UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

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

 

For the transition period from ____________ to ____________

 

Commission file number:  0-28806

 

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

 

Florida   65-0420146 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

 

86-25-5209-6831

 (Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

As of May 8, 2021, 14,810,660 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.

 

 

 

 

 

  

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

 

INDEX

 

    Page
Number
     
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ii
     
PART I.  FINANCIAL INFORMATION  
     
Item 1.   Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited) 1
     
  Condensed Consolidated Statements of Income (loss) and Comprehensive Income (loss) for the Three Months Ended March 31, 2021 and 2020 (unaudited) 2
     
  Condensed Consolidated Statements of Equity for The Three Months Ended March 31, 2021 and 2020 (unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited) 4
     
  Notes to the Condensed Consolidated Financial Statements (unaudited) 5
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4.   Controls and Procedures 27
     
PART II.  OTHER INFORMATION 28
     
Item 1.   Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3.   Defaults Upon Senior Securities 28
     
Item 4.   Mine Safety Disclosure  28
     
Item 5.   Other Information 28
     
Item 6.   Exhibits 29
     
SIGNATURES 30

 

i

 

 

Cautionary Note Regarding Forward-Looking Statements

 

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

 

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

 

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

 

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

  

ii

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

 

    March 31,
2021 		    December 31,
2020 		 
ASSETS            
             
CURRENT ASSETS            
Cash and cash equivalents   $ 78,056     $ 81,865  
Restricted cash     45,660       39,858  
Trading securities     3,036       1,792  
Accounts receivable, net     46,719       53,285  
Inventories     43,342       53,893  
Advances on inventory purchases     7,802       10,261  
Value added tax receivable     1,183       1,244  
Other receivables and prepaid expenses     5,956       5,479  
Amounts due from related parties     674       567  
Total Current Assets     232,428       248,244  
                 
NON-CURRENT ASSETS                
Equity security investment     3,877       3,932  
Intangible assets, net     4,712       4,794  
Property and equipment, net     31,881       32,164  
Operating lease right-of-use assets     55,839       41,690  
Deferred tax assets     879       902  
Total Non-Current Assets     97,188       83,482  
TOTAL ASSETS   $ 329,616     $ 331,726  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Bank loans   $ 71,534     $ 65,919  
Accounts payable     52,083       67,762  
Accounts payable and other payables – related parties     2,829       3,764  
Other payables and accrued liabilities     13,522       16,073  
Value added and other taxes payable     684       909  
Income tax payable     704       1,062  
Current operating lease liabilities     47,327       33,481  
Total Current Liabilities     188,683       188,970  
                 
NON-CURRENT LIABILITIES                
Non-current operating lease liabilities     8,622       8,307  
TOTAL LIABILITIES     197,305       197,277  
                 
COMMITMENTS AND CONTINGENCIES (Note 9)                
                 
STOCKHOLDERS’ EQUITY                
Stockholders’ equity:                
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,810,660 and 14,809,160 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively)     15       15  
Additional paid-in capital     3,655       3,650  
Retained earnings     108,001       109,171  
Statutory reserve     20,376       20,376  
Accumulated other comprehensive income     3,238       4,590  
Amounts due from related party     (2,974 )     (3,353 )
Total equity     132,311       134,449  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 329,616     $ 331,726  

 

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

 

    Three Months Ended  
    March 31,
2021 		    March 31,
2020 		 
             
SALES   $ 70,814     $ 58,355  
                 
COST OF SALES     48,379       42,317  
                 
GROSS PROFIT     22,435       16,038  
                 
OPERATING EXPENSES                
Selling expenses     15,548       13,478  
General and administrative expenses     7,851       5,785  
Total operating expenses     23,399       19,263  
      　         　    
LOSS FROM OPERATIONS     (964 )     (3,225 )
                 
OTHER INCOME (EXPENSE)                
Interest income     224       277  
Interest expense     (492 )     (341 )
Government subsidy     259       460  
Other income (expense), net     532       358  
Total other income (expense), net     523       754  
                 
LOSS BEFORE INCOME TAX     (441 )     (2,471 )
                 
INCOME TAX EXPENSE     (729 )     (227 )
                 
NET LOSS     (1,170 )     (2,698 )
Net income attributable to the non-controlling interest     -       (3 )
NET LOSS ATTRIBUTABLE TO THE COMPANY   $ (1,170 )   $ (2,701 )
                 
NET LOSS   $ (1,170 )   $ (2,698 )
Foreign currency translation loss     (1,352 )     (1,437 )
COMPREHENSIVE LOSS   $ (2,522 )   $ (4,135 )
                 
Comprehensive loss attributable to the non-controlling interest     -       6  
                 
COMPREHENSIVE LOSS ATTRIBUTABLE TO THE COMPANY   $ (2,522 )   $ (4,129 )
LOSS PER SHARE:                
Basic and diluted   $ (0.08 )   $ (0.18 )
Weighted average number of shares outstanding Basic and diluted     14,810,001       14,804,832  

 

See the accompanying notes to the condensed consolidated financial statements.

