Ever-Glory International Group, Inc. - FORM 10-Q

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EX-32.2 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0920ex32-2_everglory.htm
EX-32.1 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0920ex32-1_everglory.htm
EX-31.2 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0920ex31-2_everglory.htm
EX-31.1 - CERTIFICATION - Ever-Glory International Group, Inc.	f10q0920ex31-1_everglory.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

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

For the transition period from ____________ to ____________

Commission file number: 001-34124

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

Florida		65-0420146
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

86-25-5209-6831

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

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

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

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

As of October 13, 2020, 14,809,160 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

INDEX

		Page Number

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		ii

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosure	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

SIGNATURES		35

Cautionary Note Regarding Forward-Looking Statements

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

	●	Competition within our industry;

	●	Seasonality of our sales;

	●	Success of our investments in new product development

	●	Our plans and ability to open new retail stores;

	●	Success of our acquired businesses;

	●	Our relationships with our major customers;

	●	The popularity of our products;

	●	Relationships with suppliers and cost of supplies;

	●	Financial and economic conditions in Asia, Japan, Europe and the U.S.;

	●	Anticipated effective tax rates in future years;

	●	Regulatory requirements affecting our business;

	●	Currency exchange rate fluctuations;

	●	Our future financing needs; and

	●	Our ability to obtain future financing on acceptable terms.

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

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

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019 (UNAUDITED)

	2020			2019
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	69,950		$	48,551
Restricted cash		20,552			2,204
Trading securities		817			-
Accounts receivable, net		62,866			78,053
Inventories		46,443			67,355
Advances on inventory purchases		7,393			9,681
Value added tax receivable		2,106			2,495
Other receivables and prepaid expenses		5,229			5,293
Amounts due from related parties		1,086			123
Total Current Assets		216,442			213,755

NONCURRENT ASSETS
Equity security investment		2,936			-
Intangible assets, net		4,628			4,729
Property and equipment, net		28,203			28,812
Operating lease right-of-use assets		37,705			53,379
Deferred tax assets		1,099			996
Total Non-Current Assets		74,571			87,916
TOTAL ASSETS	$	291,013		$	301,671

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Bank loans	$	48,444		$	29,931
Accounts payable		65,155			72,418
Accounts payable and other payables – related parties		3,878			4,811
Other payables and accrued liabilities		14,159			19,137
Value added and other taxes payable		1,134			1,657
Income tax payable		1,104			1,142
Current operating lease liabilities		29,296			44,888
Total Current Liabilities		163,170			173,984

NONCURRENT LIABILITIES
Non-current operating lease liabilities		8,491			8,537
TOTAL LIABILITIES		171,661			182,521

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS’ EQUITY
Stockholders’ equity:
Preferred stock ($0.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)		-			-
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,809,160 and 14,801,770 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)		15			15
Additional paid-in capital		3,650			3,640
Retained earnings		102,049			106,328
Statutory reserve		19,939			19,939
Accumulated other comprehensive (loss)		(1,308	)		(4,330	)
Amounts due from related party		(3,430	)		(4,932	)
Total equity attributable to stockholders of the Company		120,915			120,660
Noncontrolling interest		(1,563	)		(1,510	)
Total Equity		119,352			119,150
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	291,013		$	301,671

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONDENSED

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

	Three months ended						Nine months ended
	September 30,						September 30,
	2020			2019			2020			2019
NET SALES	$	79,908		$	113,326		$	188,350		$	278,598
COST OF SALES		56,235			88,967			134,193			195,895

GROSS PROFIT		23,673			24,359			54,157			82,703

OPERATING EXPENSES
Selling expenses		12,996			17,944			39,101			58,651
General and administrative expenses		7,818			7,584			19,574			22,450
Total Operating Expenses		20,814			25,528			58,675			81,101

INCOME (LOSS) FROM OPERATIONS		2,859			(1,169	)		(4,518	)		1,602

OTHER INCOME (EXPENSES)
Interest income		313			215			930			699
Interest expense		(700	)		(265	)		(1,607	)		(1,036	)
Other income, net		574			502			2,236			1,616
Total Other Income, Net		187			452			1,559			1,279

INCOME (LOSS) BEFORE INCOME TAX EXPENSE		3,046			(717	)		(2,959	)		2,881
Income tax expense		(822	)		(387	)		(1,315	)		(2,667	)

NET INCOME (LOSS)		2,224			(1,104	)		(4,274	)		214

Net loss (income) attributable to the non-controlling interest		(8	)		28			(4	)		46
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY		2,216			(1,076	)		(4,278	)		260

NET INCOME (LOSS)	$	2,224		$	(1,104	)	$	(4,274	)	$	214

Foreign currency translation gain (loss)		4,664			(3,729	)		2,964			(2,244	)
COMPREHENSIVE INCOME (LOSS)		6,888			(4,833	)		(1,310	)		(2,030	)

Comprehensive loss (income) attributable to the non-controlling interest		51			15			53			67
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	6,939		$	(4,818	)	$	(1,257	)	$	(1,963	)

EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS
Basic and diluted	$	0.15		$	(0.07	)	$	(0.29	)	$	0.02
Weighted average number of shares outstanding Basic and diluted		14,808,737			14,801,770			14,805,987			14,801,770

See the accompanying notes to the condensed consolidated financial statements.

