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 September 30, 2017March 31, 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:  0-28806

 

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

 

Florida 65-0420146

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

 

(8625) 5209-683186-25-5209-6831

(Registrant’s (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, and posted on its corporate Web site, if any, 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 ☒ YesNo ☐ 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,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.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 pursuant to Section 13(a)7(a)(2)(B) of the ExchangeSecurities Act.  ☐

 

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

 

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

Title of each classTrading 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 November 11, 2016, 14,795,992May 8, 2020, 14,804,832 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 STATEMENTSii
   
PART I.  FINANCIAL INFORMATION 
   
Item 1.  Financial Statements1
   
 Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited)March 31, 2020 and December 31, 20162019 (unaudited)1
   
 Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017March 31, 2020 and 20162019 (unaudited)2
   
 Condensed Consolidated Statements of Cash FlowsEquity for the NineThe Three Months Ended September 30, 2017March 31, 2020 and 20162019 (unaudited)3
   
 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)4
Notes to the Condensed Consolidated Financial Statements (unaudited)45
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations1418
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk27
Item 4.  Controls and Procedures28
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings29
Item 1A.Risk Factors29
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds29
Item 3.  Defaults Upon Senior Securities29
   
Item 4.  Controls and Procedures29
PART II.  OTHER INFORMATION 30
Item 1.  Legal Proceedings30
Item 1A.Risk Factors 30
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3.  Defaults Upon Senior Securities 30
Item 4.  Mine Safety Disclosure29 30
   
Item 5.  Other Information29 30
   
Item 6.  Exhibits29 31
   
SIGNATURES3032

  

i

 

 

Cautionary Note Regarding Forward-Looking Statements

 

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

 

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

 

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

 

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

  

ii

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.Financial Statements

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

AS OF SEPTEMBER 30, 2017 (UNAUDITED)MARCH 31, 2020 AND DECEMBER 31, 20162019 (UNAUDITED)

 

 2017  2016 
      2020  2019 
ASSETS          
     
CURRENT ASSETS          
Cash and cash equivalents $40,799  $45,288  $70,036  $48,551 
Accounts receivable, net  82,550   67,644   42,265   78,053 
Inventories  50,116   49,630   52,152   67,355 
Advances on inventory purchases  1,248   2,495 
Value added tax receivable  3,844   2,938   6,961   7,497 
Other receivables and prepaid expenses  6,672   3,674   6,723   9,681 
Advances on inventory purchases  4,927   3,139 
Amounts due from related parties  934   486   102   123 
Total Current Assets  189,842   172,799   179,487   213,755 
                
INTANGIBLE ASSETS  5,881   5,769 
PROPERTY AND EQUIPMENT, NET  23,815   22,694 
NONCURRENT ASSETS       ��
Intangible assets, net  4,529   4,729 
Property and equipment, net  26,886   28,812 
Operating lease right-of-use assets  42,583   53,379 
Deferred tax assets  878   996 
Total Non-Current Assets  74,876   87,916 
TOTAL ASSETS $219,538  $201,262  $254,363  $301,671 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
CURRENT LIABILITIES                
Bank loans $44,937  $29,232  $26,104  $29,931 
Accounts payable  56,447   58,170   52,173   72,418 
Accounts payable and other payables - related parties  4,660   4,337 
Accounts payable and other payables – related parties  3,889   4,811 
Other payables and accrued liabilities  13,690   15,007   13,033   19,137 
Value added and other taxes payable  2,728   5,118   598   1,657 
Income tax payable  1,651   1,842   121   1,142 
Current operating lease liabilities  34,315   44,888 
Total Current Liabilities  124,113   113,706   130,233   173,984 
                
NONCURRENT LIABILITIES                
Deferred tax liabilities  1,345   3,254 
Non-current operating lease liabilities  8,325   8,537 
TOTAL LIABILITIES  125,458   116,960   138,558   182,521 
                
COMMITMENTS AND CONTINGENCIES                
                
STOCKHOLDERS’ EQUITY                
Stockholders’ equity:                
Preferred stock ($.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)  -   - 
Common stock ($.001 par value, authorized 50,000,000 shares, 14,792,836 and 14,787,940 shares issued and outstanding As of September 30, 2017 and December 31, 2016, respectively)  15   15 
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 March 31, 2020 and December 31, 2019, respectively)  15   15 
Additional paid-in capital  3,612   3,602   3,645   3,640 
Retained earnings  90,318   83,423   103,627   106,328 
Statutory reserve  17,107   17,107   19,939   19,939 
Accumulated other comprehensive income  50   (3,297)
Accumulated other comprehensive loss  (5,770)  (4,330)
Amounts due from related party  (15,999)  (15,936)  (4,147)  (4,932)
Total equity attributable to stockholders of the Company  95,103   84,914   117,309   120,660 
Noncontrolling interest  (1,023)  (612)  (1,504)  (1,510)
Total Equity  94,080   84,302   115,805   119,150 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $219,538  $201,262  $254,363  $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)LOSS (INCOME)
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AND 20162019 (UNAUDITED)

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
NET SALES $120,257  $109,926  $285,148  $282,295 
COST OF SALES  87,007   80,312   192,740   197,623 
                 
GROSS PROFIT  33,250   29,614   92,408   84,672 
                 
OPERATING EXPENSES                
Selling expenses  20,238   18,522   60,206   55,477 
General and administrative expenses  10,167   9,862   24,900   24,128 
Total Operating Expenses  30,405   28,384   85,106   79,605 
                 
INCOME FROM OPERATIONS  2,845   1,230   7,302   5,067 
                 
OTHER INCOME (EXPENSES)                
Interest income  370   233   909   854 
Interest expense  (562)  (580)  (1,207)  (1,511)
Other income  1,987   253   3,088   939 
Total Other Income (Expenses)  1,795   (94)  2,790   282 
                 
INCOME BEFORE INCOME TAX EXPENSE  4,640   1,136   10,092   5,349 
Income tax expense  (1,522)  (724)  (3,573)  (2,385)
                 
NET INCOME  3,118   412   6,519   2,964 
                 
Net loss attributable to the non-controlling interest  115   208   376   441 
NET INCOME ATTRIBUTABLE TO THE COMPANY  3,233   620   6,895   3,405 
                 
NET INCOME $3,118  $412  $6,519  $2,964 
                 
Foreign currency translation income(loss)  1,823   (471)  3,345   (2,860)
COMPREHENSIVE INCOME (LOSS)  4,941   (59)  9,864   104 
                 
Comprehensive loss attributable to the non-controlling interest  133   205   411   434 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY $5,074  $146  $10,275  $538 
                 
EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS                
Basic and diluted $0.22  $0.04  $0.47  $0.23 
Weighted average number of shares outstanding                
Basic and diluted  14,792,836   14,787,940   14,791,778   14,787,044 
  2020  2019 
       
SALES $58,355  $87,956 
         
COST OF SALES  42,317   58,598 
         
GROSS PROFIT  16,038   29,358 
         
OPERATING EXPENSES        
Selling expenses  13,478   21,008 
General and administrative expenses  5,785   7,529 
Total operating expenses  19,263   28,537 
   　     　   
(LOSS) INCOME FROM OPERATIONS  (3,225)  821 
         
OTHER INCOME (EXPENSE)        
Interest income  277   207 
Interest expense  (341)  (363)
Other income (expense), net  818   (295)
Total other income (expense), net  754   (451)
         
(LOSS) INCOME BEFORE INCOME TAX  (2,471)  370 
         
INCOME TAX EXPENSE  (227)  (825)
         
NET LOSS  (2,698)  (455)
Net (income) loss attributable to the non-controlling interest  (3)  (66)
NET LOSS ATTRIBUTABLE TO THE COMPANY $(2,701) $(521)
         
NET LOSS $(2,698) $(455)
Foreign currency translation gain (loss)  (1,437)  4,006 
COMPREHENSIVE (LOSS) INCOME $(4,135) $3,551 
         
Comprehensive loss attributable to the noncontrolling interest  6   100 
         
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY $(4,129) $3,651 
EARNINGS (LOSS) PER SHARE:        
Basic and diluted $(0.18) $(0.04)
Weighted average number of shares outstanding Basic and diluted  14,804,832   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 CASH FLOWSEQUITY
(In thousands of U.S. Dollars, except share and per share data or otherwise stated)

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017March 31, 2020 AND 2016 (UNAUDITED)2019 (Unaudited)

 

  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income $6,519  $2,964 
Adjustments to reconcile net income to cash provided by operating activities:        
Depreciation and amortization  5,066   5,337 
Loss from sale of property and equipment  5   40 
Provision of bad debt allowance  679   975 
Inventory write-down  4,624   7,111 
Deferred income tax  (2,004)  (79)
Stock-based compensation  10   5 
Changes in operating assets and liabilities        
Accounts receivable  (12,805)  4,127 
Inventories  (3,423)  19,293 
Value added tax receivable  (762)  (2,452)
Other receivables and prepaid expenses  (3,395)  (638)
Advances on inventory purchases  (1,619)  1,618 
Amounts due from related parties  (937)  1,918 
Accounts payable  (3,738)  (14,467)
Accounts payable and other payables- related parties  232   630 
Other payables and accrued liabilities  (2,219)  (3,289)
Value added and other taxes payable  (2,561)  (1,987)
Income tax payable  (256)  (2,460)
Net cash used in (provided by) operating activities  (16,584)  18,646 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of property and equipment  (4,356)  (8,577)
Net cash used in investing activities  (4,356)  (8,577)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from bank loans  47,570   75,263 
Repayment of bank loans  (33,372)  (69,125)
Repayment of loans from related party  7,596   1,824 
Advances to related party  (6,464)  (1,216)
Net cash provided by financing activities  15,330   6,746 
         
EFFECT OF EXCHANGE RATE CHANGES ON CASH  1,121   (1,200)
       　 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (4,489)  15,615 
       　 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  45,288   22,702 
       　 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $40,799  $38,317 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
         
Cash paid during the period for:        
         
Interest $1,207  $1,511 
Income taxes $4,521  $5,362 
     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-based compensation  3,062   0.003   5   -   -   -   -   5       5 
Net income (loss)  -   -   -   (2,701)      -   -   (2,701)  3   (2,698)
Net cash received from (paid to) related party under counter guarantee agreement  -   -   -   -   -   -   785   785   -   785 
Foreign currency translation income (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 

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

 

See the accompanying notes to the condensed consolidated financial statements.


EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

 

3

  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES      
Net loss $(2,698) $(455)
Adjustments to reconcile net loss to cash provided by operating activities:  　   　 
Depreciation and amortization  1,587   2,225 
Gain on disposal of intangible assets  (268)  - 
Loss from sale of property and equipment  102   52 
Provision of bad debt allowance  278   - 
Provision for obsolete inventories  4,204   1,824 
Deferred income tax  104   (145)
Stock-based compensation  5   8 
Changes in operating assets and liabilities        
Accounts receivable  34,906   31,027 
Inventories  10,303   10,557 
Value added tax receivable  210   1,406 
Other receivables and prepaid expenses  364   3,975 
Advances on inventory purchases  2,855   490 
Amounts due from related parties  142   103 
Accounts payable  (19,864)  (26,505 
Accounts payable and other payables- related parties  (1,038)  (741)
Other payables and accrued liabilities  (5,587)  (9,565)
Value added and other taxes payable  (31)  (2,788)
Income tax payable  (1,019)  (327)
Net cash provided by operating activities  24,555   11,141 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchase of property and equipment  (78)  (2,131)
Disposal of intangible assets  353   - 
Net cash provided by (used in) investing activities  275   (2,131)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from bank loans  11,464   6,029 
Repayment of bank loans  (14,884)  (7,408)
Repayment of counter guarantee from related party  748   3,488 
Advances to related party  -   (2,163)
Net cash provided by (used in) financing activities  (2,672)  (54)
         
EFFECT OF EXCHANGE RATE CHANGES ON CASH  1,497   1,908 
         
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  23,655   10,864 
         
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD  48,551   47,012 
         
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $72,206  $57,876 
         
Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets:        
         
Cash and Cash Equivalents  70,036   47,012 
Restricted cash (booked in other receivables and prepaid expenses)  2,170   - 
  $72,206  $47,012 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
         
Cash paid during the period for:        
Interest $341  $363 
Income taxes $1,218  $126 

 

See the accompanying notes to the condensed consolidated financial statements.


EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AND 20162019

(UNAUDITED)

 

NOTE 1 BASIS OF PRESENTATION

 

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

 

The Company’s wholesale operations are provided primarily through the Company’s wholly-owned PRC subsidiaries, Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), Nanjing Catch-Luck Garments Co. Ltd. (“Catch-Luck”), Nanjing New-Tailun Garments Co. Ltd (“New-Tailun”), Haian Tai Xin Garments Trading Company Limited (“Haian Tai Xin”), Ever-Glory International Group Apparel Inc.(“Ever-Glory Apparel”), Chuzhou Huirui Garments Co. Ltd. (“Huirui”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”) and Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”).  The Company’s retail operations are provided through its wholly- owned subsidiaries, Shanghai LA GO GO Fashion Company Limited (“Shanghai 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 YaLanYa Lan Fashion Company Limited (“YaLan”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 September 30, 2017,March 31, 2020 the condensed consolidated statements of income (loss) and comprehensive income (loss)income(loss), condensed consolidated statements of equity, and cash flows for the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

 

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. 


NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

We recognizeThe company recognizes wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable.customer. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable.sales. Retail sales are recorded net of promotional discounts, rebates, and return allowances. Retail store sales are recognized at the time of the register receipt. Retail online sales are recognized when products are shipped and customers receive the products because we retain a portion of the risk of loss on these sales during transit.

 

Financial InstrumentsOur revenue recognition policy is in compliance with ASC 606,Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:

 

(i)identification of the promised goods and services in the contract;

Management has estimated

(ii)determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract;

(iii)measurement of the transaction price, including the constraint on variable consideration;

(iv)allocation of the transaction price to the performance obligations; and

(v)recognition of revenue when (or as) the Company satisfies each performance obligation.

We only apply the five-step model to contracts when it is probable that we will collect the carrying amountsconsideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of non-related party financial instruments approximate their fair values dueASC 606 at contract inception, we review the contract to their short-term maturities. The fairdetermine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery for local sales and upon shipment of the products for export sale.

For all reporting periods, we have not disclosed the value of amounts due from (to) related partiesunsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is not practicable to estimate due toan optional exemption that is permitted under the related party nature of the underlying transactions.adopted rules.


Accounts Receivable, net

 

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history of its customers and current relationships with them. The Company writes off accounts receivable when amounts are deemed uncollectible.

 

4

For the three months ended March 31, 2020 and 2019, $0.26 million and $0 million of bad debt expenses have been provided in the consolidated financial statements, respectively. The allowance for doubtful account balances as of March 31, 2020 and December 31, 2019 are $5.6 million and $5.3 million, respectively. 

  

Fair Value Accounting

 

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

 

 Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 Level 2Quoted 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 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The fair value of forward exchange contracts is based on broker quotes, if available. If broker quotes are not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price at the reporting date for the residual maturity of the contract using a risk-free interest rate based on government bonds.

At September 30, 2017,March 31, 2020 and December 31, 2019, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

 

AsManagement has estimated that the carrying amounts of September 30, 2017,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 two derivative liability subjectsadopted ASC 825-10 “Financial Instruments”, which allows an entity to recurringchoose to measure certain financial instruments and liabilities at fair value on a contract-by-contract basis. Subsequent fair value measurement (Level 3) withfor the change in fair valuefinancial instruments and liabilities an entity chooses to measure will be recognized in earnings (Note 5).earnings.

 

Foreign Currency Translation and Other Comprehensive Income (Loss)

 

The reporting currency of the Company is the U.S. dollar. The functional currency of Ever-Glory, Perfect Dream, Ever-Glory HK and Ever-Glory HKSupply 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, YaLan,Ya Lan, He Meida, Huirui, Taixin, Haian Taixin and TaixinNanjing 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 income and comprehensive income (loss) were translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the cash flow statement are translated at the average exchange rate for the period. 

 

Income Taxes

ASC 740 states “Deferred tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be recognized.” A deferred tax asset is a tax reduction whose recognition is delayed due to deductible temporary differences and loss carryforwards. This can result in a change in taxes payable or refundable in future periods. A business should create a valuation allowance for a deferred tax asset if there is a more than 50% probability that the company will not realize some portion of the asset. Any changes to this allowance are to be recorded within income from continuing operations on the income statement. The need for a valuation allowance is especially likely if a business has a history of letting various loss carryforwards expire unused, or it expects to incur losses in the next few years.

Lease

The Company adopted ASC No. 842, Leases effective January 1, 2019 to account for all Company’s leases. All leases are recorded in the balance sheets. The lease liability is measured at present value of outstanding lease payments, both at commencement date and subsequently. The discount rate is generally the Company’s incremental borrowing rate as the lessor’s rate implicit in the lease is not readily determinable. The right-of-use (ROU) asset costs at commencement date consist of initial lease liability, any initial direct costs, and any lease payments made to the lessor at or before the commencement date, minus any lease incentives received. Subsequently, the carrying amount of ROU asset is derived from the carrying amount of the lease liability, plus unamortized direct costs and prepaid lease payments, and minus unamortized balance of lease incentives received. The annual amortization expenses will be recorded in consolidated statement of operations and allocating between cost of sales and operating expenses.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, which supersedes the revenue recognition inRevenue Recognition(Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.   

In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09,Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

5

 

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, 2019.2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

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


NOTE 3 INVENTORIES

 

Inventories at September 30, 2017March 31, 2020 and December 31, 20162019 consisted of the following:

 

 September 30,
2017		  December 31,
2016		  March 31,
2020		  December 31,
2019		 
 (In thousands of U.S. Dollars)  (In thousands of
U.S. Dollars)		 
Raw materials $1,750  $1,604  $1,137  $1,468 
Work-in-progress  17,572   9,347   10,081   8,025 
Finished goods  30,794   38,679   40,934   57,862 
Total inventories $50,116  $49,630  $52,152  $67,355 

 

NOTE 4 BANK LOANS

 

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short-termShort term bank loans consisted of the following as of September 30, 2017March 31, 2020 and December 31, 2016.2019.

 

 September 30,
2017		  December 31,
2016		  March 31,
2020		  December 31,
2019		 
Bank (In thousands of U.S. Dollars)  (In thousands of
U.S. Dollars)		 
Industrial and Commercial Bank of China $21,028  $11,232  $19,754  $18,629 
Nanjing Bank  8,272   9,360   3,528   6,449 
China Minsheng Bank  2,822   2,866 
Bank of Communications  -   1,426 
HSBC  3,191   -   -   561 
China Everbright Bank  3,004   2,880 
Bank of Communications  3,004   2,880 
China Minsheng Banking  3,004   2,880 
Bank of China  2,082   - 
China Citic Bank  1,352   - 
 $44,937  $29,232  $26,104  $29,931 

 

In January 2014,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 $9.0$5.6 million (RMB60.0(RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of September 30, 2017,March 31, 2020, Goldenway had borrowed $6.0$5.6 million (RMB 40.0(RMB40.0 million) under this linefrom Industrial and Commercial Bank of creditChina with an annual interest rate of 4.6%4.57% and due on various dates from December 2017 to January 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.  August 2020.

 

In September 2015,November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.0$14.1 million (RMB120.0(RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of September 30, 2017,March 31, 2020, Ever-Glory Apparel had borrowed $15.0$14.1 million (RMB 100.0 million) under this line of credit with annual interest rate of 4.6%rates ranging from 3.92% to 4.7% and due on various dates from October 2017May 2020 to September 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.March 2021.

  

In June 2016,August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5$7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of September 30, 2017,March 31, 2020, approximately $7.5$7.1 million was unused and available under this line of credit.

 

6

In June 2016,August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.0$8.5 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2017,March 31, 2020, Ever-Glory Apparel had borrowed $6.0$1.4 million (RMB40.0(RMB10.0 million) from Nanjing Bank with an annual interest rate of 4.4%5.0% and due on various dates from Jan to March 2018. Ever-Glory Apparel had also borrowed $0.8 million from Nanjing Bank with an annual interest rate of 2.4% and due in October 2017, and collateralized by approximately $0.9 million of accounts receivable from our wholesale customers.June 2020. As of September 30, 2017,March 31, 2020, approximately $2.2$7.1 million was unused and available under this line of credit.

 

In March 2017,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 $3.0$2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of September 30, 2017,March 31, 2020, LA GO GO had borrowed $1.5$2.1 million (RMB10.0(RMB15.0 million) from Nanjing Bank under this line of credit with an annual interest rate of 5.22% and due in June 2020. As of March 31, 2020, approximately $0.7 million was unused and available under this line of credit.


In June 2018, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2020, LA GO GO had borrowed $2.8 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 5.0% and due in May 2018.November 2020.  

