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

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EXCEL - IDEA: XBRL DOCUMENT - Ever-Glory International Group, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Ever-Glory International Group, Inc.	f10q0313ex32i_everglory.htm
EX-32.2 - CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Ever-Glory International Group, Inc.	f10q0313ex32ii_everglory.htm
EX-31.2 - CERTIFICATIONS PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - Ever-Glory International Group, Inc.	f10q0313ex31ii_everglory.htm
EX-31.1 - CERTIFICATIONS PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - Ever-Glory International Group, Inc.	f10q0313ex31i_everglory.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2013

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

For the transition period from ____________ to ____________

Commission file number: 0-28806

Ever-Glory International Group Inc.

(Exact name of registrant as specified in its charter)

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

Ever-Glory Commercial Center,

509 Chengxin Road, Jiangning Development Zone,

Nanjing, Jiangsu Province,

People’s Republic of China

(Address of principal executive offices)

(8625) 5209-6875

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of May 8, 2013, 14,777,610 shares of the Company’s common stock, $0.001 par value, were issued and outstanding.

EVER-GLORY INTERNATIONAL GROUP, INC.

FORM 10-Q

INDEX

		Page Number

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012	4

	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)	6

	Notes to the Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosure	25

Item 5.	Other Information	25

Item 6.	Exhibits	25

SIGNATURES		26

Cautionary Note Regarding Forward-Looking Statements

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

	Ÿ	Competition within our industry;
	Ÿ	Seasonality of our sales;
	Ÿ	Success of our investments in new product development
	Ÿ	Our plans and ability to open new retail stores;
	Ÿ	Success of our acquired businesses;
	Ÿ	Our relationships with our major customers;
	Ÿ	The popularity of our products;
	Ÿ	Relationships with suppliers and cost of supplies;
	Ÿ	Financial and economic conditions in Asia, Japan, Europe and the U.S.;
	Ÿ	Anticipated effective tax rates in future years;
	Ÿ	Regulatory requirements affecting our business;
	Ÿ	Currency exchange rate fluctuations;
	Ÿ	Our future financing needs; and
	Ÿ	Our ability to attract additional investment capital on attractive terms.

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

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

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2013 (UNAUDITED) AND DECEMBER 31, 2012

ASSETS
	2013				2012

CURRENT ASSETS
Cash and cash equivalents		$	16,604,182			$	9,365,958
Accounts receivable			58,162,906				68,513,893
Inventories			43,658,961				46,038,456
Value added tax receivable			2,655,326				2,866,018
Other receivables and prepaid expenses			1,662,926				1,910,383
Advances on inventory purchases			4,248,583				3,596,860
Amounts due from related parties			2,282,661				8,680
Total Current Assets			129,275,545				132,300,248

LAND USE RIGHT, NET			2,799,303				2,801,472
PROPERTY AND EQUIPMENT, NET			16,302,813				16,068,735
TOTAL ASSETS		$	148,377,661			$	151,170,455

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Bank loans		$	41,903,119			$	46,919,680
Payable to officers and employees			2,354,886				2,341,574
Accounts payable			37,954,888				49,700,392
Accounts payable and other payables - related parties			3,850,006				3,158,814
Other payables and accrued liabilities			8,644,250				10,547,190
Value added and other taxes payable			5,100,015				4,189,211
Income tax payable			925,099				952,652
Deferred tax liabilities			3,589,682				3,109,095
Derivative liability			2,000				294,000
Total Current Liabilities			104,323,945				121,212,608
TOTAL LIABILITIES			104,323,945				121,212,608

COMMITMENTS AND CONTINGENCIES

EQUITY
Stockholders' equity of the Company:
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,
14,777,610 and 14,772,270 shares issued and outstanding
as of March 31, 2013 and December 31, 2012, respectively)			14,777				14,772
Additional paid-in capital			3,562,243				3,552,166
Retained earnings			49,861,080				46,774,001
Statutory reserve			6,317,715				6,317,715
Accumulated other comprehensive income			7,181,012				6,873,170
Amounts due from related party			(22,883,111	)			(33,573,977	)
Total Stockholders' Equity			44,053,716				29,957,847

TOTAL LIABILITIES AND EQUITY		$	148,377,661			$	151,170,455

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

	2013			2012

NET SALES	$	78,311,490		$	53,226,173

COST OF SALES		58,018,567			41,623,185

GROSS PROFIT		20,292,923			11,602,988

OPERATING EXPENSES
Selling expenses		11,851,296			5,834,192
General and administrative expenses		4,472,447			3,005,276
Total Operating Expenses		16,323,743			8,839,468

INCOME FROM OPERATIONS		3,969,180			2,763,520

OTHER (EXPENSES) INCOME
Interest income		295,602			281,484
Interest expense		(791,529	)		(546,041	)
Change in fair value of derivative liability		292,000			110,800
Other income		31,457			36,303
Total Other Expenses		(172,470	)		(117,454	)

INCOME BEFORE INCOME TAX EXPENSE		3,796,710			2,646,066

INCOME TAX EXPENSE		(709,631	)		(524,856	)

NET INCOME		3,087,079			2,121,210

OTHER COMPREHENSIVE INCOME:

