f10q0912a1_everglory.htm

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 2012, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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.

Subsequent to the issuance of the Company’s September 30, 2012 consolidated interim financial statements, the Company determined that it had incorrectly reported the amount the Company provided to Jiangsu Ever-Glory under the counter-guarantee as a current receivable from Jiangsu Ever-Glory on its quarterly reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012, and September 30, 2012. Because certain of the receivables from Jiangsu Ever-Glory at the aforementioned quarters arose as a result of financing transactions, rather than from trading transactions, the advances under the counter-guarantee are analogous to unpaid subscriptions or unpaid capital contributions and accordingly should be recorded as contra equity in accordance with SEC SAB Topics 4E and 4G (see Note 8). Accordingly the Company’s September 30, 2012 interim financial statements have been restated resulting in a decrease in both amounts due from related parties and stockholders’ equity of $22,251,123. The reclassification does not affect previously reported amounts for revenue, income from operations, net income or earnings per share.

NOTE 2

SIGNIFICANT ACCOUNTING POLICIES

Financial Instruments

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

Fair Value Accounting

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

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

At September 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 liquidity.

As of September 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.

NOTE 3

INVENTORIES

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

	September 30, 2012			December 31, 2011
Raw materials	$	6,088,191		$	5,606,073
Work-in-progress		19,240,414			7,919,403
Finished goods		26,084,544			23,916,206
		51,413,149			37,441,682
Less: allowance for obsolete inventories		(969,198	)		(566,878	)
Total inventories	$	50,443,951		$	36,874,804

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. Short term bank loans consisted of the following as of September 30, 2012 and December 31, 2011

Bank	September 30, 2012		December 31, 2011
Nanjing Bank	$	16,357,623	$	11,731,223
Shanghai Pudong Development Bank		6,316,000		8,966,382
Industrial and Commercial Bank of China		-		5,294,270
Bank of Communications		8,109,071		2,660,562
Everbright Bank		3,158,000		-
HSBC		2,729,131		532,944
Bank of China		1,894,800		-
	$	38,564,625	$	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 $7.90 million (RMB50 million). The agreement has been extended until August 2, 2013. These loans are guaranteed by Jiangsu Ever-Glory International Group Corp. (“Jiangsu Ever-Glory”), an entity controlled by Mr. Kang, the Company’s Chairman and Chief Executive Officer. These loans are also collateralized by the Company’s property and equipment. As of September 30, 2012, Goldenway had borrowed $6.32 million under this line of credit from Nanjing Bank with an annual interest rate from 5.88% to 6.14% and due on various dates from December 2012 to February 2013. At September 30, 2012, approximately $1.58 million was unused and available under this line of credit.

On March 11, 2010, Ever-Glory Apparel entered into an one-year line of credit agreement for approximately $7.90 million (RMB50 million) with Nanjing Bank. The agreement has been extended until April 6, 2013. As of September 30, 2012, Ever-Glory Apparel had borrowed $3.16 million from Nanjing Bank with an annual interest rate from 6.3% to 6.89% and due on various dates from May 2013 to July 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang. In addition, Ever-Glory Apparel had borrowed $4.51 million from Nanjing Bank with an annual interest rate from 3.37% to 4.4%, due on various dates from October 2012 to December 2012, and collateralized by approximately $5.65 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. At September 30, 2012, approximately $0.23 million was unused and available. Approximately $1.91 million was repaid in October 2012.

As of September 30, 2012, LA GO GO had borrowed $2.37 million (RMB15.0 million) from Nanjing Bank with an annual interest rate from 6.29% to 6.9% and due on various dates from April 2013 to September 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.

On January 4, 2011, Goldenway entered into a one-year line of credit agreement for approximately $6.32 million (RMB40 million) with Shanghai Pudong Development Bank. In January 2012, the agreement was extended until January 4, 2013. As of September 30, 2012, Goldenway had borrowed the maximum amount available under the line of $6.32 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 September 30, 2012, Ever-Glory Apparel had borrowed $5.05 million from the Bank of Communications with an annual interest rate of 7.08%, and due in February 2013. The loan is guaranteed by Jiangsu Ever-Glory and the Company's chairman and CEO, Mr. Kang. This loan is also collateralized by assets of Jiangsu Ever-Glory’s equity investee, Nanjing Knitting, under a collateral agreement executed between the Company, Jiangsu Ever-Glory, Nanjing Knitting and the bank. In addition, Ever-Glory Apparel had borrowed $1.48 million from the Bank of Communications with an annual interest rate of 5.26%, due on various dates from October 2012 to December 2012, guaranteed by Jiangsu Ever-Glory and Mr. Kang, and collateralized by approximately $2.02 million of accounts receivable from wholesale customers. Approximately $0.22 million was repaid in October 2012.

As of September 30, 2012, LA GO GO had borrowed $1.58 million (RMB10.0 million) from the Bank of Communications with an annual interest rate from 6.06% to 6.37% and due on various dates from June to July 2013. This loan is guaranteed by Jiangsu Ever-Glory and Mr. Kang.

On August 21, 2012, Ever-Glory Apparel entered into a one-year line of credit agreement for approximately $13.11 million (RMB83 million) with Everbright Bank guaranteed by Jiangsu Ever-Glory and Mr. Kang. The line of credit is also collateralized by assets of Jiangsu Ever-Glory under a collateral agreement executed between the Company, Jiangsu Ever-Glory and the bank. As of September 30, 2012, Ever-Glory Apparel had borrowed $3.16 million (RMB20.0 million) from Everbright Bank, with an annual interest rate of 6.3% and due in September 2013.

On July 29, 2011, Ever-Glory Apparel and Perfect Dream collectively entered into a secured banking facility agreement for a combined revolving import facility, letter of credit, invoice financing facilities and a credit line for treasury products of up to $7.0 million with the Nanjing Branch of HSBC (China) Company Limited (“HSBC”). This agreement is guaranteed by the Company and Mr. Kang. The agreement has been extended until July 29, 2013. As of September 30, 2012, Ever-Glory Apparel had borrowed $2.73 million from HSBC with an annual interest rate of 5.9%, due on various dates from October to December 2012, and collateralized by approximately $3.4 million of accounts receivable from wholesale customers. These bank loans are to be repaid upon receipt of payments from customers. As of September 30, 2012, approximately $4.27 million was unused and available. Approximately $0.2 million was repaid in October 2012.

As of September 30, 2012, Ever-Glory Apparel had borrowed $1.89 million from the Bank of China with an annual interest rate of 5.9%, and due on October 2012. The loan is guaranteed by Goldenway, and collateralized by approximately $2.6 million of accounts receivable from wholesale customers. The loan was repaid in full in October 2012.

