UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 20192020

 

☐   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:  0-28806001-34124

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

 

Florida 65-0420146 

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

 

86-25-5209-6831

 (Registrant’s(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of August 13, 2019, 14,801,7702020, 14,809,160 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.  

 

 

 

 

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

 

INDEX

 

  Page Number
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSii
   
PART I.  FINANCIAL INFORMATION 
   
Item 1.  Financial Statements1
   
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited)1
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)2
Condensed Consolidated Statements of Equity for The Three and Six Months Ended June 30, 2019 and 2018 (unaudited)3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)4
Notes to the Condensed Consolidated Financial Statements (unaudited)5
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations18
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk33
Item 4.  Controls and Procedures33
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings34
   
Item 4.  1A.Controls and ProceduresRisk Factors34
   
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
Item 1A.Risk Factors
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds35
   
Item 3.  Defaults Upon Senior Securities35
   
Item 4.  Mine Safety Disclosure35
   
Item 5.  Other Information35
   
Item 6.  Exhibits36
   
SIGNATURES3637

 

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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’(the “SEC”).

  

ii

ii

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.Financial Statements

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

AS OF JUNE 30, 20192020 AND DECEMBER 31, 20182019 (UNAUDITED)

 

 2019  2018  2020  2019 
ASSETS          
     
CURRENT ASSETS          
Cash and cash equivalents $34,526  $47,012  $59,238  $48,551 
Restrict cash  17,716   2,204 
Trading securities  825   - 
Accounts receivable, net  64,704   86,527   45,766   78,053 
Inventories  63,127   65,929   51,254   67,355 
Advances on inventory purchases  8,754   6,420   5,726   9,681 
Value added tax receivable  3,102   2,580   1,340   2,495 
Other receivables and prepaid expenses  6,648   10,204   4,328   5,293 
Amounts due from related parties  144   192   329   123 
Total Current Assets  181,005   218,864   186,522   213,755 
                
NONCURRENT ASSETS                
Intangible assets, net  4,886   4,962   4,499   4,729 
Property and equipment, net  28,245   28,445   25,964   28,812 
Operating lease right-of-use assets  51,623   -   34,496   53,379 
Deferred tax assets  807   996 
Total Non-Current Assets  84,754   33,407   65,766   87,916 
TOTAL ASSETS $265,759  $252,271  $252,288  $301,671 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
CURRENT LIABILITIES                
Bank loans $25,999  $29,497  $40,271  $29,931 
Accounts payable  50,352   78,412   51,169   72,418 
Accounts payable and other payables – related parties  4,796   4,756   4,050   4,811 
Other payables and accrued liabilities  12,665   21,958   10,118   19,137 
Value added and other taxes payable  -   2,569   -   1,657 
Income tax payable  1,774   1,569   222   1,142 
Current operating lease liabilities  42,808   -   26,309   44,888 
Total Current Liabilities  138,394   138,761   132,139   173,984 
                
NONCURRENT LIABILITIES                
Deferred tax liabilities  -   354 
Non-current operating lease liabilities  8,839   -   8,256   8,537 
TOTAL LIABILITIES  147,233   139,115   140,395   182,521 
                
COMMITMENTS AND CONTINGENCIES        
COMMITMENTS AND CONTINGENCIES (Note 8)        
                
STOCKHOLDERS’ EQUITY                
Stockholders’ equity:                
Preferred stock ($0.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)  -   -   -   - 
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,800,140 and 14,798,198 shares issued and outstanding As of June 30, 2019 and December 31, 2018, respectively)  15   15 
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,804,832 and 14,801,770 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)  15   15 
Additional paid-in capital  3,635   3,627   3,645   3,640 
Retained earnings  107,249   105,914   99,833   106,328 
Statutory reserve  19,083   19,083   19,939   19,939 
Accumulated other comprehensive income  (2,093)  (3,578)
Accumulated other comprehensive (loss)  (6,031)  (4,330)
Amounts due from related party  (7,863)  (10,354)  (3,996)  (4,932)
Total equity attributable to stockholders of the Company  120,026   114,707   113,405   120,660 
Noncontrolling interest  (1,500)  (1,551)  (1,512)  (1,510)
Total Equity  118,526   113,156   111,893   119,150 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $265,759  $252,271  $252,288  $301,671 

 

See the accompanying notes to the condensed consolidated financial statements.


1

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONDENSED

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

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20192020 AND 20182019 (UNAUDITED)

 

 Three months ended Six months ended  Three months ended Six months ended 
 June 30,  June 30,  June 30,  June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
NET SALES $77,316  $88,541  $165,272  $181,326  $50,086  $77,316  $108,441  $165,272 
COST OF SALES  48,330   53,999   106,928   115,439   35,641   48,330   77,958   106,928 
                                
GROSS PROFIT  28,986   34,542   58,344   65,887   14,445   28,986   30,483   58,344 
                                
OPERATING EXPENSES                                
Selling expenses  19,699   22,590   40,706   44,817   12,626   19,699   26,105   40,706 
General and administrative expenses  7,337   8,823   14,867   16,496   5,971   7,337   11,755   14,867 
Total Operating Expenses  27,036   31,413   55,573   61,313   18,597   27,036   37,860   55,573 
                                
INCOME FROM OPERATIONS  1,950   3,129   2,771   4,574 
(LOSS) INCOME FROM OPERATIONS  (4,152)  1,950   (7,377)  2,771 
                                
OTHER INCOME (EXPENSES)                                
Interest income  277   370   484   696   339   277   616   484 
Interest expense  (408)  (360)  (771)  (924)  (566)  (408)  (907)  (771)
Other income  1,409   865   1,114   1,001   845   1,409   1,663   1,114 
Total Other Income, Net  1,278   875   827   773   618   1,278   1,372   827 
                                
INCOME BEFORE INCOME TAX EXPENSE  3,228   4,004   3,598   5,347 
(LOSS) INCOME BEFORE INCOME TAX EXPENSE  (3,534)  3,228   (6,005)  3,598 
Income tax expense  (1,455)  (1,285)  (2,280)  (2,041)  (266)  (1,455)  (493)  (2,280)
                                
NET INCOME  1,773   2,719   1,318   3,306 
NET (LOSS) INCOME  (3,800)  1,773   (6,498)  1,318 
                                
Net loss attributable to the non-controlling interest  83   57   17   285 
NET INCOME ATTRIBUTABLE TO THE COMPANY  1,856   2,776   1,335   3,591 
Non-controlling interest  6   83   3   17 
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY  (3,794)  1,856   (6,495)  1,335 
                                
NET INCOME $1,773  $2,719  $1,318  $3,306 
NET (LOSS) INCOME $(3,800) $1,773  $(6,498) $1,318 
                                
Foreign currency translation (loss) gain  (2,487)  (6,091)  1,485   (2,068)  (263)  (2,453)  (1,700)  1,553 
Unrealized loss of derivative contracts designated as cash flow hedge  -   (469)  -   (469)
COMPREHENSIVE INCOME (LOSS)  (714)  (3,841)  2,803   769 
COMPREHENSIVE (LOSS) INCOME  (4,063)  (680)  (8,198)  2,871 
                                
Comprehensive (loss)income attributable to the non-controlling interest  (48)  (13)  52   309 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY $(762) $(3,854) $2,855  $1,078 
Comprehensive loss (income) attributable to the non-controlling interest  8   49   2   (51)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY $(4,055) $(631) $(8,196) $2,820 
                                
EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS                
(LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS                
Basic and diluted $0.13  $0.19  $0.09  $0.24  $(0.26) $0.13  $(0.44) $0.09 
Weighted average number of shares outstanding Basic and diluted  14,800,140   14,795,992   14,800,140   14,795,992   14,804,832   14,800,140   14,804,595   14,800,140 

 

See the accompanying notes to the condensed consolidated financial statements.


2

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

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20192020 AND 20182019 (UNAUDITED)

 

    Additional  Retained Earnings  Accumulated
other		  Amounts
due from		  Total
equity
attributable
to stockholders		  Non-        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  Common Stock  paid-in     Statutory  Comprehensive  related  of the  controlling  Total 
 Shares  Amount  capital  Unrestricted  reserve  income  party  Company  Interest  equity  Shares  Amount  capital  Unrestricted  reserve  loss  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 
Balance at January 1, 2020  14,801,770  $15  $3,640  $106,328  $19,939  $(4,330) $(4,932) $120,660   (1,510) $119,150 
                                                                                
Stock issued for compensation  1,942   0.004   8   -   -   -   -   8       8   3,062   0.003   5   -   -   -   -   5       5 
Net income (loss)  -   -   -   (521)  -   -   -   (521)  66   (455)  -   -   -   (2,701)  -   -   -   (2,701)  3   (2,698)
Net cash received from related party under counter guarantee agreement  -   -   -   -   -   -   1,101   1,101   -   1,101   -   -   -   -   -   -   785   785   -   785 
Foreign currency translation gain                      3,972   -   3,972   34   4,006 
Balance at March 31, 2019  14,800,140   15   3,635   105,393   19,083   394   (9,253)  119,267   (1,451)  117,816 
Net income (loss)              1,856               1,856   (83)  1,773 
Foreign currency translation gain (loss)                      (1,440)  -   (1,440)  3   (1,437)
Balance at March 31, 2020  14,804,832   15   3,645   103,627   19,939   (5,770)  (4,147)  117,309   (1,504)  115,805 
Net (loss)              (3,794)              (3,794)  (6)  (3,800)
Net cash received from related party under counter guarantee agreement                          1,390   1,390       1,390                           151   151       151 
Foreign currency translation loss                      (2,487)      (2,487)  34   (2,453)                      (261)      (261)  (2)  (263)
Balance at June 30, 2019  14,800,140  $15  $3,635  $107,249  $19,083  $(2,093) $(7,863) $120,026   (1,500) $118,526 
Balance at June 30, 2020  14,804,832  $15  $3,645  $99,833  $19,939  $(6,031) $(3,996) $113,405   (1,512) $111,893 

 