Foreign currency translation gain		307,842			396,366

COMPREHENSIVE INCOME	$	3,394,921		$	2,517,576

NET INCOME PER SHARE

Basic and diluted	$	0.21		$	0.14
Weighted average number of shares outstanding
Basic and diluted		14,774,109			14,761,687

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (UNAUDITED)

	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,087,079		$	2,121,210
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization		1,630,645			1,160,636
Reduction in obsolete inventories		(7,776	)		-
Change in fair value of derivative liability		(292,000	)		(110,800	)
Deferred income tax		462,621			381,752
Stock-based compensation		10,082			9,836
Changes in operating assets and liabilities
Accounts receivable		10,700,670			14,852,591
Accounts receivable - related parties		-			7,530
Inventories		2,634,082			5,000,492
Value added tax receivable		226,843			(14,241	)
Other receivables and prepaid expenses		98,044			(77,904	)
Advances on inventory purchases		(470,766	)		464,034
Amounts due from related party		(2,403,246	)		3,257,983
Accounts payable		(12,019,711	)		(12,273,787	)
Accounts payable and other payables- related parties		691,972			(741,899	)
Other payables and accrued liabilities		(1,960,716	)		(1,142,719	)
Value added and other taxes payable		886,502			11,229
Income tax payable		(33,020	)		(56,211	)
Net cash provided by operating activities		3,241,305			12,849,732

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,755,269	)		(732,195	)
Net cash used in investing activities		(1,755,269	)		(732,195	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans		22,468,567			13,500,297
Repayment of bank loans		(27,748,567	)		(17,834,408	)
Advances to related party		(4,812,775	)		(3,986,640	)
Repayment from related party		15,806,585			-
Net cash provided by (used in) financing activities		5,713,810			(8,320,751	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		38,378			164,935

NET INCREASE IN CASH AND CASH EQUIVALENTS		7,238,224			3,961,721

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		9,365,958			8,822,581

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	16,604,182		$	12,784,302

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:
Interest	$	791,529		$	546,041
Income taxes	$	171,084		$	214,745

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(UNAUDITED)

NOTE 1 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 Company’s wholesale operations are provided primarily through the Company’s wholly-owned PRC subsidiaries, Goldenway Nanjing Garments Co. Ltd. (“Goldenway”), Nanjing Catch-Luck Garments Co. Ltd. (“Catch-Luck”), Nanjing New-Tailun Garments Co. Ltd (“New-Tailun”), Ever-Glory International Group Apparel Inc.(“Ever-Glory Apparel”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”), and the Company’s wholly-owned Samoa subsidiary, Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”). The Company’s retail operations are provided through its wholly- owned subsidiary, Shanghai LA GO GO Fashion Company Limited (“LA GO GO”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheet as of March 31, 2013, the condensed consolidated statements of comprehensive income, and cash flows for the three months ended March 31, 2013 and 2012. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. Wholesale revenues are generally higher in the third and fourth fiscal quarters, while retail revenues are generally higher in the first and fourth fiscal quarters. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

Financial Instruments

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

Fair Value Accounting

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

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

At March 31, 2013, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.

As of March 31, 2013 and December 31, 2012, The Company has a derivative liability subject to recurring fair value measurement ( Level 3) with the change in fair value recognized in earnings (Note 5).

Foreign Currency Translation and Other Comprehensive Income

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company, Ever-Glory HK and Perfect Dream Limited, British Virgin Islands incorporated subsidiary of the Company (“Perfect Dream”) is the U.S. dollar. The functional currency of Goldenway, New Tailun, Catch-luck, Ever-Glory Apparel, Tai Xin and LA GO GO is the Chinese RMB.

For subsidiaries whose functional currency is the RMB, all assets and liabilities were translated at the exchange rate at the balance sheet date; equity was translated at historical rates and items in the statement of comprehensive income were translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income. The resulting translation gains and 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. Items in the cash flow statement are translated at the average exchange rate for the period.

NOTE 3 INVENTORIES

Inventories at March 31, 2013 and December 31, 2012 consisted of the following:

	March 31, 2013			December 31, 2012
Raw materials	$	7,514,939		$	5,687,612
Work-in-progress		9,812,580			7,296,733
Finished goods		30,061,532			36,770,852
		47,389,051			49,755,197
Less: allowance for obsolete inventories		(3,730,090	)		(3,716,741	)
Total inventories	$	43,658,961		$	46,038,456

NOTE 4

PAYABLE TO OFFICERS AND EMPLOYEES

The Company established a benefit 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 the first quarter of 2013, the loan interest rate was 6.0% and the loans are payable on demand. The total loans payable as of March 31, 2013 and December 31, 2012 to the officers and employees are listed below:

	March 31, 2013		December 31, 2012
Payable to officers:	$	73,232	$	72,818
Payable to employees:		2,281,654		2,268,756
Total:	$	2,354,886	$	2,341,574

NOTE 5 BANK LOANS

Bank loans represent amounts due to various banks and are generally due on demand or within one year. These loans can be renewed with the banks. Bank loans consisted of the following at March 31, 2013 and December 31, 2012:

Bank	March 31, 2013		December 31, 2012
Nanjing Bank	$	15,124,000	$	16,743,277
Shanghai Pudong Development Bank		6,368,000		7,014,833
Bank of Communications		6,686,400		6,953,834
HSBC		3,138,741		5,414,316
Everbright Bank		3,184,000		3,166,000
China Minsheng Banking		3,597,474		4,239,800
Bank of China		3,804,504		3,387,620
	$	41,903,119	$	46,919,680

On August 2, 2010, Goldenway entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.96 million (RMB50 million). The line of credit is 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. The line of credit also collateralized by the Company’s property and equipment. As of March 31, 2013, Goldenway had borrowed $7.96 million (RMB50 million) under this line of credit from Nanjing Bank with an annual interest rate of 5.88% and due on various dates from April 2013 to September 2013. Approximately $1.59 million (RMB10 million) was repaid subsequent to March 31, 2013.

