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UNITED STATES FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2010 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to
____________ Commission file number 333-150835 BABY FOX INTERNATIONAL, INC.
Shanghai Minhang District + 86 21 5415 3855 Indicated by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ] Indicate by check mark whether the registrant is a large
accelerate filer, an accelerate filer, a non-accelerated filer, or a smaller
reporting company. See the definition of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X] Number of shares of common stock outstanding as of November 8,
2010: 40,447,500 INDEX FORWARD LOOKING STATEMENTS Information included or incorporated by reference in this
annual report may contain forward-looking statements. This information may
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, should, expect,
anticipate, estimate, believe, intend or project or the negative of
these words or other variations on these words or comparable terminology. This annual report contains forward-looking statements,
including statements regarding, among other things, (a) our projected sales and
profitability, (b) our plans for growth, (c) our relationship with our key
manufacturers, (d) the regulation to which we are subject, (e) anticipated
trends in our industry and (f) our needs for working capital. These statements
may be found under Managements Discussion and Analysis of Financial Condition
and Results of Operations and Business, as well as in this annual report
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under Risk Factors and matters described in
this annual report generally. In light of these risks and uncertainties, there
can be no assurance that the forward-looking statements contained in this annual
report will in fact occur. Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the
risk factors described in the annual report, whether as a result of new
information, future events, changed circumstances or any other reason after the
date of this annual report. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY See accompanying notes to unaudited condensed consolidated financial
statements 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
(Exact name of small business issuer as specified in its charter)
Nevada
26-0775642
(State of other jurisdiction of incorporation or
organization)
(IRS Employer identification No.)
89 Xinbang Road, Suite
305-B5
The Peoples Republic of China
(Address of principal
executive offices)
(Registrant's telephone number,
including area code)
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [X]
Page No.
PART I FINANCIAL
INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of September 30, 2010 and as of June 30, 2010
1
Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the Three Months Ended September 30, 2010
and 2009 (unaudited)
2
Condensed Consolidated Statement of
Changes in Stockholders Equity (Deficiency) for the Three Months Ended
September 30, 2010 (unaudited)
3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2010 and 2009 (unaudited)
4
Notes to Condensed Consolidated Financial
Statements (unaudited)
5
Item 2.
Managements Discussion and Analysis of
Financial Condition And Results of Operations
17
Item 3.
Quantitative and Qualitative
Disclosure About Market Risk
26
Item 4.
Controls and Procedures
26
PART II OTHER
INFORMATION
Item 1.
Legal Proceedings
27
Item 1A.
Risk Factors
27
Item 2.
Unregistered Sales of Equity Securities and Use
of Proceeds
27
Item 3.
Defaults Upon Senior Securities
27
Item 4.
(Removed and Reserved)
27
Item 5.
Other Information
27
Item 6.