     Additional  Retained Earnings  Accumulated
other		  Amounts
due from		  Total
equity
attributable
to stockholders		  Non-    
  Common Stock  paid-in     Statutory  Comprehensive  related  of the  controlling  Total 
  Shares  Amount  capital  Unrestricted  reserve  income  party  Company  Interest  equity 
Balance at January 1, 2018  14,795,992  $15  $3,620  $95,195  $17,794  $2,585  $(15,449) $103,760   (1,062) $102,698 
                                         
Net income (loss)  -   -   -   815   -   -   -   815   (228)  587 
Net cash paid to related party under counter guarantee agreement  -   -   -   -   -   -   (8,480)  (8,480)  -   (8,480)
Foreign currency translation gain(loss)                      4,023   -   4,023   (94)  3,929 
Balance at March 31, 2018  14,795,992   15   3,620   96,010   17,794   6,608   (23,929)  100,118   (1,384)  98,734 
Net income (loss)              2,776               2,776   (58)  2,718 
Net cash received from related party under counter guarantee agreement                          2,340   2,340       2,340 
Foreign currency translation loss                      (6,656)      (6,656)  123   (6,533)
Balance at June 30, 2018  14,795,992  $15  $3,620  $98,786  $17,794  $(48) $(21,589) $98,578   (1,319) $97,259 
     Additional  Retained Earnings  Accumulated
other		  Amounts
due from		  Total
equity
attributable
to stockholders		  Non-    
  Common Stock  paid-in     Statutory  Comprehensive  related  of the  controlling  Total 
  Shares  Amount  capital  Unrestricted  reserve  (loss) income  party  Company  Interest  equity 
Balance at January 1, 2019  14,798,198  $15  $3,627  $105,914  $19,083  $(3,578) $(10,354) $114,707   (1,551) $113,156 
                                         
Stock issued for compensation  1,942   0.004   8   -   -   -   -   8       8 
Net income (loss)  -   -   -   (521)  -   -   -   (521)  66   (455)
Net cash received from related party under counter guarantee agreement  -   -   -   -   -   -   1,101   1,101   -   1,101 
Foreign currency translation gain                      3,972   -   3,972   34   4,006 
Balance at March 31, 2019  14,800,140   15   3,635   105,393   19,083   394   (9,253)  119,267   (1,451)  117,816 
Net income (loss)              1,856               1,856   (83)  1,773 
Net cash received from related party under counter guarantee agreement                          1,390   1,390       1,390 
Foreign currency translation loss                      (2,487)      (2,487)  34   (2,453)
Balance at June 30, 2019  14,800,140  $15  $3,635  $107,249  $19,083  $(2,093) $(7,863) $120,026   (1,500) $118,526 

 

See the accompanying notes to the condensed consolidated financial statements.


3

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE SIX MONTHS ENDED JUNE 30, 20192020 AND 20182019 (UNAUDITED)

 

 2019  2018  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income $1,318  $3,306 
Net (loss) income $(6,498) $1,318 
Adjustments to reconcile net income to cash provided by operating activities:  　   　   　   　 
Depreciation and amortization  4,491   4,903   3,597   4,491 
Loss from sale of property and equipment  53   6   189   53 
Provision of bad debt allowance  682   -   969   682 
Provision for obsolete inventories  1,824   1,626   3,681   1,824 
Deferred income tax  (1,461)  (843)  71   (1,461)
Stock-based compensation  8   -   3   8 
Changes in operating assets and liabilities                
Accounts receivable  21,793   20,150   30,444   21,793 
Inventories  1,145   (10,873)  11,659   1,145 
Value added tax receivable  504   681   1,076   504 
Other receivables and prepaid expenses  3,502   (8,942)  737   3,502 
Advances on inventory purchases  (2,353)  (7,145)  3,845   (2,353)
Amounts due from related parties  (129)  1,117   (214)  (129)
Accounts payable  (25,954)  (14,296)  (22,522)  (25,954)
Accounts payable and other payables- related parties  58   (1,485)  (466)  58 
Other payables and accrued liabilities  (10,789)  8,006   (7,027)  (10,789)
Value added and other taxes payable  (4,684)  (5,924)  (1,593)  (4,684)
Income tax payable  207   (942)  (910)  207 
Net cash used in operating activities  (9,785)  (10,655)
Net cash provided (used in) operating activities  17,041   (9,785)
                
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment  (4,082)  (6,295)  (1,018)  (4,082)
Purchases of trading securities  (825)  - 
Net cash used in investing activities  (4,082)  (6,295)  (1,843)  (4,082)
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from bank loans  16,320   28,111   31,995   16,320 
Repayment of bank loans  (19,904)  (30,533)  (21,173)  (19,904)
Repayment of loans from related party  8,149   2,556   4,027   8,149 
Advances to related party  (5,454)  (8,734)  (3,129)  (5,454)
Net cash used in financing activities  (889)  (8,600)
Net cash provided (used in) financing activities  11,720   (889)
                
EFFECT OF EXCHANGE RATE CHANGES ON CASH  2,270   (887)  (721)  2,270 
  　   　   　   　 
NET DECREASE IN CASH AND CASH EQUIVALENTS  (12,486)  (26,437)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  26,197   (12,486)
  　   　   　   　 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  47,012   62,876 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD  50,755   47,012 
  　   　   　   　 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $34,526  $36,439 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD $76,952  $34,526 
        
Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets:        
        
Cash and Cash Equivalents  59,236   47,012 
Restricted cash  17,716   - 
 $76,952  $47,012 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                
Cash paid during the period for:                
Interest $771  $924  $907  $771 
Income taxes $2,436  $3,016  $493  $2,436 

 

See the accompanying notes to the condensed consolidated financial statements.


4

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 20192020 AND 20182019

(UNAUDITED)

 

NOTE 1 BASIS OF PRESENTATIONNature of Operations and Basis of Presentation

 

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

 

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

 

In March 2019,2020, the Company incorporated Haian Tai Xin Garments TradingNanjing Rui Lian Technology Company Limited (“Haian Tai Xin”Nanjing Rui Lian”) and it is the Company’s wholly-owned PRC subsidiaries. Haian Tai XinNanjing Rui Lian is engaged in the business of garments manufacturing.trading.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of June 30, 2019,2020 the condensed consolidated statements of income (loss) and comprehensive income(loss) andincome (loss), condensed consolidated statements of equity, and cash flows for the three and six months ended June 30, 20192020 and 2018, and cash flows for the six months ended June 30, 2019 and 2018.2019. 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”).the SEC. Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

 

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the six months ended June 30, 20192020 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. 


5

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

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

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

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

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

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

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

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

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

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

Derivatives financial instruments

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

The Company may also enter into above similar derivative instruments to hedgeuses the exposure to variabilitysame accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the expected cash flows of forecasted transactions such as international sales or purchases that the Company expects to receive or commit to remit foreign currencies. In these cases, the Company designates these instruments as the cash flow hedges.

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


Accounts Receivable, net

The Company extends unsecured credit to its customersprinciples generally accepted in the ordinary courseUnited States of business but mitigatesAmerica (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the associated risks by performing credit checksCompany's audited consolidated financial statements and actively pursuing past due accounts.  An allowancenotes thereto included in the Company’s Annual Report on Form 10-K for doubtful accounts is established and recorded basedthe year ended December 31, 2019 filed with the SEC 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.March 30, 2020 (“2019 Form 10-K.”)

 

Fair Value Accounting

 

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

 

 Level 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.

 

As of June 30, 20192020 and 2018,2019, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions and trading securities that management considers to be of a high quality.

As of June 30, 2019, the Company has one derivative liability subjects to recurring fair value measurement (Level 2) with the change in fair value recognized in earnings (Note 5).

 

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

  

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

 

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

6

Foreign Currency Translation and Other Comprehensive Income

 

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

 

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


Lease

 

Use of Estimates

The Company determines if an arrangement contains a lease at inception. The Company elected

In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the practical expedient, for all asset classes,reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to account for each lease component of a contractbe reasonable, but that are inherently uncertain and its associated non-lease components as a single lease component, rather than allocating a standalone valueunpredictable. We are also subject to each component of a lease. For purposes of calculating operating lease obligations underother risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates include the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rateassumptions used to measure a lease obligation is usuallyvalue tax liabilities, derivative financial instruments, the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.

Significant assumptions and judgments made as partestimates of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to the Company over terms similar to the lease terms. The followings are lists of leases: (i) the terms of Shanghai LAGOGO land use right and buildings are 34 years; (ii) the terms of Kunshan logistics center and Chuzhou logistics center are 5 years; (iii) the terms of flagship stores are 3 years. The terms of stores within shopping mall are one year. The shopping malls sort the stores within shopping mall based on sales every yearallowance for deferred tax assets, and the stores within shopping mallaccounts receivable allowance, and impairment of higher sales will be arrange to the better location. If the sales do not meet the requirements of the shopping malls, the stores within shopping mall will be removed. The store within shopping mall is different from flagship store. The shopping malls count the rent of counter according to the sale but the rent of flagship store is fixed every year. The company estimates the terms of flagship store are three years according to the previous data. The company calculates the Right-of-use (ROU)long-lived assets or Lease Obligation (Obligation) of the stores within shopping mall in a floating manner because the rents of the stores within shopping mall will vary according to the sales. The rents of the stores within shopping mall will be higher if the number and sales of counters is larger, so the ROU/Obligation of the counter will be higher.inventory write off.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019.2022. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

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

In April 2019, the FASB issued ASU No. 2019-04“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

 

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


Reclassification

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

NOTE 3 INVENTORIES

 

Inventories at June 30, 20192020 and December 31, 20182019 consisted of the following:

 

 June 30,
2019		  December 31,
2018		  June 30,
2020		  December 31,
2019		 
 (In thousands of
U.S. Dollars)		  (In thousands of
U.S. Dollars)		 
Raw materials $1,256  $6,805  $1,451  $1,468 
Work-in-progress  15,696   3,308   9,954   8,025 
Finished goods  46,175   55,816   39,849   57,862 
Total inventories $63,127  $65,929  $51,254  $67,355 

7

 

NOTE 4 BANK LOANS

 

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short term bank loans consisted of the following as of June 30, 20192020 and December 31, 2018.2019.