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

					Additional		Retained Earnings					Accumulated other			Amounts due from			Total equity attributable to stockholders			Non-
	Common Stock				paid-in					Statutory		Comprehensive			related			of the			controlling			Total
	Shares		Amount		capital		Unrestricted			reserve		loss			party			Company			Interest			equity
Balance at January 1, 2020		14,801,770	$	15	$	3,640	$	106,328		$	19,939	$	(4,330	)	$	(4,932	)	$	120,660			(1,510	)	$	119,150
Stock issued for compensation		3,062		-		5		-			-		-			-			5						5
Net loss		-		-		-		(2,701	)		-		-			-			(2,701	)		3			(2,698	)
Net cash received from related party under counter guarantee agreement		-		-		-		-			-		-			785			785			-			785
Foreign currency translation gain (loss)													(1,440	)		-			(1,440	)		3			(1,437	)
Balance at March 31, 2020		14,804,832		15		3,645		103,627			19,939		(5,770	)		(4,147	)		117,309			(1,504	)		115,805
Net loss								(3,794	)										(3,794	)		(6	)		(3,800	)
Net cash received from related party under counter guarantee agreement																151			151						151
Foreign currency translation loss													(261	)					(261	)		(2	)		(263	)
Balance at June 30, 2020		14,804,832	$	15	$	3,645	$	99,833		$	19,939	$	(6,031	)	$	(3,996	)	$	113,405			(1,512	)	$	111,893
Stock issued for compensation		4,328		-		5		-			-		-			-			5						5
Net income								2,216											2,216			8			2,224
Net cash received from related party under counter guarantee agreement																566			566			-			566
Foreign currency translation gain													4,723						4,723			(59	)		4,664
Balance at September 30, 2020		14,809,160	$	15	$	3,650	$	102,049		$	19,939	$	(1,308	)	$	(3,430	)	$	120,915			(1,563	)	$	119,352

					Additional		Retained Earnings					Accumulated other			Amounts due from			Total equity attributable to stockholders			Non-
	Common Stock				paid-in					Statutory		Comprehensive			related			of the			controlling			Total
	Shares		Amount		capital		Unrestricted			reserve		income			party			Company			Interest			equity
Balance at January 1, 2019		14,798,198	$	15	$	3,627	$	105,914		$	19,083	$	(3,578	)	$	(10,354	)	$	114,707			(1,551	)	$	113,156
Stock issued for compensation		1,942		0.004		8		-			-		-			-			8						8
Net income (loss)		-		-		-		(521	)		-		-			-			(521	)		66			(455	)
Net cash received from related party under counter guarantee agreement		-		-		-		-			-		-			1,101			1,101			-			1,101
Foreign currency translation gain													3,972			-			3,972			34			4,006
Balance at March 31, 2019		14,800,140		15		3,635		105,393			19,083		394			(9,253	)		119,267			(1,451	)		117,816
Net income (loss)								1,856											1,856			(83	)		1,773
Net cash received from related party under counter guarantee agreement																1,390			1,390						1,390
Foreign currency translation loss													(2,487	)					(2,487	)		34			(2,453	)
Balance at June 30, 2019		14,800,140	$	15	$	3,635	$	107,249		$	19,083	$	(2,093	)	$	(7,863	)	$	120,026			(1,500	)	$	118,526
Stock issued for compensation		1,630		0.002		5													5						5

Net income (loss)								(1,076	)										(1,076	)		(28	)		(1,104	)
Net cash advanced to related party under counter guarantee agreement																1,215			1,215						1,215
Foreign currency translation loss													(3,729	)					(3,729	)		43			(3,686	)
Balance at September 30, 2019		14,801,770	$	15	$	3,640	$	106,173		$	19,083	$	(5,822	)	$	(6,648	)	$	116,441			(1,485	)	$	114,956

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(4,274	)	$	214
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Depreciation and amortization		4,114			6,824
Loss from sale of property and equipment		283			16
Provision of bad debt allowance		683			820
Provision for obsolete inventories		5,786			3,846
Investment loss from the trading securities		13			-
Deferred income tax		(165	)		(2,388	)
Stock-based compensation		10			12
Changes in operating assets and liabilities
Accounts receivable		15,571			312
Inventories		16,135			(4,979	)
Value added tax receivable		(577	)		(281	)
Other receivables and prepaid expenses		50			3,738
Advances on inventory purchases		2,461			(3,214	)
Amounts due from related parties		(848	)		16
Accounts payable		(7,842	)		6,253
Accounts payable and other payables- related parties		(1,112	)		(692	)
Other payables and accrued liabilities		(6,093	)		(10,594	)
Value added and other taxes payable		467			(4,120	)
Income tax payable		(64	)		746
Net cash provided by (used in) operating activities		24,598			(3,471	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(2,769	)		(6,555	)
Purchases of trading securities		(825	)		-
Investment in a partnership		(2,936	)		-
Net cash used in investing activities		(6,530	)		(6,555	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans		66,599			42,570
Repayment of bank loans		(49,278	)		(35,620	)
Net collection (advance) of amounts due from related party (equity)		1,618			3,937
Net cash provided by financing activities		18,939			10,887

EFFECT OF EXCHANGE RATE CHANGES ON CASH		2,740			(650	)

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		39,747			211

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		50,755			47,012

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	90,502		$	47,223

Reconciliation of cash, cash equivalents and restricted cash reported within their consolidated balance sheets:

Cash and Cash Equivalents		69,950			45,837
Restricted cash		20,552			1,386
	$	90,502		$	47,223

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:
Interest	$	1,607		$	1,036
Income taxes	$	1,455		$	4,196

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

NOTE 1 Nature of Operations and Basis of Presentation

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

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

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of September 30, 2020 the condensed consolidated statements of income (loss) and comprehensive income (loss), condensed consolidated statements of equity, and cash flows for the three and nine months ended September 30, 2020 and 2019. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and the SEC. Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

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

Equity security investment

The Company accounts for equity security investments through which management exercises significant influence but does not have control over the investee under the equity method. Under the equity method, the investment is initially recorded at cost and adjusted for the Company’s share of undistributed earnings or losses of the investee every year.

The Company utilizes the measurement alternative for equity security investments that do not have readily determinable fair values and measures these investments at cost less impairment plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer.

The Company classifies its equity security investment without readily determinable fair value as non-current assets on the consolidated balance sheets.

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, equity security investments, 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 condensed consolidated balance sheets. Net gains and losses recognized during the periods are summarized as follows (In thousands of U.S. Dollars).

