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 June 30, 2020

 

☐   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:  001-34124

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

 

Securities registered under Section 12(g) of the Act:  None. 

 

As of August 13, 2020, 14,809,160 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 ii
     
PART I.  FINANCIAL INFORMATION  
     
Item 1.   Financial Statements 1
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 33
     
Item 4.   Controls and Procedures 33
     
PART II.  OTHER INFORMATION  
     
Item 1.   Legal Proceedings 34
     
Item 1A. Risk Factors 34
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3.   Defaults Upon Senior Securities 35
     
Item 4.   Mine Safety Disclosure 35
     
Item 5.   Other Information 35
     
Item 6.   Exhibits 36
     
SIGNATURES 37

 

  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 (the “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 JUNE 30, 2020 AND DECEMBER 31, 2019 (UNAUDITED)

 

    2020     2019  
ASSETS            
             
CURRENT ASSETS            
Cash and cash equivalents   $ 59,238     $ 48,551  
Restrict cash     17,716       2,204  
Trading securities     825       -  
Accounts receivable, net     45,766       78,053  
Inventories     51,254       67,355  
Advances on inventory purchases     5,726       9,681  
Value added tax receivable     1,340       2,495  
Other receivables and prepaid expenses     4,328       5,293  
Amounts due from related parties     329       123  
Total Current Assets     186,522       213,755  
                 
NONCURRENT ASSETS                
Intangible assets, net     4,499       4,729  
Property and equipment, net     25,964       28,812  
Operating lease right-of-use assets     34,496       53,379  
Deferred tax assets     807       996  
Total Non-Current Assets     65,766       87,916  
TOTAL ASSETS   $ 252,288     $ 301,671  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Bank loans   $ 40,271     $ 29,931  
Accounts payable     51,169       72,418  
Accounts payable and other payables – related parties     4,050       4,811  
Other payables and accrued liabilities     10,118       19,137  
Value added and other taxes payable     -       1,657  
Income tax payable     222       1,142  
Current operating lease liabilities     26,309       44,888  
Total Current Liabilities     132,139       173,984  
                 
NONCURRENT LIABILITIES                
Non-current operating lease liabilities     8,256       8,537  
TOTAL LIABILITIES     140,395       182,521  
                 
COMMITMENTS AND CONTINGENCIES (Note 8)                
                 
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, 14,804,832 and 14,801,770 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)     15       15  
Additional paid-in capital     3,645       3,640  
Retained earnings     99,833       106,328  
Statutory reserve     19,939       19,939  
Accumulated other comprehensive (loss)     (6,031 )     (4,330 )
Amounts due from related party     (3,996 )     (4,932 )
Total equity attributable to stockholders of the Company     113,405       120,660  
Noncontrolling interest     (1,512 )     (1,510 )
Total Equity     111,893       119,150  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 252,288     $ 301,671  

 

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

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

 

    Three months ended     Six months ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
NET SALES   $ 50,086     $ 77,316     $ 108,441     $ 165,272  
COST OF SALES     35,641       48,330       77,958       106,928  
                                 
GROSS PROFIT     14,445       28,986       30,483       58,344  
                                 
OPERATING EXPENSES                                
Selling expenses     12,626       19,699       26,105       40,706  
General and administrative expenses     5,971       7,337       11,755       14,867  
Total Operating Expenses     18,597       27,036       37,860       55,573  
                                 
(LOSS) INCOME FROM OPERATIONS     (4,152 )     1,950       (7,377 )     2,771  
                                 
OTHER INCOME (EXPENSES)                                
Interest income     339       277       616       484  
Interest expense     (566 )     (408 )     (907 )     (771 )
Other income     845       1,409       1,663       1,114  
Total Other Income, Net     618       1,278       1,372       827  
                                 
(LOSS) INCOME BEFORE INCOME TAX EXPENSE     (3,534 )     3,228       (6,005 )     3,598  
Income tax expense     (266 )     (1,455 )     (493 )     (2,280 )
                                 
NET (LOSS) INCOME     (3,800 )     1,773       (6,498 )     1,318  
                                 
Non-controlling interest     6       83       3       17  
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY     (3,794 )     1,856       (6,495 )     1,335  
                                 
NET (LOSS) INCOME   $ (3,800 )   $ 1,773     $ (6,498 )   $ 1,318  
                                 
Foreign currency translation (loss) gain     (263 )     (2,453 )     (1,700 )     1,553  
COMPREHENSIVE (LOSS) INCOME     (4,063 )     (680 )     (8,198 )     2,871  
                                 
Comprehensive loss (income) attributable to the non-controlling interest     8       49       2       (51 )
COMPREHENSIVE (LOSS) INCOME  ATTRIBUTABLE TO THE COMPANY   $ (4,055 )   $ (631 )   $ (8,196 )   $ 2,820  
                                 
(LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS                                
Basic and diluted   $ (0.26 )   $ 0.13     $ (0.44 )   $ 0.09  
Weighted average number of shares outstanding Basic and diluted     14,804,832       14,800,140       14,804,595       14,800,140  

 

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 AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (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     loss     party     Company     Interest     equity  
Balance at January  1, 2020     14,801,770     $ 15     $ 3,640     $ 106,328     $ 19,939     $ (4,330 )   $ (4,932 )   $ 120,660       (1,510 )   $ 119,150  
                                                                                 
Stock issued for compensation     3,062       0.003       5       -       -       -       -       5               5  
Net income (loss)     -       -       -       (2,701 )     -       -       -       (2,701 )     3       (2,698 )
Net cash received from related party under counter guarantee agreement     -       -       -       -       -       -       785       785       -       785  
Foreign currency translation gain (loss)                                             (1,440 )     -       (1,440 )     3       (1,437 )
Balance at March 31, 2020     14,804,832       15       3,645       103,627       19,939       (5,770 )     (4,147 )     117,309       (1,504 )     115,805  
Net (loss)                             (3,794 )                             (3,794 )     (6 )     (3,800 )
Net cash received from related party under counter guarantee agreement                                                     151       151               151  
Foreign currency translation loss                                             (261 )             (261 )     (2 )     (263 )
Balance at June 30, 2020     14,804,832     $ 15     $ 3,645     $ 99,833     $ 19,939     $ (6,031 )   $ (3,996 )   $ 113,405       (1,512 )   $ 111,893  

 

          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     (loss) 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 received from related party under counter guarantee agreement     -       -       -       -       -       -       1,101       1,101       -       1,101  
Foreign currency translation gain                                             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  
Net income (loss)                             1,856                               1,856       (83 )     1,773  
Net cash received from related party under counter guarantee agreement                                                     1,390       1,390               1,390  
Foreign currency translation loss                                             (2,487 )             (2,487 )     34       (2,453 )
Balance at June 30, 2019     14,800,140     $ 15     $ 3,635     $ 107,249     $ 19,083     $ (2,093 )   $ (7,863 )   $ 120,026       (1,500 )   $ 118,526  

 

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 SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

 