 

 June 30,
2019		  December 31,
2018		  June 30,
2020		  December 31,
2019		 
Bank (In thousands of
U.S. Dollars)		  (In thousands of
U.S. Dollars)		 
Industrial and Commercial Bank of China $11,648  $14,540  $19,782  $18,629 
Shanghai Pudong Development Bank  15,543   - 
China Minsheng Bank  2,826   2,866 
Bank of China  2,120   - 
Nanjing Bank  5,824   5,089   -   6,449 
China Minsheng Bank  2,912   2,908 
Bank of Communications  2,897   2,893   -   1,426 
Shanghai Pudong Development Bank  2,617   2,613 
China Everbright Bank  -   1,454 
HSBC  101   -   -   561 
 $25,999  $29,497  $40,271  $29,931 

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

 

In December 2016,2019, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $8.7$5.7 million (RMB60.0(RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2019,2020, Goldenway had borrowed $5.8$5.7 million (RMB 40.0(RMB40.0 million) under this linefrom Industrial and Commercial Bank of creditChina with an annual interest rate of 3.92%4.57% and due on November 2019. As of June 30, 2019, approximately $2.9 million was unused and available under this line of credit.  August 2020.

 

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.6$14.1 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2019,2020, Ever-Glory Apparel had borrowed $5.8$14.1 million (RMB 40.0100.0 million) under this line of credit with annual interest rates ranging from 4.57%3.92% to 4.70%4.35% and due on July 2019.from September 2020 to May 2021.

In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.7 million (RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2019,2020, approximately $8.8$5.7 million was unused and available under this line of credit. In March 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $15.5 million (RMB110.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.85% to 3.99%. In April 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $15.5 million (RMB 110.0 million) under this line of certificate with an annual interest rate of 2.02% and due on July 2020. On July 2020, Ever-Glory Apparel repaid the loan and borrowed $11.3 million (RMB 80.0 million) under this line of certificate with an annual interest rate of 2.50% and due on July 2021.

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

8

 

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.3$7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2019,2020, approximately $7.3$7.1 million was unused and available under this line of credit.

 

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.7$8.5 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $5.8 million (RMB40.0 million) from Nanjing Bank with an annual interest rate 5.0% and due on variable dates from September 2019 to June 2020. As of June 30, 2019,2020, approximately $2.9$8.5 million was unused and available under this line of credit.


In May 2018,June 2019, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.9$2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2019,2020, approximately $2.9$2.8 million was unused and available under this line of credit.

  

In June 2018,September 2019, LA GO GO entered into a line of credit agreement for approximately $2.9$2.8 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2019, LA GO GO had borrowed $2.9 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.79% and due in October 2019.  

In November 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB19.9 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of June 30, 2019, LA GO GO had borrowed $2.9 million (RMB19.9 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from November 2019 to January 2020.

In July 2018, Ever-Glory Apparel entered into a line of credit agreement for2020, approximately $2.9 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $2.6 million (RMB18.0 million) from the Shanghai Pudong Development Bank with an annual interest rate 4.57% and due on date November 2019. As of June 30, 2019, approximately $0.3$2.8 million was unused and available under this line of credit.

 

In MarchAugust 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 2019, Ever-Glory Apparel had borrowed $0.2 million from HSBC with an annual interest rate of 3.2% and due in September 2019, and collateralized by30, 2020, approximately $0.1 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2019, approximately $2.3$2.5 million was unused and available under this line of credit.

 

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

 

Total interest expense on bank loans amounted to $0.8$0.9 million and $0.9$0.8 million for the six months ended June 30, 20192020 and 2018,2019, respectively, and $0.4$0.6 million and $0.3$0.4 million for the three months ended June 30, 2020 and 2019, and 2018, respectively.

 

NOTE 5 Derivative Financial Instruments

Foreign currency swap contracts

The Company entered two foreign currency swap contracts with two banks during 2018. Due to the demand of financial management for daily operation, Ever-Glory Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB with Bank of China in May and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of principal amounts are included in other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance sheets, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is recognized in the income from operations. As of June 30, 2019, there are no currency swap contracts.


Forward foreign exchange contracts

To avoid foreign currency fluctuation on forecasted international sales and secure the profits on such revenues, the Company entered several forward foreign exchange contracts with banks from time to time. According to ASC 815-20-25, the Company designated above contracts as cash flow hedges. As of June 30, 2018, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of €0.42 million and two outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional amount of $17.0 million according to the amounts of orders. These contracts have aggregate unrealized loss of $0.49 million in fair value recognized as derivatives financial instruments liabilities and accumulated other comprehensive income (loss) in the consolidated balance sheets. 

As of June 30, 2019, the Company had one outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional amount of $10.0 million. The fair value of this contract at June 30, 2019 was not significant. 

NOTE 6 LEASES

The Company recognized operating lease liabilities and operating lease right-of-use assets on its balance sheets. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The company has leases for land-use-rights, warehouses and logistics centers, flagship stores, and stores within shopping malls in the PRC, which are classified as operating leases. The leases include fixed and variable payments according to the sales generated from flagship stores and those stores with shopping malls. Options to extend or renew are recognized as part of the lease liabilities and recognized as right of use assets. There are no residual value guarantees and no restrictions or covenants imposed by the leases. In the six months ended June 30, 2019, the costs of the leases recognized in cost of revenues and general administrative expenses are $9.8 and $0.4 million, respectively. Cash paid for the operating leases including in the operating cash flows was $10.2 million. As of June 30, 2019, the Company has $51.6 million of right-of-use assets, $42.8 million in current operating lease liabilities and $8.8 million in non-current operating lease liabilities as of June 30, 2019.

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

NOTE 7 INCOME TAX

 

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

 

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2019.2020.

 

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

 

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

 

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

 

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


9

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax (loss) income for the three and six months ended June 30, 20192020 and 20182019 was taxable in the following jurisdictions:

  

 Three months ended Six months ended  Three months ended Six months ended 
 June 30,  June 30,  June 30,  June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
 (In thousands of U.S. Dollars)  (In thousands of U.S. Dollars) 
PRC $3,228  $4,010  $3,605  $5,359  $(3,531) $3,228  $(6,000) $3,605 
Others  -   (6)  (7)  (12)  (3)  -   (5)  (7)
 $3,228  $4,004  $3,598  $5,347  $(3,534) $3,228  $(6,005) $3,598 

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 20192020 and 2018:2019:

 

 Three months ended Six months ended  Three months ended Six months ended 
 June 30,  June 30,  June 30,  June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
PRC statutory rate  25.0%  25.0%  25.0%  25.0%  25.0%  25.0%  25.0%  25.0%
Net operating losses for which no deferred tax assets was recognized  24.5   9.1   46.7   13.2 
Other  (4.4)  (2.0)  (8.3)  - 
Temporary difference between US GAAP and PRC tax accounting  (32.5)  20.1   (33.2)  38.4 
Effective income tax rate  45.1%  32.1%  63.4%  38.2%  (7.5)%  45.1%  (8.2)%  63.4%

 

Income tax expense for the three and six months ended June 30, 20192020 and 20182019 is as follows:

  

 Three months ended Six months ended  Three months ended Six months ended 
 June 30,  June 30,  June 30,  June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
Current $1,785  $1,960  $1,990  $2,884  $195  $1,785  $304  $1,990 
Deferred  (330)  (675)  290   (843)  71   (330)  189   290 
Income tax expense $1,455  $1,285  $2,280  $2,041  $266  $1,455  $493  $2,280 

 

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

 

The Company has not recorded U.S. deferred income taxes on approximately $107.2$99.9 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S. Tax Reform signed into law onOn December 22, 2017 significantly modified the U.S. Internal Revenue Code by, among other things, reducingenacted the statutory “Tax Cuts and Jobs Act” (“U.S. federalTax Reform”) which made significant changes to corporate income tax law. One significant change was to decrease the general corporate income tax rate from 35%34% to 21%. This reduction had no effect on the Company’s income tax expense as the reduction in deferred tax assets was offset by an equivalent reduction in the valuation allowance. Another significant change resulting from U.S. Tax Reform is that any future remittances to the parent company from business income earned by its subsidiaries outside of the U.S. will no longer to taxable to the Company under U.S. tax law. The Company would be liable for taxable years beginning afterpayment of income tax, or reduction of the net operating loss carryover, at a reduced rate for any accumulated earnings and profits of its non-U.S. subsidiaries at December 31, 2017; limiting and/or eliminating many business deductions; migrating2017. U.S. Tax Reform includes provisions for Global Intangible Low-Taxed Income (“GILTI”) under which taxes on foreign income are imposed on the U.S. toexcess of a territorial tax system with a one-time transition taxdeemed return on a mandatory deemed repatriation of previously deferred foreign earningstangible assets of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries;subsidiaries and providing for newBase Erosion and Anti-Abuse Tax (“BEAT”) under which taxes are imposed on certain base eroding payments to affiliated foreign earnings.companies. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax expense (income) relating to the Tax Act changed for the three and six months ended June 30, 2019.2020.


NOTE 8 EARNINGS PER SHARE

   

The following demonstrates the calculation for earnings per share for the three and six months ended June 30, 2019 and 2018: 

10

 

  Three months ended  Six months ended 
  June 30,  June 30, 
  2019  2018  2019  2018 
Weighted average number of common shares – Basic and diluted  14,800,140   14,795,992   14,800,140   14,795,992 
Earnings per share – Basic and diluted $0.13  $0.19  $0.09  $0.24 

 

NOTE 96 STOCKHOLDERS’ EQUITY

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

 

On January 31, 2019, the Company issued 1,942 shares of the Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the third and fourth quarter of 2018. The shares issued in 2019 were valued at $3.8$3.80 per share, which was the average market price of the common stock for the five days before the grant date.

