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 1,100 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).
Ever-Glory Apparel was incorporated in the PRC on January 6, 2009. Goldenway invested approximately $6.6 million (RMB45.0 million) into Ever-Glory Apparel. Ever-Glory Apparel is principally engaged in the import and export of apparel, fabric and accessories. Ever-Glory 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 Apparel 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. 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 He Meida 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, Chuzhou Huirui 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 (“Shanghai Yiduo”) to acquire 78% of the shares of Shanghai Yiduo. The Company gained effective control of Shanghai Yiduo by the end of March 2015 and Shanghai Yiduo was consolidated on March 31, 2015. The business objective of Shanghai Yiduo is to establish and create another leading brand “idole” of ladies’ garments for the mainland Chinese market.
As a result of the foregoing acquisitions and transactions, our current corporate structure is illustrated below.
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”), Chuzhou Huirui Garments Co., Ltd. (“Huirui”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”). We also have one wholly owned subsidiary is located in Samoa: Ever-Glory International Group (HK) Ltd. ("Ever-Glory HK"). In our fiscal year ended December 31, 2015, our wholesale segment achieved total sales of $196.6 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 19.5 million pieces in 2015. 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 (“Shanghai Yiduo”). As of December 31, 2015, we had approximately 6,900 retail employees and operated 1,159 retail stores in China. We achieved total retail sales of $224.8million in the fiscal year of 2015.
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, 2015, approximately 54.3% of our sales revenue came from customers in China, 6.8% of our sales revenue came from customers in Germany, 23.2% of our sales revenue came from customers in United Kingdom and other European countries, 9.0% from customers in the United States, and 6.6% from customers in Japan. In 2015, sales to our five largest customers generated approximately 41.5% of our total wholesale sales and two customers represented more than ten percent of our total wholesale sales.
Substantially all of our long-lived assets were attributable to the PRC as of December 31, 2015 and 2014.
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 13.5% and 15.0% of total raw material purchases in 2015 and 2014, 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 48.1% and 40.3% of total finished goods purchases in 2015 and 2014, respectively. One contract manufacturer provided approximately 24.5% and 16.9% of our total finished goods purchases in 2015 and 2014.
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 2015, approximately 17.0% 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, 2015, our total production capacity, including outsourced production, reached 19.5 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.
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 customers 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 2015, 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.
Retail Segment
As of December 31, 2015, we had 1,159 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 2015, we achieved total net sales of approximately US$224.8 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 24.7% of total purchases in 2015. There were no suppliers which provided more than 10% of our total raw materials purchases in 2015. 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 14.6% of total finished goods purchases in 2015. There was no one contract manufacturer which provided more than 10% of our total finished goods purchases in 2015. 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 4,500 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 2015, the return and exchange rate was very low and was not a material factor in our operations.
Store Operation
As of December 31, 2015, we had 1,159 stores, including 65 flagship stores, with each store generating average revenue of approximately $ 16,000 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, 2015, 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
Employees
As of December 31, 2015, we had over 8,300 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, 2015, 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 2015, we operated four facilities on certain land in the Nanjing Jiangning Economic and Technological Development Zone and in Shangfang Town 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%.
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, 2017.
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.
All of our income tax expenses are related to our operations in China.
ITEM 1A.
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 consumers needs.
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, 2015 and 2014, 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 24.5% and 16.9% of purchased finished goods in 2015 and 2014, 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 2015 and 2014. 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, 2015, our five largest customers represented approximately 41.5 % of our total net sales. For the year ended December 31, 2014, our top five largest customers represented approximately 42.6% 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.
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 $6.25 million and $2.10 million during 2015 and 2014, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $0.78 million and $0.16 million during 2015 and 2014, respectively.
In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of December 31, 2015 and 2014, Jiangsu Ever-Glory has provided guarantees for approximately $52.21 million (RMB 339 million) (2015) and $40.62 million (RMB 250 million) (2014) of lines of credit obtained by the Company. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $22.8 million (RMB 148 million) (2015) and $22.1 million (RMB 136 million) (2014). Mr. Kang has also provided a personal guarantee for $39.89 million (RMB 259 million) (2015) and $35.43 million (RMB 218 million) (2014). At December 31, 2014, $17.36 million (RMB 107 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the year ended December 31, 2015, an additional $4.68 million (RMB 30.4 million) was provided to and repayment of $2.31 million (RMB 15 million) was received from Jiangsu Ever-Glory under the counter-guarantee agreement. As of December 31, 2015, the amount of the counter-guarantee had been increased to $18.83 million (RMB 122 million) (the difference represents currency exchange adjustment of $0.9 million), which was 36.1% of the aggregate amount of lines of credit. This amount plus accrued interest of $2.95 million (2015) and $2.06 million (2014) have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At December 31, 2015 and 2014, the amount classified as a reduction of equity was $21.78 million and $19.42 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, 2015 and 2014 was approximately $0.89 million and $1.07 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 13 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.
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.
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.
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 severe acute respiratory syndrome (“SARS”), 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.
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.
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.
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, 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. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.
In the future, we may adopt an equity incentive plan and make numerous stock option 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.
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.
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 52 week period ended December 31, 2015 has been US$2.15 and US$6.64 per share respectively.
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.
Failure to maintain an effective system of internal controls may result in our inability to accurately report our financial results or prevent material misstatements.
In this Annual Report on Form 10-K for the year ended December 31, 2015, we concluded that our internal control over financial reporting was not effective as of December 31, 2015 based on our assessment. For more information, please refer to Item 9A. Controls and Procedures. Our staffs who are primarily responsible for the preparation of our financial statements do not have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP. Therefore, future reports may have statements indicating that our controls and procedures are not effective. We cannot assure you that even if we remediate our internal controls over financial reporting relating to the identified material weaknesses that we will establish the effectiveness of our internal controls over financial reporting or that we will not be subject to these or other material weaknesses in the future. In addition, our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
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.
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 74.5% 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.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
Wholesale segment
In 2015, we operated three complexes as our operating and production facilities at 509 Chengxin Road, in the Nanjing Jiangning Economic and Technological Development Zone, Shangfang Town, Nanjing, 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) New-Tailun. Our New-Tailun facilities include 25,000 square meters of floor space. Approximately 396 employees work at this location. Our New-Tailun facility mainly handles manufacturing. We lease the New-Tailun facility and the land from Jiangsu Ever-Glory for US$50,000 (RMB 314,000) per annum under a one year leasing arrangement that expired on December 31, 2016.
(iii) Catch-Luck. Our Catch-Luck facilities include 6,635 square meters of office and production space. Approximately 406 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, under certain lease arrangement between Goldenway and Jiangsu Ever-Glory, Goldenway currently holds the right to lease certain land and use certain building and improvements on that land until 2016. In December 2015 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 two year lease.
We believe that our current facilities will be sufficient to sustain our wholesale operations for the foreseeable future.
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 30% 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 Kunshan Jinxi 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.
Item 3. LEGAL PROCEEDINGS
There is no material pending legal proceeding to which we are a party.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
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, 2015, there were approximately 63 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 transactions.
Securities Authorized for Issuance under Equity Compensation Plans
The following table presents information regarding options outstanding under our compensation plans as of December 31, 2015:
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.
Item 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7.
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, 2015 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 leading apparel supply-chain manager and retailer 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, Jumei.com, JD.com and VIP.com 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”) 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.
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:
● Expand our global sourcing network
● Expand our overseas low-cost manufacturing base (outside of mainland China);
● Focus on high value-added products and continue our strategy to produce mid-to-high end apparel
● Continue to emphasize product design and technology utilization.
● Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
● Maintain stable revenue increases in the markets while shifting focus to higher margin wholesale markets such as mainland China.
Retail Business
The business objective for our retail segment is to establish leading brands of women’s apparel and to build a nationwide retail network in China. As of December 31, 2015, we had 1,159 stores (including store-in-stores), which included 228 stores opened in 2015 and 270 stores closed in 2015. We expect to open additional 200 to 250 stores in 2016.