  

  2  

 

  

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED March 31, 2021 AND 2020 (Unaudited)

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

 

          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 (loss)     party     Company     Interest     equity  
Balance at January 1, 2021     14,809,160     $ 15     $ 3,650     $ 109,171     $ 20,376     $ 4,590     $ (3,353 )   $ 134,449     $ -     $ 134,449  
                                                                                 
Stock-based compensation     1,500       -       5       -       -       -       -       5       -       5  
Net loss     -       -       -       (1,170 )     -       -       -       (1,170 )     -       (1,170 )
Net cash received from related party under counter guarantee agreement     -       -       -       -       -       -       379       379       -       379  
Foreign currency translation loss     -       -       -       -       -       (1,352 )     -       (1,352 )     -       (1,352 )
Balance at March 31, 2021     14,810,660     $ 15     $ 3,655     $ 108,001     $ 20,376     $ 3,238     $ (2,974 )   $ 132,311       -     $ 132,311  

 

          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 (loss)     party     Company     Interest     equity  
Balance at January 1, 2020     14,801,770     $ 15     $ 3,640     $ 106,328     $ 19,939     $ (4,330 )   $ (4,932 )   $ 120,660       (1,510 )   $ 119,150  
                                                                                 
Stock-based compensation     3,062       -       5       -       -       -       -       5       -       5  
Net income (loss)     -       -       -       (2,701 )     -       -       -       (2,701 )     3       (2,698 )
Net cash received from related party under counter guarantee agreement     -       -       -       -       -       -       785       785       -       785  
Foreign currency translation income (loss)     -       -       -       -       -       (1,440 )     -       (1,440 )     3       (1,437 )
Balance at March 31, 2020     14,804,832     $ 15     $ 3,645     $ 103,627     $ 19,939     $ (5,770 )   $ (4,147 )   $ 117,309       (1,504 )   $ 115,805  

 

See the accompanying notes to the condensed consolidated financial statements.

 

  3  

 

  

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

    Three Months Ended  
    March 31,
2021 		    March 31,
2020 		 
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (1,170 )   $ (2,698 )
Adjustments to reconcile net loss to cash provided by operating activities:     　       　  
Depreciation and amortization     1,377       1,587  
Gain on disposal of intangible assets     -       (268 )
Loss from sale of property and equipment     102       102  
(Recovering from) Provision of bad debt allowance     (196 )     278  
Provision for obsolete inventories     3,583       4,204  
Changes in fair value of trading securities     (262 )     -  
Changes in fair value of investment     28       -  
Deferred income tax     17       104  
Stock-based compensation     5       5  
Changes in operating assets and liabilities                
Accounts receivable     6,509       34,906  
Inventories     6,805       10,303  
Value added tax receivable     52       210  
Other receivables and prepaid expenses     (367 )     364  
Advances on inventory purchases     2,544       2,855  
Amounts due from related parties     (71 )     142  
Accounts payable     (14,690 )     (19,864 )
Accounts payable and other payables- related parties     (769 )     (1,038 )
Other payables and accrued liabilities     (3,221 )     (5,587 )
Value added and other taxes payable     (220 )     (31 )
Income tax payable     (358 )     (1,019 )
Net cash (used in) provided by operating activities     (302 )     24,555  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     (1,378 )     (78 )
Disposal of intangible assets     -       353  
Purchases of trading securities     (1,238 )     -  
Proceeds from trading securities     255       -  
Net cash (used in) provided by investing activities     (2,361 )     275  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from bank loans     12,336       11,464  
Repayment of bank loans     (6,168 )     (14,884 )
Net collection (advance) of amounts due from related party (equity)     148       748  
Net cash provided by (used in) financing activities     6,316       (2,672 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (1,659 )     1,497  
      　       　  
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH     1,993       23,655  
      　       　  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD     121,723       48,551  
      　       　  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD   $ 123,716     $ 72,206  
                 
Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets:                
                 
Cash and Cash Equivalents     78,056       70,036  
Restricted cash     45,660       2,170  
    $ 123,716     $ 72,206  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid during the period for:                
Interest   $ 492     $ 341  
Income taxes   $ 729     $ 1,218  

 

See the accompanying notes to the condensed consolidated financial statements.

  4  

 

  

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 1 BASIS OF PRESENTATION

 

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

 

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

 

Shanghai Yiduo Fashion Company Limited, the only then subsidiary with non-controlling interests, was deconsolidated from the financial statements as of December 31, 2020 as a result of bankruptcy liquidation.

 

He Meida was closed in April 2021, which is not a strategic shift and does not have major effect on the Company’s operations or financial results.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of March 31, 2021 the condensed consolidated statements of income (loss) and comprehensive income (loss), condensed consolidated statements of equity, and condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

 

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three months ended March 31, 2021 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, 2020. 

  

  5  

 

 

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

 

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

  

Use of Estimates

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

NOTE 3 INVESTMENTS

 

Trading securities

 

Investments in equity securities of certain US public companies are accounted for as trading securities and measured subsequently at fair value in the consolidated balance sheets. Net gains and losses recognized during the three months periods are summarized as follows (In thousands of U.S. Dollars).

   

    March 31,
2021 		    March 31,
2020 		 
    (In thousands of
U.S. Dollars) 		 
Net gains recognized during the period on equity securities   $ 262     $    -  
Less: Net gains recognized during the period on equity securities sold during the period     54       -  
Unrealized gains recognized during the reporting period on equity securities still held at the reporting date   $ 208     $ -  

 

  6  

 

 

Equity security investment

 

In August 2020, Ever-Glory Apparel invested $2.9 million (RMB 20.0 million) for 2.38% ownership in a partnership (“Partnership”). In December 2020, the Partnership invested in a public company in China. As a limited partner, the Company does not have ability to exercise significant influence due to lack of kick-out rights through voting interests. In the meantime, the Company entered an agreement with the general partner of the Partnership (GP) and an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration of the average net asset value ten trading days prior to the closing date, if the Company is not able to withdraw any part of the original investment from the Partnership in the twelve months period beginning the third year of the initial investment (“optional withdrawal period”). If the Company opts to withdraw entire investment during the optional withdrawal period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual. The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the GP and the individual is in place.