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

 

NOTE 107 RELATED PARTY TRANSACTIONS

 

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

 

Other income from Related Parties

  

Jiangsu Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in certain Company’s retail stores since the third quarter of 2014. During the three and six months ended June 30, 20192020 and 2018,2019, the Company received $5,504, $8,021, $14,176 $45,655, $17,919 and $51,541$45,655 from the customers and paid $5,504, $8,021, $13,248 $39,086, $20,130 and $39,318$39,086 to Wubijia through the consignment, respectively. The net income (loss) of $0, $0, $928 $6,570, ($2,212) and $12,223$6,570 was recorded as other income (expenses) during the three and six months ended June 30, 20192020 and 2018,2019, respectively.  

  

Other expenses due to Related Parties

 

Included in other expenses for the three and six months ended June 30, 20192020 and 20182019 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:

  

 Three months ended Six months ended  Three months ended Six months ended 
 June 30,  June 30,  June 30,  June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
 (In thousands of U.S. Dollars)  (In thousands of U.S. Dollars) 
Chuzhou Huarui  35   51   88   109   52   35   102   88 
Kunshan Enjin  22   14   44   27   21   22   43   44 
Total $57  $65  $132  $136  $73  $57  $145  $132 

 


11

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

  

Purchases from and Sub-contracts with Related Parties

 

The Company purchased raw materials from Nanjing Knitting totaling $0 million, $0 million, $0.4 million $0.6 million, $1.52 million and $1.85$0.6 million during the three and six months ended June 30, 20192020 and 2018,2019, respectively.

 

In addition, sub-contracts with related parties included in cost of sales for the three and six months ended June 30, 20192020 and 20182019 are as follows:

 

 Three Months Ended
June 30,		  Six Months Ended
June 30,		  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
 2019  2018  2019  2018  2020  2019  2020  2019 
 (In thousands of U.S. Dollars)  (In thousands of U.S. Dollars) 
Chuzhou Huarui $1,960  $1,006  $3,467  $1,873  $477  $1,960  $990  $3,467 
Fengyang Huarui  442   567   548   1,051   242   442   400   548 
Nanjing Ever-Kyowa  408   326   755   675   188   408   442   755 
Ever-Glory Vietnam  2,469   3,260   5,048   5,174   3,595   2,469   5,479   5,048 
Nanjing Knitting  600   -   600   -   487   600   487   600 
EsCeLav  13   21   101   21   14   13   24   101 
Jiangsu Ever-Glory  45   17   470   21   381   45   627   470 
 $5,937  $5,197  $10,989  $8,815  $5,384  $5,937  $8,449  $10,989 

  

Accounts Payable – Related Parties

 

The accounts payable to related parties at June 30, 20192020 and December 31, 20182019 are as follows:

 

 2019  2018  2020  2019 
 (In thousands of
U.S. Dollars)		  (In thousands of
U.S. Dollars)		 
Ever-Glory Vietnam $1,769   1,863  $1,993   2,260 
Fengyang Huarui  34   622   140   414 
Nanjing Ever-Kyowa  707   580   317   386 
Chuzhou Huarui  1,062   888   1,341   1,064 
Nanjing Knitting  283   171   254   186 
Jiangsu Ever-Glory  941   632   5   501 
Total $4,796  $4,756  $4,050  $4,811 

 

Amounts Due From Related Parties-current assets

 

The amounts due from related parties at June 30, 20192020 and December 31, 20182019 are as follows:

 

 2019  2018  2020  2019 
 (In thousands of
U.S. Dollars)		  (In thousands of
U.S. Dollars)		 
Jiangsu Ever-Glory $144  $122   329   123 
Esc’elav  -   70 
Total $144  $192  $329  $123 

 


Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and six months ended June 30, 20192020 and 2018,2019, 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$0.4 million, $0$0.6 million, $0 million and $0.3$0 million during the three and six months period ended June 30, 20192020 and 2018,2019, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0.1$0.4 million, $0.1$1.1 million, $0.1 million and $0.1 million during the three and six months ended June 30, 2020 and 2019, and 2018, respectively.

12

 

Amounts Due From Related Party under Counter Guarantee Agreement

 

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of June 30, 20192020 and December 31, 2018,2019, Jiangsu Ever-Glory has provided guarantees for approximately $33.5$37.3 million (RMB 230260 million) and $33.4$33.0 million (RMB 230 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $29.9$29.2 million (RMB 205.5 million) and $29.9$29.4 million (RMB 205.5 million) as of June 30, 20192020 and December 31, 2018,2019, respectively. Mr. Kang has also provided a personal guarantee for $17.0$14.3 million (RMB 116.8100.0 million) and $14.5 million (RMB 100.0 million) as of June 30, 20192020 and December 31, 2018,2019, respectively.

 

At December 31, 2018, $9.92019, $4.7 million (RMB 68.232.8 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the six months ended June 30, 2019,2020, an additional $5.5$3.1 million (RMB 37.022.0 million) was provided to and $8.1$4.0 million (RMB 55.328.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2019,2020, the amount of the counter-guarantee was $7.3$3.7 million (RMB 50.026.4 million) (the difference represents currency exchange adjustment of $0.1 million), which was 21.7%10.2% of the aggregate amount of lines of credit. The increase of the percentage in this quarter was mainly due to China’s credit tightening policy. Obtaining bank loan requires a higher guarantee deposit in this quarter. This amount plus accrued interest of $0.6$0.3 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At June 30, 20192020 and December 31, 2018,2019, the amount classified as a reduction of equity was $7.9$4.0 million and $10.4$5.0 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since January 1, 2019, interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for the three and six months ended June 30, 20192020 and 20182019 was approximately $0.01 million, $0.03 million, $0.1 million $0.2 million, $0.2 million and $0.4$0.2 million, respectively.

 

NOTE 11 CONCENTRATIONS8 COMMITMENTS AND CONTINGENCIES

Operating Lease Commitment

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

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

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

13

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

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

Legal Proceedings

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

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

NOTE 9 RISKS AND UNCERTAINTIES

Economic and Political Risks

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

14

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

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

Credit risk

 

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable, the allowance for doubtful accounts at June 30, 2019 and December 31, 2018 was $5.1 million and $5.9 million, respectively. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions of the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts.  If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.  

 

Concentration risk 

For the six months ended June 30, 2020, the Company had two wholesale customers that represented approximately 19% and 12% of the Company’s revenues. For the three months ended June 30, 2020, the Company had one wholesale customer that represented approximately 30% of the Company’s revenues. For the six months ended June 30, 2019, the Company had two wholesale customers that represented approximately 16% and 10% of the Company’s revenues. For the three months ended June 30, 2019, the Company had two wholesale customers that represented approximately 8% and 14% of the Company’s revenues. For the six months ended June 30, 2018, the Company had one wholesale customer that represented approximately 8.97% of the Company’s revenues. For the three months ended June 30, 2018, the Company had two wholesale customers that represented approximately 9.68% and 6.60% of the Company’s revenues.

 


For the wholesale business, the Company did not rely on any raw material supplier that represented more than 10% of the total raw material purchases during the three and six months ended June 30, 20192020 and 2018.2019.

 

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

For the Company’s retailwholesale business, the Company hadrelied on two finished goods suppliers that represented 31.4%approximately 20% and 31.2%11% of the total raw materialsmaterial purchases during the three and six months ended June 30, 2018.

2020. For the wholesale business, the Company did not rely on any finished goods supplier that represented more than 10% of the total raw material purchases during the three and six months ended June 30, 2019 and 2018.2019.

15

 

For the retail business, the Company did not rely on any supplier that represented more than 10% of the total finished goods purchases during the three and six months ended June 30, 20192020 and 2018.2019.

 

The Company’s revenues for the three and six months ended June 30, 20192020 and 20182019 were earned in the following geographic areas:

 

 Three months ended
June 30,		  Six months ended
June 30,		  Three months ended
June 30,		  Six months ended
June 30,		 
 2019  2018  2019  2018  2020  2019  2020  2019 
 (In thousands of U.S. Dollars)  (In thousands of U.S. Dollars) 
The People’s Republic of China $6,491  $9,131  $17,246  $13,342  $3,111  $6,491  $7,764  $17,246 
Hong Kong China  6,463   7,418   7,717   12,556   2,054   6,463   5,045   7,717 
Germany  877   899   1,726   2,765   48   877   243   1,726 
United Kingdom  2,038   2,881   2,838   5,099   471   2,038   1,309   2,838 
Europe-Other  4,224   5,833   9,453   10,285   3,612   4,224   7,511   9,453 
Japan  1,311   1,881   6,248   4,318   2,205   1,311   6,589   6,248 
United States  15,847   10,771   20,125   15,705   10,548   15,847   15,876   20,125 
Total wholesale business  37,251   38,814   65,353   64,070   22,049   37,251   44,337   65,353 
Retail business  40,065   49,727   99,919   117,256   28,037   40,065   64,104   99,919 
Total $77,316  $88,541  $165,272  $181,326  $50,086  $77,316  $108,441  $165,272 

 


NOTE 1110 SEGMENTS

 

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

 

(a)Wholesale segment

  

(b)Retail segment

 

 Wholesale
segment		  Retail
segment		  Total  Wholesale
segment		  Retail
segment		  Total 
 (In thousands of U.S. Dollars) 
Six months ended June 30, 2020   
Segment profit or loss:       
Net revenue from external customers $44,337   64,104   108,441 
Income (loss) from operations $1,001   (8,378)  (7,377)
Interest income $576   40   616 
Interest expense $719   188   907 
Depreciation and amortization $583   3,014   3,597 
Income tax expense $468   25   493 
Segment assets:            
Additions to property, plant and equipment  185   833   1,018 
Total assets  96,192   156,096   252,288 
 (In thousands of U.S. Dollars)             
Six months ended June 30, 2019               
Segment profit or loss:                   
Net revenue from external customers $65,353   99,919   165,272  $65,353   99,919   165,272 
Income from operations $2,374   397   2,771  $2,374   397   2,771 
Interest income $466   18   484  $466   18   484 
Interest expense $572   199   771  $572   199   771 
Depreciation and amortization $473   8,740   9,213  $473   8,740   9,213 
Income tax expense $1,475   805   2,280  $1,475   805   2,280 
Segment assets:                        
Additions to property, plant and equipment  549   3,533   4,082   549   3,533   4,082 
Total assets  77,218   188,541   265,759   77,218   188,541   265,759 
            