On June 26, 2014, Shanghai LA GO GO entered into a contract with Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) to acquire 78% of the shares of Shanghai Yiduo for $0.8 million (RMB4.6 million). The last $0.08 million was paid by the Company to Shanghai Yiduo on March 27, 2015 when Shanghai Yiduo collected all the accounts receivable from Mecox Lane. The Company gained effective control of Shanghai Yiduo by the end of March 2015 and Shanghai Yiduo was consolidated on March 31, 2015. Management made a preliminary valuation of Shanghai Yiduo, including the value of the designer team and other marketing related intangibles and recorded $0.85 million as intangible assets in the consolidated balance sheet as of March 31, 2015. During the three months ended June 30, 2015, the Company made a $1.06 million (RMB6.5 million) capital contribution to Shanghai Yiduo as required by the acquisition agreement. As a result, the value of Shanghai Yiduo recorded as intangible assets, and the non-controlling interest increased by $0.23 million. Management believes that the acquisition will improve the Company’s design and product development ability.
We believe that our growth opportunities and continued investment initiatives include:
● Build our retail brand sand to be recognized as a major player in the mid-to-high end 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 retail flagship stores in Tier-1 cities and increase penetration and coverage in Tier-2 and Tier-3 cities
● Become 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 the sales in e-commerce platform such as Tmall, Dangdang mall, Jumei.com, JD.com and VIP.com etc, we generally receive payments from these e-commerce companies between 5 to 15 days following the date of the register receipt.
Global Economic Uncertainty
Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and the slowdown of economies in the United States and Europe have increased our clients’ sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2016.
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 provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. 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, provided that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. 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.
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 2015 and 2014 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 inventory reservation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the measurement of certain inventories. Under the new guidance, inventories are required to be measured at the lower of cost and net realizable value, the latter representing the estimated selling price in the ordinary course of business, reduced by costs of completion, disposal, and transportation. Under current guidance, inventories are required to be measured at the lower of cost or market, but depending upon specific circumstances, market could refer to replacement cost, net realizable value, or net realizable value reduced by a normal profit margin. The guidance is to be applied prospectively, is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Management is currently assessing the potential impact of this ASU on its consolidated financial statements.
In September 2015, FASB issued ASU No. 2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company assessed that there is no significant impact to the consolidated financial statements on this update.
In November 2015, FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company applied this guidance to its current fiscal year ended December 31, 2015 and retroactively reclassified its balance sheet as of December 31, 2014. Adoption of this guidance had no material impact on the results of operations or financial position.
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 is currently assessing the impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09, Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2015 and 2014. 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.
Revenue
The following table sets forth a breakdown of our total sales, by region, for the years ended December 31, 2015 and 2014.
Total sales for the year ended December 31, 2015 were $421.4 million, a decrease of 8.4% from the year ended December 31, 2014. This decrease was primarily attributable to an 8.1% decrease in sales in our retail business as well as an 8.8% decrease in our wholesale business.
Sales generated from our wholesale business contributed $196.6 million or 46.7% of our total sales for the year ended December 31, 2015, a decrease of 8.8% compared with $215.5 million or 46.8% of our total sales for the year ended December 31, 2014. This decrease was primarily attributable to decreased sales in Germany, the United Kingdom, Europe and Japan partially offset by increased sales in PRC and the United States.
Sales generated from our retail business contributed $224.8 million or 53.3% of our total sales for the year ended December 31, 2015, a decrease of 8.1% compared with $244.7 million or 53.2% for the year ended December 31, 2014. This decrease was primarily due to decreased store numbers and same store sales. We had 1,159 retail stores as of December 31, 2015, compared with 1,201 retail stores at December 31, 2014.
Total retail store square footage and sales per square foot for the years ended December 31, 2015 and 2014 are as follows:
Same-store sales and newly opened store sales for the years ended December 31, 2015 and 2014 are as follows:
*Primarily consists of sales from stores that were closed in the current reporting period.
We remodeled or relocated 216 stores in 2015, and we plan to relocate or remodel an additional 150 to 200 stores in 2016. 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 2015. 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, manufacturing overheads including depreciation of production equipment and rent for retail stores, 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 years ended December 31, 2015 and 2014.
Our wholesale business raw material costs decreased by 14.9% to $85.3 million in 2015 from $100.2 million in 2014. As a percent of total wholesale sales, raw material costs accounted for 43.4% of our total wholesale sales in 2015, a decrease of 3.1% from 2014. The decrease was mainly due to the decreased raw materials prices.
Our wholesale business labor costs increased by 18.0% to $5.9 million in 2015 from $5.0 million in 2014. As a percent of total wholesale sales, labor costs accounted for 3.0% of our total wholesale sales in 2015, an increase of 0.7% from 2014. The increase was mainly due to increased average salaries of the employees in our own manufacturing factories.
Outsourced production costs for our wholesale business decreased by 4.3% to $70.0 million in 2015 from $73.2 million in 2014. As a percent of total wholesale sales, outsourced production costs were 35.6% of our total wholesale sales in 2015, an increase of 1.6% from 2014. This increase was primarily attributable to increased average salaries of the employees in our outsourced manufacturing factories.
Overhead and other expenses for our wholesale business stayed the same at 0.3% of our total wholesale sales in 2015 from 2014.
Gross profit in our wholesale business in 2015 was $34.9 million, a decrease of 4.7% from 2014. Gross margin was 17.7% in 2015, an increase of 70 basis points from 2014.
Our retail business production costs were $67.6 million in 2015 compared with $83.2 million in 2014. As a percent of total retail sales, retail production costs accounted for 30.1% of our total retail sales in 2015, compared with 34.0% of total retail sales in 2014. The decrease was due to better procurement cost control in 2015 compared with the prior year.
Rent costs for our retail business were $62.8 million in 2015 compared with $75.8 million in 2014. As a percent of total retail sales, rent costs accounted for 27.9% of our total retail sales in 2015, compared with 31.0% of total retail sales in 2014. The decrease is primarily attributable to negotiated reductions in the variable rent percentage at certain locations.
Gross profit in our retail business in 2015 was $94.4 million and gross margin was 42.0%. Gross profit in our retail business in 2014 was $85.6 million and gross margin was 35.0%.
Total cost of sales in 2015 was $292.1 million, compared with $337.9 million in 2014, a decrease of 13.6%. As a percentage of total sales, cost of sales decreased to 69.3% of total sales in 2014, compared with 73.4% of total sales in 2015. Consequently, gross margin increased to 30.7% in 2015 from 26.6% in 2014.
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, aggregate purchases from our five largest raw material suppliers represented approximately 13.5% and 15.0% of raw materials purchases in 2015 and 2014, respectively. No single supplier provided more than 10% of our raw materials purchases in 2015 and 2014. For our retail business, aggregate purchases from our five largest suppliers represented approximately 24.7% and 22.0% of raw materials purchases in 2015 and 2014, respectively. No single supplier provided more than 10% of our raw materials purchases in 2015 and 2014. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.
We also purchase finished goods from contract manufacturers. For our wholesale business, aggregate purchases from our five largest contract manufacturers represented approximately 48.1% and 40.3% of finished goods purchases in 2015 and 2014, respectively. One contract manufacturer provided approximately 24.5% and 16.9% of our finished goods purchases in 2015 and 2014, respectively. For our retail business, aggregate purchase from our five largest contract manufacturers represented approximately 14.6% and 16.7% of finished goods purchases in 2015 and 2014, respectively. No single contract manufacturer provided more than 10% of our finished goods purchases in 2015 and 2014. 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 expenses, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly our gross profit amounts may not be comparable to those of other companies who include these amounts in cost of sales.
Selling expenses were $76.5 million in 2015, an increase of 13.0% or $8.8 million from 2014. As a percent of total sales, selling expenses accounted for 18.2% of our total sales in 2015, an increase of 3.5% from 2014. The increase was attributable to the increased average salaries, as well as the increased store decoration and marketing expenses associated with the promotion of the retail brands.
