|
Total Cost of Sales
|
|
|
77,958
|
|
|
|
71.9
|
|
|
|
106,928
|
|
|
|
64.7
|
|
|
|
(27.1
|
)
|
Gross Profit
|
|
$
|
30,483
|
|
|
|
28.1
|
%
|
|
$
|
58,344
|
|
|
|
35.3
|
%
|
|
|
(47.8
|
)%
|
Raw
material costs for our wholesale business were 42.2% of our total wholesale business sales in the six months ended June 30, 2020,
compared with 42.3% in the six months ended June 30, 2019. The decrease was mainly due to lower cost of raw materials.
Labor
costs for our wholesale business were 1.2% of our total wholesale business sales in the six months ended June 30, 2020, compared
with 1.1% in the six months ended June 30, 2019. The marginal increase was mainly due to a higher average employee salaries in
2020.
Outsourced
production costs for our wholesale business were 38.3% of our total sales in the six months ended June 30, 2020, compared with
37.2% in the six months ended June 30, 2019. This increase was primarily attributable to higher average employee salaries at our
outsourced manufacturing factories.
Overhead
and other expenses for our wholesale business accounted for 0.5% and 0.2% of our total sales for the six months ended June 30,
2020 and 2019, respectively.
Gross
profit for our wholesale business for the six months ended June 30, 2020 was $7.9 million, a 37.5% decrease compared with the
six months ended June 30, 2019. As a percentage of total wholesale business sales, gross profit was 17.8% of our total wholesale
business sales for the six months ended June 30, 2020, compared with 19.2% for the six months ended June 30, 2019. The decrease
was mainly due to higher average employee salaries.
Production
costs for our retail business for the six months ended June 30, 2020 were $29.7 million compared with $34.3 million for the six
months ended June 30, 2019. As a percentage of our total retail sales, production costs were 46.3% of our total retail sales for
the six months ended June 30, 2020, compared with 34.3% for the six months ended June 30, 2019. The decrease in amounts was due
to decrease in overall purchase costs.
Rent
costs for our retail business for the six months ended June 30, 2020 were $11.8 million compared with $19.9 million for the six
months ended June 30, 2019. As a percentage of total retail sales, rent costs were 18.4% of our total retail sales for the six
months ended June 30, 2020 compared with 19.9% for the six months ended June 30, 2019. The decrease in percentage was primarily
attributable to decline in number of stores.
Gross
profit for our retail business for the six months ended June 30, 2020 was $22.6 million compared with $45.8 million for the six
months ended June 30, 2019. Gross margin for our retail business for the six months ended June 30, 2020 was 35.3% compared with
45.8% for the six months ended June 30, 2019.
Total
cost of sales for the six months ended June 30, 2020 was $78.0 million, a 27.1% decrease compared with the six months ended June
30, 2019. As a percentage of total sales, total costs were 71.9% of total sales for the six months ended June 30, 2020, compared
with 64.7% for the six months ended June 30, 2019. Total gross margin for the six months ended June 30, 2020 was 28.1% compared
with 35.3% for the six months ended June 30, 2019.
Selling,
General and Administrative Expenses
Our
selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail
staff and decoration and marketing expenses associated with our retail business.
Our
general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges,
repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable
to our revenues.
Costs
of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product
inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these
amounts in costs of sales.
|
|
Six months ended June 30,
|
|
|
Increase (Decrease) in 2020
|
|
|
|
2020
|
|
|
2019
|
|
|
Compared
|
|
|
|
(In thousands of U.S. dollars, except for percentages)
|
|
|
to 2019
|
|
Gross Profit
|
|
$
|
30,483
|
|
|
|
28.1
|
%
|
|
$
|
58,344
|
|
|
|
35.3
|
%
|
|
|
(47.8
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
26,105
|
|
|
|
24.1
|
|
|
|
40,706
|
|
|
|
24.6
|
|
|
|
(35.9
|
)
|
General and Administrative Expenses
|
|
|
11,755
|
|
|
|
10.8
|
|
|
|
14,867
|
|
|
|
9.0
|
|
|
|
(20.9
|
)
|
Total
|
|
|
37,860
|
|
|
|
34.9
|
|
|
|
55,573
|
|
|
|
33.6
|
|
|
|
(31.9
|
)
|
(Loss)Income from Operations
|
|
$
|
(7,377
|
)
|
|
|
(6.8
|
)%
|
|
$
|
2,771
|
|
|
|
1.7
|
%
|
|
|
(366.2
|
)%
|
Selling
expenses for the six months ended June 30, 2020 were $26.1 million, a 35.9% decrease compared with the six months ended June 30,
2019. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand.
General
and administrative expenses for the six months ended June 30, 2020 were $11.8 million a 20.9% decrease compared with the six months
ended June 30, 2019. As a percentage of total sales, general and administrative expenses accounted for 10.8% of total sales for
the six months ended June 30, 2020, compared with 9.0% of total sales for the six months ended June 30, 2019. The decrease in
amounts was attributable to the decline in number of stores.
