Quarterly Report (10-q)

Date : 05/14/2019 @ 5:02PM
Source : Edgar (US Regulatory)
Stock : Ever Glory International Group Inc (EVK)
Quote : 2.43  0.0 (0.00%) @ 12:00AM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the transition period from ____________ to ____________

 

Commission file number:  0-28806

 

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

 

Florida   65-0420146 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

 

86-25-5209-6831

 (Registrant’s telephone number, including area code)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act

 

Large accelerated filer  ☐   Accelerated filer ☐
Non-accelerated filer ☒     Smaller reporting company ☒
    Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒  

 

Securities registered under Section 12(b) of the Act: 

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
 Common Stock, par value $0.001    EVK    NASDAQ Global Market

 

As of May 13, 2019, 14,800,140 shares of the Company’s common stock, $0.001 par value, were issued and outstanding. 

 

 

 

 

 

 

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

 

INDEX

 

    Page Number
     
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS  
     
PART I.  FINANCIAL INFORMATION  
     
Item 1.   Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited) 1
     
  Condensed Consolidated Statements of Income (Loss) and Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (unaudited) 2
     
  Condensed Consolidated Statements of Equity for The Three Months Ended March 31, 2019 and 2018 (unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited) 4
     
  Notes to the Condensed Consolidated Financial Statements (unaudited) 5
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4.   Controls and Procedures 27 
     
PART II.  OTHER INFORMATION  
     
Item 1.   Legal Proceedings
     
Item 1A. Risk Factors  
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
     
Item 3.   Defaults Upon Senior Securities  
     
Item 4.   Mine Safety Disclosure  
     
Item 5.   Other Information
     
Item 6.   Exhibits  
     
SIGNATURES 29

 

i

 

 

Cautionary Note Regarding Forward-Looking Statements

 

Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:

 

  Competition within our industry;
     
  Seasonality of our sales;
     
  Success of our investments in new product development
     
  Our plans and ability to open new retail stores;
     
  Success of our acquired businesses;
     
  Our relationships with our major customers;
     
  The popularity of our products;
     
  Relationships with suppliers and cost of supplies;
     
  Financial and economic conditions in Asia, Japan, Europe and the U.S.;
     
  Anticipated effective tax rates in future years;
     
  Regulatory requirements affecting our business;
     
  Currency exchange rate fluctuations;
     
  Our future financing needs; and
     
  Our ability to obtain future financing on acceptable terms.

 

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar expressions are generally intended to identify forward-looking statements.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the factors described in the Section entitled “Risk Factors” on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission (’SEC’).

 

ii

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

AS OF MARCH 31, 2019 AND DECEMBER 31, 2018 (UNAUDITED)

 

    2019     2018  
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents   $ 57,876     $ 47,012  
Accounts receivable, net     57,595       86,527  
Inventories     55,035       65,929  
Advances on inventory purchases     6,087       6,420  
Value added tax receivable     1,229       2,580  
Other receivables and prepaid expenses     6,365       10,204  
Amounts due from related parties     75       192  
Total Current Assets     184,262       218,864  
                 
NONCURRENT ASSETS                
Intangible assets, net     5,046       4,962  
Property and equipment, net     29,135       28,445  
Operating lease right-of-use assets     64,549       -  
Total Non-Current Assets     98,730       33,407  
TOTAL ASSETS   $ 282,992     $ 252,271  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Bank loans   $ 28,839     $ 29,497  
Accounts payable     51,470       78,412  
Accounts payable and other payables – related parties     4,040       4,756  
Other payables and accrued liabilities     13,769       21,958  
Value added and other taxes payable     1,305       2,569  
Income tax payable     862       1,569  
Current operating lease liabilities     55,434       -  
Total Current Liabilities     155,719       138,761  
                 
NONCURRENT LIABILITIES                
Deferred tax liabilities     330       354  
Non-current operating lease liabilities     9,127       -  
TOTAL LIABILITIES     165,176       139,115  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS’ EQUITY                
Stockholders’ equity:                
Preferred stock ($0.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)     -       -  
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,800,140 and 14,798,198 shares issued and outstanding As of March 31, 2019 and December 31, 2018, respectively)     15       15  
Additional paid-in capital     3,635       3,627  
Retained earnings     105,393       105,914  
Statutory reserve     19,083       19,083  
Accumulated other comprehensive income     394       (3,578 )
Amounts due from related party     (9,253 )     (10,354 )
Total equity attributable to stockholders of the Company     119,267       114,707  
Noncontrolling interest     (1,451 )     (1,551 )
Total Equity     117,816       113,156  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 282,992     $ 252,271  

 

See the accompanying notes to the condensed consolidated financial statements.

