Annual Report (10-k)

Date : 03/29/2019 @ 6:04PM
Source : Edgar (US Regulatory)
Stock : Ever Glory International Group Inc (EVK)
Quote : 2.01  0.0 (0.00%) @ 12:00AM

Annual Report (10-k)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 2018

 

Or

 

☐   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,

Peoples Republic of China

(Address of principal executive offices) (Zip Code)

 

86-25-52096831

(Registrant’s telephone number, including area code)

 

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

 

Title of each class registered:   Name of each exchange on which registered:
Common Stock   NASDAQ Global Market

 

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

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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 ☒

 

As of June 29, 2018, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $14.1 million based on the closing price of $3.40 for the registrant’s common stock as reported on the NASDAQ Global Market.

 

As of March 25, 2019, there were 14,800,140 shares of our common stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 

 

 

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-K

For the Year Ended December 31, 2018

 

TABLE OF CONTENTS

 

  Page
Cautionary Note Regarding Forward-Looking Statements ii
     
Part I    
     
Item 1. Business 1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 23
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24
     
Part II    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25
Item 6. Selected Financial Data 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 39
Item 9A. Controls and Procedures 39
Item 9B. Other Information 40
     
Part III    
     
Item 10. Directors, Executive Officers, and Corporate Governance 41
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49
Item 13. Certain Relationships and Related Transactions, and Director Independence 50
Item 14. Principal Accountant Fees and Services 52
     
Part IV    
     
Item 15 Exhibits and Financial Statement Schedules 53
     
Signatures 54

 

i

 

  

Cautionary Note Regarding Forward-Looking Statements

 

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

 

  Competition within our industry;
     
  Seasonality of our sales;
     
  Our investments in new product development;
     
  Our plans to open new retail stores;
     
  Our ability to integrate 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.;
     
  Regulatory requirements in the PRC and countries in which we operate;
     
  Anticipated effective tax rates in future years;
     
  Regulatory requirements affecting our business;
     
  Currency exchange rate fluctuations;
     
  Our financing needs; and
     
  Our ability to attract additional investment capital on attractive 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.

 

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in “Risk Factors” in Item 1A of this Annual Report. These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this annual report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this document is a statement of our intention as of the date of this document and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

 

ii

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview and Corporate History

 

Ever-Glory International Group, Inc., sometimes referred to in this report as “ Ever-Glory ”, the “ Company ”, “ we ", or “ us ”, through its subsidiaries, is a retailer of branded fashion apparel and a leading global apparel supply chain solution provider. Ever-Glory offers apparel to woman under its own brands “La go go”, “Velwin”, “Sea To Sky” and “idole” and currently operates over 1,300 retail locations in China. Ever-Glory is also a leading global apparel supply chain solution provider with a focus on middle-to-high end casual wear, outerwear, and sportswear brands. Ever-Glory serves a number of well-known domestic and international brands and retail stores by providing a complete set of services of supply chain management on fabric development and design, sampling, sourcing, quality control, manufacturing, logistics, customs clearance, distribution, and etc.

 

The Company was incorporated in Florida on October 19, 1994. We changed our name from Andean Development Corporation to “Ever-Glory International Group, Inc.” on November 17, 2005.  

 

The following is a description of our corporate history and structure:

 

Perfect Dream Limited (“ Perfect Dream ”) was incorporated in the British Virgin Islands on July 1, 2004. Perfect Dream was originally formed as a holding company, and it became our wholly-owned subsidiary as a result of a share exchange transaction completed in November 2005.

 

In January 2005, Perfect Dream acquired 100% of Goldenway Nanjing Garments Company Limited (“ Goldenway ”). Goldenway, a wholly foreign-owned enterprise in People’s Republic of China (“ PRC ”) was incorporated on December 31, 1993. Goldenway is principally engaged in outsourcing and sale of garments. Prior to acquisition by Perfect Dream, Goldenway was a joint venture held by Jiangsu Ever-Glory International Group Corporation (“ Jiangsu Ever-Glory ”).

 

On November 9, 2006, Perfect Dream entered into a purchase agreement with Ever-Glory Enterprises (HK) Limited (“ Ever-Glory Hong Kong ”) whereby we acquired a 100% interest in Nanjing New-Tailun Garments Co, Ltd. (“ New-Tailun ”) from Ever-Glory Hong Kong. New-Tailun is a 100% foreign-owned enterprise incorporated in the PRC and is engaged in the manufacturing and sale of garments.

 

On August 27, 2007, Perfect Dream acquired Nanjing Catch-Luck Garments Co, Ltd. (“Catch-Luck”), which further expanded our production capacity. Catch-Luck is primarily engaged in the manufacturing and sale of garments in China.

 

Shanghai La Go Go Fashion Company Limited (“LA GO GO”), a joint venture of Goldenway and Shanghai La Chapelle Garment and Accessories Company Limited (“La Chapelle”), was incorporated in the PRC on January 24, 2008.  Goldenway invested approximately $0.8 million (approximately RMB 6.0 million) in cash, and La Chapelle invested approximately $0.6 million (RMB 4.0 million) in cash, for a 60% and 40% ownership interest, respectively, in LA GO GO.  In connection with the formation of LA GO GO, Goldenway made a strategic investment in La Chapelle by acquiring a 10% equity interest in La Chapelle with a cash payment of RMB 10 million (approximately USD$1.4 million). The business objective of the joint venture was to establish and create a leading brand of ladies’ garments for the mainland Chinese market.  On March 23, 2009, Goldenway transferred all of its ownership interest in LA GO GO to Ever-Glory International Group Apparel Inc. (“ Ever-Glory Apparel ”), a wholly-owned subsidiary of Goldenway. On April 23, 2010, Ever-Glory Apparel acquired the 40% non-controlling interest in LA GO GO from La Chapelle for approximately $0.9 million (RMB 6.2 million), bringing our ownership in LA GO GO to 100%. In connection with such acquisition, and in order to focus on our core business, Goldenway sold the 10% equity interest in La Chapelle to the original shareholders of La Chapelle and, in return, received a total cash payment of RMB 12.4 million (approximately $1.8 million). 

 

1

 

 

Ever-Glory Apparel was incorporated in the PRC on January 6, 2009.  Goldenway invested approximately $16.9 million (RMB110.0 million) into Ever-Glory Apparel. Ever-Glory Apparel is principally engaged in the import and export of apparel, fabric and accessories. Ever-G We also purchased finished goods from contract manufacturers. For lory Apparel began to function as our primary import and export agent since 2010.   

 

On March 19, 2012, Nanjing Tai Xin Garments Trading Company Limited (“ Tai Xin ”), a wholly owned subsidiary of Ever-Glory Apparel was incorporated in PRC. Tai Xin is primarily engaged in the purchasing of raw materials used in the garment manufacturing.

 

Ever-Glory International Group (HK) Ltd. (“ Ever-Glory HK ”), a wholly owned subsidiary of Perfect-Dream, was incorporated in Samoa on September 15, 2009. Ever-Glory HK is principally engaged in the import and export of apparel, fabric and accessories.

 

Ever-Glory Supply Chain Service Co., Limited (“ Ever-Glory Supply ”), a wholly-owned subsidiary of Ever-Glory Apparel, was incorporated in Hongkong in 2017. Ever-Glory Supply is principally engaged in the import and export of apparel, fabric and accessories.

  

Ever-Glory Apparel, Ever-Glory Supply and Ever-Glory HK focus on the import and export business.  Goldenway focuses primarily on quality and production control, and coordinates with outsourced contract manufacturers. New-Tailun focuses on the Japanese market, and has strengths in the design, production, sale and marketing of jeans and trousers. Catch-Luck is geared toward the European market, and it designs and makes products that complement the product lines of our other subsidiaries. Tai Xin is primarily engaged in the purchasing of raw materials used in the garment manufacturing. Shanghai LA GO GO focuses on establishing and creating a leading brand of ladies’ apparel for the mainland Chinese market.

 

On November 20, 2013, Jiangsu La Go Go Fashion Company Limited ( “Jiangsu LA GO GO” ) a joint venture of Ever-Glory Apparel and Catch-Luck was incorporated in PRC. The business objective of Jiangsu LA GO GO is to carry out our retail operations in different geographic markets than LA GO GO.

 

On January 26, 2014, Shanghai Ya Lan Fashion Company Limited ( “Ya Lan” ) a wholly owned subsidiary of Shanghai LA GO GO was incorporated in PRC. The business objective of Ya Lan is to establish and create another leading brand “Velwin” of ladies’ garments for the mainland Chinese market.

 

On March 19, 2014, Xizang He Meida Trading Company Limited ( “He Meida” ) a wholly owned subsidiary of Ever-Glory Apparel was incorporated in PRC. The business objective of HeMeida is to develop online operation of our retail business in the mainland Chinese market.

 

On April 29, 2014, Tianjin La Go Go Fashion Company Limited ( “Tianjin LA GO GO” ) a joint venture of Ever-Glory Apparel and Catch-Luck was incorporated in PRC. The business objective of Tianjin LA GO GO is to carry out our retail operations in different geographic markets other than Jiangsu LA GO GO.

 

On July 24, 2014, ChuzhouHuirui Garments Company Limited ( “Huirui” ), a wholly owned subsidiary of Ever-Glory Apparel was incorporated in PRC. Huirui is primarily engaged in the management of our outsourced manufacturing factories.

 

On June 26, 2014, Shanghai LA GO GO entered into a contract with Shanghai Yiduo Fashion Company Limited ( “Yiduo” ) to acquire 78% of the shares of Yiduo. The Company gained effective control of Yiduo by the end of March 2015 and Yiduo was consolidated on March 31, 2015. The business objective of Yiduo is to establish and create another leading brand “idole” of ladies’ garments for the mainland Chinese market.

 

2

 

 

As a result of the foregoing acquisitions and transactions, our current corporate structure is illustrated below.  

 

 

3

 

 

Business Operations

 

Our wholesale operations include a complete set of services of supply chain management and worldwide sale of apparel to well-known domestic and international casual wear, sportswear and outerwear brands and retailers in major markets. We conduct our original design manufacturing (“ODM”) operations through six 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, and Chuzhou, Anhui province, China: 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”), ChuzhouHuirui Garments Co., Ltd. (“Huirui”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”). We have one wholly owned subsidiary registered in Samoa: Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”). We also have one wholly owned subsidiary registered in Hongkong: Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply”). In our fiscal year ended December 31, 2018, our wholesale segment achieved total sales of $218.6 million. 

 

Although we have our own manufacturing capacity, we currently outsource most of the manufacturing to our strategic long-term contractors as part of our overall business strategy. Outsourcing allows us to maximize our production capacity and remain flexible while reducing capital expenditures and the costs of keeping skilled workers on production lines during times of seasonally lower sales. We inspect products manufactured by our long-term contractors to ensure that they meet our high-quality control standards. Total unit output from our manufacturing facilities and outsourced partners is more than 14.0 million pieces in 2018. See Production and Quality Control below.

 

Our retail business objective is to establish and develop leading brands of women’s wear and to build a nationwide retail distribution channel in China. We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“Shanghai LA GO GO”), Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”), Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), Shanghai Ya Lan Fashion Company Limited (“Ya Lan”), Xizang He Meida Trading Company Limited (“He Meida”) and Shanghai Yiduo Fashion Company Limited (“Yiduo”). As of December 31, 2018, we had approximately 6,500 retail employees and operated 1,381retail stores in China. We achieved total retail sales of $229.9 million in the fiscal year of 2018.

 

Wholesale Segment

 

Products

 

We manufacture a broad array of products in various categories for the women’s, men’s and children’s apparel markets. Within those categories, various product classifications including high and middle grade casual-wear, sportswear and outwear, including the following product lines:

 

Women’s Clothing: coats, jackets, slacks, skirts, shirts, trousers, and jeans
Men’s Clothing: vests, jackets, trousers, skiwear, shirts, coats and jeans
Children’s Clothing: coats, vests, down jackets, trousers, knitwear and jeans

 

Customers

 

We manufacture garments for a number of well-known retail chains and famous domestic and international brands. We also have our own in-house design capabilities and can provide our customers with a selection of original designs that the customer may have manufactured-to-order. We normally supply our customers through purchase orders and we have no long-term supply contracts with any of them.

 

In the fiscal year ended December 31, 2018, approximately 58.3% of our sales revenue came from customers in China, 3.1% of our sales revenue came from customers in Germany, 21.1% of our sales revenue came from customers in United Kingdom and other European countries, 14.0% from customers in the United States, and 3.5% from customers in Japan. In 2018, sales to our five largest customers generated approximately 46.5% of our total wholesale sales and one customer represented more than 10% of our total wholesale sales.

  

Substantially all of our long-lived assets were located in the PRC as of December 31, 2018 and 2017.

 

4

 

 

Suppliers

 

We purchase the majority of our raw materials (including fabric, fasteners, thread, buttons, labels and related materials) directly from numerous local fabric and accessories suppliers in China. For our wholesale business, collectively, purchases from our five largest suppliers represented approximately 16.2% and 13.9% of total raw material purchases in 2018 and 2017, respectively. No single supplier provided more than 10% of our total purchases. 

 

We also purchased finished goods from contract manufacturers. For our wholesale business, collectively, purchases from our five largest contract manufacturers represented approximately 38.8% and 43.8% of total finished goods purchases in 2018 and 2017, respectively.  One contract manufacturer provided approximately 18.1% and 24.0% of our total finished goods purchases in 2018 and 2017.

 

For our wholesale business, we generally agree to pay our suppliers within 30 to 90 days after our receipt of goods. We typically place orders for materials from suppliers when we receive orders from our customers. On average, the materials will generally be consumed by production in approximately 20 days.

 

Sales and Marketing

 

We have set up our own merchandising department to interface with our customers. We believe we have developed good and stable business relationships with our main customers in Europe, the U.S., Japan and China. Our sales staff typically works directly with our customers and arranges the terms of the contracts with them.

 

Our management believes that we continue to benefit from our solid reputation for providing high quality goods and professional service in the markets where we have a presence, which provides us further opportunities to work with desirable customers. Our marketing strategy aims to attract customers with outstanding brands from top markets. We seek to attract customers mainly from Europe, the U.S., Japan, and China. In addition, we look for customers with strong brand recognition and product lines that require high quality manufacturing and generate sufficient sales volume to support our sizeable production capacity. Referrals from existing customers have been and will continue to be a fruitful source of new customers. In addition, we aim to maintain an active presence in trade shows around the world, including those in Europe, the U.S., Japan, and China.

 

Production and Quality Control

 

In 2018, approximately 5.1% of the products we sold to wholesale customers were in our own manufacturing facilities. We typically outsource the manufacturing of a large portion of our products based upon factory capacity and customer demand. The number of outside contract manufacturers to which we outsource is expected to increase in order to meet the anticipated growth in demand from our customers.

 

As of December 31, 2018, our total production capacity, including outsourced production, reached 14.0 million pieces per year. At present, we believe our production capacity is sufficient to meet customer demand.

 

We are committed to designing and manufacturing high quality garments. We place the highest standard on quality control because we emphasize the high quality of our products. We have implemented strict quality control and craft discipline systems. Before we manufacture large quantities, we obtain the approval from our customers either through in-person visits to the factories or by shipping samples of our products to our customers for testing, inspection and feedback. This ensures that our products perfectly meet specifications prior to production. In addition, our trained professional quality control personnel periodically inspect the manufacturing process and quality of our apparel products. Our factory is ISO 9001:2000 certified. ISO 9000 is a family of standards for quality management systems maintained by ISO, International Organization for Standardization, and is administered by accreditation and certification bodies. We have been independently audited and certified to be in conformance with ISO 9001 which certifies that formalized business processes are being applied.

  

5

 

 

Due to our strict quality control and testing process, we have not undergone any significant product or merchandise recalls, and we generally do not receive any significant requests by our customers to return finished goods. Product returns are not a material factor in our business.

  

We anticipate to continue outsourcing a large portion of our production. Management believes that outsourcing allows us to maximize our production flexibility while reducing significant capital expenditure and the costs associated with managing a large production workforce. We contract for the production of a portion of our products through various outside independent manufacturers. Quality control reviews are done by our employees during and after production before the garments leave the outsourcing factories to ensure that material and component qualities and the products “fits” are in accordance with our specifications. We inspect prototypes of each product prior to cutting by the contractors and conduct a final inspection of finished products prior to shipment to ensure that they meet our high standards.

 

Delivery and Transportation

 

We generally do not hold any significant inventory of finished goods for more than ninety days, as we typically ship finished goods to our customers upon completion.