(Loss)Income
from Operations
Loss
from operations for the six months ended June 30, 2020 was $7.4 million, a 366.2% decrease from $2.8 million of income for the
six months ended June 30, 2019. This decrease was due to decreased sales.
Interest
Expense
Interest
expense was $0.9 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively. The increase was due
to the increased bank loans.
Income
Tax Expense
Income
tax expense for the six months ended June 30, 2020 was $0.5 million, a 78.4% decrease compared to the same period of 2019. The
decrease was primarily due to deferred tax asset valuation allowance which resulted in a slightly higher income tax expense.
Net
(Loss) Income
Net
loss for the six months ended June 30, 2020 was $6.5 million, a decrease of 593.0% compared with the net income from the same
period in 2019. Basic and diluted (loss) earnings per share were ($0.44) and $0.09 for the six months ended June 30, 2020 and
2019, respectively.
Summary
of Cash Flows
Summary
cash flows information for the six months ended June 30, 2020 and 2019 is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands of U.S. dollars)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
17,041
|
|
|
$
|
(9,785
|
)
|
Net cash used in investing activities
|
|
$
|
(1,843
|
)
|
|
$
|
(4,082
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
11,720
|
|
|
$
|
(889
|
)
|
Net
cash provided by operating activities was $17.0 million for the six months ended June 30, 2020, compared with $9.8 million
net cash used in operating activities during the six months ended June 30, 2019. The increase was primarily due to increase
in collection of accounts receivable.
Net
cash used in investing activities was $1.8 million for the six months ended June 30, 2020, compared with $4.1 million used during
the six months ended June 30, 2019. This decrease was mainly due to purchase of less property and equipment and decrease
in remodeling expenditure in 2020.
Net
cash provided by financing activities was $11.7 million for the six months ended June 30, 2020, compared with $0.9 million net
cash used during the six months ended June 30, 2019. During the six months ended June 30, 2020, we repaid $21.2 million of bank
loans and received additional bank loan proceeds of $32.0 million. Under the counter-guarantee agreement, we received $4.0 million
from and paid $3.1 million to the related party during the six months ended June 30, 2020.
Liquidity
and Capital Resources
As
of June 30, 2020, we had cash and cash equivalents of $59.2 million, other current assets of $127.3 million and current liabilities
of $132.1 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 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 $5.7 million (RMB40.0 million). These loans are collateralized by the Company’s property
and equipment. As of June 30, 2020, Goldenway had borrowed $5.7 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 June 30, 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 4.35% and due on from September 2020 to May 2021.
In
September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.7 million (RMB40.0 million)
with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2020, approximately $5.7 million was
unused and available under this line of credit. In March 2020, Ever-Glory Apparel entered into a certificate of three-year
time deposit of $15.5 million (RMB110.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging
from 3.85% to 3.99%. In April 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai
Pudong Development Bank and Ever-Glory Apparel had borrowed $15.5 million (RMB 110.0 million) under this line of certificate
with an annual interest rate of 2.02% and due on July 2020. On July 2020, Ever-Glory Apparel repaid the loan and
borrowed $11.3 million (RMB 80.0 million) under this line of certificate with an annual interest rate of 2.50% and due on
July 2021.
In
October 2019, 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 June 30, 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
April 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.2 million (RMB30.0 million) with Bank
of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity
investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of
June 30, 2020, Ever-Glory Apparel had borrowed $2.1 million (RMB 15.0 million) under this line of credit with an annual interest
rate of 4.57% and due on September 2020. As of June 30, 2020, approximately $2.1 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
$7.1 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 June 30, 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 June 30, 2020, approximately $8.5 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 June 30, 2020,
approximately $2.8 million was unused and available under this line of credit.
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 June 30, 2020, approximately
$2.8 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 June 30, 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.
Capital
Commitments
We
have a continuing program for the purpose of improving our manufacturing facilities and extending our retail stores. We anticipate
that cash flows from operations and borrowings from banks will be used to pay for these capital commitments.
Uses
of Liquidity
Our
cash requirements for the next year will be primarily to fund daily operations and the growth of our business, some of this being
used to fund new stores.
Sources
of Liquidity
Our
primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, and cash
equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.
We
believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet
our needs for working capital, capital expenditure and other commitments for the next year. No assurance can be made that additional
financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is
insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our
own cash flows from operations.
As
of June 30, 2020, we had access to approximately $56.2 million in lines of credit, of which approximately $31.5 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
$37.3 million (RMB 260.0 million) and approximately $3.7 million (RMB 26.4 million) was provided to Jiangsu Ever-Glory as
the counter guarantee as of June 30, 2020.
Foreign
Currency Translation Risk
Our
operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations
and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales
are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July
21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued
to appreciate against the U.S. dollar. As of June 30, 2020, the market foreign exchange rate had increased to RMB 7.08 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 subsidiaries located in China (whose functional currency is RMB) are translated into US
dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the
respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the
time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation
adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation
gain (loss) for the three and six months ended June 30, 2020 and 2019 was ($0.26) million, ($1.70) million, ($2.49) million and
$1.49 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.