Total interest expense on bank loans amounted to $449,413 and $411,206 for the three months ended September 30, 2012 and 2011, and $1,454,157 and $932,381 for the nine months ended September 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 September 30, 2012 and 2011, resulting in a decrease in the liability and increase in other income of $91,000, $15,500, $381,800 and $345,800 for the three and nine months ended September 30, 2012 and 2011, respectively.

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

NOTE 6

INCOME TAX

Pre-tax income for the three and nine months ended September 30, 2012 and 2011 was taxable in the following jurisdictions.

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
PRC	$	797,928	$	2,628,998	$	4,148,206	$	6,320,088
Others		1,640,613		720,778		3,608,560		2,793,550
Total	$	2,438,541	$	3,349,776	$	7,756,766	$	9,113,638

The Company’s operating subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (“the Income Tax Laws”).

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

Perfect Dream was incorporated in the British Virgin Islands (BVI), and under the current laws of the BVI dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes.

Ever-Glory HK was incorporated in Samoa on September 15, 2009, and under the current laws of Samoa has no liabilities for income taxes.

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
PRC statutory rate		25.0	%		25.0	%		25.0	%		25.0	%
Non-taxable items		(1.3	)		(0.2	)		(1.7	)		(1.3	)
Effect of foreign income tax rates		(15.9	)		(5.3	)		(10.4	)		(6.7	)
Other		(1.0	)		(0.2	)		0.1			(0.1	)
Effective income tax rate		6.8	%		19.3	%		13.0	%		16.9	%

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012		2011
Current	$	236,978		$	(117,529	)	$	502,070	$	861,176
Deferred		(72,369	)		764,322			508,405		678,614
Income tax expense	$	164,609		$	646,793		$	1,010,475	$	1,539,790

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 directors as compensation for her services in the third and fourth quarters of 2011. The shares were valued at $1.94 per share, which was the average market price of the common stock for the five days before the grant date.

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

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 nine months ended September 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				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
EsCeLav	$	2,949	$	2,882	$	8,882	$	8,608
Nanjing Eight-One-Five Hi-Tech (M&E) Co.,Ltd.		3,938		3,843		11,843		11,478
Jiangsu Heng-Rui		-		5,418		-		16,183
Total	$	6,887	$	12,143	$	20,725	$	36,269

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 $1.0 million (RMB 6.3 million) and $1.2 million (RMB7.5 million) during the nine months ended September 30, 2012 and 2011, and have been netted against each other for financial reporting purposes.

The Company purchased raw materials of $309,070 and $1,297,375 during the three months ended September 30, 2012 and 2011, respectively; and $1,023,092 and $2,356,466 during the nine months ended September 30, 2012 and 2011, respectively, from Nanjing Knitting.

In addition, the Company sub-contracted certain manufacturing work to related parties totaling $1,587,404 and $2,553,005 for the three months ended September 30, 2012 and 2011, respectively; and $7,010,767 and $6,551,750 for the nine months ended September 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 nine months ended September 30, 2012 and 2011 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Ever-Glory Vietnam	$	887,853	$	1,504,916	$	2,342,989	$	3,897,349
Ever-Glory Cambodia		483,225		915,419		3,264,516		1,938,674
Nanjing Ever-Kyowa		195,992		127,328		607,626		662,941
Jiangsu Ever-Glory		16,958		5,342		25,928		5,342
EsC'Lav		3,376		-		15,940		11,879
Nanjing Knitting		-		-		753,768		35,565
Total	$	1,587,404	$	2,553,005	$	7,010,767	$	6,551,750

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 September 30, 2012 and December 31, 2011 are as follows:

	September 30, 2012			December 31, 2011
Nanjing Knitting	$	1,126,572		$	661,139
Nanjing Ever-Kyowa		229,963			436,030
Ever-Glory Vietnam		83,553			1,305,696
Ever-Glory Cambodia		(361,943	)		330,047
Kunshan Enjin		-			26,091
Total	$	1,078,145		$	2,759,003

Amounts Due From Related Parties

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

	September 30, 2012		December 31, 2011
EsC'eLav	$	53,530	$	23,565
Nanjing Eight-One-Five Hi-tech (M&E) Co.,Ltd.		11,843		-
Jiangsu Ever-Glory		22,251,123		17,600,147
Total	$	22,316,496	$	17,623,712

Jiangsu Ever-Glory is an entity engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other activities. Jiangsu Ever-Glory is controlled by Mr. Kang. In 2011, because of restrictions on its ability to directly import and export products, the Company utilized Jiangsu Ever-Glory as its agent to assist the Company with its import and export transactions and its international transportation projects. Import transactions primarily consist of purchases of raw materials and accessories designated by the Company’s customers for use in garment manufacture. Export transactions consist of the Company’s sales to foreign markets such as Japan, Europe and the United States. As the Company’s agent, Jiangsu Ever-Glory’s responsibilities included managing customs, inspection, transportation, insurance and collections on behalf of the Company. Jiangsu Ever-Glory also managed transactions denominated in currencies other than the Chinese RMB at rates of exchange agreed between the Company and Jiangsu Ever-Glory and based upon rates of exchange quoted by the People’s Bank of China. In return for these services, Jiangsu Ever-Glory charged the Company a fee of approximately 3% of export sales manufactured in China and 1% of export sales manufactured overseas. For import transactions, the Company may make advance payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu Ever-Glory may make advance payments on the Company’s behalf. For export transactions, accounts receivable for export sales are remitted by the Company’s customers through Jiangsu Ever-Glory, which forwards the payments to the Company. The Company and Jiangsu Ever-Glory agreed that balances from import and export transactions may be offset. Amounts due to (from) Jiangsu Ever-Glory are typically settled within 60-90 days.

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter-guarantee in the form of cash of not less than 70%of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of September 30, 2012, Jiangsu Ever-Glory has provided guarantees for approximately US$ 40.26 million (RMB 255 million) of lines of credit obtained by the Company. Jiangsu Ever-Glory and its 20.31% owned equity investee, Nanjing Knitting, have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately US$16.32 million (RMB 103 million). Mr. Kang has also provided a personal guarantee for US$ 21.95 million (RMB 139 million). During the nine months ended September 30, 2012, US$ 21.49 million (RMB 136 million) was provided to Jiangsu Ever-Glory under the counter-guarantee, all of which was outstanding at September 30, 2012.

Interest of 0.5% is charged on net amounts due at each month end. Interest income amounted to $355,211 and $208,199 for the three months ended September 30, 2012 and 2011, respectively; and $918,506 and $347,694 for the nine months ended September 30, 2012 and 2011, respectively.