General and administrative expenses were $36.0 million in 2015, an increase of $3.3 million from 2014. As a percent of sales, general and administrative expenses accounted for 8.5% of our total sales in 2015, an increase of 1.4% from 2014. The increase was attributable to an increase in the number of wholesale and retail management personnel, and the depreciation and amortization of the new logistics center. Research and development costs included in general and administrative expenses for the years ended December 31, 2015 and 2014 amounted to $2.2 million and $2.3 million, respectively.
Income from Operations
Income from operations decreased by 23.0% to $16.8 million in 2015 from $21.8 million in 2014. As a percent of total sales, income from operations accounted for 4.0% of our total sales in 2015, a decrease of 0.7% from 2014.
Interest Expense
Interest expense was $2.7 million in 2015, a decrease of 17.8% compared with the same period in 2014. The decrease was due to the decreased bank loans and interest rate.
Income Tax Expense
Income tax expense was $5.1 million and $5.5 million in 2015 and 2014, respectively.
Our PRC subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws. Each of our consolidated entities files its own separate income tax return.
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, 2017.
Perfect Dream Limited was incorporated in the British Virgin Islands on July 1, 2004, and has no income tax.
Ever-Glory International Group (HK) Ltd was incorporated in Samoa on September 15, 2009, and has no liabilities for income tax.
Ever-Glory International Group Inc. was incorporated in the United States and incurred net operating losses for income tax purposes through 2015. The net operating loss carry forwards for the United States income taxes may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2034. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for the United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.
Although the Company’s parent entity is a US entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.
The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million will be made by the Company prospectively over the next two to three years period. Approximately $1.8 million was paid as of December 31, 2015. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.
The PRC’s Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise in PRC to its immediate holding company outside China; such distributions were exempted under the previous income tax law and regulations. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. The foreign invested enterprise became subject to the withholding tax starting from January 1, 2008. Given that the undistributed profits of the Company's subsidiaries in China are intended to be retained in China for business development and expansion purposes, no withholding tax accrual has been made.
Net Income attributable to the Company
Net income attributable to the Company in 2015 was $13.6 million, a decrease of 17.1% from 2014. Our basic and diluted earnings per share were $0.92 and $1.11 for the years ended December 31, 2015 and 2014, respectively.
Summary of Cash Flows
Summary cash flows information for 2015 and 2014 is as follows:
Net cash provided by operating activities for the year ended December 31, 2015 was approximately $19.1 million compared with approximately $9.3 million during the year ended December 31, 2014. The increase was primarily due to the decrease in accounts receivable and the increase in accounts payable offsetting by the decrease in inventories.
Net cash used in investing activities was approximately $13.5 million for the year ended December 31, 2015, compared with approximately $10.6 million during the year ended December 31, 2014. The increase was mainly due to the purchase of land use right, completion of construction of a warehouse, and acquisition of Shanghai Yiduo.
Net cash used in financing activities was approximately $15.3 million for the year ended December 31, 2015, compared with approximately $7.9 million provided by financing activities during the year ended December 31, 2014. During the year ended December 31, 2015, we repaid $149.8 million of bank loans and received bank loan proceeds of $136.9 million. Also, under the counter-guarantee agreement, we advanced $4.9 million to the related party and received $2.4 million from the related party during the year ended December 31, 2015.
Liquidity and Capital Resources
As of December 31, 2015, we had cash and cash equivalents of approximately $22.7 million, total current assets of approximately $200.6 million and current liabilities of approximately $146.9 million. We presently finance our operations primarily from cash flows from our operations and borrowings from banks, and we anticipate that these will continue to be our primary source of funds to finance our short-term cash needs.
Bank Loans
In January 2014, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $9.2 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of December 31, 2015, Goldenway had borrowed $6.1 million (RMB40.0 million) under this line of credit with annual interest rates ranging from 4.5% - 5.5% and due on various dates from February to September 2016. As of December 31, 2015, approximately $3.1 million was unused and available under this line of credit.
In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.5 million (RMB120.0 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 the Company, Nanjing Knitting and the bank. As of December 31, 2015, Ever-Glory Apparel had borrowed $10.8 million (RMB 70.0 million) under this line of credit with annual interest rates ranging from 4.4% - 4.6% and due on various dates from April to June 2016. As of December 31, 2015, approximately $7.7 million was unused and available under this line of credit.
In June 2014, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.7 million (RMB50.0 million). These loans are guaranteed by Mr. Kang and 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, 2015, Goldenway had borrowed $4.6 million (RMB30.0 million) under this line of credit with annual interest rates ranging from 4.6% to 6.1% and due on various dates from January to June 2016. As of December 31, 2015, approximately $3.1 million was unused and available under this line of credit.
In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.2 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of December 31, 2015, Ever-Glory Apparel had borrowed $4.6 million (RMB30.0 million) from Nanjing Bank with an annual interest rate of 5.0% and due on various dates from April to May 2016. Ever-Glory Apparel had also borrowed $3.2 million from Nanjing Bank with an annual interest rate of 1.5% and due on various dates from February to March 2016, and collateralized by approximately $3.8 million of accounts receivable from our wholesale customers. As of December 31, 2015, approximately $1.4 million was unused and available under this line of credit.
In October 2015, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.1 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of December 31, 2015, LA GO GO had borrowed $1.6 million (RMB10.0 million) under this line of credit with an annual interest rate of 5.9% and due in January 2016. As of December 31, 2015, approximately $1.5 million (RMB10.0 million) was unused and available under this line of credit.
In January 2015, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $12.6 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of December 31, 2015, Ever-Glory Apparel had borrowed $3.1 million from HSBC with an annual interest rate of 4.6%, due in March 2016, and collateralized by approximately $3.6 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of December 31, 2015, approximately $9.4 million was unused and available under this line of credit.
In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.2 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, 2015, Ever-Glory Apparel had borrowed $3.1 million under this line of credit with annual interest rates ranging from 4.5% - 4.8% and due on various dates from January to March 2016, and collateralized by approximately $3.9 million of accounts receivable from wholesale customers. As of December 31, 2015, approximately $3.0 million was unused and available under this line of credit.
In June 2014, LA GO GO entered into a line of credit agreement for approximately $5.1 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of December 31, 2015, LA GO GO had borrowed $3.1 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 5.0% - 5.3% and due on various dates from August to November 2016. As of December 31, 2015, approximately $2.0 million was unused and available under this line of credit.
In December 2015, LA GO GO entered into a line of credit agreement for approximately $3.1 million (RMB20.0 million) with China Minsheng Banking and guaranteed by Ever-Glory Apparel and Mr. Kang. As of December 31, 2015, LA GO GO had borrowed $3.1 million (RMB20.0 million) from China Minsheng Banking with an annual interest rate of 4.6% and due in December 2016.
In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.2 million (RMB60.0 million) with Ping An Bank. As of December 31, 2015, Ever-Glory Apparel had borrowed $1.5 million from Ping An Bank, with an annual interest of 5.6% and due in August 2016, and collateralized by approximately $2.1 million of accounts receivable from our wholesale customers. As of December 31, 2015, approximately $7.7 million was unused and available under this line of credit.
In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.5 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of December 31, 2015, approximately $5.5 million was unused and available under this line of credit.
All bank loans are used to fund our daily operations. All loans have been repaid before or at maturity date.
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 twelve months will be primarily to fund daily operations and the growth of our business.
Sources of Liquidity
Our primary sources of liquidity for our short-term cash needs are expected to be from cash and cash equivalents currently on hand, cash flows generated from operations and borrowings from banks. 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 as well as borrowings from banks will be sufficient to meet our needs for working capital, capital expenditure and other commitments through the end of 2016. 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 cash flows generated from operations and borrowings from banks.
As of December 31, 2015, we had access to approximately $89.4 million in lines of credit, of which approximately $44.4 million was unused and available. These credit facilities do not include any covenants. We have agreed to provide Jiangsu Ever-Glory a counter-guarantee of not less than 70% of the maximum aggregate lines of credit and borrowings guaranteed by Jiangsu Ever-Glory and collateralized by the assets of Jiangsu Ever-Glory and its equity investee, Nanjing Knitting, under agreements executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting, and the banks. The maximum aggregate lines of credit and available borrowings was approximately $52.2 million (RMB 339.0 million) and approximately $18.8 (RMB 122.0 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of December 31, 2015.