 

1

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONDENSED

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

 

    2019     2018  
             
SALES   $ 87,956     $ 92,785  
                 
COST OF SALES     58,598       61,440  
                 
GROSS PROFIT     29,358       31,345  
                 
OPERATING EXPENSES                
Selling expenses     21,008       22,225  
General and administrative expenses     7,529       7,674  
Total operating expenses     28,537       29,899  
                     
INCOME FROM OPERATIONS     821       1,446  
                 
OTHER INCOME (EXPENSE)                
Interest income     207       326  
Interest expense     (363 )     (564 )
Other income (expenses)     (295 )     136  
Total other expenses     (451 )     (102 )
                 
INCOME BEFORE INCOME TAX EXPENSE     370       1,344  
                 
INCOME TAX EXPENSE     (825 )     (757 )
                 
NET INCOME(LOSS)     (455 )     587  
Net income(loss) attributable to the non-controlling interest     (66 )     228  
NET INCOME(LOSS) ATTRIBUTABLE TO THE COMPANY   $ (521 )   $ 815  
                 
NET INCOME(LOSS)   $ (455 )   $ 587  
Foreign currency translation gain     3,972       4,023  
COMPREHENSIVE INCOME   $ 3,517     $ 4,610  
                 
Comprehensive loss attributable to the noncontrolling interest     100       270  
                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY   $ 3,617     $ 4,880  
EARNINGS(LOSS) PER SHARE:                
Basic and diluted   $ (0.04 )   $ 0.06  
Weighted average number of shares outstanding Basic and diluted     14,800,140       14,795,992  

 

See the accompanying notes to the condensed consolidated financial statements.

 

2

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE THREE MONTHS ENDED March 31, 2019 AND 2018 (Unaudited)

 

          Additional     Retained Earnings     Accumulated
other
    Amounts
due from
    Total
equity
attributable
to stockholders
    Non-        
    Common Stock     paid-in           Statutory     Comprehensive     related     of the     controlling     Total  
    Shares     Amount     capital     Unrestricted     reserve     income     party     Company     Interest     equity  
Balance at January 1, 2019     14,798,198     $ 15     $ 3,627     $ 105,914     $ 19,083     $ (3,578 )   $ (10,354 )   $ 114,707       (1,551 )   $ 113,156  
                                                                                 
Stock issued for compensation     1,942       0.004       8       -       -       -       -       8               8  
Net income (loss)     -       -       -       (521 )     -       -       -       (521 )     66       (455 )
Net cash paid to related party under counter guarantee agreement     -       -       -       -       -       -       1,101       1,101       -       1,101  
Foreign currency translation loss                                             3,972       -       3,972       34       4,006  
Balance at March 31, 2019     14,800,140     $ 15     $ 3,635     $ 105,393     $ 19,083     $ 394     $ (9,253 )   $ 119,267       (1,451 )   $ 117,816  

 

          Additional     Retained Earnings     Accumulated
other
    Amounts
due from
    Total
equity
attributable
to stockholders
    Non-        
    Common Stock     paid-in           Statutory     Comprehensive     related     of the     controlling     Total  
    Shares     Amount     capital     Unrestricted     reserve     income     party     Company     Interest     equity  
Balance at January 1, 2018     14,795,992     $ 15     $ 3,620     $ 95,195     $ 17,794     $ 2,585     $ (15,449 )   $ 103,760       (1,062 )   $ 102,698  
                                                                                 
Net income (loss)     -       -       -       815       -       -       -       815       (228 )     587  
Net cash paid to related party under counter guarantee agreement     -       -       -       -       -       -       (8,480 )     (8,480 )     -       (8,480 )
Foreign currency translation loss                                             4,023       -       4,023       (94 )     3,929  
Balance at March 31, 2018     14,795,992     $ 15     $ 3,620     $ 96,010     $ 17,794     $ 6,608     $ (23,929 )   $ 100,118       (1,384 )   $ 98,734  

 

See the accompanying notes to the condensed consolidated financial statements.

