Ever-Glory International Group, Inc. - Quarter Report: 2021 September (Form 10-Q)

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, 2021

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

For the transition period from ____________ to ____________

Commission file number: 0-28806

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

Florida

65-0420146

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

86-25-5209-6831

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

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

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

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

As of November 10, 2021, 14,812,312 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

INDEX

		Page Number

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		ii

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	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	33

Item 5.	Other Information	33

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;

	●	The impact (including travel and entry restrictions and quarantine) of public health epidemics, including the COVID-19 pandemic in China and the rest of the world, on the market we operate in and our business, results of operations and financial condition;

	●	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 management of business through a U.S. publicly-traded and reporting company and the general reputation and potential scrutiny of U.S. publicly-traded companies with their principal operations in China;

	●	Our future financing needs; and

	●	Our ability to obtain future financing on acceptable terms.

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

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

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

	September 30, 2021			December 31, 2020
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	48,336		$	81,865
Restricted cash		43,176			39,858
Trading securities		3,068			1,792
Accounts receivable, net		61,525			53,285
Inventories		67,275			53,893
Advances on inventory purchases		9,864			10,261
Value added tax receivable		2,484			1,244
Other receivables and prepaid expenses		6,638			5,479
Amounts due from related parties		1,994			567
Total Current Assets		244,360			248,244

NON-CURRENT ASSETS
Equity security investment		5,903			3,932
Intangible assets, net		4,686			4,794
Property and equipment, net		32,747			32,164
Operating lease right-of-use assets		49,002			41,690
Deferred tax assets		265			902
Other non-current assets		771			-
Total Non-Current Assets		93,374			83,482
TOTAL ASSETS	$	337,734		$	331,726

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Bank loans	$	67,848		$	65,919
Accounts payable		73,120			67,762
Accounts payable and other payables – related parties		1,016			3,764
Other payables and accrued liabilities		13,758			16,073
Value added and other taxes payable		554			909
Income tax payable		1,900			1,062
Current operating lease liabilities		40,590			33,481
Total Current Liabilities		198,786			188,970

NON-CURRENT LIABILITIES
Non-current operating lease liabilities		8,549			8,307
TOTAL LIABILITIES		207,335			197,277

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS’ EQUITY
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,812,312 and 14,809,160 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively)		15			15
Additional paid-in capital		3,660			3,650
Retained earnings		103,013			109,171
Statutory reserve		20,376			20,376
Accumulated other comprehensive income		5,610			4,590
Amounts due from related party		(2,275	)		(3,353	)
Total equity		130,399			134,449
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	337,734		$	331,726

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited)

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
NET SALES	$	94,406		$	79,908		$	225,776		$	188,350
COST OF SALES		71,196			56,235			161,738			134,193

GROSS PROFIT		23,210			23,673			64,038			54,157

OPERATING EXPENSES
Selling expenses		14,443			12,996			44,495			39,101
General and administrative expenses		9,467			7,818			24,980			19,574
Total Operating Expenses		23,910			20,814			69,475			58,675

(LOSS) INCOME FROM OPERATIONS		(700	)		2,859			(5,437	)		(4,518	)

OTHER INCOME (EXPENSES)
Interest income		176			313			928			930
Interest expense		(1,218	)		(700	)		(1,909	)		(1,607	)
Government subsidy		340			235			842			926
(Loss) Gain from changes in fair values of investments		(123	)		(4	)		2,151			-
Other income (expenses)		253			343			1,027			1,310
Total Other Income (expenses), Net		(572	)		187			3,039			1,559

(LOSS) INCOME BEFORE INCOME TAX EXPENSE		(1,272	)		3,046			(2,398	)		(2,959	)

Income tax expense		(1,945	)		(822	)		(3,759	)		(1,315	)

NET (LOSS) INCOME		(3,217	)		2,224			(6,157	)		(4,274	)

Net loss attributable to the non-controlling interest		-			(8	)		-			(4	)
NET LOSS ATTRIBUTABLE TO THE COMPANY		(3,217	)		2,216			(6,157	)		(4,278	)

NET (LOSS) INCOME	$	(3,217	)	$	2,224		$	(6,157	)	$	(4,274	)

Foreign currency translation gain (loss)		(1,061	)		4,664			1,020			2,964
COMPREHENSIVE INCOME (LOSS)		(4,278	)		6,888			(5,137	)		(1,310	)

Comprehensive loss attributable to the non-controlling interest		-			51			-			53
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY	$	(4,278	)	$	6,939		$	(5,137	)	$	(1,257	)

LOSS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS
Basic and diluted	$	(0.22	)	$	0.15		$	(0.42	)	$	(0.29	)
Weighted average number of shares outstanding Basic and diluted		14,811,073			14,808,737			14,810,585			14,805,987

See the accompanying notes to the condensed consolidated financial statements.

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

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

					Additional		Retained Earnings					Accumulated other			Amounts due from			Total equity attributable to stockholders
	Common Stock				paid-in					Statutory		Comprehensive			related			of the			Total
	Shares		Amount		capital		Unrestricted			reserve		loss			party			Company			equity
Balance at January 1, 2021		14,809,160	$	15	$	3,650	$	109,171		$	20,376	$	4,590		$	(3,353	)	$	134,449		$	134,449
Stock issued for compensation		1,500		-		5		-			-		-			-			5			5
Net loss		-		-		-		(1,170	)		-		-			-			(1,170	)		(1,170	)
Net cash received from related party under counter guarantee agreement		-		-		-		-			-		-			379			379			379
Foreign currency translation gain (loss)													(1,352	)		-			(1,352	)		(1,352	)
Balance at March 31, 2021		14,810,660		15		3,655		108,001			20,376		3,238			(2,974	)		132,311			132,311
Net loss								(1,771	)										(1,771	)		(1,771	)
Net cash received from related party under counter guarantee agreement																386			386			386
Foreign currency translation loss													3,434						3,434			3,434
Balance at June 30, 2021		14,810,660	$	15	$	3,655	$	106,230		$	20,376	$	6,672		$	(2,588	)	$	134,360		$	134,360
Stock issued for compensation		1,652		-		5		-			-		-			-			5			5
Net (Loss) income								(3,217	)										(3,217	)		(3,217	)
Net cash received from related party under counter guarantee agreement																313			313			313
Foreign currency translation gain													(1,062	)					(1,062	)		(1,062	)
Balance at September 30, 2021		14,812,312	$	15	$	3,660	$	103,013		$	20,376	$	5,610		$	(2,275	)	$	130,399		$	130,399