Following is a summary of the balances as of September 30, 2012:

Related Party	Type of transaction	September 30 2012 (As restated, Note 1)			December 31 2011
Jiangsu Ever-glory	Accounts receivable	$	1,132,287		$	19,999,373
Jiangsu Ever-glory	Accounts payable		(1,289,859	)		(2,399,226	)
Jiangsu Ever-glory	Interest income		918,505			-
Jiangsu Ever-glory	Counter guarantee deposit	$	21,490,190			-
Total		$	22,251,123		$	17,600,147

At September 30, 2012, amounts due from Jiangsu Ever-Glory have been classified as a reduction of equity, consistent with the guidance in SEC Staff Accounting Bulletins 4E and 4G because the receivables arose as a result of financing transactions.

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 September 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 of the customer’s industry, and general economic conditions and trends, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivables are incorrect, adjustments to the allowance may be required, which would reduce profitability.

For the nine-month period ended September 30, 2012, the Company had one wholesale customer that represented approximately 12% of the Company’s revenues. For the three-month period ended September 30, 2012, the Company had two wholesale customers that represented approximately 11% and 10% of the Company’s revenues, respectively. For the nine-month period ended September 30, 2011, the Company had two wholesale customers that represented approximately 20% and 14% of the Company’s revenues, respectively. For the three-month period ended September 30, 2011, the Company had three wholesale customers that represented approximately 11%, 11% and 13% of the Company’s revenues, respectively.

For the Company’s wholesale business during the three and nine months ended September 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 10% of raw materials purchases during the nine months ended September 30, 2012. During the three months ended September 30, 2012, the Company relied on three suppliers for 11%, 13% and 16% of purchased raw materials, respectively. For the Company’s retail business, the Company had one supplier that represented approximately 12% of raw materials purchases during the nine months ended September 30, 2011, and no supplier represented more than 10% of total raw material purchases during the three months ended September 30, 2011.

For the wholesale business, during the nine months ended September 30, 2012, the Company relied on two manufacturers for 10% and 14% of purchased finished goods, respectively. During the three months ended September 30, 2012, no supplier represented more than 10% of the total finished goods purchased. During the nine months ended September 30, 2011, the Company relied on one manufacturer for 12% of purchased finished goods. During the three months ended September 30, 2011, the Company relied on two manufacturers for 15% and 11% of purchased finished goods, respectively.

For the retail business, during the three and nine months ended September 30, 2012 and 2011, no supplier represented more than 10% of the total purchased finished goods.

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
The People’s Republic of China	$	14,814,519	$	14,055,869	$	33,690,321	$	33,890,950
Germany		6,358,446		5,480,075		15,216,552		22,890,796
United Kingdom		9,948,373		6,785,148		17,901,763		14,526,418
Europe-Other		3,198,985		3,922,109		10,952,973		11,540,852
Japan		8,764,281		3,655,819		17,287,863		14,668,238
United States		1,816,857		8,143,230		9,320,440		18,797,505
Total wholesale business		44,901,461		42,042,250		104,369,912		116,314,759
Retail business		24,368,444		11,631,683		65,321,197		33,491,051
Total	$	69,269,905	$	53,673,933	$	169,691,109	$	149,805,810

NOTE 10

SEGMENTS

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

(a) Wholesale segment

(b) Retail segment

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

	Wholesale segment		Retail segment		Total
Nine months ended September 30, 2012
Segment profit or loss:
Net revenue from external customers	$	104,369,912	$	65,321,197	$	169,691,109
Income from operations	$	6,803,378	$	949,570	$	7,752,948
Interest income	$	962,901	$	7,320	$	970,221
Interest expense	$	1,339,173	$	114,984	$	1,454,157
Depreciation and amortization	$	745,799	$	2,821,980	$	3,567,779
Income tax expense	$	211,069	$	799,406	$	1,010,475

Nine months ended September 30, 2011
Segment profit or loss:
Net revenue from external customers	$	116,314,759	$	33,491,051	$	149,805,810
Income from operations	$	8,976,828	$	301,511	$	9,278,339
Interest income	$	356,640	$	5048	$	361,688
Interest expense	$	886,027	$	46,354	$	932,381
Depreciation and amortization	$	742,916	$	1,938,592	$	2,681,508
Income tax expense	$	1,472,270	$	67,520	$	1,539,790

	Wholesale segment			Retail segment			Total
Three months ended September 30, 2012
Segment profit or loss:
Net revenue from external customers	$	44,901,461		$	24,368,444		$	69,269,905
Income from operations	$	2,308,542		$	258,770		$	2,567,312
Interest income	$	359,116		$	885		$	360,001
Interest expense	$	400,419		$	48,994		$	449,413
Depreciation and amortization	$	246,900		$	1,023,969		$	1,270,869
Income tax expense	$	(476,393	)	$	641,002		$	164,609

Three months ended September 30, 2011
Segment profit or loss:
Net revenue from external customers	$	42,042,250		$	11,631,683		$	53,673,933
Income (loss) from operations	$	3,750,311		$	(255,701	)	$	3,494,610
Interest income	$	211,321		$	3,493		$	214,814
Interest expense	$	380,784		$	30,422		$	411,206
Depreciation and amortization	$	252,492		$	762,115		$	1,014,607
Income tax expense	$	715,331		$	(68,538	)	$	646,793

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 nine months ended September 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 five wholly-owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, China: Ever-Glory International Group Apparel Inc. (“Ever-Glory Apparel”), Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments Company Limited (“New Tailun”), Nanjing Catch-Luck Garments Co., Ltd. (“Catch-Luck”) and Nanjing Tai Xin Garments Trading Company Limited (“Tai Xin”). One wholly-owned subsidiary is located in Samoa: Ever-Glory International Group (HK) Ltd. ("Ever-Glory HK").

Retail Business

We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited (“LA GO GO”), a wholly-owned subsidiary of Ever-Glory Apparel.

Business Objectives

Wholesale Business

We believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality.

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

	x	Expand our global sourcing network

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

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

Continue to emphasize product design and technology utilization;

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

	x	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 September 30, 2012, we have 644 stores (including store-in-stores) which include 218 stores that were opened and 41 stores that were closed during the nine months ended September 30, 2012.

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

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

	x	Expand the LA GO GO retail network throughout China;

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

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

	x	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.

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 doubtful 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 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 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.

