EVER-GLORY INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida		65-0420146
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if smaller reporting company)	Smaller Reporting company x

PART I

Item 1. BUSINESS

Overview and Corporate History

Ever-Glory International Group, Inc., sometimes referred to in this report as “ Ever-Glory ”, the “ Company ,”  “ we ”, or “ us ”, through its subsidiaries, is an apparel supply chain management provider, manufacturer, distributor and retailer based in the People’s Republic of China, with customers in China, the United States, Europe and Japan.  Our business is focused on middle to high-end casual wear, outerwear and sportswear brands for men, women and children.  As a holding company, we oversee the operations of our subsidiaries and provide our subsidiaries with resources and services in financial, legal, administrative and other areas. 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, we 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 in La Chapelle with a cash payment of RMB 10 million (approximately USD$1.35 million). The business objective of the joint venture is 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, Golden Way 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 12.36 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 during 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 coordinating 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.

 

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As a result of the foregoing acquisitions and transactions, we presently own and operate seven subsidiaries in China (including Hong Kong) as of the date of this annual report. Our corporate structure is illustrated below.

 

 

Business Operations

Our wholesale operations include manufacturing and worldwide sale of apparel to well-known casual wear, sportswear and outerwear brands and retailers in major markets. We manufacture our apparel products in two manufacturing facilities owned by Catch-Luck and New-Tailun, which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town, respectively, in Nanjing, China. We conduct our original design manufacturing (“ ODM ”) operations through three wholly-owned subsidiaries in China: Goldenway, New-Tailun, and Catch-Luck. In our fiscal year ended December 31, 2012, our wholesale segment achieved total sales of  $171.0 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 annual output from our manufacturing facilities and outsourced partners is more than 17.8 million pieces in 2012. See Production and Quality Control below.

 

Our retail operation is conducted by our subsidiary, LA GO GO, whose business objective is to establish and create a leading brand of women’s wear and to build a nationwide retail distribution channel in China. LA GO GO had approximately 3,750 employees as of December 31, 2012. As of December 31, 2012, we operated 727  retail stores in China and had total sales of $108.6 million.

Wholesale Segment

Products

We manufacture a broad array of products in various categories for the women’s, men’s and children’s 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 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 ordinarily supply our customers’ through purchase orders and we have no long-term supply contracts with any of them.

 

 

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In the fiscal year ended December 31, 2012, approximately 63.9% of our sales revenue came from customers in China, 7.7% of our sales revenue came from customers in Germany, 13.6% of our sales revenue came from customers in United Kingdom and other European countries, 6.5% from customers in the United States, and 8.3% from customers in Japan. In 2012, two customers represented more than ten percent of our total wholesale sales (approximately 11.1% and 10.8% of total sales). Also, in 2012, sales to our five largest customers generated approximately 44.9% of our total wholesale sales.

Substantially all of our long-lived assets were attributable to the PRC as of December 31, 2012 and 2011.

 

  Suppliers

We purchase the majority of our raw materials (including fabric, fasteners, thread, buttons, labels and related materials) directly from numerous local fabric and accessories suppliers in China. For our wholesale business, collectively, purchases from our five largest suppliers represented approximately 16.4% and 15.8% of total raw material purchases in 2012 and 2011, 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 36.9% and 40.0% of total finished goods purchases in 2012 and 2011, respectively.  One contract manufacturer provided approximately 13.9% and 13.0% of our total finished goods purchases in 2012 and 2011, respectively. 

For our wholesale business, we generally agree to pay our suppliers within 30-90 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 work directly with our customers and arrange 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 the strongest brands within the strongest markets. We seek to attract customers mainly from Europe, the U.S., Japan, and China. In addition, we look for customers with strong brand appeal 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 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 2012, we manufactured approximately 20% of the products we sell to wholesale customers 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, 2012, our total production capacity, including outsourced production, reached 17.8 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 a higher 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.

 

 

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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 for producing high quality products efficiently and at competitive prices, with excellent customer service. We believe we provide one-stop-service and more valuable products for our customers.

Currently, we have several competitors in China including small to large sized companies 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 rivals 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 the rapid feedback we receive from our customers in the supply chain and using 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 2012, 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 results of operations. 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, 2012, LA GO GO had 727 retail stores in China to sell its 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 2012, we achieved total net sales of approximately US $108.6 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 Zhengshou 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 30.7% of total purchases in 2012. No single supplier provided more than 10% of our total purchases in 2012. We have not experienced difficulty in obtaining raw materials essential to our business.

We also purchase finished goods from contract manufacturers. For our retail business, collectively, our five largest contract manufacturers represented approximately 15.2% of total finished goods purchases in 2012. There was one contract manufacturer which provided more than 10% of our total finished goods purchases in 2012. We have not experienced difficulty in obtaining finished products from our contract manufacturers.

 

 

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

Customers

LA GO GO seeks to appeal to fashionable urban females between the ages of 20 to 30.  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. LA GO GO releases 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 trend in Europe, Japan and Asia. Our design team produces approximately 1,700 designs each year. LA GO GO 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 fair; our chief designer then decides the design 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 center for sale.

 

Sales and Marketing

Our LA GO GO products are sold in flagship stores, and stores-within-a-store.  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 2012, the return and exchange rate was very low and was not a material factor in our operations.

  

Store Operation

As of December 31, 2012, we had 727 stores, including 35 flagship stores, with each store generating average revenue of approximately $ 12,400 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, 2012, we are not aware of any valid claim or challenges to our right to use our registered trademark nor 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 “Parkson Retail Management Systems”, a comprehensive and mature retail management application in China, to monitor and manage the merchandise planning, inventory and sales information.

Our Growth Strategy

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

Supply chain management:

 

	●	Expand the global sourcing network
	●	Invest in 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 increase in the export markets while shifting focus to higher margin wholesale markets such as mainland China.

 

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Retail business development:

	●	Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;
	●	Expand the LA GO GO retail network throughout China
	●	Improve the LA GO GO retail stores’ efficiency and increase same-store sales
	●	Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities
	●	Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.

Employees

As of December 31, 2012, we had over 5,100 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, 2012, 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 2012, we operated three facilities on certain land in the Nanjing Jiangning Economic and Technological Development Zone and in Shangfang Town, which are located in Nanjing, 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.  In 2012, Goldenway’s income tax rate was 25%.

New-Tailun and Catch-Luck were incorporated in the PRC and are subject to PRC income tax laws and regulations. According to the relevant laws and regulations in the PRC, enterprises with foreign investment in the PRC are entitled to full exemption from income tax for two years beginning from the first year the enterprises become profitable and have accumulated profits and a 50% income tax reduction for the subsequent three years. New-Tailun and Catch-Luck were approved as wholly foreign-owned enterprises in 2006 and are entitled to the income tax exemptions in 2006 and 2007. In 2007, no income tax was recorded by New-Tailun and Catch-Luck as these entities were entitled to full exemption from income tax. Starting from 2008 and through 2010, New-Tailun and Catch-Luck were entitled to a 50% reduction of the income tax rate of 25%. Therefore these two subsidiaries were taxed at 12.5% for 2009, 2010. In 2011, New-Tailun and Catch-Luck were subject to PRC income tax at 25%.

