NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 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”),
Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”) and Haian Tai Xin Garments Trading Company Limited (“Haian
Taixin”), 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 subsidiary.
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 September 30, 2019, the condensed consolidated statements of income and comprehensive income
(loss) and condensed consolidated statements of equity for the three and nine months ended September 30, 2019 and 2018, and cash
flows for the nine months ended September 30, 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 nine months ended September 30, 2019 are not necessarily indicative
of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction
with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
We
recognize wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the
products for export sales, at such time title passes to the customer. We recognize wholesale revenue from manufacturing fees charged
to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and
shipment of the products for export sales. Retail sales are recorded net of promotional discounts, rebates, and return allowances.
Retail store sales are recognized at the time of the register receipt. Retail online sales are recognized when products are shipped
and customers receive the products because we retain a portion of the risk of loss on these sales during transit.
Our
revenue recognition policy is in compliance with ASC 606, Revenue from Contracts with Customers that revenue is recognized
when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect
to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration
that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:
|
(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.
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.
As
of September 30, 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.
As
of September 30, 2019, the Company has one derivative liability subjects to recurring fair value measurement (Level 2) with the
change in fair value recognized in earnings (Note 5).
Management
has estimated that the carrying amounts of non-related party financial instruments approximate their fair values due to their
short-term maturities. The fair value of amounts due from (to) related parties is not practicable to estimate due to the related
party nature of the underlying transactions.
The
Company has adopted ASC 825-10 “Financial Instruments”, which allows an entity to choose to measure certain
financial instruments and liabilities at fair value on a contract-by-contract basis. Subsequent fair value measurement for the
financial instruments and liabilities an entity chooses to measure will be recognized in earnings.
Foreign
Currency Translation and Other Comprehensive Income
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.
Income Taxes
ASC 740 states “Deferred
tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than not that some or all of the
deferred tax assets will not be recognized.” A deferred tax asset is a tax reduction whose recognition is delayed due to
deductible temporary differences and loss carryforwards. This can result in a change in taxes payable or refundable in future periods.
A business should create a valuation allowance for a deferred tax asset if there is a more than 50% probability that the company
will not realize some portion of the asset. Any changes to this allowance are to be recorded within income from continuing operations
on the income statement. The need for a valuation allowance is especially likely if a business has a history of letting various
loss carryforwards expire unused, or it expects to incur losses in the next few years.
Lease
The
Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset
classes, to account for each lease component of a contract and its associated non-lease components as a single lease component,
rather than allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations
under the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees
or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount
rate used to measure a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases
generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement
to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the
rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
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 the Company over terms similar to the lease terms.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” which modifies the measurement of expected credit losses of certain financial
instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019.
The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.
In
October 2018, the FASB issued ASU No. 2018-17 “Consolidation (Topic 810): Targeted Improvements to Related Party
Guidance for Variable Interest Entities” which could be improved in the following areas: 1. Applying the variable
interest entity (VIE) guidance to private companies under common control. 2. Considering indirect interests held through related
parties under common control for determining whether fees paid to decision makers and service providers are variable interests.
The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.
In
April 2019, the FASB issued ASU No. 2019-04 “Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, 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.
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 September 30, 2019 and December 31, 2018 consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Raw materials
|
|
$
|
995
|
|
|
$
|
6,805
|
|
Work-in-progress
|
|
|
13,542
|
|
|
|
3,308
|
|
Finished goods
|
|
|
50,751
|
|
|
|
55,816
|
|
Total inventories
|
|
$
|
65,288
|
|
|
$
|
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 September 30, 2019 and December 31, 2018.
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Bank
|
|
(In thousands of
U.S. Dollars)
|
|
Industrial and Commercial Bank of China
|
|
$
|
18,382
|
|
|
$
|
14,540
|
|
Nanjing Bank
|
|
|
9,191
|
|
|
|
5,089
|
|
China Minsheng Bank
|
|
|
2,828
|
|
|
|
2,908
|
|
Bank of Communications
|
|
|
2,814
|
|
|
|
2,893
|
|
Shanghai Pudong Development Bank
|
|
|
-
|
|
|
|
2,613
|
|
China Everbright Bank
|
|
|
-
|
|
|
|
1,454
|
|
HSBC
|
|
|
2,277
|
|
|
|
-
|
|
|
|
$
|
35,492
|
|
|
$
|
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 $8.5 million (RMB60.0 million). These loans are collateralized by the Company’s property
and equipment. As of September 30, 2019, Goldenway had borrowed $5.7 million (RMB 40.0 million) under this line of credit with
an annual interest rate of 3.92% and due on November 2019. As of September 30, 2019, approximately $2.8 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 $14.1 million (RMB100.0 million) with
Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting,
under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of September 30, 2019, Ever-Glory
Apparel had borrowed $12.7 million (RMB 90.0 million) under this line of credit with annual interest rates ranging from 4.57%
to 4.70% and due on various dates from October 2019 to May 2020. As of September 30, 2019, approximately $1.4 million was unused
and available under this line of credit.
