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Ever-Glory International Group, Inc. - Quarter Report: 2013 June (Form 10-Q)

f10q0613_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 June 30, 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 August 7, 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
3
   
PART I.  FINANCIAL INFORMATION
4
     
Item 1.
Financial Statements
4
     
 
Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012
4
     
 
Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2013 and 2012 (unaudited)
5
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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
16
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
     
Item 4.
Controls and Procedures
29
     
PART II.  OTHER INFORMATION
30
     
Item 1.
Legal Proceedings
30
     
Item 1A.
Risk Factors
30
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
30
     
Item 3.
Defaults Upon Senior Securities
30
     
Item 4.
Mine Safety Disclosures
30
     
Item 5.
Other Information
30
     
Item 6.
Exhibits
30
     
SIGNATURES
31
 
 
 

 
 
Cautionary Note Regarding Forward-Looking Statements
 
Statements contained in this Quarterly Report on Form 10-Q, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:
 
Competition within our industry;
Seasonality of our sales;
Success of our investments in new product development
Our plans and ability to open new retail stores;
Success of our acquired businesses;
Our relationships with our major customers;
The popularity of our products;
Relationships with suppliers and cost of supplies;
Financial and economic conditions in Asia, Japan, Europe and the U.S.;
Anticipated effective tax rates in future years;
Regulatory requirements affecting our business;
Currency exchange rate fluctuations;
Our future financing needs; and
Our ability to attract additional investment capital on attractive terms.
 
Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar expressions are generally intended to identify forward-looking statements.
 
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’).
 
 
3

 
 
PART I.  FINANCIAL INFORMATION

ITEM 1. Financial Statements
  
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012
 
ASSETS
 
 
June 30,
2013
 
December 31,
2012
 
 
 
 
 
 
CURRENT ASSETS
       
Cash and cash equivalents
  $ 16,136,753     $ 9,365,958  
Accounts receivable
    49,748,625       68,513,893  
Inventories
    56,697,298       46,038,456  
Value added tax receivable
    4,107,991       2,866,018  
Other receivables and prepaid expenses
    1,478,315       1,910,383  
Advances on inventory purchases
    5,313,877       3,596,860  
Amounts due from related parties
    2,405,039       8,680  
Total Current Assets
    135,887,898       132,300,248  
   
 
   
 
 
LAND USE RIGHT, NET
    2,823,135       2,801,472  
PROPERTY AND EQUIPMENT, NET
    17,352,513       16,068,735  
TOTAL ASSETS
  $ 156,063,546     $ 151,170,455  
   
 
   
 
 
LIABILITIES AND EQUITY
 
   
 
   
 
 
CURRENT LIABILITIES
               
Bank loans
  $ 44,823,302     $ 46,919,680  
Payble to officers and employees
    -       2,341,574  
Accounts payable
    41,120,018       49,700,392  
Accounts payable and other payables - related parties
    3,374,320       3,158,814  
Other payables and accrued liabilities
    10,839,202       10,547,190  
Value added and other taxes payable
    4,198,504       4,189,211  
Income tax payable
    581,282       952,652  
Deferred tax liabilities
   
3,731,695
      3,109,095  
Derivative liability
 
- 
      294,000  
Total Current Liabilities
   
108,668,323
      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 June 30, 2013 and December 31, 2012, respectively)
    14,777       14,772  
Additional paid-in capital
    3,562,243       3,552,166  
Retained earnings
    52,588,291       46,774,001  
Statutory reserve
    6,317,715       6,317,715  
Accumulated other comprehensive income
   
8,031,562
      6,873,170  
Amounts due from related party
    (23,119,365 )     (33,573,977 )
Total Stockholders' Equity
   
47,395,223
      29,957,847  
   
 
   
 
 
TOTAL LIABILITIES AND EQUITY
  $ 156,063,546     $ 151,170,455  
 
See the accompanying notes to the consolidated financial statements.
 
 
4

 
 
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)
 
     
Three months ended
     
Six months ended
 
     
June 30,
     
June 30,
 
     
2013
     
2012
     
2013
     
2012
 
NET SALES
 
$
59,129,485
   
$
47,195,031
   
$
137,440,975
   
$
100,421,204
 
COST OF SALES
   
39,650,917
     
33,608,450
     
97,669,484
     
75,231,635
 
                                 
GROSS PROFIT
   
19,478,568
     
13,586,581
     
39,771,491
     
25,189,569
 
                                 
OPERATING EXPENSES
                               
Selling expenses
   
9,898,106
     
6,966,335
     
21,749,402
     
12,800,527
 
General and administrative expenses
   
5,513,105
     
4,198,130
     
9,985,552
     
7,203,406
 
Total Operating Expenses
   
15,411,211
     
11,164,465
     
31,734,954
     
20,003,933
 
                                 
INCOME FROM OPERATIONS
   
4,067,357
     
2,422,116
     
8,036,537
     
5,185,636
 
                                 
OTHER INCOME (EXPENSES)
                               
Interest income
   
342,188
     
328,736
     
637,790
     
610,220
 
Interest expense
   
(736,695
)
   
(458,703
)
   
(1,528,224
)
   
(1,004,744
)
Change in fair value of derivative liability
   
2,000
     
180,000
     
294,000
     
290,800
 
Other income (expenses)
   
(179,098
   
200,010
     
(147,641
   
236,313
 
Total Other Income (Expenses)
   
(571,605
   
250,043
     
(744,075
   
(132,589
)
                                 
INCOME BEFORE INCOME TAX EXPENSE
   
3,495,752
     
2,672,159
     
7,292,462
     
5,318,225
 
INCOME TAX EXPENSE
   
(768,541
)
   
(321,010
)
   
(1,478,172
)
   
(845,866
)
                                 
NET INCOME
   
2,727,211
     
2,351,149
     
5,814,290
     
4,472,359
 
                                 
OTHER COMPERHENSIVE (LOSS) INCOME
                               
Foreign currency translation (loss) gain
   
850,550
     
(196,365
   
1,158,392
     
200,001
 
COMPREHENSIVE INCOME
 
$
3,577,761
   
$
2,154,784
   
$
6,972,682
   
$
4,672,360
 
                                 
EARNINGS PER SHARE
                               
Basic and diluted
 
$
0.18
   
$
0.16
   
$
0.39
   
$
0.30
 
Weighted average number of shares outstanding
                               
Basic and diluted
   
14,777,610
     
14,765,942
     
14,775,869
     
14,763,815
 
 
See the accompanying notes to the condensed consolidated financial statements.
 
 
5

 
 
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)
 
   
2013
   
2012
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
5,814,290
   
$
4,472,359
 
Adjustments to reconcile net income to cash provided
               
by operating activities:
               
Depreciation and amortization
   
3,690,891
     
2,296,910
 
Recovery (Provision) for obsolete inventories
   
(315,354
   
459,213
 
Loss from sale of property and equipment
   
29,499
     
-
 
Change in fair value of derivative liability
   
(294,000
)
   
(290,800
)
Deferred income tax
   
555,716
     
563,191
 
Stock-based compensation
   
10,082
     
9,836
 
Changes in operating assets and liabilites                
Accounts receivable
   
19,994,644
     
14,295,016
 
Inventories
   
(9,415,298
)
   
(2,219,405
)
Value added tax receivable
   
(1,177,837
)
   
(1,591,861
)
Other receivables and prepaid expenses
   
307,455
     
(295,199
Advances on inventory purchases
   
(1,473,254
)
   
(555,284
Amounts due from related parties
   
(2,760,288
)
   
10,848,191
 
Accounts payable
   
(9,577,345
)
   