 

 

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

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

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. 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.

 

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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, 2012 and 2011, 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 manufacturers for 13.9 and 13.0% of purchased finished goods in 2012 and 2011, 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 2012 and 2011. 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, 2012, our five largest customers represented approximately 44.9 % of our total net sales. For the year ended December 31, 2011, our top five largest customers represented approximately 52% 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.

 

 

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We may be unable to expand our LA GO GO 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 maybe 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.

We had certain transactions with Jiangsu Ever-Glory International Enterprise Group Company (“Jiangsu Ever-Glory”), an entity majority owned and controlled by Mr. Kang. Jiangsu Ever-Glory is engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other businesses We utilized Jiangsu Ever-Glory as our agent to agent to assist with our import and export transactions and our international transportation projects. Import transactions primarily consist of purchases of raw materials and accessories designated by the Company’s customers for use in garment manufacture. Export transactions consist of our sales to markets outside of China. In return for these services, Jiangsu Ever-Glory charged us a fee of approximately 3% of export sales manufactured in China and 1% of export sales manufactured overseas. For import transactions, we may make advance payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu Ever-Glory may make advance payments on our behalf. For export transactions, accounts receivable for export sales are remitted by our customers through Jiangsu Ever-Glory, who forwards the payments to us. We and Jiangsu Ever-Glory have agreed that balances from import and export transactions may be offset. Amounts due to (from) Jiangsu Ever-Glory are typically settled within 60-90 days. Accounts receivable for the years ended December 31, 2012 and 2011 was $214,226 and $19,999,373 respectively. Accounts payable for the years ended December 31, 2012 and 2011 was $ 53,680 and $2,399,226 respectively.  We charge an interest of 0.5% (an annual interest of 6%) on net amounts due at each month end. Interest income for the years ended December 31, 2012 and 2011 was $1,261,903 and $635,479, respectively.

As of December 31, 2012, Jiangsu Ever-Glory has provided guarantees for approximately US$ 44.48 million (RMB 281 million) of lines of credit obtained by us. Jiangsu Ever-Glory and its non-controlling subsidiary have also provided their assets as collaterals for some of these lines of credits. The value of the collaterals, as per appraisals obtained by the banks in connection with these lines of credits is approximately US$20.90 million (RMB 132 million). In consideration of the guarantees and collaterals provided by Jiangsu Ever-Glory, we 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 us. 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. The oral agreements between us and Jiangsu Ever-Glory was later documented in a written Counter-Guarantee Agreement dated April 15, 2013 which is filed as an exhibit to this annual report. During the year ended December 31, 2012, US$32.13 million (RMB 203 million), which is out of the bank borrowing we obtained during that period, was provided to Jiangsu Ever-Glory under the counter guarantee, all of which was outstanding at December 31, 2012. Through March 31, 2013, approximately $4.75 million (RMB 30 million) was provided under the counter guarantee and approximately $15.67 million (RMB99 million) was returned and therefore, as of March 31, 2013, approximately $ 21.21 million (RMB 134 million) was outstanding.

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 oral agreement to repay certain portion of the fund by the end of second quarter of 2013, 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 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 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.

 

 

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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 LA GO GO brand, our retail sales are likely to decline.

 

We intend to vigorously protect our registered trademark against infringement, but we may be unable to do so. The unauthorized reproduction or other misappropriation of our trademark would diminish the value of our brand, 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 LA GO GO brand. Our brand could be adversely affected if we fail to maintain and promote the LA GO GO brand 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;

 

 

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	●	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.

 

 

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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, 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.

 

 

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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 can not 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 know 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.

 

 

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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 around 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 effect 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.

 

 

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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, 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, 2012 has been US$1.2 and US$2.22 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 NYSE MKT , 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, 2012, we concluded that our internal control over financial reporting was not effective as of December 31, 2012 based on our assessment.  For more information, please refer to Item 9A.  Controls and Procedure s.  Our staff 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.

 

Due to our failure to timely identify certain related party transactions, which management believe concluded as one of the material weaknesses in our internal control over financing reporting, we may have made errors in the preparation of certain of our historical financial statements.

 

Because of the material weaknesses in our internal control over financial reporting and the ineffectiveness of our disclosure controls and procedures, we failed to timely identify report and document certain related party transaction, including the counter guarantee transaction we had with Jiangsu Ever-Glory as discussed above.  As a result, an evaluation of previous financial statements is being completed which will likely result in restatements of our financial statements for the periods ended March 31, 2012, June 30, 2012 and September 30, 2012. The market price of our common stock may decline because of these restatements, investor perceptions of the Company may suffer, and this could cause a further decline in the market price of our stock. If we are unable to remediate the material weaknesses in our internal control effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent registered public accounting firm.

 

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

 

The US Financial Industry Regulatory Authority (“ FINRA ”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

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.

 

 

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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 includes 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.

 

 

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Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Wholesale segment

In 2012, 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 450 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$49,674 per annum under a one year leasing arrangement that expired on December 31, 2012. 

 

(iii) Catch-Luck. Our Catch-Luck facilities include 6,635 square meters of office and production space. Approximately 397 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 2008 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 are 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 LA GO GO operation.

 

In November 2011, LA GO GO entered into certain lease agreement with Shahe Village 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. LA GO GO will conduct appropriate renovation and construction and use the facilities as its headquarters.

 

Item 3. LEGAL PROCEEDINGS

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

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

 

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHSES 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”. As of December 31, 2012, there were approximately 64 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 NYSE MKT. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

NYSE MKT

 

		Bid Price
PERIOD		HIGH				LOW
FISCAL YEAR 2012:
Fourth Quarter ended December 31, 2012		$	2.20			$	1.20
Third Quarter ended September 30, 2012		$	1.63			$	1.34
Second Quarter ended June 30, 2012		$	2.06			$	1.51
First Quarter ended March 31, 2012		$	2.00			$	1.40
FISCAL YEAR 2011
Fourth Quarter ended December 31, 2011		$	2.00			$	1.30
Third Quarter ended September 30, 2011		$	2.21			$	1.58
Second Quarter ended June 30, 2011		$	2.23			$	1.79
First Quarter ended March 31, 2011		$	2.56			$	1.80

 

On March 23, 2013, the closing sale price of our common stock on the NYSE MKT was $2.06  per share.

Dividend Policy

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

 

Item 6. SELECTED FINANCIAL DATA

 

Not applicable

 

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, 2012 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 NYSE MKT (previously NYSE MKT) under the symbol of “EVK”.

 

 

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We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to famous 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 grade casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC.

 

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 low season. 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. 

 

Wholesale Business

 

We conduct our original design manufacturing (“ODM”) operations through five 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, 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”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”). One wholly-owned subsidiary is located in Samoa: 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”), a wholly-owned subsidiary of Ever-Glory Apparel. 