 

Competition

 

The garment manufacturing industry is highly competitive, particularly in China. Our competitors include garment manufacturers of all sizes, both within China and elsewhere in the world, many of which have greater financial and manufacturing resources than us. We have been in the garment manufacturing business since 1993 and believe that we have earned a reputation of producing high quality products with high efficiency, competitive prices, and excellent customer service. We believe we provide one-stop total solutions and more valuable products for our customers.

 

Currently, we have several small-to-large sized competitors in China including some state-owned trading groups and private garment companies. We believe we differentiate ourselves from the competition and will be able to effectively compete with our competitors due to our persistent pursuit of quality control, a diversified casual wear product lineup, and in-house design talent. In addition, we believe we derive advantages from our customer feedback in the supply chain and the use of our advanced Enterprise Resource Planning (“ ERP ”) system. Our ERP system integrates many of our operational processes into one system including order processing, statistical analysis, purchasing, manufacturing, logistics and financial control systems, providing management with instantaneous feedback on important aspects of our business operations.

 

Governmental Regulations/Quotas

 

In 2018, we were not subject to any export quota imposed by countries where our customers are located. Nevertheless, we have noticed that many European countries tightened their chemical inspection requirements after the removal of quotas. In addition, there can be no assurance that additional trade restrictions will not be imposed on the export of our products in the future.  Such actions could result in increases in the cost of our products generally and may adversely affect our operating results. On a longer-term basis, we believe that our customer mix and our ability to adjust the types of apparel we manufacture will mitigate our exposure to such trade restrictions in the future.

 

We are also required to comply with Chinese laws and regulations that apply to some of the products we produce for shipment to the countries to which we export. In order to address these Chinese compliance issues, we have established an advanced fabric testing center to ensure that our products meet certain quality and safety standards in the U.S. and EU. In addition, we work closely with our customers so that they understand our testing and inspection process.

  

Seasonality

 

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 result primarily from the timing of seasonal demand and shipments in our wholesale business and holiday periods in China where our retail business operates.

 

6

 

 

Retail Segment

 

As of December 31, 2018, we had 1,381 retail stores in China selling our own brand clothing. We believe our advantages in the retail segments include our ability to promptly respond to market trends, our quick turn-around in design and production, and appropriate pricing. In 2018, we achieved total net sales of approximately US$229.9 million for our retail business. We operate most of our retail stores in so-called Tier-2 or Tier-3 cities in China, such as Zhengzhou in Henan province, Taizhou in Jiangsu province, etc. We also have penetrated into Tier-1 cities, such as Beijing and Shanghai.

  

Suppliers

 

We purchase the majority of our raw materials (including fabric, fasteners, thread, buttons, labels and related materials) directly from numerous local fabric and accessories suppliers. For our retail business, collectively, purchases from our five largest suppliers represented approximately 79.3% of total purchases in 2018. There were five suppliers which provided more than 10% of our total raw materials purchases in 2018. We have not experienced difficulty in obtaining raw materials that are essential to our business.

 

We also purchase finished goods from contract manufacturers. For our retail business, collectively, our five largest contract manufacturers represented approximately 16.3% of total finished goods purchases in 2018. There was no one contract manufacturer which provided more than 10% of our total finished goods purchases in 2018. We have not experienced difficulty in obtaining finished products from our contract manufacturers. 

 

For our retail business, we generally agree to pay our suppliers within 30-180 days after the receipt of goods. We typically place orders for materials from suppliers when the style has been confirmed by our chief designer. On average, the supplies we hold in stock will generally be consumed in production in approximately 20 days.

 

Customers

 

We currently have four retail brands. “Sea to Sky” focuses on females between the ages of 18 to 25. “La Go Go” seeks to appeal to fashionable urban females between the ages of 23 to 28. “Velwin” targets females between the ages of 28 to 33 while “idole” targets females between the ages of 28 to 35. Our products are priced at a middle-to-high level in order to appeal to our targeted customers.

 

Design and Production

 

We have our own design, production and quality control departments. Our retail brands release new designs twice a year, during October for the spring/summer season and May for the autumn/winter season. Our design team attends many fashion shows each year to track the fashion trends in Europe, Japan and Asia. Our design team produces approximately 5,000 designs each year. Each of our retail brands hosts its own order-placing fair twice each year to determine the new products to be released for the spring/summer and autumn/winter season based on the orders placed by all the regional sales managers at such order-placing fair; our chief designer then decides the designs to be manufactured. The production department will then produce samples for the designer’s approval.  Our quality control department checks the quality of the final products by follow-up inspection. The final products will be shipped to the logistics and distribution centers for sale.

 

Sales and Marketing

 

Products of our retail brands are sold in flagship stores, stores-within-a-store and e-commerce platform.  The sales department is responsible for developing new sales channels. According to our new store opening plan, the ratio of flagship stores and stores-within-a-store are carefully balanced.  The store-within-a-store enters into contracts with department stores. The flagship stores are carefully chosen at prominent locations and have lease agreements with each property owner.  Under our return and exchange policy, products may be returned or exchanged for any reason within 15 days. During 2018, the return and exchange rate was very low and was not a material factor in our operations.

 

7

 

 

Store Operation

 

As of December 31, 2018, we had 1,381 stores, including 79 flagship stores, with each store generating average revenue of approximately $13,800 per month. The majority of our retail stores are situated as stores-within-a-store in large, mid-tier department stores located in over 20 provinces in China.

 

Trademarks

 

We regard our trademarks as an important part of our business due to the name recognition of our customers. We obtained trademark registration at the China Trademark Office for the mark “La Go Go” in class 25 and class 18 in 2010. As of December 31, 2018, we were not aware of any valid claim or challenges to our right to use our registered trademark or any counterfeit or other infringement to our registered trademark.

 

Information Technology

 

We recognize the importance of high-quality information management systems in the retail operation.  As a result, we use Management Systems to monitor and manage the merchandise planning, inventory and sales information.

  

Research and Development

 

We have invested in the research and development of high-tech fabrics.

 

Our Growth Strategy

 

Our strategy to grow and expand our business includes the following:

 

Supply chain management:

  

  Expand the global sourcing network
     
  Explore the overseas low-cost manufacturing base
     
  Focus on high value-added products and continue our strategy to produce mid-to-high end apparel
     
  Continue to emphasize on product design and technology application
     
  Seek strategic acquisitions of international distributors that could enhance global sales and distribution network
     
  Maintain stable revenue growth in the export markets while shifting focus to higher margin wholesale markets such as mainland China.

 

Retail business development:

 

  Build our brands to be recognized as major players in the mid-to-high women’s apparel market in China;
     
  Expand the retail network throughout China
     
  Improve the retail stores’ efficiency and increase same-store sales
     
  Continue to launch flagship stores in Tier-1 cities and increase penetration and coverage in Tier-2 and Tier-3 cities
     
  Take advantage of our position as a multi-brand operator

 

8

 

 

Employees

 

As of December 31, 2018, we had over 6,500 employees. None of our employees belong to a labor union. We have never experienced a labor strike or work stoppage. We are in full compliance with the Chinese labor laws and regulations and are committed to providing safe and comfortable working conditions and accommodations for our employees.

 

Labor Costs

 

The manufacture of garments is a labor-intensive business. Although much of our production process is automated and mechanized, we rely on skilled labor to make our products.  During the year ended December 31, 2018, our labor cost increased due to the shortage of skilled workers and rising labor cost in China.

 

Working Conditions and Employee Benefits

 

We consider our social responsibilities to our workers to be an important objective, and we are committed to providing a safe, clean, comfortable working environment and accommodations. Our employees are also entitled to paid holidays and vacations. In addition, we frequently monitor our third-party manufacturers’ working conditions to ensure their compliance with related labor laws and regulations. We are in full compliance with our obligations to contribute a certain percentage of our employees’ salaries to social insurance funds, as mandated by the PRC government. We expect the amount of contribution to the government’s social insurance funds to increase in the future as we expand our workforce and operations.  

 

Compliance with Environmental Laws

 

Based on the present nature of our operations, we do not believe that environmental laws and the cost of compliance with those laws have or will have a material impact on our operations.

 

Description of Property

 

In 2018, we operated four facilities on certain land in the Nanjing Jiangning Economic and Technological Development Zone and Huifeng Road, which are located in Nanjing and Chuzhou, China. For further details concerning our property, see Item 2 of this report regarding Properties.

 

Taxation

 

Most of our operating subsidiaries, except Ever-Glory HK, are incorporated in the PRC and therefore are governed by PRC income tax laws and are subject to the PRC enterprise income tax. Each of our consolidated entities files its own separate tax return, and we do not file a consolidated tax return. 

 

Goldenway was incorporated in the PRC and is subject to PRC income tax laws and regulations. Goldenway’s income tax rate is 25%.

 

New-Tailun and Catch-Luck were incorporated in the PRC and are subject to PRC income tax laws and regulations. Their income tax rate is 25%.

 

Shanghai LA GO GO was established on January 24, 2008, and its income tax rate is 25%.

  

Jiangsu LA GO GO was established on November 20, 2013, and its income tax rate is 25%.

 

Tianjin LA GO GO was established on April 29, 2014, and its income tax rate is 25%.

 

Shanghai YA LAN was established on January 24, 2014, and its income tax rate is 25%.

 

Shanghai Yiduo was acquired on March 31, 2015, and its income tax rate is 25%.

 

Huirui was acquired on July 24, 2014, and its income tax rate is 25%.

 

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Ever-Glory Apparel was established on January 6, 2010, and its income tax rate is 25%.

 

He Meida was established on March 19, 2014. The local government has implemented an income tax reduction from 15% to 9% valid through December 31, 2018.

 

Tai Xin was established on March 19, 2012, its income tax rate is 25%.

 

Perfect Dream was incorporated in British Virgin Islands on July 1, 2004 and has no liabilities for income tax.

 

Ever-Glory HK was incorporated in Samoa on September 15, 2009 and does not have any income tax obligation.

 

Ever-Glory Supply Chain Service Co., Limited was incorporated in Hongkong on December 27, 2017, and under the current laws of Hongkong, are subject to income tax at the 16.5% statutory rate.

  

All of our income tax expenses are related to our operations in China.  

 

On April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which came into effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17% respectively become subject to lower VAT rates of 16% starting from May 1, 2018. According to the 2019 government work report, the VAT rates of 16% will be reduced to 13%. Tax rate changes have little effect on the company.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the risks described below together with all of the other information included in this Annual Report before making an investment decision with regard to our securities. The statements contained in or incorporated into this Annual Report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following events described in these risk factors actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Relating to Our Industry

 

Our sales are influenced by general economic cycles. A prolonged period of depressed consumer spending would have a material adverse effect on our profitability.

 

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Purchase of apparel generally declines during recessionary periods when disposable income is low. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. As a result, any substantial deterioration in general economic conditions, increases in energy costs or interest rates, acts of war, acts of nature or terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition. We currently sell to customers in the U.S., the EU and Japan. Accordingly, economic conditions and consumer spending patterns in these regions could affect our sales, and an economic down turn in one or more of these regions could have an adverse effect on our business.

  

Intense competition in the worldwide apparel industry could reduce our sales and prices.

 

We face a variety of competitive challenges from other apparel manufacturers both in China and other countries. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the marketing and sale of their products or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete with them if we cannot continue enhancing our marketing and management strategies, quality and value or responding appropriately to consumer’s needs. 

 

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Our ability to increase our revenues and profits depends upon our ability to offer innovative and upgraded products at attractive price points.

 

The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our growth depends in large part on our ability to continuously and rapidly respond to customer requirements for innovative and stylish products at a competitive pace, intensity, and price. Failure on our part to regularly and rapidly respond to customer requirements could adversely affect our ability to retain our existing customers or to acquire new customers which would limit our sales growth.

 

The worldwide apparel industry is subject to ongoing pricing pressure.

 

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, ongoing emergence of new competitors with widely varying strategies and resources, and an increasing focus on apparel in the mass merchant channel of distribution. These factors contribute to ongoing pricing pressure throughout the supply chain. This pressure has and may continue to:

 

  require us to reduce wholesale prices on existing products;
     
  result in reduced gross margins across our product lines;
     
  increase pressure on us to further reduce our production costs and our operating expenses.

 

Any of these factors could adversely affect our business and financial condition.  

 

Fluctuations in the price, availability and quality of raw materials could increase our cost of goods and decrease our profitability.

 

We purchase raw materials directly from local fabric and accessory suppliers. We may also import specialty fabrics to meet specific customer requirements. We also purchase finished goods from other contract manufacturers. The prices we charge for our products are dependent in part on the market price for raw materials used to produce them. The price, availability and quality of our raw materials may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather patterns, supply conditions, transportation costs, government regulation, economic climates and other unpredictable factors. Any raw material price increases could increase our cost of goods and decrease our profitability unless we are able to pass higher prices on to our customers.

 

As of December 31, 2018 and 2017, we did not rely on any raw material supplier for more than 10% of all of our total raw material purchases. For the wholesale business, we relied on one manufacturer for 18.1% and 24.0% of purchased finished goods in 2018 and 2017, respectively. For the retail business, we did not rely on any one manufacturer for more than 10% of all of our total purchased finished goods during 2018 and 2017. We do not have any long-term written agreements with any of these suppliers and do not anticipate entering into any such agreements in the near future. However, we always execute a written agreement for each order placed with our suppliers. We do not believe that loss of any of these suppliers would have a material adverse effect on our ability to obtain finished goods or raw materials essential to our business because we believe we can locate other suppliers in a timely manner.

 

Risks Relating to Our Business

 

Our wholesale business depends on some key customers for a significant portion of our sales. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

 

For the year ended December 31, 2018, our five largest customers represented approximately 46.5% of our total net sales. For the year ended December 31, 2017, our top five largest customers represented approximately 38.5% of our total net sales.  The garment manufacturing industry has experienced substantial consolidation in recent years, which has resulted in increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by customers on inventory management and productivity.

 

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A decision by a major customer, whether motivated by competitive considerations, strategic shifts, financial requirements or difficulties, economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition. In addition, while we have long-standing customer relationships, we do not have long-term contracts with any of our customers.

 

As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. We do not believe that there is any material risk of loss of any of these customers during the next 12 months. We also believe that the unexpected loss of these customers could have material adverse effect on our earnings or financial condition. While we believe that we could replace these customers within 12 months, the loss of which will not have material adverse effect on our financial condition in the long term. None of our affiliates are officers, directors, or material shareholders of any of these customers.

 

Our business relies heavily on our ability to identify changes in fashion trends.

 

Our results of operations depend in part on our ability to effectively predict and respond to changing fashion tastes by offering appropriate products. Failure to effectively follow the changing fashion trend will lead to higher seasonal inventory levels. Our continuous ability to respond to the changing customer demands constitutes a material risk to the growth of our retail business. For our wholesale business, if we are unable to swiftly respond to the changing fashion trend, the sample we designed for our customers may not be accepted or the products based on our design may be put into inventory, and thus have a negative impact on the amount of orders the customers may place with us.

 

Our ability to attract customers to the stores heavily depends on their location.

 

Our flagship stores and the store-within-a-stores are selectively located in what we believe to be prominent locations or popular department stores to generate customer traffic. The availability and/or cost of appropriate locations for the existing or future stores may fluctuate for reasons beyond our control. If we are unable to secure these locations or to renew store leases on acceptable terms, we may not continue to attract the amount of customers, which will have a material adverse effect on our sales and results of operations.

  

We may be unable to expand our retail business by opening profitable new stores .

 

Our future growth in our retail segment requires our continuous increase of new flagship stores and stores-within-a-store in selected cities, improve our operating capabilities, and retaining and hiring qualified sales personnel in these stores. There can be no assurance that we will be able to achieve our store expansion goals, nor any assurance that our newly opened stores will achieve revenue or profitability levels comparable to those of our existing stores. If our stores fail to achieve acceptable revenue, we may incur significant costs associated with closing those stores.

 

There may be conflicts of interest between Mr. Kang’s role as the Chairman of the Board and CEO of our Company and his role as the majority owner of other entities that we do business with.

 

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.

 

The Company and Jiangsu Ever-Glory sometimes purchase raw materials for each other in order to obtain cheaper prices. The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at cost for $1.4 million and $0.3 million during 2018 and 2017, respectively.  Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $1.1 million and $0.05 million during 2018 and 2017, respectively.

 

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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 the expiration or termination of the underlying lines of credit and is to pay an annual interest at the rate of 6.0% of the amounts provided. As of December 31, 2018 and 2017, Jiangsu Ever-Glory had provided guarantees for approximately $33.4 million (RMB 230.0 million) and $49.5 million (RMB 322.0 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. As of December 31, 2018 and 2017, the value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $29.9 million (RMB 205.5 million) and $31.6 million (RMB 205.5 million), respectively. Mr. Kang has also provided a personal guarantee for $14.5 million (RMB 100.0 million) and $21.5 million (RMB 140.0 million) at the years ended of December 31, 2018 and 2017, respectively.