					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

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

	Nine Months Ended
	September 30, 2021			September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,157	)	$	(4,274	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		4,384			4,114
Loss from sale of property and equipment		590			283
Provision of bad debt allowance		676			683
Write off obsolete inventories		7,595			5,786
Changes in fair value of investment		(2,151	)		13
Deferred income tax		644			(165	)
Stock-based compensation		10			10
Changes in operating assets and liabilities
Accounts receivable		(8,614	)		15,571
Inventories		(20,702	)		16,135
Value added tax receivable		(1,235	)		(577	)
Other receivables and prepaid expenses		(1,096	)		50
Advances on inventory purchases		586			2,461
Amounts due from related parties		(1,514	)		(848	)
Accounts payable		5,930			(7,842	)
Accounts payable and other payables- related parties		(3,204	)		(1,112	)
Other payables and accrued liabilities		(3,332	)		(6,093	)
Value added and other taxes payable		(360	)		467
Income tax payable		831			(64	)
Net cash (used in) provided by operating activities		(27,119	)		24,598

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(5,109	)		(2,769	)
Net (purchase) sale of trading securities		(1,077	)		(901	)
Investment payment		(773	)		(2,860	)
Net cash (used in) investing activities		(6,959	)		(6,530	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans		56,110			66,599
Repayment of bank loans		(54,565	)		(49,278	)
Net collection (advance) of amounts due from related party (equity)		1,630			1,618
Net cash used in (provided by) financing activities		3,175			18,939

EFFECT OF EXCHANGE RATE CHANGES ON CASH		693			2,740

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(30,211	)		39,747

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		121,723			50,755

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	91,512		$	90,502

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

Cash and Cash Equivalents		48,336			69,950
Restricted cash		43,176			20,552
	$	91,512		$	90,502

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,909		$	1,607
Income taxes	$	2,272		$	1,455

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 SIX MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(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 Rui Lian Technology Company Limited (“Nanjing Rui Lian”), and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”) and the Company’s wholly-owned Hong Kong subsidiary, Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”). The Company’s retail operations are provided through its wholly-owned subsidiaries, Shanghai LA GO GO Fashion Company Limited (“Shanghai LA GO GO”), Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”).

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

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

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, 2021, the condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated statements of equity, and condensed consolidated statements of cash flows for the three and nine months ended September 30, 2021 and 2020. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements.

Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

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

Use of Estimates

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

Recently Issued Accounting Pronouncements

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

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

NOTE 3 INVESTMENTS

Trading securities

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

	Three months ended					Nine months ended
	September 30,					September 30,
	2021		2020			2021		2020
	(In thousands of U.S. Dollars)
Net (loss) gains recognized during the period on equity securities		(121)		(14	)		200		(14	)
Less: Net gains recognized during the period on equity securities sold during the period		-		(1	)		54		(1	)
Unrealized (loss) gains recognized during the reporting period on equity securities still held at the reporting date	$	(121)	$	(13	)	$	146	$	(13	)

Equity security investment

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

In December 2020, the Partnership invested in a public company in China. Since there is readily determinable fair value of the equity investment, the Company started to measure its equity investment at fair value using the public company’s stock price and the Company’s shares since December 31, 2020.

Investment advances

In September 2021, Goldenway signed an agreement and promised to invest $7.7 million (RMB 50.0 million) in a Chinese private company. Goldenway advanced $0.8 million (RMB 5.0 million) in September 2021 for 20% shares of the investee. The investee completed the registration in October 2021. As of September 30, 2021 the investment advances were recorded as the other non-current assets. Goldenway and the investee are in the process of finalizing the detail terms terms for the whole investment.

NOTE 4 INVENTORIES

Inventories at September 30, 2021 and December 31, 2020 consisted of the following:

	September 30, 2021		December 31, 2020
	(In thousands of U.S. Dollars)
Raw materials	$	1,832	$	1,297
Work-in-progress		22,593		8,130
Finished goods		42,850		44,466
Total inventories	$	67,275	$	53,893

NOTE 5 RESTRICTED CASH

As of September 30, 2021, restricted cash of $43.2 million (RMB280.0 million) was cash on demand and time deposits pledged for loans to Shanghai Pudong Development Bank. Restricted cash $41.7 million (RMB 270.0 million) of time deposit was pledged for loans to Shanghai Pudong Development Bank. And $1.5 million (RMB10.0 million) was deposit for $7.7 million (RMB 50.0 million) loan received in July and September, 2021.

NOTE 6 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, 2021 and December 31, 2020.

	September 30, 2021		December 31, 2020
Bank	(In thousands of U.S. Dollars)
Shanghai Pudong Development Bank	$	41,634	$	42,157
Industrial and Commercial Bank of China		18,504		21,462
Nanjing Bank		7,710		2,300
	$	67,848	$	65,919

From March 2020 to July 2020, Ever-Glory Apparel entered into a deposit certificate of $29.3 million (RMB190.0 million) with the Shanghai Pudong Development Bank with annual interest rates ranging from 3.75% to 3.99%. From October 2020 to September 2021, Ever-Glory Apparel pledged the deposit certificate to the Shanghai Pudong Development Bank and Ever-Glory Apparel had borrowed $24.7 million (RMB 160.0 million) under this line of certificate with an annual interest rate from 2.60% to 3.10% and due on between October 2021 and September 2022.

