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, 2012





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
oNon-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, 2012, 14,765,942  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

NumberCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
3PART I.  FINANCIAL INFORMATION
4Item 1.
Financial Statements
4Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011
4Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011 (unaudited)
5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)
6Notes to the Condensed Consolidated Financial Statements (unaudited)
7Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28Item 4.
Controls and Procedures
29PART II.  OTHER INFORMATION
30Item 1.
Legal Proceedings
30Item 1A.
Risk Factors
30Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
30Item 3.
Defaults Upon Senior Securities
30Item 4.
Mine Safety Disclosures
30Item 5.
Other Information
30Item 6.
Exhibits
30SIGNATURES
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:





Ÿ
Competition within our industry;Ÿ
Seasonality of our sales;Ÿ
Success of our investments in new product developmentŸ
Our plans and ability to open new retail stores;


Ÿ
Success of our acquired businesses;Ÿ
Our relationships with our major customers;Ÿ
The popularity of our products;Ÿ
Relationships with suppliers and cost of supplies;


Ÿ
Financial and economic conditions in Asia, Japan, Europe and the U.S.;Ÿ
Anticipated effective tax rates in future years;Ÿ
Regulatory requirements affecting our business;Ÿ
Currency exchange rate fluctuations;


Ÿ
Our future financing needs; andŸ
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, 2012 (UNAUDITED) AND DECEMBER 31, 2011
 ASSETS2012


2011CURRENT ASSETSCash and cash equivalents

$
7,184,037


$
8,822,581Accounts receivable


36,638,369



50,634,388Inventories


38,870,698



36,874,804Value added tax receivable


3,514,667



1,908,436Other receivables and prepaid expenses


1,424,516



1,122,570Advances on inventory purchases


2,749,725



2,177,544Amounts due from related party


18,672,420



17,623,712Total Current Assets


109,054,432



119,164,035LAND USE RIGHT, NET


3,082,466



2,845,552PROPERTY AND EQUIPMENT, NET


12,934,685



13,210,628TOTAL ASSETS

$
125,071,583


$
135,220,215LIABILITIES AND EQUITYCURRENT LIABILITIESBank loans

$
22,473,539


$
29,185,381Accounts payable


33,066,119



41,466,844Accounts payable and other payables - related parties


2,660,262



2,759,003Other payables and accrued liabilities


6,191,050



5,996,434Value added and other taxes payable


2,252,625



2,268,872Income tax payable


280,852



368,714Deferred tax liabilities


3,041,151



2,460,377Derivative liability


100,000



-Total Current Liabilities


70,065,598



84,505,625LONG-TERM LIABILITIESDerivative liability


-



390,800Total Long-term Liabilities


-



390,800TOTAL LIABILITIES


70,065,598



84,896,425COMMITMENTS AND CONTINGENCIESEQUITYStockholders' 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,14,765,942 and 14,760,873 shares issued and outstandingas of June 30, 2012 and December 31, 2011, respectively)


14,766



14,761Additional paid-in capital


3,542,200



3,532,369Retained earnings


39,449,211



34,976,853Statutory reserve


5,311,921



5,311,921Accumulated other comprehensive income


6,687,887



6,487,886Total Stockholders' Equity


55,005,985



50,323,790TOTAL LIABILITIES AND EQUITY

$
125,071,583


$
135,220,215
 See the accompanying notes to the condensed 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, 2012 AND 2011 (UNAUDITED)
 Three months ended



Six months endedJune 30,



June 30,2012



2011



2012



2011NET SALES

$
47,195,031


$
42,923,640


$
100,421,204


$
96,131,877COST OF SALES


33,608,450



32,566,893



75,231,635



76,663,118GROSS PROFIT


13,586,581



10,356,747



25,189,569



19,468,759OPERATING EXPENSESSelling expenses


6,966,335



3,766,770



12,800,527



7,355,875General and administrative expenses


4,198,130



4,117,313



7,203,406



6,329,155Total Operating Expenses


11,164,465



7,884,083



20,003,933



13,685,030INCOME FROM OPERATIONS


2,422,116



2,472,664



5,185,636



5,783,729OTHER INCOME (EXPENSES)Interest income


328,736



124,401



610,220



146,874Interest expense


(458,703
)


(258,924
)


(1,004,744
)


(521,175
)Change in fair value of derivative liability


180,000



134,500



290,800



330,300Other income


200,010



204



236,313



24,134Total Other Income (Expenses)


250,043



181



132,589



(19,867
)INCOME BEFORE INCOME TAX EXPENSE


2,672,159



2,472,845



5,318,225



5,763,862INCOME TAX EXPENSE


(321,010
)


(213,976
)


(845,866
)


(892,997
)NET INCOME


2,351,149



2,258,869



4,472,359



4,870,865OTHER COMPERHENSIVE (LOSS) INCOMEForeign currency translation (loss) gain


(196,365
)


479,660



200,001



716,495COMPREHENSIVE INCOME

$
2,154,784


$
2,738,529


$
4,672,360


$
5,587,360EARNINGS PER SHAREBasic and diluted

$
0.16


$
0.15


$
0.30


$
0.33Weighted average number of shares outstandingBasic and diluted


14,765,942



14,755,494



14,763,815



14,754,687
 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, 2012 AND 2011 (UNAUDITED)
  2012


2011CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
4,472,359


$
4,870,865Adjustments to reconcile net income to cash providedby operating activities:Depreciation and amortization


2,296,910



1,666,901Provision (recovery) for obsolete inventories


459,213



(13,666
)Change in fair value of derivative liability


(290,800
)


(330,300
)Deferred income tax


563,191



(85,708
)Interest on loans from related party


-



909Stock-based compensation


9,836



10,077Accounts receivable


14,295,016



9,413,419Inventories


(2,219,405
)


(37,484
)Value added tax receivable


(1,591,861
)


(1,708,832
)Other receivables and prepaid expenses


(295,199
)


8,208Advances on inventory purchases


(555,284
)


537,544Amounts due from related parties


(936,188
)


(6,019,433
)Accounts payable


(8,594,380
)


(3,242,434
)Accounts payable and other payables- related parties


(80,515
)