Six months ended June 30, 2018            
Segment profit or loss:            
Net revenue from external customers $64,070   117,256   181,326 
Income from operations $2,634   1,940   4,574 
Interest income $663   33   696 
Interest expense $782   142   924 
Depreciation and amortization $602   4,301   4,903 
Income tax expense $714   1,327   2,041 
Segment assets:            
Additions to property, plant and equipment  556   5,739   6,295 
Total assets  91,483   129,707   221,190 

 

  Wholesale
segment		  Retail
segment		  Total 
  (In thousands of U.S. Dollars) 
Three months ended June 30, 2019   
Segment profit or loss:         
Net revenue from external customers $37,251   40,065   77,316 
Income from operations $1,605   345   1,950 
Interest income $268   9   277 
Interest expense $310   98   408 
Depreciation and amortization $182   2,084   2,266 
Income tax expense $1,255   200   1,455 
             
Three months ended June 30, 2018            
Segment profit or loss:            
Net revenue from external customers $38,814   49,727   88,541 
Income from operations $1,538   1,591   3,129 
Interest income $354   16   370 
Interest expense $291   69   360 
Depreciation and amortization $297   2,069   2,366 
Income tax expense $481   804   1,285 
16

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

 

NOTE 1211 SUBSEQUENT EVENTS

 

As of August 14, 2019,2020, there is no material subsequent event to be disclosed.


17

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

 

The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 20192020 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

 

Overview

 

Our Business

 

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

 

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

 

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

 

Wholesale Business

 

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

 

Retail Business

 

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

 


18

Business Objectives

 

Wholesale Business

 

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

 

The primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:

 

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

 

 ●Continuing to emphasize product design and technology utilization;
   
 ●Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
   
 ●Maintaining stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.

  

Retail Business

 

The business objectives for our retail segment are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of June 30, 2019,2020, we had 1,235935 stores (including store-in-stores), including 40which includes 19 stores that were opened and 186185 stores that were closed in the first half year of 2019.2020. We expect to open an additional 10050 to 150100 stores in 2019.2020.

 

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

 

 ●Building our retail brand to be recognized as a major player in the mid-to-high end women’s apparel market in China;
   
 ●Expanding our retail network throughout China;
   
 ●Improving our retail stores’ efficiency and increasing same-store sales;
   
 ●Continuing to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities; and
   
 ●Becoming a multi-brand operator.

 

Seasonality of Business

 

Our business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday periods in the retail segment.

 


19

Collection Policy

 

Wholesale business

 

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

 

Retail business

 

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

 

Global Economic Uncertainty

 

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2019.2020.

 

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

 

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

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

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

 

We recognize wholesale revenue from product sales, net of value-added taxes, upon deliveryFair 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 local salesidentical assets or liabilities (Level 1 measurements) and upon shipmentthe lowest priority to unobservable inputs (Level 3 measurements). The three levels of the products for export sales, at such time title passes to the customer. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales. Retail salesfair value hierarchy under ASC 820 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:described below:

 

 (i)Level 1identificationUnadjusted 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 promised goods and services in the contract;asset or liability;

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

 (iii)Level 3measurement of the transaction price, including the constraint on variable consideration;

(iv)allocation of the transaction pricePrices or valuation techniques that require inputs that are both significant to the performance obligations;fair value measurement and

(v)recognition of revenue when (or as) the Company satisfies each performance obligation. unobservable (supported by little or no market activity).

 

We only applyThe 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 five-step model to contracts when it is probable that we will collectdifference between the consideration it is entitled to in exchangecontractual forward price and the current forward price at the reporting date for the goods or services it transfersresidual maturity of the contract using a risk-free interest rate based on government bonds.

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

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

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

As of June 30, 2020, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions and trading securities (nil at December 31, 2019) with brokerage accounts that management considers to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliverhigh quality.

Foreign Currency Translation and which of these performance obligations are distinct. We recognize as revenues the amountOther Comprehensive Income

The reporting currency of the transaction price thatCompany is allocated to the respective performance obligation whenU.S. dollar. The functional currency of Ever-Glory, Perfect Dream, Ever-Glory HK and Ever-Glory Supply Chain is the performance obligationU.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel, Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Shanghai Yiduo, Ya Lan, He Meida, Huirui, Taixin, Haian Taixin and Nanjing Rui Lian is 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.Chinese RMB .

 

For subsidiaries whose functional currency is the RMB, all reporting periods, we have not disclosedassets and liabilities were translated at the valueexchange rate at the balance sheet date; equity was translated at historical rates and items in the statement of unsatisfied performance obligationscomprehensive income were translated at the average rate for all product revenue contracts with an original expected lengththe 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 one year or less, which is an optional exemption that is permitted underoperations as incurred. Items in the adopted rules.cash flow statement are translated at the average exchange rate for the period.

 

Use of Estimates and Assumptions

 

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

Leasewrite off.

 

The Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes, to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.

Significant assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to the company over terms similar to the lease terms. The followings are lists of leases: (i) the terms of Shanghai LAGOGO land use right and buildings are 34 years; (ii) the terms of Kunshan logistics center and Chuzhou logistics center are 5 years; (iii) the terms of flagship stores are 3 years. The terms of stores within shopping mall are one year. The shopping malls sort the stores within shopping mall based on sales every year and the stores within shopping mall of higher sales will be arrange to the better location. If the sales do not meet the requirements of the shopping malls, the stores within shopping mall will be removed. The store within shopping mall is different from flagship store. The shopping malls count the rent of counter according to the sale but the rent of flagship store is fixed every year. The company estimates the terms of flagship store are three years according to the previous data. The company calculates the Right-Of-Use (ROU) or Lease Obligation (Obligation) of the stores within shopping mall in a floating manner because the rents of the stores within shopping mall will vary according to the sales. The rents of the stores within shopping mall will be higher if the number and sales of counters is larger, so the ROU/Obligation of the counter will be higher .

21

 


Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 “”Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019.2022. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

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

In April 2019, the FASB issued ASU No. 2019-04“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

  

Results of Operations for the three months ended June 30, 20192020 and 20182019

 

The following table summarizes our results of operations for the three months ended June 30, 20192020 and 2018.2019. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

 Three Months Ended June 30,  Three Months Ended June 30, 
 2019  2018  2020  2019 
 (In thousands of U.S. dollars, except for percentages)  

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

percentages)

 
Sales $77,316   100.0% $88,541   100.0% $50,086   100.0% $77,316   100.0%
Gross Profit $28,986   39.0% $34,542   39.0% $14,445   28.8% $28,986   37.5%
Operating Expense $27,036   35.5% $31,413   35.5% $18,597   37.1% $27,036   35.0%
Income From Operations $1,950   3.5% $3,129   3.5%
Other Income (Expenses) $1,278   1.0% $875   1.0%
(Loss) Income From Operations $(4,152)  (8.3)% $1,950   2.5%
Other Income $618   1.2% $1,278   1.7%
Income tax expense $1,455   1.5% $1,285   1.5% $266   0.5% $1,455   1.9%
Net Income $1,773   3.1% $2,719   3.1%
Net (Loss) Income $(3,800)  (7.6)% $1,773   2.3%

  


Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 20192020 and 2018.2019.

 

 2019  % of
total sales		  2018  % of
total sales		  

Growth (Decrease)

in 2019 compared
with 2018

  2020  2019   

Growth (Decrease)

 
Wholesale business (In thousands of U.S. dollars)     (In thousands of U.S. dollars)       (In thousands of U.S. dollars)  % of
total sales 		  (In thousands of U.S. dollars)  % of
total sales		 in 2020 compared
with 2019		 
Mainland China $6,491   8.4% $9,131   10.3%  (28.9)% $3,111   6.2% $6,491   8.4%  (52.1)%
Hong Kong China  6,463   8.4   7,418   8.4   (12.9)  2,054   4.1   6,463   8.4   (68.2)
Germany  877   1.1   899   1.0   (2.5)  48   0.1   877   1.1   (94.5)
United Kingdom  2,038   2.6   2,881   3.3   (29.3)  471   0.9   2,038   2.6   (76.9)
Europe-Other  4,224   5.5   5,833   6.6   (27.6)  3,612   7.2   4,224   5.5   (14.5)
Japan  1,311   1.7   1,881   2.1   (30.3)  2,205   4.4   1,311   1.7   68.2 
United States  15,847   20.5   10,771   12.1   47.1   10,549   21.1   15,847   20.5   (33.4)
Total Wholesale business  37,251   48.2   38,814   43.8   (4.0)  22,049   44.0   37,251   48.2   (40.8)
Retail business  40,065   51.8   49,727   56.2   (19.4)  28,037   56.0   40,065   51.8   (30.0)
Total sales $77,316   100.0% $88,541   100.0%  (12.7)% $50,086   100.0% $77,316   100.0%  (35.2)%

22

 

Sales for the three months ended June 30, 20192020 were $77.3$50.1 million, a 12.7%35.2% decrease compared with the three months ended June 30, 2018.2019. This decrease was primarily attributable to a 4.0%40.8% decrease in sales in our wholesale business partially and a 19.4%30.0% decrease in our retail business.

 

Sales generated from our wholesale business contributed 48.2%44.0% or $37.3$22.0 million of our total sales for the three months ended June 30, 2019,2020, a 4.0%40.8% decrease compared with 43.8%48.2% or $38.8$37.3 million in the three months ended June 30, 2018.2019. This decrease was primarily attributable to an increase in sales in United States partially offset by a decrease in sales in Hong Kong, Germany, Europe-Other, Mainland China, United Kingdom and United States, partially offset by an increase in sales in Japan.

 

Sales generated from our retail business contributed 51.8%56.0% or $40.1$28.0 million of our total sales for the three months ended June 30, 2019,2020, a 19.4%30.0% decrease compared with 56.2%51.8% or $49.7$40.1 million in the three months ended June 30, 2018.2019. This decrease was primarily due to a decrease in the amountsnumbers of stores and same store sales.