Net gains and (losses) recognized during the period on equity securities	$	(14	)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		(1	)
Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(13	)

Equity security investment without readily determinable fair value

In August 2020, Ever-Glory Apparel invested $3.0 million (RMB 20.0 million) for 2.38% ownership in a partnership (“Partnership”), which is planning to invest in a Chinese public listed company. 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 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.

The Company reported this investment at cost since there is no readily determinable fair value at September 30, 2020. At each reporting period, the Company made 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 September 30, 2020.

NOTE 4 INVENTORIES

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

	September 30, 2020		December 31, 2019
	(In thousands of U.S. Dollars)
Raw materials	$	1,051	$	1,468
Work-in-progress		7,349		8,025
Finished goods		38,043		57,862
Total inventories	$	46,443	$	67,355

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 September 30, 2020 and December 31, 2019.

	September 30, 2020		December 31, 2019
Bank	(In thousands of U.S. Dollars)
Industrial and Commercial Bank of China	$	20,552	$	18,629
Shanghai Pudong Development Bank		22,754		-
China Minsheng Bank		2,936		2,866
Nanjing Bank		2,202		6,449
Bank of Communications		-		1,426
HSBC		-		561
	$	48,444	$	29,931

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

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.7 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 September 30, 2020, Ever-Glory Apparel had borrowed $14.7 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.92% to 4.35% and due on from October 2020 to May 2021.

In June 2019, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.9 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of September 30, 2020, LA GO GO had borrowed $2.2 million (RMB 15.0 million) under this line of credit with annual interest 4.55% and due on September 2021. As of September 30, 2020, approximately $0.7 million was unused and available under this line of credit.

In August 2019, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $2.5 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of September 30, 2020, approximately $2.5 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 $8.8 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2020, approximately $8.8 million was unused and available under this line of credit.

In September 2019, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of September 30, 2020, approximately $2.9 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 $5.9 million (RMB40.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of September 30, 2020, Ever-Glory Apparel had borrowed $2.2 million (RMB 15.0 million) under this line of credit with annual interest 3.01% and due on September 2021. As of September 30, 2020, approximately $3.7 million was unused and available under this line of credit. In March 2020, Ever-Glory Apparel entered into a certificate of three-year time deposit of $20.6 million (RMB140.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.85% to 3.99%. From July to September 2020, Ever-Glory Apparel pledged the certificate of three-year time deposit to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $20.6 million (RMB 140.0 million) under this line of certificate with an annual interest rate of 2.62% and due on from July to September 2021.

In October 2019, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of September 30, 2020, LA GO GO had borrowed $2.9 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 5.0% and due in November 2020.

In December 2019, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $5.9 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of September 30, 2020, Goldenway had borrowed $5.9 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due on August 2021.

In April 2020, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.4 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 September 30, 2020, approximately $4.4 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 $1.6 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively, and $0.7 million and $0.2 million for the three months ended September 30, 2020 and 2019, 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.

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

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

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

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

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

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income (loss) for the three and nine months ended September 30, 2020 and 2019 was taxable in the following jurisdictions:

	Three months ended						Nine months ended
	September 30,						September 30,
	2020			2019			2020			2019
	(In thousands of U.S. Dollars)
PRC	$	3,057		$	(714	)	$	(2,943	)	$	2,891
Others		(11	)		(3	)		(16	)		(10	)
	$	3,046		$	(717	)	$	(2,959	)	$	2,881

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

	Three months ended						Nine months ended
	June 30,						September 30,
	2020			2019			2020			2019
PRC statutory rate		25.0	%		25.0	%		25.0	%		25.0	%
Temporary difference between US GAAP and PRC tax accounting		2.0			(78.9	)		(69.5	)		67.5
Effective income tax rate		27.0	%		(53.9	)%		(44.5	)%		92.5	%

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

	Three months ended					Nine months ended
	September 30,					September 30,
	2020			2019		2020			2019
Current	$	1,115		$	387	$	1,418		$	2,377
Deferred		(293	)		-		(103	)		290
Income tax expense	$	822		$	387	$	1,315		$	2,667

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

The Company has not recorded U.S. deferred income taxes on approximately $102.0 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. On December 22, 2017 the U.S. enacted the “Tax Cuts and Jobs Act” (“U.S. Tax Reform”) which made significant changes to corporate income tax law. One significant change was to decrease the general corporate income tax rate from 34% to 21%. This reduction had no effect on the Company’s income tax expense as the reduction in deferred tax assets was offset by an equivalent reduction in the valuation allowance. Another significant change resulting from U.S. Tax Reform is that any future remittances to the parent company from business income earned by its subsidiaries outside of the U.S. will no longer to taxable to the Company under U.S. tax law. The Company would be liable for payment of income tax, or reduction of the net operating loss carryover, at a reduced rate for any accumulated earnings and profits of its non-U.S. subsidiaries at December 31, 2017. U.S. Tax Reform includes provisions for Global Intangible Low-Taxed Income (“GILTI”) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (“BEAT”) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax expense (income) relating to the Tax Act changed for the three and nine months ended September 30, 2020.

NOTE 7 STOCKHOLDERS’ EQUITY

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

On January 15, 2020, the Company issued 3,062 shares of Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the third and fourth quarter of 2019. The shares issued in 2020 were valued at $1.65 per share, which was the average market price of the common stock for the five days before the grant date.

On July 10, 2020, the Company issued 4,328 shares of Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the first and second quarter of 2020. The shares issued in 2020 were valued at $1.15 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 certain Company’s retail stores since the third quarter of 2014.