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

The following table summarizes our results of operations for the three months ended September 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 September 30,
		2012				2011
		(in U.S. Dollars, except for percentages)
Sales	$	69,269,905	100.0	%	$	53,673,933	100.0	%
Gross Profit	$	15,328,169	22.1	%	$	11,195,724	20.9	%
Operating Expense	$	12,760,857	18.4	%	$	7,701,114	14.3	%
Income From Operations	$	2,567,312	3.7	%	$	3,494,610	6.5	%
Other Expenses (Income)	$	128,771	0.2	%	$	144,834	0.3	%
Income tax expense	$	164,609	0.2	%	$	646,793	1.2	%
Net Income	$	2,273,932	3.3	%	$	2,702,983	5.0	%

Revenue

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

	2012		% of total sales			2011		% of total sales			Change in 2012 Compared with 2011
Wholesale business
The People’s Republic of China	$	14,814,519		21.4	%	$	14,055,869		26.2	%		5.4	%
Germany		6,358,446		9.2			5,480,075		10.2			16.0
United States		1,816,857		2.6			8,143,230		15.2			(77.7	)
United Kingdom		9,948,373		14.4			6,785,148		12.6			46.6
Japan		8,764,281		12.7			3,655,819		6.8			139.7
Europe-Other		3,198,985		4.6			3,922,109		7.3			(18.4	)
Total wholesale business		44,901,461		64.8			42,042,250		78.3			6.8
Retail business		24,368,444		35.2			11,631,683		21.7			109.5
Total	$	69,269,905		100.0	%	$	53,673,933		100.0	%		29.1	%

Sales for the three months ended September 30, 2012 were $69.3 million, an increase of 29.1% from the three months ended September 30, 2011. This increase was primarily attributable to increased sales in our retail business as well as our wholesale business.

Sales generated from our wholesale business contributed 64.8% or $44.9 million of our total sales for the three months ended September 30, 2012, an increase of 6.8% compared to $42.0 million in the three months ended September 30, 2011. This increase was primarily attributable to increased sales in the United Kingdom and Japan.

Sales generated from our retail business contributed 35.2% or $24.4 million of our total sales for the three months ended September 30, 2012, an increase of 109.5% compared to 21.7% or $11.6 million in the three months ended September 30, 2011. This increase was primarily due to the increase in new stores opened and same store sales. We had 644 LA GO GO stores as of September 30, 2012, compared to 421 LA GO GO stores at September 30, 2011.

Costs and Expenses

Cost of Sales and Gross Margin

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

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the three months ended September 30, 2012 and 2011.

	Three months ended September 30,								Growth
	2012				2011				In 2012
	(in U.S. dollars, except for percentages)
Net Sales for Wholesale Sales	$	44,901,461	100.0	%	$	42,042,250	100.0	%	6.8	%
Raw Materials		22,372,864	49.8			21,183,921	50.4		5.6
Labor		1,240,727	2.8			1,097,522	2.6		13.0
Outsourced Production Costs		14,339,488	31.9			12,491,707	29.7		14.8
Other and Overhead		167,160	0.4			149,404	0.4		11.9
Total Cost of Sales for Wholesale		38,120,239	84.9			34,922,554	83.1		9.2
Gross Profit for Wholesale		6,781,222	15.1			7,119,696	16.9		(4.8	)
Net Sales for Retail		24,368,444	100.0			11,631,683	100.0		109.5
Production Costs		7,610,338	31.2			3,920,469	33.7		94.1
Rent		8,211,159	33.7			3,635,186	31.3		125.9
Total Cost of Sales for Retail		15,821,497	64.9			7,555,655	65.0		109.4
Gross Profit for Retail		8,546,947	35.1			4,076,028	35.0		109.7
Total Cost of Sales		53,941,736	77.9			42,478,209	79.1		27.0
Gross Profit	$	15,328,169	22.1	%	$	11,195,724	20.9	%	36.9	%

Raw material costs for our wholesale business were 49.8% of our total wholesale business sales in the three months ended September 30, 2012, compared to 50.4% in the three months ended September 30, 2011. The decrease was mainly due to decreased raw materials prices.

Labor costs for our wholesale business were 2.8% of our total wholesale business sales in the three months ended September 30, 2012, compared to 2.6% in the three months ended September 30, 2011. The increase was mainly due to the increased average salaries of employees.

Outsourced manufacturing costs for our wholesale business were 31.9% of our total wholesale business sales in the three months ended September 30, 2012, compared to 29.7% in the three months ended September 30, 2011. The increase was mainly due to more orders and the limited production capacity this quarter in China.

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

For our wholesale business gross profit for the three months ended September 30, 2012 was $6.8 million, a decrease of 4.8% compared to the three months ended September 30, 2011. As a percentage of wholesale sales, gross profit accounted for 15.1% of our total wholesale sales for the three months ended September 30, 2012, a decrease of 1.8% compared to 16.9% for the three months ended September 30, 2011. The decrease was mainly due to the higher outsourced manufacturing costs.

Production costs for our retail business were $7.6 million during the three months ended September 30, 2012 compared to $3.9 million during the three months ended September 30, 2011. As a percentage of retail sales, retail production costs accounted for 31.2% of our total retail sales in the three months ended September 30, 2012, compared to 33.7% of total retail sales in the three months ended September 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 September 30, 2011.

Rent costs for our retail business were $8.2 million for the three months ended September 30, 2012 compared to $3.6 million for the three months ended September 30, 2011. As a percentage of sales, rent costs accounted for 33.7% of our total retail sales for the three months ended September 30, 2012, compared to 31.3% of total retail sales for the three months ended September 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 third quarter of 2012; there were 97 and 61 new stores opened in the three months ended September 30, 2012 and 2011, respectively.

Gross profit in our retail business for the three months ended September 30, 2012 was $8.5 million and gross margin was 35.1%. Gross profit in our retail business for the three months ended September 30, 2011 was $4.1 million and gross margin was 35.0%.

Total cost of sales for the three months ended September 30, 2012 was $53.9 million, compared to $42.5 million for the three months ended September 30, 2011, an increase of 27%. As a percentage of total sales, cost of sales decreased to 77.9% of total sales for the three months ended September 30, 2012, compared to 79.1% of total sales for the three months ended September 30, 2011. Consequently, gross margin increased to 22.1% for the three months ended September 30, 2012 from 20.9% for the three months ended September 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 September 30,
	2012				2011				Increase (decrease)
	(in U.S. Dollars, except for percentages)
Gross Profit	$	15,328,169	22.1	%	$	11,195,724	20.9	%	36.9	%
Operating Expenses:
Selling Expenses		8,608,695	12.4	%		4,257,401	7.9		102.2
General and Administrative Expenses		4,152,162	6.0	%		3,443,713	6.4		20.6
Total		12,760,857	18.4	%		7,701,114	14.3		65.7
Income from Operations	$	2,567,312	3.7	%	$	3,494,610	6.5	%	(26.5	)%

Selling expenses increased 102.2% to $8.6 million for the three months ended September 30, 2012 from $4.3 million for the three months ended September 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 20.6% to $4.2 million the three months ended September 30, 2012 from $3.4 million for the three months ended September 30, 2011. As a percentage of total sales, general and administrative expenses decreased to 6.0% of total sales for the three months ended September 30, 2012, compared to 6.4% of total sales for the three months ended September 30, 2011. This percentage decrease was due to the increase in sales.