Exhibits
27
SIGNATURES
28
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED )
September 30,
June 30,
2010
2010
ASSETS
CURRENT ASSETS:
Cash
$
130,763
$
180,476
Accounts Receivable, net
3,484,388
2,863,542
Inventory, net
8,288,105
6,808,309
Advance to vendors, net
-
-
Prepaid expenses and other current assets
113,982
158,536
TOTAL CURRENT ASSETS
12,017,238
10,010,863
Property and equipment, net
49,205
51,037
Deferred tax asset, net
-
-
Deposits
225,269
207,101
TOTAL ASSETS
$
12,291,712
$
10,269,001
LIABILITIES AND
STOCKHOLDERS' DEFICITS
CURRENT LIABILITIES:
Accounts payable - Trade
$
600,626
$
515,298
affiliated company
10,751,766
9,510,853
Deposits payable & customer advances
1,390,335
1,263,502
Accrued expenses and other current liabilities
3,034,687
2,751,220
Loans payable - officer and stockholder
35,815
35,341
Current portion of long-term debt
1,596,753
1,575,638
Dividends payable
853,997
842,704
TOTAL CURRENT LIABILITIES
18,263,979
16,494,556
LONG-TERM DEBT
810,160
810,160
STOCKHOLDERS' DEFICIENCY
Preferred Stock, $0.001 par value, 10,000,000 shares
authorized,
-0- shares issued and outstanding
-
-
Common Stock, $0.001 par value, 90,000,000
shares authorized,
40,447,500 and 40,427,500 shares issued and
outstanding as of September 30, 2010
and June 30, 2010, respectively
40,447
40,427
Additional paid-in capital
69,980
-
Accumulated deficits
(6,831,671
)
(7,095,053
)
Accumulated other comprehensive income
(61,183
)
18,911
TOTAL STOCKHOLDERS' DEFICIENCY
(6,782,427
)
(7,035,715
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY
$
12,291,712
$
10,269,001
BABY FOX INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
FOR THREE MONTHS ENDED SEPTEMBER 30 | ||||||
2010 | 2009 | |||||
SALES | ||||||
Corporate stores | $ | 4,841,047 | $ | 4,444,991 | ||
Non-corporate stores | 413,891 | 914,448 | ||||
TOTAL SALES | 5,254,938 | 5,359,439 | ||||
COST OF GOODS SOLD | ||||||
Corporate stores | 1,690,383 | 2,898,229 | ||||
Non-corporate stores | 276,101 | 649,236 | ||||
TOTAL COST OF GOODS SOLD | 1,966,484 | 3,547,465 | ||||
GROSS PROFIT | 3,288,454 | 1,811,974 | ||||
OPERATING EXPENSES: | ||||||
Selling Expenses | 2,535,749 | 2,401,404 | ||||
General & Administrative Expenses | 464,803 | 117,439 | ||||
TOTAL OPERATING EXPENSES | 3,000,552 | 2,518,843 | ||||
INCOME (LOSS) FROM OPERATIONS | 287,902 | (706,869 | ) | |||
Other income | 6,731 | - | ||||
Interest expense | 31,251 | 31,102 | ||||
TOTAL OTHER EXPENSE | (24,520 | ) | (31,102 | ) | ||
INCOME (LOSS) BEFORE TAXES | 263,382 | (737,971 | ) | |||
INCOME TAX PROVISION | ||||||
Cuurent | - | - | ||||
Deferred | - | - | ||||
TOTAL INCOME TAX PROVISION | - | - | ||||
NET INCOME (LOSS) | $ | 263,382 | $ | (737,971 | ) | |
OTHER COMPREHENSIVE INCOME (LOSS): | ||||||
Foreign currency translation loss | (80,094 | ) | (8,260 | ) | ||
COMPREHENSIVE INCOME (LOSS) | $ | 183,288 | $ | (746,231 | ) | |
BASIC AND DILUTED INCOME (LOSS) PER SHARE | 0.01 | (0.02 | ) | |||
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING |
40,430,761 |
40,427,500 |
See accompanying notes to unaudited condensed consolidated financial statements
2
BABY FOX INTERNATIONAL, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
ACCUMULATED | ||||||||||||||||||||||||
OTHER | TOTAL | |||||||||||||||||||||||
PREFERRED STOCK | COMMON STOCK | ADDITIONAL | ACCUMULATED | COMPREHENSIVE | STOCKHOLDERS' | |||||||||||||||||||
Shares | Amount | Shares | Amount | PAID-IN CAPITAL | DEFICITS | INCOME | DEFICIENCY | |||||||||||||||||
BALANCE- JUNE30, 2008 | - | - | 40,427,500 | 40,427 | (2,176,893 | ) | 54,451 | (2,082,015 | ) | |||||||||||||||
Net loss | (4,482,629 | ) | (4,482,629 | ) | ||||||||||||||||||||