(138,168
)Other payables and accrued liabilities


36,570



975,521Value added and other taxes payable


(32,117
)


447,390Income tax payable


(90,383
)


559,150Net cash provided by operating activities


7,446,963



6,913,959CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment


(2,147,918
)


(1,535,053
)Net cash used in investing activities


(2,147,918
)


(1,535,053
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from bank loans


24,576,457



28,557,182Repayment of bank loans


(31,488,282
)


(26,167,763
)Repayment of loans from related party


-



(1,000,720
)Net cash (used in) provided byfinancing activities


(6,911,825
)


1,388,699EFFECT OF EXCHANGE RATE CHANGES ON CASH


(25,764
)


253,305NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(1,638,544
)


7,020,910CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


8,822,581



3,691,653CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
7,184,037


$
10,712,563SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest

$
1,004,744


$
520,195Income taxes

$
373,221


$
423,577See 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, 2012 AND 2011




(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”) (formed on March 19, 2012), 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, 2012, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011. 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, 2012 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, 2011.




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, 2012, the Company’s financial assets (all Level 1) consist of cash placed with financial institutions that management considers to be of a high quality.




As of June 30, 2012 and December 31, 2011, the Company has a derivative liability subject to recurring fair value measurement ( Level 3) with the change in fair value recognized in earnings (Note 5).





Foreign Currency Translation and Other Comprehensive Income




The reporting currency of the Company is the U.S. dollar. The functional currency of the Company, Ever-Glory HK and Perfect Dream Limited, 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.




Reclassification










NOTE 3   INVENTORIES




Inventories at June 30, 2012 and December 31, 2011 consisted of the following:




June 30,

2012


December 31,

2011Raw materials

$
7,974,309


$
5,606,073Work-in-progress


8,996,610



7,919,403Finished goods


22,930,130



23,916,20639,901,049



37,441,682Less: allowance for obsolete inventories


(1,030,351
)


(566,878
)Total inventories

$
38,870,698


$
36,874,804




8





NOTE 4   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, 2012 and December 31, 2011:




Bank

June 30,

2012


December 31,

2011Nanjing Bank

$
5,599,399


$
11,731,223Shanghai Pudong Development Bank


6,328,000



8,966,382Industrial and Commercial Bank of China


-



5,294,270Bank of Communications


7,432,103



2,660,562The Hong Kong and Shanghai Bank

1,215,637



532,944Bank of China


1,898,400



-$
22,473,539


$
29,185,381




On August 2, 2010, Goldenway entered into a two-year revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.91 million (RMB50 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2012, no amounts were outstanding  under this agreement.




On March 11, 2010, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $7.91 million (RMB50 million) with Nanjing Bank. The agreement has been extended until April 6, 2013. As of June 30, 2012, Ever-Glory Apparel had borrowed $2.37 million from Nanjing Bank with an annual interest rate from 6.73% to 6.89% due on various dates from November 2012 to May 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang. In addition, Ever-Glory Apparel had borrowed $1.64 million from Nanjing Bank with an annual interest rate from 4.4% to 4.9% due on various dates from August 2012 to September 2012, and collateralized by approximately $2.2 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At June 30, 2012, approximately $3.9 million was unused and available.




As of June 30, 2012, LA GO GO had borrowed $1.58 million (RMB10.0 million) from Nanjing Bank with an annual interest rate of 6.29% and due on various dates from April 2013 to May 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.




On January 4, 2011, Goldenway entered into a new one-year line of credit agreement for approximately $6.33 million (RMB40 million) with Shanghai Pudong Development Bank. As of June 30, 2012, Goldenway had borrowed the maximum amount available under the line of $6.33 million (RMB40 million), with an annual interest rate of 7.55%. These loans are collateralized by certain properties and land use rights of Goldenway, and are due in November 2012.




As of June 30, 2012, Ever-Glory Apparel had borrowed $5.06 million from the Bank of Communications with an annual interest rate of 7.08%, and due in February 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang. In addition, Ever-Glory Apparel had borrowed $1.58 million from the Bank of Communications with annual interest rate  of 5.27%, due on various dates from July 2012 to September 2012, guaranteed by Jiangsu Ever-Glory and Mr. Kang, and collateralized by approximately $1.98 million of accounts receivable from wholesale customers. Approximately $0.23 million was repaid in July 2012.




As of June 30, 2012, LA GO GO had borrowed $0.79 million (RMB5.0 million) from the Bank of Communications with an annual interest rate of 6.37% and due in June 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.




As of June 30, 2012, Ever-Glory Apparel had borrowed $1.90 million from the Bank of China with an annual interest rate rom 5.9% to 6.1% due on various dates from July 2012 to August 2012. The loan is guaranteed by Goldenway, and collateralized by approximately $2.6 million of accounts receivable from wholesale customers. Approximately $0.98 million was repaid in July 2012.




9




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, 2012, Ever-Glory Apparel had borrowed $1.22 million from HSBC with an annual interest rate from 5.85% to 7.02% due on various dates from July 2012 to September 2012, and collateralized by approximately $1.63 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At June 30, 2012, approximately $5.78 million was unused and available. Approximately $0.27 million was repaid in July 2012.




Total interest expense on bank loans amounted to $458,703, $1,004,744, $258,924 and $521,175 for the three and six months ended June 30, 2012 and 2011, respectively.




NOTE 5   DERIVATIVE WARRANT LIABILITY




The Company has warrants outstanding to purchase an aggregate of 840,454 shares of Company common stock, which warrants require liability classification because of certain provisions that may result in an adjustment to their exercise price. The liability has been adjusted to fair value as of June 30, 2012 and 2011, resulting in a decrease in the liability and increase in other income of$180,000, $290,800, $134,500 and $330,300 for the three and six months ended June 30, 2012 and 2011, respectively.




The warrants will expire in June 2013. For the three and six months ended June 30, 2012 and 2011, the Company excluded these warrants from diluted earnings per share as they were antidilutive.




NOTE 6   INCOME TAX




PRC pre-tax income for the three and six months ended June 30, 2012 and 2011, was taxable in the following jurisdictions.