Income from Operations

Income from operations decreased 26.5% to $2.6 million for the three months ended September 30, 2012 from $3.5 million for the three months ended September 30, 2011. As a percentage of sales, income from operations accounted for 3.7% of our total sales for the three months ended September 30, 2012, a decrease of 2.8% compared to the three months ended September 30, 2011 as a result of increased selling expenses for our retail business.

Interest Expense

Interest expense was $0.45 million for the three months ended September 30, 2012, an increase of 9.3% compared to the same period in 2011. The increase was due to the increased bank loans as a result of our business expansion.

Change in fair value of derivative liability

Change in fair value of derivative liability was a gain of $0.1 million and $0.02 million, based on the Binnomial Lattice model, for the three months ended September 30, 2012 and 2011, respectively.

Income Tax Expenses

Income tax expense for the three months ended September 30, 2012 was $0.2 million, a decrease of 74.5% compared to the same period of 2011. The decrease was primarily due to decreased profits of Goldenway and Ever-Glory Apparel and increased profits of Ever-Glory Hong Kong.

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

All PRC subsidiaries are subject to the 25% income tax rate.

Perfect Dream Limited was incorporated in the British Virgin Islands on July 1, 2004, and has no income tax.

Ever-Glory International Group (HK) Ltd was incorporated in Samoa on September 15, 2009, and has no liabilities for income tax.

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

Net Income

Net income for the three months ended September 30, 2012 was $2.3 million, a decrease of 15.9% compared to the same period in 2011. Our basic and diluted earnings per share were $0.15 and $0.18 for the three months ended September 30, 2012 and 2011, respectively.

Results of Operations for the nine months ended September 30, 2012 and 2011

The following table summarizes our results of operations for the nine months ended September 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.

		Nine Months Ended September 30,
		2012					2011
		(in U.S. Dollars, except for percentages)
Sales	$	169,691,109		100.0	%	$	149,805,810	100.0	%
Gross Profit	$	40,517,738		23.9	%	$	30,664,483	20.5	%
Operating Expense	$	32,764,790		19.3	%	$	21,386,144	14.3	%
Income From Operations	$	7,752,948		4.6	%	$	9,278,339	6.2	%
Other Expenses (Income)	$	(3,818	)	0.0	%	$	164,701	0.1	%
Income tax expense	$	1,010,475		0.6	%	$	1,539,790	1.0	%
Net Income	$	6,746,291		4.0	%	$	7,573,848	5.1	%

Revenue

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

	2012		% of total sales			2011		% of total sales			Change In 2012
Wholesale business
The People’s Republic of China	$	33,690,321		19.9	%	$	33,890,950		22.6	%		(0.6	)%
Germany		15,216,552		9.0			22,890,796		15.3			(33.5	)
United States		9,320,440		5.5			18,797,505		12.5			(50.4	)
United Kingdom		17,901,763		10.5			14,526,418		9.7			23.2
Japan		17,287,863		10.2			14,668,238		9.8			17.9
Europe-Other		10,952,973		6.5			11,540,852		7.7			(5.1	)
Total wholesale business		104,369,912		61.5			116,314,759		77.6			(10.3	)
Retail business		65,321,197		38.5			33,491,051		22.4			95.0
Total	$	169,691,109		100.0	%	$	149,805,810		100.0	%		13.3	%

Sales for the nine months ended September 30, 2012 were $169.7 million, an increase of 13.3% from the nine months ended September 30, 2011. This increase was primarily attributable to increased sales in our retail business.

Sales generated from our wholesale business contributed 61.5% or $104.4 million of our total sales for the nine months ended September 30, 2012, a decrease of 10.3% compared to $116.3 million in the nine months ended September 30, 2011. This decrease was primarily attributable to decreased sales in Germany and The United States. The reduced sales in the wholesale segment were primarily due to global economic uncertainty and instability. The slow recovery of the future economies represented by Europe and the US has a serious impact on China’s apparel exports. Therefore, our overseas wholesale business also faced declining orders.

Sales generated from our retail business contributed 38.5% or $65.3 million of our total sales for the nine months ended September 30, 2012, an increase of 95.0% compared to 22.4% or $33.5 million in the nine months ended September 30, 2011. This increase was primarily due to the increase in same store sales and new stores opened. We had 644 LA GO GO stores as of September 30, 2012, compared to 421 LA GO GO stores at September 30, 2011.

Costs and Expenses

Cost of Sales and Gross Margin

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 nine months ended September 30, 2012 and 2011.

		Nine months ended September 30,							Growth
		2012				2011			(Decrease)
		(in U.S. dollars, except for percentages)							In 2012
Net Sales for Wholesale Sales	$	104,369,912	100.0	%	$	116,314,759	100.0	%	(10.3	)%
Raw Materials		49,706,704	47.6			57,909,559	49.8		(14.2	)
Labor		3,287,022	3.1			3,018,020	2.6		8.9
Outsourced Production Costs		31,959,810	30.6			35,485,036	30.5		(9.9	)
Other and Overhead		420,575	0.4			413,450	0.4		1.7
Total Cost of Sales for Wholesale		85,374,111	81.8			96,826,065	83.2		(11.8	)
Gross Profit for Wholesale		18,995,801	18.2			19,488,694	16.8		(2.5	)
Net Sales for Retail		65,321,197	100.0			33,491,051	100.0		95.0
Production Costs		20,692,184	31.7			11,005,777	32.9		88.0
Rent		23,107,077	35.4			11,309,485	33.8		104.3
Total Cost of Sales for Retail		43,799,261	67.1			22,315,263	66.6		96.3
Gross Profit for Retail		21,521,936	32.9			11,175,788	33.4		92.6
Total Cost of Sales		129,173,371	76.1			119,141,327	79.5		8.4
Gross Profit	$	40,517,738	23.9	%	$	30,664,483	20.5	%	32.1	%

Raw material costs for our wholesale business were 47.6% of our total wholesale business sales in the nine months ended September 30, 2012, compared to 49.8% in the nine months ended September 30, 2011. The decrease was mainly due to decreased raw materials prices.

Labor costs for our wholesale business were 3.1% of our total wholesale business sales in the nine months ended September 30, 2012, compared to 2.6% in the nine months ended September 30, 2012. The increase was mainly due to the increased average salaries of employees.

Outsourced manufacturing costs for our wholesale business were 30.6% of our total sales in the nine months ended September 30, 2012, compared to 30.5% in the nine months ended September 30, 2012.

Overhead and other expenses for our wholesale business accounted for 0.4% of our total sales for the nine months ended September 30, 2012, the same as for the nine months ended September 30, 2011.