 

As of December 31, 2017, $12.8 million (RMB 83.6 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the year ended December 31, 2018, an additional $8.4 million (RMB 55.7 million) was provided to and repayment of $10.8 million (RMB 71.1 million) was received from Jiangsu Ever-Glory under the counter-guarantee agreement. As of December 31, 2018, the amount of the counter-guarantee had decreased to $9.9 million (RMB 68.2 million) (the difference represents currency exchange adjustment of $0.5 million), which was 29.7% of the aggregate amount of lines of credit. This amount plus accrued interest of $0.5 million (2018) and $2.6 million (2017) have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. As of December 31, 2018 and 2017, the amount classified as a reduction of equity was $10.4 million and $15.4 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. From April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Interest income for the years ended December 31, 2018 and 2017 was approximately $0.7 million and $0.8 million, respectively. 

 

It is possible that the terms of the export and import agency transactions and the counter guarantee may not be the same as those that would result from transactions between unrelated parties.  Despite of Mr. Kang’s fiduciary duty to us as the CEO and a director, in the event of any conflicts of interests between us and Jiangsu Ever-Glory, he may not act in our best interests and such conflicts of interests may not be resolved in our favor. These conflicts may result in management decisions that could negatively affect our operations.

 

For a further discussion of these related party transactions, see Notes 12 Related party transactions in the footnotes to the consolidated financial statements and Item 13. Certain Relationships and Related Transactions, and Director Independence

  

In case Jiangsu Ever-Glory fails to repay the fund we provided to it under the Counter Guarantee Agreement according to its terms, we will suffer significant financial losses.

 

Despite of management’s belief that Jiangsu Ever-Glory is financially capable of repaying all amount we provided under the counter guarantee and Jiangsu Ever-Glory’s repayment certain portion of the fund by the end of first quarter of 2014, it is possible that we would not be able to collect all amount from Jiangsu Ever-Glory due to factors beyond our control.  There is no restriction on how Jiangsu Ever-Glory can use the fund except that it is not allowed to invest in high risk investments.  We were told that Jiangsu Ever-Glory had used the entire amount of the fund we provided under the counter guarantee for its own operations. It is possible that we will not be able to collect the entire amount from Jiangsu Ever-Glory due to reasons beyond its control such as its operational failure or deterioration of the overall economic conditions.  In such event, we, as the primary obligor under the lines of credit, would be obligated to repay the entire outstanding borrowing after the banks seek collection from the assets collateralized by Jiangsu Ever-Glory. As a result, we may suffer financial losses which will have material negative effects on our financial condition and results of operations.

  

Expansion of both our wholesale and retail business depends on our ability to obtain continuous financing at acceptable terms. Failure to do so will result in negative impact on our results of operations.

 

We have historically relied on debt financing from Chinese banks to satisfy our financing needs.  Due to Chinese banks’ stringent underwriting policy to non-state-owned businesses, borrowers generally have to provide properties and land use rights as collaterals or obtain third party guarantees from either high-net-worth individuals or businesses with strong credits with the banks.   Although we have certain properties and land use rights to be used as collateral, the value of those properties are not high enough for us to obtain sufficient bank loans to support our projected growth.  Therefore, Mr. Kang previously provided personal guarantees and Jiangsu Ever-Glory provided personal guarantees and assets collateral as security interests for the bank loans.  In the event Mr. Kang or Jiangsu Ever-Glory refuses to provide sufficient security interests in the future or continue the guarantee and collateral provided in the past, we may not be able to obtain the bank loans on acceptable terms as required by our business plan. As a result, we may have to delay or reduce our retail expansion and limit our wholesale development which may materially harm our business, financial condition and results of operations.

 

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We depend on key personnel, and our ability to grow and compete will be harmed if we do not retain the continued services of such personnel.

 

We depend on the efforts and expertise of our management team. The loss of services of one or more members of this team, each of whom have substantial experience in the garment industry, could have an adverse effect on our business. If we are unable to hire and retain qualified management or if any member of our management leaves, such departure could have an adverse effect on our operations. In particular, we believe we have benefited substantially from the leadership and strategic guidance of our CEO and Chairman of the Board, Mr. Edward Yihua Kang.

 

Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising and marketing areas. In addition, if we experience material growth, we will need to attract and retain additional qualified personnel. The market for qualified and talented design and marketing personnel in the apparel industry is intensely competitive, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. If we are unable to attract or retain qualified personnel as needed, our growth will be hampered and our operating results could be materially adversely affected. 

 

If we fail to protect our trademark and maintain the value of our retail brands, our retail sales are likely to decline.

 

We intend to vigorously protect our registered trademarks against infringement, but we may be unable to do so. The unauthorized reproduction or other misappropriation of our trademarks would diminish the value of our brands, which could reduce demand for our products or the prices at which we can sell our products. Our ability to grow our retail operation significantly depends on the value and image of the brands. Our brands could be adversely affected if we fail to maintain and promote the brands by marketing efforts.

 

Failure to maintain and/or upgrade our information technology systems may have an adverse effect on our operation.

 

We rely on various information technology systems to manage our operations, and we regularly evaluate these systems against our current and expected requirements. Although we have no current plans to implement modifications or upgrades to our systems, we will eventually be required to make changes to legacy systems and acquire new systems with new functionality. We are considering additional investments in updating our ERP system to help us improve our internal control system and to meet compliance requirements under Section 404. We are also continuing to develop and update our internal information systems on a timely basis to meet our business expansion needs. Any information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on our business and operations.

  

We may engage in future acquisitions and strategic investments that dilute the ownership percentage of our shareholders and require the use of cash, incur debt or assume contingent liabilities.

 

As part of our business strategy, we expect to continue to review opportunities to buy or invest in other businesses or technologies that we believe would enhance our manufacturing capabilities, or that may otherwise offer growth opportunities. If we buy or invest in other businesses in the future, this may require the use of cash, or we may incur debt or assume contingent liabilities.

 

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As part of our business strategy, we expect to continue to review opportunities to buy or invest in other businesses or technologies that we believe would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. If we buy or invest in other businesses, products or technologies in the future, we could:

 

  incur significant unplanned expenses and personnel costs;
     
  issue stock that would dilute our current shareholders’ percentage ownership;
     
  use cash, which may result in a reduction of our liquidity;
     
  incur debt; assume liabilities; and
     
  spend resources on unconsummated transactions.

 

We may not realize the anticipated benefits of past or future acquisitions and strategic investments, and integration of acquisitions may disrupt our business and management.

 

We may in the future acquire or make strategic investments in additional companies. We may not realize the anticipated benefits of these or any other acquisitions or strategic investments, which involve numerous risks, including:

 

  our inability to integrate the purchased operations, technologies, personnel or products into our existing operations and/or over geographically disparate locations;
     
  unanticipated costs, litigation and other contingent liabilities;
     
  diversion of management’s attention from our core business;
     
  adverse effects on existing business relationships with suppliers and customers;
     
  incurrence of acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
     
  inability to retain key customers, distributors, vendors and other business partners of the acquired business; and
     
  potential loss of our key employees or the key employees of an acquired organization;

 

If we are not be able to integrate businesses, products, technologies or personnel that we acquire, or to realize expected benefits of our acquisitions or strategic investments, our business and financial results may be adversely affected. 

 

Changes in international trade policies and international barriers to trade, or the emergence of a trade war, may have an adverse effect on our business and expansion plans.

 

Changes to trade policies, treaties and tariffs in the jurisdictions in which we operate, or the perception that these changes could occur, could adversely affect the financial and economic conditions in the jurisdictions in which we operate, as well as our international and cross-border operations, our financial condition and results of operations. The U.S. administration under President Donald Trump has advocated greater restrictions on trade generally and significant increases on tariffs on certain goods imported into the United States, particularly from China and has recently taken steps toward restricting trade in certain goods. For example, on September 17, 2018, President Trump announced his decision to impose a 10% tariff on the third list of US$200 billion in imports from China to the U.S. effective September 24, 2018. The 10% tariff was scheduled to increase to 25% on January 1, 2019. However, the U.S. government has agreed to postpone this increase until March 2019 to allow the U.S. and Chinese governments time to negotiate an agreement on tariffs. It is uncertain whether the negotiations will result in an agreement by the deadline in March or that the 25% increase or other tariffs will not be imposed even if an agreement will be reached. These tariffs are in addition to two earlier rounds of tariffs implemented against Chinese products on June 6, 2018 and August 16, 2018 that amount to tariffs on US$50 billion of Chinese products imported into the U.S. In response, China has imposed, and has proposed imposing additional, tariffs on a number of the U.S. goods, on a much smaller scale, in the current time.

 

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Changes to U.S. laws or policies (as described above or otherwise) may impact the supply chain strategies of, as well as the pace of outsourcing by, U.S. customers in the future, including the possibility of such customers’ insourcing programs that were previously outsourced. This could have an adverse impact on our export to U.S. customers. In addition, China and other countries have retaliated in response to new trade policies, treaties and tariffs implemented by the United States. For example, in response to the United States’ tariff plan on steel and aluminium, China announced planned tariffs on various goods imported from the United States, including a 15% tariff on U.S. steel pipes, fresh fruit and wine, and a 25% tariff on pork and recycled aluminium. Further, China has announced plans to introduce tariffs on goods imported from the United States in response to the additional U.S. tariffs of June 15, 2018. Such policy retaliations could ultimately result in further trade policy responses by the United States and other countries, and result in an escalation leading to a trade war, which would have an adverse effect on manufacturing levels, trade levels and industries, including logistics, retail sales and other businesses and services that rely on trade, commerce and manufacturing. Any such escalation in trade tensions or a trade war, or news and rumors of the escalation of a potential trade war, could have a material and adverse effect on our business, results of operations and trading price of our common stock.

   

International political instability and concerns about other international crises may increase our cost of doing business and disrupt our business.

 

International political instability may halt or hinder our ability to do business and may increase our costs. Various events, including the occurrence or threat of terrorist attacks, increased national security measures in the EU, the United States and other countries, and military action and armed conflicts, can suddenly increase international tensions. Increases in energy prices will also impact our costs and could harm our operating results. In addition, concerns about other international crises, such as the spread of avian influenza, or bird flu, and West Nile viruses, may have an adverse effect on the world economy and could adversely affect our business operations or the operations of our OEM partners, contract manufacturer and suppliers. This political instability and concerns about other international crises may, for example:

 

  negatively affect the reliability and cost of transportation;
     
  negatively affect the desire and ability of our employees and customers to travel;
     
  adversely affect our ability to obtain adequate insurance at reasonable rates;
     
  require us to take extra security precautions for our operations; and
     
  furthermore, to the extent that air or sea transportation is delayed or disrupted, our operations may be disrupted, particularly if shipments of our products are delayed.

 

Business interruptions could adversely affect our business.

 

Our operations and the operations of our suppliers and customers are vulnerable to interruption by fire, earthquake, hurricanes, power loss, telecommunications failure and other events beyond our control. In the event of a major natural disaster, we could experience business interruptions, destruction of facilities and loss of life. In the event that a material business interruption occurs that affects us or our suppliers or customers, shipments could be delayed and our business and financial results could be harmed.

 

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

 

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

 

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Risks Related to Doing Business in China

 

Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent.

 

Our assets are, for the most part, located in the PRC. Because our assets are located overseas, our assets may be outside of the jurisdiction of U.S. courts if we are the subject of an insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our shareholders may not receive the distributions on liquidation that they would otherwise be entitled to if our assets were to be located within the U.S., under U.S. bankruptcy law.

 

Export quotas imposed by WTO and countries where our customers are located may negatively affect our business and operations, particularly if the Chinese government changes its allocation of such quotas to us.

 

Pursuant to a World Trade Organization (“ WTO ”) agreement, effective January 1, 2005, the United States and other WTO member countries agreed to remove quotas applicable to textiles.  However, as the removal of quotas resulted in an import surge from China, the U.S. took action in May 2005, and imposed safeguard quotas on seven categories of goods, including certain classes of apparel products, arousing strong objection from China. In 2008, US and EU both lifted these safeguard quotas on products from China.  However, there is no assurance that any quota or additional trade restrictions will not be imposed on the exportation of our products in the future.  Such actions could result in increases in the cost of our products generally and may adversely affect our results of operations.

 

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

 

All of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.  

  

Unprecedented rapid economic growth in China may increase our costs of doing business, and may negatively impact our profit margins and/or profitability.

 

Our business depends in part upon the availability of relatively low-cost labor and materials. Rising wages in China may increase our overall costs of production. In addition, rising raw material costs, due to strong demand and greater scarcity, may increase our overall costs of production. If we are not able to pass these costs on to our customers in the form of higher prices, our profit margins and/or profitability could decline.

 

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Our labor costs are likely to increase as a result of changes in Chinese labor laws.

  

We expect to experience an increase in our cost of labor due to recent changes in Chinese labor laws which are likely to increase costs further and impose restrictions on our relationship with our employees. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law and more strictly enforced existing labor laws.  The new law, which became effective on January 1, 2008, amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of labor unions.   In addition, under the new law, employees who either have worked for a company for 10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract” that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches the company’s rules and regulations or is in serious dereliction of his duty.  Should we become subject to such non-cancelable employment contracts, our employment related risks could increase significantly and we may be limited in our ability to downsize our workforce in the event of an economic downturn. No assurance can be given that we will not in the future be subject to labor strikes or that it will not have to make other payments to resolve future labor issues caused by the new laws.  Furthermore, there can be no assurance that the labor laws will not change further or that their interpretation and implementation will vary, which may have a negative effect upon our business and results of operations.

 

Fluctuation in the value of Chinese RMB relative to other currencies may have a material adverse effect on our business and/or an investment in our shares.

 

The value of RMB against the U.S. Dollar, the Euro and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. In the last decade, the RMB has been pegged at RMB 8.2765 to one U.S. Dollar. Following the removal of the peg to the U.S. Dollar and pressure from the United States, the People’s Bank of China also announced that the RMB would be pegged to a basket of foreign currencies, rather than being strictly tied to the U.S. Dollar, and would be allowed to float trade within a narrow 0.3% daily band against this basket of currencies. The PRC government has stated that the basket is dominated by the U.S. Dollar, the Euro, Japanese Yen and South Korean Won, with a smaller proportion made up of the British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar and Singapore Dollar. There can be no assurance that the relationship between the RMB and these currencies will remain stable over time, especially in light of the significant political pressure on the Chinese government to permit the free flotation of the RMB, which could result in greater and more frequent fluctuations in the exchange rate between the RMB, the U.S. Dollar, and the Euro. If the RMB were to increase in value against the U.S. Dollar and other currencies, for example, consumers in the U.S., Japan and Europe would experience an increase in the relative prices of goods and services produced by us, which might translate into a decrease in sales. In addition, if the RMB were to decline in value against these other currencies, the financial value of your investment in our shares would also decline.

  

The State Administration of Foreign Exchange (“SAFE”) restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively and to pay dividends.

 

All of our sales revenue and expenses are denominated in RMB.  Under PRC law, the RMB is currently convertible under the “current account”, which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account”, which includes the registered capital and foreign currency loans of a PRC entity.  Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements.  However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future.  Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies. 

  

Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE.  In particular, if our PRC operating subsidiaries desire to borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC operating subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or their respective local counterparts.  These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.

 

The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions.  If the foreign exchange control system prevents us from obtaining foreign currency, we may be unable to pay dividends or meet obligations that may be incurred in the future that require payment in foreign currency.

 

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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because our subsidiaries are incorporated in non-U.S. jurisdictions, we conduct substantially all of our operations in China, and a majority of our officers reside outside the United States.

 

Although we are incorporated in Florida, we conduct substantially all of our operations in China through our wholly owned subsidiaries in China. The majority of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

  

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation doing business entirely within the United States.

 

We must comply with the Foreign Corrupt Practices Act.

 

We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  Foreign companies, including some of our competitors, are not subject to these prohibitions.  Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China.  If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.  Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties. 

  

If we make equity compensation grants to persons who are PRC citizens, they may be required to register with SAFE.  We may also face regulatory uncertainties that could restrict our ability to adopt equity compensation plans for our directors and employees and other parties under PRC laws .

 

On March 28, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also known as “Circular 78.”  It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company, such as our company, after March 28, 2007. Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan.  In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to March 28, 2007. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.