	Three months ended						Nine months ended
	September 30,						September 30,
	2020			2019			2020			2019
	(In thousands of U.S. Dollars)
The Company received from the customers		3			11			12			57
The Company paid to Wubijia		(3	)		(11	)		(12	)		(50	)
The net income recorded as other income	$	-		$	-		$	-		$	7

Other expenses due to Related Parties

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
	(In thousands of U.S. Dollars)
Chuzhou Huarui		51		52		153		140
Kunshan Enjin		22		22		65		66
Total	$	73	$	74	$	218	$	206

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

Purchases from and Sub-contracts with Related Parties

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands of U.S. Dollars)
Chuzhou Huarui	$	421	$	1,197	$	1,411	$	4,664
Fengyang Huarui		625		1,071		1,025		1,619
Nanjing Ever-Kyowa		166		342		608		1,097
Ever-Glory Vietnam		4,019		4,689		9,498		9,737
Nanjing Knitting		504		339		991		939
EsCeLav		9		28		33		129
Jiangsu Ever-Glory		144		345		771		815
	$	5,888	$	8,011	$	14,337	$	19,000

Accounts Payable – Related Parties

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

	2020		2019
	(In thousands of U.S. Dollars)
Ever-Glory Vietnam	$	1,566		2,260
Fengyang Huarui		336		414
Nanjing Ever-Kyowa		336		386
Chuzhou Huarui		1,134		1,064
Nanjing Knitting		398		186
Jiangsu Ever-Glory		109		501
Total	$	3,878	$	4,811

Amounts Due From Related Parties-current assets

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

	2020		2019
	(In thousands of U.S. Dollars)
Jiangsu Ever-Glory		1,086		123
Total	$	1,086	$	123

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and nine months ended September 30, 2020 and 2019, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices. The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at a cost of $0.7 million, $1.3 million, $0.8 million and $0.8 million during the three and nine months period ended September 30, 2020 and 2019, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of $0 million, $0.8 million, $0 million and $0.1 million during the three and nine months ended September 30, 2020 and 2019, respectively.

Amounts Due From Related Party under Counter Guarantee Agreement

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of September 30, 2020 and December 31, 2019, Jiangsu Ever-Glory has provided guarantees for approximately $38.2 million (RMB 260 million) and $33.0 million (RMB 230 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $29.4 million (RMB 205.5 million) and $29.4 million (RMB 205.5 million) as of September 30, 2020 and December 31, 2019, respectively. Mr. Kang has also provided a personal guarantee for $17.2 million (RMB 120.3 million) and $14.5 million (RMB 100.0 million) as of September 30, 2020 and December 31, 2019, respectively.

At December 31, 2019, $4.7 million (RMB 32.8 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the nine months ended September 30, 2020, an additional $4.0 million (RMB 28.0 million) was provided to and $5.6 million (RMB 39.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of September 30, 2020, the amount of the counter-guarantee was $3.2 million (RMB 21.4 million) (the difference represents currency exchange adjustment of $0.1 million), which was 8.3% of the aggregate amount of lines of credit. Obtaining bank loan requires a higher guarantee deposit in this quarter. This amount plus accrued interest of $0.3 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At September 30, 2020 and December 31, 2019, the amount classified as a reduction of equity was $3.4 million and $5.0 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Since January 1, 2019, interest rate has changed to 0.3625% as the bank benchmark interest rate decreased. Interest income for the three and nine months ended September 30, 2020 and 2019 was approximately $0.03 million, $0.04 million, $0.05 million and $0.2 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.

The weighted average remaining lease term excluding stores in the shopping malls is 31 years and the weighted average discount rate is 4.35%. The lease term for shopping mall stores is commonly one year with options to extend or renew, and the rent is predetermined with a percentage of sales. The Company estimates the next 12 months rent for the shopping mall stores by annualizing current period rent calculated with the percentage of sales. Thus, the ROU assets and lease liabilities may vary significantly at different period ends. 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 nine months ended September 30, 2020, the costs of the leases recognized in cost of revenues and general administrative expenses are $18.9 million and $0.6 million, respectively. Cash paid for the operating leases including in the operating cash flows was $19.5 million.

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

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

Legal Proceedings

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

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

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

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

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

Credit risk

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. 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 nine months ended September 30, 2020, the Company had two wholesale customers that represented approximately 12.2% and 10.3% of the Company’s wholesale revenues. For the three months ended September 30, 2020, the Company had two wholesale customers that represented approximately 18.0% and 11.5% of the Company’s revenues. For the nine months ended September 30, 2019, the Company had one wholesale customer that represented approximately 17% of the Company’s revenues. For the three months ended September 30, 2019, the Company had one wholesale customer that represented approximately 10% of the Company’s revenues.

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

For the Company’s retail business, the Company had four suppliers that represented approximately 37%, 21%, 17% and 14% of raw materials purchases during the nine months ended September 30, 2020. For the retail business, the Company relied on four raw material suppliers that represented approximately 28%, 27%, 18% and 15% of raw material purchases during the nine months ended September 30, 2019.

For the wholesale business, the Company had two suppliers that represented approximately 11% and 10% of finished goods purchases during the nine months ended September 30, 2020. For the wholesale business, the Company did not rely on any finished goods supplier that represented more than 10% of the total finished goods purchases during the three and nine months ended September 30, 2019.

For the retail business, the Company did not rely on any supplier that represented more than 10% of the total finished goods purchases during the three and nine months ended September 30, 2020 and 2019.