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 of 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 8.26 RMB to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from 8.26 to 8.09 RMB to the dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of December 31, 2015, the market foreign exchange rate had increased to 6.49 RMB 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, Tianjin LA GO GO, Shanghai Yiduo 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 loss for the years ended December 31, 2015 and 2014 was approximately ($5.0) million and ($0.5) 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.
Item 7A. QUANTATITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2015
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Ever-Glory International Group, Inc.
We have audited the accompanying consolidated balance sheets of Ever-Glory International Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, equity and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of Ever-Glory International Group, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ever-Glory International Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
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 consolidated 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/ GHP Horwath, P.C.
Denver, Colorado
March 28, 2016
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, 2015 AND 2014
See the accompanying notes to the consolidated financial statements.
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, 2015 AND 2014
See the accompanying notes to the consolidated financial statements.
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, 2015 AND 2014
See the accompanying notes to the consolidated financial statements.
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, 2015 AND 2014
See the accompanying notes to the consolidated financial statements.
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 AND 2014
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, 2015:
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.
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.
Chuzhou Huirui 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.
The Company’s wholesale operations are provided primarily through the Company’s PRC subsidiaries, Goldenway, Catch-Luck, New Tailun, Ever-Glory Apparel, TaiXin, Huirui 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 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
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, 2015 and 2014 $2.18 million and $1.79 million of provision for doubtful accounts has been made in the consolidated financial statements respectively.
Inventories
Wholesale inventories are stated at lower of cost or market 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 market value, cost being determined on a specific identification method. The Company records an allowance 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:
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, 2015.
Financial Instruments
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.
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).
At December 31, 2015, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.
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. The Company does not hold or issue derivative instruments for trading purposes. Generally, the derivatives do not qualify for hedge accounting. Such derivatives generally consist of forward foreign exchange contracts, spot foreign exchange contracts or foreign exchange options to manage exposure to certain foreign currency operating transactions. 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.
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 which time title passes to the customer provided that there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable and collectability is deemed probable. The Company recognizes 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 upon delivery to the buyer for local sales and upon shipment of the products for export sales, provided that there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed and determinable and collectability is deemed probable. Retail product sales are recorded net of promotional discounts, rebates, and return allowances. Retail store sales are recognized at the time of register receipt. Retail online sales are recognized when the products are shipped and the customer receives the products because the Company retains a portion of the risk of loss on these sales during transit.
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 $0.2 million and $0.2 million in the years ended December 31, 2015 and 2014, 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, 2015 and 2014 amounted to $2.17 million and $2.26 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 $2.53 million and $1.28 million for the years ended December 31, 2015 and 2014, 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.
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, 2015 and 2014. 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 and Ever-Glory HK 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, 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 in the statement of equity and amounted to $3.25 million and $8.28 million as of December 31, 2015 and 2014, respectively. Assets and liabilities at December 31, 2015 and 2014 were translated at RMB6.49 and RMB6.15 to $1.00 respectively. The average translation rates applied to income statement accounts and statement of cash flows for the years ended December 31, 2015 and 2014 were RMB6.24 and RMB6.15 to $1.00, respectively. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the 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 to ($240,326) and $55,064 for the years ended December 31, 2015 and 2014, 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.
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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the measurement of certain inventories. Under the new guidance, inventories are required to be measured at the lower of cost and net realizable value, the latter representing the estimated selling price in the ordinary course of business, reduced by costs of completion, disposal, and transportation. Under current guidance, inventories are required to be measured at the lower of cost or market, but depending upon specific circumstances, market could refer to replacement cost, net realizable value, or net realizable value reduced by a normal profit margin. The guidance is to be applied prospectively, is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Management is currently assessing the potential impact of this ASU on its consolidated financial statements.
In September 2015, FASB issued ASU No. 2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company assessed that there is no significant impact to the consolidated financial statements on this update.
In November 2015, FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance becomes effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company applied this guidance to its current fiscal year ended December 31, 2015 and retroactively reclassified its balance sheet as of December 31, 2014. Adoption of this guidance had no material impact on the results of operations or financial position.
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 is currently assessing the impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09, Revenue from Contracts with Customers. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
NOTE 3 INVENTORIES
Inventories at December 31, 2015 and 2014 consisted of the following:
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, 2015 and 2014 consisted of the following:
Amortization expense was $0.12 million and $0.09 million for the years ended December 31, 2015 and 2014, respectively. Future expected amortization expense for land use rights is approximately $0.12 million for each of the next five years.
Acquisition of Shanghai Yiduo
On June 26, 2014, Shanghai LA GO GO entered into a contract with Shanghai Yiduo Fashion Company Limited (“Shanghai Yiduo”) to acquire 78% of the shares of Shanghai Yiduo for $0.75 million (RMB4.6 million). The last $0.08 million was paid by the Company to Shanghai Yiduo on March 27, 2015 when Shanghai Yiduo collected all the accounts receivable from Mecox Lane. The Company gained effective control of Shanghai Yiduo by the end of March 2015 and Shanghai Yiduo was consolidated on March 31, 2015. Management made a preliminary valuation of Shanghai Yiduo, including the value of the designer team and other marketing related intangibles and recorded $0.85 million as intangible assets in the consolidated balance sheet as of March 31, 2015. During the three months ended June 30, 2015, the Company made a $1.06 million (RMB6.5 million) capital contribution to Shanghai Yiduo as required by the acquisition agreement. As a result, the value of Shanghai Yiduo recorded as intangible assets, and the non-controlling interest increased by $0.23 million. Management believes that the acquisition will improve the Company’s design and product development ability.
NOTE 5 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2015 and 2014:
Depreciation expense was $8.37 million and $7.46 million for the years ended December 31, 2015 and 2014, respectively.
NOTE 6 OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities at December 31, 2015 and 2014 consisted of the following:
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, 2015 and 2014.
In January 2014, Goldenway entered into a line of credit agreement with Industrial and Commercial Bank of China, which allows the Company to borrow up to approximately $9.2 million (RMB60.0 million). These loans are collateralized by the Company’s property and equipment. As of December 31, 2015, Goldenway had borrowed $6.1 million (RMB40.0 million) under this line of credit with annual interest rates ranging from 4.5% - 5.5% and due on various dates from February to September 2016. As of December 31, 2015, approximately $3.1 million was unused and available under this line of credit.
In September 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $18.5 million (RMB120.0 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 the Company, Nanjing Knitting and the bank. As of December 31, 2015, Ever-Glory Apparel had borrowed $10.8 million (RMB 70.0 million) under this line of credit with annual interest rates ranging from 4.4% - 4.6% and due on various dates from April to June 2016. As of December 31, 2015, approximately $7.7 million was unused and available under this line of credit.
In June 2014, Goldenway entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.7 million (RMB50.0 million). These loans are guaranteed by Mr. Kang and 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, 2015, Goldenway had borrowed $4.6 million (RMB30.0 million) under this line of credit with annual interest rates ranging from 4.6% to 6.1% and due on various dates from January to June 2016. As of December 31, 2015, approximately $3.1 million was unused and available under this line of credit.
In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.2 million (RMB60.0 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory, Mr. Kang and Goldenway. As of December 31, 2015, Ever-Glory Apparel had borrowed $4.6 million (RMB30.0 million) from Nanjing Bank with an annual interest rate of 5.0% and due on various dates from April to May 2016. Ever-Glory Apparel had also borrowed $3.2 million from Nanjing Bank with an annual interest rate of 1.5% and due on various dates from February to March 2016, and collateralized by approximately $3.8 million of accounts receivable from our wholesale customers. As of December 31, 2015, approximately $1.4 million was unused and available under this line of credit.