 

We currently have a 2014 equity incentive plan that was approved by the Compensation Committee on May 30, 2014. We plan to make numerous equity instrument grants under the plan to our officers, directors and employees, some of whom are PRC citizens and may be required to register with SAFE.  If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants in our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected. 

   

Due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.

 

The Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises (“WFOE”) may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, WFOE is required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds.  These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes.

 

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Furthermore, if our consolidated subsidiaries in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our consolidated subsidiaries are unable to receive all of the revenues from our operations due to these contractual or dividend arrangements, we may be unable to pay dividends on our common stock. In addition, under current PRC law, we must retain a reserve equal to 10 percent of net income after taxes, not to exceed 50 percent of registered capital. Accordingly, this reserve will not be available to be distributed as dividends to our shareholders. We presently do not intend to pay dividends in the foreseeable future. Our management intends to follow a policy of retaining all of our earnings to finance the development and execution of our strategy and the expansion of our business.

 

We may be deemed a PRC resident enterprise under the Corporate Income Tax Law and be subject to PRC taxation on our worldwide income.

 

The Corporate Income Tax Law of PRC provides that enterprises established outside of China whose “de facto management bodies” are located within China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income (including dividend income received from subsidiaries). Under the Implementing Regulations for the  Corporate Income Tax Law , “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC-resident enterprise. If we were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and the results of operations, although dividends distributed from our PRC subsidiaries to us could be exempted from Chinese dividend withholding tax, since such income is exempted under the new Corporate Income Tax Law for PRC-resident recipients.

 

Dividends payable by us to our foreign investors and profits on the sale of our shares may be subject to tax under PRC tax laws.

 

Under the Implementing Regulations for the Corporate Income Tax Law , PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” not having an establishment or place of business in the PRC, or which do have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends have their sources within the PRC. Similarly, any profits realized through the transfer of shares by such investors are also subject to 10% PRC income tax if such profits are regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our share, or the profits you may realize from the transfer of our shares, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the  Implementing Regulations for the Corporate Income Tax Law  to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises,” or if you are required to pay PRC income tax on the transfer of our shares, the value of your investment in our shares may be materially and adversely affected.

   

As all of our operations and personnel are in the PRC, we may have difficulty establishing adequate western style management, legal and financial controls.

 

The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking, and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC.  As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards. We may have difficulty establishing adequate management, legal and financial controls in the PRC.  Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act and other applicable laws, rules and regulations.  This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act.  Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business and the public announcement of such deficiencies could adversely impact our stock price. 

 

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If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what affect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely and your investment in our stock could be rendered worthless.

 

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. 

 

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act.  Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our company, our SEC reports, other filings or any of our other public pronouncements.

 

Risks Related to an Investment in Our Securities

 

Our common stock has limited liquidity.

 

Our common stock has been trading on the NYSE MKT (formerly, the American Stock Exchange and NYSE Alternext US LLC) since July 16, 2008 and then transferred to the NASDAQ Global Market on December 31, 2014, but it is thinly traded compared to larger more widely known companies in the same industry. Thinly traded common stock can be more volatile than stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained. The high and low bid price of Ever-Glory’s common stock during the past 52week period ended December 31, 2018 has been US$4.35 and US$2.30 per share respectively.

  

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We cannot predict the extent to which an active public market for our common stock will develop or be sustained.  Our common shares are currently traded, but currently with low volume, based on quotations on the NASDAQ Global Market, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence trading volume. And even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous trading without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained. 

 

We expect to experience volatility in our stock price, which could negatively affect shareholders’ investments.

 

The market price for shares of our common stock may be volatile and may fluctuate based upon a number of factors, including, without limitation, business performance, news announcements or changes in general market conditions.

  

Other factors, in addition to the risks included in this section, that may have a significant impact on the market price of our common stock include, but are not limited to:

 

  receipt of substantial orders or order cancellations of products;
     
  quality deficiencies in services or products;
     
  international developments, such as technology mandates, political developments or changes in economic policies;
     
  changes in recommendations of securities analysts;
     
  shortfalls in our backlog, sales or earnings in any given period relative to the levels expected by securities analysts or projected by us;
     
  government regulations, including stock option accounting and tax regulations;
     
  energy blackouts;
     
  acts of terrorism and war;
     
  widespread illness;
     
  proprietary rights or product or patent litigation;
     
  strategic transactions, such as acquisitions and divestitures;
     
  rumors or allegations regarding our financial disclosures or practices; or
     
  earthquakes or other natural disasters in Nanjing or Shanghai, China where a significant portion of our operations are based.

  

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to changes in the volatility of our common stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.

 

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To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain all earnings for our operations. 

  

Our corporate actions are substantially controlled by our principal shareholders and affiliated entities.

 

Our principal shareholders, which include our officers and directors, and their affiliated entities own approximately 73.1% of our outstanding shares of common stock. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal shareholders and their affiliated entities, elections of our Board of Directors will generally be within the control of these shareholders and their affiliated entities. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with these principal shareholders and their affiliated entities. As such, it would be difficult for shareholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as shareholders will be viewed favorably by all of our shareholders.

 

The elimination of monetary liability against our directors, officers and employees under Florida law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.

 

Our amended and restated Articles of Incorporation contain a provision permitting us to eliminate the liability of our directors for monetary damages to our company and shareholders to the extent provided by Florida law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.

   

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Wholesale segment

 

In 2018, we operated two complexes as our operating and production facilities at 509 Chengxin Road, in the Nanjing Jiangning Economic, China. The following is a description of these facilities:

 

(i) Goldenway. Our Goldenway facilities include 112,442 square meters of floor space.  Our Goldenway facility hosts administrative, sales and distribution functions in addition to manufacturing. In the PRC, all lands are owned by the PRC government.  We obtained the right to use the land on which these facilities are constructed for 50 years.   The land use rights are used as security to obtain certain loan from banks in China.

 

(ii) Catch-Luck. Our Catch-Luck facilities include 6,635 square meters of office and production space. Approximately 280 employees work at this location. Our Catch-Luck facility mainly handles manufacturing. These facilities are located on the piece of land for which we have the 50-year land use right.

  

In addition, Goldenway currently holds the right to lease certain land and use certain building and improvements on that land until 2018.  In December 2018 we leased part of this facility to a non- affiliated third party under a lease with an annual rent of approximately $18,000 pursuant to a one year lease.

 

We believe that our current facilities will be sufficient to sustain our wholesale operations for the foreseeable future.

 

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Retail Segment

 

For our retail operations, we have a one year lease arrangement for our administrative offices and a three-year lease for our warehouse. The current flagship stores are generally leased under agreements with real estate developers, department stores or shopping mall operators for terms ranging from 2 to 5 years. The store-within-a-store is counters leased from department stores for which we generally pay approximately 20% of sales revenue as rent. We believe the administrative and warehouse facilities are adequate to sustain our operations for the foreseeable future. We also believe that the locations of the flagship stores and the stores-within-a-store units are carefully selected and suitable for the retail operation.

 

In November 2011, LA GO GO entered into certain lease agreement with Shahe Village in Shanghai for approximately 10 Mu of land located in Huajiang West Road Shahe Village. The term of the lease is 40 years starting from January 1, 2013. We have built an office building on the land and put in use in 2013. The Construction Cost was included in property and equipment (see financial statement Note 5).

 

In 2014, the Company obtained a fifty year land use right on 23,333 square meters of land located on Suzhou KunshanJinxi Tower Jinxing Road. We built a logistics center for our retail business on the land which was put in use for our retail business in 2015.

 

In 2015, the Company obtained a fifty year land use right on 33,427 square meters of land located in Tianjin Wuqing Development Zone. We intend to build a logistics center for our retail business for our retail business.

 

ITEM 3. LEGAL PROCEEDINGS

 

There is no material pending legal proceeding to which we are a party.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market for Common Equity

 

Our common stock was quoted on the Over-The-Counter Bulletin Board (the “ OTCBB ”) initially under the symbol “EGLY” and then it was changed to “EVGY” in 2007.  On July 16, 2008 our common stock commenced trading on NYSE MKT LLC (“ NYSE MKT ”) (formerly named the NYSE Annex) under the symbol of “EVK” and then transferred to the NASDAQ Global Market on December 31, 2014. As of December 31, 2018, there wer e approximately 56 shareholders of record of our common stock. The number of registered shareholders excludes any estimate by us of the number of beneficial owners of common shares held in street name. The following table sets forth the high and low bid information for the common stock for each quarter within the last two fiscal years, as reported by the NASDAQ Global Market. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactio ns.

 

    Bid Price  
    HIGH     LOW  
NASDAQ            
Period ended March 22, 2019   $ 3.75     $ 3.75  
FISCAL YEAR 2018:                
Fourth Quarter ended December 31, 2018   $ 4.10     $ 2.95  
Third Quarter ended September 30, 2018   $ 3.70     $ 2.65  
Second Quarter ended June 30, 2018   $ 4.35     $ 3.30  
First Quarter ended March 31, 2018   $ 3.90     $ 2.30  
NYSE MKT                
PERIOD                
FISCAL YEAR 2017:                
Fourth Quarter ended December 31, 2017   $ 2.60     $ 2.15  
Third Quarter ended September 30, 2017   $ 2.65     $ 2.25  
Second Quarter ended June 30, 2017   $ 2.70     $ 2.50  
First Quarter ended March 31, 2017   $ 3.00     $ 2.01  

 

Securities Authorized for Issuance under Equity Incentive Plans

 

The following table presents information regarding equity instruments outstanding under our 2014 Equity Incentive Plan as of December 31, 2018:

 

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

 

Dividend Policy

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all of our net income for use in our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects and other factors the Board of Directors may deem relevant.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable

 

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ITEM 7. 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 year ended December 31, 2018 should be read in conjunction with the Financial Statements and corresponding notes included in this annual Report on Form 10-K. 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”), Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”) and Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”).

 

Retail Business

 

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

   

Business Objectives

 

Wholesale Business

 

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

 

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

 

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

 

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  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 December 31, 2018, we had 1,381 stores (including store-in-stores), including 246 stores were opened and 265 stores were closed in 2018. We expect to open additional 150 to 200 stores in 2019.

 

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

 

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

 

Seasonality of Business

 

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

 

Collection Policy

 

Wholesale business

 

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

 

Retail business

 

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

 

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Global Economic Uncertainty

 

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2019.

 

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.

 

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

 

Summary of Critical Accounting Policies

 

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

  

Revenue Recognition

 

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

 

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

 

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

 

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

  

(iii) measurement of the transaction price, including the constraint on variable consideration;
     
(iv) allocation of the transaction price to the performance obligations; and
     
(v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

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

 

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

  

Estimates and Assumptions

 

In preparing our 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 2018 and 2017 include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, and the accounts receivable allowance, and impairment of long-lived assets and inventory reservation.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases . Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company anticipates recording lease assets and liabilities of approximately $56.5 million on its consolidated balance sheets, with no material impact to its consolidated statements of income and comprehensive income. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.

 

In June 2016, the FASB issued ASU No. 2016-13  “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”  which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

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

 

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Results of Operations

 

The following table summarizes our results of operations for the year ended December 31, 2018 and 2017. 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.

 

    Year Ended December 31,  
    2018     2017  
    (in thousands of U.S. Dollars, except for percentages)  
Sales   $ 448,508       100.0 %   $ 415,581       100.0 %
Gross Profit     147,355       32.9       135,742       32.7  
Operating Expense     132,336       29.5       120,993       29.1  
Income From Operations     15,019       3.3       14,749       3.5  
Other Income (Expenses)     1,363       0.3       3,121       0.1  
Income tax expense     4,942       1.1       5,805       1.4  
Net Income   $ 11,440       2.6 %   $ 12,065       2.9 %

   

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the year ended December 31, 2018 and 2017.

 

    2018           2017           Growth
(Decrease)
 
Wholesale business   (In thousands of U.S. dollars)     % of total sales     (In thousands of U.S. dollars)     % of total sales     in 2018 compared
with 2017
 
Mainland China   $ 89,269       19.9 %   $ 65,811       15.8 %     35.6 %
Hong Kong China     38,106       8.5       39,738       9.6       (4.1 )
Germany     6,748       1.5       8,901       2.1       (24.2 )
United Kingdom     15,460       3.4       12,417       3.0       24.5  
Europe-Other     30,747       6.9       34,804       8.4       (11.7 )
Japan     7,583       1.7       3,515       0.8       115.7  
United States     30,696       6.8       25,050       6.1       22.5  
Total Wholesale business     218,609       48.7       190,236       45.8       14.9  
Retail business     229,899       51.3       225,345       54.2       2.0  
Total sales   $ 448,508       100.0 %   $ 415,581       100.0 %     7.9 %

 

Sales for the year ended December 31, 2018 were $448.5 million, an increase of 7.9% from the year ended December 31, 2017. This increase was primarily attributable to a 14.9% increase in sales in our wholesale business.

 

Sales generated from our wholesale business contributed 48.7% or $218.6 million of our total sales for the year ended December 31, 2018, an increase of 14.9% compared with $190.2 million in the year ended December 31, 2017. This increase was primarily attributable to increased sales in Japan, Mainland China, United Kingdom and United States partially offset by decreased sales in Hong Kong China, Germany and Europe-Other. 

 

Sales generated from our retail business contributed 51.3% or $229.9 million of our total sales for the year ended December 31, 2018, an increase of 2.0% compared with $225.3 million in the year ended December 31, 2017. This increase was primarily due to an increase in same store sales.

 

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Total retail store square footage and sales per square foot for the year ended December 31, 2018 and 2017 are as follows:

 

    2018     2017  
Total store square footage     1,402,933       1,401,031  
Number of stores     1,381       1,400  
Average store size, square foot     1,005       1,001  
Total store sales (in thousands of U.S. dollars)   $ 229,899     $ 225,345  
Sales per square foot   $ 164     $ 161  

  

Same-store sales and newly opened store sales for the year ended December 31, 2018 and 2017 are as follows:

 

    2018     2017  
    (In thousands of U.S. dollars)  
Sales from stores opened for a full year   $ 191,305     $ 161,916  
Sales from newly opened store sales   $ 14,689     $ 43,070  
Sales from e-commerce platform   $ 17,364     $ 11,954  
Other*   $ 6,541     $ 8,405  
Total   $ 229,899     $ 225,345  

  

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

  

We remodeled or relocated 250 stores in 2018, and plan to relocate or remodel an aggregate of 200-300 stores in 2018. Remodels and relocations typically drive incremental same-store sales growth. A relocation typically results in an improved, more visible and accessible location, and usually includes increased square footage. We believe we will continue to have opportunities for additional remodels and relocations beyond 2018.  Same-store sales are calculated based upon stores that were open at least 12 full fiscal months in each reporting period and remain open at the end of each reporting period.

  

Costs and Expenses

 

Cost of Sales and Gross Margin

 

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

 

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the year ended December 31, 2018 and 2017.

 

                            Growth  
                            (Decrease) in
2018
 
    Year ended December 31,     Compared  
    2018     2017     with 2017  
    (In thousands of U.S. dollars, except for percentages)        
Net Sales for Wholesale Sales   $ 218,609       100.0 %   $ 190,236       100.0 %     14.9 %
Raw Materials     97,173       44.5       81,111       42.6       19.8  
Labor     2,103       1.0       3,793       2.0       (44.5 )
Outsourced Production Costs     77,228       35.3       68,804       36.2       12.2  
Other and Overhead     305       0.1       399       0.2       (23.7 )
Total Cost of Sales for Wholesale     176,809       80.9       154,107       81.0       14.7  
Gross Profit for Wholesale     41,800       19.1       36,129       19.0       15.7  
Net Sales for Retail     229,899       100.0       225,345       100.0       2.0  
Production Costs     76,314       33.2       74,685       33.1       2.2  
Rent     48,030       20.9       51,047       22.7       (5.9 )
Total Cost of Sales for Retail     124,344       54.1       125,732       55.8       1.1  
Gross Profit for Retail     105,555       45.9       99,613       44.2       6.0  
Total Cost of Sales     301,153       67.1       279,839       67.3       7.6  
Gross Profit   $ 147,355       32.9 %   $ 135,742       32.7 %     8.6 %

 

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Raw material costs for our wholesale business were 44.5% of our total wholesale business sales in 2018, compared with 42.6% in 2017. The increase was mainly due to higher raw materials prices.

 

Labor costs for our wholesale business were 1.0% of our total wholesale business sales in 2018, compared with 2.0% in 2017. The marginal decrease was mainly due to a higher number of outsourced orders in 2018.