Three months ended


Six months endedJune 30,


June 30,2012


2011


2012


2011PRC

$
1,582,335


$
712,029


$
3,350,278


$
3,691,090Others


1,089,824



1,760,816



1,967,947



2,072,772$
2,672,159


$
2,472,845


$
5,318,225


$
5,763,862





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.




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 on September 15, 2009, and under the current laws of Samoa has no liabilities for income tax.




The following table reconciles the PRC statutory rates to the Company’s effective tax rate for the three and six months ended June 30, 2012 and 2011, respectively:




Three months ended


Six months endedJune 30,


June 30,2012


2011


2012


2011PRC statutory rate


25.0
%


25.0
%


25.0
%


25.0
%Non-taxable or non-deductible items


(2.3
)


(1.8
)


(1.9
)


(1.9
)Effect of foreign income tax rates


(8.5
)


(16.5
)


(7.9
)


(7.6
)Income tax exemption


-



(0.1
)


0.1



(0.1
)Other


(2.2
)


2.1



0.6



0.1Effective income tax rate


12.0
%


8.7
%


15.9
%


15.5
%




10





Income tax expense for the three and six months ended June 30, 2012 and 2011 is as follows:




Three months ended


Six months endedJune 30,


June 30,2012


2011


2012


2011Current

$
121,988


$
474,871


$
265,092


$
978,705Deferred


199,022



(260,895
)


580,774



(85,708
)Income tax expense

$
321,010


$
213,976


$
845,866


$
892,997




NOTE 7   STOCKHOLDERS’ EQUITY




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




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




NOTE 8   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, 2012 and 2011 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 endedJune 30,


June 30,2012


2011


2012


2011EsCeLav

$
2,969


$
2,872


$
5,933


$
5,726Nanjing Eight-One-Five Hi-Tech (M&E) Co.,Ltd.

$
3,952


$
3,830


$
7,905


$
7,635Jiangsu Heng-Rui

$
-


$
5,400


$
-


$
10,765Total

$
6,921


$
12,102


$
13,838


$
24,126




11





Purchases from, and Sub-contracts with Related Parties




In connection with the Company’s tax planning strategies relating to value-added taxes, raw materials are sourced by the Company in the PRC and shipped to related party contract manufacturers in Vietnam and Cambodia. The raw materials were originally purchased by the Company, and, through a series of transactions, were sold at cost to, and repurchased at cost from, Jiangsu Ever-Glory. These transactions amounted to approximately $1.1 million (RMB7.5 million) during the six months ended June 30, 2011, and have been netted against each other for financial reporting purposes.  There were no such transactions in 2012.




For the three and six months ended June 30 2012 and 2011, the Company purchased raw materials of $79,413, $714,022, $948,146, $1,059,091, respectively, from Nanjing Knitting.




In addition, the Company sub-contracted certain manufacturing work to related parties totaling $2,597,793, $5,423,363, $2,458,327, $3,988,745 for the three and six months ended June 30, 2012 and 2011, 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, 2012 and 2011 are as follows:




Three Months Ended

June 30,


Six Months Ended

June 30,2012


2011


2012


2011Nanjing Knitting

$
119,159


$
11,855


$
753,768


$
35,565Nanjing Ever-Kyowa


246,417



297,973



411,634



535,613Ever-Glory Vietnam


625,667



1,494,180



1,455,136



2,392,433Ever-Glory Cambodia


1,594,778



653,436



2,781,291



1,023,255EsC'Lav


6,616



883



12,564



11,879Jiangsu Ever-Glory


5,156



-



8,970



-$
2,597,793


$
2,458,327


$
5,423,363


$
3,998,745





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, 2012 and December 31, 2011 are as follows:




June 30,

2012


December 31,

2011Nanjing Knitting

$
1,105,915


$
661,139Nanjing Ever-Kyowa


288,720



436,030Ever-Glory Vietnam


632,342



1,305,696Ever-Glory Cambodia


633,285



330,047Kunshan Enjin


-



26,091Total

$
2,660,262


$
2,759,003





Amounts Due From Related Party




The amounts due from related parties at June 30, 2012 and December 31, 2011 are as follows:




June 30,

2012


December 31,

2011EsC'eLav

$
5,932


$
23,565Nanjing Eight-One-Five Hi-tech (M&E) Co.,Ltd.


7,910



-Jiangsu Ever-Glory


18,658,578



17,600,147Total

$
18,724,420


$
17,623,712




12




Jiangsu Ever-Glory engages in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by the Company’s Chief Executive Officer. Because of restrictions on its ability to directly import and export products, the Company utilizes Jiangsu Ever-Glory as its agent to assist the Company with its import and export transactions and its international transportation projects. Import transactions primarily consist of purchases of raw materials and accessories designated by the Company’s customers for use in garment manufacture. Export transactions consist of the Company’s sales to foreign markets such as Japan, Europe and the United States. As the Company’s agent, Jiangsu Ever-Glory’s responsibilities include managing customs, inspection, transportation, insurance and collections on behalf of the Company. Jiangsu Ever-Glory also manages transactions denominated in currencies other than the Chinese RMB at rates of exchange agreed between the Company and Jiangsu Ever-Glory and based upon rates of exchange quoted by the People’s Bank of China. In return for these services, Jiangsu Ever-Glory charged the Company a fee of approximately 3% of export sales manufactured in China and 1% of export sales manufactured overseas. For import transactions, the Company may make advance payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu Ever-Glory may make advance payments on the Company’s behalf. For export transactions, accounts receivable for export sales are remitted by the Company’s customers through Jiangsu Ever-Glory, who forwards the payments to the Company. The Company and Jiangsu Ever-Glory have agreed that balances from import and export transactions may be offset.Amounts due to (from) Jiangsu Ever-Glory are typically settled within 60-90 days. Interest of 0.5% is charged on net amounts due at each month end. Interest income for the three and six months ended June 30, 2012 and 2011 was $290,559, $563,295, $120,379 and $139,495, respectively. Following is a summary of import and export transactions for the six months ended June 30, 2012:




Accounts Receivable


Accounts Payable


NetAs of January 1, 2012

$
19,999,373


$
2,399,226


$
17,600,147Sales

$
3,448,685



5,297,030



-Payments Received/Made

$
822,392


$
3,729,168



-As of June 30,2012

$
22,625,666


$
3,967,088


$
18,658,578





Approximately  20.8 % of the receivable balance at June 30, 2012 was settled by August 7, 2012.