(8,594,380
)
Accounts payable and other payables- related parties
   
123,426
     
(80,515
)
Other payables and accrued liabilities
   
75,308
     
36,570
 
Value added and other taxes payable
   
(77,745
)
   
(32,117
Income tax payable
   
(389,778
)
   
(90,383
Net cash provided by operating activities
   
5,120,412
     
19,241,223
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
                 
Purchase of property and equipment
   
(4,642,650
)
   
(2,147,918
)
Proceeds from sale of property and equipment
   
13,583
     
-
 
Net cash used in investing activities
   
(4,629,067
)
   
(2,147,918
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from bank loans
   
42,227,892
     
24,576,457
 
Repayment of bank loans
   
(45,290,965
)
   
(31,488,282
)
Repayment of payble to officers and employees
   
(2,381,512
)
   
-
 
Repayment of advances to related party
   
18,781,438
     
-
 
Advances to related party
   
(7,244,771
)
   
(11,794,260
)
Net cash (used in) provided by financing activities
   
6,092,082
     
(18,706,085
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
187,368
     
(25,764
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
6,770,795
     
(1,638,544
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
9,365,958
     
8,822,581
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
16,136,753
   
$
7,184,037
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
                 
Cash paid during the period for:
               
Interest
 
$
1,528,224
   
$
1,004,744
 
Income taxes
 
$
1,199,771
   
$
373,221
 
 
See the accompanying notes to the condensed consolidated financial statements.
 
 
6

 
 
 
 EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE SIX MONTHS ENDED JUNE 30, 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 June 30, 2013, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended June 30, 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 six months ended June 30, 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, and the Company's June 30, 2012, amended Form 10Q/A filed on May 15, 2013.
 
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.
 
 
7

 
 
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 June 30, 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.
 
At December 31, 2012 and through mid June 2013, the Company had a derivative liability subject to recurring fair value measurement ( Level 3) with the change in fair value recognized in earnings (Note 6).
 
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, a 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 June 30, 2013 and December 31, 2012 consisted of the following:
 
   
June 30,
2013
   
December 31,
2012
 
Raw materials
 
$
13,212,328
   
$
5,687,612
 
Work-in-progress
   
14,125,834
     
7,296,733
 
Finished goods
   
32,836,826
     
36,770,852
 
     
60,174,988
     
49,755,197
 
Less: allowance for obsolete inventories
   
(3,477,690
)
   
(3,716,741
)
  Total inventories
 
$
56,697,298
   
$
46,038,456
 
  
Note 4       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 loans could be made only in the period from September 1, 2012 to December 31, 2012. The annual interest rate varies in line with changes in China bank loan interest rates. During the period from September 1, 2012 to June 30, 2013, the average loan interest rate was 6.0% and the total interest expense for the three and six-month periods ended June 30, 2013 was $21,817 and $57,118 respectively.  The total balance of $2,381,512 was repaid to the officers and employees during the three months ended June 30, 2013.
 
 
8

 
 
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 June 30, 2013 and December 31, 2012:
 
Bank
 
June 30,
2013
   
December 31,
2012
 
Nanjing Bank
 
$
14,079,204
   
$
16,743,277
 
Shanghai Pudong Development Bank
   
6,464,000
     
7,014,833
 
Bank of Communications
   
9,703,498
     
6,953,834
 
HSBC
   
2,424,000
     
5,414,316
 
Everbright Bank
   
3,232,000
   
 
3,166,000
 
China Minsheng Bank
 
1,062,152 
     
4,239,800
 
Bank of China
 
5,670,220
     
3,387,620
 
Ping An Bank
 
572,228
     
-
 
Hua xia Bank
   
1,616,000
     
-
 
   
$
44,823,302
   
$
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 $8.08 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 is also collateralized by the Company’s property and equipment. As of June 30, 2013, Goldenway had borrowed $8.08 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 July 2013 to October 2013. Approximately $1.61 million (RMB10 million) was repaid subsequent to June 30, 2013..
 
On May 11, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.70 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory. As of June 30, 2013, Ever-Glory Apparel had borrowed $3.23 million (RMB 20 million) under this line of credit with an annual interest rate ranging from 5.88% to 6.3% and due on July 2013. Ever-Glory Apparel had also borrowed $1.15 million from Nanjing Bank with an annual interest rate of 2.28%, due in July 2013, and collateralized by approximately $1.7 million of accounts receivable from wholesale customers.  At June 30, 2013, approximately $5.32 million was unused and available under this line of credit. Approximately $4.38 million was repaid subsequent to June 30, 2013.
 
On April 10, 2012, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.23 million (RMB20 million). The line of credit is guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of June 30, 2013, LA GO GO had borrowed $1.62 million (RMB10 million) under this line of credit with annual interest rates ranging from 6.29% to 6.44% and due on various dates from September 2013 to October 2013. At June 30, 2013, approximately $1.61 million (RMB10 million) was unused and available under this line of credit.
 
On January 4, 2011, Goldenway entered into a revolving line of credit agreement for approximately $6.46 million (RMB40 million) with Shanghai Pudong Development Bank. As of June 30, 2013, Goldenway had borrowed the maximum amount available under the line of $6.46 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 June 30, 2013, Ever-Glory Apparel had borrowed $6.62 million (RMB 41 million) from the Bank of Communications with an annual interest rate ranging from 5.6% to 6.3% and due on various dates from October 2013 to 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 among the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank. Ever-Glory Apparel had also borrowed $2.27 million from the Bank of Communications with an annual interest rate of 3.4%, due on various dates from July to September 2013, and collateralized by approximately $5.2 million of accounts receivable from wholesale customers.
 
As of June 30, 2013, LA GO GO had borrowed $0.81 million (RMB5 million) from the Bank of Communications with annual interest rate of 6.06% and due in July 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang. Approximately $0.81 million (RMB5 million) was repaid subsequent to June 30, 2013.
  
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 June 30, 2013, Ever-Glory Apparel had borrowed $2.42 million from HSBC with annual interest rate of 5.6%, due on various dates from July to August 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 June 30, 2013, approximately $4.58 million was unused and available. Approximately $1.62 million was repaid subsequent to June 30, 2013.
 
 
9

 
 
On August 21, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $13.41 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 among the Company, Jiangsu Ever-Glory and the bank.  As of June 30, 2013, Ever-Glory Apparel had borrowed $3.23 million (RMB20 million) from Everbright Bank, with annual interest rate of 6.3% and due in September 2013. At June 30, 2013, approximately $10.18 million (RMB63 million) was unused and available under this line of credit.

As of June 30, 2013, Ever-Glory Apparel had borrowed $1.06 million from China Minsheng Bank, with annual interest rate of 2.93% and due in September 2013 and collateralized by approximately $1.6 million of accounts receivable from wholesale customers.
 
On November 16, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.20 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 among the Company, Jiangsu Ever-Glory and the bank.  As of June 30, 2013, Ever-Glory Apparel had borrowed $1.62 million (RMB 10 million) under this line of credit with annual interest rate of 6.05% and due on December 2013. Ever-Glory Apparel had also borrowed $4.05 million (including $1.79 million and RMB14 million) from Bank of China with an annual interest rate ranging from 1.8% to 6.72%, due on various dates from July to September 2013, and collateralized by approximately $7.2 million of accounts receivable from wholesale customers. Approximately $0.4 million was repaid subsequent to June 30, 2013.

As of June 30, 2013, Ever-Glory Apparel had borrowed $0.57 million from Ping An Bank, with annual interest rate of 6.3%, due in September 2013, and collateralized by approximately $0.72 million of accounts receivable from wholesale customers.