In September 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of September 30, 2017,March 31, 2020, approximately $1.5$2.8 million (RMB10.0 million) was unused and available under this line of credit.

 

In January 2015,September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.6 million (RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2020, approximately $5.6 million was unused and available under this line of credit.

In August 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $12.6$2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.2 million from HSBC with an annual interest rate of 3.0% and due in August 2017, and collateralized byMarch 31, 2020, approximately $3.8 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $9.4$2.5 million was unused and available under this line of credit.

 

In July 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with an annual interest rates ranging from 2.8% to 3.0% and due in November 2017. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.

In June 2014, LA GO GO entered into a line of credit agreement for approximately $4.9 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 4.6% to 5.0% and due on various dates from November 2017 to September 2018. As of September 30, 2017, approximately $1.9 million was unused and available under this line of credit.

In December 2016, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.6% and due in December 2017.  

In October 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.7 million (RMB25.0 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 September 30, 2017, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest rate of 4.8% and due in November 2017. Ever-Glory Apparel had also borrowed $0.6 million from Bank of China with an annual interest rate of 1.7% and due in October 2017, and collateralized by approximately $0.7 million of accounts receivable from our wholesale customers. TheseAll bank loans are used to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $1.6 million was unused and available under this line of credit.    

In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.4 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $1.4 million (RMB9.0 million) under this line of credit with an annual interest rate of 5.5% and due in December 2017. As of September 30, 2017, approximately $4.0 million was unused and available under this line of credit.

fund our daily operations. All loans have been repaid before or at maturity date.

 

Total interest expense on bank loans amounted to $0.6 million, $1.2 million, $0.6$0.3 million and $1.5$0.4 million for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

 

NOTE 5 DERIVATIVE LIABILITY

As of September 30, 2017, the Company had two outstanding forward foreign exchange contracts (sell EUR dollars for RMB) with total notional amount of EUR€0.39 million. As of December 31, 2016, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR€0.65 million. The fair value of these contracts as of September 30, 2017 and December 31, 2016, as well as realized gains and losses on these foreign currency derivative activities during 2016 and the nine months ended September 30, 2017 were not significant.

7

NOTE 6 INCOME TAX

 

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

 

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2017.2020.

 

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.

 

AlthoughEver-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the Company’s parent entity is a U.S. entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outsidecurrent laws of China in Southeast Asia, and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide forHongkong, its income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating its tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.

The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million should be made by the Company prospectively over the next two to three years’ period. All $3.2 million was paid off as of December 31, 2016. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC. is 8.25% when its profit is under HKD 2.0 million and its income tax rate is 16.5% when its profit is over HKD 2.0 million.

 

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

 


After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for the threeyears ended March 31, 2020 and nine months ended September 30, 2017 and 20162019 was taxable in the following jurisdictions:

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands of U.S. Dollars) 
PRC $4,641  $1,135  $10,097  $5,353 
BVI  -   4   -   4 
Others  (1)  (3)  (5)  (8)
 $4,640  $1,136  $10,092  $5,349 

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  2020  2019 
  (In thousands of
U.S. Dollars)		 
PRC $(1,748) $389 
BVI  (720)  (2)
Others  (3)  (5)
  $(2,471) $382 

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
PRC statutory rate  25.0%  25.0%  25.0%  25.0%
Effect of foreign income tax rates  -   (0.1)  -   - 
Net operating losses for which no deferred tax assets was recognized  7.8   38.8   10.4   19.6 
Other  -   -   -   - 
Effective income tax rate  32.8%  63.7%  35.4%  44.6%
  2020  2019 
PRC statutory rate  25.0%  25.0%
Temporary difference between US GAAP and PRC tax accounting  (34.2)  198.0 
Effective income tax rate  (9.2)%  223.0%

 

Income tax expense for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:

 

 Three months ended Nine months ended 
 September 30, September 30,  2020  2019 
 2017 2016 2017 2016  (In thousands of
U.S. Dollars)		 
Current $1,752 $799 $5,482 $2,543  $345  $495 
Deferred  (230)  (75)  (1,909)  (158)  (118)  330 
Income tax expense $1,522 $724 $3,573 $2,385  $227  $825 

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

 

The Company has not recorded U.S. deferred income taxes on approximately $90.3$103.6 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriatedOn 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 United States,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 required to accrue and pay U.S. federalliable for payment of income taxes and foreign withholding taxes, as adjusted for foreign tax, credits. Determinationor reduction of the amountnet operating loss carryover, at a reduced rate for any accumulated earnings and profits of any unrecognizedits 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 incometaxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax liability on these earnings is not practicable.   expense (income) relating to the Tax Act changes for the three months ended March 31, 2020.


NOTE 76 EARNINGS PER SHARE

 

The following demonstrates the calculation for earnings per share for the three and nine months ended September 30, 2017March 31, 2020 and 2016: 2019:

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
Weighted average number of common shares – Basic and diluted  14,792,836   14,787,940   14,791,778   14,787,044 
Earnings per share – Basic and diluted $0.22  $0.04  $0.47  $0.23 
  2020  2019 
Weighted average number of common shares- Basic and diluted  14,804,832   14,800,140 
         
Earnings (loss) per share - basic and diluted $(0.18) $(0.04)

  

NOTE 87 STOCKHOLDERS’ EQUITY

 

On April 29, 2016,January 31, 2019, the Company issued an aggregate of 2,0721,942 shares of itsthe Company’s common stock to two of the Company’s independent directors as compensation for their services inrendered during the third and fourth quartersquarter of 2015.2018. The shares issued in 2019 were valued at $2.43$3.8 per share, which was the average market price of the common stock for the five days before the grant date.

 

On February 28, 2017,January 15, 2020, the Company issued an aggregate of 2,5423,062 shares of itsCompany’s common stock to two of the Company’s independent directors as compensation for their services in the first and second quarters of 2016. The shares were valued at $1.96 per share, which was the average market price of the common stock for the five days before the grant date.

On February 28, 2017, the Company issued an aggregate of 2,354 shares of its common stock to two of the Company’s independent directors as compensation for their services inrendered during the third and fourth quartersquarter of 2016.2019. The shares issued in 2020 were valued at $2.14$1.41 per share, which was the average market price of the common stock for the five days before the grant date. 

On October 19, 2017, the Company issued an aggregate of 3,156 shares of its common stock to two of the Company’s independent directors as compensation for their services in the first, second and third quarters of 2017. The shares were valued at $2.37 per share, which was the average market price of the common stock for the five days before the grant date.   

9

 

NOTE 98 RELATED PARTY TRANSACTIONS

 

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

 

Other income from Related Parties

  

Jiangsu Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter of 2014. During the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, the Company received $8,580, $26,063, $9,747$2,517 and $21,002$31,479 from the customers and paid $7,095, $20,651, $6,483$2,517 and $16,768$25,838 to Wubijia through the consignment, respectively. The net (loss) profit of $1,483, $5,411, $3,264$0 and $4,234$5,641 was recorded as other income (expenses) during the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

Nanjing Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s retail stores since the third quarter of 2015. During the three and nine months ended September 30, 2017 and 2016, the Company received $30, $6,395, $21,944 and $122,783 from the customers and paid $1,041, $11,575, $16,085 and $101,531 to Nanjing Knitting through the consignment, respectively. The net (loss) profit of ($1,009), ($5,179), $5,859 and $21,252 was recorded as other income (expenses) during the three and nine months ended September 30, 2017 and 2016, respectively.

Included in other income for the three and nine months ended September 30, 2017 and 2016 is rent income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term though June 2017. The rent income is $0, $14,529, $16,022 and $48,455 for the three and nine months ended September 30, 2017 and 2016, respectively.  

  

Other expenses due to Related Parties

 

Included in other expenses for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

  

 Three months ended Nine months ended  2020  2019 
 September 30,  September 30,  (In thousands of
U.S. Dollars)		 
 2017  2016  2017  2016 
 (In thousands of U.S. Dollars) 
Jiangsu Ever-Glory $12  $12  $35  $36 
Chuzhou Huarui  53   57   157   171   50   53 
Kunshan Enjin  11   12   33   34   22   22 
Total $76  $81  $225  $241  $72  $75 

 

The Company leases Jiangsu Ever-Glory’s factory as the factory is in a location where there is a good supply of experienced workers. 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 $0.36 million, $0.96 million, $0.11totaled $0 million and $0.45$0.20 million during the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

 

In addition, the Company sub-contracted certain manufacturing work to related companies totaled $3.1 million and $5.1 million for the three months ended March 31, 2020 and 2019, respectively. The Company provided raw materials to the sub-contractors and charged a fixed fee for labor provided by the sub-contractors.

Sub-contracts with related parties included in cost of sales for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are as follows:

  

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2017  2016  2017  2016 
  (In thousands of U.S. Dollars) 
Chuzhou huarui $714  $1,228  $2,714  $4,922 
Fengyang huarui  4   344   855   846 
Nanjing Ever-Kyowa  361   490   1,181   1,485 
Ever-Glory Vietnam  6,773   6,196   12,504   11,253 
Ever-Glory Cambodia  15   996   239   3,091 
EsCeLav  1   -   5   5 
Jiangsu Ever-Glory  -   22   3   73 
  $7,868  $9,276  $17,501  $21,675 

10

  2020  2019 
  (In thousands of
U.S. Dollars)		 
Ever-Glory Vietnam $1,884  $2,579 
Chuzhou Huarui  513   1,507 
Fengyang Huarui  158   106 
Nanjing Ever-Kyowa  254   347 
EsC’eLav  10   88 
Jiangsu Ever-Glory  246   425 
Total $3,065  $5,052 

  

Accounts Payable – Related Parties

 

The accounts payable to related parties at September 30, 2017March 31, 2020 and December 31, 20162019 are as follows:

 

 September 30,
2017		  December 31,
2016		  2020  2019 
 (In thousands of U.S. Dollars)  (In thousands of
U.S. Dollars)		 
Ever-Glory Vietnam $2,448   1,938  $1,561   2,260 
Fengyang Huarui  478   709   351   414 
Nanjing Ever-Kyowa  724   785   380   386 
Chuzhou Huarui  473   643   1,360   1,064 
Ever-Glory Cambodia  60   262 
Nanjing Knitting  171   186 
Jiangsu Ever-Glory  407   -   66   501 
Nanjing Knitting  70   - 
Total $4,660  $4,337  $3,889  $4,811 

 

Amounts Due From Related Parties-current assets

 

The amounts due from related parties as of September 30, 2017at March 31, 2020 and December 31, 20162019 are as follows:

 

 September 30,
2017		  December 31,
2016		  2020  2019 
 (In thousands of U.S. Dollars)  (In thousands of
U.S. Dollars)		 
Jiangsu Ever-Glory $819  $403  $102  $123 
Nanjing Knitting  -   9 
EsC’eLav  115   74 
Esc’elav  -   - 
Total $934  $486  $102  $123 

 

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, 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 $0.7 million, $0.8 million,for $0.2 million and $2.1 million$0 during the three and nine monthsmonth period ended September 30, 2017March 31, 2020 and 2016,2019, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.25 million, $0.3 million, $0.2for $0.7 million and $0.5$0.4 million during the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.  