 

Outsourced manufacturing costs for our wholesale business were 35.3% of our total wholesale sales in 2018, compared with 36.2% in 2017. This decrease was primarily attributable to increased outsourced orders to our related entities in Vietnam, which have lower labor costs compared to orders outsourced to Chinese factories. 

 

Overhead and other expenses for our wholesale business accounted for 0.1% and 0.2% of our total wholesale sales in 2018 and 2017, respectively.

 

Gross profit for our wholesale business in 2018 was $41.8 million, an increase of 15.7% from 2017. As a percentage of total wholesale business sales, gross profit was 19.1% of our total wholesale business sales in 2018, compared with 19.0% in 2017. The increase in gross margin was mainly due to decreased labor costs.

  

Production costs for our retail business for the year ended December 31, 2018 were $76.3 million compared with $74.7 million for the year ended December 31, 2017. As a percentage of our total retail sales, production costs were 33.2% of our total retail sales for the year ended December 31, 2018, compared with 33.1% for the year ended December 31, 2017. The increase was due to higher discounts on our out-of-season products in the year ended December 31, 2018 compared with the same period of the prior year in percentage of sales.

  

Rent costs for our retail business for the year ended December 31, 2018 were $48.0 million compared with $51.0 million for the year ended December 31, 2017. As a percentage of total retail sales, rent costs were 20.9% of our total retail sales for the year ended December 31, 2018 compared with 22.7% for the year ended December 31, 2017. The decrease was primarily attributable to lower rent at certain locations.

 

Gross profit for our retail business for the year ended December 31, 2018 was $105.6 million compared with $99.6 million for the year ended December 31, 2017. Gross margin for our retail business for the year ended December 31, 2018 was 45.9% compared with 44.2% for the year ended December 31, 2017.

 

Total cost of sales for the year ended December 31, 2018 was $301.1 million, a 7.6% increase compared with the year ended December 31, 2017. As a percentage of total sales, total costs were 67.1% of total sales for the year ended December 31, 2018, compared with 67.3% for the year ended December 31, 2017. Total gross margin for the year ended December 31, 2018 was 32.9% compared with 32.7% for the year ended December 31, 2017.

 

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. Some of our customers also furnish us with raw materials so that we can manufacture their products. For our wholesale business, purchases from our five largest suppliers represented approximately 16.2% and 13.9% of raw material purchases for the year ended December 31, 2018 and 2017, respectively. No one supplier provided more than 10% of our raw material purchases for the year ended December 31, 2018 and 2017. For our retail business, purchases from our five largest suppliers represented approximately 79.3% and 72.1% of raw material purchases for the year ended December 31, 2018 and 2017, respectively. Five suppliers provided approximately 24.0%, 18.2%, 15.1%, 13.9% and 8.1% of our raw material purchases for the year ended December 31, 2018. Five suppliers provided approximately 17.1%, 15.7%, 13.9%, 13.3% and 12.0% of our raw material purchases for the year ended December 31, 2017. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

 

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We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 38.8% and 43.8% of finished goods purchases for the year ended December 31, 2018 and 2017, respectively. One contract manufacturer provided approximately 24.0% and 24.7% of our finished goods purchases for the year ended December 31, 2018 and 2017, respectively. For our retail business, our five largest contract manufacturers represented approximately 16.3% and 18.3% of finished goods purchases for the year ended December 31, 2018 and 2017, respectively. No contract manufacturer provided more than 10% of our retail finished goods purchases for the year ended December 31, 2018 and 2017. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

 

Selling, General and Administrative Expenses

 

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

 

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

  

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

 

    Year ended December 31,     Increase (Decrease) in 2018 Compared  
    2018     2017     to 2017  
    ( In thousands of U.S. dollars, except for percentages )        
Gross Profit   $ 147,355       32.9 %   $ 135,742       32.7 %     8.6 %
Operating Expenses:                                        
Selling Expenses     91,439       20.4       85,940       20.7       6.4  
General and Administrative Expenses     39,811       8.9       35,053       8.4       13.6  
Intangible asset impairment     1,086       0.2       -       -       100.0  
Total     132,336       29.5       120,993       29.1       9.4  
Income from Operations   $ 15,019       3.3 %   $ 14,749       3.5 %     1.8 %

   

Selling expenses for the year ended December 31, 2018 were $91.4 million, a 6.40% increase compared with the year ended December 31, 2017. The increase was attributable to higher retail sales.

 

General and administrative expenses for the year ended December 31, 2018 were $39.8 million a 13.6% increase compared with the year ended December 31, 2017. As a percentage of total sales, general and administrative expenses accounted for 8.9% of total sales for the year ended December 31, 2018, compared with 8.4% of total sales for the year ended December 31, 2017. The increase in absolute amount was mainly attributable to the increased average salaries.

 

For the year ended December 31, 2018, we recognized a marketing related intangible asset acquired from Yiduo acquisition in 2015 impairment loss. A number of factors, including sustaining negative profits and the slower than expected growth of business were considered. Based on our impairment test of intangible asset, the fair value amount was lower than the carrying amount of the marketing related intangible assets recorded and it was concluded that carrying amount of marketing related intangible assets of $1.1 million was impaired.

 

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Income from Operations

 

Income from operations for the year ended December 31, 2018 was $15.0 million, a 1.8% increase from $14.7 million for the year ended December 31, 2017. This increase was due to increased gross profit.

 

Interest Expense

 

Interest expense was $2.0 million and $1.6 million for the year ended December 31, 2018 and 2017, respectively. The increase was due to the increased the annual average interest rate of bank loans.

 

Other Income

 

Other income was $2.0 million and $3.5 million for the year ended December 31, 2018 and 2017, respectively. The decrease was due to a decrease in government financial incentives.

 

Income Tax Expenses

 

Income tax expense for the year ended December 31, 2018 was $4.9 million, a 14.9% decrease compared to the same period of 2017. The decrease was primarily due to lower business profits.

 

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, 2018.

 

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

 

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

 

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

  

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

 

New U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform 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. Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax expense (income) relating to the Tax Act changes for the year ended December 31, 2018.

 

Net Income attributable to the Company

 

Net income for the year ended December 31, 2018 was $12.0 million, a decrease of 3.6% compared with the same period in 2017. Our basic and diluted earnings per share were $0.81 and $0.84 for the year ended December 31, 2018 and 2017, respectively.

 

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Summary of Cash Flows

 

Summary cash flows information for the year ended December 31, 2018 and 2017 is as follows:

 

    2018     2017  
    (In thousands of U.S. dollars)  
Net cash provided by operating activities   $ 2,562     $ 14,924  
Net cash used in investing activities   $ (12,182 )   $ (8,564 )
Net cash provided by (used in) financing activities   $ (5,281 )   $ 8,558  

   

Net cash provided by operating activities was $2.6 million for the year ended December 31, 2018, compared with net cash provided by $14.9 million during the year ended December 31, 2017. The decrease was primarily due to increase in accounts receivable.

  

Net cash used in investing activities was $12.2 million for the year ended December 31, 2018, compared with $8.5 million during the year ended December 31, 2017. This increase was mainly due to the increased in purchase of property and equipment and remodeling expenditure in 2018.

 

Net cash used in financing activities was $5.3 million for the year ended December 31, 2018 compared with net cash provided $8.6 million during the year ended December 31, 2017. During the year ended December 31, 2018, we repaid $70.5 million of bank loans and received bank loan proceeds of $64.0 million. Also, under the counter-guarantee agreement, we received $9.7 million from and paid $8.4 million to the related party during the year ended December 31, 2018.

 

Liquidity and Capital Resources

 

As of December 31, 2018, we had cash and cash equivalents of $47.0 million, other current assets of $171.9 million and current liabilities of $138.8 million. We presently finance our operations primarily from cash flows from operations and bank loans and we anticipate that these will continue to be our primary sources of funds to finance our short-term cash needs.

   

Bank Loans

 

In December 2016, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $8.7 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of December 31, 2018, Goldenway had borrowed $2.9 million (RMB20.0 million) from Industrial and Commercial Bank of China with an annual interest rate 3.92% and due on November 2019. As of December 31, 2018, approximately $5.8 million was unused and available under this line of credit.  

 

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.6 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of December 31, 2018, Ever-Glory Apparel had borrowed $11.6 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 4.57% to 4.7% and due on July 2019. As of December 31, 2018, approximately $3.0 million was unused and available under this line of credit.

  

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.3 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of December 31, 2018, approximately $7.3 million was unused and available under this line of credit.

 

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.7 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of December 31, 2018, Ever-Glory Apparel had borrowed $2.9 million (RMB20.0 million) from Nanjing Bank with an annual interest rates 4.41% and due on various dates from January to March 2019. As of December 31, 2018, approximately $5.8 million was unused and available under this line of credit.

 

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In May 2018, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.9 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of December 31, 2018, LA GO GO had borrowed $2.2 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in June 2019. As of December 31, 2018, approximately $0.7 million was unused and available under this line of credit.

     

In June 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of December 31, 2018, LA GO GO had borrowed $2.9 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.79% and due in June 2019.  

  

In November 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of December 31, 2018, LA GO GO had borrowed $2.9 million (RMB20.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from January to November 2019.

 

In July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of December 31, 2018, Ever-Glory Apparel had borrowed $2.6 million (RMB18.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on date November 2019. As of September 30, 2018, approximately $0.3 million was unused and available under this line of credit.

 

In July 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.8 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of December 31, 2018, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on date April 2019. As of December 31, 2018, approximately $4.3 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.

 

DERIVATIVE LIABILITY  

 

During 2018, the Company had entered into four foreign currency swap contracts with three banks. Due to the increased demand of effective control on financial management for daily operations, Ever-Glory Apparel had entered into different foreign currency swap contracts to exchange $6.0 million for equivalent RMB with Bank of China in May, entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June and entered into a foreign currency swap contract to exchange $6.0 million and $4.0 million for equivalent RMB with Shanghai Pudong Development Bank in July. The terms of three foreign currency contracts are both six months and the contract of $4.0 million with Shanghai Pudong Development Bank is three months. Ever-Glory Apparel and the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company pays annual interest of 1.43% for the RMB received and receives 0 interest for the USD exchanged with the Bank of China and Industrial and Commercial Bank of China. The company pays annual interest of 0.98% for the RMB received and receives 0.0001% interest for the USD exchanged with Shanghai Pudong Development Bank. If the Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As of December 31, 2018, the fair value of principal amounts are included in other receivable ($4.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance sheets, and unrealized gain of $0.2 million for the year ended December 31, 2018 is recognized in the income from operations.

 

36

 

 

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 December 31, 2018, we had access to approximately $53.8 million in lines of credit, of which approximately $27.2 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not more 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 under agreements executed between the Company, Jiangsu Ever-Glory and the banks. The maximum aggregate lines of credit and available borrowings was approximately $33.4 million (RMB230 million) and approximately $9.9 (RMB68.2 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of December 31, 2018.

 

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 December 31, 2018, the market foreign exchange rate had increased to RMB 6.88 to one U.S. dollar. We are continuously negotiating price adjustments with most of our customers based on the daily market foreign exchange rates, which we believe will reduce our exposure to exchange rate fluctuations in the future and will pass some of the increased cost to our customers.

  

In addition, the financial statements of Goldenway, New-Tailun, Catch-Luck, Ever-Glory Apparel, Taixin, He Meida, Huirui, Shanghai LA GO GO, Yalan, Shanghai Yiduo, Tianjin LA GO GO and Jiangsu LA GO GO (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 year ended December 31, 2018 and 2017 was ($6.2 million) and $5.9 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

37

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2018

 

CONTENTS

 

Reports of Independent Registered Public Accounting Firm F-1
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Income and Comprehensive Income F-3
   
Consolidated Statements of Equity F-4
   
Consolidated Statements of Cash Flows F-5
   
Notes to Consolidated Financial Statements F-6

 

38

 

   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the shareholders and the board of directors of Ever-Glory International Group, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Ever-Glory International Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income and comprehensive income, equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Emphasis of a Matter

 

The Company has significant transactions and relationships with related parties, including entities controlled by the Company’s Chairman and Chief Executive Officer and by the Company’s major shareholder, which are described in Note 12 to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis, as the requisite conditions of competitive, free market dealings may not exist.

 

/s/ B F Borgers CPA PC

 

We have served as the Company’s auditor since 2017.

 

Lakewood, Colorado

 

March 29, 2019 

 

F- 1

 

 

  EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

AS OF DECEMBER 31, 2018 AND 2017

 

    2018     2017  
ASSETS            
CURRENT ASSETS            
Cash and cash equivalents   $ 47,012     $ 62,876  
Accounts receivable, net     86,527       81,859  
Inventories     65,929       56,182  
Value added tax receivable     2,580       3,757  
Other receivables and prepaid expenses     10,204       5,139  
Advances on inventory purchases     6,420       3,028  
Amounts due from related parties     192       265  
Total Current Assets     218,864       213,106  
                 
INTANGIBLE ASSETS     4,962       5,995  
PROPERTY AND EQUIPMENT, NET     28,445       25,891  
TOTAL ASSETS   $ 252,271     $ 244,992  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Bank loans   $ 29,497     $ 37,730  
Accounts payable     78,412       73,788  
Accounts payable and other payables - related parties     4,756       4,675  
Other payables and accrued liabilities     21,958       16,454  
Value added and other taxes payable     2,569       6,052  
Income tax payable     1,569       1,712  
Total Current Liabilities     138,761       140,411  
                 
NONCURRENT LIABILITIES                
Deferred tax liabilities     354       1,883  
TOTAL LIABILITIES     139,115       142,294  
                 
NOTE 13 COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS’ EQUITY                
Stockholders’ equity:                
Preferred stock ($0.001 par value, authorized 5,000,000 shares, no shares issued and outstanding)     -       -  
Common stock ($0.001 par value, authorized 50,000,000 shares, 14,798,198 and 14,795,992 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively)     15       15  
Additional paid-in capital     3,627       3,620  
Retained earnings     105,914       95,195  
Statutory reserve     19,083       17,794  
Accumulated other comprehensive income     (3,578 )     2,585  
Amounts due from related party     (10,354 )     (15,449 )
Total equity attributable to stockholders of the Company     114,707       103,760  
Noncontrolling interest     (1,551 )     (1,062 )
Total Equity     113,156       102,698  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 252,271     $ 244,992  

 

See the accompanying notes to the consolidated financial statements.

 

F- 2

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

    2018     2017  
             
SALES   $ 448,508     $ 415,581  
                 
COST OF SALES     301,153       279,839  
                 
GROSS PROFIT     147,355       135,742  
                 
OPERATING EXPENSES                
Selling expenses     91,439       85,940  
General and administrative expenses     39,811       35,053  
Marketing related intangible asset impairment     1,086       -  
Total operating expenses     132,336       120,993  
                     
INCOME FROM OPERATIONS     15,019       14,749  
                 
OTHER INCOME (EXPENSE)                
Interest income     1,375       1,260  
Interest expense     (1,989 )     (1,648 )
Other income     1,977       3,509  
Total other income     1,363       3,121  
                 
INCOME BEFORE INCOME TAX EXPENSE     16,382       17,870  
                 
INCOME TAX EXPENSE     (4,942 )     (5,805 )
                 
NET INCOME     11,440       12,065  
                 
Net loss attributable to the non-controlling interest     568       394  
NET INCOME ATTRIBUTABLE TO THE COMPANY   $ 12,008     $ 12,459  
                 
NET INCOME   $ 11,440     $ 12,065  
Foreign currency translation gain     (6,163 )     5,882  
COMPREHENSIVE INCOME   $ 5,277     $ 17,947  
                 
Comprehensive loss attributable to the noncontrolling interest     79       450  
                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY   $ 5,198     $ 18,397  
EARNINGS PER SHARE ATTRIBUTABLE TO THE COMPANY’S STOCKHOLDERS:                
Basic and diluted   $ 0.81     $ 0.84  
Weighted average number of shares outstanding Basic and diluted     14,796,947       14,795,992  

 

See the accompanying notes to the consolidated financial statements.