 

3

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (UNAUDITED)

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income (loss)   $ (455 )   $ 587  
Adjustments to reconcile net income to cash provided by operating activities:                
Depreciation and amortization     2,225       2,537  
Loss from sale of property and equipment     52       4  
Provision for obsolete inventories     1,824       1,626  
Deferred income tax     (145 )     (234 )
Stock-based compensation     8       -  
Changes in operating assets and liabilities                
Accounts receivable     31,027       28,466  
Inventories     10,557       (129 )
Value added tax receivable     1,406       1,895  
Other receivables and prepaid expenses     3,975       832  
Advances on inventory purchases     490       (1,175 )
Amounts due from related parties     103       (165 )
Accounts payable     (26,505 )     (17,944 )
Accounts payable and other payables- related parties     (741 )     (653 )
Other payables and accrued liabilities     (9,565 )     (5,182 )
Value added and other taxes payable     (2,788 )     (1,988 )
Income tax payable     (327 )     (670 )
Net cash provided by operating activities     11,141       7,807  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     (2,131 )     (2,552 )
Net cash used in investing activities     (2,131 )     (2,552 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from bank loans     6,029       17,346  
Repayment of bank loans     (7,408 )     (14,780 )
Repayment of loans from related party     3,488       -  
Advances to related party     (2,163 )     (7,692 )
Net cash used in financing activities     (54 )     (5,126 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     1,908       2,172  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS     10,864       2,301  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     47,012       62,876  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 57,876     $ 65,177  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                 
Cash paid during the period for:                
Interest   $ 363     $ 564  
Income taxes   $ 126     $ 1,938  

 

See the accompanying notes to the condensed consolidated financial statements.

 

4

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

 

NOTE 1 BASIS OF PRESENTATION

 

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

 

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

 

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

 

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

 

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 

 

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition  

 

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

 

5

 

 

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.

 

Derivatives financial instruments  

 

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

 

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

 

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

 

Accounts Receivable, net

 

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

 

6

 

 

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

 

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

 

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

 

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

 

Foreign Currency Translation and Other Comprehensive Income

 

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

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

7

 

 

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

 

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

  

NOTE 3 INVENTORIES

 

Inventories at March 31, 2019 and December 31, 2018 consisted of the following:

 

    March 31,
2019
    December 31,
2018
 
    (In thousands of
U.S. Dollars)
 
Raw materials   $ 6,878     $ 6,805  
Work-in-progress     7,351       3,308  
Finished goods     40,806       55,816  
Total inventories   $ 55,035     $ 65,929  

 

NOTE 4 BANK LOANS

 

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

 

    March 31,
2019
    December 31,
2018
 
Bank   (In thousands of
U.S. Dollars)
 
Industrial and Commercial Bank of China   $ 14,900     $ 14,540  
Nanjing Bank     3,725       5,089  
China Minsheng Bank     2,980       2,908  
Bank of Communications     2,965       2,893  
Shanghai Pudong Development Bank     2,678       2,613  
China Everbright Bank     1,490       1,454  
HSBC     101       -  
    $ 28,839     $ 29,497  

 

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

 

8

 

 

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

   

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

 

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

 

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

 

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

 

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

 

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

 

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

   

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

 

All loans have been repaid before or at maturity date.

 

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

 

9

 

 

NOTE 5 LEASES

 

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

 

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

 

NOTE 6 INCOME TAX

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10

 

 

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

 

    2019     2018  
    (In thousands of
U.S. Dollars)
 
PRC   $ 389     $ 1,349  
BVI     (2 )     (3
Others     (5 )     (2 )
    $ 382     $ 1,344  

 

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

 

    2019     2018  
PRC statutory rate     25.0 %     25.0 %
Net operating losses for which no deferred tax assets was recognized     198       31.3  
Effective income tax rate     223.0 %     56.3 %

 

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

 

    2019     2018  
    (In thousands of
U.S. Dollars)
 