As of June 30, 2013, Ever-Glory Apparel had borrowed $1.62 million (RMB 10 million) from Hua Xia Bank, with annual interest rate of 6.6% and due in April 2014. This loan is guaranteed by Goldenway.
 
Total interest expense on bank loans amounted to $736,695, $1,528,224, $458,703 and $1,004,744 for the three and six months ended June 30, 2013 and 2012, respectively.
 
NOTE 6   DERIVATIVE WARRANT LIABILITY
 
The Company had warrants outstanding to purchase an aggregate of 840,454 shares of Company common stock, which warrants required liability classification because of certain provisions that may have resulted in an adjustment to their exercise price. The warrants expired in June 2013. At the expiration date, the remaining value of the warrants not exercised ($2,000) was reduced to $0. The increase in other income resulting from the decrease in derivative warrant liability was $2,000 and $294,000 for the three and six months ended June 30, 2013, respectively, and $180,000 and $290,800 for the three and six months ended June 30, 2012, respectively.
 
NOTE 7   INCOME TAX
 
PRC pre-tax income for the three and six months ended June 30, 2013 and 2012, was taxable in the following jurisdictions.
 
  
 
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
PRC
  $ 2,863,460     $ 1,582,335     $ 5,548,096     $ 3,350,278  
Samoa
    636,295       882,620       1,462,766       1,713,142  
BVI
    (1,003 )     26,204       (2,318 )     (38,159 )
Others
    (3,000 )     181,000       283,918       292,964  
 
  $ 3,495,752     $ 2,672,159     $ 7,292,462     $ 5,318,225  
 
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 25% statutory rate.
 
 
10

 
 
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 has no liabilities for income tax under the current laws of Samoa.
 
The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2013 and 2012, respectively:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
PRC statutory rate
   
25.0
%
   
25.0
%
   
25.0
%
   
25.0
%
Non-taxable or non-deductible items
   
-
     
(2.3
   
(1.4
)
   
(1.9
)
Effect of foreign income tax rates
   
(4.5
)
   
(8.5
)
   
(5.0
)
   
(7.9
)
Other
   
1.5
     
(2.2
   
1.7
     
0.7
 
Effective income tax rate
   
22.0
%
   
12.0
%
   
20.3
%
   
15.9
%
 
Income tax expense for the three and six months ended June 30, 2013 and 2012 is as follows:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Current
 
$
626,528
   
$
121,988
   
$
855,572
   
$
265,092
 
Deferred
   
142,013
     
199,022
     
622,600
     
580,774
 
Income tax expense
 
$
768,541
   
$
321,010
   
$
1,478,172
   
$
845,866
 
 
NOTE 8    EARNINGS PER SHARE
 
The following demonstrates the calculation for earnings per share for the three and six months ended June 30, 2013 and 2012:

   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income
 
$
2,727,211
   
$
2,351,149
   
$
5,814,290
   
$
4,472,359
 
Weighted average number of common shares –Basic and diluted
   
14,777,610
     
14,765,942
     
14,775,869
     
14,763,815
 
Earnings per share –Basic and diluted
 
$
0.18
   
$
0.16
   
$
0.39
   
$
0.30
 

For three and six months ended June 30, 2012, the Company excluding 840,454 warrants outstanding from diluted earnings per share as they were anticipative.

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.
 
 
11

 
 
NOTE 10   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 three and six months ended June 30, 2013 and 2012 is rent revenue from entities controlled by Mr. Kang under operating lease agreements with various terms though 2015 as follows:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
EsCeLav
 
$
3,056
   
$
2,969
   
$
6,038
   
$
5,933
 
Nanjing Eight-One-Five Hi-tech (M&E) Co.,Ltd.
   
4,070
     
3,952
     
8,050
     
7,905
 
Total
 
$
7,126
   
$
6,921
   
$
14,088
   
$
13,838
 
 
Other expenses due to Related Parties
 
Included in other expenses for the three and six months ended June 30, 2013 and 2012 are rent costs due to entities controlled by Mr. Kang under operating lease agreements as follows:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Jiangsu Ever-Glory
 
$
12,788
   
$
12,403
   
$
25,277
   
$
24,822
 
Kunshan Enjin
   
8,517
     
6,569
     
16,774
     
13,137
 
Total
 
$
21,305
   
$
18,972
   
$
42,051
   
$
37,959
 
 
Purchases from, and Sub-contracts with Related Parties
  
For the three and six months ended June 30, 2013 and 2012, the Company purchased raw materials of $101,370, $184,608, $79,413, $714,022, respectively, from Nanjing Knitting.
 
In addition, the Company sub-contracted certain manufacturing work to related parties totaling $5,102,919, $9,088,426, $2,597,793, $5,423,363 for the three and six months ended June 30, 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 and six months ended June 30, 2013 and 2012 are as follows:
 
  
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Nanjing Knitting
 
$
211,296
   
$
119,159
   
$
232,602
   
$
753,768
 
Nanjing Ever-Kyowa
   
255,893
     
246,417
     
523,878
     
411,634
 
Ever-Glory Vietnam
   
3,175,681
     
625,667
     
5,094,787
     
1,455,136
 
Ever-Glory Cambodia
   
1,446,661
     
1,594,778
     
3,221,188
     
2,781,291
 
EsCeLav
   
1,775
     
 6,616
     
4,358
     
12,564
 
Jiangsu Ever-Glory
   
 11,613
     
  5,156
     
11,613
     
8,970
 
   
$
5,102,919
   
$
2,597,793
   
$
9,088,426
   
$
5,423,363
 
 
 
12

 
 
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 June 30, 2013 and December 31, 2012 are as follows:
 
   
June 30,
2013
   
December 31,
2012
 
Nanjing Knitting
 
$
747,004
   
$
756,842
 
Nanjing Ever-Kyowa
   
78,272
     
128,505
 
Ever-Glory Vietnam
   
1,117,607
     
2,183,039
 
Ever-Glory Cambodia
   
1,414,613
     
90,428
 
Kunshan Enjin
 
 
16,774
     
-
 
  Total
 
$
3,374,270
   
$
3,158,814
 

Amounts Due From Related Party
 
The amounts due from related parties at June 30, 2013 and December 31, 2012 are as follows:
 
  
 
June 30,
2013
   
December 31,
2012
 
EsCeLav
 
$
12,473
   
$
8,680
 
Nanjing Eight-One-Five Hi-tech (M&E) Co.,Ltd.
   
61,702
     
-
 
Jiangsu Ever-Glory
   
25,450,229
     
33,573,977
 
  Total
 
$
25,524,404
   
$
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. Because of restrictions on its ability to directly import and export products, the Company had utilized Jiangsu Ever-Glory as its agent to assist the Company with its import and export transactions and its international transportation projects since 2005. 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. These transactions ceased at end of 2011.
 
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 June 30, 2013, Jiangsu Ever-Glory has provided guarantees for approximately $45.4 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 $21.33 million (RMB 132 million).  Mr. Kang has also provided a personal guarantee for $22.46 million (RMB 139 million). During the six months ended June 30, 2013, $7.27 million (RMB45 million) was provided to Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2013, the amount of the counter-guarantee had been reduced to $21.24 million (RMB131 million), which was 46.7% of the aggregate amount of lines of credit. This amount plus accrued interest of $1.88 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G.
 
 
13

 
 
Interest of 0.5% is charged on net amounts due from Jiangsu Ever-Glory at each month end. Interest income for the three and six months ended June 30, 2013 and 2012 was approximately $0.34 million, $0.64 million, $0.33 million and $0.61 million, respectively.
 