 

Costs and Expenses

 

Cost of Sales and Gross Margin

 

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

 

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended June 30, 20192020 and 2018.2019.  

 

          Growth           Growth��
          (Decrease) in
2019		           (Decrease) in 
 Three months ended June 30,  Compared  Three months ended June 30,  2020 
 2019  2018  with 2018  2020  2019  Compared 
 (In thousands of U.S. dollars, except for percentages)    (In thousands of U.S. dollars, except for percentages)  with 2019 
Net Sales for Wholesale Sales $37,251   100.0% $38,814   100.0%  (4.0)% $22,049   100.0% $37,251   100.0%  (40.8)%
Raw Materials  16,376   44.0   16,456   42.5   (0.5)  8,614   39.1   16,376   44.0   (47.4)
Labor  398   1.1   396   1.0   0.6   299   1.4   398   1.1   (25.0)
Outsourced Production Costs  14,409   38.7   14,722   37.9   (2.1)  8,623   39.1   14,409   38.7   (40.2)
Other and Overhead  55   0.1   84   0.2   (35.2)  152   0.7   55   0.1   178.0 
Total Cost of Sales for Wholesale  31,238   83.9   31,658   81.6   (1.3)  17,688   80.3   31,238   83.9   (43.4)
Gross Profit for Wholesale  6,013   16.1   7,156   18.4   (16.0)  4,361   19.7   6,013   16.1   (27.5)
Net Sales for Retail  40,065   100.0   49,727   100.0   (19.4)  28,037   100.0   40,065   100.0   (30.0)
Production Costs  10,084   25.2   13,984   28.1   (27.9)  13,865   49.5   10,084   25.2   37.5 
Rent  7,008   17.5   8,357   16.8   (16.1)  4,088   14.3   7,008   17.5   (41.7)
Total Cost of Sales for Retail  17,092   42.7   22,341   44.9   (23.5)  17,953   63.8   17,092   42.7   5.0 
Gross Profit for Retail  22,973   57.3   27,386   55.1   (16.1)  10,084   36.2   22,973   57.3   (56.1)
Total Cost of Sales  48,330   62.5   53,999   61.0   (10.5)  35,641   71.2   48,330   62.5   (26.3)
Gross Profit $28,986   37.5% $34,542   39.0%  (16.1)% $14,445   28.8% $28,986   37.5%  (50.2)%

 


Raw material costs for our wholesale business were 44.0%39.1% of our total wholesale business sales in the three months ended June 30, 2019,2020, compared with 42.5%44.0% in the three months ended June 30, 2018.2019. The increasedecrease was mainly due to higherlower raw material prices.

 

Labor costs for our wholesale business were 1.1%1.4% of our total wholesale business sales in the three months ended June 30, 2019,2020, compared with 1.0%1.1% in the three months ended June 30, 2018.2019. The marginal increase was mainly due to a higher average employee salaries in 2019.2020.

23

 

Outsourced production costs for our wholesale business for the three months ended June 30, 20192020 decreased 2.1%40.2% to $14.4$8.6 million from $14.7$14.4 million for the three months ended June 30, 2018.2019. Outsourced production costs accounted for 38.7%39.1% of our total wholesale business sales in the three months ended June 30, 2019,2020, a 0.8% increase40.2% decrease from the three months ended June 30, 2018.2019. This increase in percentage was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.1%0.7% of our total wholesale business sales for the three months ended June 30, 2019,2020, compared with 0.2%0.1% of total wholesale business sales for the three months ended June 30, 2018.2019.

 

Wholesale business gross profit for the three months ended June 30, 20192020 was $6.0$4.4 million compared with $7.2$6.0 million for the three months ended June 30, 2018.2019. Gross profit accounted for 16.1%19.7% of our total wholesale sales for the three months ended June 30, 2019,2020, compared with 18.4%16.1% for the three months ended June 30, 2018.2019. The decrease was mainly due to an increase in raw material costs and higher average employee salaries.

 

Production costs for our retail business were $10.1$13.9 million for the three months ended June 30, 20192020 compared with $14.0$10.1 million during the three months ended June 30, 2018.2019. Retail production costs accounted for 25.2%49.5% of our total retail sales in the three months ended June 30, 2019,2020, compared with 28.1%25.21% for the three months ended June 30, 2018.2019. The decrease in percentage was due to decrease in overall purchase costs. 

 

Rent costs for our retail business for the three months ended June 30, 20192020 were $7.0$4.1 million compared with $8.4$7.0 million for the three months ended June 30, 2018.2019. Rent costs for our retail business accounted for 17.5%14.3% of our total retail sales for the three months ended June 30, 2019,2020, compared with 16.8%17.5% for the three months ended June 30, 2018.2019. The decrease was primarily attributable to the decline in number of stores.

  

Gross profit in our retail business for the three months ended June 30, 20192020 was $23.0$10.1 million and gross margin was 57.3%36.2%. Gross profit in our retail business for the three months ended June 30, 20182019 was $27.4$23.0 million and gross margin was 55.1%57.3%.

 

Total cost of sales for the three months ended June 30, 20192020 was $48.3$35.6 million, a 10.5%26.3% decrease from $54.0$48.30 million for the three months ended June 30, 2018.2019. Total cost of sales as a percentage of total sales for the three months ended June 30, 20192020 was 62.5%71.2%, compared with 61.0%62.5% for the three months ended June 30, 2018.2019. Gross margin for the three months ended June 30, 20192020 was 37.5%28.8% compared with 39.0%37.5% for the three months ended June 30, 2018.2019.  

 

Selling, General and Administrative Expenses

 

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

 

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

 


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

 

  Three Months Ended June 30,  Increase (Decrease) in 2019 Compared 
  2019  2018  to 2018 
  (In thousands of U.S. dollars, except for percentages)    
Gross Profit $28,986   37.5% $34,542   39.0%  (16.1)%
Operating Expenses:      　       　   　 
Selling Expenses  19,699   25.5   22,590   25.5   (12.8)
General and Administrative Expenses  7,337   9.5   8,823   10.0   (16.8)
Total  27,036   35.0   31,413   35.5   (13.9)
Income from Operations $1,950   2.5% $3,129   3.5%  (37.7)%

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

 

Selling expenses for the three months ended June 30, 20192020 decreased 12.8%35.9% to $19.7$12.6 million from $22.6$19.7 million for the three months ended June 30, 2018.2019. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand. 

 

General and administrative expenses for the three months ended June 30, 20192020 decreased 16.8%18.6% to $7.3$6.0 million from $8.8$7.3 million for the three months ended June 30, 2018.2019. The decrease was attributable to the decline in number of stores.

 

(Loss) Income from Operations

 

IncomeLoss from operations for the three months ended June 30, 2019 decreased 37.6% to2020 was $4.2 million, a decrease of 312.8% from $2.0 million from $3.1 millionof income for the three months ended June 30, 2018. Income2019. Loss from operations for the three months ended June 30, 2020 accounted for 8.3% of our total sales, while income from operations for the three months ended June 30, 2019 accounted for 2.5% of our total sales, a 1.0% decrease compared with the three months ended June 30, 2018.sales.

 

Interest Expense

 

Interest expense for the three months ended June 30, 20192020 was $0.4$0.6 million, a 13.3%38.7% increase compared with the same period in 2018.2019. The increase was due to the increase in interest rate.increased bank loans.

 

Income Tax Expenses

 

Income tax expense was $0.7$0.3 million and $1.3$1.5 million for the three months endended June 30, 20192020 and 2018,2019, respectively.

 

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

 

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2019.2020.

 

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

 

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

 


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

 

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

 

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Net (Loss) Income

 

Net incomeloss for the three months ended June 30, 20192020 was $1.8 million,($3.8 million), a 34.8%304.3% decrease compared with the same period in 2018.2019. Our basic and diluted (loss) earnings per share were $0.13($0.26) and $0.19$0.13 for the three months ended June 30, 20192020 and 2018,2019, respectively.

 

Results of Operations for the six months ended June 30, 20192020 and 20182019

 

The following table summarizes our results of operations for the six months ended June 30, 20192020 and 2018.2019. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

 Six Months Ended June 30,  Six Months Ended June 30, 
 2019  2018  2020  2019 
 (In thousands of U.S. Dollars, except for percentages)  (In thousands of U.S. Dollars, except for percentages) 
Sales $165,272   100.0% $181,326   100.0% $108,441   100.0% $165,272   100.0%
Gross Profit  58,344   35.3   65,887   36.3   30,483   28.1   58,344   35.3 
Operating Expense  55,573   33.6   61,313   33.8   37,860   34.9   55,573   33.6 
Income From Operations  2,771   1.7   4,574   2.5 
(Loss) Income From Operations  (7,377)  (6.8)  2,771   1.7 
Other Income  827   0.5   773   0.4   1,372   1.3   827   0.5 
Income tax expense  2,280   1.4   2,041   1.1   493   0.5   2,280   1.4 
Net Income $1,318   0.8% $3,306   1.8%
Net (Loss) Income $(6,498)  (6.0)% $1,318   0.8%

 


Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 20192020 and 2018.2019.