In October 2015, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.1 million (RMB20.0 million). The line of credit is guaranteed by Mr. Kang and Goldenway. As of December 31, 2015, LA GO GO had borrowed $1.6 million (RMB10.0 million) under this line of credit with an annual interest rate of 5.9% and due in January 2016. As of December 31, 2015, approximately $1.5 million (RMB10.0 million) was unused and available under this line of credit.
In January 2015, Ever-Glory Apparel and Goldenway collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $12.6 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. As of December 31, 2015, Ever-Glory Apparel had borrowed $3.1 million from HSBC with an annual interest rate of 4.6%, due in March 2016, and collateralized by approximately $3.6 million of accounts receivable from our wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of December 31, 2015, approximately $9.4 million was unused and available under this line of credit.
In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $6.2 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, 2015, Ever-Glory Apparel had borrowed $3.1 million under this line of credit with annual interest rates ranging from 4.5% - 4.8% and due on various dates from January to March 2016, and collateralized by approximately $3.9 million of accounts receivable from wholesale customers. As of December 31, 2015, approximately $3.0 million was unused and available under this line of credit.
In June 2014, LA GO GO entered into a line of credit agreement for approximately $5.1 million (RMB33.0 million) with the Bank of Communications and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of December 31, 2015, LA GO GO had borrowed $3.1 million (RMB20.0 million) from the Bank of Communications with annual interest rates ranging from 5.0% - 5.3% and due on various dates from August to November 2016. As of December 31, 2015, approximately $2.0 million was unused and available under this line of credit.
In December 2015, LA GO GO entered into a line of credit agreement for approximately $3.1 million (RMB20.0 million) with China Minsheng Banking and guaranteed by Ever-Glory Apparel and Mr. Kang. As of December 31, 2015, LA GO GO had borrowed $3.1 million (RMB20.0 million) from China Minsheng Banking with an annual interest rate of 4.6% and due in December 2016.
In July 2015, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.2 million (RMB60.0 million) with Ping An Bank. As of December 31, 2015, Ever-Glory Apparel had borrowed $1.5 million from Ping An Bank, with an annual interest of 5.6% and due in August 2016, and collateralized by approximately $2.1 million of accounts receivable from our wholesale customers. As of December 31, 2015, approximately $7.7 million was unused and available under this line of credit.
In December 2014, LA GO GO entered into a line of credit agreement for approximately $5.5 million (RMB36.0 million) with the China Citic Bank and guaranteed by Jiangsu Ever-Glory, Ever-Glory Apparel and Mr. Kang. As of December 31, 2015, approximately $5.5 million was unused and available under this line of credit.
All loans have been repaid before or at maturity date.
Total interest expense on bank loans amounted to $2.6 million and $3.3 million for the year ended December 31, 2015 and 2014, respectively.
The annual average interest rate of bank loans was 5.00% and 5.76% for the year ended December 31, 2015 and 2014, respectively.
NOTE 8 DERIVATIVE LIABILITY
In October 2014, we entered into a forward foreign exchange option contract (sell EUR dollars for RMB), with a notional amount of EUR $60,000, that was settled in March 2015. The settlement amounts were not significant.
At December 31, 2015, the Company had four outstanding forward foreign exchange contracts (sell US dollars for RMB), with total notional amount of US$11.1 million. The fair value of this contract at December 31, 2015, as well as realized losses on this foreign currency derivative activity during 2015 was not significant.
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, 2017.
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.
Although the Company’s parent entity is a US entity, the Company’s primary operations are through subsidiaries located in China, certain apparel manufacturing is performed outside of China in Southeast Asia, and sales are made globally. Therefore, the Company uses significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which it operates. In the ordinary course of the Company’s business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with the Company’s subsidiaries, potential challenges to nexus, value added estimates, and similar matters. In September 2009, the Company formed its subsidiary, Ever-Glory HK, domiciled in Samoa, in order to engage in certain limited import and export of apparel, fabric and accessories, as well as to efficiently address currency exchange matters with international transactions. Over the past few years, the operational matters handled by this subsidiary have expanded with respect to sub-contracting of certain manufacturing work outside of China, as well as to other operational matters with non-PRC customers and vendors. Additionally, over this time period, tax guidance, rules and positions taken by the PRC with respect to transfer pricing issues have evolved, and in certain cases, become more standardized. As part of the Company’s on-going process of evaluating our tax positions, the Company considered various factors as they relate to its Samoan subsidiary and as related to intercompany transactions. This evaluation resulted in a change in the Company’s estimate of exposure to potential unfavorable outcomes related to these uncertainties, and the Company recorded a tax liability of approximately $3.2 million as of December 31, 2013 based on the probability for such outcomes.
The Company and the PRC Tax Bureau have agreed that payments on the tax liability $3.2 million will be made by the Company prospectively over the next two to three years period. Approximately $1.8 million was paid as of December 31, 2015. Beginning January 1, 2014, all net income generated from Ever-Glory HK has been reported as a taxable income at 25% tax rate in PRC.
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.
The pre-tax income for the year ended December 31, 2015 and 2014 was taxable in the following jurisdictions:
The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the years ended December 31, 2015 and 2014, respectively:
Income tax expense for the year ended December 31, 2015 and 2014 is as follows:
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 $78.4 million of its non-U.S. subsidiaries’ undistributed earnings because such amounts are intended to be reinvested outside the United States indefinitely. If these earnings were repatriated to the United States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted for foreign tax credits. Determination of the amount of any unrecognized deferred income tax liability on these earnings is not practicable.
NOTE 10 EARNINGS PER SHARE
Basic and diluted earnings per share for 2015 and 2014 were calculated as follows:
NOTE 11 STOCKHOLDERS’ EQUITY
Stock Issued to Independent Directors
On August 15, 2014, the Company issued an aggregate of 2,055 shares of its common stock to three of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2013. The shares were valued at $4.91 per share, which was the average market price of the common stock for the five days before the grant date.
On August 15, 2014, the Company issued an aggregate of 798 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 2014. The shares were valued at $6.22 per share, which was the average market price of the common stock for the five days before the grant date.
On July 29, 2015, the Company issued an aggregate of 854 shares of its common stock to three of the Company’s independent directors as compensation for their services in the third and fourth quarters of 2014. The shares were valued at $5.91 per share, which was the average market price of the common stock for the five days before the grant date.
On July 29, 2015, the Company issued an aggregate of 920 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 2015. The shares were valued at $5.39 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, 2015, New-Tailun and Catch-Luck had fulfilled the 50% statutory reserve contribution requirement; therefore no further transfers are required for those entities. In 2015, Goldenway appropriated $0.2 million, Ever-Glory Apparel appropriated $0.6 million, Shanghai La GO GO appropriated $0.4 million, Jiangsu La GO GO appropriated $0.8 million, Tianjin La GO GO appropriated $0.8 million and Huirui appropriated $0.8 million to the statutory reserve.
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-tem in nature and are expected to be settled in cash.
Other income from Related Parties
JiangsuWubijia 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 year ended December 31, 2014 and 2015, the Company received $54,682 and $32,760 from the customers and paid $49,223 and $31,778 to Wubijia through the consignment, respectively. The net profit of $5,459 and $982 was recorded as other income during the year ended December 31, 2014 and 2015, 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 year ended December 31, 2015, the Company received $123,402 from the customers and paid $97,323 to Nanjing Knitting through the consignment, respectively. The net profit of $26,079 was recorded as other income during the year ended December 31, 2015.
Included in other income for the year ended December 31, 2015 is rent revenue from entity controlled by Mr. Kang under operating lease agreement with term though 2016 as follows. There was no such income in 2014:
Other expenses due to Related Parties
Included in other expenses for the years ended December 31, 2015 and 2014 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows (See details at Note 13):
The Company leases Jiangsu Ever-Glory's factory as the factory is in a location where there is a good supply of experienced workers. 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 entered an agreement with Shanghai Weiwen Fashion Company Ltd. (Shanghai Weiwen) in April 2014 to purchase the “Velwin” brand along with existing inventory of Shanghai Weiwen. The Company purchased the inventory and brand for $2.5 million during the year 2014.