 


Amounts Due From Related Party under Counter Guarantee Agreement

 

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, Jiangsu Ever-Glory has provided guarantees for approximately $54.7$33.0 million (RMB 364.0230 million) and $52.4$33 million (RMB 364.0230.0 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $30.9$29.4 million (RMB 205.5 million) and $29.6$29.4 million (RMB 205.5 million) as of September 30, 2017March 31, 2020 and December 31, 2016,2019 respectively. Mr. Kang has also provided a personal guarantee for $31.4$14.3 million (RMB 209.0100.0 million) and $30.1$14.5 million (RMB 209.0100.0 million) as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.

11

 

At December 31, 2016, $14.12019, $4.7 million (RMB 98.232.8 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the ninethree months ended September 30, 2017, an additional $6.5 million (RMB 44.0 million)March 31, 2020, no advance was provided to and $7.6repayment of $0.7 million (RMB 51.7(RMB5.2 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of September 30, 2017,March 31, 2020, the amount of the counter-guarantee was $13.6$3.9 million (RMB 9827.5 million) (the difference represents currency exchange adjustment of $0.6$0.07 million), which was 24.9%11.97% of the aggregate amount of lines of credit. This amount plus accrued interest of $2.4$0.3 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At September 30, 2017March 31, 2020 and December 31, 2016,2019, the amount classified as a reduction of equity was $16.0$4.1 million and $15.9$5 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Since January 1, 2019, interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 was approximately $0.2 million, $0.6 million, $0.2$0.02 million and $0.4$0.1 million, respectively.

 

NOTE 9 COMMITMENTS AND CONTINGENCIES

Operating Lease Commitment

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

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

In the three months ended March 31, 2020, the costs of the leases recognized in cost of revenues and general administrative expenses are $6.0 and $0.2 million, respectively. Cash paid for the operating leases including in the operating cash flows was $6.2 million. 


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

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

Legal Proceedings

On March 2019, Shanghai La Go Go Fashion Company Limited (“LA GO GO”) filed a complaint against Shanghai Chijing Investment Management Co., Ltd. (“Shanghai Chijing”) for unpaid rent of RMB2.45 million ($0.36 million) in the Shanghai People’s Court (the “Court”). On July 2019, Shanghai Chijing filed a counterclaim against LA GO GO for RMB15.38 million ($2.17 million), alleging that LA GO GO had not fulfilled its corresponding obligations as a landlord. As a result, the Court has frozen the bank accounts of both Shanghai Chijing and LA GO GO. As of December 31, 2019, a total balance of RMB15.38 million ($2.2 million) was frozen in the bank accounts of LA GO GO. LA GO GO believes that Shanghai Chijing’s counterclaim is frivolous and without merit, and is rigorously defending against the counterclaim. As of December 31, 2019, the company had booked this restricted cash in other receivables. On March 10, CONCENTRATIONS2020, the Court entered a judgment in favor of LA GO GO and dismissed Shanghai Chijing’s counterclaim. LA GO GO believes that the damages awarded by the Court in favor of LA GO GO were insufficient. As of the date of this report, both LA GO GO and Shanghai Chijing have appealed the decision of the Court entered on March 10, 2020 and the date of the appeal hearing has not been determined yet. 

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

NOTE 10 RISKS AND RISKSUNCERTAINTIES

Economic and Political Risks

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

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


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

Credit risk

 

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable. The allowance for doubtful accounts at September 30, 2017 and December 31, 2016 was $4.7 million and $3.1 million, respectively. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions inof the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts.  If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.  

 

Concentration risk 

For the three and nine monthsthree-month period ended September 30, 2017,March 31, 2020, the Company had twofour wholesale customers that represented approximately 20%, 21%10%, 12%10% and 13% of the Company’s revenues. For the nine-month period ended September 30, 2016, the Company had no wholesale customer that represented more than 10% of the Company’s revenues. For the three-month period ended September 30, 2016, the Company had one wholesale customer that represented approximately 12% of the Company’s revenues.

For the Company’s wholesale business during the three and nine months ended September 30, 2017 and 2016, no supplier represented more than 10% of the total raw materials purchased.

For the Company’s retail business,March 31, 2019, the Company had two supplierswholesale customers that represented approximately 42%26% and 17%11% of raw materials purchases during the three months ended September 30, 2017. The Company had one supplier that represented approximately 23% of raw materials purchases during the three months ended September 30, 2016. The Company had five suppliers that represented approximately 26%, 20%, 12%, 11% and 10% of raw materials purchases during the nine months ended September 30, 2017. The Company had no supplier that represented more than 10% of raw materials purchases during the nine months ended September 30, 2016.Company’s revenues.

  

For the wholesale business, the Company relied on one manufacturers for 29.2%raw material supplier that represented 11% of purchased finished goodsthe total raw material purchases during the nine months ended September 30, 2017. The Company relied on two manufacturers for 26.6% and 11.6% of purchased finished goods during the nine months ended September 30, 2016. During the three months ended September 30, 2017,March 31, 2020. The Company did not rely on any raw material supplier that represented more than 10% of the Company relied on one manufacturer for 35.9% of purchased finished goods. Duringtotal raw material purchases during the three months ended September 30, 2016, the Company relied on one manufacturer for 29.2% of purchased finished goods. March 31, 2019.

 

For the retail business, the Company had no supplierrelied on two raw material suppliers that represented more thanapproximately 60% and 34% of raw material purchases during the three months ended March 31, 2020. For the retail business, the Company relied on three raw material suppliers that represented approximately 36%, 35% and 23% of raw material purchases during the three months ended March 31, 2019.

For the wholesale business, during the three months ended March 31, 2020, the Company relied on one manufacturer that represented 11% of finished goods purchases, and during the three months ended March 31, 2019, the Company relied on two manufacturers that represented 11% and 10% of finished goods purchases during the three and nine months ended September 30, 2017 and 2016.purchases.

 

The Company’s revenues for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 were earned in the following geographic areas:

 

 Three months ended
September 30,		  Nine months ended
September 30,		  2020  2019 
 2017  2016  2017  2016  (In thousands of
U.S. Dollars)		 
 (In thousands of U.S. Dollars) 
The People’s Republic of China $23,885  $22,860  $34,000  $36,854 
Hong Kong, China  20,520   10,245   33,738   22,314 
Mainland China $4,653  $10,754 
Hong Kong China  2,992   1,253 
Germany  2,239   3,517   7,007   5,760   195   850 
United Kingdom  5,599   6,149   11,174   12,568   837   800 
Europe-Other  10,899   14,724   25,288   32,999   3,898   5,229 
Japan  232   2,562   2,863   9,181   4,385   4,938 
United States  5,611   8,816   16,225   19,554   5,328   4,278 
Total wholesale business  68,985   68,873   130,295   139,230   22,288   28,102 
Retail business  51,272   41,053   154,853   143,065   36,067   59,854 
Total $120,257  $109,926  $285,148  $282,295  $58,355  $87,956 

 


NOTE 11 SEGMENTS

 

The Company reports financial and operating information in the following two segments:

 

(a)  Wholesale segment

  

(b)  Retail segment

  

12
  Wholesale
segment		  Retail
segment		  Total 
  (In thousands of U.S. Dollars) 
As of and for the period ended March 31, 2020   
Segment profit or loss:         
Net revenue from external customers $22,288   36,067   58,355 
Income from operations $(674)  (2,551)  (3,225)
Interest income $262   15   277 
Interest expense $218   123   341 
Depreciation and amortization $254   1,333   1,587 
Income tax expense $186   41   227 
Segment assets:            
Additions to property, plant and equipment  419   (341)  78 
Total assets  82,846   171,517   254,363 

 

  Wholesale
segment		  Retail
segment		  Total 
  (In thousands of U.S. Dollars) 
As of and for the period ended March 31, 2019   
Segment profit or loss:         
Net revenue from external customers $28,102   59,854   87,956 
Income from operations $769   52   821 
Interest income $199   8   207 
Interest expense $262   101   363 
Depreciation and amortization $290   1,935   2,225 
Income tax expense $219   606   825 
Segment assets:            
Additions to property, plant and equipment  367   1,764   2,131 
Total assets  78,419   204,573   282,992 

 

The Company also provides general corporate services to its segments and these costs are reported as “corporate and others”:NOTE 12 SUBSEQUENT EVENTS

 

  Wholesale
segment		  Retail
segment		  Total 
  (In thousands of U.S. Dollars) 
Nine months ended September 30, 2017   
Segment profit or loss:         
Net revenue from external customers $130,295   154,853   285,148 
Income (Loss) from operations $5,050   2,252   7,302 
Interest income $854   55   909 
Interest expense $932   275   1,207 
Depreciation and amortization $824   4,242   5,066 
Income tax expense $1,443   2,130   3,573 
             
Nine months ended September 30, 2016            
Segment profit or loss:            
Net revenue from external customers $139,231   143,064   282,295 
Income from operations $5,959   (892)  5,067 
Interest income $807   47   854 
Interest expense $1,170   341   1,511 
Depreciation and amortization $758   4,579   5,337 
Income tax expense $1,425   960   2,385 

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

  Wholesale
segment		  Retail
segment		  Total 
  (In thousands of U.S. Dollars) 
Three months ended September 30, 2017   
Segment profit or loss:         
Net revenue from external customers $68,985   51,272   120,257 
Income (Loss) from operations $2,388   457   2,845 
Interest income $355   15   370 
Interest expense $462   100   562 
Depreciation and amortization $272   1,314   1,586 
Income tax expense $686   836   1,522 
             
Three months ended September 30, 2016            
Segment profit or loss:            
Net revenue from external customers $68,873   41,053   109,926 
Income from operations $2,510   (1,280)  1,230 
Interest income $217   16   233 
Interest expense $468   112   580 
Depreciation and amortization $254   1,753   2,007 
Income tax expense $584   140   724 

 

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

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 nine months ended September 30, 2017March 31, 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”), 78% owned subsidiary Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) and Xizang He Meida Trading Company Limited (“He Meida”).