Foreign currency translation adjustment | (4,818 | ) | (4,818 | ) | ||||||||||||||||||||
BALANCE- JUNE30,2009 | - | - | 40,427,500 | 40,427 | - | (6,659,522 | ) | 49,633 | (6,569,462 | ) | ||||||||||||||
Net income | (435,531 | ) | (435,531 | ) | ||||||||||||||||||||
Foreign currency translation adjustment | (30,722 | ) | (30,722 | ) | ||||||||||||||||||||
BALANCE- June 30,2010 | - | - | 40,427,500 | 40,427 | - | (7,095,053 | ) | 18,911 | (7,035,715 | ) | ||||||||||||||
Common stock issued for legal services | 20,000 | 20 | 69,980 | 70,000 | ||||||||||||||||||||
Net income | - | 263,382 | 263,382 | |||||||||||||||||||||
Foreign currency translation adjustment | (80,094 | ) | (80,094 | ) | ||||||||||||||||||||
BALANCE- September 30,2010 | - | - | 40,447,500 | 40,447 | 69,980 | (6,831,671 | ) | (61,183 | ) | (6,782,427 | ) |
See accompanying notes to unaudited condensed consolidated financial statements
3
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30 | ||||||
2010 | 2009 | |||||
OPERATING ACTIVITIES: | ||||||
Net income (loss) | $ | 263,382 | $ | (737,971 | ) | |
Adjustments to reconcile net income (loss) to net
cash used in operating activities: |
||||||
Depreciation expense | 4,323 | 3,710 | ||||
Bad debt allowance | 113,649 | - | ||||
(Reversal) Accrual of inventory reserve | (365,548 | ) | 273,788 | |||
(Decrease) increase of valuation allowance on deferred tax assets | (24,460 | ) | 133,404 | |||
Common stock issued for legal services | 70,000 | - | ||||
Decrease (increase) in current assets | ||||||
Accounts receivable | (692,245 | ) | (676,706 | ) | ||
Inventory | (1,013,770 | ) | (459,976 | ) | ||
Advance to vendors | - | (16,567 | ) | |||
Deposit | (15,290 | ) | (8,927 | ) | ||
Prepaid expenses and sundry current assets | 46,368 | (205,363 | ) | |||
Deferred tax | 24,460 | (133,404 | ) | |||
Increase (decrease) in current liabilities | ||||||
Accounts payable-trade | 77,901 | (1,050,780 | ) | |||
Accrued expenses, taxes and sundry current liabilities | 246,299 | 278,353 | ||||
Customer deposits and advances | 109,170 | (145 | ) | |||
NET CASH USED IN OPERATING ACTIVITIES | (1,155,761 | ) | (2,600,584 | ) | ||
INVESTING ACTIVITIES: | ||||||
Acquisition of property and equipment | (1,824 | ) | (1,762 | ) | ||
NET CASH USED IN INVESTING ACTIVITIES | (1,824 | ) | (1,762 | ) | ||
FINANCING ACTIVITIES: | ||||||
Accounts payable- affiliated company | 1,106,048 | 1,627,401 | ||||
Proceeds of stockholder loan | - | 2,199 | ||||
Proceeds from short-term loan | - | 439,830 | ||||
Proceeds from long-term debt | - | 293,220 | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,106,048 | 2,362,650 | ||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 1,824 | 252 | ||||
DECREASE IN CASH | (49,713 | ) | (239,444 | ) | ||
CASH - BEGINNING OF THE PERIOD | 180,476 | 312,397 | ||||
CASH - END OF THE PERIOD | $ | 130,763 | $ | 72,953 | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||
Income tax paid | $ | - | $ | - |
See accompanying notes to unaudited condensed consolidated financial statements
4
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
1. | BUSINESS DESCRIPTION AND BASIS OF PRESENTATION |
Business description
Baby Fox International, Inc. (the Company), through its wholly-owned subsidiary Shanghai Baby Fox Fashion Co., Ltd. (Shanghai Baby Fox) is a specialty retailer, developer and designer of fashionable, value-priced womens apparel and accessories. The Company primarily sells merchandise through its corporate-owned stores located within upscale shopping malls across China. The mall operator collects the proceeds of sales from customers and remits the proceeds, net of rent and other charges, to the Company.