On May 11, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.55 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory. As of March 31, 2013, Ever-Glory Apparel had borrowed $4.78 million under this line of credit with an annual interest rate from 5.88% to 6.89% and due on various dates from May 2013 to July 2013. At March 31, 2013, approximately $4.77 million was unused and available under this line of credit.

On April 10, 2012, LA GO GO entered into a line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.18 million (RMB20 million). The line of credit is guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of March 31, 2013, LA GO GO had borrowed $2.39 million (RMB15 million) under this line of credit with annual interest rates ranging from 6.29% to 6.9% and due on various dates from April 2013 to September 2013. At March 31, 2013, approximately $0.79 million (RMB5 million) was unused and available under this line of credit. Approximately $0.79 million (RMB5 million) was repaid subsequent to March 31, 2013.

On January 4, 2011, Goldenway entered into a line of credit agreement for approximately $6.37 million (RMB40 million) with Shanghai Pudong Development Bank. As of March 31, 2013, Goldenway had borrowed the maximum amount available under the line of $6.37 million (RMB40 million), with an annual interest rate of 6.3%. These loans are collateralized by certain properties and land use rights of Goldenway, and are due in November 2013.

As of March 31, 2013, Ever-Glory Apparel had borrowed $5.09 million (RMB32 million) from the Bank of Communications with an annual interest rate of 6.3%, and due in February 2014. The loan is guaranteed by Jiangsu Ever-Glory and 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.

As of March 31, 2013, LA GO GO had borrowed $1.59 million (RMB10 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 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. As of March 31, 2013, Ever-Glory Apparel had borrowed $3.14 million from HSBC with an annual interest rates ranging from 5.32% to 5.6%, due on various dates from April to June 2013, and collateralized by approximately $4.5 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of March 31, 2013, approximately $3.86 million was unused and available.

On August 21, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $13.21 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 March 31, 2013, Ever-Glory Apparel had borrowed $3.18 million (RMB20 million) from Everbright Bank, with an annual interest rate of 6.3% and due in September 2013. At March 31, 2013, approximately $10.03 million (RMB63 million) was unused and available under this line of credit.

As of March 31, 2013, Ever-Glory Apparel had borrowed $3.60 million from China Minsheng Banking, with annual interest rates ranging from 2.8% to 3.04% due on various dates from April to May 2013. This loan is guaranteed by Goldenway. Approximately $3.6 million was repaid subsequent to March 31, 2013.

On November 16, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.14 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 March 31, 2013, Ever-Glory Apparel had borrowed $3.80 million under this line of credit with an annual interest rates ranging from 1.65% to 6.05%, and due on various dates from April to September 2013, and collateralized by approximately $2.6 million of accounts receivable from wholesale customers. As of March 31, 2013, approximately $0.34 million was unused and available. Approximately $0.4 million was repaid subsequent to March 31, 2013.

Total interest expense on bank loans amounted to $791,529 and $546,041 for the three month ended March 31, 2013 and 2012, respectively.

NOTE 6 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 as of March 31, 2013 and 2012, resulting in a decrease in the liability and increase in other income of $292,000 and $110,800 for the three months ended March 31, 2013 and 2012, respectively.

NOTE 7 INCOME TAX

Pre-tax income for the three months ended March 31, 2013 and 2012 was taxable in the following jurisdictions:

	2013			2012
PRC	$	2,684,636		$	1,767,942
Samoa		826,471			830,523
BVI		(1,315	)		(64,363	)
Others		286,918			111,964
	$	3,796,710		$	2,646,066

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 three months ended March 31, 2013 and 2012:

	2013			2012
PRC statutory rate		25.0	%		25.0	%
Non-taxable items		(2.6	)		(1.4	)
Effect of foreign income tax rates		(5.4	)		(7.2	)
Other		1.7			3.4
Effective income tax rate		18.7	%		19.8	%

Income tax expense for the three months ended March 31, 2013 and 2012 is as follows:

	2013		2012
Current	$	229,044	$	143,104
Deferred		480,587		381,752
Income tax expense	$	709,631	$	524,856

NOTE 8 EARNINGS PER SHARE

The following demonstrates the calculation for earnings per share for the three months ended March 31, 2013 and 2012:

	2013		2012
Net income	$	3,087,079	$	2,121,210

Weighted average number of common shares –Basic and diluted		14,774,109		14,761,687

Earnings per share –Basic and diluted	$	0.21	$	0.14

For each of the three months ended March 31, 2013 and 2012, 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 $1.93 and $1.75 for the three months ended March 31, 2013 and 2012, respectively, making these warrants anti-dilutive.