 

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:

 

	o	Expand our global sourcing network
	o	Expand our overseas low-cost manufacturing base (outside of mainland China);
	o	Focus on high value-added products and continue our strategy to produce mid to high end apparel
	o	Continue to emphasize product design and technology utilization.
	o	Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network; and
	o	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 a leading brand of women’s apparel and to build a nationwide retail network in China. As of December 31, 2012, we had 727 stores (including store-in-stores) which included 313 stores were opened and 53 stores were closed in 2012. We expect to open an additional 150-200 stores in 2013. We believe that our growth opportunities and continued investment initiatives include:

 

	o	Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;
	o	Expand the LA GO GO retail network throughout China;
	o	Improve the LA GO GO retail stores’ efficiency and increase same-store sales
	o	Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities
	o	Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.

 

 

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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 120 days following 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 at the same time as 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 a slowdown in the United States and Europe economies 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 2013.

 

In addition, economic conditions in the United States and in foreign markets in which we operate could substantially affect our sales and profitability and our 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 at the time of register receipt.

 

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 2012 and 2011 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.

 

 

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Recently Issued Accounting Pronouncements

 

The Company reviews new accounting standards and as issued. Although some of the accounting standards issued are effective after the end of the Company’s previous fiscal years, and therefore may be applicable to the Company. Management has not identified any standards that it believes will have a significant impact on the Company’s consolidated financial statements. 

Results of Operations

 

The following table summarizes our results of operations for the years ended December 31, 2012 and 2011. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.

   

		Year Ended December 31
		2012								2011
		(in U.S. Dollars, except for percentages)
Sales		$	279,633,212				100.0	%		$	215,779,014				100.0	%
Gross Profit			65,055,935				23.3				44,544,115				20.6
Operating Expenses			49,972,035				17.9				32,490,543				15.1
Income From Operations			15,083,900				5.4				12,053,572				5.6
Other Expenses (Income)			373,347				0.1				366,323				0.2
Income Tax Expense			1,907,611				0.7				2,040,246				0.9
Net Income		$	12,802,942				4.6	%		$	9,647,003				4.5	%

 

Revenue

 

The following table sets forth a breakdown of our total sales, by region, for the years ended December 31, 2012 and 2011.

		2012				% of total sales				2011				% of total sales				Growth in 2012 compared with 2011
Wholesale business
The People’s Republic of China		$	70,161,563				25.1	%		$	61,908,224				28.7	%			13.3	%
Germany			21,627,788				7.7				31,232,561				14.5				(30.8	)
United Kingdom			22,885,131				8.2				14,042,858				6.5				63.0
Europe-Other			15,154,483				5.4				13,119,058				6.1				15.5
Japan			23,082,506				8.3				20,245,785				9.4				14.0
United States			18,129,628				6.5				21,687,984				10.1				(16.4	)
Total Wholesale business			171,041,099				61.2				162,236,470				75.2				5.4
Retail business			108,592,113				38.8				53,542,544				24.8				102.8
Total sales		$	279,633,212				100.0	%		$	215,779,014				100.0	%			29.6	%

 

Total sales for the year ended December 31, 2012 were $279.6 million, an increase of 29.6% from the year ended December 31, 2011. This increase was primarily attributable to a 1 03% increase in sales in our retail business as well as a 5% increase in as our wholesale business.

 

Sales generated from our wholesale business contributed $171.0 million or 61.2% of our total sales for the year ended December 31, 2012, an increase of 5.4% compared to $162.2 million or 75.2% of our total sales for the year ended December 31, 2011. This increase was primarily attributable to increased sales in the PRC, the United Kingdom and Japan partially offset for decreased sales in Germany and the United States.

 

Sales generated from our retail business contributed $108.6 million or 38.8% of our total sales for the year ended December 31, 2012, an increase of 102.8% compared to $53.5 million or 24.8% for the year ended December 31, 2011. This increase was primarily due to the increase in new stores opened and same store sales. We had 727 LA GO GO stores as of December 31, 2012, compared to 467 LA GO GO stores at December 31, 2011. In 2012 we opened 313 new LA GO GO stores.

Total retail store square footage and sales per square foot for the years ended December 31, 2012 and 2011 are as follows:

 

		2012				2011
Total store square footage			649,432				414,671
Number of stores			727				467
Average store size, square feet			893				888
Total store sales		$	108,592,113			$	53,542,544
Sales per square foot		$	167			$	129

 

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Same store sales and newly opened store sales for the years ended December 31, 2012 and 2011 are as follows:

 

		2012				2011
Sales from stores open a full year		$	82,563,140			$	39,803,116
Newly opened store sales		$	23,128,624			$	11,706,234
Other*		$	2,900,349			$	2,033,194
Total		$	108,592,113			$	53,542,544

 

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

We remodeled or relocated 119 stores in 2012, and we plan to relocate or remodel 200 stores in 2013. 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 2013.  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, 2012 and 2011.

 

		For the Year Ended December 31,																Growth (Decrease) in 2012
		2012								2011								compared
		(in U.S. dollars, except for percentages)																with 2011
Wholesale Sales		$	171,041,099				100.0	%		$	162,236,470				100.0	%			5.4	%
Raw Materials			80,411,746				47.0				79,383,219				48.9				1.3
Labor			4,454,096				2.6				4,030,556				2.5				10.5
Outsourced Production Costs			56,252,762				32.9				51,995,950				32.0				8.2
Other and Overhead			568,201				0.3				551,686				0.3				3.0
Total Cost of Sales for Wholesale			141,686,805				82.8				135,961,411				83.8				4.2
Gross Profit for Wholesale			29,354,294				17.2				26,275,059				16.2				11.7
Net Sales for Retail			108,592,113				100.0				53,542,544				100.0				102.8
Production Costs			33,885,305				31.2				16,794,347				31.4				101.8
Rent			39,005,167				35.9				18,479,141				34.5				111.1
Total Cost of Sales for Retail			72,890,472				67.1				35,273,488				65.9				106.6
Gross Profit for Retail			35,701,641				32.9				18,269,056				34.1				95.4
Total Cost of Sales			214,577,277				76.7				171,234,899				79.4				25.3
Gross Profit		$	65,055,935				23.3	%		$	44,544,115				20.6	%			46.0	%

 

Our wholesale business raw material costs increased 1.3% to $80.4 million in 2012 from $79.4 million in 2011. As a percent of sales, raw material costs accounted for 47.0% of our total sales in 2012, a decrease of 1.9% compared to 2011. The decrease was mainly due to decreased raw materials prices.

 

Our wholesale business labor costs increased 10.5% to $4.5 million in 2012 from $4.0 million in 2011. As a percent of sales, labor costs accounted for2.6% of our total sales in 2012, an increase of 0.1% compared to 2011. The increase was mainly due to the increased average salaries of employees.

 

Outsourced production costs for our wholesale business increased 8.2% to $56.3 million in 2012 from $52.0 million in 2011. As a percent of sales, outsourced production costs were 32.9% of our total sales in 2012, an increase of 0.9% compared to 2011. The increase was mainly due to more orders and the limited production capacity this year in China.

 

Overhead and other expenses for our wholesale business accounted for 0.3% of our total sales in 2012 and 2011, respectively.