 

 2019  % of total sales  2018  % of total sales  

Growth (Decrease)

in 2019 compared
with 2018

  2020   2019    

Growth (Decrease)

 
Wholesale business (In thousands of U.S. dollars)     (In thousands of U.S. dollars)       (In thousands of U.S. dollars)  % of total sales  (In thousands of U.S. dollars)  % of total sales  in 2020 compared
with 2019		 
Mainland China $17,246   10.4% $13,342   7.4%  29.3% $7,764   7.2% $17,246   10.4%  (55.0)%
Hong Kong China  7,717   4.7   12,556   6.9   (38.5)  5,045   4.7   7,717   4.7   (34.6)
Germany  1,726   1.0   2,765   1.5   (37.6)  243   0.2   1,726   1.0   (85.9)
United Kingdom  2,838   1.7   5,099   2.8   (44.3)  1,309   1.2   2,838   1.7   (53.9)
Europe-Other  9,453   5.7   10,286   5.7   (8.1)  7,511   6.9   9,453   5.7   (20.5)
Japan  6,248   3.8   4,318   2.4   44.7   6,589   6.1   6,248   3.8   5.5 
United States  20,125   12.2   15,704   8.6   28.1   15,876   14.6   20,125   12.2   (21.1)
Total Wholesale business  65,353   39.5   64,070   35.3   2.0   44,337   40.9   65,353   39.5   (32.2)
Retail business  99,919   60.5   117,256   64.7   (14.8)  64,104   59.1   99,919   60.5   (35.8)
Total sales $165,272   100.0% $181,326   100.0%  (8.9)% $108,441   100.0% $165,272   100.0%  (34.4)%

  

Sales for the six months ended June 30, 20192020 were $165.3$108.4 million, a decrease of 8.9%34.4% from the six months ended June 30, 2018.2019. This decrease was primarily attributable to a 2.0% increase32.2% decrease in sales in our wholesale business and a 14.8%35.8% decrease in our retail business.

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Sales generated from our wholesale business contributed 39.5%40.9% or $65.4$44.3 million of our total sales for the six months ended June 30, 2019, an increase2020, a decrease of 2.0%32.2% compared with 35.3%39.5% or $64.1$65.4 million in the six months ended June 30, 2018.2019. This increasedecrease was primarily attributable to increased sales in Mainland China, Japan and the United States partially offset by decreased sales in Hong Kong China, Germany, Mainland China, United Kingdom, the United States and Europe-Other.Europe-Other, partially offset by increased sales in Japan.

 

Sales generated from our retail business contributed 60.5%59.1% or $99.9$64.1 million of our total sales for the six months ended June 30, 2019,2020, a decrease of 14.8%35.8% compared with 64.7%60.5% or $117.3$99.9 million in the six months ended June 30, 2018.2019. This decrease was primarily due to a decrease in same store sales.

 

Total retail store square footage and sales per square foot for the six months ended June 30, 20192020 and 20182019 are as follows:

 

 2019  2018  2020  2019 
Total store square footage  1,274,661   1,421,156   989,034   1,274,661 
Number of stores  1,235   1,417   935   1,235 
Average store size, square feet  1,032   1,003   1,058   1,032 
Total store sales (in thousands of U.S. dollars) $99,919  $117,256  $64,104  $99,919 
Sales per square foot $78  $83  $65  $78 

   

Same store sales and newly opened store sales for the six months ended June 30, 20192020 and 20182019 are as follows:

 

 2019  2018  2020  2019 
 (In thousands of U.S. dollars)  (In thousands of U.S. dollars) 
Sales from stores opened for a full year $77,984  $92,898  $43,678  $77,984 
Sales from newly opened store sales $7,417  $11,728  $4,636  $7,417 
Sales from e-commerce platform $6,197  $6,989  $7,822  $6,197 
Other* $8,321  $5,641  $7,968  $8,321 
Total $99,919  $117,256  $64,104  $99,919 

  

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

 

We remodeled or relocated 250117 stores in 2018,2019, and 399 stores during the six months ended June 30, 2019.2020. We plan to relocate or remodel 100-15050-100 stores in 2019.2020. 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 2018.2020.  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.

 

27

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the six months ended June 30, 20192020 and 2018.2019.

 

          Growth           Growth 
          (Decrease) in
2019		           (Decrease) in
2020		 
 Six months ended June 30,  Compared  Six months ended June 30,  2020 
 2019  2018  with 2018  2020  2019  Compared 
 (In thousands of U.S. dollars, except for percentages)    (In thousands of U.S. dollars, except for percentages) with 2019 
Net Sales for Wholesale Sales $65,353   100.0% $64,071   100.0%  2.0% $44,337   100.0% $65,353   100.0%  (32.2)%
Raw Materials  27,685   42.3   26,724   41.7   3.6   18,704   42.2   27,685   42.3   (32.4)
Labor  705   1.1   781   1.2   (9.7)  544   1.2   705   1.1   (22.9)
Outsourced Production Costs  24,279   37.2   23,447   36.6   3.6   16,993   38.3   24,279   37.2   (30.0)
Other and Overhead  113   0.2   157   0.3   (27.5)  238   0.5   113   0.2   110.6 
Total Cost of Sales for Wholesale  52,782   80.8   51,109   79.8   3.3   36,479   82.2   52,782   80.8   (30.9)
Gross Profit for Wholesale  12,571   19.2   12,962   20.2   (3.0)  7,858   17.8   12,571   19.2   (37.5)
Net Sales for Retail  99,919   100.0   117,255   100.0   (14.8)  64,104   100.0   99,919   100.0   (35.8)
Production Costs  34,286   34.3   40,055   34.2   (14.4)  29,712   46.3   34,286   34.3   (13.3)
Rent  19,860   19.9   24,275   20.7   (18.2)  11,767   18.4   19,860   19.9   (40.7)
Total Cost of Sales for Retail  54,146   54.2   64,330   54.9   (15.8)  41,479   64.7   54,146   54.2   (23.4)
Gross Profit for Retail  45,773   45.8   52,925   45.1   (13.5)  22,625   35.3   45,773   45.8   (50.6)
Total Cost of Sales  106,928   64.7   115,439   63.7   (7.4)  77,958   71.9   106,928   64.7   (27.1)
Gross Profit $58,344   35.3% $65,887   36.3%  (11.4)% $30,483   28.1% $58,344   35.3%  (47.8)%

 

Raw material costs for our wholesale business were 42.3%42.2% of our total wholesale business sales in the six months ended June 30, 2019,2020, compared with 41.7%42.3% in the six months ended June 30, 2018.2019. The increasedecrease was mainly due to higherlower cost of raw materials.

 

Labor costs for our wholesale business were 1.1%1.2% of our total wholesale business sales in the six months ended June 30, 2019,2020, compared with 1.2%1.1% in the six months ended June 30, 2018.2019. The marginal decreaseincrease was mainly due to a lower number of outsourced ordershigher average employee salaries in first half of 2019.2020.

 

Outsourced production costs for our wholesale business were 37.2%38.3% of our total sales in the six months ended June 30, 2019,2020, compared with 36.6%37.2% in the six months ended June 30, 2018.2019. This increase was primarily attributable to higher average employee salaries at our outsourced manufacturing factories.

 

Overhead and other expenses for our wholesale business accounted for 0.2%0.5% and 0.3%0.2% of our total sales for the six months ended June 30, 20192020 and 2018,2019, respectively.

 

Gross profit for our wholesale business for the six months ended June 30, 20192020 was $12.6$7.9 million, a 3.0%37.5% decrease compared with the six months ended June 30, 2018.2019. As a percentage of total wholesale business sales, gross profit was 19.2%17.8% of our total wholesale business sales for the six months ended June 30, 2019,2020, compared with 20.2%19.2% for the six months ended June 30, 2018.2019. The decrease was mainly due to increased raw materials costs and higher average employee salaries.

  


Production costs for our retail business for the six months ended June 30, 20192020 were $34.3$29.7 million compared with $40.1$34.3 million for the six months ended June 30, 2018.2019. As a percentage of our total retail sales, production costs were 34.3%46.3% of our total retail sales for the six months ended June 30, 2019,2020, compared with 34.2%34.3% for the six months ended June 30, 2018.2019. The decrease in amounts was due to decrease in overall purchase costs.

   

Rent costs for our retail business for the six months ended June 30, 20192020 were $19.9$11.8 million compared with $24.3$19.9 million for the six months ended June 30, 2018.2019. As a percentage of total retail sales, rent costs were 19.9%18.4% of our total retail sales for the six months ended June 30, 20192020 compared with 20.7%19.9% for the six months ended June 30, 2018.2019. The decrease in percentage was primarily attributable to decline in number of stores.

 

Gross profit for our retail business for the six months ended June 30, 20192020 was $45.8$22.6 million compared with $52.9$45.8 million for the six months ended June 30, 2018.2019. Gross margin for our retail business for the six months ended June 30, 20192020 was 45.8%35.3% compared with 45.1%45.8% for the six months ended June 30, 2018.2019.

 

Total cost of sales for the six months ended June 30, 20192020 was $106.9$78.0 million, a 7.4%27.1% decrease compared with the six months ended June 30, 2018.2019. As a percentage of total sales, total costs were 64.7%71.9% of total sales for the six months ended June 30, 2019,2020, compared with 63.7%64.7% for the six months ended June 30, 2018.2019. Total gross margin for the six months ended June 30, 20192020 was 35.3%28.1% compared with 36.3%35.3% for the six months ended June 30, 2018.2019.

  

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our two largest suppliers represented approximately 15.7% and 16.5% of raw material purchases for the six months ended June 30, 2019 and 2018, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six months ended June 30, 2019 and 2018. For our retail business, purchases from our two largest suppliers represented approximately 63.3% and 55.1% of raw material purchases for the six months ended June 30, 2019 and 2018, respectively. One supplier provided approximately 32.2% and 31.2% of our total purchases for the six months ended June 30, 2019 and 2018, respectively. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

28

 

We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 29.4% and 28.9% of finished goods purchases for the six months ended June 30, 2019 and 2018, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2019 and 2018. For our retail business, our five largest contract manufacturers represented approximately 23.2% and 16.4% of finished goods purchases for the six months ended June 30, 2019 and 2018, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2019 and 2018. 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.

 

 Six months ended June 30,  Increase (Decrease) in 2019 Compared  Six months ended June 30,  Increase (Decrease) in 2020 
 2019  2018  to 2018  2020  2019  Compared 
 (In thousands of U.S. dollars, except for percentages)    (In thousands of U.S. dollars, except for percentages)  to 2019 
Gross Profit $58,344   35.3% $65,887   36.3%  (11.4)% $30,483   28.1% $58,344   35.3%  (47.8)%
Operating Expenses:      　       　   　       　       　   　 
Selling Expenses  40,706   24.6   44,817   24.7   (9.2)  26,105   24.1   40,706   24.6   (35.9)
General and Administrative Expenses  14,867   9.0   16,496   9.1   (9.9)  11,755   10.8   14,867   9.0   (20.9)
Total  55,573   33.6   61,313   33.8   (9.4)  37,860   34.9   55,573   33.6   (31.9)
Income from Operations $2,771   1.7% $4,574   2.5%  (39.4)%
(Loss)Income from Operations $(7,377)  (6.8)% $2,771   1.7%  (366.2)%

   

Selling expenses for the six months ended June 30, 20192020 were $40.7$26.1 million, a 9.2%35.9% decrease compared with the six months ended June 30, 2018.2019. The decrease was attributable to the marketing expenses associated with the promotion of the retail brand. 