NOTE 9 STOCKHOLDERS’ EQUITY

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.

NOTE 9 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-term in nature and are expected to be settled in cash.

Purchases from and Sub-contracts with Related Parties

The Company purchased raw materials from Nanjing Knitting totaling $83,238 and $634,609 during the three months ended March 31, 2013 and 2012, respectively.

In addition, the Company sub-contracted certain manufacturing work to related companies totaling $3,985,507 and $2,825,570 for the three months ended March 31, 2013 and 2012, respectively. The Company provided raw materials to the sub-contractors and was charged a fixed fee for labor provided by the sub-contractors.

Sub-contracts with related parties included in cost of sales for the three months ended March 31, 2013 and 2012 are as follows:

	March 31, 2013		March 31, 2012
Nanjing High-Tech	$	21,306	$	634,609
Nanjing Ever-Kyowa		267,985		165,217
Ever-Glory Vietnam		1,919,106		829,469
Ever-Glory Cambodia		1,774,527		1,186,513
EsC'eLav		2,583		5,948
Jiangsu Ever-Glory		-		3,814
Total	$	3,985,507	$	2,825,570

Accounts Payable – Related Parties

The Company purchases raw materials from and subcontracts some of its production to related parties. Accounts payable to related parties at March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013		December 31, 2012
Nanjing Knitting	$	370,393	$	756,842
Nanjing Ever-Kyowa		99,187		128,505
Ever-Glory Vietnam		2,707,017		2,183,039
Ever-Glory Cambodia		665,147		90,428
Kunshan enjin		8,262		-
Total	$	3,850,006	$	3,158,814

Amounts Due From Related Party

The amounts due from related parties at March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013		December 31, 2012
EsC'eLav	$	17,929	$	8,680
Nanjing Eight-One-Five Hi-tech (M&E) Co., Ltd.		3,980		-
Jiangsu Ever-Glory		25,143,863		33,573,977
Total	$	25,165,772	$	33,582,657

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. In 2011, because of restrictions on its ability to directly import and export products, the Company utilized Jiangsu Ever-Glory as its agent to assist the Company with its import and export transactions and its 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 the Company’s sales to foreign markets such as Japan, Europe and the United States. As the Company’s agent, Jiangsu Ever-Glory’s responsibilities included managing customs, inspection, transportation, insurance and collections on behalf of the Company. Jiangsu Ever-Glory also managed transactions denominated in currencies other than the Chinese RMB at rates of exchange agreed between the Company and Jiangsu Ever-Glory and based upon rates of exchange quoted by the People’s Bank of China. In return for these services, Jiangsu Ever-Glory charged the Company a fee of approximately 3% of export sales manufactured in China and 1% of export sales manufactured overseas. For import transactions, the Company may make advance payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu Ever-Glory may make advance payments on the Company’s behalf. For export transactions, accounts receivable for export sales are remitted by the Company’s customers through Jiangsu Ever-Glory, which forwards the payments to the Company. The Company and Jiangsu Ever-Glory 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.

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of March 31, 2013, Jiangsu Ever-Glory has provided guarantees for approximately US$ 44.74 million (RMB 281 million) of lines of credit obtained by the Company. Jiangsu Ever-Glory, and its 20.31% owned equity investee, Nanjing Knitting, have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately US$21.01 million (RMB 132 million). Mr. Kang has also provided a personal guarantee for US$22.13 million (RMB 139 million). During the three months ended March 31, 2013, US$4.82 million (RMB30.25 million) was provided to Jiangsu Ever-Glory under the counter-guarantee. US$21.33 million (RMB134 million) was outstanding at March 31, 2013. This amount plus accrued interest of $1.6 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G. At the end of April 2013, the Company and Jiangsu Ever-glory orally agreed to reduce the Counter-guarantee amount to be 50% of the aggregate amount of lines of credit by the end of the second quarter of 2013.

Interest of 0.5% is charged on net amounts due at each month end. Interest income for the years ended March 31, 2013 and 2012 was approximately $0.3 million and $0.3 million, respectively.

Following is a summary of balances at March 31, 2013 and December 31, 2012:

Related Party	Type of transaction	March 31, 2013		December 31, 2012
Jiangsu Ever-glory	Accounts receivable	$	1,013,820	$	214,226
Jiangsu Ever-glory	Advance/(Accounts payable)		1,246,932		(53,680	)
Jiangsu Ever-glory	Interest income		1,550,311		1,262,701
Jiangsu Ever-glory	Counter guarantee deposit		21,332,800		32,150,730
Total		$	25,143,863	$	33,573,977

NOTE 10 CONCENTRATIONS AND RISKS

The Company extends unsecured credit to its customers in the normal course of business and generally does not require collateral. As a result, management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. Based on management’s assessment of the amount of probable credit losses, if any, in existing accounts receivable, management has concluded that no allowance for doubtful accounts is necessary at March 31, 2013 and December 31, 2012. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customer’s receivable and also considers the credit worthiness of the customer, the economic conditions in the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.

For the three-month period ended March 31, 2013, the Company had two wholesale customers that represented approximately 13% and 11% of the Company’s revenues. For the three-month period ended March 31, 2012, the Company had two wholesale customers that represented approximately 15% and 13% of the Company’s revenues.