 

Gross profit in our wholesale business in 2012 was $29.4 million, an increase of 11.7% compared to 2011. Gross margin was 17.2% in 2012, an increase of 1.0% compared to 2011.

 

 

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Our retail business production costs were $33.9 million in 2012 as compared to $16.8 million in 2011. As a percent of sales, retail production costs accounted for 31.2% of our total sales in 2012, compared to 31.4% of total sales in 2011.

 

Rent costs for our retail business were $39.0 million in 2012 compared to $18.5 million in 2011. As a percent of sales, rent costs accounted for 35.9% of our total retail sales in 2012, compared to 34.5% of total retail sales in 2011. Total rent costs increased as a result of the increase in the number of our stores. The increase in rent costs as a percentage of total retail sales was due to the increase in the number of new stores opened in the year of 2012; there were 313 and 210 new stores opened in the year of 2012 and 2011, respectively.

 

Gross profit in our retail business in 2012 was $35.7 million and gross margin was 32.9%. Gross profit in our retail business in 2011 was $18.3 million and gross margin was 34.1%.

 

Total cost of sales in 2012 was $214.6 million, compared to $171.2 million in 2011, an increase of 25.3%. As a percentage of total sales, cost of sales decreased to 76.7% of total sales in 2012, compared to 79.4% of total sales in 2011. Consequently, gross margin increased to 23.3% in 2012 from 20.6% in 2011.

 

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. Some of our customers also furnish us with raw materials so that we can manufacture their products. For our wholesale business, purchases from our five largest suppliers represented approximately 16.4% and 15.8% of raw materials purchases in 2012 and 2011, respectively. No single supplier provided more than 10% of our raw materials purchases in 2012 and 2011. For our retail business, purchases from our five largest suppliers represented approximately 30.7% and 27.1% of raw materials purchases in 2012 and 2011, respectively. No single supplier provided more than 10% of our total purchases in 2012 and 2011. 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, purchases from our five largest contract manufacturers represented approximately 36.9% and 40.1% of finished goods purchases in 2012 and 2011, respectively. One contract manufacturer provided approximately 13.9% and 12.7% of our finished goods purchases in 2012 and 2011, respectively. For our retail business, our five largest contract manufacturers represented approximately 15.2% and 24.6% of finished goods purchases in 2012 and 2011, respectively. No single contract manufacturer provided more than 10% of our finished goods purchases in 2012 and 2011. 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.

 

		For the Years Ended December 31,
		2012								2011								Increase
		(in U.S. Dollars, except for percentages)
Gross Profit		$	65,055,935				23.3	%		$	44,544,115				20.6	%			46.0	%
Operating Expenses
Selling Expenses			33,723,088				12.1				18,145,937				8.4				85.8
General and Administrative Expenses			16,248,947				5.8				14,344,606				6.6				13.3
Total Operating Expenses			49,972,035				17.9				32,490,543				15.1				53.8
Income from Operations		$	15,083,900				5.4	%		$	12,053,572				5.6	%			25.1	%

  

Selling expenses were $33.7 million in 2012, an increase of 85.8% or $15.6 million compared to 2011. As a percent of sales, Selling expense accounted for 12.1% of our total sales in 2012, an increase of 3.7% compared to 2011. The increase was attributable to the increased number of stores, leading to increased numbers of retail employees and increased average salaries, as well as the increased store decoration and marketing expenses associated with the promotion of the LA GO GO brand.

 

 

23

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General and administrative expenses were $16.2 million in 2012, an increase of $1.9 million compared to 2011. As a percent of sales, general and administrative expenses accounted for 5.8% of our total sales in 2012, a decrease of 0.8% compared to 2011. The general and administrative expenses increase was attributable to an increase in payroll for additional management, and design and marketing staff as a result of our business expansion. The decrease in general and administrative expenses as a percentage of total sales was due to an increase in our sales.

 

Income from Operations

 

Income from operations increased by 25.1% to $15.1 million in 2012 from $12.1 million in 2011. As a percent of sales, income from operations accounted for 5.4% of our total sales in 2012, a decrease of 0.2% compared to 2011.

 

Interest Expense

 

Interest expense was $2.1 million in 2012, an increase of 45.4% compared to the same period in 2011. The increase was due to the increased bank loans as a result of our business expansion.

 

Change in fair value of derivative liability

 

Change in fair value of derivative liability was the gain of $0.1 million and $0.2 million based on the Binnomial Lattice model for 2012 and 2011, respectively.

 

Income Tax Expense

 

Income tax expense was $1.9 and $2.0 million in 2012 and 2011, 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 are subject to the 25% income tax rate.

 

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 has incurred net operating losses for income tax purposes through 2011. The net operating loss carry forwards for United States income taxes may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses is uncertain due to our limited operating history and continuing losses for United States income tax purposes. Accordingly, we provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero.

 

Net Income

 

Net income in 2012 was $12.8million, an increase of 32.7% compared to 2011. Our diluted earnings per share were $0.87 and $0.65 for the years ended December 31, 2012 and 2011, respectively.

  

Summary of Cash Flows

 

Summary cash flows information for 2012 and 2011 is as follows:

 

		2012				2011
Net cash provided by (used in) operating activities		$	20,354,509			$	(425,868	)
Net cash used in investing activities		$	(7,649,346	)		$	(3,892,831	)
Net cash used in (provided by) financing activities		$	(12,290,020	)		$	9,177,986

Net cash provided by operating activities for the year ended December 31, 2012 was approximately $20.3 million compared with approximately $0.4 million used in operations during the year ended December 31, 2011. This increase was mainly due to decreased amounts due from related parties.

 

Net cash used in investing activities was approximately $7.6 million for the year ended December 31, 2012, compared with approximately $3.9 million during the year ended December 31, 2011. The increase was mainly due to increased equipment purchases.

 

Net cash used in financing activities was approximately $12.3 million for the year ended December 31, 2012, compared with approximately $9.2 million provided by financing activities during the year ended December 31, 2011. The decrease was primarily due to advances to a related party.

 

 

24

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Liquidity and Capital Resources

 

As of December 31, 2012, we had cash and cash equivalents of approximately $9.4 million, total current assets of approximately $132.3 million and current liabilities of approximately $121.2 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.

 

Payable to officers and employees

 

The Company established a plan in September 2012.  Under this plan, eligible employees may make loans to the Company and earn interest equal to prevailing China bank loan interest rates, normally two to four times rates on savings accounts.  The maximum loan amount cannot exceed RMB 500,000, RMB 300,000 and RMB 200,000 made by mid-level or above managers, supervisors or employees who have worked in the Company for more than 5 years, and other eligible employees, respectively. The loans can be made only in the period from September 1, 2012 to December 31, 2012.  In order to be eligible for this plan, employees must have worked for the Company for at least three years.  The annual interest rate on the loans varies in line with changes in China bank loan interest rates.  During 2012, the loan interest rate was 6.0% and the loans are payable on demand.   The total loans payable as of December 31, 2012 to the officers and employees are listed below:

 

Payable to officers:		$	72,818
Payable to employees:			2,268,756
Total:		$	2,341,574

 

Bank Loans

 

On August 2, 2010, Goldenway entered into a two-year revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.91 million (RMB50 million). The term of the agreement has been extended until August 2, 2013. These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of December 31, 2012, Goldenway had borrowed $6.33 million under this line of credit from Nanjing Bank with an annual interest rate of 5.88% from January 2013 to November 2013. As of December 31, 2012, approximately $1.57 million was unused and available under this line of credit. Approximately $4.75 million was repaid in January and February 2013.