The Company entered an agreement with Shanghai Sea to Sky Fashion Company Ltd. (Shanghai Sea to Sky) in April 2014 to purchase the “Sea to Sky” brand along with existing inventory of Shanghai Sea to Sky. The Company purchased the inventory and brand for $0.6 million during the year 2014.
The Company purchased raw materials of $0.89 million and $1.90 million during the years ended 2015 and 2014, respectively, from Nanjing Knitting.
In addition, the Company sub-contracted certain manufacturing work to related companies totaling $21.43 million and $27.81 million for the years ended December 31, 2015 and 2014, 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, 2015 and 2014 are as follows:
Accounts Payable - Related Parties
The accounts payable to related parties at December 31, 2015 and 2014 are as follows:
Amounts Due From Related Parties - Current Assets
The amounts due from related parties at December 31, 2015 and 2014 are as follows:
The Company prepaid $106,387 and $14,909 to the sub-contractors, Nanjing Knitting and Ever-Glory Cambodia, respectively, for the next period’s subcontracting fees.
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 2015 and 2014, 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 $6.2 million and $2.1 million during 2015 and 2014, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $77,723 and $160,658 during 2015 and 2014, 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, 2015 and 2014, Jiangsu Ever-Glory had provided guarantees for approximately $52.2 million (RMB 339.0 million) (2015) and $40.6 million (RMB 250.0 million) (2014) of lines of credit obtained by the Company. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $22.8 million (RMB 148.0 million) (2015) and $22.1 million (RMB 136.0 million) (2014). Mr. Kang has also provided a personal guarantee for $39.9 million (RMB 259.0 million) (2015) and $35.4 million (RMB 218.0 million) (2014).
As of December 31, 2014, $17.4 million (RMB 107.0 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the year ended December 31, 2015, an additional $4.7 million (RMB 30.4 million) was provided to and repayment of $2.3 million (RMB 15.0 million) was received from Jiangsu Ever-Glory under the counter-guarantee agreement. As of December 31, 2015, the amount of the counter-guarantee had increased to $18.8 million (RMB 122.0 million) (the difference represents currency exchange adjustment of $0.9 million), which was 36.1% of the aggregate amount of lines of credit. This amount plus accrued interest of $3.0 million (2015) and $2.1 million (2014) have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. As of December 31, 2015 and 2014, the amount classified as a reduction of equity was $21.8 million and $19.4 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, 2015 and 2014 was approximately $0.9 million and $1.1 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 Jiangsu Ever-Glory since the inception of the Company. The leased factory is located in Nanjing Shangfang Town. The lease term is one year and can be renewed once a year. On January 1, 2016, the Company renewed the lease which expires on December 31, 2016, at an annual rental of $50,000 (RMB 0.3 million). For the years ended December 31, 2015 and 2014, the Company recognized rental expense in the amounts of approximately $50,334 and $51,088, respectively.
The Company has entered into the operating lease agreement with Chuzhou Huarui as La go go’s logistics warehouse in 2015. The leased warehouse is located in Chuzhou City in Anhui Province. The lease term is two years and which expires on December 31, 2016, at an annual rental of $240,450 (RMB 1.5 million). For the years ended December 31, 2015 and 2014, the Company recognized rental expense in the amounts of approximately $240,450 and $0, respectively.
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, 2016, the Company renewed the lease which expires on December 31, 2016, at an annual rental of $48,000 (RMB 0.3 million). For the years ended December 31, 2015 and 2014, the Company recognized rental expense in the amounts of approximately $47,907 and $45,979, 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 $16,000 (RMB 0.1 million) every five years. For the years ended December 31, 2015 and 2014, total rental expense was $0.5 million and $0.5 million, respectively.
The Company leases retail space, warehouses and office facilities under operating leases expiring on various dates through 2016. 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 rent liability in the consolidated balance sheets and the corresponding rent expense when management determines that achieving the specified levels during the fiscal year is probable. Total rent expense was $61.9 million and $75.8 million for the years ended December 31, 2015 and 2014, respectively. Future minimum lease payments for leases with initial or remaining noncancelable lease terms in excess of one year are as follows:
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 that no allowance for doubtful accounts is necessary at December 31, 2015 and 2014. 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 two wholesale customers that represented approximately 11.6% and 10.1% of the Company’s revenues, respectively for the year ended December 31, 2015 and had one customer that represented 11.7% of the Company’s revenues for the year ended December 31, 2014.
For the Company’s wholesale business during 2015 and 2014, no supplier represented more than 10% of the total raw materials purchased.
For the Company’s retail business, the Company had no supplier represented more than 10% of the total raw materials purchased during 2015 and 2014.
For the wholesale business, the Company relied on one manufacturer for 25% of total purchased finished goods during 2015. The Company relied on one manufacturer for 17% of total purchased finished goods during 2014.
For the retail business, the Company did not rely on any single manufacturer for more than 10% of total purchased finished goods during 2015 and 2014.
The Company’s revenues for the years ended December 31, 2015 and 2014 were earned in the following geographic areas:
Substantially all of the Company’s long-lived assets were attributable to the PRC as of December 31, 2015 and 2014.
NOTE 15 SEGMENTS
The Company reports financial and operating information in the following two segments:
(a) Wholesale segment
(b) Retail segment
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
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, 2015. 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 not operating effectively as of December 31, 2015. Our disclosure controls and procedures were not effective because of the “material weaknesses” described below under “Management’s Annual Report on Internal Controls Over Financial Reporting”.
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.
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, 2015. 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. Because of the material weaknesses described in the following paragraphs, management believes that, as of December 31, 2015, our internal control over financial reporting was not effective based on those criteria.
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 material weaknesses in our internal control over financial reporting process consisting of the following:
● The personnel primarily responsible for the preparation of our financial statements do not have requisite levels of knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements.
● No formal plan to provide applicable training for our financial and accounting staff to enhance our understanding of U.S. GAAP and internal control over financial reporting;
Remediation of Material Weaknesses
During the year ended December 31, 2015, we implemented the following measures to remediate the material weaknesses identified:
● We provided applicable training for our accounting and internal controls staff to enhance our understanding of U.S. GAAP and internal control over financial reporting;
● We engaged outside consultant in the review of our financial statements for year ended December 31, 2015 in February 2016;
Despite the above measures which were intended to address the identified material weaknesses as well as to enhance our overall internal control environment, management concluded that as of December 31, 2015, the material weaknesses identified above had not been fully remediated.
Management Plan to Remediate Material Weaknesses
We intend to continue implementing the following measures to remediate the material weaknesses identified:
● Further formalize and effectively execute a mandatory training plan for the staff of financial and accounting department and internal audit division;
● Expand the involvement of our external consultant to supervise and review our financial reporting process:
Changes in Internal Control Over Financial Reporting
Other than discribed above, during the fourth quarter of the fiscal year ended December 31, 2015, 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
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10.
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, 2015:
(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.
JiajunSun 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 Bachelors degree in Accounting from Hohai University in the PRC.
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).
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 employees and other polices, providing assistance and recommendations with respect to the compensation policies and practices of the Company.
Nominating and Corporate Governance Committee
Nominating and Corporate Governance Committee currently consists of Mr. Wang, Mr. Zhang and Ms. Tang. Mr. Wang serves as chairman of the Nominating and Corporate Governance Committee. The members of the Nominating and Corporate Governance Committee are currently “independent directors” as that term is defined in Rule 5005 of NASDAQ Listing Rules.
In accordance with the Nominating and Governance Committee’s Charter, the Nominating and Corporate Governance Committee is responsible to identity and propose new potential director nominees to the board of directors for consideration and review our corporate governance policies.
Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act, as amended, requires our directors and certain of our officers, as well as persons who own more than 10% of a registered class of our equity securities (“Reporting Persons”), to file reports with the SEC. To our knowledge, based solely on review of the copies of such reports furnished to us and written representations that no other reports were required, and all Section 16(a) filing requirements applicable to officers, directors and greater than ten percent shareholders were complied with during the fiscal year ended December 31, 2015.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to our officers, directors and employees, including our Chief Executive Officer, senior executive officers, principal accounting officer, controller and other senior financial officers. Our code of business conduct and ethics is available on our website at www.everglorygroup.com. A copy of our code of business conduct will be provided to any person without charge, upon written request sent to us at our offices located at 509 Chengxin Road, Jiangning Development Zone, Nanjing, Jiangsu Province, China, Attention “Shareholder Relations.”