For the wholesale business, the Company did not rely on any one raw material supplier that represented more than 10% of the total raw material purchases during the three months ended March 31, 2013 and 2012.

For the retail business, the Company did not rely on any one raw material supplier that represented more than 10% of the total raw material purchases during the three months ended March 31, 2013. The Company relied on two raw material suppliers that represented approximately 24% and 11% of raw material purchases during the three months ended March 31, 2012.

For the wholesale business, during the three months ended March 31, 2013, the Company relied on two manufacturers that represented 13% and 12% of finished goods purchases, and during the three months ended March 31, 2012, the Company relied on three manufacturers for 15%, 12% and 11% of purchased finished goods. The first two manufacturers are related party companies. Ever-Glory Vietnam and Ever-Glory Cambodia.

For the retail business, the Company did not rely on any one supplier that represented more than 10% of the total finished goods purchases during the three months ended March 31, 2013 and 2012.

The Company’s revenues for the three months ended March 31, 2013 and 2012 were earned in the following geographic areas:

	2013		2012
The People’s Republic of China(PRC)	$	13,031,064	$	7,942,831
Germany		4,371,333		5,464,693
United Kingdom		2,864,634		3,365,159
France		3,412,988		4,089,760
Europe-Other		554,627		474,673
Japan		3,698,834		6,107,149
United States		3,726,975		3,216,258
Total wholesale business		31,660,455		30,660,523
Retail business-PRC		46,651,035		22,565,650
Total	$	78,311,490	$	53,226,173

NOTE 11 SEGMENTS

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

(a) Wholesale segment

(b) Retail segment

The Company also provides general corporate services to its segments and these costs are reported as "corporate and others”:

	Wholesale segment		Retail segment		Total
March 31,2013
Segment profit or loss:
Net revenue from external customers	$	31,660,455	$	46,651,035	$	78,311,490
Income from operations	$	2,792,628	$	1,176,552	$	3,969,180
Interest income	$	291,927	$	3,675	$	295,602
Interest expense	$	734,027	$	57,502	$	791,529
Depreciation and amortization	$	233,711	$	1,396,934	$	1,630,645
Income tax expense	$	428,154	$	281,477	$	709,631

March 31,2012
Segment profit or loss:
Net revenue from external customers	$	30,660,523	$	22,565,650	$	53,226,173
Income from operations	$	2,527,004	$	236,516	$	2,763,520
Interest income	$	278,299	$	3,185	$	281,484
Interest expense	$	514,561	$	31,480	$	546,041
Depreciation and amortization	$	250,465	$	910,171	$	1,160,636
Income tax expense	$	472,405	$	52,451	$	524,856

ITEM 2.

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

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2013 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

Overview

Our Business

We are a leading apparel supply-chain manager and retailer in China. We are listed on the NYSE MKT under the symbol of “EVK”.

We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to 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 seasons. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high quality control standards and timely delivery.

Wholesale Business

We conduct our original design manufacturing (“ODM”) operations through six wholly-owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, 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”), Ever-Glory International Group (HK) Ltd. (“Ever-Glory HK”), and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”).

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. We maintain long-term, satisfactory relationships with a portfolio of well-known, mid-class global brands.

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

	Ÿ	Expand the global sourcing network

	Ÿ	Expand our overseas low-cost manufacturing base (outside of mainland China);

Focus on high value-added products and continue our strategy to produce mid to high end apparel

Continue to emphasize on product design and technology utilization.

	Ÿ	Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network

	Ÿ	Maintain stable revenue increase 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 March 31, 2013, we have 755 stores (including store-in-stores) which included 32 stores that were opened and 4 stores that were closed in first quarter of 2013.

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

	Ÿ	Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;

	Ÿ	Expand the LA GO GO retail network throughout China

	Ÿ	Improve the LA GO GO retail stores’ efficiency and increase same-store sales

	Ÿ	Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities

	Ÿ	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.

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 a good payment track record, 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 and 90 days following the date of the register receipt. For our own flagship stores, we receive payments at the same time of the register receipt.

Global Economic Uncertainty

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and 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 2013 and 2012 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.

Results of Operations

The following table summarizes our results of operations for the three months ended March 31, 2013 and 2012. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

		Three Months Ended March 31,
		2013				2012
		(in U.S. Dollars, except for percentages)
Sales	$	78,311,490	100.0	%	$	53,226,173	100.0	%
Gross Profit	$	20,292,923	25.9	%	$	11,602,988	21.8	%
Operating Expense	$	16,323,743	20.8	%	$	8,839,468	16.6	%
Income From Operations	$	3,969,180	5.1	%	$	2,763,520	5.2	%
Other Expenses	$	172,470	0.2	%	$	117,454	0.2	%
Income Tax Expense	$	709,631	0.9	%	$	524,856	1.0	%
Net Income	$	3,087,079	3.9	%	$	2,121,210	4.0	%

Revenue

The following table sets forth a breakdown of our total sales, by region, for the three months ended March 31, 2013 and 2012.