 Following is a summary of balances at June 30, 2013 and December 31, 2012:
 
Related Party
 
Type of transaction
 
June 30,
2013
   
December 31,
2012
 
Jiangsu Ever-glory
 
Accounts receivable
 
$
1,059,477
   
$
214,226
 
Jiangsu Ever-glory
 
Advance/(Accounts payable)
   
1,271,387
     
(53,680
Jiangsu Ever-glory
 
Interest income
   
1,878,066
     
1,262,701
 
Jiangsu Ever-glory
 
Counter guarantee deposit
   
21,241,299
     
32,150,730
 
Total
     
$
25,450,229
   
$
33,573,977
 
  
NOTE 11   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 June 30, 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 six-month period ended June 30, 2013, the Company had two wholesale customers that each represented approximately 11% of the Company’s revenues. For the three-month period ended June 30, 2013, the Company had two wholesale customers that represented approximately 14% and 10% of the Company’s revenues respectively, For the six-month period ended June 30, 2012, the Company had two wholesale customers that represented approximately 13% and 12% of the Company’s revenues, respectively. For the three-month period ended June 30, 2012, the Company had two wholesale customers that each represented approximately 11% of the Company’s revenues.
 
For the Company’s wholesale business during the three and six months ended June 30, 2013 and 2012, no supplier represented more than 10% of the total raw materials purchased.
 
For the Company’s retail business, the Company had no supplier that represented more than 10% of raw materials purchases during the six months ended June 30, 2013. The Company purchased 10% of  its raw materials from one supplier during the three months ended June 30, 2013. For the Company’s retail business, the Company had one supplier that represented approximately 14% of raw materials purchases during the six months ended June 30, 2012. The Company purchased 11% and 14% of its raw materials from two suppliers respectively, during the three months ended June 30, 2012.
 
For the wholesale business, during the six months ended June 30, 2013, the Company relied on two manufacturers for 15% and 13% of purchased finished goods, respectively. During the six months ended June 30, 2012, the Company relied on two manufacturers for 17% and 13% of purchased finished goods, respectively. During the three months ended June 30, 2013, the Company relied on two manufacturers for 17% and 16% of purchased finished goods, respectively. During the three months ended June 30, 2012, the Company relied on two manufacturers for 19% and 16% of purchased finished goods, respectively. 
 
For the retail business, during the three and six months ended June 30, 2013 and 2012, no supplier represented more than 10% of the total purchased finished goods.
 
 
14

 
 
The Company’s revenues for the three and six months ended June 30, 2013 and 2012 were earned in the following geographic areas:
 
  
 
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
The People’s Republic of China
 
$
40,694,314
   
$
29,320,073
   
$
100,376,413
   
$
59,828,555
 
Germany
   
3,305,231
     
3,393,413
     
7,676,564
     
8,858,106
 
United Kingdom
   
4,961,895
     
4,588,231
     
7,826,529
     
7,953,390
 
Europe-Other
   
3,134,666
     
3,189,555
     
7,102,281
     
7,753,988
 
Japan
   
5,306,554
     
2,416,434
     
9,005,388
     
8,523,582
 
United States
   
1,726,825
     
4,287,325
     
5,453,800
     
7,503,583
 
Total
 
$
59,129,485
   
$
47,195,031
   
$
137,440,975
   
$
100,421,204
 
  
NOTE 12   SEGMENTS
 
The Company reports financial and operating information in the following two segments:
 
(a)  Wholesale segment
 
(b)  Retail segment
 
  
 
Wholesale segment
   
Retail segment
   
Total
 
Six months ended June 30, 2013
                 
Segment profit or loss:
                 
Net revenue from external customers
 
$
58,711,923
   
$
78,729,052
   
$
137,440,975
 
Income from operations
 
$
5,339,873
   
$
2,696,664
   
$
8,036,537
 
Interest income
 
$
624,195
   
$
13,595
   
$
637,790
 
Interest expense
 
$
1,412,096
   
$
116,128
   
$
1,528,224
 
Depreciation and amortization
 
$
478,315
   
$
3,212,576
   
$
3,690,891
 
Income tax expense
 
$
828,834
   
$
649,338
   
$
1,478,172
 
   
 
   
 
   
 
 
Six months ended June 30, 2012
 
 
   
 
   
 
 
Segment profit or loss:
 
 
   
 
   
 
 
Net revenue from external customers
 
$
59,468,451
   
$
40,952,753
   
$
100,421,204
 
Income (loss) from operations
 
$
4,494,836
   
$
690,800
   
$
5,185,636
 
Interest income
 
$
603,785
   
$
6,435
   
$
610,220
 
Interest expense
 
$
938,754
   
$
65,990
   
$
1,004,744
 
Depreciation and amortization
 
$
498,899
   
$
1,798,011
   
$
2,296,910
 
Income tax expense
 
$
687,462
   
$
158,404
   
$
845,866
 
 
   
Wholesale segment
   
Retail segment
   
Total
 
Three months ended June 30, 2013
                 
Segment profit or loss:
                 
Net revenue from external customers
 
$
27,051,468
   
$
32,078,017
   
$
59,129,485
 
Income from operations
 
$
2,547,245
   
$
1,520,112
   
$
4,067,357
 
Interest income
 
$
332,268
   
$
9,920
   
$
342,188
 
Interest expense
 
$
678,069
   
$
58,626
   
$
736,695
 
Depreciation and amortization
 
$
244,604
   
$
1,815,642
   
$
2,060,246
 
Income tax expense
 
$
400,680
   
$
367,861
   
$
768,541
 
   
 
   
 
   
 
 
Three months ended June 30, 2012
 
 
   
 
   
 
 
Segment profit or loss:
 
 
   
 
   
 
 
Net revenue from external customers
 
$
28,807,928
   
$
18,387,103
   
$
47,195,031
 
Income (loss) from operations
 
$
1,967,832
   
$
454,284
   
$
2,422,116
 
Interest income
 
$
325,486
   
$
3,250
   
$
328,736
 
Interest expense
 
$
424,193
   
$
34,510
   
$
458,703
 
Depreciation and amortization
 
$
248,435
   
$
887,840
   
$
1,136,275
 
Income tax expense
 
$
215,057
   
$
105,953
   
$
321,010
 
 
 
15

 
 
EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)
 
ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
The following discussion and analysis of our financial condition and results of operations for the three and six months  ended June 30, 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 NYSE MKT (previously NYSE Amex) 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.
 
 
16

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

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

Retail Business
 
The business objective for our retail segment is to establish a leading brand of women’s apparel and to build a nationwide retail network in China. As of June 30, 2013, we have 831 stores (including store-in-stores) which included 127 stores that were opened and 23 stores that were closed in first half of 2013.
 
We believe that our growth opportunities and continued investment initiatives include:

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.

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 180 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 time of the register receipt.
 
 
17

 
 
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 European 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 or should it weaken, these 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 other 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 reserve for bad accounts receivable may need to be taken or such receivable 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 for the three months ended June 30, 2013 and 2012

The following table summarizes our results of operations for the three months ended June 30, 2013 and 2012. The table and the discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.
 
     
Three Months Ended June 30,
 
     
2013
     
2012
 
     
(in U.S. Dollars, except for percentages)
 
Sales
 
$
59,129,485
     
100.0
%
 
$
47,195,031
     
100.0
%
Gross Profit
 
$
19,478,568
     
32.9
%
 
$
13,586,581
     
28.8
%
Operating Expense
 
$
15,411,211
     
26.0
%
 
$
11,164,465
     
23.7
%
Income From Operations
 
$
4,067,357
     
6.9
%
 
$
2,422,116
     
5.1
%
Other Income (Expenses)
 
$
(571,605)
     
(0.1)
%
 
$
250,043
     
0.1
%
Income tax expense
 
$
768,541
     
1.3
%
 
$
321,010
     
0.7
%
Net Income
 
$
2,727,211
     
4.6
%
 
$
2,351,149
     
5.0
%
 
 
18

 
 
Revenue
 
The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2013 and 2012.
 