 

F- 3

 

 

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

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

          Additional     Retained Earnings     Accumulated
other
    Amounts
due from
    Total
equity
attributable
to stockholders
    Non-        
    Common Stock     paid-in           Statutory     Comprehensive     related     of the     controlling     Total  
    Shares     Amount     capital     Unrestricted     reserve     income     party     Company     Interest     equity  
Balance at January 1, 2017     14,787,940     $ 15     $ 3,602     $ 83,423     $ 17,107     $ (3,297 )   $ (15,936 )   $ 84,914       (612 )   $ 84,302  
                                                                                 
Stock issued for compensation     8,052       0.008       18       -       -       -       -       18               18  
Net income (loss)     -       -       -       12,459       -       -       -       12,459       (394 )     12,065  
Transfer to reserve     -       -       -       (687 )     687       -       -       -               -  
Net cash paid to related party under counter guarantee agreement     -       -       -       -       -       -       487       487       -       487  
Foreign currency translation loss                                             5,882               5,882       (56 )     5,826  
Balance at December 31, 2017     14,795,992     $ 15     $ 3,620     $ 95,195     $ 17,794     $ 2,585     $ (15,449 )   $ 103,760       (1,062 )   $ 102,698  
                                                                                 
Stock issued for compensation     2,206       0.002       7       -       -       -       -       7               7  
Net income (loss)     -       -       -       12,008       -       -       -       12,008       (568 )     11,440  
Transfer to reserve     -       -       -       (1,289 )     1,289       -       -       -               -  
Net cash paid to related party under counter guarantee agreement (Note 12)     -       -       -       -       -       -       5,095       5,095       -       5,095  
Foreign currency translation gain                                             (6,163 )             (6,163 )     79       (6,084 )
Balance at December 31, 2018     14,798,198     $ 15     $ 3,627     $ 105,914     $ 19,083     $ (3,578 )   $ (10,354 )   $ 114,707       (1,551 )   $ 113,156  

  

See the accompanying notes to the consolidated financial statements.

 

F- 4

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

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

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

    2018     2017  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income   $ 11,440     $ 12,065  
Adjustments to reconcile net income to cash provided by operating activities:                
Intangible asset impairment loss     1,086       -  
Depreciation and amortization     6,664       7,015  
Loss from sale of property and equipment     108       24  
Provision of bad debt allowance     660       1,223  
Provision for obsolete inventories     3,324       4,624  
Deferred income tax     (1,370 )     (1,530 )
Stock-based compensation     7       18  
Changes in operating assets and liabilities                
Accounts receivable     (9,893 )     (11,204 )
Inventories     (16,462 )     (7,919 )
Value added tax receivable     1,016       (600 )
Other receivables and prepaid expenses     (5,659 )     (1,136 )
Advances on inventory purchases     (3,698 )     307  
Amounts due from related parties     (2,761 )     (592 )
Accounts payable     8,485       11,489  
Accounts payable and other payables- related parties     6,275       351  
Other payables and accrued liabilities     5,604       460  
Value added and other taxes payable     (2,210 )     567  
Income tax payable     (54 )     (238 )
Net cash provided by operating activities     2,562       14,924  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of property and equipment     (12,182 )     (8,564 )
Net cash used in investing activities     (12,182 )     (8,564 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from bank loans     64,006       62,693  
Repayment of bank loans     (70,513 )     (56,296 )
Repayment of loans from related party     6,657       9,280  
Advances to related party     (8,428 )     (7,119 )
Interest income received from related party     2,997       -  
Net cash provided by (used in) financing activities     (5,281 )     8,558  
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (963 )     2,670  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     (15,864 )     17,588  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     62,876       45,288  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 47,012     $ 62,876  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                 
Cash paid during the period for:                
Accrued interest income on amounts due from related party under counter-guarantee agreement (Note 12)   $ 738     $ 818  
Interest   $ 1,755     $ 1,648  
Income taxes   $ 6,350     $ 6,247  

 

See the accompanying notes to the consolidated financial statements.

 

F- 5

 

 

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 AND 2017

 

NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION

 

Ever-Glory International Group, Inc. (the “Company”), together with its subsidiaries, is an apparel manufacturer, supplier and retailer in The People’s Republic of China (“China or “PRC”), with a wholesale segment and a retail segment. The Company’s wholesale business consists of recognized brands for department and specialty stores located in China, Europe, Japan and the United States. The Company’s retail business consists of flagship stores and store-in-stores for the Company’s own-brand products. The following are the Company’s subsidiaries as of December 31, 2018:

 

Perfect Dream Limited (“Perfect Dream”), a wholly-owned subsidiary of Ever-Glory, was incorporated in the British Virgin Islands in 2004.

 

Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”), a wholly-owned subsidiary of Perfect Dream, was incorporated in Samoa in 2009. Ever-Glory HK is principally engaged in the import and export of apparel, fabric and accessories.

 

Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), a wholly-owned subsidiary of Perfect Dream, was incorporated in the PRC in 1993.

 

Nanjing Catch-Luck Garments Co, Ltd. (“Catch-Luck”), a wholly-owned subsidiary of Perfect Dream, was incorporated in the PRC in 1995.

 

Nanjing New-Tailun Garments Co. Ltd. (“New-Tailun’), a wholly-owned subsidiary of Perfect Dream, was incorporated in the PRC in 2006.

 

Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), a wholly-owned subsidiary of Goldenway, was incorporated in the PRC in 2009.

 

Shanghai LA GO GO Fashion Company Limited (“Shanghai LA GO GO”), a wholly-owned subsidiary of Ever-Glory Apparel, was incorporated in the PRC in 2008.

 

Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), a wholly-owned subsidiary of Ever-Glory Apparel, was incorporated in the PRC in 2012.

 

Jiangsu LA GO GO Fashion Company Limited (“Jiangsu LA GO GO”), a joint venture of Ever-Glory Apparel and Catch-Luck, was incorporated in the PRC in 2013.

 

Shanghai Ya Lan Fashion Company Limited (“Ya Lan”), a wholly-owned subsidiary of Shanghai LA GO GO, was incorporated in the PRC in 2014.

 

F- 6

 

 

Xizang He Meida Trading Company Limited (“He Meida”), a wholly-owned subsidiary of Ever-Glory Apparel, was incorporated in the PRC in 2014.  

 

Tianjin LA GO GO Fashion Company Limited (“Tianjin LA GO GO”), a joint venture of Ever-Glory Apparel and Catch-Luck, was incorporated in the PRC in 2014.

 

ChuzhouHuirui Garments Co. Ltd. (“Huirui”), a wholly-owned subsidiary of Ever-Glory Apparel, was incorporated in the PRC in 2014.

 

Shanghai LA GO GO acquired 78% of the shares of Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) in March 2015 (Note 4). Shanghai Yiduo was incorporated in the PRC in 2011.

 

Ever-Glory Supply Chain Service Co., Limited (“Ever-Glory Supply Chain”), a wholly-owned subsidiary of Ever-Glory Apparel, was incorporated in Hongkong in 2017. Ever-Glory Supply Chain is principally engaged in the import and export of apparel, fabric and accessories.

 

The Company’s wholesale operations are provided primarily through the Company’s PRC subsidiaries, Goldenway, Catch-Luck, New Tailun, Ever-Glory Apparel, TaiXin, Huirui, the Company’s Hongkong subsidiary, Ever-Glory Supply Chain and the Company’s Samoa subsidiary, Ever-Glory HK. The Company’s retail operations are provided through its subsidiaries, Shanghai LA GO GO, Jiangsu LA GO GO, Tianjin LA GO GO, Ya Lan, He Meida and 78% owned Shanghai Yiduo.

  

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include Ever-Glory International Group, Inc. and its subsidiaries, and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates and Assumptions

 

In preparing the consolidated financial statements in conformity with GAAP, management makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the periods reported.  Management believes that the estimates utilized in preparing the financial statements are reasonable and prudent based on the best information available at the time the estimates are made. Actual results could differ from these estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and demand deposits with banks with original maturities within three months.

  

Accounts Receivable, net

 

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

 

As of December 31, 2018 and 2017, $0.66 million and $1.2 million of bad debt expense have been made in the consolidated financial statements respectively. The allowance for doubtful account balances as of December 31, 2018 and 2017 are $5.9 million and $5.5 million, respectively.

 

F- 7

 

 

Inventories

 

Wholesale inventories are stated at lower of cost or net realizable value, cost being determined on a specific identification method. The Company manufactures products upon receipt of orders from its customers. All products must pass the customers’ quality assurance procedures before delivery. Therefore, products are rarely returned by customers after delivery.

 

Retail inventories are stated at the lower of average cost or net realizable value, cost being determined on a specific identification method. The Company records a provision for slow-moving or obsolete materials and finished goods aged more than two years.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation.  Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. 

 

Depreciation is provided on a straight-line basis, less estimated residual value, over the assets’ estimated useful lives.  The estimated useful lives are as follows:

 

Property and plant   15-20 Years
Leasehold  improvements   10 Months - 2 Years
Machinery and equipment   5-10 Years
Office equipment and furniture   3-5 Years
Motor vehicles   5 Years

  

Land Use Rights

 

All land in the PRC is owned by the government and cannot be sold to any individual or company.  However, the government may grant a “land use right” to occupy, develop and use land. The Company records land use rights obtained as intangible assets at cost, which is amortized evenly over the grant period of 50 years. 

 

Long-Lived Assets

 

Long-lived assets, property, equipment and land use rights held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. There were no impairments of long-lived assets as of December 31, 2018 and 2017.

  

Fair Value Accounting

 

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

 

  Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
     
  Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
     
  Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

F- 8

 

 

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

 

At December 31, 2018 and 2017, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

 

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

  

As of December 31, 2018, the Company has the following derivative financial instruments measured at their fair value using Level 2 quoted prices provided by banks. The fair value of foreign currency swap contracts is determined by the variation of measurement date foreign exchange market rates and contract closing date predetermined foreign exchange rates. As of December 31, 2017, the Company has five derivative liability subjects to recurring fair value measurement (Level 3) with the change in fair value recognized in earnings.

 

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

 

Derivative Financial Instruments

 

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

 

The Company may also enter into above similar derivative instruments to hedge the exposure to variability in the expected cash flows of forecasted transactions such as international sales or purchases that the Company expects to receive or commit to remit foreign currencies. In these cases, the Company designates these instruments as the cash flow hedges.

 

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

 

Revenue and Cost Recognition

 

The Company recognizes wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer. Retail sales are recorded net of promotional discounts, rebates, and return allowances. Retail store sales are recognized at the time of the register receipt. Retail online sales are recognized when products are shipped and customers receive the products because the Company retains a portion of the risk of loss on these sales during transit.

 

F- 9

 

 

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

 

(i) identification of the promised goods and services in the contract;
     
(ii) determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract;
     
(iii) measurement of the transaction price, including the constraint on variable consideration;
     
(iv) allocation of the transaction price to the performance obligations; and
     
(v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

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

 

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

  

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

 

Local transportation charges and production inspection charges are included in selling expenses and totaled $1.1 million and $0.8 million in the years ended December 31, 2018 and 2017, respectively.

 

Research and Development Costs

 

Research and development costs are expensed as incurred.  Research and development costs included in general and administrative expenses for the years ended December 31, 2018 and 2017 amounted to $0.8 million and $1.07 million, respectively.

 

Government subsidies

 

Government subsidies are recognized when received and when all the conditions for their receipt have been met. Subsidies that compensate the Company for expenses incurred are recognized as a reduction of expenses in the consolidated statements of operations. Subsidies that are not associated with expenses are recognized as other income. Four of the Company’s PRC subsidiaries received government subsidies of $1.19 million and $2.93 million for the years ended December 31, 2018 and 2017, respectively, which was recorded in other income when subsidies were received and all the conditions were met.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.

 

F- 10

 

 

The Company has adopted ASC 740 “ Income Taxes ” pursuant to which tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company does not have any material unrecognized tax benefits and the Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended December 31, 2018 and 2017. The Company’s effective tax rate differs from the PRC statutory rate primarily due to non-deductible expenses, temporary differences, and preferential tax treatment.

  

The Company files income tax returns with the relevant government authorities in the U.S. and the PRC. 

  

Foreign Currency Translation and Other Comprehensive Income

 

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

 

For the subsidiaries whose functional currency is the RMB, all assets and liabilities are translated at the exchange rate on the balance sheet date; equity is translated at historical rates and items in the statement of income are translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in the statement of equity and amounted to ($3.58 million) and $2.59 million as of December 31, 2018 and 2017, respectively. Assets and liabilities at December 31, 2018 and 2017 were translated at RMB6.88 and RMB6.51 to $1.00 respectively. The average translation rates applied to income statement accounts and consolidated statements of cash flows for the years ended December 31, 2018 and 2017 were RMB6.61 and RMB6.76 to $1.00, respectively. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. 

 

Translation gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred and amounted a loss of $1.20 million and a gain of $1.88 million for the years ended December 31, 2018 and 2017, respectively.

 

Earnings Per Share

 

The Company reports earnings per share in accordance with ASC 260 “Earnings Per Share” , which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of a basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure.

 

Included in the calculation of basic EPS are shares of restricted common stock that have been issued by the Company, all of which are fully vested. Shares of restricted common stock whose issuance is contingent upon the attainment of specified earnings targets are considered outstanding and included in the computation of basic EPS as of the date that all necessary conditions have been satisfied, which is the date upon which the specified amount of earnings has been attained.  These shares are to be considered outstanding and included in the computation of diluted EPS as of the beginning of the period in which the conditions are satisfied.  If the specified amount of earnings has not been attained as of the end of the reporting period, the contingently issuable shares are excluded from the calculation of basic and diluted EPS.

 

Unvested restricted shares to be issued (share-based compensation) under the 2014 Equity Incentive Plan are not included in basic weighted average number of shares but are considered to be outstanding as of the grant date for purposes of computing diluted earnings per share even though the shares are subject to vesting requirements.

 

F- 11

 

 

Segments

 

The Company applies  ASC 280 “Segment Reporting”  which establishes standards for operating information regarding operating segments in financial statements and requires selected information for those segments to be presented in financial reports issued to stockholders. ASC 280 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The Company reports financial and operating information in two segments:

 

(1) Wholesale apparel manufacture and sales

 

(2) Retail sales of own-brand clothing

  

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases . Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. The Company has evaluated the impact of the adoption of these standards on January 1, 2019, and anticipates recognition of an asset and a corresponding liability related to the lease on the balance sheet at effective date. The Company anticipates recording lease assets and liabilities of approximately $56.5 million on its consolidated balance sheets, with no material impact to its consolidated statements of income and comprehensive income. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.

 

In June 2016, the FASB issued ASU No. 2016-13  “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”  which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

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

 

F- 12

 

 

NOTE 3 INVENTORIES

 

Inventories at December 31, 2018 and 2017 consisted of the following:

 

    December 31,
2018
    December 31,
2017
 
    (In thousands of
U.S. Dollars)
 
Raw materials   $ 6,805     $ 2,148  
Work-in-progress     3,308       8,852  
Finished goods     55,816       45,182  
Total inventories   $ 65,929     $ 56,182  

 

F- 13

 

 

NOTE 4 INTANGIBLE ASSETS

 

Land use rights

 

In 2006, the Company obtained a fifty-year land use right on 112,442 square meters of land in the Nanjing Jiangning Economic and Technological Development Zone.

 

In 2014, the Company obtained a fifty-year land use right on 23,333 square meters of land in the Suzhou Kunshan Jinxi Tower Jinxing Road.

 

In 2015, the Company obtained a fifty-year land use right on 33,427 square meters of land in the Tianjin Wuqing Development Zone.

 

Land use rights at December 31, 2018 and 2017 consisted of the following:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Land use rights   $ 5,702     $ 5,475  
Less: accumulated amortization     (740 )     (566 )
Land use rights, net   $ 4,962     $ 4,909  

 

Amortization expense was $0.12 million and $0.12 million for the years ended December 31, 2018 and 2017, respectively. Future expected amortization expense for land use rights is approximately $0.12 million for each of the next five years. 

 

Impairment of Intangible Assets

 

The Company acquired and gained effective control of Shanghai Yiduo since March 27, 2015. The value of the designer team and other marketing related intangibles was recorded $0.85 million as intangible assets in the consolidated balance sheet as of March 31, 2015. Subsequently, the Company made further capital contribution to Shanghai Yiduo as required by the acquisition agreement. The value of this capital contribution to Shanghai Yiduo was recorded as intangible assets, and the non-controlling interest increased by $0.23 million. As of December 31, 2018, the Company tested marketing related intangible assets for impairment and determined that fair value was lower than the carrying amount of the marketing related intangible assets. Therefore it was concluded that the carrying amount of marketing related intangible assets of $1.08 million was impaired.

F- 14

 

 

NOTE 5 PROPERTY AND EQUIPMENT

 

The following is a summary of property and equipment at December 31, 2018 and 2017:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Property and plant   $ 27,829     $ 28,922  
Leasehold improvements     21,278       16,651  
Equipment and machinery     2,451       2,877  
Office equipment and furniture     3,102       3,739  
Motor vehicles     1,112       1,147  
      55,772       53,336  
Less: accumulated depreciation     (27,327 )     (27,535 )
Construction-in-progress     -       90  
Property and equipment, net   $ 28,445     $ 25,891  

 

Depreciation expense was $6.54 million and $6.89 million for the years ended December 31, 2018 and 2017, respectively.