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

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands of U.S. Dollars)
The People’s Republic of China	$	7,171	$	23,241	$	14,935	$	40,486
Hong Kong China		12,019		14,574		17,063		22,291
Germany		48		981		291		2,708
United Kingdom		7,116		10,555		8,425		13,393
Europe-Other		8,642		12,523		16,152		21,977
Japan		3,124		10,056		9,714		16,304
United States		6,945		9,807		22,823		29,931
Total wholesale business		45,065		81,737		89,403		147,090
Retail business		34,843		31,589		98,947		131,508
Total	$	79,908	$	113,326	$	188,350	$	278,598

NOTE 11 SEGMENTS

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

	Wholesale segment		Retail segment			Total
	(In thousands of U.S. Dollars)
Nine months ended September 30, 2020
Segment profit or loss:
Net revenue from external customers	$	89,403		98,947			188,350
Income (loss) from operations	$	3,467		(7,985	)		(4,518	)
Interest income	$	865		65			930
Interest expense	$	1,382		225			1,607
Depreciation and amortization	$	841		3,273			4,114
Income tax expense	$	965		350			1,315
Segment assets:
Additions to property, plant and equipment		2,494		275			2,769
Total assets		126,755		164,258			291,013

Nine months ended September 30, 2019
Segment profit or loss:
Net revenue from external customers	$	147,090		131,508			278,598
Income from operations	$	6,925		(5,323	)		1,602
Interest income	$	673		26			699
Interest expense	$	775		261			1,036
Depreciation and amortization	$	1,179		5,645			6,824
Income tax expense	$	1,617		1,050			2,667
Segment assets:
Additions to property, plant and equipment		1,069		5,486			6,555
Total assets		114,789		170,456			285,245

	Wholesale segment		Retail segment			Total
	(In thousands of U.S. Dollars)
Three months ended September 30, 2020
Segment profit or loss:
Net revenue from external customers	$	45,065		34,843			79,908
Income from operations	$	2,466		393			2,859
Interest income	$	289		24			313
Interest expense	$	662		38			700
Depreciation and amortization	$	257		261			518
Income tax expense	$	497		325			822

Three months ended September 30, 2019
Segment profit or loss:
Net revenue from external customers	$	81,737		31,589			113,326
Income from operations	$	4,551		(5,720	)		(1,169	)
Interest income	$	206		9			215
Interest expense	$	203		62			265
Depreciation and amortization	$	706		1,628			2,334
Income tax expense	$	143		244			388

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

Our Business

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

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

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

Wholesale Business

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

Retail Business

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

Business Objectives

Wholesale Business

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

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

	●	Expanding our global sourcing network;

	●	Expanding our overseas low-cost manufacturing base (outside of mainland China);

	●	Focusing on high value-added products and continuing our strategy to produce mid-to-high end apparel;

	●	Continuing to emphasize product design and technology utilization;

	●	Seeking strategic acquisitions of international distributors that could enhance global sales and our distribution network; and

	●	Maintaining stable revenue increase in the markets while shifting focus to higher margin wholesale markets such as mainland China.

Retail Business

The business objectives for our retail segment are to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of September 30, 2020, we had 923 stores (including store-in-stores), which includes 59 stores that were opened and 237 stores that were closed during nine months ended September 30, 2020. We expect to open an additional 20 to 50 stores and close 20 to 30 stores in 2020.

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

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

	●	Expanding our retail network throughout China;

	●	Improving our retail stores’ efficiency and increasing same-store sales;

	●	Continuing to launch retail flagship stores in Tier-1 cities and increasing our penetration and coverage in Tier-2 and Tier-3 cities; and

	●	Becoming a multi-brand operator.

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.

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.

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

Our results of operations could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the outbreak of COVID-19. The outbreak in China 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.

Fair Value Accounting

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

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

	Level 2	Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

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

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

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

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

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

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

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

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

	Three Months Ended September 30,
	2020				2019
	(In thousands of U.S. dollars, except for percentages)
Sales	$	79,908	100.0	%	$	113,326		100.0	%
Gross Profit	$	23,673	29.6	%	$	24,359		21.5	%
Operating Expense	$	20,814	26.0	%	$	25,528		22.5	%
Income (Loss) From Operations	$	2,859	3.6	%	$	(1,169	)	(1.0	)%
Other Income	$	187	0.2	%	$	452		0.4	%
Income tax expense	$	822	1.0	%	$	387		0.3	%
Net Income (Loss)	$	2,224	2.8	%	$	(1,104	)	(1.0	)%

Revenue

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

	2020		% of total sales			2019		% of total sales			Growth (Decrease) in 2020 compared with 2019
Wholesale business	(In thousands of U.S. dollars)					(In thousands of U.S. dollars)
Mainland China	$	7,171		9.0	%	$	23,241		20.4	%		(69.1	)%
Hong Kong China		12,019		15.0			14,574		12.8			(17.5	)
Germany		48		0.1			981		0.9			(95.1	)
United Kingdom		7,116		8.9			10,555		9.3			(32.6	)
Europe-Other		8,642		10.8			12,523		11.1			(31.0	)
Japan		3,124		3.9			10,056		8.9			(68.9	)
United States		6,945		8.7			9,807		8.7			(29.2	)
Total Wholesale business		45,065		56.4			81,737		72.1			(44.9	)
Retail business		34,843		43.6			31,589		27.9			10.3
Total sales	$	79,908		100.0	%	$	113,326		100.0	%		(29.5	)%

Sales for the three months ended September 30, 2020 were $79.9 million, a 29.5% decrease compared with the three months ended September 30, 2019. This decrease was primarily attributable to a 44.9% decrease in sales in our wholesale business, partially offset by an 10.3% increase in our retail business.

Sales generated from our wholesale business contributed 56.4% or $45.1 million of our total sales for the three months ended September 30, 2020, a 44.9% decrease compared with 72.1% or $81.7 million in the three months ended September 30, 2019. This decrease was primarily attributable to a decrease in sales in Mainland China, Hong Kong, Germany, Europe-Other, Japan, United States and United Kingdom.

Sales generated from our retail business contributed 43.6% or $34.8 million of our total sales for the three months ended September 30, 2020, an 10.3% increase compared with 27.9% or $31.6 million in the three months ended September 30, 2019. This increase was primarily due to an increase in the e-commercesales.