 

On May 11, 2012, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $9.50 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory. As of December 31, 2012, Ever-Glory Apparel had borrowed $3.17 million in liquidity loans from Nanjing Bank with annual interest rates ranging from 6.3% to 6.89% and due on various dates from May 2013 to July 2013, and borrowed $4.87 million with an annual interest rates from 3.32% to 3.8%, due on various dates from January 2013 to March 2013, and collateralized by approximately $6.09 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At December 31, 2012, approximately $1.46 million was unused and available under this line of credit. Approximately $3.41 million was repaid in January and February 2013.

 

On April 10, 2012, LA GO GO entered into a one-year  line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.17 million (RMB20 million). These loans are guaranteed by Jiangsu Ever-Glory and  Mr. Kang. As of December 31, 2012, LA GO GO had borrowed $2.37 million (RMB15.0 million) from Nanjing Bank with an annual interest rate ranging from 6.29% to 7.55% and due on various dates from April 2013 to September 2013. At December 31, 2012, approximately $0.79 million was unused and available under this line of credit.

 

On January 4, 2011, Goldenway entered into a one-year line of credit agreement for approximately $6.33 million (RMB40 million) with Shanghai Pudong Development Bank. In January 2012, the term of the agreement was extended until January 4, 2013. As of December 31, 2012, Goldenway had borrowed the maximum amount available under the line of $6.33 million (RMB40 million), with an annual interest rate of 7.56%. These loans are collateralized by certain properties and land use rights of Goldenway, and are due in November 2013.

 

As of December 31, 2012, Ever-Glory Apparel had borrowed $0.68 million from Shanghai Pudong Development Bank with an annual interest rate of 5.88%, and due on March 2013. The loan is guaranteed by Goldenway, and collateralized by approximately $0.9 million of accounts receivable from wholesale customers.

As of December 31, 2012, Ever-Glory Apparel had borrowed $5.06 million (RMB32.0 million) from the Bank of Communications with an annual interest rate of 7.08%, and due in February 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang.  This loan is also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank.  In addition, Ever-Glory Apparel had borrowed $0.31 million from the Bank of Communications with an annual interest rate of 4.86%, due on January 2013, and collateralized by approximately $0.4 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. Approximately $5.37 million was repaid in January and February 2013.

 

As of December 31, 2012, LA GO GO had borrowed $1.58 million (RMB10.0 million) from the Bank of Communications with an annual interest rate from 6.06% to 6.37% and due on various dates from June to July 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.

  

On August 21, 2012, Ever-Glory Apparel entered into a one-year line of credit agreement for approximately $13.14 million (RMB83 million) with Everbright Bank guaranteed by Jiangsu Ever-Glory and Mr. Kang.  The line of credit is also collateralized by assets of Jiangsu Ever-Glory under a collateral agreement executed between the Company, Jiangsu Ever-Glory and the bank.   As of December 31, 2012, Ever-Glory Apparel had borrowed $3.16 million (RMB20.0 million) from Everbright Bank, with an annual interest rate of 5.8% and due in September 2013. At December 31, 2012, approximately $9.98 million was unused and available under this line of credit.

 

On July 29, 2011, Ever-Glory Apparel and Perfect Dream 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 $7.0 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. The agreement has been extended until July 29, 2013. As of December 31, 2012, Ever-Glory Apparel had borrowed $5.41 million from HSBC with an annual interest rate of 5.6%, due on various dates from January to March 2013, and collateralized by approximately $7.1 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of December 31, 2012, approximately $1.59 million was unused and available. Approximately $4.6 million was repaid in January and February 2013.

 

 

25

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On November 16, 2012, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $4.12 million (RMB26 million) with the Bank of China guaranteed by Jiangsu Ever-Glory and Mr. Kang.  The line of credit is also collateralized by assets of Jiangsu Ever-Glory under a collateral agreement executed between the Company, Jiangsu Ever-Glory and the bank.  As of December 31, 2012, Ever-Glory Apparel had borrowed $3.39 million from the Bank of China with an annual interest rate of 6.05%, and due on various dates from March to May 2013, and collateralized by approximately $7.6 million of accounts receivable from wholesale customers.  As of December 31, 2012, approximately $0.73 million was unused and available.

As of December 31, 2012, Ever-Glory Apparel had borrowed $4.24 million from China Minsheng Banking, with annual interest rates ranging from 2.61% to 3.04% due on various dates from February to May 2013. This loan is guaranteed by Goldenway. Approximately $0.5 million was repaid in February 2013.

All bank loans are used to fund our daily operations.

 

Loans from related party

 

As of March 31, 2011 the Company owed $0.9 million to Blue Power Holdings Limited, a company controlled by the Company’s Chief Executive Officer. Interest was charged at 6% per annum on the amounts due. The loans were paid in full in April 2011. For the three months ended March 31, 2011, the Company incurred interest expense of $909.

 

Capital Commitments

 

We have a continuing program for the purpose of improving our manufacturing facilities and extending our LA GO GO 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 through the end of 2012 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 2013. 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, 2012, we had access to approximately $50.8 million in lines of credit, of which approximately $14.5 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 $44.48 million (RMB 281 million) and approximately $32.13 (RMB 203 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of December 31, 2012.

 

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, 2012, the market foreign exchange rate had increased to 6.32 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 and 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 exchange differences are recorded within equity. The foreign currency translation gain for the years ended December 31, 2012 and 2011 was approximately $0.4 million and $1.3 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 QUANTATITIVE AND QUALITATIVE DISCLSOURE ABOUT MARKET RISK

Not applicable.

 

 

26

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS

 

As of December 31, 2012

 

CONTENTS

 

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

 

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, 2012 and 2011, 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, 2012.  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, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012 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 13 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

April 16, 2013

 

 

F-1

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND 2011

 