   
2013
   
% of total
sales
   
2012
   
% of total
sales
   
Growth in 2013compared with 2012
 
Wholesales business
                             
The People’s Republic of China
 
$
8,616,297
     
14.6
%
 
$
10,932,971
     
23.2
%
   
(21.2
)%
Germany
   
3,305,231
     
5.6
     
3,393,413
     
7.2
     
(2.6
)
United Kingdom
   
4,961,895
     
8.4
     
4,588,231
     
9.7
     
8.1
 
France
   
2,956,328
     
5.0
     
3,049,795
     
6.5
     
(3.1
)
Europe-Other
   
178,338
     
0.3
     
139,760
     
0.3
     
27.6
 
Japan
   
5,306,554
     
9.0
     
2,416,433
     
5.1
     
119.6
 
United States
   
1,726,825
     
2.9
     
4,287,325
     
9.1
     
(59.7
Total wholesale business
   
27,051,468
     
45.7
     
28,807,928
     
61.0
     
(6.1)
 
Retail business
   
32,078,017
     
54.3
     
18,387,103
     
39.0
     
74.5
 
Total
 
$
59,129,485
     
100.0
%
 
$
47,195,031
     
100.0
%
   
25.3
%

Sales for the three months ended June 30, 2013 were $59.1 million, an increase of 25.3% from the three months ended June 30, 2012. This increase was primarily attributable to increased sales in our retail business partially offset for decreased sales in our wholesales business.

Sales generated from our wholesale business contributed 45.7% or $27.1 million of our total sales for the three months ended June 30, 2013, a decrease of 6.1% compared to $28.8 million in the three months ended June 30, 2012. This decrease was primarily attributable to decreased sales in P.R.C, the United States, Germany and France. The reduced sales in the overseas wholesale segment was primarily due to global economic uncertainty and instability, the advanced economies represented by Europe and the US are recovering slowly, which seriously impacted China's apparel exports; therefore, our overseas wholesale business also faced declining orders. The  domestic fashion consumption was weak due to the slow microeconomic development in China. As the retailers kept to reduce inventory, our domestic wholesale decreased 21.2% compared to the same period last year.
 
Sales generated from our retail business contributed 54.3% or $32.1 million of our total sales for the three months ended June 30, 2013, an increase of 74.5% compared to 39.0% or $18.4 million in the three months ended June 30, 2012. This increase was primarily due to the increase in same store sales and new stores opened. We had 831 LA GO GO stores as of June 30, 2013, compared to 562 LA GO GO stores at June 30, 2012.

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.
 
 
19

 
 
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 June 30, 2013 and 2012.

                           
Growth
 
                           
(Decrease) in
 
   
Three months ended June 30,
   
2013 Compared
 
   
2013
   
2012
   
with 2012
 
   
(in U.S. dollars, except for percentages)
       
Net Sales for Wholesale Sales
 
$
27,051,468
     
100.0
%
 
$
28,807,928
     
100.0
%
   
(6.1
)%
Raw Materials
   
12,038,807
     
44.5
     
13,097,205
     
45.5
     
(8.1
)
Labor
   
1,231,609
     
4.6
     
1,137,557
     
3.9
     
8.3
 
Outsourced Production Costs
   
6,942,002
     
25.7
     
7,979,797
     
27.7
     
(13.0
)
Other and Overhead
   
140,929
     
0.5
     
22,662
     
0.1
     
521.8
 
Total Cost of Sales for Wholesale
   
20,353,347
     
75.2
     
22,237,221
     
77.2
     
(8.5
)
Gross Profit for Wholesale
   
6,698,121
     
24.8
     
6,570,707
     
22.8
     
1.9
 
Net Sales for Retail
   
32,078,017
     
100.0
     
18,387,103
     
100.0
     
74.5
 
Production Costs
   
9,455,948
     
29.5
     
5,212,762
     
28.4
     
81.4
 
Rent
   
9,841,622
     
30.7
     
6,158,467
     
33.5
     
59.8
 
Total Cost of Sales for Retail
   
19,297,570
     
60.2
     
11,371,229
     
61.8
     
69.7
 
Gross Profit for Retail
   
12,780,447
     
39.8
     
7,015,874
     
38.2
     
82.2
 
Total Cost of Sales
   
39,650,917
     
67.1
     
33,608,450
     
71.2
     
18.0
 
Gross Profit
 
$
19,478,568
     
32.9
%
 
$
13,586,581
     
28.8
%
   
43.4
%
 
Raw material costs for our wholesale business were 44.5% of our total wholesale business sales in the three months ended June 30, 2013, compared to 45.5% in the three months ended June 30, 2012.  The decrease was mainly due to decreased raw materials prices.

Labor costs for our wholesale business were 4.6% of our total wholesale business sales in the three months ended June 30, 2013, compared to 3.9% in the three months ended June 30, 2012. The increase was mainly due to the increased average salaries of employees.
 
Outsourced manufacturing costs for our wholesale business were 25.7% of our total wholesale business sales in the three months ended June 30, 2013, compared to 27.7% in the three months ended June 30, 2012. This decrease was primarily attributable to the outsourced orders of approximately $4.6 million to our related factories in Vietnam and Cambodia, for lower manufacturing costs in the three months ended June 30, 2013.
 
Overhead and other expenses for our wholesale business accounted for 0.5% of our total wholesale business sales for the three months ended June 30, 2013, compared to 0.1% of total sales for the three months ended June 30, 2012.

Wholesale business gross profit for the three months ended June 30, 2013 and 2012 was $6.7 and $6.6 million, respectively. As a percentage of wholesale sales, gross profit accounted for 24.8% of our total wholesale sales for the three months ended June 30, 2013, an increase of 2.0% compared to 22.8% for the three months ended June 30, 2012. The increase was mainly due to decreased raw materials prices and outsourced manufacturing costs.

Production costs for our retail business were $9.5 million during the three months ended June 30, 2013 compared to $5.2 million during the three months ended June 30, 2012. As a percentage of retail sales, retail production costs accounted for 29.5% of our total retail sales in the three months ended June 30, 2013, compared to 28.4% of total retail sales in the three months ended June 30, 2012. This increase was primarily due to reduced retail prices in various promotions in exchange for increased sales volume during the three months ended June 30, 2013.      .
 
Rent costs for our retail business were $9.8 million for the three months ended June 30, 2013 compared to $6.2 million for the three months ended June 30, 2012. As a percentage of sales, rent costs accounted for 30.7% of our total retail sales for the three months ended June 30, 2013, compared to 33.5% of total retail sales for the three months ended June 30, 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 June 30, 2013 was $12.8 million and gross margin was 39.8%. Gross profit in our retail business for the three months ended June 30, 2012 was $7.0 million and gross margin was 38.2%.

Total cost of sales for the three months ended June 30, 2013 was $39.7 million, compared to $33.6 million for the three months ended June 30, 2012, an increase of 18.0%. As a percentage of total sales, cost of sales decreased to 67.1% of total sales for the three months ended June 30, 2013, compared to 71.2% of total sales for the three months ended June 30, 2012. Consequently, gross margin increased to 32.9% for the three months ended June 30, 2013 from 28.8% for the three months ended June 30, 2012.
 