In addition, the Company sells merchandise to licensed non-corporate owned stores which only carry the Baby Fox brand merchandise.
Basis of presentation
The Companys accounting policies used in the preparation of the accompanying unaudited consolidated financial statements conform to accounting principles generally accepted in the United States of America ("US GAAP") and have been consistently applied.
In the opinion of management, the Companys unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are considered necessary for a fair presentation of consolidated results of operations, financial position and cash flows as of and for the periods present. Operating results for the three month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.
The balance sheet at June 30, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principal of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Shanghai Baby Fox. All significant inter-company balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. The Companys significant estimates include estimates for reserves for inventory markdowns, allowance for doubtful accounts and useful lives of property and equipment. Actual results could differ from those estimates.
5
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Foreign currency translation
The reporting currency of the Company is the US dollar. The functional currency of Baby Fox International is the US dollar. Shanghai Baby Fox uses its local currency, the Chinese Renminbi (RMB) as its functional currency. In accordance with accounting standards regarding foreign currency translation, results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
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. Gains and losses from foreign currency transactions are included in the results of operations. The Company did not have any material transaction gain or loss for three months ended September 30, 2010 and 2009.
Revenue recognition and return policy
The Company recognizes revenue in accordance with accounting standards regarding revenue recognition, which specifies that revenue is realized or realizable and earned when four criteria are met:
Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The sellers price to the buyer is fixed or determinable; and
Collectability of payment is reasonably assured.
The Companys revenues are generated from sales at its company-owned retail stores and from sales of merchandise to licensed non-corporate owned stores.
Revenues from sales at company owned retail stores are recognized when the ultimate customer purchases the merchandise in the store and pays for it at the cash register. Customers have the right to return merchandise for credit, exchange or refunds for up to fourteen days after purchase. The return policy is set by corporate headquarters and consistent among all our corporate stores. Period allowed for return is short (two weeks) and based on historical experience, actual returns by end consumers have been rare and immaterial across all retail stores. Management will keep monitoring returns by end consumers at our corporate stores as we open more stores each period.
Revenues from sales to licensed non-corporate stores are recognized at the date of shipment to the non-corporate stores when a formal arrangement exists, the price is fixed or determinable, and no other significant obligations of the Company exist and collectability is reasonably assured. According to the contract, non-corporate stores have the right to return defected merchandise within ten days of receipt. Return of unsold merchandise for current style is determined by our headquarters and full cooperation from non-corporate stores is required. Reserves are established to reflect actual and anticipated losses resulting from the returns of defected and unsold merchandise based on historical information. Currently we estimate returns to be 20% of our sales to non-corporate stores and relevant reserves have been made accordingly each reporting period. Since fashion clothing is trending towards shorter product life cycle and the return period we allow for non-corporate stores is relatively long, the current reserve already takes into the effect of introducing new products on expected return of previous products. The return reserve based on this percentage of sales has been consistent with actual returns in our operating history. The balances of the return reserve as of September 30, 2010 and 2009 were $23,962 and $140,142, respectively. We will closely monitor returns for existing and new stores and adjust reserve for returns if necessary. We do not offer early payment discounts, incentive discounts based on volume or credit for products that do not sell well at non-corporate stores.
6
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue recognition and return policy (continued)
Shipping and handling of merchandise sold to non-corporate stores is included in revenue and not separately billed to customers or paid directly by the customer.
Cost of sales
Cost of sales includes the cost of merchandise sold and related costs including purchasing, receiving, warehousing and related costs.
Advertising expense
Advertising expense is charged to operations as incurred and totaled approximately $-0- and $22,079 for the three months ended September 30, 2010 and 2009, respectively.
Fair value of financial instruments
The Company adopted the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entitys own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The carrying amounts reported in the balance sheets for cash, accounts receivable, loan receivables, other receivables, advance to suppliers, short-term loan, accounts payable, advance from customers, other payables and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The carrying value of the long-term debt approximates fair value based on market rates and terms currently available to the Company. The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.