In December 2020, Goldenway entered into a deposit certificate of $17.0 million (RMB110.0 million) with the Shanghai Pudong Development Bank with an annual interest rate of 3.85%. From December 2020 to September 2021, Goldenway pledged the deposit certificate to the Shanghai Pudong Development Bank and Goldenway had borrowed $17.0 million (RMB 110.0 million) under this line of certificate with annual interest rate from 2.60% to 3.4% and due on between December 2021 and June 2022.

In April 2020, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $6.2 million (RMB40.0 million). These loans are collateralized by the Company’s property and equipment. As of September 30, 2021, Goldenway had borrowed $6.2 million (RMB40.0 million) from Industrial and Commercial Bank of China with an annual interest rate 4.57% and due in August 2022.

In July 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $15.4 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, 2021, Ever-Glory Apparel had borrowed $12.3 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 3.92% to 4.35% and due between October 2021 to May 2022. As of September 30, 2021, approximately $3.1 million was unused and available under this line of credit.

In April 2020, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $6.9 million (RMB45.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of September 30, 2021, approximately $6.9 million was unused and available under this line of credit.

In June 2021, Goldenway entered into a margin contract with Nanjing Bank. Goldenway had borrowed $4.6 million (RMB 30.0 million) under this contract for $0.9 million (RMB 6.0 million) was restricted with an annual interest rate 3.36% and due on June 2022. In September 2021, Goldenway entered into another margin contract with Nanjing Bank. Goldenway had borrowed $3.1 million (RMB 20.0 million) under this contract for $0.6 million (RMB 4.0 million) was restricted with an annual interest rate 3.44% and due on September 2022.

In September 2019, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.3 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of September 30, 2021, approximately $9.3 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 $1.9 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively, and $1.2 million and $0.7 million for the three months ended September 30, 2021 and 2020, respectively.

NOTE 7 INCOME TAX

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

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

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

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

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

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

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

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax (loss) income for the three and nine months ended September 30, 2021 and 2020 was taxable in the following jurisdictions:

	Three months ended						Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
	(In thousands of U.S. Dollars)
Mainland China	$	(1,923	)	$	3,057		$	(2,390	)	$	(2,943	)
Hongkong, PRC		653			-			(1	)		-
Others		(2	)		(11	)		(7	)		(16	)
	$	(1,272	)	$	3,046		$	(2,398	)	$	(2,959	)

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and nine months ended September 30, 2021 and 2020:

	Three months ended						Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
PRC statutory rate		25.0	%		25.0	%		25.0	%		25.0	%
Valuation allowance against subsidiaries with pretax losses		(98.4	)		2.0			(100.1	)		(60.6	)
Timing difference between US GAAP and PRC tax accounting		(117.9	)		-			(103.0	)		-
Provision of bad debt allowance unrecognized in PRC		(4.3	)		-			(7.0	)		-
Changes in fair value of investment and trading securities		35.8			-			22.3			-
Other not deductible expenses in PRC tax filing		7.0			-			6.0			(8.9	)
Effective income tax rate		(152.8	)%		27.0	%		(156.8	)%		(44.5	)%

Income tax expense for the three and nine months ended September 30, 2021 and 2020 is as follows:

	Three months ended					Nine months ended
	September 30,					September 30,
	2021		2020			2021		2020
Current	$	1,903	$	1,115		$	3,121	$	1,418
Deferred		42		(293	)		638		(103	)
Income tax expense	$	1,945	$	822		$	3,759	$	1,315

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 $105.2 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S. Tax Reform signed into law on December 22, 2017 significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, there is no deferred tax expense (income) relating to the Tax Act changes for the year ended September 30, 2021.

NOTE 8 STOCKHOLDERS’ EQUITY

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

On February 9, 2021, the Company issued 1,500 shares of the Company’s common stock to two of the Company’s independent directors as compensation for their services rendered during the third and fourth quarter of 2020. The shares issued in 2021 were valued at $3.34 per share, which was the average market price of the common stock for the five days before the grant date.

On September 8, 2021, the Company issued 1,652 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 2021. The shares issued in 2021were valued at $3 per share, which was the average market price of the common stock for the five days before the grant date.

NOTE 9 RELATED PARTY TRANSACTIONS

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

Other income from Related Parties

Jiangsu Wubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. Wubijia has sold their home goods on consignment in some Company’s retail stores since the third quarter of 2014.

Other income from Wubijia for the three and nine months ended at September 30, 2021 and 2020 are as follows:

	Three months ended September 30,					Nine months ended September 30,
	2021		2020			2021			2020
	(In thousands of U.S. Dollars)
The Company received from the customers	$	-	$	3		$	3		$	12
The Company paid to Wubijia		-		(3	)		(3	)		(12	)
The net income recorded as other income	$	-	$	-		$	-		$	-

Included in other income for the nine months ended September 30, 2021 and 2020 is rental income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term through 2021. The rental income is $6,378, $5,970, $19,135 and $17,711 for the three and nine months ended September 30, 2021 and 2020, respectively.

Other expenses due to Related Parties

Included in other expenses for the three and nine months ended September 30, 2021 and 2020 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,
	2021		2020		2021		2020
	(In thousands of U.S. Dollars)
Chuzhou Huarui		56		51		166		153
Kunshan Enjin		23		22		70		65
Total	$	79	$	73	$	236	$	218

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

Purchases from and Sub-contracts with Related Parties

The Company purchased raw materials from Nanjing Knitting totaling $0.3 million, $0.6 million, $1.2 million and $1.0 million during the three and nine months ended September 30, 2021 and 2020, respectively.

In addition, the Company sub-contracted certain manufacturing work to related companies totaled $6.9 million, $5.9 million, $17.0 million and $14.3 million for the three and nine months ended September 30, 2021 and 2020, respectively. The Company provided raw materials to the sub-contractors and charged a fixed fee for labor provided by the sub-contractors.