  


Business Objectives

 

Wholesale Business

 

We believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality. We maintain long-term, satisfactory relationships with a portfolio of well-known and mid-class global brands.

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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 September 30, 2017,March 31, 2020, we had 1,3631,038 stores (including store-in-stores), including 174which includes 4 stores that were opened and 18967 stores that were closed duringin the nine months ended September 30, 2017.first quarter of 2020. We expect to open an additional 100 to 150 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.

 


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 2017.2020.

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

 

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

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


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

 

Summary of Critical Accounting Policies

 

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

  

Revenue Recognition

 

We recognize wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable.customer. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable.sales. Retail sales are recorded net of promotional discounts, rebates, and return allowances. Retail store sales are recognized at the time of the register receipt. Retail online sales are recognized when products are shipped and customers receive the products because we retain a portion of the risk of loss on these sales during transit.

 

Our revenue recognition policy is in compliance with ASC 606,Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:

(i)identification of the promised goods and services in the contract;

(ii)determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract;

(iii)measurement of the transaction price, including the constraint on variable consideration;

(iv)allocation of the transaction price to the performance obligations; and

(v)recognition of revenue when (or as) the Company satisfies each performance obligation.

We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery for local sales and upon shipment of the products for export sale.

For all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.

Estimates and Assumptions

 

In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2017 and 2016 include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory reservation.write-downs and write-offs.

 


Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, which supersedes the revenue recognition inRevenue Recognition(Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption. 

In March 2016, the FASB issued ASU No. 2016-08,Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09,Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements. 

In February 2016, the FASB issued ASU No. 2016-02,Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.  

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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, 2019.2022. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

   

Results of Operations for the three months ended September 30, 2017 and 2016

 

The following table summarizes our results of operations for the three months ended September 30, 2017March 31, 2020 and 2016.2019. The table and the discussion below should be read in conjunction with ourthe condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

  Three Months Ended
September 30,		 
  2017  2016 
  (In thousands of U.S. dollars, except for percentages) 
Sales $120,257   100.0% $109,926   100.0%
Gross Profit $33,250   27.6% $29,614   26.9%
Operating Expense $30,405   25.3% $28,384   25.8%
Income From Operations $2,845   2.4% $1,230   1.1%
Other Income (Expenses) $1,795   1.5% $(94)  (0.1)%
Income tax expense $1,522   1.3% $724   0.7%
Net Income $3,118   2.6% $412   0.4%
  Three Months Ended March 31, 
  2020  2019 
  (In thousands of U.S. dollars, except for percentages) 
Sales $58,355   100.0% $87,956   100.0%
Gross Profit  16,038   27.5   29,358   33.4 
Operating Expenses  19,263   33.0   28,537   32.4 
(Loss) Income From Operations  (3,225)  (5.5)  821   0.9 
Other Income (Expenses)  754   1.3   (451)  (0.5)
Income Tax Expense  227   0.4   825   0.9 
Net Loss $(2,698)  (4.6)% $(455)  (0.5)%

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended September 30, 2017March 31, 2020 and 2016. 2019.

 

 2017     2016     

Growth
(Decrease)

  2020  % of total sales  2019  % of total sales  Growth in 2020 compared
with 2019		 
Wholesale business (In thousands of U.S. dollars)  % of total sales  (In thousands of U.S. dollars)  % of total sales  

in 2017 compared
with 2016

  (In thousands of U.S. dollars)     (In thousands of U.S. dollars)      
Mainland China $23,885   19.9% $22,860   20.8%  4.5% $4,653   8.0% $10,754   12.2%  (56.7)%
Hong Kong, China  20,520   17.1   10,245   9.3   100.3 
Hong Kong  2,992   5.1   1,253   1.4   138.7 
Germany  2,239   1.9   3,517   3.2   (36.3)  195   0.3   850   1.0   (77.1)
United Kingdom  5,599   4.7   6,149   5.6   (8.9)  837   1.4   800   0.9   4.7 
Europe-Other  10,899   9.1   14,724   13.4   (26.0)  3,898   6.7   5,229   5.9   (25.5)
Japan  232   0.2   2,562   2.4   (90.9)  4,385   7.5   4,938   5.7   (11.2)
United States  5,611   4.7   8,816   8.0   (36.4)  5,328   9.1   4,278   4.9   24.5 
Total Wholesale business  68,985   57.4   68,873   62.7   0.2   22,288   38.2   28,102   32.0   (20.7)
Retail business  51,272   42.6   41,053   37.3   24.9   36,067   61.8   59,854   68.0   (39.7)
Total sales $120,257   100.0% $109,926   100.0%  9.4% $58,355   100.0% $87,956   100.0%  (33.7)%

 


SalesTotal sales for the three months ended September 30, 2017March 31, 2020 were $120.3$58.4 million, a 9.4% increase compared withdecrease of 33.7% from the three months ended September 30, 2016.March 31, 2019. This increasedecrease was primarily attributable to a 0.2% increase in sales20.7% decrease in our wholesale business and a 24.9% increase39.7% decrease in our retail business.

 

Sales generated from our wholesale business contributed 57.4%38.2% or $69.0$22.3 million of our total sales for the three months ended September 30, 2017,March 31, 2020, a 0.2% increasedecrease of 20.7% compared with $68.9to $28.1 million in the three months ended September 30, 2016.March 31, 2019. This increasedecrease was primarily attributable to an increase indecreased sales in Mainland China, Germany, other European markets and Japan partially offset for increased sales in Hong Kong, China partially offset by a decrease in sales in Germany, the United Kingdom, Europe-Other, JapanStates and the United States. Kingdom.

 

Sales generated from our retail business contributed 42.6%61.8% or $51.3$36.1 million of our total sales for the three months ended September 30, 2017, an 24.9% increaseMarch 31, 2020, a decrease of 39.7% compared with 37.3%to 68.0% or $41.1$59.9 million in the three months ended September 30, 2016.March 31, 2019. This increasedecrease was primarily due to an increasethe decrease in same storesame-store sales.

 

Total retail store square footage and sales per square foot for the three months ended March 31, 2020 and 2019 are as follows:

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  2020  2019 
Total store square footage  1,088,007   1,340,174 
Number of stores  1,038   1,315 
Average store size, square feet  1,048   1,019 
Total store sales (in thousands of U.S. dollars) $36,067  $59,854 
Sales per square foot $33  $45 

  

Same-store sales and newly opened store sales for the three months ended March 31, 2020 and 2019 are as follows:

  2020  2019 
  (In thousands of U.S. dollars) 
Sales from stores opened for a full year $24,813  $45,955 
Sales from newly opened store sales $3,900  $6,310 
Sales from e-commerce platform $4,217  $3,701 
Other* $3,137  $3,888 
Total $36,067  $59,854 

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

We remodeled or relocated 117 stores in year 2019, and 2 stores during the three months ended March 31, 2020. We plan to relocate or remodel 50-100 stores in 2020. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2020.  Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

Costs and Expenses

 

Cost of Sales and Gross Margin

 

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

 


The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended September 30, 2017March 31, 2020 and 2016.2019.

 

          Growth  Three Months Ended March 31,  Growth
(Decrease)
in 2020		 
          (Decrease) in  2020  2019  compared 
 Three months ended
September 30,		  2017 Compared  (In thousands of U.S. dollars, except for percentages)  with 2019 
 2017  2016  with 2016 
 (In thousands of U.S. dollars, except for percentages)   
Net Sales for Wholesale Sales $68,985   100.0% $68,873   100.0%  0.2%
Wholesale Sales $22,288   100.0% $28,102   100.0%  (20.7)%
Raw Materials  31,092   45.1   31,451   45.7   (1.1)  10,090   45.3   11,308   40.2   (10.8)
Labor  1,468   2.1   1,310   1.9   12.1   245   1.1   307   1.1   (20.2)
Outsourced Production Costs  25,999   37.7   25,927   37.6   0.3   8,370   37.6   9,871   35.1   (15.2)
Other and Overhead  199   0.3   123   0.2   60.6   86   0.4   58   0.3   46.4 
Total Cost of Sales for Wholesale  58,758   85.2   58,811   85.4   (0.1)  18,791   84.3   21,544   76.7   (12.8)
Gross Profit for Wholesale  10,227   14.8   10,062   14.6   1.6   3,497   15.7   6,558   23.3   (46.7)
                    
Net Sales for Retail  51,272   100.0   41,053   100.0   24.9   36,067   100.0   59,854   100.0   (39.7)
Production Costs  18,081   35.3   11,145   27.1   62.2   15,847   43.9   24,203   40.4   (34.5)
Rent  10,168   19.8   10,356   25.2   (1.8)  7,679   21.3   12,851   21.5   (40.2)
Total Cost of Sales for Retail  28,249   55.1   21,501   52.4   31.4   23,526   65.2   37,054   61.9   (36.5)
Gross Profit for Retail  23,023   44.9   19,552   47.6   17.8   12,541   34.8   22,800   38.1   (45.0)
                    
Total Cost of Sales  87,007   72.4   80,312   73.1   8.3   42,317   72.5   58,598   66.6   (27.8)
Gross Profit $33,250   27.6% $29,614   26.9%  12.3% $16,038   27.5% $29,358   33.4%  (45.4)%

 

Raw material costs for our wholesale business were 45.1%45.3% of our total wholesale business sales in the three months ended September 30, 2017,March 31, 2020, a decrease of 10.8% compared with 45.7%to 40.2% in the three months ended September 30, 2016.March 31, 2019.  The decreasecost percentage to total sale increase was mainly due to lowerthe higher raw material prices.

 

Labor costs for our wholesale business were 2.1%1.1% of our total wholesale business sales in the three months ended September 30, 2017,March 31, 2020, a decrease of 20.2% compared with 1.9%to 1.1% in the three months ended September 30, 2016.March 31, 2019. The marginal increasedecrease was mainly due to a higher numberthe fact that we outsourced most of outsourcedthe new orders in 2016.2020.  

 

Outsourced production costs for our wholesale business fordecreased by 15.2% to $8.4 million in the three months ended September 30, 2017 increased 0.3% to $26.0March 31, 2020 from $9.9 million from $25.9 million forin the three months ended September 30, 2016. OutsourcedMarch 31, 2019. As a percentage of total wholesale sales, outsourced production costs accounted for 37.7%were 37.6% of our total wholesale business sales in the three months ended September 30, 2017,March 31, 2020, a 0.1% increasedecrease of 15.2% from the three months ended September 30, 2016.March 31, 2019. This increasedecrease was primarily attributable to higher average employee salaries atincreased outsourced orders to our related entities in Vietnam, which have lower labor costs compared to orders outsourced manufacturingto Chinese factories.