Loan from Related Party




As of January 1, 2010 the Company owed $1.0 million to Blue Power Holdings Limited, a company controlled by the Company’s Chief Executive Officer. Interest was charged at 6% per annum on the amounts due. The loans were paid in full in April 2011.




NOTE 9   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, 2012 and December 31, 2011. 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.




13




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. 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 six-month period ended June 30, 2011, the Company had two wholesale customers that each represented approximately 23% and 17% of the Company’s revenues. For the three-month period ended June 30, 2011, the Company had one wholesale customer that represented approximately 26% of the Company’s revenues.




For the Company’s wholesale business during the three and six months ended June 30, 2012 and 2011, no supplier represented more than 10% of the total raw materials purchased.




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 during the three months ended June 30, 2012. The Company had one supplier that represented approximately 16% of raw materials purchases during the six months ended June 30, 2011. The Company purchased 22% of its raw materials from one supplier during the three months ended June 30, 2011.





For the wholesale business, during the six months ended June 30, 2012, the Company relied on two manufacturers for 17% and 13% of purchased finished goods. During the six months ended June 30, 2011, the Company relied on one manufacturer for 10% of purchased finished goods. During the three months ended June 30, 2012, the Company relied on two manufacturers for 19% and 16% of purchased finished goods. During the three months ended June 30, 2011, the Company relied on two manufacturers for 15% and 11% of purchased finished goods.




For the retail business, during the three and six months ended June 30, 2012 , no supplier represented more than 10% of the total purchased finished goods.During the six months ended June 30, 2011 , no supplier represented more than 10% of the total purchased finished goods. During the three months ended June 30, 2011 , the Company relied on one manufacturer for 10% of purchased finished goods.




The Company’s revenues for the three and six months ended June 30, 2012 and 2011 were earned in the following geographic areas:




Three months ended

June 30,


Six months ended

June 30,2012


2011


2012


2011The People’s Republic of China

$
29,320,073


$
15,420,664


$
59,828,555


$
41,694,449Germany


3,393,413



8,670,146



8,858,106



17,410,721United Kingdom


4,588,231



5,403,112



7,953,390



7,741,270Europe-Other


3,189,555



2,826,082



7,753,988



7,618,743Japan


2,416,434



5,060,331



8,523,582



11,012,419United States


4,287,325



5,543,305



7,503,583



10,654,275Total

$
47,195,031


$
42,923,640


$
100,421,204


$
96,131,877





NOTE 10   SEGMENTS




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




(a)  Wholesale segment




(b)  Retail segment




14




Wholesale segment


Retail segment


TotalSix months ended June 30, 2012Segment profit or loss:Net revenue from external customers

$
59,468,451


$
40,952,753


$
100,421,204Income from operations

$
4,494,836


$
690,800


$
5,185,636Interest income

$
603,785


$
6,435


$
610,220Interest expense

$
938,754


$
65,990


$
1,004,744Depreciation and amortization

$
498,899


$
1,798,011


$
2,296,910Income tax expense

$
687,462


$
158,404


$
845,866Six months ended June 30, 2011Segment profit or loss:Net revenue from external customers

$
74,272,509


$
21,859,368


$
96,131,877Income (loss) from operations

$
5,226,517


$
557,212


$
5,783,729Interest income

$
145,319


$
1,555


$
146,874Interest expense

$
505,243


$
15,932


$
521,175Depreciation and amortization

$
797,969


$
868,932


$
1,666,901Income tax expense

$
756,939


$
136,058


$
892,997





Wholesale segment


Retail segment


TotalThree months ended June 30, 2012Segment profit or loss:Net revenue from external customers

$
28,807,928


$
18,387,103


$
47,195,031Income from operations

$
1,967,832


$
454,284


$
2,422,116Interest income

$
325,486


$
3,250


$
328,736Interest expense

$
424,193


$
34,510


$
458,703Depreciation and amortization

$
248,435


$
887,840


$
1,136,275Income tax expense

$
215,057


$
105,953


$
321,010Three months ended June 30, 2011Segment profit or loss:Net revenue from external customers

$
33,663,153


$
9,260,487


$
42,923,640Income (loss) from operations

$
2,227,029


$
245,635


$
2,472,664Interest income

$
123,430


$
971


$
124,401Interest expense

$
246,082


$
12,842


$
258,924Depreciation and amortization

$
556,621


$
319,683


$
876,304Income tax expense

$
155,371


$
58,605


$
213,976





15





EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011


(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, 2012 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:





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





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





Ÿ
Continue to emphasize product design and technology utilization.





Ÿ
Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network; andŸ
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, 2012, we have 562 stores (including store-in-stores) which included 121 stores that were opened and  26 stores that were closed in first half of 2012.





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





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





Ÿ
Improve the LA GO GO retail stores’ efficiency and increase same-store salesŸ
Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 CitiesŸ
Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.





Seasonality of Business





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





Collection Policy





Wholesale business





For our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers with a good payment track record, we generally provide payment terms between 30 to 120 days following delivery of finished goods.





Retail business





For store-in-store shops, we generally receive payments from the stores between 60 and 90 days following the date of the register receipt. For our own flagship stores, we receive payments at the 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 2012.




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




18




Results of Operations for the three months ended June 30, 2012 and 2011





The following table summarizes our results of operations for the three months ended June 30, 2012 and 2011. 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 30,2012



2011(in U.S. Dollars, except for percentages)Sales

$
47,195,031



100.0
%

$
42,923,640



100.0
%Gross Profit

$
13,586,581



28.8
%

$
10,356,747



24.1
%Operating Expense

$
11,164,465



23.7
%

$
7,884,083



18.4
%Income From Operations

$
2,422,116



5.1
%

$
2,472,664



5.8
%Other Income

$
250,043



0.1
%

$
181



0.1
%Income tax expense

$
321,010



0.7
%

$
213,976



0.5
%Net Income

$
2,351,149



5.0
%

$
2,258,869



5.3
%





Revenue





The following table sets forth a breakdown of our total sales, by region, for the three months ended June 30, 2012 and 2011.