Current   $ 495     $ 925  
Deferred     330       (168 )
Income tax expense   $ 825     $ 757  

 

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

 

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

  

NOTE 7 EARNINGS PER SHARE

 

The following demonstrates the calculation for earnings per share for the three months ended March 31, 2019 and 2018:

 

    2019     2018  
Weighted average number of common shares- Basic and diluted     14,800,140       14,795,992  
                 
Earnings (loss) per share - basic and diluted   $ (0.04 )   $ 0.06  

 

11

 

 

NOTE 8 STOCKHOLDERS’ EQUITY

 

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

 

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

 

NOTE 9 RELATED PARTY TRANSACTIONS

 

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

 

Other income from Related Parties

  

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

  

Other expenses due to Related Parties

 

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

  

    2019     2018  
    (In thousands of
U.S. Dollars)
 
Chuzhou Huarui     53       58  
Kunshan Enjin     22       13  
Total   $ 75     $ 71  

 

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

  

Purchases from and Sub-contracts with Related Parties

 

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

 

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

 

12

 

 

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

  

    2019     2018  
    (In thousands of
U.S. Dollars)
 
Ever-Glory Vietnam   $ 2,579     $ 1,914  
Chuzhou Huarui     1,507       867  
Fengyang Huarui     106       484  
Nanjing Ever-Kyowa     347       349  
EsC’eLav     88       -  
Jiangsu Ever-Glory     425       45  
Total   $ 5,052     $ 3,659  

  

Accounts Payable – Related Parties

 

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

 

    2019     2018  
    (In thousands of
U.S. Dollars)
 
Ever-Glory Vietnam   $ 1,519       1,863  
Fengyang Huarui     223       622  
Nanjing Ever-Kyowa     593       580  
Chuzhou Huarui     671       888  
Nanjing Knitting     144       171  
Jiangsu Ever-Glory     890       632  
Total   $ 4,040     $ 4,756  

 

Amounts Due From Related Parties-current assets

 

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

 

    2019     2018  
    (In thousands of
U.S. Dollars)
 
Jiangsu Ever-Glory   $ 63     $ 122  
Esc’elav     12       70  
Total   $ 75     $ 192  

 

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

  

13

 

 

Amounts Due From Related Party under Counter Guarantee Agreement

 

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

 

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

 

NOTE 10 CONCENTRATIONS AND RISKS

 

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

  

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

  

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

 

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

 

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

 

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

 

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

 

14

 

 

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

 

    2019     2018  
    (In thousands of
U.S. Dollars)
 
Mainland China   $ 10,754     $ 4,211  
Hong Kong China     1,253       5,138  
Germany     850       1,866  
United Kingdom     800       2,218  
Europe-Other     5,229       4,453  
Japan     4,938       2,436  
United States     4,278       4,934  
Total wholesale business     28,102       25,256  
Retail business     59,854       67,529  
Total   $ 87,956     $ 92,785  

  

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, 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  
                         
As of and for the period ended March 31, 2018                        
Segment profit or loss:                        
Net revenue from external customers   $ 25,256       67,529       92,785  
Income from operations   $ 1,096       350       1,446  
Interest income   $ 309       17       326  
Interest expense   $ 490       74       564  
Depreciation and amortization   $ 305       2,232       2,537  
Income tax expense   $ 234       523       757  
Segment assets:                        
Additions to property, plant and equipment     482       2,070       2,552  
Total assets     86,526       134,988       221,514  

 

NOTE 12 SUBSEQUENT EVENTS

 

As of May 14, 2019, there is no material subsequent event to be disclosed.

 

15

 

 

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 months ended March 31, 2019 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”), 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”).

  

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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;
     
  Expanding our overseas low-cost manufacturing base (outside of mainland China);
     
  Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel;

 

  Continuing to emphasize product design and technology utilization;
     
  Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
     
  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 March 31, 2019, we had 1,315 stores (including store-in-stores), including 12 stores were opened and 78 stores were closed in first quarter of 2019. We expect to open additional 150 to 200 stores in 2019.

 

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;
     
  Expanding our retail network throughout China;
     
  Improving our retail stores’ efficiency and increasing same-store sales;
     
  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.

 

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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 2019.

 

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.

 

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.

  

Revenue Recognition

 

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

 

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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.