 

Overhead and other expenses for our wholesale business accounted for 0.4% and 0.3% of our total wholesale business sales for the three months ended September 30, 2017, compared with 0.2% of totalMarch 31, 2020 and 2019, respectively.

Gross profit for our wholesale business sales for the three months ended September 30, 2016.

Wholesale business gross profitMarch 31, 2020 was $3.5 million, a decrease of 46.7% compared to the three months ended March 31, 2019. Gross margin was 15.7% for the three months ended September 30, 2017 was $10.2 millionMarch 31, 2020, a decrease of 46.7% compared with $10.1 millionto 23.3% for the three months ended September 30, 2016. Gross profit accounted for 14.8% of our total wholesale sales for the three months ended September 30, 2017, compared with 14.6% for the three months ended September 30, 2016.March 31, 2019. The increasedecrease in gross margin was mainly due to a decrease inthe higher raw Materials costs.material prices.

  

Production costs for our retail business were $18.1 million for the three months ended September 30, 2017 compared with $11.1$15.8 million during the three months ended September 30, 2016. RetailMarch 31, 2020 compared to $24.2 million during the three months ended March 31, 2019. As a percentage of retail sales, retail production costs accounted for 35.3%43.9% of our total retail sales in the three months ended September 30, 2017,March 31, 2020, compared with 27.1% forto 40.4% of total retail sales in the three months ended September 30, 2016.March 31, 2019. The increasedecrease was due to higher discounts on our out-of-season products in the three months ended September 30, 2017March 31, 2020 compared with the same period of the prior year.

 

Rent costs for our retail business for the three months ended September 30, 2017 were $10.2 million compared with $10.4$7.7 million for the three months ended September 30, 2016. RentMarch 31, 2020 compared to $12.9 million for the three months ended March 31, 2019. As a percentage of retail sales, rent costs for our retail business accounted for 19.8%21.3% of our total retail sales for the three months ended September 30, 2017,March 31, 2020, compared with 25.2%to 21.5% of total retail sales for the three months ended September 30, 2016.March 31, 2019. The decrease was primarily attributable to lower variable rent charged at certain locations.

  

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Gross profit in our retail business for the three months ended September 30, 2017March 31, 2020 was $23.0$12.5 million and gross margin was 44.9%34.8%. Gross profit in our retail business for the three months ended September 30, 2016March 31, 2018 was $19.6$22.8 million and gross margin was 47.6%38.1%. The decrease in gross margin was attributable to decreased rent costs and decrease in production costs.

 

Total cost of sales for the three months ended September 30, 2017March 31, 2020 was $87.0$42.3 million, an 8.3% increase from $80.3compared to $58.6 million for the three months ended September 30, 2016. TotalMarch 31, 2019, a decrease of 27.8%. As a percentage of total sales, cost of sales as a percentageincreased to 72.5% of total sales for the three months ended September 30, 2017 was 72.4%,March 31, 2020, compared with 73.1%to 66.6% of total sales for the three months ended September 30, 2016. GrossMarch 31, 2019. Consequently, gross margin decreased to 27.5% for the three months ended September 30, 2017 was 27.6% compared with 26.9%March 31, 2020 from 33.4% for the three months ended September 30, 2016.March 31, 2019.

 

Selling, General and Administrative Expenses

 

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

 

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

   

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

 

 Three Months Ended
September 30,		  Increase (Decrease) in 2017 Compared  Three Months Ended March 31,    
 2017  2016  to 2016  2020  2019  Increase 
 (In thousands of U.S. dollars, except for percentages)    (In thousands of U.S. dollars, except for percentages)    
Gross Profit $33,250   27.6% $29,614   26.9%  12.3% $16,038   27.5% $29,358   33.4%  (45.4)%
Operating Expenses:                  　 
Operating Expenses      　       　   　 
Selling Expenses  20,238   16.8   18,522   16.8   9.3   13,478   23.1   21,008   23.9   (35.8)
General and Administrative Expenses  10,167   8.5   9,862   9.0   3.1   5,785   9.9   7,529   8.6   (23.2)
Total  30,405   25.3   28,384   25.8   7.1 
Income from Operations $2,845   2.4% $1,230   1.1%  131.3%
Total Operating Expenses  19,263   33.0   28,537   32.4   (32.5)
(Loss)Income from Operations $(3,225)  (5.5)% $821   0.9%  (493.0)%

  

Selling expenses for the three months ended September 30, 2017 increased 9.3%decreased 35.8% to $20.2 million from $18.5$13.5 million for the three months ended September 30, 2016.March 31, 2020 from $21.0 million for the three months ended March 31, 2019. The increasedecrease was attributable to higher retailthe decreased sales.

 

General and administrative expenses for the three months ended September 30, 2017 increased 3.1%decreased 23.2% to $10.2 million from $9.9$5.8 million for the three months ended September 30, 2016.March 31, 2020 from $7.5 million for the three months ended March 31, 2019. As a percentage of total sales, general and administrative expenses increased to 9.9% of total sales for the three months ended March 31, 2020, compared to 8.6% of total sales for the three months ended March 31, 2019. The decrease was mainly attributable to the decreased office expenses.

 

(Loss) Income from Operations

 

IncomeLoss from operations was $3.2 million for the three months ended March 31, 2020, compared to $0.8 million of income from operations for the three months ended September 30, 2017 increased 131.2%March 31, 2019. As a percentage of sales, loss from operations accounted for 5.5% of our total sales for the three months ended March 31, 2020, a decrease of 493.0% compared to $2.8 million from $1.20.9% the three months ended March 31, 2019 as a result of decreased gross profit.


Interest Expense

Interest expense was $0.3 million for the three months ended September 30, 2016. March 31, 2020, a decrease of 6.1% compared to the same period in 2019. The decrease was due to the decreased bank loans borrowed.

Income from operationsTax Expenses

Income tax expense was $0.2 million and $0.8 million for the three months ended September 30, 2017 accounted for 2.4% of our total sales, a 1.3% increase compared with the three months ended September 30, 2016 as a result of increased gross profit.March 31, 2020 and 2019, respectively.

 

Interest Expense

Interest expense for the three months ended September 30, 2017 was $0.6 million, a 3.1% decrease compared with the same period in 2016.

Income Tax Expenses

Income tax expense for the three months ended September 30, 2017 was $1.5 million, an increase of 110.7% compared to the same period of 2016. The increase was primarily due to increased profits of our business.

Our PRCCompany’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. Each of our consolidated entities files its own separate income tax return.laws (“the Income Tax Laws”).

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at the 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2017.2020.

 

Perfect Dream Limited 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 International Group (HK) LtdHK was incorporated in Samoa, on September 15, 2009, and under the current laws of Samoa has no liabilities for income tax.taxes.

 

AlthoughEver-Glory Supply Chain Service Co., Limited was incorporated in Hongkong, and under the Company’s parent entitycurrent 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 US entity, the Company’s primary operations are through subsidiaries located intax treaty arrangement between mainland China certain apparel manufacturing is performed outside of China in Southeast Asia, sales are made globally, and the Company has other subsidiary operations in Hong Kong and Samoa. Therefore, the Company uses significant judgment to calculate and provide for income taxes in eachjurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax jurisdictions in which it operates. Instarting from January 1, 2008. Given that the ordinary courseundistributed profits of the Company’s subsidiaries in China are intended to be retained in China for business there are transactionsdevelopment and calculations undertaken whose ultimateexpansion purposes, no withholding tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters.  In September 2009, the Company formed its subsidiary, Ever-Glory Hong Kong, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors.  Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized.  As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.

The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million will be made by the Company prospectively over two to three years’ period. All $3.2 million was paid off as of December 31, 2016. Beginning January 1, 2014, all net income generated from Ever-Glory HKaccrual has been reported as a taxable income at 25% tax rate in PRC.    

Ever-Glory International Group Inc. was incorporated in the United States and has incurred net operating losses for income tax purposes through September 30, 2017. The net operating loss carry forwards for the United States income taxes may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2035. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for the United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.

Net Incomemade.   

 

Net incomeIncome (Loss)

Net loss for the three months ended September 30, 2017March 31, 2020 and 2019 was $3.1$2.7 million a 656.6% increase compared with the same period in 2016.and $0.5 million, respectively. Our basic and diluted earningsloss per share were $0.22$0.18 and $0.04 for the three months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.

 

ResultsSummary of OperationsCash Flows

Summary cash flows information for the ninethree months ended September 30, 2017March 31, 2020 and 2016

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016. 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.

  Nine Months Ended
September 30,		 
  2017  2016 
  (in thousands of U.S. Dollars, except for percentages) 
Sales $285,148   100.0% $282,295   100.0%
Gross Profit  92,408   32.4   84,672   30.0 
Operating Expense  85,106   29.8   79,605   28.2 
Income From Operations  7,302   2.6   5,067   1.8 
Other Income (Expenses)  2,790   1.0   282   0.1 
Income tax expense  3,573   1.3   2,385   0.8 
Net Income $6,519   2.3% $2,964   1.1%

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Revenue

The following table sets forth a breakdown of our total sales, by region, for the nine months ended September 30, 2017 and 2016.

  2017     2016     Growth
(Decrease)		 
Wholesale business (In thousands of U.S. dollars)  % of total sales  (In thousands of U.S. dollars)  % of total sales  in 2017 compared
with 2016		 
Mainland China $34,000   11.9% $36,854   13.1%  (7.7)%
Hong Kong China  33,738   11.8   22,314   7.9   51.2 
Germany  7,007   2.5   5,760   2.0   21.7 
United Kingdom  11,174   3.9   12,568   4.5   (11.1)
Europe-Other  25,288   8.9   32,999   11.7   (23.4)
Japan  2,863   1.0   9,181   3.2   (68.8)
United States  16,225   5.7   19,554   6.9   (17.0)
Total Wholesale business  130,295   45.7   139,230   49.3   (6.4)
Retail business  154,853   54.3   143,065   50.7   8.2 
Total sales $285,148   100.0% $282,295   100.0%  1.0%

Sales for the nine months ended September 30, 2017 were $285.1 million, an increase of 1.0% from the nine months ended September 30, 2016. This increase was primarily attributable to an 8.2% increase in sales in our retail business partially offset by a 6.4% sales decrease in our wholesale business.