ASSETS
		2012				2011
CURRENT ASSETS
Cash and cash equivalents		$	9,365,958			$	8,822,581
Accounts receivable			68,513,893				50,634,388
Inventories			46,038,456				36,874,804
Value added tax receivable			2,866,018				1,908,436
Other receivables and prepaid expenses			1,910,383				1,122,570
Advances on inventory purchases			3,596,860				2,177,544
Amounts due from related party			8,680				17,623,712
Total Current Assets			132,300,248				119,164,035
LAND USE RIGHT, NET			2,801,472				2,845,552
PROPERTY AND EQUIPMENT, NET			16,068,735				13,210,628
TOTAL ASSETS		$	151,170,455			$	135,220,215
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans		$	46,919,680			$	29,185,381
Payable to officers and employees			2,341,574				-
Accounts payable			49,700,392				41,436,689
Accounts payable and other payables - related parties			3,158,814				2,759,003
Other payables and accrued liabilities			10,547,190				5,996,434
Value added and other taxes payable			4,189,211				2,299,027
Income tax payable			952,652				368,714
Deferred tax liabilities			3,109,095				2,460,377
Derivative liability			294,000				-
Total Current Liabilities			121,212,608				84,505,625
LONG-TERM LIABILITIES
Derivative liability			-				390,800
Total Long-term Liabilities			-				390,800
TOTAL LIABILITIES			121,212,608				84,896,425
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock ($.001 par value, authorized 5,000,000 shares,
no shares issued and outstanding)			-				-
Common stock ($.001 par value, authorized 50,000,000 shares,
14,772,270 and 14,750,873 shares issued and outstanding
as of December 30, 2012 and December 31, 2011, respectively)			14,772				14,761
Additional paid-in capital			3,552,166				3,532,369
Retained earnings			46,774,001				34,976,853
Statutory reserve			6,317,715				5,311,921
Accumulated other comprehensive income			6,873,170				6,487,886
Amounts due from related party			(33,573,977	)			-
Total Stockholders' Equity			29,957,847				50,323,790
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	151,170,455			$	135,220,215
See the accompanying notes to the consolidated financial statements.

 

 

F-2

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

		2012				2011
SALES		$	279,633,212			$	215,779,014
COST OF SALES			214,577,277				171,234,899
GROSS PROFIT			65,055,935				44,544,115
OPERATING EXPENSES
Selling expenses			33,723,088				18,145,937
General and administrative expenses			16,248,947				14,344,606
Total operating expenses			49,972,035				32,490,543
INCOME FROM OPERATIONS			15,083,900				12,053,572
OTHER INCOME (EXPENSE)
Interest income			1,348,646				703,039
Interest expense			( 2,103,103	)			(1,446,192	)
Change in fair value of derivative liability			96,800				216,000
Other income			284,310				160,830
Total other income(expense)			(373,347	)			(366,323	)
INCOME BEFORE INCOME TAX EXPENSE			14,710,553				11,687,249
INCOME TAX EXPENSE			(1,907,611	)			(2,040,246	)
NET INCOME			12,802,942				9,647,003
Foreign currency translation gain			385,284				1,327,093
COMPREHENSIVE INCOME		$	13,188,226			$	10,974,096
EARNINGS PER SHARE:
Basic and diluted		$	0.87			$	0.65
Weighted average number of shares outstanding
Basic and diluted			14,767,253				14,757,319

 

See the accompanying notes to the consolidated financial statements.

 

 

F-3

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	12,802,942			$	9,647,003
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization			4,961,510				3,776,545
Provision for obsolete inventories			3,143,544				273,428
Change in fair value of derivative liability			(96,800	)			(216,000	)
Deferred income tax			629,526				1,332,624
Interest on loans from related party			-				909
Stock-based compensation			19,809				19,999
Changes in operating assets and liabilities
Accounts receivable			(17,532,398	)			(12,982,656	)
Inventories			(12,043,857	)			(8,704,293	)
Value added tax receivable			(942,408	)			(88,749	)
Other receivables and prepaid expenses			(622,788	)			(26,379	)
Advances on inventory purchases			(1,557,755	)			(14,682	)
Amounts due from related parties			16,305,342				(6,725,157	)
Accounts payable			8,003,110				8,779,612
Accounts payable and other payables- related parties			415,867				813,218
Other payables and accrued liabilities			4,386,302				2,445,334
Value added and other taxes payable			1,901,804				1,195,275
Income tax payable			580,759				48,101
Net cash provided by (used in) operating activities			20,354,509				(425,868	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment			(7,649,346	)			(3,892,831	)
Net cash used in investing activities			(7,649,346	)			(3,892,831	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans			78,588,792				65,322,164
Repayment of bank loans			(61,088,486	)			(55,143,458	)
Proceeds from payable to officers and employees			2,340,094				-
Repayment of loans from related party			-				(1,000,720	)
Advances to related party			(32,130,420	)			-
Net cash provided by financing activities			(12,290,020	)			9,177,986
EFFECT OF EXCHANGE RATE CHANGES ON CASH			128,234				271,641
NET INCREASE IN CASH AND CASH EQUIVALENTS			543,377				5,130,928
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			8,822,581				3,691,653
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	9,365,958			$	8,822,581
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	2,103,103			$	1,445,212
Income taxes		$	876,293			$	701,251

 

See the accompanying notes to the consolidated financial statements.

 

 

F-4

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

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

										Additional				Retained Earnings								Accumulated other				Amounts due
		Common Stock								paid-in								Statutory				comprehensive				from
		Shares				Amount				capital				Unrestricted				reserve				income				related party				Total
Balance at January 1, 2011			14,750,783			$	14,751			$	3,512,380			$	26,419,672			$	4,222,098			$	5,160,793							$	39,329,694
Stock issued for compensation			10,090				10				19,989																				19,999
Net income															9,647,004																9,647,004
Transfer to reserve															(1,089,823	)			1,089,823												-
Foreign currency translation gain																							1,327,093								1,327,093
Balance at December 31, 2011			14,760,873			$	14,761			$	3,532,369			$	34,976,853			$	5,311,921			$	6,487,886							$	50,323,790
Stock issued for compensation			11,397				11				19,797																				19,808
Net income															12,802,942																12,802,942
Transfer to reserve															(1,005,794	)			1,005,794												-
Amounts due from related party																											(33,573,977	)			(33,573,977	)
Foreign currency translation gain																							385,284								385,284
Balance at December 31, 2012			14,772,270			$	14,772			$	3,552,166			$	46,774,001			$	6,317,715			$	6,873,170			$	(33,573,977	)		$	29,957,847

 

See the accompanying notes to the consolidated financial statements.

 

 

F-5

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EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012 AND 2011

 

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, 2012.

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 (“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.

The Company’s wholesale operations are provided primarily through the Company’s PRC subsidiaries, Goldenway, Catch-Luck, New Tailun, Ever-Glory Apparel, TaiXin and the Company’s Samoa subsidiary, Ever-Glory HK. The Company’s retail operations are provided through its subsidiary, La Go Go.

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.

 

 

F-6

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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, 2012 and 2011, the Company considers all its accounts receivable to be collectable and no provision for doubtful accounts has been made in the consolidated financial statements.

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 obsolete materials and finished goods aged more than one year.

 

Property and Equipment

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

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

 

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

 

Land Use Rights

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

Long-Lived Assets

Long-lived assets, property, equipment and land use rights held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. There were no impairments of long-lived assets as of December 31, 2012.

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).

 

 

F-7

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At December 31, 2012, 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.

 

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 sales are recognized at the time of register receipt.

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

Local transportation charges and production inspection charges are included in selling expenses and totaled $164,873 and $101,463 in the years ended December 31, 2012 and 2011, 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, 2012 and 2011 amounted to $1,109,143 and $462,446, respectively.

 

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, 2012 and 2011. The Company’s effective tax rate differs from the federal 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. The Company is not subject to U.S. federal tax examinations for years before 2007.