											Growth in 2013
											compared with
	2013		% of total sales			2012		% of total sales			2012
Wholesales business
The People’s Republic of China	$	13,031,064		16.6	%	$	7,942,831		14.9	%		64.1	%
Germany		4,371,333		5.6			5,464,693		10.3			(20.0	)
United Kingdom		2,864,634		3.7			3,365,159		6.3			(14.9	)
France		3,412,988		4.3			4,089,760		7.7			(16.5	)
Europe-Other		554,627		0.7			474,673		0.9			16.8
Japan		3,698,834		4.7			6,107,149		11.5			(39.4	)
United States		3,726,975		4.8			3,216,258		6.0			15.9
Total wholesale business		31,660,455		40.4			30,660,523		57.6			3.3
Retail business		46,651,035		59.6			22,565,650		42.4			106.7
Total	$	78,311,490		100.0	%	$	53,226,173		100.0	%		47.1	%

Total sales for the three months ended March 31, 2013 were $78.3 million, an increase of 47.1% from the three months ended March 31, 2012. This increase was primarily attributable to a 106.7% increase in sales in our retail business as well as a 3.3% increase in our wholesale business.

Sales generated from our wholesale business contributed 40.4% or $31.7 million of our total sales for the three months ended March 31, 2013, an increase of 3.3% compared to $30.7 million in the three months ended March 31, 2012. This increase was primarily attributable to increased sales in the PRC and the United States partially offset for decreased sales in Germany, the United Kingdom, France and Japan.

Sales generated from our retail business contributed 59.6% or $46.7 million of our total sales for the three months ended March 31, 2013, an increase of 106.7% compared to 42.4% or $22.6 million in the three months ended March 31, 2012. This increase was primarily due to the increase in same store sales and new stores opened. We had 755 LA GO GO stores as of March 31, 2013, compared to 484 LA GO GO stores at March 31, 2012.

Total retail store square footage and sales per square foot for the three months ended March 31, 2013 and 2012 are as follows:

	2013		2012
Total store square footage		675,514		425,812
Number of stores		755		484
Average store size, square feet		895		880
Total store sales	$	46,651,035	$	22,565,650
Sales per square foot	$	69	$	53

Same store sales and newly opened store sales for the three months ended March 31, 2013 and 2012 are as follows:

	2013		2012
Sales from stores open a full year	$	26,984,038	$	15,220,401
Newly opened store sales		18,190,559		7,031,617
Other*		1,476,438		313,632
Total	$	46,651,035	$	22,565,650

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

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended March 31, 2013 and 2012.

	Three months ended March 31,								Growth (Decrease) in 2013 compared
	2013				2012				with 2012
	(in U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	31,660,455	100.0	%	$	30,660,523	100.0	%		3.3	%
Raw Materials		14,002,376	44.2			14,236,635	46.4			(1.6)
Labor		1,056,053	3.3			908,738	3.0			16.2
Outsourced Production Costs		9,954,222	31.4			9,640,526	31.4			3.3
Other and Overhead		130,585	0.4			230,751	0.8			(43.4)
Total Cost of Sales for Wholesale		25,143,236	79.4			25,016,650	81.6			0.5
Gross Profit for Wholesale		6,517,219	20.6			5,643,873	18.4			15.5
Net Sales for Retail		46,651,035	100.0			22,565,650	100.0			106.7
Production Costs		15,056,718	32.3			7,869,084	34.9			91.3
Rent		17,818,613	38.2			8,737,451	38.7			103.9
Total Cost of Sales for Retail		32,875,331	70.5			16,606,535	73.6			98.0
Gross Profit for Retail		13,775,704	29.5			5,959,115	26.4			131.2
Total Cost of Sales		58,018,567	74.1			41,623,185	78.2			39.4
Gross Profit	$	20,292,923	25.9	%	$	11,602,988	21.8	%		74.9	%

Raw material costs for our wholesale business were 44.2% of our total wholesale business sales in the three months ended March 31, 2013, a decrease of 2.2% compared to 46.4% in the three months ended March 31, 2012. The decrease was mainly due to decreased raw materials prices.

Labor costs for our wholesale business were 3.4% of our total wholesale business sales in the three months ended March 31, 2013, an increase of 0.4% compared to 3.0% in the three months ended March 31, 2012. The increase was mainly due to the increased average salaries of employees.

Outsourced manufacturing costs for our wholesale business were 31.4% of our total wholesale business sales in the three months ended March 31, 2013 and 2012.

Overhead and other expenses for our wholesale business accounted for 0.4% of our total wholesale business sales for the three months ended March 31, 2013, a decrease of 0.4% compared to 0.8% of total sales for the three months ended March 31, 2012. This decrease was mainly due to improved control over these expenses.

For our wholesale business gross profit for the three months ended March 31, 2013 was $6.5 million, an increase of 15.5% compared to the three months ended March 31, 2012. Gross margin was 20.6% for the three months ended March 31, 2013, an increase of 2.2% compared to 18.4% for the three months ended March 31, 2012. The increase was mainly due to decreased raw material prices.

Production costs for our retail business were $15.1 million during the three months ended March 31, 2013 compared to $7.9 million during the three months ended March 31, 2012. As a percentage of retail sales, retail production costs accounted for 32.3% of our total retail sales in the three months ended March 31, 2013, compared to 34.9% of total retail sales in the three months ended March 31, 2012. The decrease was due to the discount of sales prices in the three months ended March 31, 2013 being less than the same period of the prior year.