In
August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately
$7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”),
an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized
by the Company’s property and equipment. As of September 30, 2019, approximately $7.1 million was unused and available under
this line of credit.
In
August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.5 million (RMB60.0 million) with
Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2019, Ever-Glory Apparel had borrowed
$7.1 million (RMB50.0 million) from Nanjing Bank with an annual interest rate 5.0% and due on various dates from December 2019
to June 2020. As of September 30, 2019, approximately $1.4 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 $2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of September 30,
2019, LA GO GO had borrowed $2.1 million (RMB15.0 million) from Nanjing Bank with an annual interest rate 5.2% and due on June
2020. As of September 30, 2019, approximately $0.7 million was unused and available under this line of credit.
In
June 2018, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with China Minsheng
Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2019, LA GO GO had borrowed $2.8 million (RMB20.0
million) from China Minsheng Bank with an annual interest rate of 4.79% and due in October 2019.
In
November 2018, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB19.9 million) with the Bank
of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of September 30, 2019, LA GO
GO had borrowed $2.8 million (RMB19.9 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 $2.8 million (RMB20.0 million) with the
Shanghai Pudong Development Bank and guaranteed by Goldenway. As of September 30, 2019, approximately $2.8 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 September 2019, Ever-Glory Apparel had collateralized approximately $2.3 million of accounts receivable from our
wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2019, approximately
$0.2 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 $1.0 million and $1.2 million for the nine months ended September 30, 2019 and 2018,
respectively, and $0.2 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively.
NOTE
5 Derivative Financial Instruments
Foreign
currency swap contracts
During 2018, the Company had entered into four
foreign currency swap contracts with three banks. Due to the increased demand of effective control on financial management for
daily operations, Ever-Glory Apparel had entered into different foreign currency swap contracts to exchange $6.0 million for equivalent
RMB with Bank of China in May, entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial
and Commercial Bank of China in June and entered into a foreign currency swap contract to exchange $6.0 million and $4.0 million
for equivalent RMB with Shanghai Pudong Development Bank in July. The terms of the three foreign currency contracts are both six
months and the contract of $4.0 million with Shanghai Pudong Development Bank is three months. Ever-Glory Apparel and the banks
swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company
pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged with the Bank of China and Industrial
and Commercial Bank of China. The company pays annual interest of 0.98% for the RMB received and receives 0.0001% interest for
the USD exchanged with Shanghai Pudong Development Bank. If the Company failed to execute the exchange at the expiration of contracts,
the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As
of December 31, 2018, the fair value of principal amounts are included in other receivable ($4.0 million plus unrealized gain)
and other payables (equivalent RMB payables) in the consolidated balance sheets, and unrealized gain of $0.2 million for the year
ended December 31, 2018 is recognized in the income from operations.
In
September 2019, Ever-Glory Apparel entered into a 15-day foreign currency swap contract with Industrial and Commercial Bank
of China. The Company agreed to exchanged $4.9 million for EUR on September 26 and then to re-exchange these currencies on
the swap maturity date of October 8, 2019. As of September 30, 2019, the unrealized foreign currency exchange gain of the
asset was $2.6 thousands. The final realized gain is $4.1 thousands in October 2019.
Forward
foreign exchange contracts
To
avoid foreign currency fluctuation on forecasted international sales and secure the profits on such revenues, the Company entered
several forward foreign exchange contracts with banks from time to time. According to ASC 815-20-25, the Company designated above
contracts as cash flow hedges. At December 31, 2018, the Company did not have any outstanding derivative contracts.
As
of September 30, 2019, the Company had one outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total
notional amount of $8.0 million. The unrealized gain of this contract at September 30, 2019 was $58.6 thousands.