2012


% of total

sales


2011


% of total

sales


Growth in 2012

Compared with

2011Wholesale businessThe People’s Republic of China

$
10,932,970



23.2
%

$
6,160,177



14.4
%


77.5
%Germany


3,393,413



7.2



8,670,146



20.2



(60.9
)United States


4,287,325



9.1



5,543,305



12.9



(22.7
)United Kingdom


4,588,231



9.7



5,403,112



12.6



(15.1
)Japan


2,416,434



5.1



5,060,331



11.8



(52.2
)Europe-Other


3,189,555



6.8



2,826,082



6.6



12.9Total wholesale business


28,807,928



61.0



33,663,153



78.4



(14.4
)Retail business


18,387,103



39.0



9,260,487



21.6



98.6Total

$
47,195,031



100.0
%

$
42,923,640



100.0
%


10.0
%





Sales for the three months ended June 30, 2012 were $47.2 million, an increase of 10.0% from the three months ended June 30,  2011. This increase was primarily attributable to increased sales in our retail business.





Sales generated from our wholesale business contributed 61.0% or $28.8 million of our total sales for the three months ended June 30, 2012, a decrease of 14.4% compared to $33.7 million in the three months ended June 30, 2011. This decrease was primarily attributable to decreased sales in Germany, the United States, the United Kingdom and Japan. The reduced sales in the 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.




Sales generated from our retail business contributed 39.0% or $18.4 million of our total sales for the three months ended June 30, 2012, an increase of 98.6% compared to 21.6% or $9.3 million in the three months ended June 30, 2011. This increase was primarily due to the increase in same store sales and new stores opened. We had 562 LA GO GO stores as of June 30, 2012, compared to 368 LA GO GO stores at June 30, 2011.





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, 2012 and 2011.





Three months ended June 30,


Growth (Decrease) in 2012 Compared with2012


2011


2011(in U.S. dollars, except for percentages)Net Sales for Wholesale Sales

$
28,807,928



100.0
%

$
33,663,153



100.0
%


(14.4
)%Raw Materials


13,097,205



45.5



16,395,407



48.7



(20.1
)Labor


1,137,557



3.9



1,073,988



3.2



5.9Outsourced Production Costs


7,979,797



27.7



9,543,021



28.3



(16.4
)Other and Overhead


22,662



0.1



66,428



0.2



(65.9
)Total Cost of Sales for Wholesale


22,237,221



77.2



27,078,844



80.4



(17.9
)Gross Profit for Wholesale


6,570,707



22.8



6,584,309



19.6



(0.2
)Net Sales for Retail


18,387,103



100.0



9,260,487



100.0



98.6Production Costs


5,212,762



28.4



2,758,990



29.8



88.9Rent


6,158,467



33.5



2,729,059



29.5



125.7Total Cost of Sales for Retail


11,371,229



61.8



5,488,049



59.3



107.2Gross Profit for Retail


7,015,874



38.2



3,772,438



40.7



86.0Total Cost of Sales


33,608,450



71.2



32,566,893



75.9



3.2Gross Profit

$
13,586,581



28.8
%

$
10,356,747



24.1
%


31.2
%





Raw material costs for our wholesale business were 45.5% of our total wholesale business sales in the three months ended June 30, 2012, compared to 48.7% in the three months ended June 30, 2011.  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 three months ended June 30, 2012, compared to 3.2% in the three months ended June 30, 2011. The increase was mainly due to decreased  outsourced production.





Outsourced manufacturing costs for our wholesale business were 27.7% of our total wholesale business sales in the three months ended June 30, 2012, compared to 28.3% in the three months ended June 30, 2011. This decrease was primarily attributable to the decreased outsourced manufacturing costs in the PRC, because we had available domestic capacity in the three months ended June 30, 2012, compared with limited capacity in the three months ended June 30, 2011, and our Chinese suppliers were willing to lower their prices due to their excess production capacity .





Overhead and other expenses for our wholesale business accounted for 0.1% of our total wholesale business sales for the three months ended June 30, 2012, compared to 0.2% of total sales for the three months ended June 30, 2011.





Wholesale business gross profit for the three months ended June 30, 2012 and 2011 was both $6.6 million. As a percentage of wholesale sales, gross profit accounted for 22.8% of our total wholesale sales for the three months ended June 30, 2012, an increase of 3.2% compared to 19.6% for the three months ended June 30, 2011. The increase was mainly due to decreased raw materials prices and outsourced manufacturing costs.





Production costs for our retail business were $5.2 million during the three months ended June 30, 2012 compared to $2.8 million during the three months ended June 30, 2011. As a percentage of retail sales, retail production costs accounted for 28.4% of our total  retail sales in the three months ended June 30, 2012, compared to 29.8% of total retail sales in the three months ended June 30, 2011. This decrease was primarily due to reduced retail prices in various promotions in exchange for increased sales volume during the three months ended June 30, 2011.      .





Rent costs for our retail business were $6.2 million for the three months ended June 30, 2012 compared to $2.7 million for the three months ended June 30, 2011. As a percentage of sales, rent costs accounted for 33.5% of our total retail sales for the three months ended June 30, 2012, compared to 29.5% of total retail sales for the three months ended June 30, 2011. Total rent costs increased as a result of the increase in the number of our stores. The increase in rent costs as a percentage of total retail sales was due to the increase in the number of new stores opened in the second quarter of 2012; there were 95 and 77 new stores opened in the three months ended June 30, 2012 and 2011, respectively.




20





Gross profit in our retail business for the three months ended June 30, 2012 was $7.0 million and gross margin was 38.2%. Gross profit in our retail business for the three months ended June 30, 2011 was $3.8 million and gross margin was 40.7%.





Total cost of sales for the three months ended June 30, 2012 was $33.6 million, compared to $32.6 million for the three months ended June 30, 2011, an increase of 3.2%. As a percentage of total sales, cost of sales decreased to 71.2% of total sales for the three months ended June 30, 2012, compared to 75.9% of total sales for the three months ended June 30, 2011. Consequently, gross margin increased to 28.8% for the three months ended June 30, 2012 from 24.1% for the three months ended June 30, 2011.