    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net (loss) income   $ (6,498 )   $ 1,318  
Adjustments to reconcile net income to cash provided by operating activities:                
Depreciation and amortization     3,597       4,491  
Loss from sale of property and equipment     189       53  
Provision of bad debt allowance     969       682  
Provision for obsolete inventories     3,681       1,824  
Deferred income tax     71       (1,461 )
Stock-based compensation     3       8  
Changes in operating assets and liabilities                
Accounts receivable     30,444       21,793  
Inventories     11,659       1,145  
Value added tax receivable     1,076       504  
Other receivables and prepaid expenses     737       3,502  
Advances on inventory purchases     3,845       (2,353 )
Amounts due from related parties     (214 )     (129 )
Accounts payable     (22,522 )     (25,954 )
Accounts payable and other payables- related parties     (466 )     58  
Other payables and accrued liabilities     (7,027 )     (10,789 )
Value added and other taxes payable     (1,593 )     (4,684 )
Income tax payable     (910 )     207  
Net cash provided (used in) operating activities     17,041       (9,785 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     (1,018 )     (4,082 )
Purchases of trading securities     (825 )     -  
Net cash used in investing activities     (1,843 )     (4,082 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from bank loans     31,995       16,320  
Repayment of bank loans     (21,173 )     (19,904 )
Repayment of loans from related party     4,027       8,149  
Advances to related party     (3,129 )     (5,454 )
Net cash provided (used in) financing activities     11,720       (889 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (721 )     2,270  
                 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH     26,197       (12,486 )
                 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD     50,755       47,012  
                 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD   $ 76,952     $ 34,526  
                 
Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets:                
                 
Cash and Cash Equivalents     59,236       47,012  
Restricted cash     17,716       -  
    $ 76,952     $ 47,012  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                 
Cash paid during the period for:                
Interest   $ 907     $ 771  
Income taxes   $ 493     $ 2,436  

 

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 SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 1 Nature of Operations and Basis of Presentation

 

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

 

In March 2020, the Company incorporated Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”) and it is the Company’s wholly-owned PRC subsidiaries. Nanjing Rui Lian is engaged in the business of garments trading.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of June 30, 2020 the condensed consolidated statements of income (loss) and comprehensive income (loss), condensed consolidated statements of equity, and cash flows for the three and six months ended June 30, 2020 and 2019. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and 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 six months ended June 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 

  

  5  

 

 

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 (“2019 Form 10-K.”)

 

Fair Value Accounting

 

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

 

  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 June 30, 2020 and 2019, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions and trading securities that management considers to be of a high quality.

 

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

  

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

 

As of June 30, 2020, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions and trading securities (nil at December 31, 2019) with brokerage accounts that management considers to be high quality.

 

  6  

 

 

Foreign Currency Translation and Other Comprehensive Income

 

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

 

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

 

Use of Estimates

 

In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory write off.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

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

 

Reclassification

 

Certain amounts in the prior period presented have been reclassified to conform to the current year presentation. There was no impact on previously reported assets, net income or total cash flows.

 

NOTE 3 INVENTORIES

 

Inventories at June 30, 2020 and December 31, 2019 consisted of the following:

 

    June 30,
2020
    December 31,
2019
 
    (In thousands of
U.S. Dollars)
 
Raw materials   $ 1,451     $ 1,468  
Work-in-progress     9,954       8,025  
Finished goods     39,849       57,862  
Total inventories   $ 51,254     $ 67,355  

 

  7  

 

 

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 June 30, 2020 and December 31, 2019.

 

    June 30,
2020
    December 31,
2019
 
Bank   (In thousands of
U.S. Dollars)
 
Industrial and Commercial Bank of China   $ 19,782     $ 18,629  
Shanghai Pudong Development Bank     15,543       -  
China Minsheng Bank     2,826       2,866  
Bank of China     2,120       -  
Nanjing Bank     -       6,449  
Bank of Communications     -       1,426  
HSBC     -       561  
    $ 40,271     $ 29,931  

 

In April 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.2 million (RMB30.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of June 30, 2020, Ever-Glory Apparel had borrowed $2.1 million (RMB 15.0 million) under this line of credit with an annual interest rate of 4.57% and due on September 2020. As of June 30, 2020, approximately $2.1 million was unused and available under this line of credit.

 

In December 2019, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $5.7 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2020, Goldenway had borrowed $5.7 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due on August 2020.

 

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.1 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2020, Ever-Glory Apparel had borrowed $14.1 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.92% to 4.35% and due on from September 2020 to May 2021.

 

In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.7 million (RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2020, approximately $5.7 million was unused and available under this line of credit. In March 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $15.5 million (RMB110.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.85% to 3.99%. In April 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $15.5 million (RMB 110.0 million) under this line of certificate with an annual interest rate of 2.02% and due on July 2020. On July 2020, Ever-Glory Apparel repaid the loan and borrowed $11.3 million (RMB 80.0 million) under this line of certificate with an annual interest rate of 2.50% and due on July 2021.

 

In October 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2020, LA GO GO had borrowed $2.8 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 5.0% and due in November 2020.  

 

  8  

 

 

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2020, approximately $7.1 million was unused and available under this line of credit.

 

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.5 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2020, approximately $8.5 million was unused and available under this line of credit.

 

In June 2019, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2020, approximately $2.8 million was unused and available under this line of credit.

  

In September 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of June 30, 2020, approximately $2.8 million was unused and available under this line of credit.

 

In August 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 30, 2020, approximately $2.5 million was unused and available under this line of credit.

 

All bank loans are used to fund our daily operations. All loans have been repaid before or at maturity date.

 

Total interest expense on bank loans amounted to $0.9 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively, and $0.6 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively.

 

NOTE 5 INCOME TAX

 

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

 

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2020.

 

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

 

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

 

Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the current laws of Hongkong, its income tax rate is 8.25% when its profit is under HKD 2.0 million and its income tax rate is 16.5% when its profit is over HKD 2.0 million.

 

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

 

  9  

 

 

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 (loss) income for the three and six months ended June 30, 2020 and 2019 was taxable in the following jurisdictions:

  

    Three months ended     Six months ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
    (In thousands of U.S. Dollars)  
PRC   $ (3,531 )   $ 3,228     $ (6,000 )   $ 3,605  
Others     (3 )     -       (5 )     (7 )
    $ (3,534 )   $ 3,228     $ (6,005 )   $ 3,598  

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2020 and 2019:

 

    Three months ended     Six months ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
PRC statutory rate     25.0 %     25.0 %     25.0 %     25.0 %
Temporary difference between US GAAP and PRC tax accounting     (32.5 )     20.1       (33.2 )     38.4  
Effective income tax rate     (7.5 )%     45.1 %     (8.2 )%     63.4 %

 

Income tax expense for the three and six months ended June 30, 2020 and 2019 is as follows:

  

    Three months ended     Six months ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Current   $ 195     $ 1,785     $ 304     $ 1,990  
Deferred     71       (330 )     189       290  
Income tax expense   $ 266     $ 1,455     $ 493     $ 2,280  

 

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 $99.9 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. On December 22, 2017 the U.S. enacted the “Tax Cuts and Jobs Act” (“U.S. Tax Reform”) which made significant changes to corporate income tax law. One significant change was to decrease the general corporate income tax rate from 34% to 21%. This reduction had no effect on the Company’s income tax expense as the reduction in deferred tax assets was offset by an equivalent reduction in the valuation allowance. Another significant change resulting from U.S. Tax Reform is that any future remittances to the parent company from business income earned by its subsidiaries outside of the U.S. will no longer to taxable to the Company under U.S. tax law. The Company would be liable for payment of income tax, or reduction of the net operating loss carryover, at a reduced rate for any accumulated earnings and profits of its non-U.S. subsidiaries at December 31, 2017. U.S. Tax Reform includes provisions for Global Intangible Low-Taxed Income (“GILTI”) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (“BEAT”) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax expense (income) relating to the Tax Act changed for the three and six months ended June 30, 2020.