Gross profit in our wholesale business for the nine months ended September 30, 2012 was $19.0 million, a decrease of 2.5% compared to the nine months ended September 30, 2011. As a percentage of wholesale sales, gross profit accounted for 18.2% of our total wholesale sales for the nine months ended September 30, 2012, an increase of 1.4% compared to 16.8% for the nine months ended September 30, 2011.

Production costs for our retail business were $20.7 million during the nine months ended September 30, 2012 versus $11.0 million during the nine months ended September 30, 2011. As a percentage of retail sales, retail production costs accounted for 31.7% of our total retail sales in the Nine months ended September 30, 2012, compared to 32.9% of total retail sales in the Nine months ended September 30, 2011. This decrease was primarily due to reduced retail prices in various promotions in exchange for increased sales volume during the nine months ended September 30, 2011.

Rent costs for our retail business were $23.1 million or 35.4% of our total retail sales during the nine months ended September 30, 2012 versus $11.3 million or 33.8% during the nine months ended September 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 during the nine months ended September 30, 2012; there were 218 and 154 new stores opened in the nine months ended September 30, 2012 and 2011, respectively.

Gross profit in our retail business for the nine months ended September 30, 2012 was $21.5 million and gross margin was 32.9%. Gross profit in our retail business for the nine months ended September 30, 2011 was $11.2 million and gross margin was 33.4%.

Total cost of sales for the nine months ended September 30, 2012 was $129.2 million, an increase of 8.4% compared to the nine months ended September 30, 2011. As a percentage of total sales, our cost of sales decreased to 76.1% for the nine months ended September 30, 2012, compared to 79.5% for the nine months ended September 30, 2011. Consequently, gross margin increased to 23.9% for the nine months ended September 30, 2012 from 20.5% for the nine months ended September 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 16.7% and 15.2% of raw material purchases for the nine months ended September 30, 2012 and 2011, respectively. No one supplier provided more than 10% of our raw material purchases for the nine months ended September 30, 2012 and 2011. For our retail business, purchases from our five largest suppliers represented approximately 34.9% and 33.3% of raw material purchases for the nine months ended September 30, 2012 and 2011, respectively. One supplier provided 10.1% and 12.1% of our total purchases for the nine months ended September 30, 2012 and 2011, respectively. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 41.2% and 38.7% of finished goods purchases for the nine months ended September 30, 2012 and 2011, respectively. Two contract manufacturers provided approximately 14.3% and 10% of our finished goods purchases for the nine months ended September 30, 2012. One contract manufacturer provided approximately 12% of our finished goods purchases for the nine months ended September 30, 2011. For our retail business, our five largest contract manufacturers represented approximately 14.6% and 25.4% of finished goods purchases for the nine months ended September 30, 2012 and 2011, respectively. No contract manufacturer provided more than 10% of our retail finished goods purchases for the nine months ended September 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

	Nine months ended September 30,
	2012				2011				Increase (decrease)
	(in U.S. Dollars, except for percentages)
Gross Profit	$	40,517,738	23.9	%	$	30,664,483	20.5	%		32.1	%
Operating Expenses:
Selling Expenses		21,409,222	12.6			11,613,276	7.8			84.4	%
General and Administrative Expenses		11,355,568	6.7			9,772,868	6.5			16.2	%
Total		32,764,790	19.3			21,386,144	14.3			53.2	%
Income from Operations	$	7,752,948	4.6	%	$	9,278,339	6.2	%		(16.4	)%

Selling expenses were $21.4 million in the nine months ended September 30, 2012, an increase of 84.4% or $9.8 million compared to the nine months ended September 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 $11.4 million in the nine months ended September 30, 2012. an increase of 16.2% compared to the nine months ended September 30, 2011. As a percentage of total sales, general and administrative expenses increased to 6.7% of total sales for the nine months ended September 30, 2012, compared to 6.5% of total sales for the nine months ended September 30, 2011. The increase was attributable to an increase in the number of retail management personnel.

Income from Operations

Income from operations decreased 16.4% to $7.8 million for the nine months ended September 30, 2012 from $9.3 million for the nine months ended September 30, 2011.

Income from operations for our retail business was $0.9 million in the nine months ended September 30, 2012 compared to $0.3 million in the nine months ended September 30, 2011. As a percentage of total retail sales, income from operations increased to 1.5% of total retail sales for the nine months ended September 30, 2012, compared to 0.9% of total retail sales for the nine months ended September 30, 2011. The increase was due to the increased sales in our retail business.

Income from operations for our wholesale business was $6.8 million in the nine months ended September 30, 2012 compared to $9.0 million in the nine months ended September 30, 2011. As a percentage of total wholesale sales, income from operations decreased to 6.5% of total wholesale sales for the nine months ended September 30, 2012, compared to 7.7% of total wholesale sales for the nine months ended September 30, 2011. The decrease was due to the increased selling expenses for our retail business.

Interest Expense

Interest expense was $1.5 million for the nine months ended September 30, 2012, an increase of 56.0% compared to the same period in 2011. The increase was due to increased bank loans as a result of our business expansion.

Change in fair value of derivative liability

Change in fair value of derivative liability was a gain of $0.38 million and $0.35 million, based on the Binnomial Lattice model, for the nine months ended September 30, 2012 and 2011, respectively.

Income Tax Expenses

Income tax expense for the nine months ended September 30, 2012 was $1.0 million, a decrease of 34.4% compared to the same period of 2011. The decrease was primarily due to decreased profits of Goldenway and Ever-Glory Apparel and increased profits of Ever-Glory Hong Kong.

Net Income

Net income for the nine months ended September 30, 2012 was $6.7 million, a decrease of 10.9% compared to the same period in 2011. Our diluted earnings per share were $0.46 and $0.51 for the nine months ended September 30, 2012 and 2011, respectively.

Summary of Cash Flows

Net cash provided by operating activities was $19.1 million for the nine months ended September 30, 2012, compared with $3.2 million used in operating activities during the nine months ended September 30, 2011. The increase was mainly due to the decrease in amounts due from related parties.

Net cash used in investing activities was $5.1 million for the nine months ended September 30, 2012, compared with $2.7 million during the nine months ended September 30, 2011. The increase was mainly due to increased equipment purchases.

Net cash used in financing activities was $12.3 million for the nine months ended September 30, 2012, compared with $10.2 million provided by financing activities during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, we repaid $38.6 million of bank loans and received bank loan proceeds of $47.8 million. We also advanced $21.5 million to a related party under the counter-guarantee agreement.

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents of $10.4 million, other current assets of $105.0 million and current liabilities of $98.2 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

All bank loans are used to fund our daily operations.