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/2012


2011


(Decrease)(in U.S. Dollars, except for percentages)Gross Profit

$
13,586,581



28.8
%

$
10,356,747



24.1
%


31.2
%Operating Expenses:Selling Expenses


6,966,335



14.8
%


3,766,770



8.8



84.9General and Administrative Expenses


4,198,130



8.9
%


4,117,313



9.6



2.0Total


11,164,465



23.7
%


7,884,083



18.4



41.6Income from Operations

$
2,422,116



5.1
%

$
2,472,664



5.8
%


(2.0)
%





Selling expenses increased 84.9% to $7.0 million for the three months ended June 30, 2012 from $3.8 million for the three months ended June 30, 2011. 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 2.0% to $4.2 million the three months ended June 30, 2012 from $4.1 million for the three months ended June 30, 2011. As a percentage of total sales, general and administrative expenses decreased to 8.9% of total sales for the three months ended June 30, 2012, compared to 9.6% of total sales for the three months ended June 30, 2011. The percentage decrease was attributable to the increase in our sales.





Income from Operations





Income from operations decreased 2.0% to $2.4 million for the three months ended June 30, 2012 from $2.5 million for the three months ended June 30, 2011.  As a percentage of sales, income from operations accounted for 5.1% of our total sales  for the three months ended June 30, 2012, a decrease of 0.7% compared to the three months ended June 30, 2011 as a result of increasing selling expenses.




21





Interest Expense





Interest expense was $0.5 million for the three months ended June 30, 2012, an increase of  77.2% compared to the same period in 2011. This increase was attributable to the increased  interest rates.





Change in fair value of derivative liability





Change in fair value of derivative liability was a gain of $0.2 million and $0.1 million, based on the Binnomial Lattice model, for the three months ended June  30, 2012 and 2011, respectively.




Income Tax Expenses





Income tax expense for the three months ended June 30, 2012 was $0.3 million, an increase of 50% compared to the same period of 2011. The increase was primarily due to increased profits of  LA GO GO and Ever-Glory Apparel.





Our PRC subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws. Each of our consolidated entities files its own separate income tax return.





All PRC subsidiaries are subject to 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 2010. 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, 2012 was $2.4 million, an increase of  4.1% compared to the same period in 2011. Our basic and diluted earnings per share were $0.16 and $0.15 for the three months ended June 30, 2012 and 2011, respectively.





Results of Operations for the six months ended June 30, 2012 and 2011





The following table summarizes our results of operations for the six months ended June 30, 2012 and 2011. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.





Six Months Ended June 30,2012



2011(in U.S. Dollars, except for percentages)Sales

$
100,421,204



100.0
%

$
96,131,877



100.0
%Gross Profit

$
25,189,569



25.1
%

$
19,468,759



20.3
%Operating Expense

$
20,003,933



19.9
%

$
13,685,030



14.2
%Income From Operations

$
5,185,636



5.2
%

$
5,783,729



6.0
%Other Income (Expenses)

$
132,589



0.5
%

$
(19,867
)


0
%Income tax expense

$
845,866



0.8
%

$
892,997



0.9
%Net Income

$
4,472,359



4.5
%

$
4,870,865



5.1
%





22





Revenue





The following table sets forth a breakdown of our total sales, by region, for the six months ended June 30, 2012 and 2011.





2012


% of total sales


2011


% of total sales


Growth in 2012 compared with 2011Wholesales businessThe People’s Republic of China

$
18,875,802



18.8


$
19,835,081



20.6
%


(4.8
)%Germany


8,858,106



8.8



17,410,721



18.1



(49.1
)United Kingdom


7,503,583



7.5



7,741,270



8.1



(3.1
)Europe-Other


7,953,390



7.9



7,618,743



7.9



4.4Japan


8,523,582



8.5



11,012,419



11.5



(22.6
)United States


7,753,988



7.7



10,654,275



11.1



(27.2
)Total wholesale business


59,468,451



59.2



74,272,509



77.3



(19.9
)Retail business


40,952,753



40.8



21,859,368



22.7



87.3Total

$
100,421,204



100.0


$
96,131,877



100.0
%


4.5
%





Sales for the six months ended June 30, 2012 were $100.4 million, an increase of 4.5% from the six months ended June 30,  2011. This increase was primarily attributable to increased sales in our retail business.





Sales generated from our wholesale business contributed 59.2% or $59.5 million of our total sales for the six months ended June 30, 2012, a decrease of 19.9% compared to $74.3 million in the six months ended June 30, 2011. This decrease was primarily attributable to decreased sales in Germany, theUnited Kingdomand Japan. The reduced sales in the 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, so, our overseas wholesale business also faced declining orders.





Sales generated from our retail business contributed 40.8% or $41.0 million of our total sales for the six months ended June 30, 2012, an increase of 87.3% compared to 22.7% or $21.9 million in the six months ended June 30, 2011. This increase was primarily due to the increase in same store sales and new stores opened. We had 562 LA GO GO stores as of June 30, 2012, compared to 368 LA GO GO stores at June 30, 2011.





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, 2012 and 2011.





Six months ended June 30,


Growth (Decrease)

in 2012

compared with2012


2011


2011(in U.S. dollars, except for percentages)Net Sales for Wholesale Sales

$
59,468,451



100.0
%

$
74,272,509



100.0
%


(19.9
)%Raw Materials


27,333,840



46.0



36,725,638



49.4



(25.6
)Labor


2,046,295



3.4



1,920,498



2.6



6.6Outsourced Production Costs


17,620,323



29.6



22,993,329



31.0



(23.4
)Other and Overhead


253,413



0.4



264,046



0.4



(4.0
)Total Cost of Sales for Wholesale


47,253,871



79.5



61,903,511



83.3



(23.7
)Gross Profit for Wholesale


12,214,580



20.5



12,368,998



16.7



(1.2)Net Sales for Retail


40,952,753



100.0



21,859,368



100.0



87.3Production Costs


13,081,846



31.9



7,085,307



32.4



84.6Rent


14,895,918



36.4



7,674,300



35.1



94.1Total Cost of Sales for Retail


27,977,764



68.3



14,759,607



67.5



89.6Gross Profit for Retail


12,974,989



31.7



7,099,761



32.5



82.8Total Cost of Sales


75,231,635



74.9



76,663,118



79.7



(1.9
)Gross Profit

$
25,189,569



25.1
%

$
19,468,759



20.3
%


29.4
%





Raw material costs for our wholesale business were 46.0% of our total wholesale business sales in the six months ended June 30, 2012, compared to 49.4% in the six months ended June 30, 2011.  The decrease was mainly due to decreased raw materials prices.