 
20

 
 
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 June 30,
   
Increase/
 
   
2013
   
2012
   
(Decrease)
 
   
(in U.S. Dollars, except for percentages)
       
Gross Profit
  $ 19,478,568       32.9 %   $ 13,586,581       28.8 %     43.4 %
Operating Expenses:
 
 
   
 
           
 
         
Selling Expenses
    9,898,106       16.7       6,966,335       14.8       42.1  
General and Administrative Expenses
    5,513,105       9.3       4,198,130       8.9       31.3  
Total
    15,411,211       26.0       11,164,465       23.7       38.0  
Income from Operations
  $ 4,067,357       6.9 %   $ 2,422,116       5.1 %     67.9 %
 
Selling expenses increased 42.1% to $9.9 million for the three months ended June 30, 2013 from $7.0 million for the three months ended June 30, 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 31.3% to $5.5 million for the three months ended June 30, 2013 from $4.2 million for the three months ended June 30, 2012. As a percentage of total sales, general and administrative expenses increased to 9.3% of total sales for the three months ended June 30, 2013, compared to 8.9% of total sales for the three months ended June 30, 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 67.9% to $4.1 million for the three months ended June 30, 2013 from $2.4 million for the three months ended June 30, 2012.  As a percentage of sales, income from operations accounted for 6.9% of our total sales for the three months ended June 30, 2013, an increase of 1.8% compared to the three months ended June 30, 2012 as a result of increasing gross profit.
  
Interest Expense
 
Interest expense was $0.7 million for the three months ended June 30, 2013, an increase of 60.6% compared to the same period in 2012. This increase was attributable to the increased interest rates and loan amounts.
 
Change in fair value of derivative liability

Change in fair value of derivative liability was a gain of $0.002 million and $0.2 million, based on the Binnomial Lattice model, for the three months ended June 30, 2013 and 2012, respectively.
 
Income Tax Expenses
 
Income tax expense for the three months ended June 30, 2013 was $0.8 million, an increase of 139% compared to the same period of 2012. The increase was primarily due to increased profits of LA GO GO.

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.
 
 
21

 
 
All PRC subsidiaries are subject to 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 for the three months ended June 30, 2013 was $2.7 million, an increase of 16% compared to the same period in 2012. Our basic and diluted earnings per share were $0.18 and $0.16 for the three months ended June 30, 2013 and 2012, respectively.

Results of Operations for the six months ended June 30, 2013 and 2012

The following table summarizes our results of operations for the six months ended June 30, 2013 and 2012. 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.
 
     
Six Months Ended June 30,
 
     
2013
     
2012
 
     
(in U.S. Dollars, except for percentages)
 
Sales
 
$
137,440,975
     
100.0
%
 
$
100,421,204
     
100.0
%
Gross Profit
   
39,771,491
     
28.9
     
25,189,569
     
25.1
 
Operating Expense
   
31,734,954
     
23.1
     
20,003,933
     
19.9
 
Income From Operations
   
8,036,537
     
5.8
     
5,185,636
     
5.2
 
Other Income (Expenses)
   
(744,075
)    
0.5
     
(132,589
)    
0.1
 
Income tax expense
   
1,478,172
     
1.1
     
845,866
     
0.8
 
Net Income
 
$
5,814,290
     
4.2
%
 
$
4,472,359
     
4.5
%
  
Revenue
 
The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2013 and 2012.

   
2013
   
% of total
sales
   
2012
   
% of total
sales
   
Growth in
2013compared
with 2012
 
Wholesales business
                             
The People’s Republic of China
 
$
21,647,361
     
15.8
%
 
$
18,875,802
     
18.8
%
   
14.7
%
Germany
   
7,676,564
     
5.6
     
8,858,106
     
8.8
     
(13.3
)
United Kingdom
   
7,826,529
     
5.7
     
7,953,390
     
7.9
     
(1.6
)
France
   
6,369,316
     
4.6
     
7,139,555
     
7.1
     
(10.8
)
Europe-Other
   
732,965
     
0.5
     
614,433
     
0.6
     
19.3
 
Japan
   
9,005,388
     
6.6
     
8,523,582
     
8.5
     
5.7
 
United States
   
5,453,800
     
4.0
     
7,503,583
     
7.5
     
(27.3
Total wholesale business
   
58,711,923
     
42.7
     
59,468,451
     
59.2
     
(1.3
Retail business
   
78,729,052
     
57.3
     
40,952,753
     
40.8
     
92.2
 
Total
 
$
137,440,975
     
100.0
%
 
$
100,421,204
     
100.0
%
   
36.9
%
 
 
22

 
 
Sales for the six months ended June 30, 2013 were $137.4 million, an increase of 36.9% from the six months ended June 30, 2012. This increase was primarily attributable to increased sales in our retail business.

Sales generated from our wholesale business contributed 42.7% or $58.7 million of our total sales for the six months ended June 30, 2013, a decrease of 1.3% compared to $59.5 million in the six months ended June 30, 2012. This decrease was primarily attributable to decreased sales in Germany, the United States and France. The reduced sales in the overseas wholesale segment was primarily due to global economic uncertainty and instability, the developed economies represented by Europe and the US are recovering slowly, which seriously impacted China's apparel exports; as a result, our overseas wholesale business also faced declining orders.

Sales generated from our retail business contributed 57.3% or $78.7 million of our total sales for the six months ended June 30, 2013, an increase of 92.2% compared to 40.8% or $41.0 million in the six months ended June 30, 2012. This increase was primarily due to the increase in same store sales and new stores opened. We had 831 LA GO GO stores as of June 30, 2013, compared to 562 LA GO GO stores at June 30, 2012.
 
Total retail store square footage and sales per square foot for the six months ended June 30, 2013 and 2012 are as follows:
 
   
2013
   
2012
 
Total store square footage
   
754,870
     
489,444
 
Number of stores
   
831
     
562
 
Average store size, square feet
   
908
     
871
 
Total store sales
 
$
78,729,052
   
$
40,952,753
 
Sales per square foot
 
$
104
   
$
84
 
 
Same store sales and newly opened store sales for the six months ended June 30, 2013 and 2012 are as follows:
 
   
2013
   
2012
 
Sales from stores open a full year
 
$
49,510,906
   
$
24,508,726
 
Newly opened store sales
   
26,054,394
     
14,133,718
 
Other*
   
3,163,752
     
2,310,309
 
Total
 
$
78,729,052
   
$
40,952,753
 
 
*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.
 
 
23

 
 
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 six months ended June 30, 2013 and 2012.
 
         
Growth
 
         
(Decrease) in
 
   
Six months ended June 30,
   
2013 compared
 
   
2013
   
2012
   
with 2012
 
   
(in U.S. dollars, except for percentages)
       
Net Sales for Wholesale Sales
 
$
58,711,923
     
100.0
%
 
$
59,468,451
     
100.0
%
   
(1.3
)%
Raw Materials
   
26,041,183
     
44.4
     
27,333,840
     
46.0
     
(4.7
)
Labor
   
2,287,662
     
3.9
     
2,046,295
     
3.4
     
11.8
 
Outsourced Production Costs
   
16,896,224
     
28.8
     
17,620,323
     
29.6
     
(4.1
)
Other and Overhead
   
271,514
     
0.5
     
253,413
     
0.4
     
7.1
 
Total Cost of Sales for Wholesale
   
45,496,583
     
77.5
     
47,253,871
     
79.5
     
(3.7
)
Gross Profit for Wholesale
   
13,215,340
     
22.5
     
12,214,580
     
20.5
     
8.2
 
Net Sales for Retail
   
78,729,052
     
100.0
     
40,952,753
     
100.0
     
92.2
 
Production Costs
   
24,512,666
     
31.1
     
13,081,846
     
31.9
     
87.4
 
Rent
   
27,660,235
     
35.1
     
14,895,918
     
36.4
     
85.7
 
Total Cost of Sales for Retail
   
52,172,901
     
66.3
     
27,977,764
     
68.3
     
86.5
 
Gross Profit for Retail
   
26,556,151
     
33.7
     
12,974,989
     
31.7
     
104.7
 
Total Cost of Sales
   
97,669,484
     
71.1
     
75,231,635
     
74.9
     
29.8
 
Gross Profit
 
$
39,771,491
     
28.9
%
 
$
25,189,569
     
25.1
%
   
57.9
%
 
Raw material costs for our wholesale business were 44.4% of our total wholesale business sales in the six months ended June 30, 2013, compared to 46.0% in the six months ended June 30, 2012.  The decrease was mainly due to decreased raw materials prices.