 

In December 2020, the Partnership invested in a public company in China. Since there is readily determinable fair value of the equity investment, the Company started to measure its equity investment at fair value using the public company’s stock price and the Company’s shares since December 31, 2020. At each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. There is no significant adverse change in the regulatory, economic, or technological environment of the investee. So the investment was not impaired at March 31, 2021.

 

NOTE 4 INVENTORIES

 

Inventories at March 31, 2021 and December 31, 2020 consisted of the following:

 

    March 31,
2021 		    December 31,
2020 		 
    (In thousands of
U.S. Dollars) 		 
Raw materials   $ 1,029     $ 1,297  
Work-in-progress     11,211       8,130  
Finished goods     31,102       44,466  
Total inventories   $ 43,342     $ 53,893  

 

NOTE 5 BANK LOANS

 

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Short term bank loans consisted of the following as of March 31, 2021 and December 31, 2020.

 

    March 31,
2021 		    December 31,
2020 		 
Bank   (In thousands of
U.S. Dollars) 		 
Shanghai Pudong Development Bank   $ 47,943     $ 42,157  
Industrial and Commercial Bank of China     21,308       21,462  
Nanjing Bank     2,283       2,300  
    $ 71,534     $ 65,919  

 

In August 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2021, Ever-Glory Apparel had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual interest 3.01% and due on September 2021. As of March 31, 2021, approximately $0.7 million was unused and available under this line of credit.

 

  7  

 

 

From March 2020 to July 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $29.0 million (RMB190.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.75% to 3.99%. From July to November 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $29.0 million (RMB 190.0 million) under this line of certificate with an annual interest rate from 2.50% to 3.10% and due on between May 2021 and October 2021.

 

In December 2020, Goldenway entered into a certificate of three-year time deposit of $16.7 million (RMB110.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of 3.85%. From November 2020 to February 2021, Goldenway pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Goldenway had borrowed $16.7 million (RMB 110.0 million) under this line of certificate with annual interest rate of 2.90% and 3.4%, due between May 2021 and February 2022.

 

In April 2020, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.1 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of March 31, 2021, Goldenway had borrowed $6.1 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due in August 2021.

 

In July 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $15.2 million (RMB100.0 million) with Industrial and Commercial Bank of China, which is collateralized by assets of Nanjing Knitting, an equity investee of Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of March 31, 2021, Ever-Glory Apparel had borrowed $15.2 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.95% to 4.35% and due between May 2021 to March 2022.

 

In April 2020, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $6.9 million (RMB45.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of March 31, 2021, approximately $6.9 million was unused and available under this line of credit.

 

In June 2020, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of March 31, 2021, LA GO GO had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual interest 4.55% and due in September 2021. As of March 31, 2021, approximately $0.7 million was unused and available under this line of credit.

 

In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.1 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2021, approximately $9.1 million was unused and available under this line of credit.

 

In March 2021, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.6 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 March 31, 2021, approximately $4.6 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 $0.5 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively.

 

NOTE 6 INCOME TAX

 

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

 

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

 

  8  

 

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2020. He Meida was closed in April 2021.

 

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

 

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

 

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

 

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

 

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 for the three months ended March 31, 2021 and 2020 was taxable in the following jurisdictions: 

 

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
PRC   $ (438 )   $ (1,748 )
BVI     -       (720 )
Others     (3 )     (3 )
    $ (441 )   $ (2,471 )

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three months ended March 31, 2021 and 2020:

 

    2021     2020  
PRC statutory rate     25.0 %     25.0 %
Temporary difference between US GAAP and PRC tax accounting     (190.7 )     (34.2 )
Effective income tax rate     (165.7 )%     (9.2 )%

 

Income tax expense for the three months ended March 31, 2021 and 2020 is as follows:

 

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
Current   $ 706     $ 345  
Deferred     23       (118 )
Income tax expense   $ 729     $ 227  

 

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. 

 

  9  

 

 

The Company has not recorded U.S. deferred income taxes on approximately $110.2 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S. Tax Reform signed into law on December 22, 2017 significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, there is no deferred tax expense (income) relating to the Tax Act changes for the year ended March 31, 2021.

 

NOTE 7 STOCKHOLDERS’ EQUITY

 

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. 

 

On February 9, 2021, the Company issued 1,500 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 2020. The shares issued in 2021 were valued at $3.34 per share, which was the average market price of the common stock for the five days before the grant date.

 

NOTE 8 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 some Company’s retail stores since the third quarter of 2014.

 

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
The Company received from the customers   $ 3       3  
The Company paid to Wubijia     (3 )     (3 )
The net income recorded as other income   $ -     $ -  

 

Included in other income for the years ended March 31, 2021 and 2020 is rental income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term through 2021. The rental income is $6,366 and $5,916 for the three months ended March 31, 2021 and 2020, respectively.

   

  10  

 

 

Other expenses due to Related Parties

 

Included in other expenses for the three months ended March 31, 2021 and 2020 are rent due to entities controlled by Mr. Kang under operating lease agreements as follows:

  

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
Chuzhou Huarui     55       50  
Kunshan Enjin     23       22  
Total   $ 78     $ 72  

 

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 totaled $0.2 million and $0.1 million during the three months ended March 31, 2021 and 2020, respectively.

 

In addition, the Company sub-contracted certain manufacturing work to related companies totaled $4.7 million and $3.1 million for the three months ended March 31, 2021 and 2020, respectively. The Company provided raw materials to the sub-contractors and charged a fixed fee for labor provided by the sub-contractors.