Changes in Nominating Process
There are no material changes to the procedures by which security holders may recommend nominees to our Board.
Meetings of the Board of Directors and Annual Meeting Attendance
Our board of directors met telephonically once in 2015 and also acted by unanimous written consents. Each member of our board of directors was present at eighty-five (85%) percent or more of the board of directors meetings held.
The Company does not have a policy with respect to Board members' attendance at the annual meeting of stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This compensation discussion and analysis describes the material elements of the compensation awarded to our current executive officers. This compensation discussion focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. Our Board of Directors and the Compensation Committee, since its chartering, has overseen and administered our executive compensation program.
Our current executive compensation program presently includes a base salary. Our compensation program does not include (i) discretionary annual cash performance-based incentives, (ii) termination/severance and change of control payments, or (iii) perquisites and benefits.
Our Compensation Philosophy and Objectives
Our philosophy regarding compensation of our executive officers includes the following principles:
● our compensation program should align the interests of our management team with those of our shareholders;
● our compensation program should reward the achievement of our strategic initiatives and short- and long-term operating and financial goals;
● compensation should appropriately reflect differences in position and responsibility; compensation should be reasonable and bear some relationship with the compensation standards in the market in which our management team operates; and
● the compensation program should be understandable and transparent.
In order to implement such compensation principles, we have developed the following objectives for our executive compensation program:
● overall compensation levels must be sufficiently competitive to attract and retain talented leaders and motivate those leaders to achieve superior results;
● a portion of total compensation should be contingent on, and variable with, achievement of objective corporate performance goals, and that portion should increase as an executive’s position and responsibility increases;
● total compensation should be higher for individuals with greater responsibility and greater ability to influence our achievement of operating goals and strategic initiatives;
● the number of elements of our compensation program should be kept to a minimum, and those elements should be readily understandable by and easily communicated to executives, shareholders, and others; and
● executive compensation should be set at responsible levels to promote a sense of fairness and equity among all employees and appropriate stewardship of corporate resources among shareholders.
Determination of Compensation Awards
Our Board of Directors is provided with the primary authority to determine the compensation awards available to our executive officers. To aid the Board of Directors in making its determination for the last fiscal year, our current senior management provided recommendations to the Compensation Committee regarding the compensation of Chief Executive Officer and Chief Operating Officer.
Compensation Benchmarking and Peer Group
Our Board of Directors did not rely on any consultants or utilize any peer company comparisons or benchmarking in 2015 in setting executive compensation. However, our management has considered competitive market practices by reviewing publicly available information relating to compensation of executive officers at other comparable companies in the apparel industry in China in making its recommendations to our Board of Directors regarding our executives’ compensation for fiscal year 2015. As our company evolves, we expect to take steps, including the utilization of peer company comparisons and/or hiring of compensation consultants, to ensure that the Board has a comprehensive picture of the compensation paid to our executives and with a goal toward total direct compensation for our executives that are on a par with the median total direct compensation paid to executives in peer companies if annually established target levels of performance at the company and business segment level are achieved.
Elements of Compensation
Presently, we compensate our executives with a base salary and annual a cash performance-based bonus. We do not pay any compensation to our executive officers in the form of discretionary long-term incentive plan awards or perquisites and other compensation, although our Board of Directors may recommend and institute such forms of compensation in the future.
Base Salaries
Base salary is used to recognize the experience, skills, knowledge and responsibilities required of our employees, including our named executive officers. All of our named executive officers, including our Chief Executive Officer, are subject to employment agreements, and accordingly each of their compensation has been determined as set forth in their respective agreement. When establishing base salaries since 2009, subject to the provisions of each person's employment agreement, our Board and management considered a number of factors, including the seniority of the individual, the functional role of the position, the level of the individual's responsibility, the ability to replace the individual, the base salary of the individual at their prior employment and the number of well qualified candidates to assume the individual's role.
Long-Term Incentive Plan Awards
We currently have a 2014 equity incentive plan pursuant to which 1,500,000 shares were authorized. No stock awards or stock option grants were made to any of the named executive officers during the fiscal year ended December 31, 2015. No stock options were held by the named executive officers as of December 31, 2015.
Perquisites and Other Compensation
We do not have any retirement or pension plans in place for any of our named executives. Our named executive officers are eligible for group medical benefits that are generally available to and on the same terms as our other employees.
Management’s Role in the Compensation-Setting Process
Our management plays a role in our compensation-setting process. We believe this input from management to the Compensation Committee is needed in order for the committee to evaluate the performance of our officers, recommend business performance targets and objectives, and recommend compensation levels. Our management may from time to time, make recommendations to our Board of Directors regarding executive compensation. During this process, management may be asked to provide the board with their evaluation of the executive officers’ performances, the background information regarding our strategic financial and operational objectives, and compensation recommendations as to the executive officers.
Summary Compensation Table for Fiscal Year 2015, 2014 and 2013
The following table sets forth information for the fiscal year ended December 31, 2015, 2014 and 2013 concerning the compensation paid and awarded to all individuals serving as (a) our Chief Executive Officer and Chief Financial Officer (b) the three most highly compensated Executive Officers (other than our Chief Executive Officer and Chief Financial Officer) of ours and our subsidiaries at the end of our fiscal year ended December 31, 2015, 2014, and 2013 whose total compensation exceeded $100,000 for these periods, and (c) two additional individuals for whom disclosure would have been provided pursuant to (b) except that they were not serving as executive officers at the end of our fiscal year ended December 31, 2015. These individuals may be collectively referred to in this report as our “Named Executive Officers.”
(1) All compensation is paid in Chinese RMB. For reporting purposes, the amounts in the table above have been converted to U.S. Dollars at the conversion rate of 6.24, 6.15 and 6.20 for 2015, 2014 and 2013, respectively. The officers listed in this table received no other form of compensation in the years shown, other than the salary set forth in this table.
Other Compensation
Other than as described above, there were no post-employment compensation, pension or nonqualified deferred compensation benefits earned by the executive officers during the year ended December 31, 2015. We do not have any retirement, pension, or profit-sharing programs for the benefit of our directors, officers or other employees. The Board of Directors may recommend adoption of one or more such programs in the future.
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
The Company entered into an employment agreement with Edward Yihua Kang on November 1, 2005 pursuant to which Mr. Kang was appointed as the Chief Executive Officer and President of the Company. In determining the compensation to be paid to Mr. Kang, the Board of Directors and the Compensation Committee reviewed the overall performance of the Company and the relative contribution of Mr. Kang in order to arrive at an appropriate compensation level.
The Company entered into an employment agreement with Jiajun Sun on November 1, 2005 pursuant to which Mr. Sun was appointed as the Chief Operating Officer of the Company. In determining the compensation to be paid to Mr. Sun, the Board of Directors and the Compensation Committee reviewed the overall performance of the Company and the relative contribution of Mr. Sun in order to arrive at an appropriate compensation level.
Although the Company does not have a written employment agreement with Jiansong Wang, he will be compensated approximately US$27,000 (RMB 170,000 ) per year for his services as the Chief Financial Officer and Secretary, which was based on the Board of Directors and the Compensation Committee’s review of the overall performance of the Company and the relative contribution of Mr.Wang.
There are no compensatory plans or arrangements, including payments to be received from us, with respect to any director or executive officer of us which would in any way result in payments to any such person because of his resignation, retirement, or other termination of employment with us, any change in control of the Company, or a change in the person’s responsibilities following a change in control of the Company.
Director Compensation for Fiscal 2015
The following table reflects all compensation awarded to, earned by or paid to our directors for the fiscal year ended December 31, 2015. Directors who are also officers do not receive any additional compensation for their services as directors.