Cash and cash equivalents
The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of their acquisition date. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value.
The Company maintains cash with financial institutions in the Peoples Republic of China (PRC) which are not insured or otherwise protected. Should any of these institutions holding the Companys cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution.
7
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Accounts receivable
Accounts receivable consist of amounts due from mall operators which are generally received within sixty days and amounts due from sales to non-corporate stores. The risk of credit loss in the Companys trade receivables is substantially mitigated by the Companys credit evaluation process, short collection terms from mall operators and deposits required from non-corporate store operators. Allowances for potential credit losses are determined based on historical experience and current evaluation of the composition of accounts receivable. Historically, credit losses have been within managements expectations. On September 30, 2010 and June 30, 2010, the balances of bad debt allowance represented 23.1% and 24.3% of the outstanding accounts receivable balances.
Inventories
Inventories, consisting of finished goods and accessories, are valued at the lower of cost as determined by the average cost or market. Cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. Due to the high style nature of the Companys merchandise, slow moving, out of season and broken style merchandise is sold to discount stores substantially below cost. Reserves are created to reduce the carrying value of these items to market value.
The company maintains a perpetual inventory and sales report, by store location. This is updated daily based upon shipping and sales reports. A weekly review is made by the merchandising group and management to identify slow moving merchandise. Merchandise, which is slow moving during the first month at a store is reported to the head office, and is sometimes moved to other stores, due to varying style demand in the diverse markets in China. Unsold merchandise is then marked down, and if not sold within 90 days of receipt, it is shipped back to the warehouse. The company then has periodic discount warehouse sales and uses certain liquidators.
The company values inventory at the lower of cost or market, and maintains a reserve for inventory markdowns. This encompasses current goods held for liquidation and markdown, and application of historical percentages of current inventory which is anticipated to be marked down and /or liquidated. The percentage was 36% and 42% of ending inventory level as of September 30, 2010 and June 30, 2010, respectively based on historical experience and current goods held for liquidation, and reserves are made accordingly at each reporting period. The company periodically adjusts the percentage based on a review of changing ratios and the percentage of selling prices recovered through liquidation.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets less estimated residual value over their useful lives using the straight line method for financial reporting purposes. Total depreciation for the three months ended September 30, 2010 and 2009 were $4,323 and $3,710, respectively. The useful life and estimated residual value are as follows:
Office equipment | |
Useful life | 5 years |
Residual value | 5% |
Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized.
8
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Income taxes
The Company accounts for income taxes in accordance with the FASB Codification Topic 740-10-25 (ASC 740-10-25), which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, it requires recognition of future tax benefits, such as carryforwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
Earnings per share
Basic earnings per common share is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of common shares and dilutive securities (such as warrants and convertible preferred stock) outstanding. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.
Statement of cash flows
In accordance with FASB issued Accounting Standards cash flows from the Companys operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Segment reporting
The Company uses the management approach model for segment reporting. The management approach model is based on the way a companys management organized segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company consists of one reportable business segment, the sale of merchandise.
Recent accounting pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Level 1 and 2, separate disclosures of purchases, sales, issuance, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Companys fiscal year 2011); early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2010-06 on its financial statements.
9
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recent accounting pronouncements (continued)
In February 2010, FASB issued new standards in ASC 855, Subsequent Event. This amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. All of the amendments are effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the adoption of this amendment to have a material impact on its consolidated financial statements.
3. | GOING CONCERN |
As of September 30, 2010, the Companys current liabilities exceeded its current assets by $6,246,741 and the Companys total liabilities exceeded its total assets by $6,782,427. The Companys cash position on September 30, 2010 was $130,763. In addition, the Company receives payment terms from a related party supplier, that may not be available from unrelated third parties. Our auditor has expressed their concern as to our ability to continue as a going concern in the audit opinion of our financial statements for the year ended June 30, 2010.