Labor costs for our wholesale business were 3.4% of our total wholesale business sales in the six months ended June 30, 2012, compared to 2.6% in the six months ended June 30, 2011. The increase was mainly due to decreased outsourced production.





Outsourced manufacturing costs for our wholesale business were 29.6% of our total sales in the six months ended June 30, 2012, compared to 31.0% in the six months ended June 30, 2011. This decrease was primarily attributable to the decreased outsourced manufacturing costs in the PRC, because we had available domestic capacity in the six months ended June 30, 2012, compared with limited capacity in the six months ended June 30, 2011, and our Chinese suppliers were willing to lower their prices due to their excess production capacity





Overhead and other expenses for our wholesale business accounted for 0.4% of our total sales for the six months ended June 30, 2012 and 2011.





Gross profit in our wholesale business for the six months ended June 30, 2012 was $12.2 million, a slight decrease of 1.2% compared to the six months ended June 30, 2011. As a percentage of wholesal sales, gross profit accounted for 20.5% of our total  wholesale sales for the six months ended June 30, 2012, an increase of 3.8% compared to 16.7% for the six months ended June 30, 2011. The increase was mainly due to decreased raw materials prices and outsourced manufacturing costs.





Production costs for our retail business were $13.1 million during the six months ended June 30, 2012 versus $7.1 million during the six months ended June 30, 2011. As a percentage of total retail sales, Production costs for our retail business were 31.9% of our total retail sales during the six months ended June 30, 2012, a slight decreased compared to 32.4% during the six months ended June 30, 2011.





Rent costs for our retail business were $14.9 million or 36.4% of our total retail sales during the six months ended June 30, 2012 versus $7.7 million or 35.1% during the six months ended June 30, 2011. Total rent costs increased as a result of the increase in the number of our stores. The increase in rent costs as a percentage of total retail sales was due to the increase in the number of new stores opened in the half year of 2012; there were 121 and 93 new stores opened in the half year of 2012 and 2011, respectively.





Gross profit in our retail business for the six months ended June 30, 2012 was $13.0 million and gross margin was 31.7%. Gross profit in our retail business for the six months ended June 30, 2011 was $7.1 million and gross margin was 32.5%.





Total cost of sales for the six months ended June 30, 2012 was $75.2 million, a decrease of 1.9% compared to the six months ended June 30, 2011. As a percentage of total sales, our cost of sales decreased  to 74.9% for the six months ended June 30, 2012, compared to 79.7% for the six months ended June 30, 2011. Consequently, gross margin increased to 25.1% for the six months ended June 30, 2012 from 20.3% for the six months ended June 30, 2011.





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 19.0% and 18.3% of raw material purchases for the six months ended June 30, 2012 and 2011, respectively. No one supplier provided more than 10.0% of our raw material purchases for the six months ended June 30, 2012 and 2011. For our retail business, purchases from our five largest suppliers represented approximately 43.9% and 39.6% of raw material purchases for the six months ended June 30, 2012 and 2011. One supplier provided 13.8% of our total purchases for the six months ended June 30, 2012. One supplier provided 16.1% of our total purchases for the six months ended June 30, 2011. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.




24





Wealso purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 46.6% and 38.3% of finished goods purchases for the six months ended June 30, 2012 and 2011, respectively. Two contract manufacturers provided approximately 16.6% and 13.2% of our finished goods purchases for the six months ended June 30, 2012. One contract manufacturer provided approximately 10.4% of our finished goods purchases for the six months ended June 30, 2011. For our retail business, our five largest contract manufacturers represented approximately 18.5% and 31.0% of finished goods purchases for the six months ended June 30, 2012 and 2011, respectively. No manufacturer provided more than 10% of our finished goods purchases for the six months ended June 30, 2012 and 2011. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.





Selling, General and Administrative Expenses





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





Our general and administrative expenses include administrative salaries, office 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,


Increase2012


2011


(Decrease) %(in U.S. Dollars, exceptfor percentages)Gross Profit

$
25,189,569



25.1
%

$
19,468,759



20.3
%


29.4
%Operating Expenses:Selling Expenses


12,800,527



12.7



7,355,875



7.7



74
%General and Administrative Expenses


7,203,406



7.2



6,329,155



6.6



13.8
%Total


20,003,933



19.9



13,685,030



14.2



46.2
%Income from Operations

$
5,185,636



5.2
%

$
5,783,729



6.0
%


(10.3
)%





Selling expenses were $12.8 million in the six months ended June 30, 2012, an increase of 74% or $5.4 million compared to the six months ended June 30, 2011. 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 $7.2 million in the six months ended June 30, 2012, an increase of 13.8% compared to the six months ended June 30, 2011. As a percentage of total sales, general and administrative expenses slight increased to 7.2% of total sales for the six months ended June 30, 2012, compared to 6.6% of total sales for the six months ended June 30, 2011.





Income from Operations





Income from operations decreased 10.3% to $5.2 million for the six months ended June 30, 2012 from $5.8 million for the six months ended June 30, 2011. This decrease was due to our increased selling expenses.





Income from operations for our retail business was $0.7 million in the six months ended June 30, 2012 compared to $0.6 million in the six months ended June 30, 2011. As a percentage of total retail sales, income from operations decreased to 1.7% of total retail sales for the six months ended June 30, 2012, compared to 2.5% of total retail sales for the six months ended June 30, 2011. The decrease was due to increased average salaries and the increased number of employees in the retail segment that resulted from expansion of LA GO GO, as well as increased store decoration and marketing expenses associated with the promotion of LA GO GO. There were 121 new stores opened in the six months ended June 30, 2012, compared to 93 new stores opened in the six months ended June 30, 2011.