   

  10  

 

 

NOTE 6 STOCKHOLDERS’ EQUITY

 

On January 31, 2019, the Company issued 1,942 shares of the Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the third and fourth quarter of 2018. The shares issued in 2019 were valued at $3.80 per share, which was the average market price of the common stock for the five days before the grant date.

 

On January 15, 2020, the Company issued 3,062 shares of Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the third and fourth quarter of 2019. The shares issued in 2020 were valued at $1.41 per share, which was the average market price of the common stock for the five days before the grant date. 

 

NOTE 7 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 six months ended June 30, 2020 and 2019, the Company received $5,504, $8,021, $14,176 and $45,655 from the customers and paid $5,504, $8,021, $13,248 and $39,086 to Wubijia through the consignment, respectively. The net income of $0, $0, $928 and $6,570 was recorded as other income (expenses) during the three and six months ended June 30, 2020 and 2019, respectively.  

  

Other expenses due to Related Parties

 

Included in other expenses for the three and six months ended June 30, 2020 and 2019 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

  

    Three months ended     Six months ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
    (In thousands of U.S. Dollars)  
Chuzhou Huarui     52       35       102       88  
Kunshan Enjin     21       22       43       44  
Total   $ 73     $ 57     $ 145     $ 132  

 

  11  

 

 

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 million, $0 million, $0.4 million and $0.6 million during the three and six months ended June 30, 2020 and 2019, respectively.

 

In addition, sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 2020 and 2019 are as follows:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2020     2019     2020     2019  
    (In thousands of U.S. Dollars)  
Chuzhou Huarui   $ 477     $ 1,960     $ 990     $ 3,467  
Fengyang Huarui     242       442       400       548  
Nanjing Ever-Kyowa     188       408       442       755  
Ever-Glory Vietnam     3,595       2,469       5,479       5,048  
Nanjing Knitting     487       600       487       600  
EsCeLav     14       13       24       101  
Jiangsu Ever-Glory     381       45       627       470  
    $ 5,384     $ 5,937     $ 8,449     $ 10,989  

  

Accounts Payable – Related Parties

 

The accounts payable to related parties at June 30, 2020 and December 31, 2019 are as follows:

 

    2020     2019  
    (In thousands of
U.S. Dollars)
 
Ever-Glory Vietnam   $ 1,993       2,260  
Fengyang Huarui     140       414  
Nanjing Ever-Kyowa     317       386  
Chuzhou Huarui     1,341       1,064  
Nanjing Knitting     254       186  
Jiangsu Ever-Glory     5       501  
Total   $ 4,050     $ 4,811  

 

Amounts Due From Related Parties-current assets

 

The amounts due from related parties at June 30, 2020 and December 31, 2019 are as follows:

 

    2020     2019  
    (In thousands of
U.S. Dollars)
 
Jiangsu Ever-Glory     329       123  
Total   $ 329     $ 123  

 

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and six months ended June 30, 2020 and 2019, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices.  The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at a cost of $0.4 million, $0.6 million, $0 million and $0 million during the three and six months period ended June 30, 2020 and 2019, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.4 million, $1.1 million, $0.1 million and $0.1 million during the three and six months ended June 30, 2020 and 2019, respectively.

    

  12  

 

 

 

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 June 30, 2020 and December 31, 2019, Jiangsu Ever-Glory has provided guarantees for approximately $37.3 million (RMB 260 million) and $33.0 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 $29.2 million (RMB 205.5 million) and $29.4 million (RMB 205.5 million) as of June 30, 2020 and December 31, 2019, respectively. Mr. Kang has also provided a personal guarantee for $14.3 million (RMB 100.0 million) and $14.5 million (RMB 100.0 million) as of June 30, 2020 and December 31, 2019, respectively.

 

At December 31, 2019, $4.7 million (RMB 32.8 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the six months ended June 30, 2020, an additional $3.1 million (RMB 22.0 million) was provided to and $4.0 million (RMB 28.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2020, the amount of the counter-guarantee was $3.7 million (RMB 26.4 million) (the difference represents currency exchange adjustment of $0.1 million), which was 10.2% of the aggregate amount of lines of credit. Obtaining bank loan requires a higher guarantee deposit in this quarter. This amount plus accrued interest of $0.3 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At June 30, 2020 and December 31, 2019, the amount classified as a reduction of equity was $4.0 million and $5.0 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 six months ended June 30, 2020 and 2019 was approximately $0.01 million, $0.03 million, $0.1 million and $0.2 million, respectively.

 

NOTE 8 COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitment

 

The Company recognized operating lease liabilities and operating lease right-of-use assets on its balance sheets. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The company has leases with fixed payments for land-use-rights, warehouses and logistics centers, flagship stores, and leases with variable payments for stores within shopping malls (“shopping mall stores”) in the PRC, which are classified as operating leases. Options to extend or renew are recognized as part of the lease liabilities and recognized as right of use assets. There are no residual value guarantees and no restrictions or covenants imposed by the leases.

 

The weighted average remaining lease term excluding stores in the shopping malls is 31 years and the weighted average discount rate is 4.35%. The lease term for shopping mall stores is commonly one year with options to extend or renew, and the rent is predetermined with a percentage of sales. The Company estimates the next 12 months rent for the shopping mall stores by annualizing current period rent calculated with the percentage of sales. Thus, the ROU assets and lease liabilities may vary significantly at different period ends. 

 

In the six months ended June 30, 2020, the costs of the leases recognized in cost of revenues and general administrative expenses are $4.6 and $0.2 million, respectively. Cash paid for the operating leases including in the operating cash flows was $4.8 million.

 

  13  

 

 

Future minimum lease payments for leases with initial or remaining noncancelable lease terms in excess of one year are as follows:

 

Year ending December 31, (In thousands of U.S. Dollars)      
2020   387  
2021     387  
2022     387  
2023     401  
2024     401  
Thereafter     12,374  
    $ 14,337  

  

Legal Proceedings

 

In 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 RMB0.27 million ($0.04 million) per month in the Shanghai People’s Court for Jiading District (the “District Court”). The rent arrears began accumulating from April 2018 to the actual payment date. In July 2019, Shanghai Chijing filed counterclaims against LA GO GO to claim RMB10.19 million ($1.45 million) in damages, alleging that LA GO GO had not fulfilled its corresponding obligations as a landlord. As a result, the District Court froze the bank accounts of both Shanghai Chijing and LA GO GO. As of December 31, 2019, a total balance of RMB15.38 million ($2.2 million) was frozen in the bank accounts of LA GO GO. As of December 31, 2019, the Company had booked this restricted cash in other receivables. On March 10, 2020, the District Court entered a judgment in favor of LA GO GO and dismissed most of Shanghai Chijing’s counterclaims. The District Court ordered Shanghai Chijing to pay to LA GO GO an aggregate sum of RMB4.77 million ($0.68 million), which is the accumulated unpaid rent from April 2018 to January 2020. The District Court also ordered LA GO GO to pay Shanghai Chijing RMB1.49 ($0.21 million) for the expenses incurred from remodeling. Both parties were required to pay the monetary damages within ten days after the District Court’s decision. LA GO GO appealed to the Shanghai Second Appellate Court (the “Appellate Court”) to claim more damages, while Shanghai Chijing appealed to reverse the judgment. LA GO GO later requested to withdraw its appeal, which was granted by the Appellate Court. In June 2020, the Appellate Court entered a final decision to dismiss the appeal of Shanghai Chijing and sustained the District Court’s judgment. LA GO GO has not received RMB4.77 million ($0.68 million) in monetary damages from Shanghai Chijing as of June 30, 2020, and has applied for compulsory enforcement with the District Court. The total balance of RMB15.38 million ($2.2 million) in LA GO GO’s bank accounts were unfrozen after the final decision in July.