 

Sub-contracts with related parties included in cost of sales for the three months ended March 31, 2021 and 2020 are as follows:

  

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
Ever-Glory Vietnam   $ 3,083     $ 1,884  
Chuzhou Huarui     491       513  
Fengyang Huarui     319       158  
Nanjing Ever-Kyowa     391       254  
EsC’eLav     6       10  
Jiangsu Ever-Glory     457       246  
Total   $ 4,747     $ 3,065  

   

Accounts Payable – Related Parties

 

The accounts payable to related parties at March 31, 2021 and December 31, 2020 are as follows:

 

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
Ever-Glory Vietnam   $ 2,211       1,727  
Fengyang Huarui     2       150  
Nanjing Ever-Kyowa     -       384  
Chuzhou Huarui     215       1,234  
Nanjing Knitting     228       257  
Jiangsu Ever-Glory     173       12  
Total   $ 2,829     $ 3,764  

 

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Amounts Due From Related Parties-current assets

 

The amounts due from related parties at March 31, 2021 and December 31, 2020 are as follows:

 

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
Jiangsu Ever-Glory   $ 660     $ 567  
Esc’elav     14       -  
Total   $ 674     $ 567  

 

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three months ended March 31, 2021 and 2020, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices. The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at cost for $1.8 million and $0.2 million during the three month period ended March 31, 2021 and 2020, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $0.5 million and $0.7 million during the three months ended March 31, 2021 and 2020, respectively.  

   

Amounts Due From Related Party under Counter Guarantee Agreement

 

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of March 31, 2021 and December 31, 2020, Jiangsu Ever-Glory has provided guarantees for approximately $35.8 million (RMB 235 million) and $36 million (RMB 235.0 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $31.3 million (RMB 205.5 million) and $31.5 million (RMB 205.5 million) as of March 31, 2021 and December 31, 2020 respectively. Mr. Kang has also provided a personal guarantee for $12.2 million (RMB 80.0 million) and $14.8 million (RMB 96.3 million) as of March 31, 2021 and December 31, 2020, respectively.

 

At December 31, 2020, $3.1 million (RMB 20.0 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the three months ended March 31, 2021, an additional $0.2 million (RMB 1.2 million) was provided to and repayment of $0.3 million (RMB 2.2 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of March 31, 2021, the amount of the counter-guarantee was $2.9 million (RMB 19.1 million) (the difference represents currency exchange adjustment of $0.02 million), which was 8.11% of the aggregate amount of lines of credit. This amount plus accrued interest of $0.07 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At March 31, 2021 and December 31, 2020, the amount classified as a reduction of equity was $3.0 million and $3.4 million, respectively. Interest of 0.5% was charged on net amounts due from Jiangsu Ever-Glory at each month end. Since January 1, 2019, interest rate has changed to 0.3625% charged at each month end as the bank benchmark interest rate decreased. Interest income for the three months ended March 31, 2021 and 2020 was approximately $0.3 thousands and $0.02 million, respectively.

 

NOTE 9 COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitment

 

The Company recognized operating lease liabilities and operating lease right-of-use (ROU) 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.

 

  12  

 

 

The weighted average remaining lease term excluding stores in the shopping malls is 30 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. For stores closed before the lease end, we would incur insignificant amounts in net of loss on impairment of ROU assets and gain on extinguishment of lease liabilities, which are recorded in the current period statement of income (loss) and comprehensive income (loss). 

 

In the three months ended March 31, 2021, the costs of the leases recognized in cost of revenues and general administrative expenses are $9.9 million and $0.1 million, respectively. Cash paid for the operating leases including in the operating cash flows was $10.0 million. In the three months ended March 31, 2020, the costs of the leases recognized in cost of revenues and general administrative expenses are $6.0 million and $0.2 million, respectively. Cash paid for the operating leases including in the operating cash flows was $6.2 million. 

 

The following table summarizes the maturity of operating lease liabilities:

 

Year ending December 31, (In thousands of U.S. Dollars)      
2021   $ 563  
2022     751  
2023     766  
2024     432  
2025     432  
Thereafter     12,883  
Total lease payment     15,827  
Less: Interest     7,092  
Total   $ 8,735  

 

Legal Proceedings

 

We are not aware of any pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity. 

 

Lawsuits against Client A

 

In November 2020, the Company’s two subsidiaries, Ever-Glory International Group Apparel Inc. and Goldenway Nanjing Garments Company Limited filed a complaint against Client A (“Client A”) for unpaid goods worth RMB 70.15 million ($10.75 million) in the Tianjin No.1 Intermediate People’s Court based on processing contracts between the parties. The Company has applied for interim measures with the court and has frozen bank accounts of Client A for a total amount of RMB 68.12 million ($10.44 million). The Company has delivered goods worth RMB 62.06 million ($9.51 million) to Client A pursuant to the processing contracts. The Company also seeks Client A for the payment of the loss incurred from the cost of raw materials paid to suppliers in the amount of RMB 8.09 million ($1.24 million) in reliance on the processing contracts. The Company received RMB 71.4 million ($10.9 million) from Client A in April 2021 which settled the complaint amount.

 

  13  

 

 

NOTE 10 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 in the retail business with a decline in sales since February 2020. The Company’s wholesale business is also significantly affected as the Company is facing a sharp decline in its order quantities. Some of the Company’s wholesale clients have also cancelled or postponed existing orders.  Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where the Company’s suppliers are located, The Company’s supply chain and business operations of its suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of the Company’s or its suppliers’ or customers’ products, could have adverse ripple effects on the Company’s manufacturing output and delivery schedule. The Company could also face difficulties in collecting its accounts receivables due to the effects of COVID-19 on its customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which the Company, its suppliers and customers operate.