Costs and Expenses

Cost of Sales and Gross Margin

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

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

									Growth
									(Decrease) in 2020
	Three months ended September 30,								Compared
	2020				2019				with 2019
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	45,065	100.0	%	$	81,737	100.0	%		(44.9	)%
Raw Materials		20,435	45.3			39,488	48.3			(48.3	)
Labor		366	0.8			635	0.8			(42.3	)
Outsourced Production Costs		14,915	33.1			31,176	38.1			(52.2	)
Other and Overhead		157	0.3			181	0.2			(13.4	)
Total Cost of Sales for Wholesale		35,873	79.6			71,480	87.4			(49.8	)
Gross Profit for Wholesale		9,192	20.4			10,257	12.6			(10.4	)
Net Sales for Retail		34,843	100.0			31,589	100.0			10.3
Production Costs		13,212	37.9			12,765	40.4			3.5
Rent		7,150	20.5			4,722	14.9			51.4
Total Cost of Sales for Retail		20,362	58.4			17,487	55.3			16.4
Gross Profit for Retail		14,481	41.6			14,102	44.7			2.7
Total Cost of Sales		56,235	70.4			88,967	78.5			(36.8	)
Gross Profit	$	23,673	29.6	%	$	24,359	21.5	%		(2.8	)%

Raw material costs for our wholesale business were 45.3% of our total wholesale business sales in the three months ended September 30, 2020, compared with 48.3% in the three months ended September 30, 2019. The decrease was mainly due to lower raw materials purchase prices.

Labor costs for our wholesale business were 0.8% of our total wholesale business sales in the three months ended September 30, 2020, compared with 0.8% in the three months ended September 30, 2019.

Outsourced production costs for our wholesale business for the three months ended September 30, 2020 decreased 52.2% to $14.9 million from $31.2 million for the three months ended September 30, 2019. Outsourced production costs accounted for 33.1% of our total wholesale business sales in the three months ended September 30, 2020, a 5.0% decrease from the three months ended September 30, 2019. This decrease in percentage 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 0.3% of our total wholesale business sales for the three months ended September 30, 2020, compared with 0.2% of total wholesale business sales for the three months ended September 30, 2019.

Wholesale business gross profit for the three months ended September 30, 2020 was $9.2 million compared with $10.3 million for the three months ended September 30, 2019. Gross profit accounted for 20.4% of our total wholesale sales for the three months ended September 30, 2020, compared with 12.6% for the three months ended September 30, 2019. The increase was mainly due to a decrease in raw material costs.

Production costs for our retail business were $13.2 million for the three months ended September 30, 2020 compared with $12.8 million during the three months ended September 30, 2019. Retail production costs accounted for 37.9% of our total retail sales in the three months ended September 30, 2020, compared with 40.4% for the three months ended September 30, 2019. The decrease in percentage was due to decrease in overall purchase costs.

Rent costs for our retail business for the three months ended September 30, 2020 were $7.2 million compared with $4.7 million for the three months ended September 30, 2019. Rent costs for our retail business accounted for 20.5% of our total retail sales for the three months ended September 30, 2020, compared with 14.9% for the three months ended September 30, 2019. The increase was primarily attributable to the increased of sales.

Gross profit in our retail business for the three months ended September 30, 2020 was $14.5 million and gross margin was 41.6%. Gross profit in our retail business for the three months ended September 30, 2019 was $14.1 million and gross margin was 44.7%.

Total cost of sales for the three months ended September 30, 2020 was $56.2 million, a 36.8% decrease from $89.0 million for the three months ended September 30, 2019. Total cost of sales as a percentage of total sales for the three months ended September 30, 2020 was 70.4%, compared with 78.5% for the three months ended September 30, 2019. Gross margin for the three months ended September 30, 2020 was 29.6% compared with 21.5% for the three months ended September 30, 2019.

Selling, General and Administrative Expenses

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

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

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

	Three Months Ended September 30,									Increase (Decrease) in 2020 Compared
	2020				2019					to 2019
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	23,673	29.6	%	$	24,359		21.5	%		(2.8	)%
Operating Expenses:
Selling Expenses		12,996	16.3			17,944		15.8			(27.6	)
General and Administrative Expenses		7,818	9.8			7,584		6.7			3.1
Total		20,814	26.0			25,528		22.5			(18.5	)
Income (Loss) from Operations	$	2,859	3.6	%	$	(1,169	)	(1.0	)%		344.5	%

Selling expenses for the three months ended September 30, 2020 decreased 27.6% to $13.0 million from $17.9 million for the three months ended September 30, 2019. The decrease was attributable to the travelling expenses.

General and administrative expenses for the three months ended September 30, 2020 increased 3.1% to $7.8 million from $7.6 million for the three months ended September 30, 2019. The increase was attributable to the foreign currency transaction gain.

Income (Loss) from Operations

Income (loss) from operations for the three months ended September 30, 2020 increased 344.5% to $2.8 million from ($1.2) million for the three months ended September 30, 2019. Income from operations accounted for 3.6% and (1.0%) of our total sales during the three months ended September 30, 2020 and 2019.

Interest Expense

Interest expense for the three months ended September 30, 2020 was $0.7 million, an 164.2% increase compared with the same period in 2019. The increase was due to the increased bank loans.

Income Tax Expenses

Income tax expense was $0.8 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively.

Net Income (Loss)

Net income (loss) for the three months ended September 30, 2020 was $2.2 million, a 301.4% increase compared with the same period in 2019. Our basic and diluted earnings (loss) per share were $0.15 and ($0.07) for the three months ended September 30, 2020 and 2019, respectively.