  

In addition to the foregoing, the Company may become subject to other legal proceedings that arise in the ordinary course of business and have not been finally adjudicated. Adverse decisions in any of the foregoing may have a material adverse effect on our results of operations, cash flows or our financial condition. 

 

NOTE 9 RISKS AND UNCERTAINTIES

 

Economic and Political Risks

 

The Company’s results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of its control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China from late January to March, which has adversely affected the company is the retail business with a decline in sales since February 2020. The Company’s wholesale business is also significantly affected as the Company is facing a sharp decline in its order quantities. Some of the Company’s wholesale clients have also cancelled or postponed existing orders.  Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where the Company’s suppliers are located, The Company’s supply chain and business operations of its suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of the Company’s or its suppliers’ or customers’ products, could have adverse ripple effects on the Company’s manufacturing output and delivery schedule. The Company could also face difficulties in collecting its accounts receivables due to the effects of COVID-19 on its customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which the Company, its suppliers and customers operate.

 

  14  

 

 

Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect the Company’s liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of its common stock. If the Company’s future sales continue to decline significantly, it may risk facing financial difficulties due to its recurring fixed expenses. The extent to which COVID-19 impacts the Company’s operating is uncertain and cannot be predicted at this time, and it will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others. 

 

The majority of the Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.  

 

Credit risk

 

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

 

Concentration risk 

   

For the six months ended June 30, 2020, the Company had two wholesale customers that represented approximately 19% and 12% of the Company’s revenues. For the three months ended June 30, 2020, the Company had one wholesale customer that represented approximately 30% of the Company’s revenues. For the six months ended June 30, 2019, the Company had two wholesale customers that represented approximately 16% and 10% of the Company’s revenues. For the three months ended June 30, 2019, the Company had two wholesale customers that represented approximately 8% and 14% 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 six months ended June 30, 2020 and 2019.

 

For the Company’s retail business, the Company had three suppliers that represented 41%, 24% and 19% of raw materials purchases during the six months ended June 30, 2020. For the retail business, the Company relied on three raw material suppliers that represented approximately 32%, 31% and 21% of raw material purchases during the six months ended June 30, 2019.

  

For the wholesale business, the Company relied on two finished goods suppliers that represented approximately 20% and 11% of the total raw material purchases during the six months ended June 30, 2020. 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 six months ended June 30, 2019.

 

  15  

 

 

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 six months ended June 30, 2020 and 2019.

 

The Company’s revenues for the three and six months ended June 30, 2020 and 2019 were earned in the following geographic areas:

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2020     2019     2020     2019  
    (In thousands of U.S. Dollars)  
The People’s Republic of China   $ 3,111     $ 6,491     $ 7,764     $ 17,246  
Hong Kong China     2,054       6,463       5,045       7,717  
Germany     48       877       243       1,726  
United Kingdom     471       2,038       1,309       2,838  
Europe-Other     3,612       4,224       7,511       9,453  
Japan     2,205       1,311       6,589       6,248  
United States     10,548       15,847       15,876       20,125  
Total wholesale business     22,049       37,251       44,337       65,353  
Retail business     28,037       40,065       64,104       99,919  
Total   $ 50,086     $ 77,316     $ 108,441     $ 165,272  

 

NOTE 10 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)  
Six months ended June 30, 2020      
Segment profit or loss:                  
Net revenue from external customers   $ 44,337       64,104       108,441  
Income (loss) from operations   $ 1,001       (8,378 )     (7,377 )
Interest income   $ 576       40       616  
Interest expense   $ 719       188       907  
Depreciation and amortization   $ 583       3,014       3,597  
Income tax expense   $ 468       25       493  
Segment assets:                        
Additions to property, plant and equipment     185       833       1,018  
Total assets     96,192       156,096       252,288  
                         
Six months ended June 30, 2019                        
Segment profit or loss:                        
Net revenue from external customers   $ 65,353       99,919       165,272  
Income from operations   $ 2,374       397       2,771  
Interest income   $ 466       18       484  
Interest expense   $ 572       199       771  
Depreciation and amortization   $ 473       8,740       9,213  
Income tax expense   $ 1,475       805       2,280  
Segment assets:                        
Additions to property, plant and equipment     549       3,533       4,082  
Total assets     77,218       188,541       265,759  

 

  16  

 

 

    Wholesale
segment
    Retail
segment
    Total  
    (In thousands of U.S. Dollars)  
Three months ended June 30, 2020      
Segment profit or loss:                  
Net revenue from external customers   $ 22,049       28,037       50,086  
Income (loss) from operations   $ 1,675       (5,827 )     (4,152 )
Interest income   $ 314       25       339  
Interest expense   $ 501       65       566  
Depreciation and amortization   $ 329       1,681       2,010  
Income tax expense   $ 282       (16 )     266  
                         
Three months ended June 30, 2019                        
Segment profit or loss:                        
Net revenue from external customers   $ 37,251       40,065       77,316  
Income from operations   $ 1,605       345       1,950  
Interest income   $ 268       9       277  
Interest expense   $ 310       98       408  
Depreciation and amortization   $ 182       2,084       2,266  
Income tax expense   $ 1,255       200       1,455  

 

NOTE 11 SUBSEQUENT EVENTS

 

As of August 14, 2020, there is no material subsequent event to be disclosed.

 

 

  17  

 

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2020 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

 

Overview

 

Our Business

 

We are a retailer of branded fashion apparel and leading global apparel supply chain solution provider based in China. We are listed on the NASDAQ Global Market under the symbol of “EVK”.

 

We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to domestically and international recognized brands, and department stores located throughout Europe, the U.S., Japan and the People’s Republic of China (“PRC”). We focus on well-known, middle-to-high end casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC as well as sales via online stores at Tmall, Dangdang mall, JD.com, VIP.com and etc.

 

Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled workers on production lines during slow seasons. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high-quality control standards and timely delivery requirement.

 

Wholesale Business

 

We conduct our original design manufacturing (“ODM”) operations through seven wholly owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, Jiangsu province, China, Chuzhou, Anhui province, China and Samoa: Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited (“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”), Chuzhou Huirui Garments Co., Ltd. (“Huirui), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”), Nanjing Rui Lian Technology Company Limited (“Nanjing Rui Lian”), Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”).