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, LA GO GO 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 $6,873,170 and $6,487,886 as of December 31, 2012 and 2011, respectively. Assets and liabilities at December 31, 2012 and 2011 were translated at RMB6.32 and RMB6.37 to $1.00 respectively. The average translation rates applied to income statement accounts and statement of cash flows for the years ended December 31, 2012 and 2011 were RMB6.32 and RMB6.47 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.

 

 

F-8

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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 $(134,272) and $(96,496) for the years ended December 31, 2012 and 2011, respectively.

 

Earnings Per Share

The Company reports earnings per share in accordance 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 Accounting Pronouncements

 

The Company reviews new accounting standards and as issued. Although some of the accounting standards issued are effective after the end of the Company’s previous fiscal years, and therefore may be applicable to the Company. Management has not identified any standards that it believes will have a significant impact on the Company’s consolidated financial statements.

NOTE 3

INVENTORIES

Inventories at December 31, 2012 and 2011 consisted of the following:

 

		December 31, 2012				December 31, 2011
Raw materials		$	5,687,612			$	5,606,073
Work-in-progress			7,296,733				7,919,403
Finished goods			36,770,852				23,916,206
			49,755,197				37,441,682
Less: allowance for obsolete inventories			(3,716,741	)			(566,878	)
Total inventories		$	46,038,456			$	36,874,804

 

 

F-9

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NOTE 4

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.

Land use rights at December 31, 2012 and 2011 consisted of the following:

		2012				2011
Land use rights		$	3,163,861			$	3,163,861
Less: accumulated amortization			(362,389	)			(318,309	)
Land use rights, net		$	2,801,472			$	2,845,552

Amortization expense was $71,183 and $69,275 for the years ended December 31, 2012 and 2011, respectively. Future expected amortization expense for land use rights is approximately $72,000 for each of the next five years.

 

NOTE 5

PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at December 31, 2012 and 2011:

 

		2012				2011
Property and plant		$	24,783,378			$	18,742,014
Equipment and machinery			3,691,593				3,883,441
Office equipment and furniture			1,216,415				917,702
Motor vehicles			535,671				499,702
			30,227,057				24,042,859
Less: accumulated depreciation			14,158,322				10,832,231
Property and equipment, net		$	16,068,735			$	13,210,628

Depreciation expense was $4,895,736 and $3,707,270 for the years ended December 31, 2012 and 2011, respectively.

 

NOTE 6

PAYABLE TO OFFICERS AND EMPLOYEES

        

The Company established a plan in September 2012.  Under this plan, eligible employees may make loans to the Company and earn interest equal to prevailing China bank loan interest rates, normally two to four times rates on savings accounts.  The maximum loan amount cannot exceed RMB 500,000, RMB 300,000 and RMB 200,000 made by mid-level or above managers, supervisors or employees who have worked in the Company for more than 5 years, and other eligible employees, respectively. The loans can be made only in the period from September 1, 2012 to December 31, 2012.  In order to be eligible for this plan, employees must have worked for the Company for at least three years.  The annual interest rate varies in line with changes in China bank loan interest rates.  During 2012, the loan interest rate was 6.0% and the loans are payable on demand.   The total loans payable as of December 31, 2012 to officers and employees are listed below:

 

Payable to officers:		$	72,818
Payable to employees:			2,268,756
Total:		$	2,341,574

 

NOTE 7

OTHER PAYABLES AND ACCRUED LIABILITIES

 

Other payables and accrued liabilities at December 31, 2012 and 2011 consisted of the following:

		2012				2011
Building construction costs payable		$	-			$	410,542
Accrued professional fees			41,497				121,844
Accrued wages and welfare			4,279,561				3,289,674
Other payables			6,226,132				2,174,374
Total other payables and accrued liabilities		$	10,547,190			$	5,996,434

NOTE 8

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, 2012 and 2011.

Bank		December 31, 2012				December 31, 2011
Nanjing Bank		$	16,743,277			$	11,731,223
Shanghai Pudong Development Bank			7,014,833				8,966,382
Bank of Communications			6,953,834				2,660,562
HSBC			5,414,316				532,944
Everbright Bank			3,166,000				-
China Minsheng Banking			4,239,800				-
Bank of China			3,387,620				-
Industrial and Commercial Bank of China			-				5,294,270
		$	46,919,680			$	29,185,381

 

 

F-10

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On August 2, 2010, Goldenway entered into a two-year revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.91 million (RMB50 million). The agreement has been extended until August 2, 2013. These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of December 31, 2012, Goldenway had borrowed $6.33 million under this line of credit from Nanjing Bank with an annual interest rate of 5.88% from January 2013 to November 2013. At December 31, 2012, approximately $1.57 million was unused and available under this line of credit. Approximately $4.75 million was repaid in January and February 2013.

 

On May 11, 2012, 2010, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $9.50 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory. As of December 31, 2012, Ever-Glory Apparel had borrowed $3.17 million in liquidity loans  from Nanjing Bank with an annual interest rate from 6.3% to 6.89% and due on various dates from May 2013 to July 2013, and borrowed $4.87 million with annual interest rates ranging from 3.32% to 3.8%, due on various dates from January 2013 to March 2013, and collateralized by approximately $6.09 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At December 31, 2012, approximately $1.46 million was unused and available under this line of credit. Approximately $3.41 million was repaid in January and February 2013.

 

On April 10, 2012, LA GO GO entered into a one-year  line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.17 million (RMB20 million). These loans are guaranteed by Jiangsu Ever-Glory and  Mr. Kang. As of December 31, 2012, LA GO GO had borrowed $2.37 million (RMB15.0 million) from Nanjing Bank with annual interest rates ranging from 6.29% to 7.55% and due on various dates from April 2013 to September 2013. At December 31, 2012, approximately $0.79 million was unused and available under this line of credit.

 

On January 4, 2011, Goldenway entered into a one-year line of credit agreement for approximately $6.33 million (RMB40 million) with Shanghai Pudong Development Bank. In January 2012, the term of the agreement was extended until January 4, 2013. As of December 31, 2012, Goldenway had borrowed the maximum amount available under the line of $6.33 million (RMB40 million), with an annual interest rate of 7.56%. These loans are collateralized by certain properties and land use rights of Goldenway, and are due in November 2013.

 

As of December 31, 2012, Ever-Glory Apparel had borrowed $0.68 million from Shanghai Pudong Development Bank with an annual interest rate of 5.88%, and due on March 2013. The loan is guaranteed by Goldenway, and collateralized by approximately $0.9 million of accounts receivable from wholesale customers.

As of December 31, 2012, Ever-Glory Apparel had borrowed $5.06 million (RMB32.0 million) from the Bank of Communications with an annual interest rate of 7.08%, and due in February 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang.  This loan is also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank (Note 13).  In addition, Ever-Glory Apparel had borrowed $0.31 million from the Bank of Communications with an annual interest rate of 4.86%, due on January 2013, and collateralized by approximately $0.4 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. Approximately $5.37 million was repaid in January and February 2013.