Labor costs for our wholesale business were 3.9% of our total wholesale business sales in the six months ended June 30, 2013, compared to 3.4% in the six months ended June 30, 2012. The increase was mainly due to the increased average salaries of employees.
Outsourced manufacturing costs for our wholesale business were 28.8% of our total sales in the six months ended June 30, 2013, compared to 29.6% in the six months ended June 30, 2012. This decrease was primarily attributable to the outsourced orders of approximately $8.3 million to our related factories in Vietnam and Cambodia, for lower manufacturing costs in the six months ended June 30, 2013.

Overhead and other expenses for our wholesale business accounted for 0.5% and 0.4% of our total sales for the six months ended June 30, 2013 and 2012 respectively.
 
Gross profit in our wholesale business for the six months ended June 30, 2013 was $13.2 million, an increase of 8.2% compared to the six months ended June 30, 2012. As a percentage of wholesale sales, gross profit accounted for 22.5% of our total wholesale sales for the six months ended June 30, 2013, an increase of 2.0% compared to 20.5% for the six months ended June 30, 2012. The increase was mainly due to decreased raw materials prices and outsourced manufacturing costs.

Production costs for our retail business were $24.5 million during the six months ended June 30, 2013 versus $13.1 million during the six months ended June 30, 2012. As a percentage of total retail sales, Production costs for our retail business were 31.1% of our total retail sales during the six months ended June 30, 2013, a slight decreased compared to 31.9% during the six months ended June 30, 2012.
 
Rent costs for our retail business were $27.7 million or 35.1% of our total retail sales during the six months ended June 30, 2013 versus $14.9 million or 36.4% during the six months ended June 30, 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 six months ended June 30, 2013 was $26.6 million and gross margin was 33.7%. Gross profit in our retail business for the six months ended June 30, 2012 was $13.0 million and gross margin was 31.7%.

Total cost of sales for the six months ended June 30, 2013 was $97.7 million, an increase of 29.8% compared to the six months ended June 30, 2012. As a percentage of total sales, our cost of sales decreased to 71.1% for the six months ended June 30, 2013, compared to 74.9% for the six months ended June 30, 2012. Consequently, gross margin increased to 28.9% for the six months ended June 30, 2013 from 25.1% for the six months ended June 30, 2012.
 
 
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We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. For our wholesale business, purchases from our five largest suppliers represented approximately 22.9% and 19.0% of raw material purchases for the six months ended June 30, 2013 and 2012, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six months ended June 30, 2013 and 2012. For our retail business, purchases from our five largest suppliers represented approximately 31.0% and 43.9% of raw material purchases for the six months ended June 30, 2013 and 2012 respectively. No one supplier provided more than 10% of our total purchases for the six months ended June 30, 2013. One supplier provided 13.8% of our total purchases for the six months ended June 30, 2012. 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 46.6% of finished goods purchases for the six months ended June 30, 2013 and 2012. Two contract manufacturers provided approximately 15.4% and 13.1% of our finished goods purchases for the six months ended June 30, 2013. Two contract manufacturers provided approximately 16.6% and 13.2% of our finished goods purchases for the six months ended June 30, 2012. For our retail business, our five largest contract manufacturers represented approximately 16.0% and 18.5% of finished goods purchases for the six months ended June 30, 2013 and 2012, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2013 and 2012. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

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

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

Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly our gross profit amounts may not be comparable to those of other companies who include these amounts in costs of sales.
 
   
Six months ended June 30,
   
Increase
 
   
2013
   
2012
   
(Decrease) %
 
   
(in U.S. Dollars, except for percentages)
       
Gross Profit
  $ 39,771,491       28.9 %   $ 25,189,569       25.1 %     57.9 %
Operating Expenses:
 
 
   
 
                   
 
 
Selling Expenses
    21,749,402       15.8       12,800,527       12.7       69.9  
General and Administrative Expenses
    9,985,552       7.3       7,203,406       7.2       38.6  
Total
    31,734,954       23.1       20,003,933       19.9       58.6  
Income from Operations
  $ 8,036,537       5.8 %   $ 5,185,636       5.2 %     55.0 %
 
Selling expenses were $21.7 million in the six months ended June 30, 2013, an increase of 69.9% or $8.9 million compared to the six months ended June 30, 2012. The increase was attributable to an increase in salaries and the number of retail staff, as well as increased decoration and marketing expenses associated with the promotion of LA GO GO.

General and administrative expenses were $10.0 million in the six months ended June 30, 2013, an increase of 38.6% compared to the six months ended June 30, 2012. As a percentage of total sales, general and administrative expenses slightly increased to 7.3% of total sales for the six months ended June 30, 2013, compared to 7.2% of total sales for the six months ended June 30, 2012.
 
 
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Income from Operations
 
Income from operations increased 55.0% to $8.0 million for the six months ended June 30, 2013 from $5.2 million for the six months ended June 30, 2012. This increase was due to our increased gross profit.
 
Income from operations for our retail business was $2.7 million in the six months ended June 30, 2013 compared to $0.7 million in the six months ended June 30, 2012. As a percentage of total retail sales, income from operations increased to 3.4% of total retail sales for the six months ended June 30, 2013, compared to 1.7% of total retail sales for the six months ended June 30, 2012. The increase was due to increased gross profit in our retail business.
 
Income from operations for our wholesale business was $5.3 million in the six months ended June 30, 2013 compared to $4.5 million in the six months ended June 30, 2012. As a percentage of total wholesale sales, income from operations increased to 9.1% of total wholesale sales for the six months ended June 30, 2013, compared to 7.6% of total wholesale sales for the six months ended June 30, 2012. The increase was due to the decreased cost of sales for our wholesale business.
 
Interest Expense
 
Interest expense was $1.5 million for the six months ended June 30, 2013, an increase of 52.1% compared to the same period in 2012. This increase was attributable to the increased interest rates and loan amounts.
 
Change in fair value of derivative liability

Change in fair value of derivative liability was a gain of $0.29 million and $0.29 million, based on the Binnomial Lattice model, for the six months ended June 30, 2013 and 2012, respectively.
 
Income Tax Expenses
 
Income tax expense for the six months ended June 30, 2013 was $1.5 million, an increase of 74.8% compared to the same period of 2012. The increase was primarily due to increase in profit of LA GO GO.

Net Income

Net income for the six months ended June 30, 2013 was $5.8 million, an increase of 30.0% compared to the same period in 2012. Our diluted earnings per share were $0.39 and $0.30 for the six months ended June 30, 2013 and 2012, respectively.
 
Summary of Cash Flows
 
Net cash provided by operating activities was $5.12 million for the six months ended June 30, 2013, compared with $19.2 million during the six months ended June 30, 2012. The decrease was primarily due to a decrease in amounts due from related parties.
 
Net cash used in investing activities was $4.6 million for the six months ended June 30, 2013, compared with $2.1 million during the six months ended June 30, 2012. The increase was mainly due to increased equipment purchases.