 

Retail Business

 

We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”), Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and Xizang He Meida Trading Company Limited (“He Meida”).

 

  18  

 

 

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 June 30, 2020, we had 935 stores (including store-in-stores), which includes 19 stores that were opened and 185 stores that were closed in the first half year of 2020. We expect to open an additional 50 to 100 stores in 2020.

 

We believe that our growth opportunities and continued investment initiatives include:

 

  Building our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
     
  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.

 

  19  

 

 

Collection Policy

 

Wholesale business

 

For our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following the delivery of finished goods.

 

Retail business

 

For store-in-store shops, we generally receive payments from the stores between 60 to 90 days following the date of the register receipt. For our own flagship stores, we receive payments on the same day of the register receipt. For sales from e-commerce platforms such as Tmall, Dangdang mall, JD.com, VIP.com and etc., we generally receive payments between 5 to 15 days following the date of the register receipt.

 

Global Economic Uncertainty

 

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2020.

 

In addition, economic conditions in the United States and other foreign markets in which we operate could substantially affect our sales profitability, cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.

 

Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China from late January to March, which has adversely affected our retail business with a decline in sales since February 2020. Our wholesale business is also significantly affected as we are facing a sharp decline in our order quantities. Some of our wholesale clients have also cancelled or postponed existing orders.  Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, could have adverse ripple effects on our manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19 on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate.

 

Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. If our future sales continue to decline significantly, we may risk facing bankruptcy due to our recurring fixed expenses. The extent to which COVID-19 impacts our results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.

 

  20  

 

 

Despite the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.

 

Summary of Critical Accounting Policies

 

We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.

 

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020 (“2019 Form 10-K.”)

 

Fair Value Accounting

 

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

 

  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 June 30, 2020 and 2019, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions and trading securities that management considers to be of a high quality.

 

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

  

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

 

As of June 30, 2020, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions and trading securities (nil at December 31, 2019) with brokerage accounts that management considers to be high quality.

 

Foreign Currency Translation and Other Comprehensive Income

 

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

 

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

 

Use of Estimates

 

In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory write off.

 

  21  

 

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 ”Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

  

Results of Operations for the three months ended June 30, 2020 and 2019

 

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

    Three Months Ended June 30,  
    2020     2019  
   

(In thousands of U.S. dollars, except for

percentages)

 
Sales   $ 50,086       100.0 %   $ 77,316       100.0 %
Gross Profit   $ 14,445       28.8 %   $ 28,986       37.5 %
Operating Expense   $ 18,597       37.1 %   $ 27,036       35.0 %
(Loss) Income From Operations   $ (4,152 )     (8.3 )%   $ 1,950       2.5 %
Other Income   $ 618       1.2 %   $ 1,278       1.7 %
Income tax expense   $ 266       0.5 %   $ 1,455       1.9 %
Net (Loss) Income   $ (3,800 )     (7.6 )%   $ 1,773       2.3 %

  

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2020 and 2019.

 

    2020         2019        

Growth (Decrease)

 
Wholesale business   (In thousands of U.S. dollars)     % of
total sales 
    (In thousands of U.S. dollars)     % of
total sales
    in 2020 compared
with 2019
 
Mainland China   $ 3,111       6.2 %   $ 6,491       8.4 %     (52.1 )%
Hong Kong China     2,054       4.1       6,463       8.4       (68.2 )
Germany     48       0.1       877       1.1       (94.5 )
United Kingdom     471       0.9       2,038       2.6       (76.9 )
Europe-Other     3,612       7.2       4,224       5.5       (14.5 )
Japan     2,205       4.4       1,311       1.7       68.2  
United States     10,549       21.1       15,847       20.5       (33.4 )
Total Wholesale business     22,049       44.0       37,251       48.2       (40.8 )
Retail business     28,037       56.0       40,065       51.8       (30.0 )
Total sales   $ 50,086       100.0 %   $ 77,316       100.0 %     (35.2 )%

 

  22  

 

 

Sales for the three months ended June 30, 2020 were $50.1 million, a 35.2% decrease compared with the three months ended June 30, 2019. This decrease was primarily attributable to a 40.8% decrease in sales in our wholesale business and a 30.0% decrease in our retail business.

 

Sales generated from our wholesale business contributed 44.0% or $22.0 million of our total sales for the three months ended June 30, 2020, a 40.8% decrease compared with 48.2% or $37.3 million in the three months ended June 30, 2019. This decrease was primarily attributable to a decrease in sales in Hong Kong, Germany, Europe-Other, Mainland China, United Kingdom and United States, partially offset by an increase in sales in Japan.

 

Sales generated from our retail business contributed 56.0% or $28.0 million of our total sales for the three months ended June 30, 2020, a 30.0% decrease compared with 51.8% or $40.1 million in the three months ended June 30, 2019. This decrease was primarily due to a decrease in the numbers of stores and same store sales.

 

Costs and Expenses

 

Cost of Sales and Gross Margin

 

Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.

 

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended June 30, 2020 and 2019.  

 

                            Growth  
                            (Decrease) in  
    Three months ended June 30,     2020  
    2020     2019     Compared  
    (In thousands of U.S. dollars, except for percentages)     with 2019  
Net Sales for Wholesale Sales   $ 22,049       100.0 %   $ 37,251       100.0 %     (40.8 )%
Raw Materials     8,614       39.1       16,376       44.0       (47.4 )
Labor     299       1.4       398       1.1       (25.0 )
Outsourced Production Costs     8,623       39.1       14,409       38.7       (40.2 )
Other and Overhead     152       0.7       55       0.1       178.0  
Total Cost of Sales for Wholesale     17,688       80.3       31,238       83.9       (43.4 )
Gross Profit for Wholesale     4,361       19.7       6,013       16.1       (27.5 )
Net Sales for Retail     28,037       100.0       40,065       100.0       (30.0 )
Production Costs     13,865       49.5       10,084       25.2       37.5  
Rent     4,088       14.3       7,008       17.5       (41.7 )
Total Cost of Sales for Retail     17,953       63.8       17,092       42.7       5.0  
Gross Profit for Retail     10,084       36.2       22,973       57.3       (56.1 )
Total Cost of Sales     35,641       71.2       48,330       62.5       (26.3 )
Gross Profit   $ 14,445       28.8 %   $ 28,986       37.5 %     (50.2 )%

 

Raw material costs for our wholesale business were 39.1% of our total wholesale business sales in the three months ended June 30, 2020, compared with 44.0% in the three months ended June 30, 2019. The decrease was mainly due to lower raw material prices.

 

Labor costs for our wholesale business were 1.4% of our total wholesale business sales in the three months ended June 30, 2020, compared with 1.1% in the three months ended June 30, 2019. The marginal increase was mainly due to a higher average employee salaries in 2020.

 

  23  

 

 

Outsourced production costs for our wholesale business for the three months ended June 30, 2020 decreased 40.2% to $8.6 million from $14.4 million for the three months ended June 30, 2019. Outsourced production costs accounted for 39.1% of our total wholesale business sales in the three months ended June 30, 2020, a 40.2% decrease from the three months ended June 30, 2019. This increase in percentage was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.7% of our total wholesale business sales for the three months ended June 30, 2020, compared with 0.1% of total wholesale business sales for the three months ended June 30, 2019.