Amounts due from related party

We have historically relied on debt financing from Chinese banks to satisfy our financing needs. Due to Chinese banks’ stringent underwriting policies to non-state-owned businesses, borrowers generally have to provide land use rights as collateral or obtain third party guarantees from either high-net-worth individuals or businesses with strong credit histories with the banks. Although we have certain land use rights available to be used as collateral, the value of these rights are inadequate for us to obtain sufficient bank loans to support our projected growth. As of September 30, 2012, Jiangsu Ever-Glory provided guarantees for approximately US$ 40.26 million (RMB 255 million) of lines of credit we obtained from Chinese banks. Jiangsu Ever-Glory and its 20.31% owned equity investee also provided certain of their assets as collateral. The value of the collateral provided, as per appraisals obtained by the banks in connection with the lines of credit, is approximately US$16.32 million (RMB 103 million). In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory, we orally agreed to provide Jiangsu Ever-Glory a counter-guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by us. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay interest at an annual rate of 6.0% of amounts provided. The oral agreements between us and Jiangsu Ever-Glory have been documented in a written Counter-Guarantee Agreement dated April 15, 2013, that was filed as an exhibit to our Annual Report on Form 10-K filed on April 16, 2013. During the nine months ended September 30, 2012, the Company provided an amount of US$21.49 million (RMB 136 million) from its bank borrowings to Jiangsu Ever-Glory under the counter-guarantee, all of which was outstanding as of September 30, 2012.

Loans from related party

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

Capital Commitments

We have a continuing program for improving our manufacturing facilities and increasing our LA GO GO stores. We anticipate that cash flows from operations and borrowings from banks will be adequate to pay for these capital commitments.

Uses of Liquidity

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

Sources of Liquidity

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

We believe our cash flows from operations together with our cash and cash equivalents currently on hand and our unused credit facilities 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 September 30, 2012, we had access to $29.12 million in lines of credit, of which $6.07 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 September 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. The foreign currency translation loss (gain) for the three and nine months ended September 30, 2012 and 2011 was ($192,935), $7,066, $332,262 and $1,048,757, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rates: Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. On September 30, 2012, we had $10.4 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 wholesale 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 September 30, 2012, the exchange rate between the RMB and U.S. Dollar was 6.33 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 not 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 September 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

The following risk factors were included in our Form 10-K for fiscal year ended December 31, 2012 as a result of the counter-guarantee:

There maybe conflicts of interest between Mr. Kang’s role as the Chairman of the Board and CEO of our Company and his role as the majority owner of other entities that we do business with.

We had certain transactions with Jiangsu Ever-Glory International Enterprise Group Company (“Jiangsu Ever-Glory”), an entity majority owned and controlled by Mr. Kang. Jiangsu Ever-Glory is engaged in importing/exporting, apparel-manufacture, real-estate development, car sales and other businesses We utilized Jiangsu Ever-Glory as our agent to agent to assist with our import and export transactions and our international transportation projects. Import transactions primarily consist of purchases of raw materials and accessories designated by the Company’s customers for use in garment manufacture. Export transactions consist of our sales to markets outside of China. In return for these services, Jiangsu Ever-Glory charged us a fee of approximately 3% of export sales manufactured in China and 1% of export sales manufactured overseas. For import transactions, we may make advance payments, through Jiangsu Ever-Glory, for the raw material purchases, or Jiangsu Ever-Glory may make advance payments on our behalf. For export transactions, accounts receivable for export sales are remitted by our customers through Jiangsu Ever-Glory, who forwards the payments to us. We and Jiangsu Ever-Glory have agreed that balances from import and export transactions may be offset. Amounts due to (from) Jiangsu Ever-Glory are typically settled within 60-90 days. Accounts receivable at September 30, 2012 and December 31, 2011 was US$ 1.1 million and US$ 20 million respectively. Accounts payable at September 30, 2012 and December 31, 2011 was US$ 1.29 million and US$ 2.4 million respectively. We charge an interest of 0.5% (an annual interest of 6%) on net amounts due at each month end. Interest income amounted to US$ 0.36 million and US$ 0.21 million for the three months ended September 30, 2012 and 2011, respectively; and US$ 0.92 million and US$ 0.35 million for the nine months ended September 30, 2012 and 2011, respectively.

In March 2012, in consideration of the guarantees and collateral provided by Jiangsu Ever-Glory and Nanjing Knitting, the Company agreed to provide Jiangsu Ever-Glory a counter-guarantee in the form of cash of not less than 70% of the maximum aggregate lines of credit obtained by the Company. Jiangsu Ever-Glory is obligated to return the full amount of the counter-guarantee funds provided upon expiration or termination of the underlying lines of credit and is to pay annual interest at the rate of 6.0% of amounts provided. As of September 30, 2012, Jiangsu Ever-Glory have provided guarantees for approximately US$ 40.26 million (RMB 255 million) of lines of credit obtained by the Company. Jiangsu Ever-Glory, and its 20.31% owned equity investee, Nanjing Knitting, have also provided their assets as collateral for certain of these lines of credit. The value of the collateral, as per appraisals obtained by the banks in connection with these lines of credit is approximately US$16.32 million (RMB 103 million). Mr. Kang has also provided a personal guarantee for US$21.95 million (RMB 139 million). During nine months ended September 30, 2012, US$21.49 million (RMB 136 million) was provided to Jiangsu Ever-Glory under the counter-guarantee, all of which was outstanding at September 30, 2012.

It is possible that the terms of the export and import agency transactions and the counter-guarantee may not be the same as those that would result from transactions between unrelated parties. Despite Mr. Kang’s fiduciary duty to us as the CEO and a director, in the event of any conflicts of interest between us and Jiangsu Ever-Glory, he may not act in our best interests and such conflicts of interest may not be resolved in our favor. These conflicts may result in management decisions that could negatively affect our operations.

For a further discussion of these related party transactions, see Notes 13 Related party transactions in the footnotes to the consolidated financial statements and Item 13. Certain Relationships and Related Transactions, and Director Independence in our Form 10-K for fiscal year ended December 31, 2012 filed with the SEC on April 16, 2013.

In case Jiangsu Ever-Glory fails to repay the funds we provided to it under the Counter-Guarantee Agreement according to its terms, we would suffer significant financial losses.