Results of Operations for the nine months ended September 30, 2020 and 2019

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

	Nine Months Ended September 30,
	2020					2019
	(In thousands of U.S. Dollars, except for percentages)
Sales	$	188,350		100.0	%	$	278,598	100.0	%
Gross Profit		54,157		28.8			82,703	29.7
Operating Expense		58,675		31.2			81,101	29.1
(Loss) Income From Operations		(4,518	)	(2.4	)		1,602	0.6
Other Income		1,559		0.8			1,279	0.5
Income tax expense		1,315		0.7			2,667	1.0
Net (Loss) Income	$	(4,274)		(2.3	)%	$	214	0.1	%

Revenue

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

	2020		% of total sales			2019		% of total sales			Growth (Decrease) in 2019 compared with 2018
Wholesale business	(In thousands of U.S. dollars)					(In thousands of U.S. dollars)
Mainland China	$	14,935		7.9	%	$	40,487		14.5	%		(63.1	)%
Hong Kong China		17,063		9.1			22,291		8.0			(23.5	)
Germany		291		0.2			2,708		1.0			(89.3	)
United Kingdom		8,425		4.5			13,393		4.8			(37.1	)
Europe-Other		16,152		8.6			21,977		7.9			(26.5	)
Japan		9,714		5.2			16,304		5.9			(40.4	)
United States		22,823		12.1			29,930		10.7			(23.7	)
Total Wholesale business		89,403		47.5			147,090		52.8			(39.2	)
Retail business		98,947		52.5			131,508		47.2			(24.8	)
Total sales	$	188,350		100.0	%	$	278,598		100.0	%		(32.4	)%

Sales for the nine months ended September 30, 2020 were $188.4 million, a decrease of 32.4% from the nine months ended September 30, 2019. This decrease was primarily attributable to a 39.2% decrease in sales in our wholesale business and a 24.8% decrease in our retail business.

Sales generated from our wholesale business contributed 47.5% or $89.4 million of our total sales for the nine months ended September 30, 2020, a decrease of 39.2% compared with 52.8% or $147.1 million in the nine months ended September 30, 2019. This decrease was primarily attributable to decreased sales in Hong Kong China, Germany, Europe-Other, Mainland China, United Kingdom, Japan and the United States.

Sales generated from our retail business contributed 52.5% or $98.9 million of our total sales for the nine months ended September 30, 2020, a decrease of 24.8% compared with 47.2% or $131.5 million in the nine months ended September 30, 2019. This decrease was primarily due to a decrease in same store sales.

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

	2020		2019
Total store square footage		983,291		1,219,459
Number of stores		923		1,157
Average store size, square feet		1,065		1,054
Total store sales (in thousands of U.S. dollars)	$	98,947	$	131,508
Sales per square foot	$	101	$	108

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

	2020		2019
	(In thousands of U.S. dollars)
Sales from stores opened for a full year	$	77,727	$	111,739
Sales from newly opened store sales	$	6,060	$	6,027
Sales from e-commerce platform	$	10,355	$	9,000
Other*	$	4,805	$	4,742
Total	$	98,947	$	131,508

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

We remodeled or relocated 117 stores in 2019, and 38 stores during the nine months ended September 30, 2020. We plan to relocate or remodel approximately 50 stores in 2020. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2020. Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

Costs and Expenses

Cost of Sales and Gross Margin

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

									Growth
									(Decrease) in 2020
	Nine months ended September 30,								Compared
	2020				2019				with 2019
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	89,403	100.0	%	$	147,090	100.0	%		(39.2	)%
Raw Materials		39,139	43.8			67,172	45.7			(41.7	)
Labor		910	1.0			1,340	0.9			(32.1	)
Outsourced Production Costs		31,909	35.7			55,455	37.7			(42.5	)
Other and Overhead		395	0.4			295	0.2			33.9
Total Cost of Sales for Wholesale		72,353	80.9			124,262	84.5			(41.8	)
Gross Profit for Wholesale		17,050	19.1			22,828	15.5			(25.3	)
Net Sales for Retail		98,947	100.0			131,508	100.0			(24.8	)
Production Costs		42,923	43.4			47,051	35.8			(8.8	)
Rent		18,917	19.1			24,582	18.7			(23.0	)
Total Cost of Sales for Retail		61,840	62.5			71,633	54.5			(13.7	)
Gross Profit for Retail		37,107	37.5			59,875	45.5			(38.0	)
Total Cost of Sales		134,193	71.2			195,895	70.3			(31.5	)
Gross Profit	$	54,157	28.8	%	$	82,703	29.7	%		(34.5	)%

Raw material costs for our wholesale business were 43.8% of our total wholesale business sales in the nine months ended September 30, 2020, compared with 45.7% in the nine months ended September 30, 2019. The decrease was mainly due to lower raw materials purchase prices.

Labor costs for our wholesale business were 1.0% of our total wholesale business sales in the nine months ended September 30, 2020, compared with 0.9% in the nine months ended September 30, 2019. The marginal increase was mainly due to lower number of outsourced orders in 2020.

Outsourced manufacturing costs for our wholesale business were 35.7% of our total wholesale sales in the nine months ended September 30, 2020, compared with 37.7% in the nine months ended September 30, 2019. This decrease in percentage was primarily attributable to lower outsourced labor.

Overhead and other expenses for our wholesale business accounted for 0.4% and 0.2% of our total wholesale sales for the nine months ended September 30, 2020 and 2019, respectively.

Gross profit for our wholesale business for the nine months ended September 30, 2020 was $17.1 million, a 25.3% decrease compared with the nine months ended September 30, 2019. As a percentage of total wholesale business sales, gross profit was 19.1% of our total wholesale business sales for the nine months ended September 30, 2020, compared with 15.5% for the nine months ended September 30, 2019. The decrease in gross profits was mainly due to lower revenues.

Production costs for our retail business for the nine months ended September 30, 2020 were $42.9 million compared with $47.1 million for the nine months ended September 30, 2019. As a percentage of our total retail sales, production costs were 43.4% of our total retail sales for the nine months ended September 30, 2020, compared with 35.8% for the nine months ended September 30, 2019. The increase in percentage was due to higher discounts on our past season products in the nine months ended September 30, 2020 compared with the same period of the prior year in percentage of sales.