Sub-contracts with related parties included in cost of sales for the three and nine months ended September 30, 2021 and 2020 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(In thousands of U.S. Dollars)
Chuzhou Huarui	$	449	$	421	$	1,310	$	1,411
Fengyang Huarui		665		625		1,316		1,025
Nanjing Ever-Kyowa		392		166		1,102		608
Ever-Glory Vietnam		5,154		4,019		11,597		9,498
Nanjing Knitting		300		504		1,217		991
EsCeLav		0		9		37		33
Jiangsu Ever-Glory		0		144		464		771
	$	6,960	$	5,888	$	17,043	$	14,337

Accounts Payable – Related Parties

The accounts payable to related parties at September 30, 2021 and December 31, 2020 are as follows:

	2021		2020
	(In thousands of U.S. Dollars)
Ever-Glory Vietnam	$	-		1,727
Fengyang Huarui		47		150
Nanjing Ever-Kyowa		57		384
Chuzhou Huarui		415		1,234
Nanjing Knitting		465		257
Jiangsu Ever-Glory		32		12
Total	$	1,016	$	3,764

Amounts Due From Related Parties-current assets

The amounts due from related parties at September 30, 2021 and December 31, 2020 are as follows:

	2021		2020
	(In thousands of U.S. Dollars)
Jiangsu Ever-Glory	$	1,630	$	567
Ever-Glory Vietnam		364		-
Total	$	1,994	$	567

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. During three and nine months ended September 30, 2021 and 2020, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices. The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at a cost of $0.1 million, $0.7 million, $2.9 million and $0.8 million during the three and nine months period ended September 30, 2021 and 2020, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at a cost of nil, $0 million, $0.5 million and $0.8 million during the three and nine months ended September 30, 2021 and 2020, respectively.

Amounts Due From Related Party under Counter Guarantee Agreement

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of September 30, 2021 and December 31, 2020, Jiangsu Ever-Glory has provided guarantees for approximately $31.6 million (RMB 205 million) and $36.0 million (RMB 235.0 million) of lines of credit obtained by the Company, respectively. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $18.5 million (RMB 120.2 million) and $31.5 million (RMB 205.5 million) as of September 30, 2021 and December 31, 2020 respectively. Mr. Kang has also provided a personal guarantee for $9.3 million (RMB 60.0 million) and $14.8 million (RMB 96.3 million) as of September 30, 2021 and December 31, 2020, respectively.

At December 31, 2020, $3.1 million (RMB 20.0 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the nine months ended September 30, 2021, an additional $0.3 million (RMB 1.8 million) was provided to and repayment of $1.4million (RMB 9.3 million) was received from Jiangsu Ever-Glory under the counter-guarantee. As of September 30, 2021, the amount of the counter-guarantee was $2.0 million (RMB 12.6 million) (the difference represents currency exchange adjustment of $0.02 million), which was 6.13% of the aggregate amount of lines of credit. 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, 2021 and December 31, 2020, the amount classified as a reduction of equity was $2.3 million and $3.4 million, respectively. Interest of 0.5% was charged on net amounts due from Jiangsu Ever-Glory at each month end. Since January 1, 2019, interest rate has changed to 0.3625% charged at each month end as the bank benchmark interest rate decreased. Interest income for the three and nine months ended September 30, 2021 and 2020 was approximately $0.04 million, $0 million, $0.05 million and $0.05 million, respectively.

NOTE 10 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 30 years and the weighted average discount rate is 4.35%. The lease term for shopping mall stores is commonly one year with options to extend or renew, and the rent is predetermined with a percentage of sales. The Company estimates the next 12 months rent for the shopping mall stores by annualizing current period rent calculated with the percentage of sales. Thus, the ROU assets and lease liabilities may vary significantly at different period ends. For stores closed before the lease end, we would incur insignificant amounts in net of loss on impairment of ROU assets and gain on extinguishment of lease liabilities, which are recorded in the current period statement of income (loss) and comprehensive income (loss).

In the nine months ended September 30, 2021, the costs of the leases recognized in cost of revenues and general administrative expenses are $22.5 million and $0.6 million, respectively. Cash paid for the operating leases including in the operating cash flows was $23.1 million. 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.

The following table summarizes the maturity of operating lease liabilities:

Year ending December 31, (In thousands of U.S. Dollars)
2021	$	188
2022		751
2023		766
2024		432
2025		432
Thereafter		12,883
Total lease payment		15,452
Less: Interest		6,904
Total	$	8,548

Legal Proceedings

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

Lawsuits against Client A

In November 2020, the Company’s two subsidiaries, Ever-Glory International Group Apparel Inc. and Goldenway Nanjing Garments Company Limited filed a complaint against Client A (“Client A”) for unpaid goods worth RMB 70.15 million ($10.86 million) in the Tianjin No.1 Intermediate People’s Court based on processing contracts between the parties. The Company has applied for interim measures with the court and has frozen bank accounts of Client A for a total amount of RMB 68.12 million ($10.54 million). The Company has delivered goods worth RMB 62.06 million ($9.51 million) to Client A pursuant to the processing contracts. The Company also seeks Client A for the payment of the loss incurred from the cost of raw materials paid to suppliers in the amount of RMB 8.09 million ($1.25 million) in reliance on the processing contracts. The Company received RMB 71.4 million ($11.05 million) from Client A in April 2021 which settled the complaint amount.

NOTE 11 RISKS AND UNCERTAINTIES

Economic and Political Risks

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

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

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

Credit risk

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

Concentration risk

For the three months ended September 30, 2021, the Company had one wholesale customer that represented approximately 17% of the Company’s revenues. For the nine months ended September 30, 2021, the Company had one wholesale customer that represented approximately 15% of the Company’s 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, 2020, the Company had two wholesale customers that represented approximately 12.2% and 10.3% of the Company’s wholesale 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, 2021 and 2020.

For the retail business, the Company relied on five raw material suppliers that represented approximately 30%, 24%, 19%,11% and 10% of raw material purchases during the nine months ended September 30, 2021. 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 wholesale business, the Company relied on one finished goods supplier which is a related-party that represented 29.7% of the total finished goods purchases during the nine months ended September 30, 2021. 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 retail business, the Company did not rely on any supplier that represented more than 10% of the total finished goods purchases during the nine months ended September 30, 2021 and 2020.