 

General and administrative expenses for the six months ended June 30, 20192020 were $14.9$11.8 million a 9.9%20.9% decrease compared with the six months ended June 30, 2018.2019. As a percentage of total sales, general and administrative expenses accounted for 10.8% of total sales for the six months ended June 30, 2020, compared with 9.0% of total sales for the six months ended June 30, 2019, compared with 9.1% of total sales for the six months ended June 30, 2018.2019. The decrease in amounts was attributable to the decline in number of stores.

 

(Loss)Income from Operations

 

IncomeLoss from operations for the six months ended June 30, 20192020 was $7.4 million, a 366.2% decrease from $2.8 million a 39.4% decrease from $4.6 millionof income for the six months ended June 30, 2018.2019. This decrease was due to increased expenses.decreased sales. 

 

Interest Expense

 

Interest expense was $0.8$0.9 million and $0.9$0.8 million for the six months ended June 30, 20192020 and 2018,2019, respectively. The decreaseincrease was due to the decreasedincreased bank loans.

 

Income Tax Expense

 

Income tax expense for the six months ended June 30, 20192020 was $2.3$0.5 million, an 11.7% increasea 78.4% decrease compared to the same period of 2018.2019. The increasedecrease was primarily due to deferred tax asset valuation allowance which resulted in a slightly higher income tax expense.

 

29

Net (Loss) Income

 

Net incomeloss for the six months ended June 30, 20192020 was $1.3$6.5 million, a decrease of 60.1%593.0% compared with the net income from the same period in 2018.2019. Basic and diluted (loss) earnings per share were $0.09($0.44) and $0.24$0.09 for the six months ended June 30, 20192020 and 2018,2019, respectively.

 

Summary of Cash Flows

 

Summary cash flows information for the six months ended June 30, 20192020 and 20182019 is as follows:

 

  2019  2018 
  (In thousands of U.S. dollars) 
Net cash used in operating activities $(9,785) $(10,655)
Net cash used in investing activities $(4,082) $(6,295)
Net cash used in financing activities $(889) $(8,600)
  2020  2019 
  (In thousands of U.S. dollars) 
Net cash provided by (used in) operating activities $17,041  $(9,785)
Net cash used in investing activities $(1,843) $(4,082)
Net cash provided by (used in) financing activities $11,720  $(889)

 


Net cash used inprovided by operating activities was $9.8$17.0 million for the six months ended June 30, 2019,2020, compared with $10.7$9.8 million net cash used in operating activities during the six months ended June 30, 2018.2019. The decreaseincrease was primarily due to decreaseincrease in inventory and decrease incollection of accounts receivable.

 

Net cash used in investing activities was $4.1$1.8 million for the six months ended June 30, 2019,2020, compared with $6.3$4.1 million used during the six months ended June 30, 2018.2019. This decrease was mainly due to the decreased in purchase of less property and equipment and decrease in remodeling expenditure in 2019.2020.

 

Net cash used inprovided by financing activities was $0.9$11.7 million for the six months ended June 30, 2019,2020, compared with $8.6$0.9 million net cash providedused during the six months ended June 30, 2018.2019. During the six months ended June 30, 2019,2020, we repaid $19.9$21.2 million of bank loans and received additional bank loan proceeds of $16.3$32.0 million. Also, underUnder the counter-guarantee agreement, we received $8.1$4.0 million from and $5.5paid $3.1 million paid to the related party during the six months ended June 30, 2019.2020.

 

Liquidity and Capital Resources

 

As of June 30, 2019,2020, we had cash and cash equivalents of $34.5$59.2 million, other current assets of $146.5$127.3 million and current liabilities of $138.4$132.1 million. We presently finance our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue to be our primary source of funds to finance our short-term cash needs.

 

Bank Loans

 

In December 2016,2019, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $8.7$5.7 million (RMB60.0(RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of June 30, 2019,2020, Goldenway had borrowed $5.8$5.7 million (RMB 40.0(RMB40.0 million) under this linefrom Industrial and Commercial Bank of creditChina with an annual interest rate of 3.92%4.57% and due on November 2019. As of June 30, 2019, approximately $2.9 million was unused and available under this line of credit.  August 2020.

 

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.6$14.1 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of June 30, 2019,2020, Ever-Glory Apparel had borrowed $5.8$14.1 million (RMB 40.0100.0 million) under this line of credit with annual interest rates ranging from 4.57%3.92% to 4.70%4.35% and due on July 2019.from September 2020 to May 2021.

In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.7 million (RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2019,2020, approximately $8.8$5.7 million was unused and available under this line of credit. In March 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $15.5 million (RMB110.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.85% to 3.99%. In April 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $15.5 million (RMB 110.0 million) under this line of certificate with an annual interest rate of 2.02% and due on July 2020. On July 2020, Ever-Glory Apparel repaid the loan and borrowed $11.3 million (RMB 80.0 million) under this line of certificate with an annual interest rate of 2.50% and due on July 2021.

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

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

 

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.3$7.1 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2019,2020, approximately $7.3$7.1 million was unused and available under this line of credit.

 

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.7$8.5 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $5.8 million (RMB40.0 million) from Nanjing Bank with an annual interest rates 5.0% and due on variable dates from September 2019 to June 2020. As of June 30, 2019,2020, approximately $2.9$8.5 million was unused and available under this line of credit.

 

In May 2018,June 2019, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.9$2.8 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of June 30, 2019,2020, approximately $2.9$2.8 million was unused and available under this line of credit.

  

In June 2018,September 2019, LA GO GO entered into a line of credit agreement for approximately $2.9$2.8 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of June 30, 2019, LA GO GO had borrowed $2.9 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.79% and due in October 2019.  


In November 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB19.9 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of June 30, 2019, LA GO GO had borrowed $2.9 million (RMB19.9 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from November 2019 to January 2020.

In July 2018, Ever-Glory Apparel entered into a line of credit agreement for2020, approximately $2.9 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of June 30, 2019, Ever-Glory Apparel had borrowed $2.6 million (RMB18.0 million) from the Shanghai Pudong Development Bank with an annual interest rate 4.57% and due on date November 2019. As of June 30, 2019, approximately $0.3$2.8 million was unused and available under this line of credit.

 

In MarchAugust 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of June 2019, Ever-Glory Apparel had borrowed $0.2 million from HSBC with an annual interest rate of 3.2% and due in September 2019, and collateralized by30, 2020, approximately $0.1 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of June 30, 2019, approximately $2.3$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 Financial Instruments

Foreign currency swap contracts

The Company entered two foreign currency swap contracts with two banks during 2018. Due to the demand of financial management for daily operation, Ever-Glory Apparel entered into a foreign currency swap contract to exchange $6.0 million for equivalent RMB with Bank of China in May and entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June. The terms of two foreign currency contracts are both six months. Ever-Glory Apparel and the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged. If the Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As of June 30, 2018, the fair value of principal amounts are included in other receivable ($9.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance sheets, and unrealized gain of $0.27 million for the six months ended June 30, 2018 is recognized in the income from operations. As of June 30, 2019, there are no currency swap contracts.

Forward foreign exchange contracts

To avoid foreign currency fluctuation on forecasted international sales and secure the profits on such revenues, the Company entered several forward foreign exchange contracts with banks from time to time. According to ASC 815-20-25, the Company designated above contracts as cash flow hedges. As of June 30, 2018, the Company had one outstanding forward foreign exchange contract (sell EUR dollars for RMB), with total notional amount of €0.42 million and two outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional amount of $17.0 million according to the amounts of orders. These contracts have aggregate unrealized loss of $0.49 million in fair value recognized as derivatives financial instruments liabilities and accumulated other comprehensive income (loss) in the consolidated balance sheets. 

As of June 30, 2019, the Company had one outstanding forward foreign exchange contracts (sell USD dollars for RMB), with total notional amount of $10.0 million. The fair value of this contract at June 30, 2019 was not significant. 


Capital Commitments

 

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

  

Uses of Liquidity

 

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

31

  

Sources of Liquidity

 

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

 

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

 

As of June 30, 2019,2020, we had access to approximately $53.4$56.2 million in lines of credit, of which approximately $27.4$31.5 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately $33.5$37.3 million (RMB 230.0260.0 million) and approximately $7.3$3.7 million (RMB 50.026.4 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of June 30, 2019.2020.

 

Foreign Currency Translation Risk

 

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2019,2020, the market foreign exchange rate had increased to RMB 6.877.08 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.

 

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Haian Taixin, 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 gain (loss) for the three and six months ended June 30, 2020 and 2019 and 2018 was ($0.26) million, ($1.70) million, ($2.49) million and $1.49 million, ($6.09) million and ($2.07) million, respectively.

 


OFF-BALANCE SHEET ARRANGEMENTS

 

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

ITEM 2A.RISK FACTORS32

 

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

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

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

Evaluation of Disclosure Controls and Procedures.  Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the period ended June 30, 2019.2020. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were operating effectively. 

 

Changes in Internal Control Over Financial Reporting

 

Other than described above, during the second quarter of 2019,2020, 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.

 


33

PART II.  OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

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

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

ITEM 1A.RISK FACTORS

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

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

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


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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

 

Securities Authorized for Issuance under Equity Incentive Plans

 

The following table presents information regarding equity instruments outstanding under our 2014 Equity Incentive Plan as of June 30, 2019:2020:

 

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


ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

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

 


SIGNATURES

 

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

 

August 13, 20192020EVER-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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