Net cash provided by financing activities was $6.1 million for the six months ended June 30, 2013, compared with net cash used in financing activities of $18.7 million during the six months ended June 30, 2012. During the six months ended June 30, 2013, we repaid $45.3 million of bank loans and received bank loan proceeds of $42.2 million. Also, under the counter-guarantee agreement, we advanced $7.2 million to the related party and received $18.8 million from the related party during the six months ended June 30, 2013.
 
Liquidity and Capital Resources
 
As of June 30, 2013, we had cash and cash equivalents of $16.1 million, other current assets of $119.8 million and current liabilities of $108.7 million. We presently finance our operations primarily from cash flows from operations and bank loans and we anticipate that these will continue to be our primary sources of funds to finance our short-term cash needs.
 
 
26

 
 
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 $8.08 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 is also collateralized by the Company’s property and equipment. As of June 30, 2013, Goldenway had borrowed $8.08 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 July 2013 to October 2013. Approximately $1.61 million (RMB10 million) was repaid subsequent to June 30, 2013..
 
On May 11, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $9.70 million (RMB60 million) with Nanjing Bank and guaranteed by Jiangsu Ever-Glory. As of June 30, 2013, Ever-Glory Apparel had borrowed $3.23 million (RMB 20 million) under this line of credit with an annual interest rate ranging from 5.88% to 6.3% and due on July 2013. Ever-Glory Apparel had also borrowed $1.15 million from Nanjing Bank with an annual interest rate of 2.28%, due in July 2013, and collateralized by approximately $1.7 million of accounts receivable from wholesale customers. At June 30, 2013, approximately $5.32 million was unused and available under this line of credit. Approximately $4.38 million was repaid subsequent to June 30, 2013..
 
On April 10, 2012, LA GO GO entered into a revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $3.23 million (RMB20 million). The line of credit is guaranteed by Jiangsu Ever-Glory and Mr. Kang. As of June 30, 2013, LA GO GO had borrowed $1.62 million (RMB10 million) under this line of credit with annual interest rates ranging from 6.29% to 6.44% and due on various dates from September 2013 to October 2013. At June 30, 2013, approximately $1.61 million (RMB10 million) was unused and available under this line of credit.
 
On January 4, 2011, Goldenway entered into a revolving line of credit agreement for approximately $6.46 million (RMB40 million) with Shanghai Pudong Development Bank. As of June 30, 2013, Goldenway had borrowed the maximum amount available under the line of $6.46 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 June 30, 2013, Ever-Glory Apparel had borrowed $6.62 million (RMB 41 million) from the Bank of Communications with an annual interest rate ranging from 5.6% to 6.3% and due on various dates from October 2013 to 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 among the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank. Ever-Glory Apparel had also borrowed $2.27 million from the Bank of Communications with an annual interest rate of 3.4%, due on various dates from July to September 2013, and collateralized by approximately $5.2 million of accounts receivable from wholesale customers.
 
As of June 30, 2013, LA GO GO had borrowed $0.81 million (RMB5 million) from the Bank of Communications with annual interest rate of 6.06% and due in July 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang. Approximately $0.81 million (RMB 5 million) was repaid subsequent to June 30, 2013.
  
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 June 30, 2013, Ever-Glory Apparel had borrowed $2.42 million from HSBC with annual interest rate of 5.6%, due on various dates from July to August 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 June 30, 2013, approximately $4.58 million was unused and available. Approximately $1.62 million was repaid subsequent to June 30, 2013.

On August 21, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $13.41 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 among the Company, Jiangsu Ever-Glory and the bank.  As of June 30, 2013, Ever-Glory Apparel had borrowed $3.23 million (RMB20 million) from Everbright Bank, with annual interest rate of 6.3% and due in September 2013. At June 30, 2013, approximately $10.18 million (RMB63 million) was unused and available under this line of credit.

As of June 30, 2013, Ever-Glory Apparel had borrowed $1.06 million from China Minsheng Bank, with annual interest rate of 2.93% and due in September 2013 and collateralized by approximately $1.6 million of accounts receivable from wholesale customers.
 
 
27

 
 
On November 16, 2012, Ever-Glory Apparel entered into a line of credit agreement for approximately $4.20 million (RMB 26 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 among the Company, Jiangsu Ever-Glory and the bank.  As of June 30, 2013, Ever-Glory Apparel had borrowed $1.62 million (RMB 10 million) under this line of credit with annual interest rate of 6.05% and due on December 2013. Ever-Glory Apparel had also borrowed $4.05 million (including $1.79 million and RMB 14 million) from Bank of China with an annual interest rate ranging from 1.8% to 6.72%, due on various dates from July to September 2013, and collateralized by approximately $7.2 million of accounts receivable from wholesale customers. Approximately $0.4 million was repaid subsequent to June 30, 2013.

As of June 30, 2013, Ever-Glory Apparel had borrowed $0.57 million from Ping An Bank, with annual interest rate of 6.3%, due in September 2013, and collateralized by approximately $0.72 million of accounts receivable from wholesale customers.

As of June 30, 2013, Ever-Glory Apparel had borrowed $1.62 million (RMB 10 million) from Hua Xia Bank, with annual interest rate of 6.6% and due in April 2014. This loan is guaranteed by Goldenway.

As of June 30, 2013, Ever-Glory Apparel had borrowed $1.62 million from Hua Xia Bank, with annual interest rate of 6.3% and due in April 2014. This loan is guaranteed by Goldenway.
 
All bank loans are used to fund our daily operations.

Amounts due from related party
 
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 June 30, 2013, Jiangsu Ever-Glory has provided guarantees for approximately $45.4 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 $21.33 million (RMB 132 million).  Mr. Kang has also provided a personal guarantee for $22.46 million (RMB 139 million). During the six months ended June 30, 2013, $7.27 million (RMB45 million) was provided to Jiangsu Ever-Glory under the counter-guarantee. As of June 30, 2013, the amount of the counter-guarantee had been reduced to $21.24 million (RMB131 million), which was 46.7% of the aggregate amount of lines of credit. This amount plus accrued interest of $1.88 million have been classified as a reduction of equity, consistent with the guidance of SEC Staff Accounting Bulletins 4E and 4G.
 
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, some of this being used to fund new stores.
 
Sources of Liquidity
 
Our primary sources of liquidity for our short-term cash needs are expected to be from cash flows generated from operations, and cash equivalents currently on hand. We believe that we will be able to borrow additional funds if necessary.
 
We believe our cash flows from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our needs for working capital, capital expenditure and other commitments for the next 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.
 
 
28

 
 
As of June 30, 2013, we had access to $64.9 million in lines of credit, of which $20.1 million was unused and is currently available. These credit facilities do not include any covenants.
 
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 United States (U.S.) dollars. During 2003 and 2004 the exchange rate of RMB to the U.S. 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 U.S. dollar. From that time, the RMB continued to appreciate against the U.S. dollar. As of June 30, 2013, the foreign exchange rate had increased to 6.19 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 we 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. The foreign currency translation gain (loss) for the three and six months ended June 30, 2013 and 2012 was $850,550, $1,158,392, $(196,365) and $200,001, 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 June 30, 2013, we had $16.1 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 has been 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 June 30, 2013, the exchange rate between the RMB and U.S. Dollar was 6.19 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 fiscal year ended on 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

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”)  is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including 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  June 30, 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 June 30, 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 June 30, 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 June 30, 2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
29

 
 
PART II.  OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS
 
We know of no pending legal proceedings to which we are a party which are 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

None

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4.      MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.      OTHER INFORMATION

None.
 
ITEM 6.      EXHIBITS

The following exhibits are filed herewith:
 
Exhibit No. 
 
Description
     
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.
 
 
 
 
30

 
 
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.
 
August 19, 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)
 
 
31