The Company’s revenues for the three and nine months ended September 30, 2021 and 2020 were earned in the following geographic areas:

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
	(In thousands of U.S. Dollars)
The People’s Republic of China	$	16,376	$	7,171	$	28,222	$	14,935
Hong Kong China		9,153		12,019		16,124		17,063
United Kingdom		2,020		7,116		5,558		8,425
Europe-Other		8,846		8,690		18,905		16,443
Japan		8,435		3,124		13,390		9,714
United States		17,373		6,945		29,650		22,823
Total wholesale business		62,202		45,065		111,849		89,403
Retail business		32,204		34,843		113,927		98,947
Total	$	94,406	$	79,908	$	225,776	$	188,350

NOTE 12 SEGMENTS

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

(a)

Wholesale segment

(b)

Retail segment

	Wholesale segment		Retail segment			Total
	(In thousands of U.S. Dollars)
Nine months ended September 30, 2021
Segment profit or loss:
Net revenue from external customers	$	111,849		113,927			225,776
Income (loss) from operations	$	199		(5,635	)		(5,437	)
Interest income	$	849		79			928
Interest expense	$	1,828		82			1,909
Depreciation and amortization	$	657		3,727			4,384
Income (loss) before income tax expense		2,135		(4,533	)		(2,398	)
Income tax expense	$	2,735		1,024			3,759
Segment assets:
Additions to property, plant and equipment		1,406		3,703			5,109
Inventory		24,972		42,303			67,275
Total assets		186,276		151,458			337,734

	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 (Loss) before income tax expense		4,143		(7,102	)		(2,959	)
Income tax expense	$	965		350			1,315
Segment assets:
Additions to property, plant and equipment		2,494		275			2,769
Inventory		9,712		36,731			46,443
Total assets		126,755		164,258			291,013

	Wholesale segment		Retail segment			Total
	(In thousands of U.S. Dollars)
Three months ended September 30, 2021
Segment profit or loss:
Net revenue from external customers	$	62,203		32,203			94,406
Income (loss) from operations	$	3,570		(4,270	)		(700	)
Interest income	$	150		26			176
Interest expense	$	1,189		29			1,218
Depreciation and amortization	$	347		825			1,172
Income (Loss)before income tax expense		2,575		(3,847	)		(1,272	)
Income tax expense	$	1,932		13			1,945

	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 before income tax expense		2,417		629		3,046
Income tax expense	$	497		325		822

NOTE 13 SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date which the consolidated financial statements were available to be issued. All subsequent events requiring recognition as of September 30, 2021 have been incorporated into these consolidated financial statements and there are no other significant subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”

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, 2021 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

Overview

Our Business

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

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

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

Wholesale Business

We conduct our original design manufacturing (“ODM”) operations through seven wholly owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, Jiangsu province, China, Chuzhou, Anhui province, China and Samoa: Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited (“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”), Chuzhou Huirui Garments Co., Ltd. (“Huirui), 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”), Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and Xizang He Meida Trading Company Limited (“He Meida”). He Media was closed in April 2021.

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, 2021, we had 893 stores (including store-in-stores), which includes 83 stores that were opened and 126 stores that were closed in the three quarters of 2021. We had 31 stores that were opened and 69 stores that were closed during the three months ended September 30, 2021.

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

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

	●	Expanding our retail network throughout China;

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

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

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

Partnership Investment

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

In September 2021, Goldenway signed an agreement and promised to invest in a Chinese private company. Goldenway advanced $0.8 million (RMB 5.0 million) in September 2021 for 20% shares of the investee. The investee completed the registration in October 2021. As of September 30, 2021 the investment advances were recorded as the other non-current assets. Goldenway and the investee are in the process of finalizing the detail terms for the whole investment.

Seasonality of Business

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

Collection Policy

Wholesale business

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

Retail business

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

Global Economic Uncertainty

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

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

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

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

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

Summary of Critical Accounting Policies

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

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

Estimates and Assumptions

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

Recently Issued Accounting Pronouncements

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

Results of Operations for the three months ended September 30, 2021 and 2020

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020. 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,
	2021					2020
	(In thousands of U.S. dollars, except for percentages)
Sales	$	94,406		100.0	%	$	79,908	100.0	%
Gross Profit	$	23,210		24.6	%	$	23,673	29.6	%
Operating Expense	$	23,910		25.3	%	$	20,814	26.0	%
(Loss) Income From Operations	$	(700	)	(0.7	)%	$	2,859	3.6	%
Other (Expenses) Income	$	(572	)	(0.6	)%	$	187	0.2	%
Income tax expense	$	1,945		2.1	%	$	822	1.0	%
Net (Loss) Income	$	(3,217	)	(3.4	)%	$	2,224	2.8	%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the three months ended September 30, 2021 and 2020.

	2021		% of total sales			2020		% of total sales			Growth (Decrease) in 2021 compared with 2020
Wholesale business	(In thousands of U.S. dollars)					(In thousands of U.S. dollars)
Mainland China	$	16,376		17.3	%	$	7,171		9.0	%		128.4	%
Hong Kong China		9,153		9.7			12,019		15.0			(23.8	)
United Kingdom		2,020		2.1			7,116		8.9			(71.6	)
Europe-Other		8,846		9.4			8,690		10.9			1.8
Japan		8,435		8.9			3,124		3.9			170.0
United States		17,372		18.5			6,945		8.7			150.1
Total Wholesale business		62,202		65.9			45,065		56.4			38.0
Retail business		32,204		34.1			34,843		43.6			(7.6	)
Total sales	$	94,406		100.0	%	$	79,908		100.0	%		18.1	%

Sales for the three months ended September 30, 2021 were $94.4 million, an 18.1% increase compared with the three months ended September 30, 2020. This increase was primarily attributable to a 38.0% increase in sales in our wholesale business, partially offset by a 7.6% decrease in our retail business.