 

Estimates and Assumptions

 

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 reservation.

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

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

   

Results of Operations

 

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

    Three Months Ended March 31,  
    2019     2018  
    (In thousands of U.S. dollars, except for percentages)  
Sales   $ 87,956       100.0 %   $ 92,785       100.0 %
Gross Profit     29,358       33.4       31,345       33.8  
Operating Expenses     28,537       32.4       29,899       32.2  
Income From Operations     821       0.9       1,446       1.6  
Other Expenses     (451 )     (0.5 )     (102 )     (0.1 )
Income Tax Expense     825       0.9       757       0.8  
Net (Loss) Income   $ (455 )     (0.5 )%   $ 587       0.6 %

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended March 31, 2019 and 2018.

 

    2019     % of total sales     2018     % of total sales     Growth in 2019 compared
with 2018
 
Wholesale business   (In thousands of U.S. dollars)           (In thousands of U.S. dollars)              
Mainland China   $ 10,754       12.2 %   $ 4,211       4.6 %     155.4 %
Hong Kong     1,253       1.4       5,138       5.5       (75.6 )
Germany     850       1.0       1,866       2.0       (54.5 )
United Kingdom     800       0.9       2,218       2.4       (63.9 )
Europe-Other     5,229       5.9       4,453       4.8       17.4  
Japan     4,938       5.7       2,436       2.6       102.7  
United States     4,278       4.9       4,934       5.3       (13.3
Total Wholesale business     28,102       32.0       25,256       27.2       11.3  
Retail business     59,854       68.0       67,529       72.8       (11.4
Total sales   $ 87,956       100.0 %   $ 92,785       100.0 %     (5.2 )%

 

Total sales for the three months ended March 31, 2019 were $88.0 million, a decrease of 5.2% from the three months ended March 31, 2018. This decrease was primarily attributable to an 11.4% decrease in our retail business partially offset by an 11.3% increase in our wholesale business.

 

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Sales generated from our wholesale business contributed 32.0% or $28.1 million of our total sales for the three months ended March 31, 2019, an increase of 11.3% compared to $25.3 million in the three months ended March 31, 2018. This increase was primarily attributable to increased sales in Mainland China, other European markets and Japan partially offset for decreased sales in Hong Kong, the United States, the United Kingdom and Germany.

 

Sales generated from our retail business contributed 68.0% or $59.9 million of our total sales for the three months ended March 31, 2019, a decrease of 11.4% compared to 72.8% or $67.5 million in the three months ended March 31, 2018. This decrease was primarily due to the decrease in same-store sales. 

 

Total retail store square footage and sales per square foot for the three months ended March 31, 2019 and 2018 are as follows:

 

    2019     2018  
Total store square footage     1,340,174       1,414,181  
Number of stores     1,315       1,409  
Average store size, square feet     1,019       1,033  
Total store sales (in thousands of U.S. dollars)   $ 59,854     $ 67,529  
Sales per square foot   $ 45     $ 48  

  

Same-store sales and newly opened store sales for the three months ended March 31, 2019 and 2018 are as follows:

 

    2019     2018  
    (In thousands of U.S. dollars)  
Sales from stores opened for a full year   $ 45,955     $ 52,826  
Sales from newly opened store sales   $ 6,310     $ 7,935  
Sales from e-commerce platform   $ 3,701     $ 3,731  
Other*   $ 3,888     $ 3,037  
Total   $ 59,854     $ 67,529  

 

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

 

We remodeled or relocated 250 stores in year 2018, and 7 stores during the three months ended March 31, 2019. We plan to relocate or remodel 150-200 stores in 2019. 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 2018.  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 three months ended March 31, 2019 and 2018.