 

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

 

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

 

Credit risk

 

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. 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 three-month period ended March 31, 2021, the Company had only one wholesale customer that represented approximately 12.6% of the Company’s revenues. For the three-month period ended March 31, 2020, the Company had four wholesale customers that represented approximately 20%, 10%, 10% and 10% of the Company’s revenues.

  

For the wholesale business, the Company did not rely on any raw material supplier that represented more than 10% of the total raw material purchases during the three months ended March 31, 2021. The Company relied on one raw material supplier that represented 11% of the total raw material purchases during the three months ended March 31, 2020.

 

For the retail business, the Company relied on two raw material suppliers that represented approximately 46% and 38% of raw material purchases during the three months ended March 31, 2021. The Company relied on two raw material suppliers that represented approximately 60% and 34% of raw material purchases during the three months ended March 31, 2020.

  

For the wholesale business, during the three months ended March 31, 2021, the Company relied on one manufacturer that represented 14.4% of finished goods purchases and during the three months ended March 31, 2020, the Company relied on one manufacturer that represented 11% of finished goods purchases.

 

  14  

 

 

The Company’s revenues for the three months ended March 31, 2021 and 2020 were earned in the following geographic areas:

 

    2021     2020  
    (In thousands of
U.S. Dollars) 		 
Mainland China   $ 7,490     $ 4,653  
Hong Kong China     4,056       2,992  
United Kingdom     1,053       837  
Europe-Other     4,146       4,093  
Japan     3,405       4,385  
United States     3,069       5,328  
Total wholesale business     23,219       22,288  
Retail business     47,595       36,067  
Total   $ 70,814     $ 58,355  

 

NOTE 11 SEGMENTS

 

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

 

(a)  Wholesale segment

  

(b)  Retail segment

  

    Wholesale
segment 		    Retail
segment 		    Total  
    (In thousands of U.S. Dollars)  
As of and for the period ended March 31, 2021      
Segment profit or loss:                  
Net revenue from external customers   $ 23,219       47,595       70,814  
Loss from operations   $ (705 )     (259 )     (964 )
Interest income   $ 196       28       224  
Interest expense   $ 466       26       492  
Depreciation and amortization   $ 261       1,116       1,377  
Loss before income tax expense     (387 )     (54 )     (441 )
Income tax expense   $ 325       404       729  
Segment assets:                        
Additions to property, plant and equipment     734       644       1,378  
Inventory     13,913       29,429       43,342  
Total assets     181,535       148,081       329,616  

  

    Wholesale
segment 		    Retail
segment 		    Total  
    (In thousands of U.S. Dollars)  
As of and for the period ended March 31, 2020      
Segment profit or loss:                  
Net revenue from external customers   $ 22,288       36,067       58,355  
Loss from operations   $ (674 )     (2,551 )     (3,225 )
Interest income   $ 262       15       277  
Interest expense   $ 218       123       341  
Depreciation and amortization   $ 254       1,333       1,587  
Loss before income tax expense     64       (2,535 )     (2,471 )
Income tax expense   $ 186       41       227  
Segment assets:                        
Additions to property, plant and equipment     419       (341 )     78  
Inventory     13,607       38,545       52,152  
Total assets     82,846       171,517       254,363  

  

NOTE 12 SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date which the consolidated financial statements were available to be issued. All subsequent events requiring recognition as of March 31, 2021 have been incorporated into these consolidated financial statements and there are no significant subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.” 

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

 

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2021 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), 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”), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and Xizang He Meida Trading Company Limited (“He Meida”). He Media was closed in April 2021.

 

Shanghai Yiduo Fashion Company Limited, the only then subsidiary with non-controlling interests, was deconsolidated from the financial statements as of December 31, 2020 as a result of bankruptcy liquidation.

 

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Business Objectives

 

Wholesale Business

 

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

 

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

 

  ● Expanding our global sourcing network;
     
  ● Exploring the overseas low-cost manufacturing base;
     
  ● Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel;

 

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

  

Retail Business

 

The business objectives for our retail segment are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of March 31, 2021, we had 921 stores (including store-in-stores), which includes 11 stores that were opened and 26 stores that were closed in the first quarter of 2021. We expect to increase an additional 50 to 100 stores in 2021.

 

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
     
  ● Taking advantage of our position as a multi-brand operator.

 

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Partnership Investment

 

The Company had idle cash and cash equivalent in operation. In order to realize the capital preservation and appreciation, Ever-Glory Apparel invested in a Partnership in August 2020. As a limited partner of the Partnership, Ever-Glory Apparel does not have the right to kick-out and appointment of general manager. Therefore, Ever-Glory does not have ability to exercise significant influence. In the meantime, the Company entered an agreement with the GP and an individual that the Company has the privilege to sell the ownership interests in the Partnership to GP or the individual for the consideration of the average net asset value ten days prior to the closing date, if the Company is not able to withdraw any part of the original investment from the Partnership during the optional withdrawal period. If the Company opts to withdraw entire investment during the optional withdrawal period, the GP will compensate up to 8% of annual return on investment. If the return on investment is in excess of 8% for any portion of the investment withdrawn during the optional withdrawal period, then 20% of the return in excess of 8% will be shared with the individual. The Company may also continue to invest in the Partnership beyond the optional withdrawal period, but none of above agreement with the GP and the individual is in place. In December 2020, the Partnership invested in a public company in China.

 

Seasonality of Business

 

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

 

Collection Policy

 

Wholesale business

 

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

 

Retail business

 

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

 

Global Economic Uncertainty

 

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2020 and 2021.