 

Wholesale business gross profit for the three months ended June 30, 2020 was $4.4 million compared with $6.0 million for the three months ended June 30, 2019. Gross profit accounted for 19.7% of our total wholesale sales for the three months ended June 30, 2020, compared with 16.1% for the three months ended June 30, 2019. The decrease was mainly due to higher average employee salaries.

 

Production costs for our retail business were $13.9 million for the three months ended June 30, 2020 compared with $10.1 million during the three months ended June 30, 2019. Retail production costs accounted for 49.5% of our total retail sales in the three months ended June 30, 2020, compared with 25.21% for the three months ended June 30, 2019. The decrease in percentage was due to decrease in overall purchase costs. 

 

Rent costs for our retail business for the three months ended June 30, 2020 were $4.1 million compared with $7.0 million for the three months ended June 30, 2019. Rent costs for our retail business accounted for 14.3% of our total retail sales for the three months ended June 30, 2020, compared with 17.5% for the three months ended June 30, 2019. The decrease was primarily attributable to the decline in number of stores.

  

Gross profit in our retail business for the three months ended June 30, 2020 was $10.1 million and gross margin was 36.2%. Gross profit in our retail business for the three months ended June 30, 2019 was $23.0 million and gross margin was 57.3%.

 

Total cost of sales for the three months ended June 30, 2020 was $35.6 million, a 26.3% decrease from $48.30 million for the three months ended June 30, 2019. Total cost of sales as a percentage of total sales for the three months ended June 30, 2020 was 71.2%, compared with 62.5% for the three months ended June 30, 2019. Gross margin for the three months ended June 30, 2020 was 28.8% compared with 37.5% for the three months ended June 30, 2019.  

 

Selling, General and Administrative Expenses

 

Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.

 

Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.

 

Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges and product inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these amounts in cost of sales.

 

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    Three Months Ended June 30,     Increase (Decrease) in 2020  
    2020     2019     Compared  
    (In thousands of U.S. dollars, except for percentages)     to 2019  
Gross Profit   $ 14,445       28.8 %   $ 28,986       37.5 %     (50.2 )%
Operating Expenses:                                        
Selling Expenses     12,626       25.2       19,699       25.5       (35.9 )
General and Administrative Expenses     5,971       11.9       7,337       9.5       (18.6 )
Total     18,597       37.1       27,036       35.0       (31.2 )
(Loss) Income from Operations   $ (4,152 )     (8.3 )%   $ 1,950       2.5 %     (312.8 )%

 

Selling expenses for the three months ended June 30, 2020 decreased 35.9% to $12.6 million from $19.7 million for the three months ended June 30, 2019. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand. 

 

General and administrative expenses for the three months ended June 30, 2020 decreased 18.6% to $6.0 million from $7.3 million for the three months ended June 30, 2019. The decrease was attributable to the decline in number of stores.

 

(Loss) Income from Operations

 

Loss from operations for the three months ended June 30, 2020 was $4.2 million, a decrease of 312.8% from $2.0 million of income for the three months ended June 30, 2019. Loss from operations for the three months ended June 30, 2020 accounted for 8.3% of our total sales, while income from operations for the three months ended June 30, 2019 accounted for 2.5% of our total sales.

 

Interest Expense

 

Interest expense for the three months ended June 30, 2020 was $0.6 million, a 38.7% increase compared with the same period in 2019. The increase was due to the increased bank loans.

 

Income Tax Expenses

 

Income tax expense was $0.3 million and $1.5 million for the three months ended June 30, 2020 and 2019, respectively.

 

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

 

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2020.

 

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

 

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

 

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

 

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

 

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Net (Loss) Income

 

Net loss for the three months ended June 30, 2020 was ($3.8 million), a 304.3% decrease compared with the same period in 2019. Our basic and diluted (loss) earnings per share were ($0.26) and $0.13 for the three months ended June 30, 2020 and 2019, respectively.

 

Results of Operations for the six months ended June 30, 2020 and 2019

 

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

    Six Months Ended June 30,  
    2020     2019  
    (In thousands of U.S. Dollars, except for percentages)  
Sales   $ 108,441       100.0 %   $ 165,272       100.0 %
Gross Profit     30,483       28.1       58,344       35.3  
Operating Expense     37,860       34.9       55,573       33.6  
(Loss) Income From Operations     (7,377 )     (6.8 )     2,771       1.7  
Other Income     1,372       1.3       827       0.5  
Income tax expense     493       0.5       2,280       1.4  
Net (Loss) Income   $ (6,498 )     (6.0 )%   $ 1,318       0.8 %

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2020 and 2019.

 

    2020           2019          

Growth (Decrease)

 
Wholesale business   (In thousands of U.S. dollars)     % of total sales     (In thousands of U.S. dollars)     % of total sales     in 2020 compared
with 2019
 
Mainland China   $ 7,764       7.2 %   $ 17,246       10.4 %     (55.0 )%
Hong Kong China     5,045       4.7       7,717       4.7       (34.6 )
Germany     243       0.2       1,726       1.0       (85.9 )
United Kingdom     1,309       1.2       2,838       1.7       (53.9 )
Europe-Other     7,511       6.9       9,453       5.7       (20.5 )
Japan     6,589       6.1       6,248       3.8       5.5  
United States     15,876       14.6       20,125       12.2       (21.1 )
Total Wholesale business     44,337       40.9       65,353       39.5       (32.2 )
Retail business     64,104       59.1       99,919       60.5       (35.8 )
Total sales   $ 108,441       100.0 %   $ 165,272       100.0 %     (34.4 )%

  

Sales for the six months ended June 30, 2020 were $108.4 million, a decrease of 34.4% from the six months ended June 30, 2019. This decrease was primarily attributable to a 32.2% decrease in sales in our wholesale business and a 35.8% decrease in our retail business.

 

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Sales generated from our wholesale business contributed 40.9% or $44.3 million of our total sales for the six months ended June 30, 2020, a decrease of 32.2% compared with 39.5% or $65.4 million in the six months ended June 30, 2019. This decrease was primarily attributable to decreased sales in Hong Kong China, Germany, Mainland China, United Kingdom, the United States and Europe-Other, partially offset by increased sales in Japan.

 

Sales generated from our retail business contributed 59.1% or $64.1 million of our total sales for the six months ended June 30, 2020, a decrease of 35.8% compared with 60.5% or $99.9 million in the six months ended June 30, 2019. This decrease was primarily due to a decrease in same store sales.

 

Total retail store square footage and sales per square foot for the six months ended June 30, 2020 and 2019 are as follows:

 

    2020     2019  
Total store square footage     989,034       1,274,661  
Number of stores     935       1,235  
Average store size, square feet     1,058       1,032  
Total store sales (in thousands of U.S. dollars)   $ 64,104     $ 99,919  
Sales per square foot   $ 65     $ 78  

   

Same store sales and newly opened store sales for the six months ended June 30, 2020 and 2019 are as follows:

 

    2020     2019  
    (In thousands of U.S. dollars)  
Sales from stores opened for a full year   $ 43,678     $ 77,984  
Sales from newly opened store sales   $ 4,636     $ 7,417  
Sales from e-commerce platform   $ 7,822     $ 6,197  
Other*   $ 7,968     $ 8,321  
Total   $ 64,104     $ 99,919  

  

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

 

We remodeled or relocated 117 stores in 2019, and 9 stores during the six months ended June 30, 2020. We plan to relocate or remodel 50-100 stores in 2020. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2020.  Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

  

Costs and Expenses

 

Cost of Sales and Gross Margin

 

Cost of goods sold includes the direct raw material cost, direct labor cost, and manufacturing overhead including depreciation of production equipment and rent, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.