  

NOTE 6 OTHER PAYABLES AND ACCRUED LIABILITIES

 

Other payables and accrued liabilities at December 31, 2018 and 2017 consisted of the following:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Advance from customers   $ 976     $ 1,036  
Accrued wages and welfare     8,671       6,146  
Other payables     12,311       9,272  
Total other payables and accrued liabilities   $ 21,958     $ 16,454  

 

As of December 31, 2018, the fair value of foreign currency swap contract principle are included in other receivable ($4.0 million plus unrealized gain) and other payables (equivalent RMB payables).

 

F- 15

 

 

NOTE 7 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 December 31, 2018, and 2017.

 

    December 31,
2018
    December 31,
2017
 
Bank   (In thousands of
U.S. Dollars)
 
Industrial and Commercial Bank of China   $ 14,540     $ 21,504  
Nanjing Bank     5,089       9,216  
China Minsheng Bank     2,908       3,072  
Bank of Communications     2,893       1,536  
Shanghai Pudong Development Bank     2,613       -  
China Everbright Bank Shanghai Pudong Development Bank     1,454       -  
HSBC     -       2,402  
    $ 29,497     $ 37,730  

 

In December 2016, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $8.7 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of December 31, 2018, Goldenway had borrowed $2.9 million (RMB20.0 million) from Industrial and Commercial Bank of China with an annual interest rate 3.92% and due on November 2019. As of December 31, 2018, approximately $5.8 million was unused and available under this line of credit.  

 

In November 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $14.6 million (RMB100.0 million) with Industrial and Commercial Bank of China and collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed among Ever-Glory Apparel, Nanjing Knitting and the bank. As of December 31, 2018, Ever-Glory Apparel had borrowed $11.6 million (RMB 80.0 million) under this line of credit with annual interest rates ranging from 4.57% to 4.7% and due on July 2019. As of December 31, 2018, approximately $3.0 million was unused and available under this line of credit.

  

In August 2018, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.3 million (RMB50.0 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of December 31, 2018, approximately $7.3 million was unused and available under this line of credit.

 

In August 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $8.7 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of December 31, 2018, Ever-Glory Apparel had borrowed $2.9 million (RMB20.0 million) from Nanjing Bank with an annual interest rates 4.41% and due on various dates from January to March 2019. As of December 31, 2018, approximately $5.8 million was unused and available under this line of credit.

 

In May 2018, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $2.9 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of December 31, 2018, LA GO GO had borrowed $2.2 million (RMB15.0 million) under this line of credit with an annual interest rate of 5.22% and due in June 2019. As of December 31, 2018, approximately $0.7 million was unused and available under this line of credit.

     

In June 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with China Minsheng Bank and guaranteed by Ever-Glory Apparel and Mr. Kang. As of December 31, 2018, LA GO GO had borrowed $2.9 million (RMB20.0 million) from China Minsheng Bank with an annual interest rate of 4.79% and due in June 2019.  

  

In November 2018, LA GO GO entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Jiangsu LAGOGO. As of December 31, 2018, LA GO GO had borrowed $2.9 million (RMB20.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on variable dates from January to November 2019.

 

In July 2018, Ever-Glory Apparel entered into a line of credit agreement for approximately $2.9 million (RMB20.0 million) with the Shanghai Pudong Development Bank and guaranteed by Goldenway. As of December 31, 2018, Ever-Glory Apparel had borrowed $2.6 million (RMB18.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on date November 2019. As of September 30, 2018, approximately $0.3 million was unused and available under this line of credit.

 

F- 16

 

 

In July 2017, Ever-Glory Apparel entered into a line of credit agreement for approximately $5.8 million (RMB40.0 million) with China Everbright Bank and guaranteed by Goldenway and Mr. Kang. These loans are also collateralized by Jiangsu Ever-Glory’s property. As of December 31, 2018, Ever-Glory Apparel had borrowed $1.5 million (RMB10.0 million) from the Bank of Communications with an annual interest rate 4.57% and due on date April 2019. As of December 31, 2018, approximately $4.3 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 $1.99 million and $1.65 million for the year ended December 31, 2018 and 2017, respectively.

 

The annual average interest rate of bank loans was 4.59% and 4.92% for the year ended December 31, 2018 and 2017, respectively.

 

NOTE 8 DERIVATIVE LIABILITY

   

Foreign currency swap contracts

 

During 2018, the Company had entered into four foreign currency swap contracts with three banks. Due to the increased demand of effective control on financial management for daily operations, Ever-Glory Apparel had entered into different foreign currency swap contracts to exchange $6.0 million for equivalent RMB with Bank of China in May, entered into a foreign currency swap contract to exchange $3.0 million for equivalent RMB with Industrial and Commercial Bank of China in June and entered into a foreign currency swap contract to exchange $6.0 million and $4.0 million for equivalent RMB with Shanghai Pudong Development Bank in July. The terms of three foreign currency contracts are both six months and the contract of $4.0 million with Shanghai Pudong Development Bank is three months. Ever-Glory Apparel and the banks swapped two currencies by same pre-determined exchange rate at the beginning and end of the contracts. During the period, the Company pays annual interest of 1.43% for the RMB received and receives no interest for the USD exchanged with the Bank of China and Industrial and Commercial Bank of China. The company pays annual interest of 0.98% for the RMB received and receives 0.0001% interest for the USD exchanged with Shanghai Pudong Development Bank. If the Company failed to execute the exchange at the expiration of contracts, the banks would sell the USD at the market rate then the difference in RMB will be converted into bank loan for the Company. As of December 31, 2018, the fair value of principal amounts are included in other receivable ($4.0 million plus unrealized gain) and other payables (equivalent RMB payables) in the consolidated balance sheets, and unrealized gain of $0.2 million for the year ended December 31, 2018 is recognized in the income from operations. This contract was settled in January 2019.

 

Forward foreign exchange contracts

 

At December 31, 2017, the Company had five outstanding forward foreign exchange contracts (sell EUR dollars for RMB), with total notional amount of EUR€1.68 million. The fair value of this contract at December 31, 2017 was not significant.

 

At December 31, 2018, the Company did not have any outstanding derivative contracts.

 

NOTE 9 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, 2018.

 

F- 17

 

 

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

 

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

 

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

 

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

 

After the tax liability adjustment resulted from the reevaluation of the Company’s tax position (resulting in the company allocating substantially all of the earnings of the Samoan subsidiary to the PRC and reporting such earnings as taxable in the PRC), pre-tax income for the years ended December 31, 2018 and 2017 was taxable in the following jurisdictions: 

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
PRC   $ 16,384     $ 17,881  
BVI     18       (1 )
Others     (20 )     (10 )
    $ 16,382     $ 17,870  

 

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the years ended December 31, 2018 and 2017, respectively:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
PRC statutory rate     25.0 %     25.0 %
Net operating losses for which no deferred tax assets was recognized     6.6       6.4  
Other     (1.4 )     1.1  
Effective income tax rate     30.2 %     32.5 %

  

Income tax expense for the years ended December 31, 2018 and 2017 is as follows:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Current   $ 7,115     $ 7,177  
Deferred     (2,173 )     (1,372 )
Income tax expense   $ 4,942     $ 5,805  

 

F- 18

 

 

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 $105.9 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. The U.S. Tax Reform signed into law 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, no deferred tax expense (income) relating to the Tax Act changes for the year ended December 31, 2018.

   

NOTE 10 EARNINGS PER SHARE

 

Basic and diluted earnings per share for 2018 and 2017 were calculated as follows:

 

    2018     2017  
Weighted average number of common shares- Basic and diluted     14,796,947       14,795,992  
                 
Earnings per share - basic and diluted   $ 0.81     $ 0.84  

 

As of December 31, 2018 and 2017, there was no securities that could potentially dilute basic EPS and would be included in the calculation of diluted EPS.

 

NOTE 11 STOCKHOLDERS’ EQUITY

 

Stock Issued to Independent Directors

 

On February 28, 2017, the Company issued an aggregate of 2,542 shares of its common stock to two of the Company’s independent directors as compensation for their services in the first and second quarters of 2016. The shares were valued at $1.96 per share, which was the average market price of the common stock for the five days before the grant date.

 

On February 28, 2017, the Company issued an aggregate of 2,354 shares of its common stock to two of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2016. The shares were valued at $2.14 per share, which was the average market price of the common stock for the five days before the grant date.

 

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

 

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

 

Statutory Reserve

 

Subsidiaries incorporated in China are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (“PRC GAAP”). Appropriations to the statutory surplus reserve are to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital.  Appropriations to the statutory public welfare fund are 10% of the after tax net income determined in accordance with PRC GAAP. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Appropriations to the surplus reserve are made at the discretion of the Board of Directors. Effective January 1, 2006, the Company is only required to contribute to one statutory reserve fund at 10% of net income after tax per annum, and any contributions are not to exceed 50% of the respective companies’ registered capital.

 

As of December 31, 2018, New-Tailun, Tianjin La GO GO and Catch-Luck had fulfilled the 50% statutory reserve contribution requirement; therefore no further transfers are required for those entities. In 2018, Goldenway appropriated $0.33 million, Ever-Glory Apparel appropriated $0.59 million, Shanghai La GO GO appropriated $0.08 million and Jiangsu La GO GO appropriated $0.29 million to the statutory reserve.

 

F- 19

 

 

NOTE 12 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. During the years ended December 31, 2018 and 2017, the Company received $96,556 and $54,081 from the customers and paid $79,925 and $42,241 to Wubijia through the consignment, respectively. The net profit of $16,631 and $11,840 was recorded as other income during the years ended December 31, 2018 and 2017, respectively.

 

Nanjing Knitting Company Limited (“Nanjing Knitting”) is an entity engaged in knitted fabric products and knitting underwear sales and is controlled by Mr. Kang. Nanjing Knitting has sold their knitting underwear on consignment in some Company’s retail stores since the third quarter of 2015. During the years ended December 31, 2018 and 2017, the Company received $4,452 and $6,443 from the customers and paid $0 and $11,661 to Nanjing Knitting through the consignment, respectively. The net profit (loss) of $0 and ($5,218) was recorded as other income during the years ended December 31, 2018 and 2017.

 

Included in other income for the years ended December 31, 2018 and 2017 is rental income from EsC’Lav, the entity controlled by Mr. Kang under operating lease agreement with term though 2018. The rental income is $0 and $14,638 for the years ended December 31, 2018 and 2017, respectively.

 

Other expenses due to Related Parties

 

Included in other expenses for the years ended December 31, 2018 and 2017 are rental expenses due to entities controlled by Mr. Kang under operating lease agreements as follows (See details at Note 13):

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Jiangsu Ever-Glory   $ -     $ 47  
Chuzhou Huarui     217       222  
EsC’Lav     25       -  
Kunshan Enjin     94       44  
Total   $ 336     $ 313  

 

F- 20

 

 

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 of $1.44 million and $1.39 million during the years ended 2018 and 2017, respectively, from Nanjing Knitting.

  

In addition, the Company sub-contracted certain manufacturing work to related companies totaling $25.0 million and $23.79 million for the years ended December 31, 2018 and 2017, respectively. The Company provided raw materials to the sub-contractors and was charged a fixed fee for labor provided by the sub-contractors.

 

Sub-contracts with related parties included in cost of sales for the years ended December 31, 2018 and 2017 are as follows:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Ever-Glory Vietnam   $ 14,718     $ 15,998  
Chuzhou Huarui     6,356       4,155  
Ever-Glory Cambodia     -       179  
Fengyang Huarui     2,438       1,860  
Nanjing Ever-Kyowa     1,566       1,577  
EsC’Lav     50       20  
Total   $ 25,128     $ 23,789  

 

Accounts Payable – Related Parties

 

The accounts payable to related parties at December 31, 2018 and 2017 are as follows:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Ever-Glory Vietnam   $ 1,863       1,934  
Fengyang Huarui     622       459  
Nanjing Ever-Kyowa     580       900  
Chuzhou Huarui     888       1,152  
Nanjing Knitting     171       114  
Esc’elav     -       6  
Jiangsu Ever-Glory     632       110  
Total   $ 4,756     $ 4,675  

   

Amounts Due From Related Parties – Current Assets

 

The amounts due from related parties at December 31, 2018 and 2017 are as follows:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Jiangsu Ever-Glory   $ 122     $ 265  
EsC’eLav     70       -  
Total   $ 192     $ 265  

 

F- 21

 

 

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 2018 and 2017, the Company and Jiangsu Ever-Glory purchased raw materials on behalf of each other in order to obtain cheaper purchase prices.  The Company purchased raw materials on Jiangsu Ever-Glory’s behalf and sold to Jiangsu Ever-Glory at cost for $1.4 million and $0.3 million during 2018 and 2017, respectively.  Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $1.1 million and $49,967 during 2018 and 2017, 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 the expiration or termination of the underlying lines of credit and is to pay an annual interest at the rate of 6.0% of the amounts provided. As of December 31, 2018 and 2017, Jiangsu Ever-Glory had provided guarantees for approximately $33.4 million (RMB 230.0 million) and $49.5 million (RMB 322.0 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. As of December 31, 2018 and 2017, the value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $29.9 million (RMB 205.5 million) and $31.6 million (RMB 205.5 million), respectively. Mr. Kang has also provided a personal guarantee for $14.5 million (RMB 100.0 million) and $21.5 million (RMB 140.0 million) at the years ended of December 31, 2018 and 2017, respectively.

 

As of December 31, 2017, $12.8 million (RMB 83.6 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the year ended December 31, 2018, an additional $8.4 million (RMB 55.7 million) was provided to and repayment of $10.8 million (RMB 71.1 million) was received from Jiangsu Ever-Glory under the counter-guarantee agreement. As of December 31, 2018, the amount of the counter-guarantee had decreased to $9.9 million (RMB 68.2 million) (the difference represents currency exchange adjustment of ($0.5) million), which was 29.7% of the aggregate amount of lines of credit. This amount plus accrued interest of $0.5 million (2018) and $2.6 million (2017) have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. As of December 31, 2018 and 2017, the amount classified as a reduction of equity was $10.4 million and $15.4 million, respectively. Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. From April 1, 2015, interest rate has changed to 0.41% as the bank benchmark interest rate decreased. Interest income for the years ended December 31, 2018 and 2017 was approximately $0.7 million and $0.8 million, respectively. 

 

NOTE 13 COMMITMENTS AND CONTINGENCIES

 

Economic and Political Risks

 

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.  

 

Operating Lease Commitment

 

The Company has entered into the operating lease agreement with Chuzhou Huarui as LA GO GO’s logistics warehouse in 2018. The leased warehouse is located in Chuzhou City in Anhui Province. The lease term is one year and expires on December 31, 2018, at an annual rental of $0.2 million (RMB 1.5 million). For the years ended December 31, 2018 and 2017, the Company recognized rental expense in the amounts of approximately $216,890 and $222,000, respectively.

 

F- 22

 

 

The Company has entered the operating lease agreement with Kunshan Enjin as LA GO GO’s Logistics warehouse since inception of the Company. The leased warehouse is located in Suzhou Kunshan. The lease term is one year and can be renewed once a year. On January 1, 2018, the Company renewed the lease which expires on December 31, 2018, at an annual rental of $43,000 (RMB 0.3 million). For the years ended December 31, 2018 and 2017, the Company recognized rental expense in the amounts of approximately $93,948 and $44,231, respectively.

 

The Company has entered the operating lease agreement with Shahe Village for approximately 10 Mu of land in Shahe Village, Shanghai. The term of the lease is 40 years starting from January 1, 2013, with an annual rent of $0.4 million (RMB 2.6 million) for the first 5 years. The rent will increase by $15,000 (RMB 0.1 million) every five years. For the years ended December 31, 2018 and 2017 total rental expense was $0.4 million and $0.4 million, respectively.

 

The Company leases retail space, warehouses and office facilities under operating leases expiring on various dates through 2018. The majority of the Company’s retail leases is for twelve-month periods and provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a lease liability in the consolidated balance sheets and the corresponding rental expense when management determines that achieving the specified levels during the fiscal year is probable. Total rental expense was $48.03 million and $51.04 million for the years ended December 31, 2018 and 2017, respectively.  Future minimum lease payments for leases with initial or remaining noncancelable lease terms in excess of one year are as follows:

 

Year ending December 31, (In thousands of U.S. Dollars)      
2019     409  
2020     409  
2021     409  
2022     409  
2023     423  
Thereafter     13,487  
    $ 15,546  

 

Under the new Leases guidance, the Company will record right-of-use assets and lease liabilities in the consolidated balance sheets. In 2019, the right-of-use assets and lease liabilities will approximately be $56.5 million (RMB 373.3 million) and the annual amortization expenses will be booked in consolidated statement of operations and allocating between cost of sales and operating expenses.