4. | ACCOUNTS RECEIVABLE |
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Accounts receivable | $ | 4,532,347 | $ | 3,784,745 | ||
Less: bad debt allowance | (1,047,959 | ) | (921,203 | ) | ||
Accounts receivable, net | $ | 3,484,388 | $ | 2,863,542 |
5. | ADVANCE TO VENDORS |
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Advance to vendors | $ | 22,355 | $ | 22,059 | ||
Less: bad debt allowance | (22,355 | ) | (22,059 | ) | ||
Advance to vendors, net | $ | - | $ | - |
10
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
6. | INVENTORIES |
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Inventories | $ | 12,849,609 | $ | 11,672,624 | ||
Less: reserve for inventory markdown | (4,561,504 | ) | (4,864,315 | ) | ||
Inventories, net | $ | 8,288,105 | $ | 6,808,309 |
7. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of the following:
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Employee advance | $ | 3,731 | $ | 3,682 | ||
Prepaid expenses | 110,251 | 154,854 | ||||
Total | $ | 113,982 | $ | 158,536 |
8. | RELATED PARTY TRANSACTIONS |
The Company purchased 100% of its merchandise for the three months ended September 30, 2010 from Changzhou CTS Fashion Co., Ltd. (CTS) which is owned by the majority shareholder and Chief Executive Officer (CEO) of the Company. Total purchases from CTS amounted to $4,533,181 and $3,480,918 for the three months ended September 30, 2010 and 2009, respectively.
Total accounts payable to CTS as of September 30, 2010 and June 30, 2010 were $10,751,766 and $9,510,853, respectively. These payables do not bear interest and are due upon demand during the normal course of business operations.
The Company also rents warehouse and office space from CTS and one of its board directors Ms. Fengling Wang. Total rent to CTS and Fengling Wang, respectively, were $8,524 and $2,224 for the three months ended September 30, 2010, and $8,430 and $2,199 for the three months ended September 30, 2009.
On February 18, 2008, The Company entered into a loan agreement with its CEO, Jieming Huang, pursuant to which, the Company borrowed $810,160 from Mr. Jieming Huang. The loan agreement is subject to a five-year term with five percent (5%) annual interest payable in arrears.
9. | CUSTOMER DEPOSITS AND ADVANCES |
Customer deposits and advances consist of deposits and advances from vendors for the purchase of merchandise and security deposits from licensed non-corporate stores. Pursuant to the terms of the contracts with licensed non-corporate stores, the security deposits are fully refundable at the end of the contract term with no interest due.
11
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
10. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following:
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Employee benefits payable | $ | 102,797 | $ | 101,971 | ||
Salary payable | 112,848 | 109,678 | ||||
Store expense | 55,888 | 67,171 | ||||
Agency fee | 1,814,395 | 1,607,950 | ||||
Interest payable | 306,969 | 273,198 | ||||
Other current liabilities | 641,790 | 591,252 | ||||
Total | $ | 3,034,687 | $ | 2,751,220 |
We formally adopted an agency marketing system in October 2008. Regional agents are an individual or a trading company who is contracted to have exclusive and nontransferable rights to sell and promote our products in designated areas such as a city or province. The contract term is usually for a year and renewable 60 days prior to expiration. The agent is selected from our target area and responsible for determining store locations within the area (contingent upon Company approval), setting up the corporate stores in that area, hiring store staff, and managing all stores day-to- day operation in the area. The agent does not have authority to raise standard price of our products or offer discount without our approval nor can they sell products of other brand names in the stores. In return for their services on behalf of the Company, sales agent is paid a commission called agency fee ranging from 5% to 38% of the stores sales revenue. As our regional agent is selected based on his or her local expertise in sales and marketing in the area, such marketing system helps us penetrate a target market more rapidly and provides proper incentive for the agent to increase our market share in that area. For the three months ended September 30, 2010 and 2009, we incurred agency fee of $516,389 and $588,284, respectively.