Sales generated from our wholesale business contributed 65.9% or $62.2 million of our total sales for the three months ended September 30, 2021, a 38.0% increase compared with 56.4% or $45.1 million in the three months ended September 30, 2020. This increase was primarily attributable to an increase in sales in Mainland China, Europe-Other, Japan and United States partially offset by a decrease in sales in Hong Kong and United Kingdom.

Sales generated from our retail business contributed 34.1% or $32.2 million of our total sales for the three months ended September 30, 2021, a 7.6% decrease compared with 43.6% or $34.8 million in the three months ended September 30, 2020. This decrease was primarily due to a decrease in the e-commerce sales.

Costs and Expenses

Cost of Sales and Gross Margin

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

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended September 30, 2021 and 2020.

									Growth
									(Decrease) in 2021
	Three months ended September 30,								Compared
	2021				2020				with 2020
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	62,202	100.0	%	$	45,065	100.0	%		38.0	%
Raw Materials		29,507	47.4			20,435	45.3			44.4
Labor		422	0.7			366	0.8			15.3
Outsourced Production Costs		20,967	33.7			14,915	33.1			40.6
Other and Overhead		1,090	1.8			157	0.3			545.3
Total Cost of Sales for Wholesale		51,986	83.6			35,873	79.6			44.9
Gross Profit for Wholesale		10,217	16.4			9,192	20.4			11.2
Net Sales for Retail		32,204	100.0			34,843	100.0			(7.6	)
Production Costs		12,632	39.2			13,212	37.9			(4.4	)
Rent		6,579	20.4			7,150	20.5			(8.0	)
Total Cost of Sales for Retail		19,210	59.7			20,362	58.4			(5.7	)
Gross Profit for Retail		12,993	40.3			14,481	41.6			(10.3	)
Total Cost of Sales		71,196	75.4			56,235	70.4			26.6
Gross Profit	$	23,210	24.6	%	$	23,673	29.6	%		(2.0	)%

Raw material costs for our wholesale business were 47.4% of our total wholesale business sales in the three months ended September 30, 2021, compared with 45.3% in the three months ended September 30, 2020. The increase was mainly due to higher raw material purchase prices.

Labor costs for our wholesale business were 0.7% of our total wholesale business sales in the three months ended September 30, 2021, compared with 0.8% in the three months ended September 30, 2020.

Outsourced production costs for our wholesale business for the three months ended September 30, 2021 increased to $21.0 million from $14.9 million for the three months ended September 30, 2020. Outsourced production costs accounted for 33.7% of our total wholesale business sales in the three months ended September 30, 2021, a 40.6% increase from the three months ended September 30, 2020. This increase in percentage was primarily attributable to higher labor costs.

Overhead and other expenses for our wholesale business accounted for 1.8% of our total wholesale business sales for the three months ended September 30, 2021, compared with 0.3% of total wholesale business sales for the three months ended September 30, 2020.

Wholesale business gross profit for the three months ended September 30, 2021 was $10.2 million compared with $9.2 million for the three months ended September 30, 2020. Gross profit accounted for 16.4% of our total wholesale sales for the three months ended September 30, 2021, compared with 20.4% for the three months ended September 30, 2020. The decrease was mainly due to an increase in wholesale raw material prices and outsourced production costs.

Production costs for our retail business were $12.6 million for the three months ended September 30, 2021 compared with $13.2 million during the three months ended September 30, 2020. Retail production costs accounted for 39.2% of our total retail sales in the three months ended September 30, 2021, compared with 37.9% for the three months ended September 30, 2020. The decrease in amount was due to decrease in sales.

Rent costs for our retail business for the three months ended September 30, 2021 were $6.6 million compared with $7.2 million for the three months ended September 30, 2020. Rent costs for our retail business accounted for 20.4% of our total retail sales for the three months ended September 30, 2021, compared with 20.5% for the three months ended September 30, 2020. There were no significant changes.

Gross profit in our retail business for the three months ended September 30, 2021 was $13.0 million and gross margin was 40.3%. Gross profit in our retail business for the three months ended September 30, 2020 was $14.5 million and gross margin was 41.6%. The decrease was primarily due to increased production costs and write off obsolete inventories.

Total cost of sales for the three months ended September 30, 2021 was $71.2 million, a 26.6% increase from $56.2 million for the three months ended September 30, 2020. Total cost of sales as a percentage of total sales for the three months ended September 30, 2021 was 75.4%, compared with 70.4% for the three months ended September 30, 2020. Gross margin for the three months ended September 30, 2021 was 24.6% compared with 29.6% for the three months ended September 30, 2020.

Selling, General and Administrative Expenses

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

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

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

	Three Months Ended September 30,									Increase (Decrease) in 2021 Compared
	2021					2020				to 2020
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	23,210		24.6	%	$	23,673	29.6	%		(2.0	)%
Operating Expenses:
Selling Expenses		14,443		15.3			12,996	16.3			11.1
General and Administrative Expenses		9,467		10.0			7,818	9.8			21.1
Total		23,910		25.3			20,814	26.0			14.9
(Loss) Income from Operations	$	(700	)	(0.7	)%	$	2,859	3.6	%		(124.5	)%

Selling expenses for the three months ended September 30, 2021 increased 11.1% to $14.4 million from $13.0 million for the three months ended September 30, 2020. The increase was attributable to the higher travelling expenses.

General and administrative expenses for the three months ended September 30, 2021 increased 21.1% to $9.5 million from $7.8 million for the three months ended September 30, 2020. The increase was attributable to the increased salaries.

(Loss) Income from Operations

(Loss) income from operations for the three months ended September 30, 2020 decreased 124.5% to ($0.7) million from $2.9 million for the three months ended September 30, 2020. (Loss) income from operations accounted for (0.7%) and 3.6% of our total sales during the three months ended September 30, 2021 and 2020.