 

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The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the six months ended June 30, 2020 and 2019.

 

                            Growth  
                            (Decrease) in
2020
 
    Six months ended June 30,     2020  
    2020     2019     Compared  
    (In thousands of U.S. dollars, except for percentages)     with 2019  
Net Sales for Wholesale Sales   $ 44,337       100.0 %   $ 65,353       100.0 %     (32.2 )%
Raw Materials     18,704       42.2       27,685       42.3       (32.4 )
Labor     544       1.2       705       1.1       (22.9 )
Outsourced Production Costs     16,993       38.3       24,279       37.2       (30.0 )
Other and Overhead     238       0.5       113       0.2       110.6  
Total Cost of Sales for Wholesale     36,479       82.2       52,782       80.8       (30.9 )
Gross Profit for Wholesale     7,858       17.8       12,571       19.2       (37.5 )
Net Sales for Retail     64,104       100.0       99,919       100.0       (35.8 )
Production Costs     29,712       46.3       34,286       34.3       (13.3 )
Rent     11,767       18.4       19,860       19.9       (40.7 )
Total Cost of Sales for Retail     41,479       64.7       54,146       54.2       (23.4 )
Gross Profit for Retail     22,625       35.3       45,773       45.8       (50.6 )
Total Cost of Sales     77,958       71.9       106,928       64.7       (27.1 )
Gross Profit   $ 30,483       28.1 %   $ 58,344       35.3 %     (47.8 )%

 

Raw material costs for our wholesale business were 42.2% of our total wholesale business sales in the six months ended June 30, 2020, compared with 42.3% in the six months ended June 30, 2019. The decrease was mainly due to lower cost of raw materials.

 

Labor costs for our wholesale business were 1.2% of our total wholesale business sales in the six months ended June 30, 2020, compared with 1.1% in the six months ended June 30, 2019. The marginal increase was mainly due to a higher average employee salaries in 2020.

 

Outsourced production costs for our wholesale business were 38.3% of our total sales in the six months ended June 30, 2020, compared with 37.2% in the six months ended June 30, 2019. This increase was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.5% and 0.2% of our total sales for the six months ended June 30, 2020 and 2019, respectively.

 

Gross profit for our wholesale business for the six months ended June 30, 2020 was $7.9 million, a 37.5% decrease compared with the six months ended June 30, 2019. As a percentage of total wholesale business sales, gross profit was 17.8% of our total wholesale business sales for the six months ended June 30, 2020, compared with 19.2% for the six months ended June 30, 2019. The decrease was mainly due to higher average employee salaries.

  

Production costs for our retail business for the six months ended June 30, 2020 were $29.7 million compared with $34.3 million for the six months ended June 30, 2019. As a percentage of our total retail sales, production costs were 46.3% of our total retail sales for the six months ended June 30, 2020, compared with 34.3% for the six months ended June 30, 2019. The decrease in amounts was due to decrease in overall purchase costs.

   

Rent costs for our retail business for the six months ended June 30, 2020 were $11.8 million compared with $19.9 million for the six months ended June 30, 2019. As a percentage of total retail sales, rent costs were 18.4% of our total retail sales for the six months ended June 30, 2020 compared with 19.9% for the six months ended June 30, 2019. The decrease in percentage was primarily attributable to decline in number of stores.

 

Gross profit for our retail business for the six months ended June 30, 2020 was $22.6 million compared with $45.8 million for the six months ended June 30, 2019. Gross margin for our retail business for the six months ended June 30, 2020 was 35.3% compared with 45.8% for the six months ended June 30, 2019.

 

Total cost of sales for the six months ended June 30, 2020 was $78.0 million, a 27.1% decrease compared with the six months ended June 30, 2019. As a percentage of total sales, total costs were 71.9% of total sales for the six months ended June 30, 2020, compared with 64.7% for the six months ended June 30, 2019. Total gross margin for the six months ended June 30, 2020 was 28.1% compared with 35.3% for the six months ended June 30, 2019.

  

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Selling, General and Administrative Expenses

 

Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.

 

Our general and administrative expenses include administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.

 

Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly, our gross profit amounts may not be comparable to those of other companies who include these amounts in costs of sales.

 

    Six months ended June 30,     Increase (Decrease) in 2020  
    2020     2019     Compared  
    (In thousands of U.S. dollars, except for percentages)     to 2019  
Gross Profit   $ 30,483       28.1 %   $ 58,344       35.3 %     (47.8 )%
Operating Expenses:                                        
Selling Expenses     26,105       24.1       40,706       24.6       (35.9 )
General and Administrative Expenses     11,755       10.8       14,867       9.0       (20.9 )
Total     37,860       34.9       55,573       33.6       (31.9 )
(Loss)Income from Operations   $ (7,377 )     (6.8 )%   $ 2,771       1.7 %     (366.2 )%

   

Selling expenses for the six months ended June 30, 2020 were $26.1 million, a 35.9% decrease compared with the six months ended June 30, 2019. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand. 

 

General and administrative expenses for the six months ended June 30, 2020 were $11.8 million a 20.9% decrease compared with the six months ended June 30, 2019. As a percentage of total sales, general and administrative expenses accounted for 10.8% of total sales for the six months ended June 30, 2020, compared with 9.0% of total sales for the six months ended June 30, 2019. The decrease in amounts was attributable to the decline in number of stores.

 

(Loss)Income from Operations

 

Loss from operations for the six months ended June 30, 2020 was $7.4 million, a 366.2% decrease from $2.8 million of income for the six months ended June 30, 2019. This decrease was due to decreased sales. 

 

Interest Expense

 

Interest expense was $0.9 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively. The increase was due to the increased bank loans.

 

Income Tax Expense

 

Income tax expense for the six months ended June 30, 2020 was $0.5 million, a 78.4% decrease compared to the same period of 2019. The decrease was primarily due to deferred tax asset valuation allowance which resulted in a slightly higher income tax expense.

 

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Net (Loss) Income

 

Net loss for the six months ended June 30, 2020 was $6.5 million, a decrease of 593.0% compared with the net income from the same period in 2019. Basic and diluted (loss) earnings per share were ($0.44) and $0.09 for the six months ended June 30, 2020 and 2019, respectively.

 

Summary of Cash Flows

 

Summary cash flows information for the six months ended June 30, 2020 and 2019 is as follows:

 

    2020     2019  
    (In thousands of U.S. dollars)  
Net cash provided by (used in) operating activities   $ 17,041     $ (9,785 )
Net cash used in investing activities   $ (1,843 )   $ (4,082 )
Net cash provided by (used in) financing activities   $ 11,720     $ (889 )

 

Net cash provided by operating activities was $17.0 million for the six months ended June 30, 2020, compared with $9.8 million net cash used in operating activities during the six months ended June 30, 2019. The increase was primarily due to increase in collection of accounts receivable.