 

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    Three Months Ended March 31,     Growth
(Decrease)
in 2019
 
    2019     2018     compared  
    (In thousands of U.S. dollars, except for percentages)     with 2018  
Wholesale Sales   $ 28,102       100.0 %   $ 25,256       100.0 %     11.3 %
Raw Materials     11,308       40.2       10,269       40.7       10.1  
Labor     307       1.1       386       1.5       (20.4 )
Outsourced Production Costs     9,871       35.1       8,724       34.5       13.1  
Other and Overhead     58       0.3       71       0.3       (18.6 )
Total Cost of Sales for Wholesale     21,544       76.7       19,450       77.0       10.8  
Gross Profit for Wholesale     6,558       23.3       5,806       23.0       13.0  
                                         
Net Sales for Retail     59,854       100.0       67,529       100.0       (11.4 )
Production Costs     24,203       40.4       26,071       38.6       (7.2 )
Rent     12,851       21.5       15,919       23.6       (19.3 )
Total Cost of Sales for Retail     37,054       61.9       41,990       62.2       (11.8 )
Gross Profit for Retail     22,800       38.1       25,539       37.8       (10.7 )
                                         
Total Cost of Sales     58,598       66.6       61,440       66.2       (4.6 )
Gross Profit   $ 29,358       33.4 %   $ 31,345       33.8 %     (6.3 )%

 

Raw material costs for our wholesale business were 40.2% of our total wholesale business sales in the three months ended March 31, 2019, an increase of 10.1% compared to 40.7% in the three months ended March 31, 2018.  The increase was mainly due to the higher raw material prices.

 

Labor costs for our wholesale business were 1.1% of our total wholesale business sales in the three months ended March 31, 2019, a decrease of 20.4% compared to 1.5% in the three months ended March 31, 2018. The marginal decrease was mainly due to the fact that we outsourced most of the new orders in 2019.  

 

Outsourced production costs for our wholesale business increased by 13.1% to $9.9 million in the three months ended March 31, 2019 from $8.7 million in the three months ended March 31, 2018. As a percentage of total wholesale sales, outsourced production costs were 35.1% of our total wholesale sales in the three months ended March 31, 2019, an increase of 0.6% from the three months ended March 31, 2018. This increase was primarily attributable to decreased outsourced orders to our related entities in Vietnam, which have lower labor costs compared to orders outsourced to Chinese factories.

 

Overhead and other expenses for our wholesale business accounted for 0.3% and 0.3% of our total wholesale business sales for the three months ended March 31, 2019 and 2018, respectively.

 

Gross profit for our wholesale business for the three months ended March 31, 2018 was $6.6 million, an increase of 13.0% compared to the three months ended March 31, 2018. Gross margin was 23.3% for the three months ended March 31, 2019, an increase of 0.3% compared to 23.0% for the three months ended March 31, 2018. The decrease was mainly due to decreased labor costs.

  

Production costs for our retail business were $24.2 million during the three months ended March 31, 2019 compared to $26.1 million during the three months ended March 31, 2018. As a percentage of retail sales, retail production costs accounted for 40.4% of our total retail sales in the three months ended March 31, 2018, compared to 38.6% of total retail sales in the three months ended March 31, 2018. The increase was due to higher discounts on our out-of-season products ended March 31, 2019 compared with the same period of the prior year.

 

Rent costs for our retail business were $12.9 million for the three months ended March 31, 2019 compared to $15.9 million for the three months ended March 31, 2018. As a percentage of retail sales, rent costs accounted for 21.5% of our total retail sales for the three months ended March 31, 2019, compared to 23.6% of total retail sales for the three months ended March 31, 2018. The decrease was primarily attributable to lower rent at certain locations.

 

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Gross profit in our retail business for the three months ended March 31, 2019 was $22.8 million and gross margin was 38.1%. Gross profit in our retail business for the three months ended March 31, 2018 was $25.5 million and gross margin was 37.8%. The increase in gross margin was attributable to decreased rent costs offset by an increase in production costs.

 

Total cost of sales for the three months ended March 31, 2019 was $58.6 million, compared to $61.4 million for the three months ended March 31, 2018, a decrease of 4.6%. As a percentage of total sales, cost of sales increased to 66.6% of total sales for the three months ended March 31, 2019, compared to 66.2% of total sales for the three months ended March 31, 2018. Consequently, gross margin decreased to 33.4% for the three months ended March 31, 2019 from 33.8% for the three months ended March 31, 2018.