Interest Expense

Interest expense for the three months ended September 30, 2021 was $1.2 million, a 74.0% increase compared with the same period in 2020. The increase was due to the increased bank loans.

Income Tax Expenses

Income tax expense was $1.9 million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively. The increased income tax expenses are mainly due to some subsidiaries are profitable and there are higher income tax expenses but other subsidiaries are loss.

Net (Loss) Income

Net (loss) income for the three months ended September 30, 2021 was ($3.2) million, a 244.9% decrease compared with the same period in 2020. Our basic and diluted (loss) earnings per share were ($0.22) and $0.15 for the three months ended September 30, 2021 and 2020, respectively.

Results of Operations for the nine months ended September 30, 2021 and 2020

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020. 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,
	2021					2020
	(In thousands of U.S. Dollars, except for percentages)
Sales	$	225,776		100.0	%	$	188,350		100.0	%
Gross Profit		64,038		28.4			54,157		28.8
Operating Expense		69,475		30.8			58,675		31.2
(Loss) Income From Operations		(5,437	)	(2.4	)		(4,518	)	(2.4	)
Other Income		3,039		1.3			1,559		0.8
Income tax expense		3,759		1.7			1,315		0.7
Net (Loss) Income	$	(6,157	)	(2.7	)%	$	(4,274	)	(2.3	)%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the nine months ended September 30, 2021 and 2020.

	2021		% of total sales			2020		% of total sales			Growth (Decrease) in 2021 compared with 2020
Wholesale business	(In thousands of U.S. dollars)					(In thousands of U.S. dollars)
Mainland China	$	28,222		12.5	%	$	14,935		7.9	%		89.0	%
Hong Kong China		16,124		7.1			17,063		9.1			(5.5	)
United Kingdom		5,558		2.5			8,425		4.7			(34.0	)
Europe-Other		18,905		8.4			16,443		8.6			15.0
Japan		13,390		5.9			9,714		5.2			37.8
United States		29,650		13.1			22,823		12.1			29.9
Total Wholesale business		111,849		49.5			89,403		47.5			25.1
Retail business		113,927		50.5			98,947		52.5			15.1
Total sales	$	225,776		100.0	%	$	188,350		100.0	%		19.9	%

Sales for the nine months ended September 30, 2021 were $225.8 million, an increase of 19.9% from the nine months ended September 30, 2020. This increase was primarily attributable to a 25.1% increase in sales in our wholesale business and a 15.1% increase in our retail business.

Sales generated from our wholesale business contributed 49.5% or $111.8 million of our total sales for the nine months ended September 30, 2021, an increase of 25.1% compared with 47.5% or $89.4 million in the nine months ended September 30, 2020. This increase was primarily attributable to increased sales in Mainland China, Europe-Other, Japan and the United States, partially offset by decreased sales in Hong Kong China and United Kingdom,.

Sales generated from our retail business contributed 50.5% or $113.9 million of our total sales for the nine months ended September 30, 2021, an increase of 15.1% compared with $98.9 million in the nine months ended September 30, 2020. This increase was primarily due to an increase in same store sales.

Total retail store square footage and sales per square foot for the nine months ended September 30, 2021 and 2020 are as follows:

	2021		2020
Total store square footage		982,683		983,291
Number of stores		893		923
Average store size, square feet		1,100		1,065
Total store sales (in thousands of U.S. dollars)	$	113,927	$	98,947
Sales per square foot	$	116	$	101

Same store sales and newly opened store sales for the nine months ended September 30, 2021 and 2020 are as follows:

	2021		2020
	(In thousands of U.S. dollars)
Sales from stores opened for a full year	$	89,478	$	77,727
Sales from newly opened store sales	$	6,950	$	6,060
Sales from e-commerce platform	$	9,725	$	10,355
Other*	$	7,774	$	4,805
Total	$	113,927	$	98,947

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

We remodeled or relocated 54 stores in year 2020, and 113 stores during the nine months ended September 30, 2021. We plan to relocate or remodel 100 to 150 stores in 2021. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2021. Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

Costs and Expenses

Cost of Sales and Gross Margin

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, 2021 and 2020.

									Growth
									(Decrease) in 2021
	Nine months ended September 30,								Compared
	2021				2020				with 2020
	(In thousands of U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	111,849	100.0	%	$	89,403	100.0	%		25.1	%
Raw Materials		51,299	45.9			39,139	43.8			31.1
Labor		1,141	1.0			910	1.0			25.4
Outsourced Production Costs		39,744	35.5			31,909	35.7			24.6
Other and Overhead		1,290	1.2			395	0.4			226.3
Total Cost of Sales for Wholesale		93,474	83.6			72,353	80.9			29.2
Gross Profit for Wholesale		18,375	16.4			17,050	19.1			7.8
Net Sales for Retail		113,927	100.0			98,947	100.0			15.1
Production Costs		45,784	40.2			42,923	43.4			6.7
Rent		22,480	19.7			18,917	19.1			18.8
Total Cost of Sales for Retail		68,264	59.9			61,840	62.5			10.4
Gross Profit for Retail		45,663	40.1			37,107	37.5			23.1
Total Cost of Sales		161,738	71.6			134,193	71.2			20.5
Gross Profit	$	64,038	28.4	%	$	54,157	28.8	%		18.2	%

Raw material costs for our wholesale business were 45.9% of our total wholesale business sales in the nine months ended September 30, 2021, compared with 43.8% in the nine months ended September 30, 2020. The increase was mainly due to higher raw material purchase prices.

Labor costs for our wholesale business were 1.0% of our total wholesale business sales in the nine months ended September 30, 2021, compared with 1.0% in the nine months ended September 30, 2020.

Outsourced manufacturing costs for our wholesale business were 35.5% or $39.7 million in the nine months ended September 30, 2021, compared with 35.7% or $31.9 million in the nine months ended September 30, 2020. There were no significant changes in percentage of sales.

Overhead and other expenses for our wholesale business accounted for 1.2% and 0.4% of our total wholesale sales for the nine months ended September 30, 2021 and 2020, respectively.