Sales generated from our wholesale business contributed 45.7% or $130.3 million of our total sales for the nine months ended September 30, 2017, a decrease of 6.4% compared with $139.2 million in the nine months ended September 30, 2016. This decrease was primarily attributable to decreased sales in Mainland China, the United Kingdom, Europe-Other, Japan and the United States partially offset by increased sales in Hong Kong, China and Germany. 

Sales generated from our retail business contributed 54.3% or $154.9 million of our total sales for the nine months ended September 30, 2017, an increase of 8.2% compared with $143.1 million in the nine months ended September 30, 2016. This increase was primarily due to an increase in same store sales.

Total retail store square footage and sales per square foot for the nine months ended September 30, 2017 and 2016 are2019 is as follows:

 

  2017  2016 
Total store square footage  1,370,117   1,329,708 
Number of stores  1,363   1,345 
Average store size, square foot  1,005   989 
Total store sales (in thousands of U.S. dollars) $154,853  $143,065 
Sales per square foot $113  $108 
  2020  2019 
  (In thousands of U.S. dollars) 
Net cash provided by operating activities $24,555  $11,141 
Net cash provided by (used in) investing activities $275  $(2,131)
Net cash used in financing activities $(2,672) $(54)

 

Same-store salesNet cash provided by operating activities was $24.6 million and newly opened store sales$11.1 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016 are as follows:

  2017  2016 
  (In thousands of U.S. dollars) 
Sales from stores opened for a full year $130,790  $113,734 
Sales from newly opened store sales $12,944  $14,137 
Sales from e-commerce platform $7,716  $9,368 
Other* $3,403  $5,826 
Total $154,853  $143,065 

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

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We remodeled or relocated 200 stores in 2016, and 195 stores during the nine months ended September 30, 2017.We plan to relocate or remodel an aggregate of 150-200 stores in 2017. 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 2017.  Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

Costs and Expenses

Cost of Sales and Gross Margin

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

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the nine months ended September 30, 2017 and 2016.

  ��           Growth 
              (Decrease) in 
  Nine months ended
September 30,		  2017 Compared 
  2017  2016  with 2016 
  (In thousands of U.S. dollars, except for percentages)    
Net Sales for Wholesale Sales $130,295   100.0% $139,230   100.0%  (6.4)%
Raw Materials  56,766   43.6   61,935   44.5   (8.3)
Labor  3,236   2.5   3,932   2.8   (17.7)
Outsourced Production Costs  47,542   36.5   50,603   36.3   (6.1)
Other and Overhead  325   0.2   370   0.3   (12.2)
Total Cost of Sales for Wholesale  107,869   82.8   116,840   83.9   (7.7)
Gross Profit for Wholesale  22,426   17.2   22,390   16.1   0.2 
Net Sales for Retail  154,853   100.0   143,065   100.0   8.2 
Production Costs  49,769   32.1   45,172   31.6   10.2 
Rent  35,102   22.7   35,611   24.9   (1.4)
Total Cost of Sales for Retail  84,871   54.8   80,783   56.5   5.1 
Gross Profit for Retail  69,982   45.2   62,282   43.5   12.4 
Total Cost of Sales  192,740   67.6   197,623   70.0   (2.5)
Gross Profit $92,408   32.4% $84,672   30.0%  9.1%

Raw material costs for our wholesale business were 43.6% of our total wholesale business sales in the nine months ended September 30, 2017, compared with 44.5% in the nine months ended September 30, 2016. The decrease was mainly due to lower raw materials prices.

Labor costs for our wholesale business were 2.5% of our total wholesale business sales in the nine months ended September 30, 2017, compared with 2.8% in the nine months ended September 30, 2016. The marginal decrease was mainly due to a higher number of outsourced orders in the nine months ended September 30, 2017.

Outsourced manufacturing costs for our wholesale business were 36.5% of our total wholesale sales in the nine months ended September 30, 2017, compared with 36.3% in the nine months ended September 30, 2016.2019, respectively. This increase was primarily attributable to increased average salaries of the employees at our outsourced manufacturing factories.

Overhead and other expenses for our wholesale business accounted for 0.2% and 0.3% of our total wholesale sales for the nine months ended September 30, 2017 and 2016, respectively.

Gross profit for our wholesale business for the nine months ended September 30, 2017 was $22.4 million, a 0.2% increase compared with the nine months ended September 30, 2016. As a percentage of total wholesale business sales, gross profit was 17.2% of our total wholesale business sales for the nine months ended September 30, 2017, compared with 16.1% for the nine months ended September 30, 2016. The increase was mainly due to decreased raw material costs.accounts receivable and inventories, offset by decreased accounts payable.

 


Production costs for our retail business for the nine months ended September 30, 2017 were $49.8Net cash provided by (used in) investing activities was $0.3 million compared with $45.2and ($2.1) million for the ninethree months ended September 30, 2016. As a percentage of our total retail sales, production costs were 32.1% of our total retail sales forMarch 31, 2020 and 2019. This change was mainly due to we purchased property and equipment in the ninethree months ended September 30, 2017, compared with 31.6% for the nine months ended September 30, 2016. The increase was due to higher discounts on our out-of-season products in the nine months ended September 30, 2017 compared withMarch 31, 2020 less than the same period of the prior year.

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Rent costs for our retail business for the nine months ended September 30, 2017 were $35.1 million compared with $35.6 million for the nine months ended September 30, 2016. As a percentage of total retail sales, rent costs were 22.7% of our total retail sales for the nine months ended September 30, 2017 compared with 24.9% for the nine months ended September 30, 2016. The decrease was primarily attributable to lower rent at certain locations.

Gross profit for our retail business for the nine months ended September 30, 2017 was $70.0 million compared with $62.3 million for the nine months ended September 30, 2016. Gross margin for our retail business for the nine months ended September 30, 2017 was 45.2% compared with 43.5% for the nine months ended September 30, 2016.

Total cost of sales for the nine months ended September 30, 2017 was $192.7 million, a 2.5% decrease compared with the nine months ended September 30, 2016. As a percentage of total sales, total costs were 67.6% of total sales for the nine months ended September 30, 2017, compared with 70.0% for the nine months ended September 30, 2016. Total gross margin for the nine months ended September 30, 2017 was 32.4% compared with 30.0% for the nine months ended September 30, 2016.

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 14.9% and 14.8% of raw material purchases for the nine months ended September 30, 2017 and 2016, respectively. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2017 and 2016. For our retail business, purchases from our five largest suppliers represented approximately 79.8% and 33.0% of raw material purchases for the nine months ended September 30, 2017 and 2016, respectively. Five suppliers provided approximately 25.9%, 20.4%, 11.7%, 11.0 and 10.8% of our raw material purchases for the nine months ended September 30, 2017. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2016. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 49.2% and 54.4% of finished goods purchases for the nine months ended September 30, 2017 and 2016, respectively. One contract manufacturer provided approximately 29.2% of our finished goods purchases for the nine months ended September 30, 2017. Two contract manufacturers provided approximately 26.6% and 11.6% of our finished goods purchases for the nine months ended September 30, 2016. For our retail business, our five largest contract manufacturers represented approximately 16.7% and 14.8% of finished goods purchases for the nine months ended September 30, 2017 and 2016, respectively. No contract manufacturer provided more than 10% of our retail finished goods purchases for the nine months ended September 30, 2017 and 2016. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

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.

  Nine months ended
September 30,		  Increase (Decrease) in 2017 Compared 
  2017�� 2016  to 2016 
  (In thousands of U.S. dollars, except for percentages)    
Gross Profit $92,408   32.4% $84,672   30.0%  9.1%
Operating Expenses:      　           　 
Selling Expenses  60,206   21.1   55,477   19.7   8.5 
General and Administrative Expenses  24,900   8.7   24,128   8.5   3.2 
Total  85,106   29.8   79,605   28.2   6.9 
Income from Operations $7,302   2.6% $5,067   1.8%  44.1%

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Selling expenses for the nine months ended September 30, 2017 were $60.2 million, an 8.5% increase compared with the nine months ended September 30, 2016. The increase was attributable to higher retail sales.

General and administrative expenses for the nine months ended September 30, 2017 were $24.9 million a 3.2% increase compared with the nine months ended September 30, 2016. As a percentage of total sales, general and administrative expenses accounted for 8.7% of total sales for the nine months ended September 30, 2017, compared with 8.5% of total sales for the nine months ended September 30, 2016. The increase was mainly attributable to the increased average salaries.

Income from Operations

Income from operations for the nine months ended September 30, 2017 was $7.3 million, a 44.1% increase from $5.1 million for the nine months ended September 30, 2016. This increase was due to increased gross profit.

Interest Expense

Interest expense was $1.2 million and $1.5 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease was due to the decreased bank loans.

Income Tax Expenses

Income tax expense for the nine months ended September 30, 2017 was $3.6 million, a 49.8% increase compared to the same period of 2016. The increase was primarily due to higher business profits.

Net Income

Net income for the nine months ended September 30, 2017 was $6.5 million, an increase of 119.9% compared with the same period in 2016. Our diluted earnings per share were $0.47 and $0.23 for the nine months ended September 30, 2017 and 2016, respectively.

Summary of Cash Flows

Summary cash flows information for the nine months ended September 30, 2017 and 2016 is as follows:

  2017  2016 
  (In thousands of U.S. dollars) 
Net cash used in (provided by) operating activities $(16,584)  18,646 
Net cash used in investing activities $(4,356)  (8,577)
Net cash provided by financing activities $15,330  $6,746 

Net cash used in operating activities was $16.6 million for the nine months ended September 30, 2017, compared with net cash provided by $18.6 million during the nine months ended September 30, 2016. The decrease was primarily due to increase in accounts receivable.2019.

 

Net cash used in investingfinancing activities was $4.4were $2.7 million and $0.05 million for the ninethree months ended September 30, 2017, compared with $8.5 million duringMarch 31, 2020 and 2019, respectively. During the ninethree months ended September 30, 2016. This decrease was mainly due toMarch 31, 2020, we received new bank loans of $11.5 million and repaid the decreased in purchasebank loans of property and equipment and remodeling expenditure in 2017.$14.9 million.

 

Net cash provided by financing activities was $15.3 million for the nine months ended September 30, 2017 compared with $6.7 million net cash used during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we repaid $33.4 million of bank loans and received bank loan proceeds of $47.6 million. Also, under the counter-guarantee agreement, we received $7.6 million from and paid $6.5 million to the related party during the nine months ended September 30, 2017.