 

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.

 

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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 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 had adversely affected our retail business with a decline in sales since February 2020. Our wholesale business was also significantly affected as we were facing a sharp decline in our order quantities. Some of our wholesale clients had also cancelled or postponed existing orders.  Due to the Chinese factories’ shutdowns and traffic restrictions during the outbreak in China and potential shutdowns and traffic restrictions in the countries where our suppliers are located, our supply chain and business operations of our suppliers may be affected. Disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, could have adverse ripple effects on our manufacturing output and delivery schedule. We also face difficulties in collecting our accounts receivables due to the effects of COVID-19 on our customers and risk gaining a large amount of bad debt. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate.

 

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

 

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

 

Summary of Critical Accounting Policies

 

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

 

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 30, 2021 (“2020 Form 10-K.”)  

 

Estimates and Assumptions

 

In preparing our condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2021 and 2020 include the assumptions used to value tax liabilities, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory write-offs.

  

Recently Issued Accounting Pronouncements

 

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

 

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

 

Results of Operations

 

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

    Three Months Ended March 31,  
    2021     2020  
    (In thousands of U.S. dollars, except for percentages)  
Sales   $ 70,814       100.0 %   $ 58,355       100.0 %
Gross Profit     22,435       31.7       16,038       27.5  
Operating Expenses     23,399       33.0       19,263       33.0  
Loss Income From Operations     (964 )     (1.4 )     (3,225 )     (5.5 )
Other Income, net     523       0.7       754       1.3  
Income Tax Expense     729       1.0       227       0.4  
Net Loss   $ (1,170 )     (1.7 )%   $ (2,698 )     (4.6 )%

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the three months ended March 31, 2021 and 2020.

 

    2021         2020         Growth
(decrease) 		 
Wholesale business   (In thousands of U.S. dollars)     % of total sales     (In thousands of U.S. dollars)     % of total sales     in 2021
compared
with 2020  		 
Mainland China   $ 7,490       10.6 %   $ 4,653       8.0 %     61.0 %
Hong Kong     4,056       5.7       2,992       5.1       35.6  
United Kingdom     1,053       1.5       837       1.4       25.8  
Europe-Other     4,146       5.9       4.093       7.1       1.3  
Japan     3,405       4.8       4,385       7.5       (22.3 )
United States     3,069       4.3       5,328       9.1       (42.4 )
Total Wholesale business     23,219       32.8       22,288       38.2       4.2  
Retail business     47,595       67.2       36,067       61.8       32.0  
Total sales   $ 70,814       100.0 %   $ 58,355       100.0 %     21.4 %

 

Total sales for the three months ended March 31, 2021 were $70.8 million, an increase of 21.4% from the three months ended March 31, 2020. This increase was primarily attributable to a 4.2% increase in our wholesale business and a 32.0% increase in our retail business.

 

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Sales generated from our wholesale business contributed 32.8% or $23.2 million of our total sales for the three months ended March 31, 2021, an increase of 4.2% compared to $22.3 million in the three months ended March 31, 2020. This increase was primarily attributable to increased sales in Mainland China, Hong Kong, the United Kingdom, and other European markets partially offset for decreased sales in Japan and the United States.

 

Sales generated from our retail business contributed 67.2% or $47.6 million of our total sales for the three months ended March 31, 2021, an increase of 32.0% compared to 61.8% or $36.1 million in the three months ended March 31, 2020. This increase was primarily due to the increase in same-store sales. 

 

Total retail store square footage and sales per square foot for the three months ended March 31, 2021 and 2020 are as follows:

 

    2021     2020  
Total store square footage     1,001,864       1,088,007  
Number of stores     921       1,038  
Average store size, square feet     1,088       1,048  
Total store sales (in thousands of U.S. dollars)   $ 47,595     $ 36,067  
Sales per square foot   $ 48     $ 33  

  

Same-store sales and newly opened store sales for the three months ended March 31, 2021 and 2020 are as follows:

 

    2021     2020  
    (In thousands of U.S. dollars)  
Sales from stores opened for a full year   $ 35,885     $ 24,813  
Sales from newly opened store sales   $ 3,933     $ 3,900  
Sales from e-commerce platform   $ 3,440     $ 4,217  
Other*   $ 4,337     $ 3,137  
Total   $ 47,595     $ 36,067  

 

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

 

We remodeled or relocated 54 stores in year 2020, and 2 stores during the three months ended March 31, 2021. We plan to relocate or remodel 50-100 stores in 2021. 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 2021.  Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

 

Costs and Expenses

 

Cost of Sales and Gross Margin

 

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

 

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The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended March 31, 2021 and 2020.

 

    Three Months Ended March 31,     Growth
(Decrease)
in 2021 		 
    2021     2020     compared  
    (In thousands of U.S. dollars, except for percentages)     with 2020  
Wholesale Sales   $ 23,219       100.0 %   $ 22,288       100.0 %     4.2 %
Raw Materials     10,385       44.7       10,090       45.3       2.9  
Labor     333       1.4       245       1.1       36.0  
Outsourced Production Costs     7,833       33.7       8,370       37.6       (6.4 )
Other and Overhead     105       0.5       86       0.4       21.8  
Total Cost of Sales for Wholesale     18,656       80.4       18,791       84.3       (0.7 )
Gross Profit for Wholesale     4,562       19.6       3,497       15.7       30.5  
                                         
Net Sales for Retail     47,595       100.0       36,067       100.0       32.0  
Production Costs     19,764       41.5       15,847       43.9       24.7  
Rent     9,959       20.9       7,679       21.3       29.7  
Total Cost of Sales for Retail     29,723       62.4       23,526       65.2       26.3  
Gross Profit for Retail     17,873       37.6       12,541       34.8       42.5  
                                         
Total Cost of Sales     48,379       68.3       42,317       72.5       14.3  
Gross Profit   $ 22,435       31.7 %   $ 16,038       27.5 %     39.9 %

 

Raw material costs for our wholesale business were 44.7% of our total wholesale business sales in the three months ended March 31, 2021, an increase of 2.9% compared to 45.3% in the three months ended March 31, 2020.  The cost percentage to total sale increase was mainly due to the higher raw material prices.