NOTE
6 LEASES
The Company recognized operating lease
liabilities and operating lease right-of-use assets on its balance sheets. ROU assets represent the right to use an underlying
asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets
and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease
term. The company has leases with fixed payments for land-use-rights, warehouses and logistics centers, flagship stores, and leases
with variable payments for stores within shopping malls (“shopping mall stores”) in the PRC, which are classified as
operating leases. Options to extend or renew are recognized as part of the lease liabilities and recognized as right of use assets.
There are no residual value guarantees and no restrictions or covenants imposed by the leases.
The
followings are lists of leases: (i) the terms of Shanghai LAGOGO land use right and buildings are 34 years; (ii) the terms of
Kunshan logistics center and Chuzhou logistics center are 5 years; (iii) the terms of flagship stores are 3 years. The lease
term for shopping mall stores is commonly one year with options to extend or renew, and the rent is predetermined with a
percentage of sales. The Company estimates the next 12 months rent for the shopping mall stores by annualizing current
period rent calculated with the percentage of sales. Thus, the ROU assets and lease liabilities may vary significantly at
different period ends.
In the nine months
ended September 30, 2019, the costs of the leases recognized in cost of revenues and general administrative expenses are $5.9
and $0.6 million, respectively. Cash paid for the operating leases including in the operating cash flows was $6.5 million. As
of September 30, 2019, the Company has $35.2 million of right-of-use assets, $26.8 million in current operating lease liabilities
and $8.4 million in non-current operating lease liabilities as of September 30, 2019.
NOTE
7 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 Hong Kong, and under the current laws of Hong Kong, are subject to income
tax at the 16.5% statutory rate.
The
PRC’s Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise
in PRC to its immediate holding company outside China; such distributions were exempted under the previous income tax law and
regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the
jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting from
January 1, 2008. Given that the undistributed profits of the Company’s subsidiaries in China are intended to be retained
in China for business development and expansion purposes, no withholding tax accrual has been made.
After
the tax assets and liabilities 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 (loss) for the three and nine months ended September 30, 2019 and 2018 was taxable in
the following jurisdictions:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
PRC
|
|
$
|
(714
|
)
|
|
$
|
4,084
|
|
|
$
|
2,891
|
|
|
$
|
9,445
|
|
Others
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(14
|
)
|
|
|
$
|
(717
|
)
|
|
$
|
4,084
|
|
|
$
|
2,881
|
|
|
$
|
9,431
|
|
The
following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and nine months ended
September 30, 2019 and 2018:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
PRC statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Net operating losses
|
|
|
0.2
|
|
|
|
18.5
|
|
|
|
78.0
|
|
|
|
8.1
|
|
Other
|
|
|
(79.1
|
)
|
|
|
(21.3
|
)
|
|
|
(10.5
|
)
|
|
|
(1.8
|
)
|
Effective income tax rate
|
|
|
(53.9
|
)%
|
|
|
22.2
|
%
|
|
|
92.5
|
%
|
|
|
31.3
|
%
|
Income
tax expense for the three and nine months ended September 30, 2019 and 2018 is as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
387
|
|
|
$
|
1,853
|
|
|
$
|
2,377
|
|
|
$
|
4,737
|
|
Deferred
|
|
|
-
|
|
|
|
(945
|
)
|
|
|
290
|
|
|
|
(1,788
|
)
|
Income tax expense
|
|
$
|
387
|
|
|
$
|
908
|
|
|
$
|
2,667
|
|
|
$
|
2,949
|
|
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 $104.3 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 changed for the three and nine months ended September 30,
2019.
NOTE
8 EARNINGS PER SHARE
The
following demonstrates the calculation for earnings per share for the three and nine months ended September 30, 2019 and 2018:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average number of common shares – Basic and diluted
|
|
|
14,801,770
|
|
|
|
14,798,198
|
|
|
|
14,801,770
|
|
|
|
14,796,527
|
|
Earnings per share – Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
0.22
|
|
|
$
|
0.02
|
|
|
$
|
0.47
|
|
NOTE
9 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.
On
July 26, 2019, the Company issued 1,630 shares of Company’s common stock to two of the Company’s independent directors
as compensation for their services rendered during the first and second quarter of 2019. The shares issued in 2019 were valued
at $3.04 per share, which was the average market price of the common stock for the five days before the grant date.