Liquidity and Capital Resources

 

As of September 30, 2017,March 31, 2020, we had cash and cash equivalents of $40.8$70.0 million, other current assets of $149.0other than cash $109.5 million and current liabilities of $124.1$130.3 million. We presently finance our operations primarily from cash flows from operations and bank loansborrowings from banks, and we anticipate that these will continue to be our primary sourcessource of funds to finance our short-term cash needs.

 

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Bank Loans

 

In January 2014,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 $9.0$5.6 million (RMB60.0(RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of September 30, 2017,March 31, 2020, Goldenway had borrowed $6.0$5.6 million (RMB 40.0(RMB40.0 million) under this linefrom Industrial and Commercial Bank of creditChina with an annual interest rate of 4.6%4.57% and due on various dates from December 2017 to January 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.  August 2020.

 

In September 2015,November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.0$14.1 million (RMB120.0(RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of September 30, 2017,March 31, 2020, Ever-Glory Apparel had borrowed $15.0$14.1 million (RMB 100.0 million) under this line of credit with annual interest rate of 4.6%rates ranging from 3.92% to 4.7% and due on various dates from October 2017May 2020 to September 2018. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.March 2021.

  

In June 2016,August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.5$7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of September 30, 2017,March 31, 2020, approximately $7.5$7.1 million was unused and available under this line of credit.

   

In June 2016,August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.0$8.5 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2017,March 31, 2020, Ever-Glory Apparel had borrowed $6.0$1.4 million (RMB40.0(RMB10.0 million) from Nanjing Bank with an annual interest rate of 4.4%5.0% and due on various dates from Jan to March 2018. Ever-Glory Apparel had also borrowed $0.8 million from Nanjing Bank with an annual interest rate of 2.4% and due in October 2017, and collateralized by approximately $0.9 million of accounts receivable from our wholesale customers.June 2020. As of September 30, 2017,March 31, 2020, approximately $2.2$7.1 million was unused and available under this line of credit.

 

In March 2017,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 $3.0$2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of September 30, 2017,March 31, 2020, LA GO GO had borrowed $1.5$2.1 million (RMB10.0(RMB15.0 million) from Nanjing Bank under this line of credit with an annual interest rate of 5.22% and due in June 2020. As of March 31, 2020, approximately $0.7 million was unused and available under this line of credit.

In June 2018, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of March 31, 2020, LA GO GO had borrowed $2.8 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 5.0% and due in May 2018.November 2020.  

In September 2019, LA GO GO entered into a line of credit agreement for approximately $2.8 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of March 31, 2020, approximately $2.8 million was unused and available under this line of credit.


In September 30, 2017,2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $1.5$5.6 million (RMB10.0(RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2020, approximately $5.6 million was unused and available under this line of credit.

 

In January 2015, 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 $12.6$2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.2 million from HSBC with an annual interest rate of 3.0% and due in August 2017, and collateralized byMarch 31, 2020, approximately $3.8 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $9.4 million was unused and available under this line of credit.

In July 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.0 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of September 30, 2017, Ever-Glory Apparel had borrowed $3.0 million (RMB20.0 million) under this line of credit with an annual interest rates ranging from 2.8% to 3.0% and due in November 2017. As of September 30, 2017, approximately $3.0 million was unused and available under this line of credit.

In June 2014, LA GO GO entered into a line of credit agreement for approximately $4.9 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 4.6% to 5.0% and due on various dates from November 2017 to September 2018. As of September 30, 2017, approximately $1.9 million was unused and available under this line of credit.

In December 2016, LA GO GO entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $3.0 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.6% and due in December 2017.  

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In October 2016, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.7 million (RMB25.0 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 September 30, 2017, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) under this line of credit with an annual interest rate of 4.8% and due in November 2017. Ever-Glory Apparel had also borrowed $0.6 million from Bank of China with an annual interest rate of 1.7% and due in October 2017, and collateralized by approximately $0.7 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2017, approximately $1.6 million was unused and available under this line of credit.    

In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.4 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of September 30, 2017, LA GO GO had borrowed $1.4 million (RMB9.0 million) under this line of credit with an annual interest rate of 5.5% and due in December 2017. As of September 30, 2017, approximately $4.0$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.

 

DERIVATIVE LIABILITY

 

As of September 30, 2017, the Company had two outstanding forward foreign exchange contracts (sell EUR dollars for RMB) with total notional amount of EUR€0.39 million. As of DecemberMarch 31, 2016, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of EUR€0.65 million. The fair value of these contracts as of September 30, 20172020 and December 31, 2016, as well as realized gains and losses on these foreign currency2019, there is no derivative activities during 2016 and the nine months ended September 30, 2017 were not significant.liability.

 

Capital Commitments

 

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

  

Uses of Liquidity

 

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

  

Sources of Liquidity

 

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

 

We believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our needs for working capital, capital expenditure and other commitments for the next twelve months.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 September 30, 2017,March 31, 2020, we had access to approximately $82.1$49.3 million in lines of credit, of which approximately $37.1$23.2 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 moreless 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 $54.7$32.46 million (RMB364(RMB 230.0 million) and approximately $13.6$3.9 million (RMB90.5(RMB 27.5 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of September 30, 2017.March 31, 2020.

 

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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 September 30, 2017,March 31, 2020, the market foreign exchange rate had increased to RMB 6.667.09 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 Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GOsubsidiaries 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 (loss) gain (loss) for the three and nine3 months ended September 30, 2017March 31, 2020 and 20162019 was $1.8 million, $3.3 million, ($0.5)1.3) million and ($2.9)$4.0 million, respectively.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, bank loans and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less from the date of purchase to be cash equivalents.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rates: Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. On September 30, 2017, we had $40.8 million in cash and cash equivalents. A hypothetical 5% increase or decrease in either the short term or long term interest rates would not have any material impact on our earnings or loss, or the fair market value or cash flows of these instruments.Not applicable.

Foreign Exchange Rates: We pay our suppliers and employees in Chinese RMB, however, most of our wholesale customers are located in the U.S., Japan and Europe and we generate sales from them in U.S. Dollars, Euros and British Pounds. Accordingly, our business has substantial exposure to changes in exchange rates between and among the Chinese RMB, the U.S. Dollar, the Euro and the British Pound. In the last decade, the RMB was initially pegged at RMB 8.26 to one U.S. Dollar. On July 21, 2005 it was revalued to 8.09 per U.S. Dollar. Following the removal of the peg to the U.S. Dollar and pressure from the United States, the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. Dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. Dollar, Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. Dollar and the Euro. On September 30, 2017, the exchange rate between the RMB and U.S. Dollar was RMB6.66 to one U.S. Dollar. For additional discussion regarding our foreign currency risk, see the section titled Risk Factors in the Annual Report on Form 10-K for our fiscal year ended December 31, 2016. Fluctuation in the value of Chinese RMB relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.

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ITEM 4.CONTROLS AND PROCEDURES

 

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(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 our Chief Executive Officerits chief executive officer and Chief Financial Officer,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. As of September 30, 2017, the end of the fiscal quarter covered by this report, we carried out an evaluation, underProcedures.  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.procedures for the period ended March 31, 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 not operating effectively as of September 30, 2017. Our disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting” section in Item 9 of our annual report for fiscal year ended December 31, 2016. As of September 30, 2017, we had not completed the remediation of these material weaknesses.effectively.

 

Limitations on the Effectiveness of Disclosure Controls.  Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control overOver Financial Reporting

 

Our management has worked, and will continue to work to improve our internal controls over financial reporting. DuringOther than described above, during the nine months ended September 30, 2017,first 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

 

We know of no pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are fromITEM 1.LEGAL PROCEEDINGS

From time to time, duringwe may become involved in claims, suits, investigations and proceedings arising in the normalordinary course of our business operations, subject to various litigation claimsbusiness.

On March 2019, Shanghai La Go Go Fashion Company Limited (“LA GO GO”) filed a complaint against Shanghai Chijing Investment Management Co., Ltd. (“Shanghai Chijing”) for unpaid rent of RMB2.45 million ($0.36 million) in the Shanghai People’s Court (the “Court”). On July 2019, Shanghai Chijing filed a counterclaim against LA GO GO for RMB15.38 million ($2.17 million), alleging that LA GO GO had not fulfilled its corresponding obligations as a landlord. As a result, the Court has frozen the bank accounts of both Shanghai Chijing and legal disputes. We do not believeLA GO GO. As of December 31, 2019, a total balance of RMB15.38 million ($2.2 million) was frozen in the bank accounts of LA GO GO. LA GO GO believes that Shanghai Chijing’s counterclaim is frivolous and without merit, and is rigorously defending against the counterclaim. As of December 31, 2019, the company had booked this restricted cash in other receivables. On March 10, 2020, the Court entered a judgment in favor of LA GO GO and dismissed Shanghai Chijing’s counterclaim. LA GO GO believes that the ultimate dispositiondamages awarded by the Court in favor of anyLA GO GO were insufficient. As of these matters willthe date of this report, both LA GO GO and Shanghai Chijing have a material adverse effectappealed the decision of the Court entered on our financial position, resultsMarch 10, 2020 and the date of operations or liquidity.the appeal hearing has not been determined yet.  

ITEM 1A.RISK FACTORS

 

There hasITEM 1A.RISK FACTORS

As of the date of this report and except as set forth below, there have been no material changechanges to the risk factors disclosed in the information provided in Item 1A ofour annual report on Form 10-K Annual Report for the year ended December 31, 2016 filed with the SEC on March 30, 2017.2020.

 

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.

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

 

On October 31, 2017, we issued 1,578 shares of Company’s common stock to Jianhua Wang, a director of the Company. The shares were issued as compensation for his services rendered during the first, second, and third quarters of 2017 as a director.ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On October 31, 2017, we issued 1,578 shares of Company’s common stock to Zhixue Zhang, a director of the Company. The shares were issued as compensation for his services rendered during the first, second, and third quarters of 2017 as a director.None.

The securities issued in the abovementioned transactions were issued in connection with transactions which were exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, pursuant to the terms of Section 4(2) of that Act.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

ITEM 4.MINE SAFETY DISCLOSURE

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 March 31, 2020:

ITEM 5.OTHER INFORMATIONEquity Incentive Plan Information
Number of Securities to be issued upon exercise of outstanding options, warrants and rightsWeighted-
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

 

None.


ITEM 6.EXHIBITS

ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

Exhibit No.  Description
3.1Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Annual Report on Form 10-KSB, filed March 29, 2006);
3.2Articles 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);
3.3Amended 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 2002.2002.
   
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 2002.2002.
   
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002.
   
32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002.
   
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

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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.

 

November 13, 2017May 14, 2020EVER-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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