 

Legal Proceedings

 

There is no material pending legal proceeding to which the Company is a party.

 

NOTE 14 CONCENTRATIONS AND RISKS

 

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable, management has concluded $5.9 million and $5.5 million of doubtful accounts on December 31, 2018 and 2017. 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.   

 

The Company had one customer represented approximately 20.9% of the total revenues for the year ended December 31, 2018 and had one customer represented approximately 13.5% of the total revenues for the year ended December 31, 2017.

 

F- 23

 

 

For the Company’s wholesale business during 2018 and 2017, no supplier represented more than 10% of the total raw materials purchased.

 

For the Company’s retail business, the Company had four suppliers represented approximately 24.0%, 18.2%, 15.1% and 13.9% of the total raw materials purchased, respectively during 2018. For the Company’s retail business, the Company had six suppliers represented approximately 11.7%, 12.0%, 13.3%, 13.9%, 15.7% and 17.1% of the total raw materials purchased, respectively during 2017.

 

For the wholesale business, the Company relied on one manufacturer for 18.1% and 24.0% of total purchased finished goods during 2018 and 2017, respectively.

 

For the retail business, the Company did not rely on any single manufacturer for more than 10% of total purchased finished goods during 2018 and 2017.

 

The Company’s revenues for the years ended December 31, 2018 and 2017 were earned in the following geographic areas:

 

    2018     2017  
    (In thousands of
U.S. Dollars)
 
Mainland China   $ 89,269     $ 65,811  
Hong Kong China     38,106       39,738  
Germany     6,748       8,901  
United Kingdom     15,460       12,417  
Europe-Other     30,747       34,804  
Japan     7,583       3,515  
United States     30,696       25,050  
Total wholesale business     218,609       190,236  
Retail business     229,899       225,345  
Total   $ 448,508     $ 415,581  

 

Substantially all of the Company’s long-lived assets are located in the PRC as of December 31, 2018 and 2017.

 

F- 24

 

 

NOTE 15 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)  
December 31, 2018      
Segment profit or loss:                  
Net revenue from external customers   $ 218,609     $ 229,899     $ 448,508  
Income from operations   $ 12,071     $ 2,948     $ 15,019  
Interest income   $ 1,330     $ 45     $ 1,375  
Interest expense   $ 1,667     $ 322     $ 1,989  
Depreciation and amortization   $ 1,175     $ 5,489     $ 6,664  
Income tax expense   $ 3,337     $ 1,605     $ 4,942  
Segment assets:                        
Additions to property, plant and equipment   $ 2,153     $ 10,029     $ 12,182  
Total assets   $ 98,493     $ 153,778     $ 252,271  
                         
December 31, 2017                             
Segment profit or loss:                             
Net revenue from external customers   $ 190,236     $ 225,345     $ 415,581  
Income from operations   $ 10,331     $ 4,418     $ 14,749  
Interest income   $ 1,188     $ 72     $ 1,260  
Interest expense   $ 1,275     $ 373     $ 1,648  
Depreciation and amortization   $ 1,104     $ 5,911     $ 7,015  
Income tax expense   $ 3,048     $ 2,757     $ 5,805  
Segment assets:                        
Additions to property, plant and equipment   $ 759     $ 7,805     $ 8,564  
Total assets   $ 97,026     $ 147,966     $ 244,992  

 

F- 25

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

ITEM 9A. 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 December 31, 2018. 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 as of December 31, 2018. 

 

Management’s Annual Report on Internal Controls Over Financial Reporting

 

Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors (notably, the Audit Committee thereof), management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
     
  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
     
  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

39

 

 

Our management, including our Chief Executive Officer and our Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Tread way Commission (COSO) in Internal Control—Integrated Framework. Based on the criteria described in “Internal Control—Integrated Framework”, our management concluded that our internal control over financial reporting was effective as of December 31, 2018.

 

Remediation of Previously Identified Material Weaknesses

 

A “material weakness” is defined under the SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. As a result of its review, management concluded that we had following material weakness in our internal control over financial reporting process:

 

  The personnel primarily responsible for the preparation of our financial statements do not have requisite levels of knowledge and training in the application of U.S. GAAP commensurate with our financial reporting requirements.

 

Remediation of Material Weaknesses

 

During the year ended December 31, 2018, we implemented the following measures to remediate the material weaknesses identified:

 

 

Since 2016, we have implemented a formal training plan and procured applicable training for our accounting and internal controls staff to enhance our understanding of U.S. GAAP and internal control over financial reporting; In 2018, the following training have been completed:

(1)       All staff in accounting department have completed a 24-credit training related to accounting and finance through continuing education program;

(2)       All accountants who are responsible for general ledgers have completed an additional 24-credit internal training;

(3)       All staff who work on prepare of consolidated financial statements have completed a 40-credit training on US GAAP provided by a specialized accounting education institute.

     
  Our CFO was admitted to a Training Program for Advanced Accounting Professionals and completed a total of 255-credit training on accounting and finance related subjects in Nanjing University, Shanghai National Accounting Institute, Xiamen University and Sichuan University. Out of these 255 credits, 52 credits are US GAAP related courses.
     
  W e have been working with US GAAP financial reporting consultants to help the CFO in his review and supervision of financial statement preparation and reporting. During the year of 2018, the consultant provided approximately 120 hours’ services.
     
  We have added a manager position who has master’s degree in accounting and has four years financial reporting experience. And she supervises the preparation of the financial statements and reports directly to the CFO.

 

As such management concluded that as of December 31, 2018, the material weaknesses identified above had been fully remediated.  

 

Despite of the remediation of the identified weaknesses, we intend to continue implementing the following measures to maintain quality of our internal control:

 

  Continue to implement the mandatory training plan for the staff of financial and accounting department and internal audit division;
     
  Continue working with our external consultant in our financial reporting process:

 

Changes in Internal Control Over Financial Reporting

 

Other than described above, during the fourth quarter of the fiscal year ended December 31, 2018, there were no other 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.

 

ITEM 9B OTHER INFORMATION

 

None.

 

40

 

 

PART III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Board of Directors and Management

 

The Board of Directors oversees our management and our business affairs in order to ensure that our stockholder’s interests are best served. Our Board does not involve itself in our day-to-day operations. It establishes with management the objectives and strategies to be implemented and monitors management’s general performance and conduct.

 

The following table includes the names, positions held, and ages of our current executive officers and directors as of December 31, 2018:

 

Name   Age   Position  

Held Position

Since

             
Edward Yihua Kang   56    Chief Executive Officer, President, and Director   2005
             
Jiajun Sun   46    Chief Operating Officer and Director   2005
             
Jason Jiansong Wang   40    Chief Financial Officer and Secretary   2010
             
Jianhua Wang (1)(2)(3)   52   Director   2014
             
Zhixue Zhang (1)(2)(3)   52   Director   2008
             
Merry Tang (1) (2)(3)   59   Director   2011

 

(1) Member of the Audit Committee

 

(2) Member of the Compensation Committee

 

(3) Member of the Nominating and Corporate Governance Committee

 

Each director will hold office until the next annual meeting of shareholders and until his or her successor has been elected and qualified.  

 

Edward Yihua Kang has served as our President and Chief Executive Officer and as the Chairman of our Board of Directors, since 2005. From December 1993 to January 2008, Mr. Kang served as the President and Chairman of the Board of Directors of Goldenway. Mr. Kang has extensive worldwide managerial and operational experience focusing upon business development and strategic planning. Mr. Kang formerly was the Senior lecturer of the Management College, Nanjing Aeronautics and Astronautics University, and the Vice General Manager of the Import and Export Department of Nanjing Shenda Company. Mr. Kang earned a MS degree from Peking University, a Bachelor’s degree in Management from Beijing Aeronautics and Astronautics University and a Bachelor’s degree in Engineering from Nanjing Aeronautics and Astronautics University. Mr. Kang’s extensive experience in the garment industry, his acute vision and outstanding leadership capability, as well as his commitment to the Company since its inception make him well-qualified in the Board’s opinion to serve as our Chairman of the Board.

 

41

 

 

Jiajun Sun has served as our Chief Operating Officer and a member of our Board of Directors since 2005. Mr. Sun also has served as a member of the Board of Directors of Goldenway since 2000 and as a member of the Board of Directors of New-Tailun since 2006. From July 1996 to November 2002, Mr. Sun was the General Manager of International Trade Department at Goldenway. Mr. Sun has more than 15 years experience in import and export in the textile industry. Mr. Sun earned his bachelor’s degree from the Wuhan Textile Industry Institute. Mr. Sun has accumulated substantial institutional knowledge of our business and operations.  His managing experiences and analytical skills make him well positioned for his role as one of our Directors.

 

Jianhua Wang was appointed as a member of the Board of Directors and chairman of the nominating & governance committee in September 24, 2014 and serves on the Audit Committee and compensation committee. Mr. Wang is the Chief Lawyer of Wang Jianhua Law Offices, a boutique law firm based in Kunshan city, Jiangsu Province. Mr. Wang had more than 20 years of practicing experience in corporate, securities and business laws in China. He held numerous honors and distinctions, including being listed as one of Outstanding Young Lawyers of Jiangsu Province. He was a member of the Standing Committee of People’s Political Consultant Committee of Kunshan City. He is currently a member of the Advisory Board of Legal Affairs of The People’s Government of Kunshan City, Vice Chairman of the Entrepreneurs Chamber of Commerce of Peking University Alumni of Suzhou City, Vice Chairman of the Bar of Kunshan City, a member of the Social Security and Labor Law Committee of the Jiangsu Provincial Bar. He had a master degree in Executive Master of Business Administration (EMBA) from Guanghua School of Management Peking University.

  

Zhixue Zhang was appointed to the Board of Directors in March 2008 and serves on the Audit Committee and as chairman of the Compensation Committee.  Mr. Zhang is a professor of Organizational Management at Peking University, and has held this position since August 2008. Mr. Zhang has over fifteen years of experience in the fields of organizational psychology, management and organizational culture as it relates to conducting business within China and with Chinese businesses. From August 2001 to July 2008, he was the Associate professor at Peking University. From August 2006 to June 2007, he was a Freeman Fellow at the University of Illinois at Urbana-Champaign. From September 2001 to March 2002, he was a visiting scholar at the Kellogg School of Management at Northwestern University. Mr. Zhang holds a Ph.D. from the University of Hong Kong, and a M.Sc. from Beijing Normal University, and a B.Sc. from Henan University.  Mr. Zhang’s life-long background of management education, as well as his business aptitude and strong analytical skills, qualify him for his position as one of our Directors.

 

Merry Tang was appointed as a member of the Board of Directors and chairwoman of the Audit Committee, and a member of the Compensation Committee and the Nominating and the Corporate Governance Committee of the Board in August 31, 2011.  She has been an independent director for China Sunergy Co., Ltd. (Nasdaq: CSUN), a specialized manufacturer of solar cell and module products in China since June 2008. She is currently a principal and managing partner of GTZY CPA Group, LLC. Ms. Tang served a managing director at GTA International, LLC and partner at Tang & Company, PC — both U.S.-based CPA firms offering services in risk assessment, audit engagements and Sarbanes-Oxley  related documentation to leading banks, financial service providers and telecommunications firms from 2006 to 2008. Prior to forming GZTY CPA Group, LLC, she served as a senior auditor in PricewaterhouseCoopers, LLC from 2004 to 2006.  Ms. Tang graduated from the Central University of Finance & Banking, Beijing, China with a bachelor degree in banking in 1983 and a master degree in Finance in 1986, before going on to receive her masters degree in accounting from the State University of New York at Albany in 1993.

 

Jiansong Wang was appointed as the Chief Financial Officer and Corporate Secretary in September 2010.  From September 2009 to September 1, 2010, he was the General Manager of the Accounting Department in Ever-Glory International Group Apparel Inc., a subsidiary of the Company.  From July 2006 to August 2009, he served as the International Settlement Accountant for Goldenway Nanjing Garments Co. Ltd., a subsidiary of the Company.  From March 2004 to June 2006, he served as the General Manager of the Accounting Department in MG Garment Manufacturing Co., Ltd.  From July 2002 to February 2004, Mr. Wang served as the Cost Accountant in Nanjing GongNongBing Textile (Group) Co., Ltd. Mr. Wang earned a master degree in Master of Professional Accounting (MPACC) from Hohai University in the PRC.

 

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Director Qualifications

 

We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our businesses. We also seek directors who possess the qualities of integrity and candor, who have strong analytical skills and who are willing to engage management and each other in a constructive and collaborative fashion. We also seek directors who have the ability and commitment to devote significant time and energy to service on the Board and its committees. We believe that all of our directors meet the foregoing qualifications.

  

Our directors have backgrounds in a variety of different areas including industry, operation, marketing, strategic business management, and finance. We believe that the backgrounds and skills of our directors bring a diverse range of perspectives to the Board.

 

Board Practices

 

Our business and affairs are managed under the direction of our Board of Directors. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. It is our expectation that the Board of Directors will meet regularly on a quarterly basis and additionally as required.

  

Board Leadership Structure

 

The Board of Directors believes that Mr. Kang’s service as both Chairman of the Board and Chief Executive Officer is in the best interest of the Company and its shareholders. Mr. Kang possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company and its business and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances our ability to communicate its message and strategy clearly and consistently to our shareholders, employees and customers.  We have three independent directors. We do not have a lead independent director. 

 

Board’s Role in Risk Oversight

 

Our Board of Directors has overall responsibility for risk oversight. To effectively achieve the goal of efficient risk management, the Board has delegated responsibility for the oversight of specific risks to Board committees as follows:

 

  The Audit Committee oversees our risk policies and processes relating to the financial statements and financial reporting processes, as well as key credit risks, liquidity risks, market risks and compliance, and the guidelines, policies and processes for monitoring and mitigating those risks.
     
  The Compensation Committee oversees risks related to our director compensation.
     
 

 

The Nominating and Corporate Governance Committee identifies and proposes new potential director nominees to the board of directors and review our corporate governance policies.

 

Our Board of Directors is responsible for the approval of all related party transactions according to our Code of Ethics.

 

Family relationship

 

There are no family relationships, or other arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer.

 

Involvement in Certain Legal Proceedings

 

No director, person nominated to become a director, executive officer, promoter or control person of the Company has, during the last ten years: (i) been convicted in or is currently subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any Federal or state securities or banking or commodities laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law; (iii) has any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy or for the two years prior thereto; (iv) been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:  (a) Any Federal or State securities or commodities law or regulation; or (b) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; nor (v) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. (covering stock, commodities or derivatives exchanges, or other SROs).

 

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Board Committees

 

In March 2008, the Board created the Audit Committee and the Compensation Committee and has adopted charters for these committees. In December 2013, the Board created the Nominating and Corporate Governance Committee and adopted its charter. The Board has determined that in its judgment, Ms. Merry Tang, Mr. Wang and Mr. Zhang are independent directors within the meaning of Rule 5005 of NASDAQ Listing Rules. Accordingly, all members of the Audit Committee are independent within the meaning of Rule 5005 of NASDAQ Listing Rules.

 

Audit Committee

 

The Board of Directors adopted and approved a charter for the Audit Committee on March 13, 2008, and the charter was amended on May 26, 2008, on June 20, 2008 and further amended December 22, 2015. Currently, three directors comprise the Audit Committee: Ms. Tang, Mr. Wang and Mr. Zhang.  Ms. Tang serves as the chairwoman of the Audit Committee. The members of the Audit Committee are currently “independent directors” as that term is defined in Rule 5005 of NASDAQ Listing Rules.  Ms. Tang qualifies as an “audit committee financial expert” as that term is defined in applicable regulations of the SEC.

 

Our Audit Committee is responsible, in accordance with the Audit Committee charter, for recommending our independent auditors, and overseeing our audit activities and certain financial matters to protect against improper and unsound practices and to furnish adequate protection to all assets and records. 

 

Our Audit Committee pre-approves all audit and non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to a particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date.

 

Compensation Committee

 

The Compensation Committee currently consists of Mr. Wang, Mr. Zhang and Ms. Merry Tang. Mr. Zhang serves as chairman of the Compensation Committee. The members of the Compensation Committee are currently “independent directors” as that term is defined in Rule 5005 of NASDAQ Listing Rules.

 

In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and, and as appropriate, making recommendations to the Board regarding the annual salaries and other compensation of our executive officers and general