 

Net cash used in investing activities was $1.8 million for the six months ended June 30, 2020, compared with $4.1 million used during the six months ended June 30, 2019. This decrease was mainly due to purchase of less property and equipment and decrease in remodeling expenditure in 2020.

 

Net cash provided by financing activities was $11.7 million for the six months ended June 30, 2020, compared with $0.9 million net cash used during the six months ended June 30, 2019. During the six months ended June 30, 2020, we repaid $21.2 million of bank loans and received additional bank loan proceeds of $32.0 million. Under the counter-guarantee agreement, we received $4.0 million from and paid $3.1 million to the related party during the six months ended June 30, 2020.

 

Liquidity and Capital Resources

 

As of June 30, 2020, we had cash and cash equivalents of $59.2 million, other current assets of $127.3 million and current liabilities of $132.1 million. We presently finance our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue to be our primary source of funds to finance our short-term cash needs.

 

Bank Loans

 

In December 2019, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $5.7 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2020, Goldenway had borrowed $5.7 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due on August 2020.

 

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.1 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2020, Ever-Glory Apparel had borrowed $14.1 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.92% to 4.35% and due on from September 2020 to May 2021.

 

In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.7 million (RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2020, approximately $5.7 million was unused and available under this line of credit. In March 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $15.5 million (RMB110.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.85% to 3.99%. In April 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $15.5 million (RMB 110.0 million) under this line of certificate with an annual interest rate of 2.02% and due on July 2020. On July 2020, Ever-Glory Apparel repaid the loan and borrowed $11.3 million (RMB 80.0 million) under this line of certificate with an annual interest rate of 2.50% and due on July 2021.

 

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In October 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2020, LA GO GO had borrowed $2.8 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 5.0% and due in November 2020.  

 

In April 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.2 million (RMB30.0 million) with Bank of China and guaranteed by Jiangsu Ever-Glory. These loans are also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Chuzhou Huarui, under a collateral agreement executed by Ever-Glory Apparel, Chuzhou Huarui and Bank of China. As of June 30, 2020, Ever-Glory Apparel had borrowed $2.1 million (RMB 15.0 million) under this line of credit with an annual interest rate of 4.57% and due on September 2020. As of June 30, 2020, approximately $2.1 million was unused and available under this line of credit.  

 

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2020, approximately $7.1 million was unused and available under this line of credit.

 

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.5 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2020, approximately $8.5 million was unused and available under this line of credit.

 

In June 2019, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2020, approximately $2.8 million was unused and available under this line of credit.

  

In September 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of June 30, 2020, approximately $2.8 million was unused and available under this line of credit.

 

In August 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 30, 2020, approximately $2.5 million was unused and available under this line of credit.

 

All bank loans are used to fund our daily operations. All loans have been repaid before or at maturity date.

  

Capital Commitments

 

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

  

Uses of Liquidity

 

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

 

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Sources of Liquidity

 

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

 

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

 

As of June 30, 2020, we had access to approximately $56.2 million in lines of credit, of which approximately $31.5 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately $37.3 million (RMB 260.0 million) and approximately $3.7 million (RMB 26.4 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of June 30, 2020.

 

Foreign Currency Translation Risk

 

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2020, the market foreign exchange rate had increased to RMB 7.08 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.

 

In addition, the financial statements of subsidiaries located in China (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain (loss) for the three and six months ended June 30, 2020 and 2019 was ($0.26) million, ($1.70) million, ($2.49) million and $1.49 million, respectively.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

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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 June 30, 2020. 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 second quarter of 2020, 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.

 

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PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in claims, suits, investigations and proceedings arising in the ordinary course of business.

 

In 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 RMB0.27 million ($0.04 million) per month in the Shanghai People’s Court for Jiading District (the “District Court”). The rent arrears began accumulating from April 2018 to the actual payment date. In July 2019, Shanghai Chijing filed counterclaims against LA GO GO to claim RMB10.19 million ($1.45 million) in damages, alleging that LA GO GO had not fulfilled its corresponding obligations as a landlord. As a result, the District Court froze the bank accounts of both Shanghai Chijing and LA GO GO. As of December 31, 2019, a total balance of RMB15.38 million ($2.2 million) was frozen in the bank accounts of LA GO GO. As of December 31, 2019, the Company had booked this restricted cash in other receivables. On March 10, 2020, the District Court entered a judgment in favor of LA GO GO and dismissed most of Shanghai Chijing’s counterclaims. The District Court ordered Shanghai Chijing to pay to LA GO GO an aggregate sum of RMB4.77 million ($0.68 million), which is the accumulated unpaid rent from April 2018 to January 2020. The District Court also ordered LA GO GO to pay Shanghai Chijing RMB1.49 ($0.21 million) for the expenses incurred from remodeling. Both parties were required to pay the monetary damages within ten days after the District Court’s decision. LA GO GO appealed to the Shanghai Second Appellate Court (the “Appellate Court”) to claim more damages, while Shanghai Chijing appealed to reverse the judgment. LA GO GO later requested to withdraw its appeal, which was granted by the Appellate Court. In June 2020, the Appellate Court entered a final decision to dismiss the appeal of Shanghai Chijing and sustained the District Court’s judgment. LA GO GO has not received RMB4.77 million ($0.68 million) in monetary damages from Shanghai Chijing as of June 30, 2020, and has applied for compulsory enforcement with the District Court. The total balance of RMB15.38 million ($2.2 million) in LA GO GO’s bank accounts were unfrozen after the final decision in July.

 

ITEM 1A. RISK FACTORS

 

As of the date of this report and except as set forth below, there have been no material changes to the risk factors disclosed in our annual report on Form 10-K filed with the SEC on March 30, 2020.

 

Unfavorable global economic conditions, including as a result of health and safety concerns, could adversely affect our business, financial condition or results of operations.

 

The Company’s results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of its control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China has resulted in the reduction of customer traffic and temporary closures of shopping malls as mandated by the provincial governments in various provinces of China from late January to March, which has adversely affected the company is the retail business with a decline in sales since February 2020. The Company’s wholesale business is also significantly affected as the Company is facing a sharp decline in its order quantities. Some of the Company’s wholesale clients have also cancelled or postponed existing orders.  Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where the Company’s suppliers are located, The Company’s supply chain and business operations of its suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of the Company’s or its suppliers’ or customers’ products, could have adverse ripple effects on the Company’s manufacturing output and delivery schedule. The Company could also face difficulties in collecting its accounts receivables due to the effects of COVID-19 on its customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which the Company, its suppliers and customers operate.

 

34  

 

 

Although China has already begun to recover from the outbreak of COVID-19, the epidemic continues to spread on a global scale and there is the risk of the epidemic returning to China in the future, thereby causing further business interruption. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect the Company’s liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of its common stock. If the Company’s future sales continue to decline significantly, it may risk facing financial difficulties due to its recurring fixed expenses. The extent to which COVID-19 impacts the Company’s operating is uncertain and cannot be predicted at this time, and it will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others. 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. 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 June 30, 2020:

 

    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  

 

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ITEM 6. EXHIBITS

 

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

 

36  

 

 

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.

 

August 13, 2020 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)

 

 

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