Despite management’s belief that Jiangsu Ever-Glory is financially capable of repaying all amounts we provided under the counter-guarantee and Jiangsu Ever-Glory’s oral agreement to repay a certain portion of the funds by the end of the second quarter of 2013, it is possible that we will not be able to collect all amounts from Jiangsu Ever-Glory due to factors beyond our control. There is no restriction on how Jiangsu Ever-Glory can use the funds except that it is not allowed to invest in high risk investments. We were told that Jiangsu Ever-Glory has used the entire amount of the funds we provided under the counter-guarantee for its own operations. It is possible that we will not be able to collect the entire amount from Jiangsu Ever-Glory due to reasons beyond its control such as its operational failure or deterioration of overall economic conditions. In such event, we, as the primary obligor under the lines of credit, would be obligated to repay the entire outstanding borrowings after the banks seek collection from the assets collateralized by Jiangsu Ever-Glory. As a result, we may suffer financial losses which could have material negative effects on our financial condition and results of operations.

Expansion of both our wholesale and retail business depends on our ability to obtain continuous financing at acceptable terms. Failure to do so will result in negative impact on our results of operations.

We have historically relied on debt financing from Chinese banks to satisfy our financing needs. Due to Chinese banks’ stringent underwriting policy to non-state-owned businesses, borrowers generally have to provide land use rights as collaterals or obtain third party guarantees from either high-net-worth individuals or businesses with strong credits with the banks. Although we have certain land use rights to be used as collateral, the value of those properties are not high enough for us to obtain sufficient bank loans to support our projected growth. Therefore, Mr. Kang previously provided personal guarantees and Jiangsu Ever-Glory provided personal guarantees and assets collateral as security interests for the bank loans. In the event Mr. Kang or Jiangsu Ever-Glory refuses to provide sufficient security interests in the future or continue the guarantee and collateral provided in the past, we may not be able to obtain the bank loans on acceptable terms as required by our business plan. As a result, we may have to delay or reduce our retail expansion and limit our wholesale development which may materially harm our business, financial condition and results of operations.

ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

Exhibit No.		Description

10.1		Counter-Guarantee Agreement entered on April 15, 2013 between the Company and Jiangsu Ever-Glory included in our Form 10-K for fiscal year ended December 31, 2012.

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

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

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

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

101.INS **	XBRL Instance Document

101.SCH **	XBRL Taxonomy Extension Schema Document

101.CAL **	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **	XBRL Taxonomy Extension Label Linkbase Document

101.PRE **	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herein

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

SIGNATURES

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

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

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

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

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

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

		Page Number

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		4

PART I. FINANCIAL INFORMATION		5

Item 1.	Financial Statements	5

	Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	5

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	7

	Notes to the Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

SIGNATURES		33

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

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

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

	x	Our future financing needs; and
	x	Our ability to attract additional investment capital on attractive terms.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011

ASSETS
	September 30,			December 31,
	2012			2011
	(As restated, Note 1)
CURRENT ASSETS
Cash and cash equivalents	$	10,392,722		$	8,822,581
Accounts receivable		42,180,694			50,634,388
Inventories		50,443,951			36,874,804
Value added tax receivable		3,915,996			1,908,436
Other receivables and prepaid expenses		1,717,388			1,122,570
Advances on inventory purchases		6,629,609			2,177,544
Amounts due from related parties		65,373			17,623,712
Total Current Assets		115,345,733			119,164,035

LAND USE RIGHT, NET		2,806,943			2,845,552
PROPERTY AND EQUIPMENT, NET		14,875,971			13,210,628
TOTAL ASSETS	$	133,028,647		$	135,220,215

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Bank loans	$	38,564,625		$	29,185,381
Accounts payable		39,545,072			41,466,844
Accounts payable and other payables - related parties		1,078,145			2,759,003
Other payables and accrued liabilities		13,702,970			5,996,434
Value added and other taxes payable		2,012,463			2,268,872
Income tax payable		301,758			368,714
Deferred tax liabilities		2,968,782			2,460,377
Derivative liability		9,000			-
Total Current Liabilities		98,182,815			84,505,625

LONG-TERM LIABILITIES
Derivative liability		-			390,800
Total Long-term Liabilities		-			390,800
TOTAL LIABILITIES		98,182,815			84,896,425

COMMITMENTS AND CONTINGENCIES

EQUITY
Stockholders' equity of the Company:
Preferred stock ($.001 par value, authorized 5,000,000 shares,
no shares issued and outstanding)		-			-
Common stock ($.001 par value, authorized 50,000,000 shares,
14,772,270 and 14,760,873 shares issued and outstanding
as of September 30, 2012 and December 31, 2011, respectively)		14,772			14,761
Additional paid-in capital		3,552,166			3,532,369
Retained earnings		41,723,143			34,976,853
Statutory reserve		5,311,921			5,311,921
Accumulated other comprehensive income		6,494,953			6,487,886
Amounts due from related party		(22,251,123	)		-
Total Stockholders' Equity		34,845,832			50,323,790

TOTAL LIABILITIES AND EQUITY	$	133,028,647		$	135,220,215

See the accompanying notes to the condensed consolidated financial statements.

EVER-GLORY INTERNATIONAL GROUP, INC. AND SUBSDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED)

		Three months ended						Nine months ended
		September30,						September30,
		2012			2011			2012			2011

NET SALES		$	69,269,905		$	53,673,933		$	169,691,109		$	149,805,810

COST OF SALES			53,941,736			42,478,209			129,173,371			119,141,327

GROSS PROFIT			15,328,169			11,195,724			40,517,738			30,664,483

OPERATING EXPENSES
	Selling expenses		8,608,695			4,257,401			21,409,222			11,613,276
	General and administrative expenses		4,152,162			3,443,713			11,355,568			9,772,868
	Total Operating Expenses		12,760,857			7,701,114			32,764,790			21,386,144

INCOME FROM OPERATIONS			2,567,312			3,494,610			7,752,948			9,278,339

OTHER (EXPENSES) INCOME
	Interest income		360,001			214,814			970,221			361,688
	Interest expense		(449,413	)		(411,206	)		(1,454,157	)		(932,381	)
	Change in fair value of derivative liability		91,000			15,500			381,800			345,800
	Other (expenses) income		(130,359	)		36,058			105,954			60,192
	Total Other (Expenses) Income		(128,771	)		(144,834	)		3,818			(164,701	)

INCOME BEFORE INCOME TAX EXPENSE			2,438,541			3,349,776			7,756,766			9,113,638

INCOME TAX EXPENSE			(164,609	)		(646,793	)		(1,010,475	)		(1,539,790	)

NET INCOME			2,273,932			2,702,983			6,746,291			7,573,848

	Foreign currency translation (loss) gain		(192,935	)		332,262			7,066			1,048,757
COMPREHENSIVE INCOME		$	2,080,997		$	3,035,245		$	6,753,357		$	8,622,605

EARNINGS PER SHARE
	Basic and diluted	$	0.15		$	0.18		$	0.46		$	0.51
Weighted average number of shares outstanding
	Basic and diluted		14,765,942			14,758,944			14,765,568			14,756,122

See the accompanying notes to the condensed consolidated financial statements.