Rent costs for our retail business were $17.8 million for the three months ended March 31, 2013 compared to $8.7 million for the three months ended March 31, 2012. As a percentage of retail sales, rent costs accounted for 38.2% of our total retail sales for the three months ended March 31, 2013, compared to 38.7% of total retail sales for the three months ended March 31, 2012. Total rent costs increased as a result of the increase in the number of our stores. The decrease in rent costs as a percentage of total retail sales was due to an increase in same store sales in 2013.

Gross profit in our retail business for the three months ended March 31, 2013 was $13.8 million and gross margin was 29.5%. Gross profit in our retail business for the three months ended March 31, 2012 was $6.0 million and gross margin was 26.4%. The increase was mainly due to fewer discounts to sales prices in 2013 compared to 2012 as discussed above.

Total cost of sales for the three months ended March 31, 2013 was $58.0 million, compared to $41.6 million for the three months ended March 31, 2012, an increase of 39.4%. As a percentage of total sales, cost of sales decreased to 74.1% of total sales for the three months ended March 31, 2013, compared to 78.2% of total sales for the three months ended March 31, 2012. Consequently, gross margin increased to 25.9% for the three months ended March 31, 2013 from 21.8% for the three months ended March 31, 2012.

Selling, General and Administrative Expenses

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

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

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

	Three Months Ended March 31,
	2013					2012				Increase
	(in U.S. Dollars, except for percentages)
Gross Profit		$	20,292,923	25.9	%	$	11,602,988	21.8	%		74.9	%
Operating Expenses:
Selling Expenses			11,851,296	15.1	%		5,834,192	11.1			103.1
General and Administrative Expenses			4,472,447	5.7	%		3,005,276	5.6			48.8
Total Expenses		$	16,323,743	20.8	%	$	8,839,468	16.6			84.7
Income from Operations		$	3,969,180	5.1	%	$	2,763,520	5.2	%		43.6	%

Selling expenses increased 103.1% to $11.9 million for the three months ended March 31, 2013 from $5.8 million for the three months ended March 31, 2012. The increase was attributable to the increased number of retail employees and increased average salaries, as well as increased store decoration and marketing expenses associated with the promotion of the LA GO GO brand.

General and administrative expenses increased 48.8% to $4.5 million for the three months ended March 31, 2013 from $3.0 million for the three months ended March 31, 2012. As a percentage of total sales, general and administrative expenses increased to 5.7% of total sales for the three months ended March 31, 2013, compared to 5.6% of total sales for the three months ended March 31, 2012. The increase was attributable to an increase in payroll for additional management and design and marketing staff as a result of our business expansion.

Income from Operations

Income from operations increased 43.6% to $4.0 million for the three months ended March 31, 2013 from $2.8 million for the three months ended March 31, 2012. As a percentage of sales, income from operations accounted for 5.1% of our total sales for the three months ended March 31, 2013, a decrease of 0.1% compared to the three months ended March 31, 2012 as a result of increased selling expenses and general and administrative expenses.

Interest Expense

Interest expense was $0.8 million for the three months ended March 31, 2013, an increase of 45.0% compared to the same period in 2012. The increase was due to the increased bank loans as a result of our business expansion, from $25.0 million at March 31, 2012 to $41.9 million at March 31, 2013.

Change in fair value of derivative liability

Change in fair value of derivative liability was a gain of $0.3 million and $0.1 million, based on the Binnomial Lattice model, for the three months ended March 31, 2013 and 2012, respectively.

Income Tax Expenses

Income tax expense for the three months ended March 31, 2013 was $0.7 million, an increase of 35.2% compared to the same period of 2012. The increase was primarily due to the increase in net income.

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 March 31, 2013. 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 2033. 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 for the three months ended March 31, 2013 was $3.1 million, an increase of 45.5% compared to the same period in 2012. Our diluted earnings per share were $0.21 and $0.14 for the three months ended March 31, 2013 and 2012, respectively. This increase was primarily due to the increase in our net income.

Summary of Cash Flows

Summary cash flows information for the three months ended March 31, 2013 and 2012 is as follows:

	2013			2012
Net cash provided by operating activities	$	3,241,305		$	12,849,732
Net cash used in investing activities	$	(1,755,269	)	$	(732,195	)
Net provided by(used in) financing activities	$	5,713,810		$	(8,320,751	)

Net cash provided by operating activities was $3.2 million and $12.8 million for the three months ended March 31, 2013 and 2012. This decrease was mainly due to decreased accounts payable.

Net cash used in investing activities was $1.8 million and $0.7 million for the three months ended March 31, 2013 and 2012. This increase was mainly due to the renovation and construction of LA GO GO’s headquarters.

Net cash provided by financing activities was $5.7 million for the three months ended March 31, 2013. Net cash used in financing activities was $8.3 million for the three months ended March 31, 2012. During the three months ended March 31, 2013, we received $15.8 million in repayment of advances to related party and made advances to the related party of $4.8 million.