 

Labor costs for our wholesale business were 1.4% of our total wholesale business sales in the three months ended March 31, 2021, an increase of 36.0% compared to 1.1% in the three months ended March 31, 2020. The marginal increase was mainly due to the increased labor fee.  

 

Outsourced production costs for our wholesale business decreased by 6.4% to $7.8 million in the three months ended March 31, 2020 from $8.4 million in the three months ended March 31, 2020. As a percentage of total wholesale sales, outsourced production costs were 33.7% of our total wholesale sales in the three months ended March 31, 20210, a decrease of 6.4% from the three months ended March 31, 2020. This decrease was primarily attributable to increased outsourced orders to our related entities in Vietnam, which have lower labor costs compared to orders outsourced to Chinese factories.

 

Overhead and other expenses for our wholesale business accounted for 0.5% and 0.4% of our total wholesale business sales for the three months ended March 31, 2021 and 2020, respectively.

 

Gross profit for our wholesale business for the three months ended March 31, 2021 was $4.6 million, an increase of 30.5% compared to the three months ended March 31, 2020. Gross margin was 19.6% for the three months ended March 31, 2021, an increase of 30.5% compared to 15.7% for the three months ended March 31, 2020. The increase in gross margin was mainly due to the decreased outsourced production costs.

  

Production costs for our retail business were $19.8 million during the three months ended March 31, 2021 compared to $15.8 million during the three months ended March 31, 2020. As a percentage of retail sales, retail production costs accounted for 41.5% of our total retail sales in the three months ended March 31, 2021, compared to 43.9% of total retail sales in the three months ended March 31, 2020. The decrease in percentage was due to lower discounts on our products ended March 31, 2021 compared with the same period of the prior year.

 

Rent costs for our retail business were $10.0 million for the three months ended March 31, 2021 compared to $7.7 million for the three months ended March 31, 2020. As a percentage of retail sales, rent costs accounted for 20.9% of our total retail sales for the three months ended March 31, 2021, compared to 21.3% of total retail sales for the three months ended March 31, 2020. The decrease in percentage was primarily attributable to lower rent at certain locations.

  

Gross profit in our retail business for the three months ended March 31, 2021 was $17.9 million and gross margin was 37.6%. Gross profit in our retail business for the three months ended March 31, 2020 was $12.5 million and gross margin was 34.8%. The increase in gross margin was attributable to decreased rent costs and production costs.

 

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Total cost of sales for the three months ended March 31, 2021 was $48.4 million, compared to $42.3 million for the three months ended March 31, 2020, an increase of 14.3%. As a percentage of total sales, cost of sales decreased to 68.3% of total sales for the three months ended March 31, 2021, compared to 72.5% of total sales for the three months ended March 31, 2020. Consequently, gross margin increased to 31.7% for the three months ended March 31, 2021 from 27.5% for the three months ended March 31, 2020.

 

Selling, General and Administrative Expenses

 

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

 

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

   

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

 

    Three Months Ended March 31,        
    2021     2020      
    (In thousands of U.S. dollars, except for percentages)     Increase  
Gross Profit   $ 22,435       31.7 %   $ 16,038       27.5 %     39.9 %
Operating Expenses             　               　       　  
Selling Expenses     15,548       22.0       13,478       23.1       15.4  
General and Administrative Expenses     7,851       11.1       5,785       9.9       35.7  
Total Operating Expenses     23,399       33.0       19,263       33.0       21.5  
Loss from Operations   $ (964 )     (1.4 )%   $ (3,225 )     (5.5 )%     70.1 %

  

Selling expenses increased 15.4% to $15.5 million for the three months ended March 31, 2021 from $13.5 million for the three months ended March 31, 2020. The increase was attributable to the increased sales.

 

General and administrative expenses increased 35.7% to $7.9 million for the three months ended March 31, 2020 from $5.8 million for the three months ended March 31, 2020. As a percentage of total sales, general and administrative expenses increased to 11.1% of total sales for the three months ended March 31, 2021, compared to 9.9% of total sales for the three months ended March 31, 2020. The increase was mainly attributable to the decreased business trip and the exemption of social benefits by the PRC government in 2020.

 

Loss from Operations

 

Loss from operations was $1.0 million for the three months ended March 31, 2021, compared to $3.2 million for the three months ended March 31, 2020. As a percentage of sales, loss from operations accounted for 1.4% of our total sales for the three months ended March 31, 2021, an increase of 70.1% compared to 5.5% for the three months ended March 31, 2020 as a result of increased gross profit.

 

Interest Expense

 

Interest expense was $0.5 million for the three months ended March 31, 2021, an increase of 44.3% compared to the same period in 2020. The increase was due to the increased bank loans.

 

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Income Tax Expenses

 

Income tax expense was $0.7 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively.

 

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

 

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

 

He Meida incorporated in Xizang (Tibet) Autonomous Region is subject to income tax at 15% statutory rate. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2020. He Meida was closed in April 2021.