(1) All cash compensation was paid in RMB except the cash compensation paid to Ms. Tang. The amounts in the foregoing table have been converted into U.S. Dollar at the conversion rate of 6.24RMB to the dollar.
Each director may be appointed to perform multiple functions or serve on multiple committees, and accordingly, may be eligible to receive more than one category of compensation described above. Annual compensation will be paid in cash or a combination of stock and cash. Compensation paid in stock will be in the form of a number of shares of our restricted common stock having an aggregate value equal to the annual compensation, as determined by the average per share closing prices of our common stock as quoted on NASDAQ MKT, for the five trading days leading up to and including the last trading date of the quarter following which the shares are to be issued (i.e. when the shares are issued within 30 days following the end of the second quarter, and the fourth quarter when the shares are issued within 30 days following the end of the fourth quarter) of the year for which compensation is being paid. Compensation, in the form of shares, shall be issued and paid semi-annually, within 30 days following the end of the second quarter, and within 30 days after the end of the fourth quarter, of each calendar year. In addition, the annual compensation will be prorated daily (based on a 360 day year) for any portion of the year during which a director serves. Independent directors are also eligible for reimbursement of all travel and other reasonable expenses relating to the directors’ attendance of board meetings. In addition, we have agreed to reimburse independent directors for reasonable expenses incurred in connection with the performance of duties as a director of the Company.
Outstanding Equity Awards at Fiscal Year-End
None of our executive officers was granted or otherwise received any option, stock or equity incentive plan awards during 2015 and there were no outstanding unexercised options previously awarded to our officers and directors, at the fiscal year end, December 31, 2015.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of our common stock as of March 18, 2016, for each of the following persons:
● each of our directors and each of the named executive officers in the “Management” section of this Annual Report;
● all directors and named executive officers as a group; and
● each person who is known by us to own beneficially five percent or more of our common stock.
Beneficial ownership is determined in accordance with the rules of the SEC. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the shareholder’s name. Unless otherwise indicated, the address of each beneficial owner listed below is c/o Ever-Glory International Group, Inc. The percentage of class beneficially owned set forth below is based on 14,785,868 shares of our common stock outstanding on March 19, 2016.
* less than 1%
(1)
The percentage of shares beneficially owned is based on 14,785,868 shares of common stock outstanding as of March 18, 2016. Except as otherwise noted, shares are owned beneficially and of record, and such record shareholder has sole voting, investment and dispositive power of the shares.
(2) Huake Kang is the sole director and majority shareholder of Ever-Glory Enterprises (H.K.) Ltd. and, as such, may be deemed to be the beneficial owner of the 5,623,098 shares held by Ever-Glory Enterprises (H.K.) Ltd. Huake Kang is the son of Yi Hua Kang.
Equity Compensation Plan Information
See Part II, Item 5, under the heading, “Securities Authorized for Issuance under Equity Compensation Plans” for information on compensation plans under which our equity securities are authorized for issuance.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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-tem in nature and are expected to be settled in cash.
Other income from Related Parties
JiangsuWubijia Trading Company Limited (“Wubijia”) is an entity engaged in high-grade home goods sales and is controlled by Mr. Kang. JiangsuWubijia has sold their home goods on consignment in some Company’s retail stores since the third quarter of 2014. During the year ended December 31, 2014 and 2015, the Company received $54,682 and $32,760 from the customers and paid $49,223 and $31,778 to Wubijia through the consignment, respectively. The net profit of $5,459 and $982 was recorded as other income during the year ended December 31, 2014 and 2015, 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 year ended December 31, 2015, the Company received $123,402 from the customers and paid $97,323 to Nanjing Knitting through the consignment, respectively. The net profit of $26,079 was recorded as other income during the year ended December 31, 2015.
Included in other income for the year ended December 31, 2015 is rent revenue from entity controlled by Mr.Kang under operating lease agreement with term though 2016 as follows:
Other expenses due to Related Parties
Included in other expenses for the years ended December 31, 2015 and 2014 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows (See details at Note 13):
The Company leases Jiangsu Ever-Glory's factory as the factory is in a location where there is a good supply of experienced workers. 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 entered an agreement with Shanghai Weiwen Fashion Company Ltd. (Shanghai Weiwen) in April 2014 to purchase the “Velwin” brand along with existing inventory of Shanghai Weiwen. The Company purchased the inventory and brand for $2.5 million during the year 2014.
The Company entered an agreement with Shanghai Sea to Sky Fashion Company Ltd. (Shanghai Sea to Sky) in April 2014 to purchase the “Sea to Sky” brand along with existing inventory of Shanghai Sea to Sky. The Company purchased the inventory and brand for $0.6 million during the year 2014.
The Company purchased raw materials of $0.89 million and $1.90 million during the years ended 2015 and 2014, respectively, from Nanjing Knitting.
In addition, the Company sub-contracted certain manufacturing work to related companies totaling $21.43 million and $27.81 million for the years ended December 31, 2015 and 2014, 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, 2015 and 2014 are as follows:
Accounts Payable - Related Parties
The accounts payable to related parties at December 31, 2015 and 2014 are as follows:
Amounts Due From Related Parties - Current Assets
The amounts due from related parties at December 31, 2015 and 2014 are as follows:
The Company prepaid $106,387 and $14,909 to the sub-contractors, Nanjing Knitting and Ever-Glory Cambodia, respectively, for the next period’s subcontracting fees.
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 2015 and 2014, 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 $6.2 million and $2.1 million during 2015 and 2014, respectively. Jiangsu Ever-Glory purchased raw materials on the Company’s behalf and sold to the Company at cost for $77,723 and $160,658 during 2015 and 2014, 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, 2015 and 2014, Jiangsu Ever-Glory had provided guarantees for approximately $52.2 million (RMB 339.0 million) (2015) and $40.6 million (RMB 250.0 million) (2014) of lines of credit obtained by the Company. Jiangsu Ever-Glory and Nanjing Knitting have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately $22.8 million (RMB 148.0 million) (2015) and $22.1 million (RMB 136.0 million) (2014). Mr. Kang has also provided a personal guarantee for $39.9 million (RMB 259.0 million) (2015) and $35.4 million (RMB 218.0 million) (2014).
As of December 31, 2014, $17.4 million (RMB 107.0 million) was outstanding due from Jiangsu Ever-Glory under the counter guarantee agreement. During the year ended December 31, 2015, an additional $4.7 million (RMB 30.4 million) was provided to and repayment of $2.3 million (RMB 15.0 million) was received from Jiangsu Ever-Glory under the counter-guarantee agreement. As of December 31, 2015, the amount of the counter-guarantee had increased to $18.8 million (RMB 122.0 million) (the difference represents currency exchange adjustment of $0.9 million), which was 36.1% of the aggregate amount of lines of credit. This amount plus accrued interest of $3.0 million (2015) and $2.1 million (2014) have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. As of December 31, 2015 and 2014, the amount classified as a reduction of equity was $21.8 million and $19.4 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, 2015 and 2014 was approximately $0.9 million and $1.1 million, respectively.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On December 2015 the Audit Committee engaged GHP Horwath P.C. as our independent auditor.
Fees for audit services include fees associated with the annual audit and the review of documents filed with the SEC including quarterly reports on Form 10-Q and the Annual Report on Form 10-K.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE
(1) Financial Statements
The consolidated financial statements of Ever-Glory International Group, Inc. are included in Part II, Item 8 of this Report.
(2) Financial Statement Schedules
Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.
(3) Exhibits
*Filed herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 2016.
Ever-Glory International Group, Inc.,
By /s/ Edward Yihua Kang
Edward Yihua Kang,
Chief Executive Officer, President and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Jia Jun Sun
Chief Operating Officer and Director
March 28, 2016
Jia Jun Sun
/s/ Jiansong Wang
Chief Financial Officer
March 28, 2016
Jiansong Wang
(Principal Financial and Accounting Officer)
/s/ Jianhua Wang
Director
March 28, 2016
Jianhua Wang
/s/ Zhixue Zhang
Director
March 28, 2016
Zhixue Zhang
/s/ Merry Tang
Director
March 28, 2016
Merry Tang