Liquidity and Capital Resources

As of March 31, 2013, we had cash and cash equivalents of $16.6 million, other current assets of $112.7 million and current liabilities of $104.3 million. We presently finance our operations primarily from cash flows from operations and borrowings from banks, and we anticipate that this 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 benefit 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 could 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 the first quarter of 2013, the loan interest rate was 6.0% and the loans are payable on demand. The total loans payable as of March 31, 2013 and December 31, 2012 to the officers and employees are listed below:

	March 31, 2013		December 31, 2012
Payable to officers:	$	73,232	$	72,818
Payable to employees:		2,281,654		2,268,756
Total:	$	2,354,886	$	2,341,574

Bank Loans

On August 2, 2010, Goldenway entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.96 million (RMB50 million). The line of credit is 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. The line of credit are also collateralized by the Company’s property and equipment. As of March 31, 2013, Goldenway had borrowed $7.96 million (RMB50 million) under this line of credit from Nanjing Bank with an annual interest rate of 5.88% and due on various dates from April 2013 to September 2013. Approximately $1.59 million (RMB10 million) was repaid subsequent to March 31, 2013.

On May 11, 2012, Ever-Glory Apparel entered into a one-year line of credit agreement for approximately $9.55 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory. As of March 31, 2013, Ever-Glory Apparel had borrowed $4.78 million under this line of credit with an annual interest rate from 5.88% to 6.89% and due on various dates from May 2013 to July 2013. At March 31, 2013, approximately $4.77 million was unused and available under this line of credit.

Total interest expense on bank loans amounted to $791,529 and $546,041 for the three month ended March 31, 2013 and 2012, respectively.

All bank loans are used to fund our daily operations.

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 for the next twelve months will be primarily to fund daily operations and the growth of our business.

Sources of Liquidity

Our primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, borrowing from banks and cash equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.

We believe our cash flows from operations together with our cash and cash equivalents currently on hand and our short term borrowing capacity will be sufficient to meet our needs for working capital, capital expenditure and other commitments for the next twelve months. No assurance can be made that additional financing will be available to us if required, and adequate funds may not be available on terms acceptable to us. If funding is insufficient at any time in the future, we will develop or enhance our products or services and expand our business through our own cash flows from operations.

As of March 31, 2013, we had access to approximately $61.69 million in lines of credit, of which approximately $19.79 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 $44.74 million (RMB 281 million) and approximately $21.33 (RMB 134 million) was provided to Jiangsu Ever-Glory as the counter guarantee as of March 31, 2013. At the end of April 2013, the Company and Jiangsu Ever-glory orally agreed to reduce the counter-guarantee amount to be 50% of the aggregate amount of lines of credit by the end of the second quarter of 2013.

Foreign Currency Translation Risk

Our operations are, for the most part, located in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the United States dollar and the Chinese RMB. Most of our sales are in dollars. During 2003 and 2004, the exchange rate of RMB to the dollar remained constant at 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 March 31, 2013, the market foreign exchange rate had increased to 6.28 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, Tai Xin and LA GO GO (whose functional currency is the RMB) are translated into US dollars using the current 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 expense items are translated at the average exchange rate for the period. All exchange differences are recorded within equity. Foreign currency translation gain for the three and three months ended March 31, 2013 and 2012 was $0.20 million and $0.40 million respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable, bank loans and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less from the date of purchase to be cash equivalents.

Interest Rates: Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. On March 31, 2013, we had $16.6 million in cash and cash equivalents. A hypothetical 5% increase or decrease in either the short term or long term interest rates would not have any material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

Foreign Exchange Rates: We pay our suppliers and employees in Chinese RMB, however, most of our wholesales customers are located in the U.S., Japan and Europe and we generate sales from them in U.S. Dollars, Euros and British Pounds. Accordingly, our business has substantial exposure to changes in exchange rates between and among the Chinese RMB, the U.S. Dollar, the Euro and the British Pound. In the last decade, the RMB was initially pegged at 8.26 RMB to one U.S. Dollar. On July 21, 2005 it was revalued to 8.09 per 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, 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. On March 31, 2013, the exchange rate between the RMB and U.S. Dollar was 6.28 RMB to one U.S. Dollar. For additional discussion regarding our foreign currency risk, see the section titled Risk Factors in the Annual Report on Form 10-K for our fiscal year ended December 31, 2012. 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.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures. As of March 31, 2013, the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not operating effectively as of March 31, 2013. Our disclosure controls and procedures were not effective because of certain “material weaknesses” described in the “Management’s Annual Report on Internal Control over Financial Reporting” section in Item 9 of our annual report for fiscal year ended December 31, 2012. As of March 31, 2013, we had not completed the remediation of these material weaknesses.

Limitations on the Effectiveness of Disclosure Controls. Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

Our management has worked, and will continue to work to improve our internal controls over financial reporting. During the three months ended March 31, 2013, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We know of no pending legal proceedings to which we are a party which is material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

There has been no material change in the information provided in Item 1A of Form 10-K Annual Report for the year ended December 31, 2012 filed with the SEC on April 16, 2013.

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

In March, 2013, the Company issued 5,340 shares of common stock to the Company’s three independent directors as compensation for their services in the fourth quarter 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 December 31, 2012.

The above transactions were not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemptions from the registration requirements of the Securities Act set forth in Section 4(2) thereof as transactions by the Company not involving any public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

Exhibit No.		Description

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

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

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

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

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

* Filed herein

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

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

May 15, 2013	EVER-GLORY INTERNATIONAL GROUP, INC.

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

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

Attached files

Ever-Glory International Group, Inc. Reports

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