 

As of December 31, 2012, LA GO GO had borrowed $1.58 million (RMB10.0 million) from the Bank of Communications with annual interest rates ranging from 6.06% to 6.37% and due on various dates from June to July 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.

  

On August 21, 2012, Ever-Glory Apparel entered into a one-year line of credit agreement for approximately $13.14 million (RMB83 million) with Everbright Bank guaranteed by Jiangsu Ever-Glory and Mr. Kang.  The line of credit is also collateralized by assets of Jiangsu Ever-Glory under a collateral agreement executed between the Company,  Jiangsu Ever-Glory and the bank.  As of December 31, 2012, Ever-Glory Apparel had borrowed $3.16 million (RMB20.0 million) from Everbright Bank, with an annual interest rate of 5.8% and due in September 2013. At December 31, 2012, approximately $9.98 million was unused and available under this line of credit.

 

On July 29, 2011, Ever-Glory Apparel and Perfect Dream 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 $7.0 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. The agreement has been extended until July 29, 2013. As of December 31, 2012, Ever-Glory Apparel had borrowed $5.41 million from HSBC with an annual interest rate of 5.6%, due on various dates from January to March 2013, and collateralized by approximately $7.1 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of December 31, 2012, approximately $1.59 million was unused and available. Approximately $4.6 million was repaid in January and February 2013.

On November 16, 2012, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $4.12 million (RMB26 million) with Bank of China guaranteed by Jiangsu Ever-Glory and Mr. Kang.  The line of credit is also collateralized by assets of Jiangsu Ever-Glory under a collateral agreement executed between the Company, Jiangsu Ever-Glory and the bank.   As of December 31, 2012, Ever-Glory Apparel had borrowed $3.39 million from the Bank of China with an annual interest rate of 6.05%, and due on various dates from March to May 2013, and collateralized by approximately $7.6 million of accounts receivable from wholesale customers. As of December 31, 2012, approximately $0.73 million was unused and available

As of December 31, 2012, Ever-Glory Apparel had borrowed $4.24 million from China Minsheng Banking, with annual interest rates ranging from 2.61% to 3.04% due on various dates from February to May 2013. This loan is guaranteed by Goldenway. Approximately $0.5 million was repaid in February 2013.

  

Total interest expense on bank loans amounted to $2,103,103 and $1,445,212 for the year ended December 31, 2012 and 2011, respectively.

NOTE 9

DERIVATIVE WARRANT LIABILITY

The Company has warrants outstanding to purchase an aggregate of 840,454 shares of Company common stock, which warrants require liability classification because of certain provisions that may result in an adjustment to their exercise price. The liability has been adjusted to fair value. The adjustments decreased liability (and increased other income) by $96,800 and $216,000 for the years ended December 31, 2012 and 2011, respectively.

 

The warrants will expire in June 2013. For the years ended 2012 and 2011, the Company excluded these warrants from diluted earnings per share as they were antidilutive.

 

 

F-11

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NOTE 10

INCOME TAX

Pre-tax income for the years ended December 31, 2012 and 2011 was taxable in the following jurisdictions:

 

		2012				2011
PRC		$	7,727,981			$	8,603,740
Samoa			6,922,098				2,638,417
BVI			(28,518	)			255,092
Others			88,992				190,000
		$	14,710,553			$	11,687,249

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 are subject to income tax at the 25% statutory rate.

 

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.

  

The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the years ended 2012 and 2011, respectively:

 

		2012				2011
PRC statutory rate			25.0	%			25.0	%
Non-taxable items			(0.2	)			(0.6	)
Effect of foreign income tax rates			(11.7	)			(6.2	)
Other			(0.1	)			(0.7	)
Effective income tax rate			13.0	%			17.5	%

Income tax expense for the year ended 2012 and 2011 is as follows:

		2012				2011
Current		$	1,165,918			$	707,622
Deferred			741,693				1,332,624
Income tax expense		$	1,907,611			$	2,040,246

NOTE 11

EARNINGS PER SHARE

Basic and diluted earnings per share for 2012 and 2011 were calculated as follows:

		2012				2011
Weighted average number of common shares- Basic and diluted			14,767,253				14,757,319
Earnings per share - basic and diluted		$	0.87			$	0.65

For each of the years ended December 31, 2012 and 2011, the Company excluded 840,454 warrants outstanding from diluted earnings per share because the exercise price of $3.20 exceeded the average trading price of $1.63 and $1.88 for the years ended December 31, 2012 and 2011, respectively, making these warrants anti-dilutive.

  

NOTE 12

STOCKHOLDERS’ EQUITY

 

Stock Issued to Independent Directors

On March 14, 2012, the Company issued an aggregate of 3,346 shares of its common stock to the Company’s three independent directors as compensation for their services in the third and fourth quarters of 2011. The shares were valued at $1.94 per share, which was the average market price of the common stock for the five days before the grant date.

 

 

F-12

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On March 21, 2012, the Company issued an aggregate of 1,723 shares of its common stock to one of the Company’s independent directors as compensation for her services in the third and fourth quarters of 2011. The shares were valued at $1.94 per share, which was the average market price of the common stock for the five days before the grant date.

On August 16, 2012, the Company issued an aggregate of 6,328 shares of its common stock to three of the Company’s independent directors as compensation for their services in the first and second quarters of 2012. The shares were valued at $1.58 per share, which was the average market price of the common stock for the five days before the grant date.

On February 28, 2013, the Company issued an aggregate of 5,340 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 2012. The shares were valued at $1.89 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, 2012, New-Tailun and Catch-Luck had fulfilled the 50% statutory reserve contribution requirement; therefore no further transfers are required for those entities. In 2012, Goldenway appropriated $63,113 Ever-Glory Apparel appropriated $325,379, La GO GO appropriated $530,422, and Taixin appropriated $86,881 to the statutory reserve.

Warrants

The Company has 840,454 warrants outstanding in connection with a 2007 private placement. The warrants are exercisable at $3.20 per share on or before June 6, 2013.

Following is a summary of the status of warrants outstanding and exercisable at December 31, 2012 and 2011:

 

2012										2011
Exercise Price		Number of Shares				Average Remaining Contractual Life				Average Exercise Price				Number of Shares				Average Remaining Contractual Life
$3.20			840,454				0.43			$	3.20				840,454				1.43

NOTE 13

RELATED PARTY TRANSACTIONS

Mr. Kang is the Company’s Chairman and Chief Executive Officer.  Ever-Glory Enterprises (H.K.) Ltd. (“Ever-Glory Enterprises”) is the Company’s major shareholder.  Mr. Xiaodong Yan is Ever-Glory Enterprises’ sole shareholder. All transactions associated with the following companies controlled by Mr. Kang or Mr. Yan 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

 

Included in other income for the years ended December 31,2012 and 2011 is rent revenue from entities controlled by Mr. Kang under operating lease agreements with various terms though 2015 as follows:

 

		2012				2011
EsCeLav		$	10,856			$	11,783
Nanjing Eight-One-Five Hi-Tech (M&E) Co.,Ltd.			15,830				15,710
Jiangsu Heng-Rui			-				22,151
Total		$	26,686			$	49,644

  

 

F-13

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