25





Income from operations for our wholesale business was $4.5 million in the six months ended June 30, 2012 compared to $5.2 million in the six months ended June 30, 2011. As a percentage of total wholesale sales, income from operations increased to 7.6% of total wholesale sales for the six months ended June 30, 2012, compared to 7.0% of total wholesale sales for the six months ended June 30, 2011. The increase was due to the decreased cost of sales for our wholesale business.





Interest Expense





Interest expense was $1.0 million for the six months ended June 30, 2012, an increase of 92.8% compared to the same period in 2011. This increase was attributable to the increased  interest rates.





Change in fair value of derivative liability





Change in fair value of derivative liability was a gain of $0.29 million and $0.33 million, based on the Binnomial Lattice model, for the six months ended June 30, 2012 and 2011, respectively.




Income Tax Expenses





Income tax expense for the six months ended June 30, 2012 was $0.8 million, a decrease of 5.3% compared to the same period of 2011.





Net Income





Net income for the six months ended June 30, 2012 was $4.5 million, a decrease of 8.2% compared to the same period in 2011. Our diluted earnings per share were $0.30 and $0.33 for the six months ended June 30, 2012 and 2011, respectively.





Summary of Cash Flows





Net cash provided by operating activities was $7.4 million for the six months ended June 30, 2012, compared with $6.9 million during the the six months ended June 30, 2011. The increase was mainly due to increased accounts payable for suppliers and decreased accounts receivable.





Net cash used in investing activities was $2.1 million for the six months ended June 30, 2012, compared with $1.5 million during the the six months ended June 30, 2012. The increase was mainly due to increased equipment purchases.





Net cash used in financing activities was $6.9 million for the six months ended June 30, 2012, compared with net cash provided by  financing activities of $1.4 million during the six months ended June 30, 2011. During the six months ended June 30, 2012, we repaid $31.5 million of bank loans and received bank loan proceeds of $24.6 million.





Liquidity and Capital Resources





As of June 30, 2012, we had cash and cash equivalents of $7.2 million, other current assets of $101.9 million and current liabilities of $70.0 million. We presently finance our operations primarily from cash flows from operations and bank loans and we anticipate that these will continue to be our primary sources of funds to finance our short-term cash needs.





Bank Loans





On August 2, 2010, Goldenway entered into a two-year revolving line of credit agreement with Nanjing Bank, which allows the Company to borrow up to approximately $7.91 million (RMB50 million). These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of June 30, 2012, no amounts were outstanding  under this agreement.




26




On March 11, 2010, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $7.91 million (RMB50 million) with Nanjing Bank. The agreement has been extended until April 6, 2013. As of June 30, 2012, Ever-Glory Apparel had borrowed $2.37 million from Nanjing Bank with an annual interest rate from 6.73% to 6.89% due on various dates from November 2012 to May 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang. In addition, Ever-Glory Apparel had borrowed $1.64 million from Nanjing Bank with an annual interest rate from 4.4% to 4.9% due on various dates from August 2012 to September 2012, and collateralized by approximately $2.2 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At June 30, 2012, approximately $3.9 million was unused and available.




As of June 30, 2012, LA GO GO had borrowed $1.58 million (RMB10.0 million) from Nanjing Bank with an annual interest rate of 6.29% and due on various dates from April 2013 to May 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.




On January 4, 2011, Goldenway entered into a new one-year line of credit agreement for approximately $6.33 million (RMB40 million) with Shanghai Pudong Development Bank. As of June 30, 2012, Goldenway had borrowed the maximum amount available under the line of $6.33 million (RMB40 million), with an annual interest rate of 7.55%. These loans are collateralized by certain properties and land use rights of Goldenway, and are due in November 2012.




As of June 30, 2012, Ever-Glory Apparel had borrowed $5.06 million from the Bank of Communications with an annual interest rate of 7.08%, and due in February 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang. In addition, Ever-Glory Apparel had borrowed $1.58 million from the Bank of Communications with annual interest rate  of 5.27%, due on various dates from July 2012 to September 2012, guaranteed by Jiangsu Ever-Glory and Mr. Kang, and collateralized by approximately $1.98 million of accounts receivable from wholesale customers. Approximately $0.23 million was repaid in July 2012.




As of June 30, 2012, LA GO GO had borrowed $0.79 million (RMB5.0 million) from the Bank of Communications with an annual interest rate of 6.37% and due in June 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.




As of June 30, 2012, Ever-Glory Apparel had borrowed $1.90 million from the Bank of China with an annual interest rate rom 5.9% to 6.1% due on various dates from July 2012 to August 2012. The loan is guaranteed by Goldenway, and collateralized by approximately $2.6 million of accounts receivable from wholesale customers. Approximately $0.98 million was repaid in July 2012.




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, 2012, Ever-Glory Apparel had borrowed $1.22 million from HSBC with an annual interest rate from 5.85% to 7.02% due on various dates from July 2012 to September 2012, and collateralized by approximately $1.63 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At June 30, 2012, approximately $5.78 million was unused and available. Approximately $0.27 million was repaid in July 2012.




All bank loans are used to fund our daily operations.





Loans from related party





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




27





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.





As of June 30, 2012, we had access to $29.2 million in lines of credit, of which $17.6 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, 2012, the foreign exchange rate had increased to 6.33 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, 2012 and 2011 was $(196,365), $200,001, $479,660 and $716,495, 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.




28





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, 2012, we had $7.2 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, 2012, the exchange rate between the RMB and U.S. Dollar was 6.32 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, 2011. 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





Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.





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, 2012, 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.





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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, 2011 filed with the SEC on March 28, 2012.





ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None





ITEM3.  DEFAULTS UPON SENIOR SECURITIES





None.





ITEM4.  MINE SAFETY DISCLOSURES





Not applicable.




ITEM 5.  OTHER INFORMATION





None.





ITEM6.  EXHIBITS





The following exhibits are filed herewith:





Exhibit No.

Description31.1

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.





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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 10, 2012
EVER-GLORY INTERNATIONAL GROUP, INC.By:
/s/ Edward Yihua KangEdward Yihua KangChief Executive Officer(Principal Executive Officer)By:
/s/ Jiansong WangJiansong WangChief Financial Officer(Principal Financial and Accounting Officer)





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