Rent costs for our retail business for the nine months ended September 30, 2020 were $18.9 million compared with $24.6 million for the nine months ended September 30, 2019. As a percentage of total retail sales, rent costs were 19.1% of our total retail sales for the nine months ended September 30, 2020 compared with 18.7% for the nine months ended September 30, 2019. The decrease was primarily attributable to lower rent at certain locations.

Gross profit for our retail business for the nine months ended September 30, 2020 was $37.1 million compared with $59.9 million for the nine months ended September 30, 2019. Gross margin for our retail business for the nine months ended September 30, 2020 was 37.5% compared with 45.5% for the nine months ended September 30, 2019.

Total cost of sales for the nine months ended September 30, 2020 was $134.2 million, a 31.5% decrease compared with the nine months ended September 30, 2019. As a percentage of total sales, total costs were 71.2% of total sales for the nine months ended September 30, 2020, compared with 70.3% for the nine months ended September 30, 2019. Total gross margin for the nine months ended September 30, 2020 was 28.8% compared with 29.7% for the nine months ended September 30, 2019.

Selling, General and Administrative Expenses

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

	Nine months ended September 30,									Increase (Decrease) in 2020 Compared
	2020					2019				to 2019
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	54,157		28.8	%	$	82,703	29.7	%		(34.5	)%
Operating Expenses:
Selling Expenses		39,101		20.8			58,651	21.1			(33.3	)
General and Administrative Expenses		19,574		10.4			22,450	8.1			(12.8	)
Total		58,675		31.2			81,101	29.2			(27.7	)
(Loss) Income from Operations	$	(4,518	)	(2.4	)%	$	1,602	0.5	%		(382.0	)%

Selling expenses for the nine months ended September 30, 2020 were $39.1 million, a 33.3% decrease compared with the nine months ended September 30, 2019. The decrease was attributable to lower retail sales.

General and administrative expenses for the nine months ended September 30, 2020 were $19.6 million a 12.8% decrease compared with the nine months ended September 30, 2019. As a percentage of total sales, general and administrative expenses accounted for 10.4% of total sales for the nine months ended September 30, 2020, compared with 8.1% of total sales for the nine months ended September 30, 2019. The amount decrease was mainly attributable to the decline in number of stores.

(Loss) Income from Operations

(Loss) Income from operations for the nine months ended September 30, 2020 was ($4.5) million, a 382.0% decrease from $1.6 million for the nine months ended September 30, 2019. This decrease was due to decreased gross profit.

Interest Expense

Interest expense was $1.6 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively. The increase was due to the increased bank loans.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2020 was $1.3 million, a 50.7% decrease compared to the same period of 2019. The decrease was primarily due to less taxable income.

Net (Loss) Income

Net (loss) income was ($4.3) million and $0.2 million during the nine months ended September 30, 2020 and 2019. Basic and diluted earnings per share were ($0.29) and $0.02 for the nine months ended September 30, 2020 and 2019, respectively.

Summary of Cash Flows

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

	2020			2019
	(In thousands of U.S. dollars)
Net cash provided by (used in) operating activities	$	24,598		$	(3,471	)
Net cash used in investing activities	$	(6,530	)	$	(6,555	)
Net cash provided by financing activities	$	18,939		$	10,887

Net cash provided by operating activities was $24.6 million for the nine months ended September 30, 2020 compared with net cash used in $3.5 million during the nine months ended September 30, 2019. The increase was primarily due to decrease in inventories.

Net cash used in investing activities was $6.5 million for the nine months ended September 30, 2020, compared with $6.6 million during the nine months ended September 30, 2019. This decrease was mainly due to the decreased in purchase of property and equipment and remodeling expenditure in 2020.

Net cash provided by financing activities was $18.9 million for the nine months ended September 30, 2020 compared with $10.9 million net cash provided by financing activities during the nine months ended September 30, 2019. During the nine months ended September 30, 2020, we repaid $49.3 million of bank loans and received bank loan proceeds of $66.6 million. Also, under the counter-guarantee agreement, we received $5.6 million from and paid $4.0 million to the related party during the nine months ended September 30, 2020.

Liquidity and Capital Resources

As of September 30, 2020, we had cash and cash equivalents of $70.0 million, other current assets of $146.6 million and current liabilities of $163.2 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 November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.7 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of September 30, 2020, Ever-Glory Apparel had borrowed $14.7 million (RMB 100.0 million) under this line of credit with annual interest rates ranging from 3.92% to 4.35% and due on from October 2020 to May 2021.

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 September 30, 2020, we had access to approximately $58.2 million in lines of credit, of which approximately $30.3 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 $38.2 million (RMB 260 million) and $3.2 million (RMB 21.4 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of September 30, 2020.

Foreign Currency Translation Risk

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at RMB 8.26 to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from RMB 8.26 to 8.09 to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of September 30, 2020, the market foreign exchange rate had increased to RMB 6.81 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.

In addition, the financial statements of subsidiaries located in China (whose functional currency is RMB) are translated into US dollars using the closing rate method. The balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain (loss) for the three and nine months ended September 30, 2020 and 2019 was $4.7 million, $3.0 million, ($3.7) million and ($2.2) 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 September 30, 2020. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were operating effectively.

Changes in Internal Control Over Financial Reporting

Other than described above, during the third quarter of 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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 September 30, 2020:

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

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

Exhibit No.		Description

3.1		Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Annual Report on Form 10-KSB, filed March 29, 2006);

3.2		Articles of Amendment as filed with the Department of State of Florida, effective November 20, 2007 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed November 29, 2007);

3.3		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of our Current Report Form 8-K filed on April 22, 2008);

31.1		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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

November 13, 2020	EVER-GLORY INTERNATIONAL GROUP, INC.

	By:	/s/ Edward Yihua Kang
		Edward Yihua Kang
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Jiansong Wang
		Jiansong Wang
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Ever-Glory International Group, Inc. - FORM 10-Q - November 13, 2020

Attached files

Ever-Glory International Group, Inc. Reports