Gross profit for our wholesale business for the nine months ended September 30, 2021 was $18.4 million, a 7.8% increase compared with the nine months ended September 30, 2020. As a percentage of total wholesale business sales, the gross margin was 16.4% of our total wholesale business sales for the nine months ended September 30, 2021, compared with 19.1% for the nine months ended September 30, 2020. The decrease in gross margin was mainly due to an increase in raw material prices.

Production costs for our retail business for the nine months ended September 30, 2021 were $45.8 million compared with $42.9 million for the nine months ended September 30, 2020. As a percentage of our total retail sales, production costs were 40.2% of our total retail sales for the nine months ended September 30, 2021, compared with 43.4% for the nine months ended September 30, 2020. The increase was due to higher discounts on our past season products in the nine months ended September 30, 2021 compared with the same period of the prior year of sales.

Rent costs for our retail business for the nine months ended September 30, 2021 were $22.5 million compared with $18.9 million for the nine months ended September 30, 2020. As a percentage of total retail sales, rent costs were 19.7% of our total retail sales for the nine months ended September 30, 2021 compared with 19.1% for the nine months ended September 30, 2020. The increase was primarily attributable to higher rent at certain locations.

Gross profit for our retail business for the nine months ended September 30, 2021 was $45.7 million compared with $37.1 million for the nine months ended September 30, 2020. Gross margin for our retail business for the nine months ended September 30, 2021 was 40.1% compared with 37.5% for the nine months ended September 30, 2020.

Total cost of sales for the nine months ended September 30, 2021 was $161.7 million, a 20.5% increase compared with the nine months ended September 30, 2020. As a percentage of total sales, total costs were 71.6% of total sales for the nine months ended September 30, 2021, compared with 71.2% for the nine months ended September 30, 2020. Total gross margin for the nine months ended September 30, 2021 was 28.4% compared with 28.8% for the nine months ended September 30, 2020.

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 2021 Compared
	2021					2020					to 2020
	(In thousands of U.S. dollars, except for percentages)
Gross Profit	$	64,038		28.4	%	$	54,157		28.8	%		18.2	%
Operating Expenses:
Selling Expenses		44,495		19.7			39,101		20.8			13.8
General and Administrative Expenses		24,980		11.1			19,574		10.4			27.6
Total		69,475		30.8			58,675		31.2			18.4
Loss from Operations	$	(5,437	)	(2.4	)%	$	(4,518	)	(2.4	)%		20.3	%

Selling expenses for the nine months ended September 30, 2021 were $44.5 million, a 13.8% increase compared with the nine months ended September 30, 2020. The increase was attributable to the increased travelling expenses.

General and administrative expenses for the nine months ended September 30, 2021 were $25.0 million a 27.6% increase compared with the nine months ended September 30, 2020. As a percentage of total sales, general and administrative expenses accounted for 11.1% of total sales for the nine months ended September 30, 2021, compared with 10.4% of total sales for the nine months ended September 30, 2020. The increase was attributable to the increased salaries.

Loss from Operations

Loss from operations for the nine months ended September 30, 2021 was ($5.4) million, a 20.3% decrease from ($4.5) million for the nine months ended September 30, 2020. This decrease was due to decreased gross profit.

Interest Expense

Interest expense was $1.9 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively. The increase was due to the increased bank loans.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2021 was $3.8 million, a 185.9% increase compared to the same period of 2020. The increase was primarily due to higher taxable income from certain PRC subsidiaries.

Net Loss

Net loss was $6.2 million and $4.3 million during the nine months ended September 30, 2021 and 2020. Basic and diluted earnings per share were ($0.42) and ($0.29) for the nine months ended September 30, 2021 and 2020, respectively.

Summary of Cash Flows

Summary cash flows information for the nine months ended September 30, 2021 and 2020 is as follows:

	2021			2020
	(In thousands of U.S. dollars)
Net cash (used in) provided by operating activities	$	(27,119	)	$	24,598
Net cash used in investing activities	$	(6,959	))	$	(6,530	)
Net cash provided by financing activities	$	3,175		$	18,939

Net cash used in operating activities was $7.1 million for the nine months ended September 30, 2021 compared with net cash provided by $24.6 million during the nine months ended September 30, 2020. The increase was primarily due to more inventories purchased this year.

Net cash used in investing activities was $7.0 million for the nine months ended September 30, 2021, compared with $6.5 million during the nine months ended September 30, 2020. This increase was mainly due to the increase in purchase of property and equipment and remodeling expenditure in 2021.

Net cash provided by financing activities was $3.2 million for the nine months ended September 30, 2021 compared with $18.9 million net cash provided by financing activities during the nine months ended September 30, 2020. The decrease was primarily because we received less loan proceeds from and repaid more loans to the banks this year. During the nine months ended September 30, 2021, we repaid $54.6 million of bank loans and received bank loan proceeds of $56.1 million. Also, under the counter-guarantee agreement, we received $1.4 million from and paid $0.3 million to the related party during the nine months ended September 30, 2021.

Liquidity and Capital Resources

As of September 30, 2021, we had cash and cash equivalents of $48.3 million, other current assets of $202.7 million and current liabilities of $200.2 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

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, 2021, we had access to approximately $37.8 million in lines of credit, of which approximately $19.3 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 $31.7 million (RMB 205 million) and approximately $1.9 million (RMB 12.6 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of September 30, 2021.

Foreign Currency Translation Risk

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our 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, 2021, the market foreign exchange rate had increased to RMB 6.49 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, 2021 and 2020 was ($1.1) million, $4.7 million, $1.0 million and $3.0 million, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Lawsuits against Client A

ITEM 1A. RISK FACTORS

As of the date of this report and except as set forth below, there have been no material changes to the risk factors disclosed in our annual report on Form 10-K filed with the SEC on March 30, 2021.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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 12, 2021	EVER-GLORY INTERNATIONAL GROUP, INC.

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

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