 

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

 

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

 

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

 

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

 

Net Loss

 

Net loss for the three months ended March 31, 2021 and 2020 was $1.2 million and $2.7 million, respectively. Our basic and diluted loss per share were $0.08 and $0.18 for the three months ended March 31, 2021 and 2020, respectively.

 

Summary of Cash Flows

 

Summary cash flows information for the three months ended March 31, 2021 and 2020 is as follows:

 

    2021     2020  
    (In thousands of U.S. dollars)  
Net cash (used in) provided by operating activities   $ (302 )   $ 24,555  
Net cash (used in) provided by investing activities   $ (2,361 )   $ 275  
Net cash provided by (used in) financing activities   $ 6,316     $ (2,672 )

 

Net cash (used in) provided by operating activities was ($0.3) million and $24.6 million for the three months ended March 31, 2021 and 2020, respectively. This decrease was mainly due to decreased accounts payable and other payables.

 

Net cash (used in) provided by investing activities was ($2.4) million and $0.3 million for the three months ended March 31, 2021 and 2020. This change was mainly due to that we purchased property and equipment in the three months ended March 31, 2021 more than the same period of 2020. In addition, we purchased more trading securities.

 

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Net cash provided by (used in) financing activities were $6.3 million and ($2.7) million for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, we received new bank loans of $12.3 million and repaid the bank loans of $6.2 million.

 

Liquidity and Capital Resources

 

As of March 31, 2021, we had cash and cash equivalents $78.0 million, current assets other than cash $154.4 million and current liabilities $188.7 million. We presently finance our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that these will continue to be our primary source of funds to finance our short-term cash needs.

 

Bank Loans

 

In August 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $3.0 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of March 31, 2021, Ever-Glory Apparel had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual interest 3.01% and due on September 2021. As of March 31, 2021, approximately $0.7 million was unused and available under this line of credit.

 

From March 2020 to July 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $29.0 million (RMB190.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.75% to 3.99%. From July to November 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $29.0 million (RMB 190.0 million) under this line of certificate with an annual interest rate from 2.50% to 3.10% and due on between May 2021 and October 2021.

 

In December 2020, Goldenway entered into a certificate of three-year time deposit of $16.7 million (RMB110.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of 3.85%. From November 2020 to February 2021, Goldenway pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Goldenway had borrowed $16.7 million (RMB 110.0 million) under this line of certificate with annual interest rates of 2.90% and 3.4%, due between May 2021 and February 2022.

 

In April 2020, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.1 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of March 31, 2021, Goldenway had borrowed $6.1 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due in August 2021.

 

In July 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $15.2 million (RMB100.0 million) with Industrial and Commercial Bank of China, which is collateralized by assets of Nanjing Knitting, an equity investee of Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of March 31, 2021, Ever-Glory Apparel had borrowed $15.2 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.95% to 4.35% and due between May 2021 to March 2022.

 

In April 2020, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $6.9 million (RMB45.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of March 31, 2021, approximately $6.9 million was unused and available under this line of credit.

 

In June 2020, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.0 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of March 31, 2021, LA GO GO had borrowed $2.3 million (RMB 15.0 million) under this line of credit with annual interest 4.55% and due in September 2021. As of March 31, 2021, approximately $0.7 million was unused and available under this line of credit.

 

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In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.1 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of March 31, 2021, approximately $9.1 million was unused and available under this line of credit.

 

In March 2021, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.6 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 March 31, 2021, approximately $4.6 million was unused and available under this line of credit.

 

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

 

Capital Commitments

 

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

  

Uses of Liquidity

 

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

  

Sources of Liquidity

 

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

 

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

 

As of March 31, 2021, we had access to approximately $47.9 million in lines of credit, of which approximately $22.0 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately $35.8 million (RMB 235.0 million) and approximately $2.9 million (RMB 19.10 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of March 31, 2021.

 

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 wholesale sales are in USD. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of March 31, 2021, the market foreign exchange rate had decreased to RMB 6.57 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.

 

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In addition, the financial statements of subsidiaries located in China (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation loss for the 3 months ended March 31, 2021 and 2020 was $1.4 million and $1.4 million, respectively.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

Evaluation of Disclosure Controls and Procedures.  Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for the period ended March 31, 2021. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were operating effectively.

 

Changes in Internal Control Over Financial Reporting

 

Other than described above, during the first quarter of 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not aware of any pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity. 

 

Lawsuits against Client A

 

In November 2020, the Company’s two subsidiaries, Ever-Glory International Group Apparel Inc. and Goldenway Nanjing Garments Company Limited filed a complaint against Client A (“Client A”) for unpaid goods worth RMB 70.15 million ($10.75 million) in the Tianjin No.1 Intermediate People’s Court based on processing contracts between the parties. The Company has applied for interim measures with the court and has frozen bank accounts of Client A for a total amount of RMB 68.12 million ($10.44 million). The Company has delivered goods worth RMB 62.06 million ($9.51 million) to Client A pursuant to the processing contracts. The Company also seeks Client A for the payment of the loss incurred from the cost of raw materials paid to suppliers in the amount of RMB 8.09 million ($1.24 million) in reliance on the processing contracts. The Company received RMB 71.4 million ($10.9 million) from Client A in April 2021 which settled the complaint amount.

 

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, 2021.

  

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 March 31, 2021:

 

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

 

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ITEM 6. EXHIBITS

 

The following exhibits are filed herewith:

 

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

 

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SIGNATURES

 

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

 

May 13, 2021 EVER-GLORY INTERNATIONAL GROUP, INC.
   
  By: /s/ Edward Yihua Kang
    Edward Yihua Kang
    Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Jiansong Wang
    Jiansong Wang
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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