NOTE
10 RELATED PARTY TRANSACTIONS
Mr.
Kang is the Company’s Chairman and Chief Executive Officer. Ever-Glory Enterprises (HK) Ltd. (Ever-Glory Enterprises) is
the Company’s major shareholder. Mr. Xiaodong Yan was Ever-Glory Enterprises’ sole shareholder and sole director.
Mr. Huake Kang, Mr. Kang’s son, acquired 83% interest of Ever-Glory Enterprises and became its sole director in 2014. All
transactions associated with the following companies controlled by Mr. Kang or his son are considered to be related party transactions,
and it is possible that the terms of these transactions may not be the same as those that would result from transactions between
unrelated parties. All related party outstanding balances are short-term in nature and are expected to be settled in cash.
Other
income from Related Parties
Jiangsu
Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled
by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter
of 2014. During the three and nine months ended September 30, 2019 and 2018, the Company received $10,868, $56,523, $17,961 and
$69,502 from the customers and paid $10,935, $50,021, $18,077 and $57,395 to Wubijia through the consignment, respectively. The
net income (loss) of ($67), $6,503, ($117) and $12,106 was recorded as other income (expenses) during the three and nine months
ended September 30, 2019 and 2018, respectively.
Other
expenses due to Related Parties
Included
in other expenses for the three and nine months ended September 30, 2019 and 2018 are rent costs due to entities controlled by
Mr. Kang under operating lease agreements as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Chuzhou Huarui
|
|
|
52
|
|
|
|
48
|
|
|
|
140
|
|
|
|
157
|
|
Kunshan Enjin
|
|
|
22
|
|
|
|
11
|
|
|
|
66
|
|
|
|
38
|
|
Total
|
|
$
|
74
|
|
|
$
|
59
|
|
|
$
|
206
|
|
|
$
|
195
|
|
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
In
addition, sub-contracts with related parties included in cost of sales for the three and nine months ended September 30, 2019
and 2018 are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Chuzhou Huarui
|
|
$
|
1,197
|
|
|
$
|
653
|
|
|
$
|
4,664
|
|
|
$
|
2,526
|
|
Fengyang Huarui
|
|
|
1,071
|
|
|
|
911
|
|
|
|
1,619
|
|
|
|
1,962
|
|
Nanjing Ever-Kyowa
|
|
|
342
|
|
|
|
392
|
|
|
|
1,097
|
|
|
|
1,067
|
|
Ever-Glory Vietnam
|
|
|
4,689
|
|
|
|
6,754
|
|
|
|
9,737
|
|
|
|
11,928
|
|
Nanjing Knitting
|
|
|
339
|
|
|
|
-
|
|
|
|
939
|
|
|
|
-
|
|
EsCeLav
|
|
|
28
|
|
|
|
10
|
|
|
|
129
|
|
|
|
31
|
|
Jiangsu Ever-Glory
|
|
|
345
|
|
|
|
664
|
|
|
|
815
|
|
|
|
685
|
|
|
|
$
|
8,011
|
|
|
$
|
9,384
|
|
|
$
|
19,000
|
|
|
$
|
18,199
|
|
Accounts
Payable – Related Parties
The
accounts payable to related parties at September 30, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Ever-Glory Vietnam
|
|
$
|
1,920
|
|
|
|
1,863
|
|
Fengyang Huarui
|
|
|
388
|
|
|
|
622
|
|
Nanjing Ever-Kyowa
|
|
|
279
|
|
|
|
580
|
|
Chuzhou Huarui
|
|
|
1,142
|
|
|
|
888
|
|
Nanjing Knitting
|
|
|
146
|
|
|
|
171
|
|
Jiangsu Ever-Glory
|
|
|
480
|
|
|
|
632
|
|
Total
|
|
$
|
4,355
|
|
|
$
|
4,756
|
|
Amounts
Due From Related Parties-current assets
The
amounts due from related parties at September 30, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of
U.S. Dollars)
|
|
Jiangsu Ever-Glory
|
|
$
|
123
|
|
|
$
|
122
|
|
Esc’elav
|
|
|
-
|
|
|
|
70
|
|
Total
|
|
$
|
123
|
|
|
$
|
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 and nine months ended September 30, 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 a cost of $0.8 million,
$0.8 million, $0.4 million and $0.7 million during the three and nine months period ended September 30, 2019 and 2018, respectively.
Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0 million, $0.1
million, $0.3 million and $0.4 million during the three and nine months ended September 30, 2019 and 2018, respectively.
Amounts
Due From Related Party under Counter Guarantee Agreement
In
March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company
agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate
lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee
funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at
the rate of 6.0% of amounts provided. As of September 30, 2019 and December 31, 2018, Jiangsu Ever-Glory has provided guarantees
for approximately $32.5 million (RMB 230 million) and $33.4 million (RMB 230 million) of lines of credit obtained
by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain
of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines
of credit is approximately $29.1 million (RMB 205.5 million) and $29.9 million (RMB 205.5 million) as of September 30, 2019 and
December 31, 2018, respectively. Mr. Kang has also provided a personal guarantee for $16.4 million (RMB 117.7 million) and
$14.5 million (RMB 100.0 million) as of September 30, 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 nine months ended September 30, 2019, an additional $6.8 million (RMB 46.3 million) was provided to and $10.7 million
(RMB 73.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of September 30, 2019, the amount of the
counter-guarantee was $5.8 million (RMB 41.3 million) (the difference represents currency exchange adjustment of $0.1 million),
which was 17.9% of the aggregate amount of lines of credit. The increase of the percentage in this quarter was mainly due to China’s
credit tightening policy. Obtaining bank loan requires a higher guarantee deposit in this quarter. This amount plus accrued interest
of $0.6 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins
4E and 4G. At September 30, 2019 and December 31, 2018, the amount classified as a reduction of equity was $6.6 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 January
1, 2019, interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for the three and
nine months ended September 30, 2019 and 2018 was approximately $0.05 million, $0.2 million, $0.3 million and $1.0 million, respectively.
NOTE
11 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 September 30, 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 nine months ended September 30, 2019, the Company had one wholesale customer that represented approximately 17%of the Company’s
revenues. For the three months ended September 30, 2019, the Company had one wholesale customer that represented approximately
10% of the Company’s revenues. For the nine-months ended September 30, 2018, the Company had two wholesale customers that
represented more than 11% and 12% of the Company’s revenues. For the three-month period ended September 30, 2018, the Company
had two wholesale customers that represented approximately 7% and 7% 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 and nine months ended September 30, 2019 and 2018.
For
the retail business, the Company relied on four raw material suppliers that represented approximately 28%, 27%, 18% and 15% of
raw material purchases during the nine months ended September 30, 2019. For the Company’s retail business, the Company had
two suppliers that represented approximately 22% and 19% of raw materials purchases during the three months ended September 30,
2018.
For
the wholesale business, the Company did not rely on any finished goods supplier that represented more than 10% of the total raw material
purchases during the three and nine months ended September 30, 2019 and 2018.
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 and nine months ended September 30, 2019 and 2018.
The
Company’s revenues for the three and nine months ended September 30, 2019 and 2018 were earned in the following geographic
areas:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
The People’s Republic of China
|
|
$
|
23,241
|
|
|
$
|
25,853
|
|
|
$
|
40,486
|
|
|
$
|
39,195
|
|
Hong Kong China
|
|
|
14,574
|
|
|
|
18,427
|
|
|
|
22,291
|
|
|
|