 

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 March 31,        
    2019     2018     Increase  
    (In thousands of U.S. dollars, except for percentages)        
Gross Profit   $ 29,358       33.4 %   $ 31,345       33.8 %     (6.3 )%
Operating Expenses                                        
Selling Expenses     21,008       23.9       22,225       24.0       (5.5 )
General and Administrative Expenses     7,529       8.6       7,674       8.3       (1.9 )
Total Operating Expenses     28,537       32.4       29,899       32.3       (9.3 )
Income from Operations   $ 821       0.9 %   $ 1,446       1.6 %     (43.2 )%

  

Selling expenses decreased 5.5% to $21.0 million for the three months ended March 31, 2019 from $22.2 million for the three months ended March 31, 2018. The decrease was attributable to the decreased sales.

 

General and administrative expenses decreased 1.9% to $7.5 million for the three months ended March 31, 2019 from $7.7 million for the three months ended March 31, 2018. As a percentage of total sales, general and administrative expenses increased to 8.6% of total sales for the three months ended March 31, 2019, compared to 8.3% of total sales for the three months ended March 31, 2018. The decrease was mainly attributable to the decreased office expenses.

 

Income from Operations

 

Income from operations decreased 43.2% to $0.8 million for the three months ended March 31, 2019 from $1.4 million for the three months ended March 31, 2018.  As a percentage of sales, income from operations accounted for 0.9% of our total sales for the three months ended March 31, 2019, a decrease of 0.5% compared to the three months ended March 31, 2018 as a result of decreased gross profit and operating expense.

 

Interest Expense

 

Interest expense was $0.4 million for the three months ended March 31, 2019, a decrease of 35.7% compared to the same period in 2018. The decrease was due to the decreased bank loans borrowed.

 

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Income Tax Expenses

 

Income tax expense was $0.8 million and $0.8 million for the three months end March 31, 2019 and 2018, 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, 2019.

 

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

 

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

 

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

 

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

 

Net Income (Loss)

 

Net income (loss) for the three months ended March 31, 2019 and 2018 was ($0.4) million and $0.6 million, respectively. Our basic and diluted earnings (loss) per share were ($0.04) and $0.06 for the three months ended March 31, 2019 and 2018, respectively.

 

Summary of Cash Flows

 

Summary cash flows information for the three months ended March 31, 2019 and 2018 is as follows:

 

    2019     2018  
    (In thousands of U.S. dollars)  
Net cash provided by operating activities   $ 11,141     $ 7,807  
Net cash used in investing activities   $ (2,131 )   $ (2,552 )
Net cash used in financing activities   $ (54 )   $ (5,126 )

 

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

 

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

 

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

 

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Liquidity and Capital Resources

 

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

 

Bank Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

25

 

 

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

   

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

 

All loans have been repaid before or at maturity date.

 

DERIVATIVE LIABILITY

 

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

 

Capital Commitments

 

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

  

Uses of Liquidity

 

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

  

Sources of Liquidity

 

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

 

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

 

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

 

Foreign Currency Translation Risk

 

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

 

26

 

 

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

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

ITEM 2A. RISK FACTORS

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

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

 

Changes in Internal Control Over Financial Reporting

 

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

 

27

 

 

PART II.  OTHER INFORMATION

 

Securities Authorized for Issuance under Equity Incentive Plans

 

The following table presents information regarding equity instruments outstanding under our 2014 Equity Incentive Plan as of March 31, 2019:

 

    Equity Incentive Plan Information  
    Number of Securities to be issued upon exercise of outstanding options, warrants and rights     Weighted-
average exercise price of outstanding options, warrants and rights
    Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a))  
Plan Category   (a)     (b)     (c)  
Equity incentive plans approved by security holders            -     $         -       1,500,000  
Total     -     $ -       1,500,000  

 

The following exhibits are filed herewith:

 

Exhibit No.    Description
     
3.1   Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Annual Report on Form 10-KSB, filed March 29, 2006);
     
3.2   Articles of Amendment as filed with the Department of State of Florida, effective November 20, 2007 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed November 29, 2007);
     
3.3   Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of our Current Report Form 8-K filed on April 22, 2008);
     
31.1   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document 
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

28

 

 

SIGNATURES

 

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

 

May 14, 2019 EVER-GLORY INTERNATIONAL GROUP, INC.
   
  By: /s/ Edward Yihua Kang
    Edward Yihua Kang
    Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Jiansong Wang
    Jiansong Wang
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

29

 

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