30,982
|
|
Germany
|
|
|
981
|
|
|
|
2,750
|
|
|
|
2,708
|
|
|
|
5,515
|
|
United Kingdom
|
|
|
10,555
|
|
|
|
8,254
|
|
|
|
13,393
|
|
|
|
13,353
|
|
Europe-Other
|
|
|
12,523
|
|
|
|
19,707
|
|
|
|
21,977
|
|
|
|
29,993
|
|
Japan
|
|
|
10,056
|
|
|
|
2,371
|
|
|
|
16,304
|
|
|
|
6,689
|
|
United States
|
|
|
9,807
|
|
|
|
8,321
|
|
|
|
29,931
|
|
|
|
24,026
|
|
Total wholesale business
|
|
|
81,737
|
|
|
|
85,683
|
|
|
|
147,090
|
|
|
|
149,753
|
|
Retail business
|
|
|
31,589
|
|
|
|
39,797
|
|
|
|
131,508
|
|
|
|
157,053
|
|
Total
|
|
$
|
113,326
|
|
|
$
|
125,480
|
|
|
$
|
278,598
|
|
|
$
|
306,806
|
|
NOTE
12 SEGMENTS
The
Company reports financial and operating information in the following two segments:
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Nine months ended September 30, 2019
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
147,090
|
|
|
|
131,508
|
|
|
|
278,598
|
|
Income from operations
|
|
$
|
6,925
|
|
|
|
(5,323
|
)
|
|
|
1,602
|
|
Interest income
|
|
$
|
673
|
|
|
|
26
|
|
|
|
699
|
|
Interest expense
|
|
$
|
775
|
|
|
|
261
|
|
|
|
1,036
|
|
Depreciation and amortization
|
|
$
|
1,179
|
|
|
|
5,645
|
|
|
|
6,824
|
|
Income tax expense
|
|
$
|
1,617
|
|
|
|
1,050
|
|
|
|
2,667
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
1,069
|
|
|
|
5,486
|
|
|
|
6,555
|
|
Total assets
|
|
|
114,789
|
|
|
|
170,456
|
|
|
|
285,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
149,753
|
|
|
|
157,053
|
|
|
|
306,806
|
|
Income from operations
|
|
$
|
6,935
|
|
|
|
1,593
|
|
|
|
8,528
|
|
Interest income
|
|
$
|
968
|
|
|
|
35
|
|
|
|
1,003
|
|
Interest expense
|
|
$
|
976
|
|
|
|
226
|
|
|
|
1,202
|
|
Depreciation and amortization
|
|
$
|
834
|
|
|
|
5,689
|
|
|
|
6,523
|
|
Income tax expense
|
|
$
|
1,800
|
|
|
|
1,149
|
|
|
|
2,949
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
1,322
|
|
|
|
7,822
|
|
|
|
9,144
|
|
Total assets
|
|
|
121,951
|
|
|
|
150,334
|
|
|
|
272,285
|
|
|
|
Wholesale
segment
|
|
|
Retail
segment
|
|
|
Total
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Three months ended September 30, 2019
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
81,737
|
|
|
|
31,589
|
|
|
|
113,326
|
|
Income from operations
|
|
$
|
4,551
|
|
|
|
(5,720
|
)
|
|
|
(1,169
|
)
|
Interest income
|
|
$
|
206
|
|
|
|
9
|
|
|
|
215
|
|
Interest expense
|
|
$
|
203
|
|
|
|
62
|
|
|
|
265
|
|
Depreciation and amortization
|
|
$
|
706
|
|
|
|
1,628
|
|
|
|
2,334
|
|
Income tax expense
|
|
$
|
143
|
|
|
|
244
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit or loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
85,683
|
|
|
|
39,797
|
|
|
|
125,480
|
|
Income from operations
|
|
$
|
4,302
|
|
|
|
(348
|
)
|
|
|
3,954
|
|
Interest income
|
|
$
|
304
|
|
|
|
3
|
|
|
|
307
|
|
Interest expense
|
|
$
|
194
|
|
|
|
84
|
|
|
|
278
|
|
Depreciation and amortization
|
|
$
|
233
|
|
|
|
1,387
|
|
|
|
1,620
|
|
Income tax expense
|
|
$
|
1,085
|
|
|
|
(177
|
)
|
|
|
908
|
|
NOTE
13 COMMITMENT AND CONTINGENCIES
On March 2019, Shanghai La Go Go Fashion Company Limited (“LA GO GO”) filed a complaint against
Shanghai Chijing Investment Management Co., Ltd. (“Shanghai Chijing”) for unpaid rent of RMB2.45 million ($0.36 million)
in the Shanghai People’s Court (the “Court”). On July 2019, Shanghai Chijing filed a counterclaim against LA
GO GO for RMB15.38 million ($2.17 million), alleging that LA GO GO had not fulfilled its corresponding obligations as a landlord.
As a result, the Court has frozen the bank accounts of both Shanghai Chijing and LA GO GO. As of September 30, 2019, a total balance
of RMB9.79 million ($1.4 million) was frozen in the bank accounts of LA GO GO. LA GO GO believes that Shanghai Chijing’s
counterclaim is frivolous and without merit, and intends to rigorously defend against the counterclaim. As of September 30, 2019,
the company had booked this restricted cash in other receivables.
NOTE
14 SUBSEQUENT EVENTS
The Company has performed an evaluation of subsequent events through
the time of filing this quarterly report on Form 10-Q with the SEC. During this period the Company did not have any additional
material recognizable subsequent events.