11. | DIVIDENDS PAYABLE |
The Companys wholly-owned subsidiary, Shanghai Baby Fox Fashion Co., Ltd. declared dividends on August 8, 2007 and December 10, 2007 in the amount of approximately $411,005 and $442,992, respectively, to Fengling Wang, its sole shareholder on record on the dates the dividends were declared.
12. | LONG-TERM DEBTS |
Long-term debt consists of the following:
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Amount borrowed from our CEO, bearing
interest at 5% per annum and due February 17, 2013 |
$ |
810,160 |
$ |
810,160 |
||
Amount borrowed from an unrelated party, bearing
interest at 10% per annum and due June 16, 2011 |
850,607 |
839,359 |
||||
Amount borrowed from an unrelated party,
bearing zero interest and due January 31, 2011, the loan is guaranteed by CTS |
746,146 |
736,279 |
||||
Subtotal | 2,406,913 | 2,385,798 | ||||
Less: current portion | 1,596,753 | 1,575,638 | ||||
Total | $ | 810,160 | $ | 810,160 |
12
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
12. | LONG-TERM DEBTS (continued) |
Long-term debt matures as follows:
As of September 30, 2010 | |||
2011 | $ | 1,596,753 | |
2012 | - | ||
2013 | $ | 810,160 |
The total interest expense for the three months ended September 30, 2010 and 2009 were $21,124 and $20,892, respectively.
13. | INCOME TAXES |
The Companys earnings from continuing operations before income taxes are as follows:
For the three months ended September 30, | ||||||
2010 | 2009 | |||||
Earnings from continuing operation before income taxes-China | 344,479 | (727,761 | ) | |||
Earnings from continuing operation before income taxes-US | (81,097 | ) | (10,210 | ) |
The income tax expense (benefit) are as follows:
For the three months ended September 30, | ||||||
2010 | 2009 | |||||
Current-China | $ | - | $ | - | ||
Deferred-China | - | - | ||||
Subtotal-China | - | - | ||||
Current-US | - | - | ||||
Deferred-US | - | - | ||||
Subtotal-US | - | - | ||||
Current-Total | - | - | ||||
Deferred-Total | - | - | ||||
Total | $ | - | $ | - |
13
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
13. | INCOME TAXES (continued) |
Deferred tax assets at September 30, 2010 and June 30, 2010 amounted to $-0- and $-0-, respectively, net of valuation allowance recorded. The tax effects of temporary differences that give rise to significant portions of deferred tax assets at September 30, 2010 and June 30, 2010 are as follows:
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Bad debt allowance | $ | 261,990 | $ | 235,815 | ||
Inventory provision | 1,140,376 | 1,216,079 | ||||
Net loss carried forward-China | 278,714 | 258,644 | ||||
Net loss carried forward-US | 72,425 | 44,852 | ||||
Total deferred tax assets | 1,753,505 | 1,755,390 | ||||
Valuation allowance | (1,753,505 | ) | (1,755,390 | ) | ||
Net deferred tax assets | - | - |
The Companys subsidiary is governed by the Income Tax Laws of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws, which are subject to tax at a rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
The reconciliation of income tax computed at the statutory rates to the total income tax for the three months ended September 30, 2010 and 2009 is as follows:
For the three months ended September 30, | ||||||
2010 | 2009 | |||||
Income tax expense (benefit) at federal statutory rate | 89,550 | (250,910 | ) | |||
Adjustment due to: | ||||||
Foreign rate differential | (31,003 | ) | 65,498 | |||
Other | (34,087 | ) | 52,008 | |||
Increase (decrease) in valuation allowance | (24,460 | ) | 133,404 | |||
Income tax expense | - | - |
14. | EARNINGS PER SHARE |
Basic and diluted income (loss) per share is computed as net income divided by the weighted-average number of common shares outstanding for the period.
Weighted-average number of shares are as follows:
For the three months ended September 30, | ||||||
2010 | 2009 | |||||
Weighted-average number of shares-basic and diluted | 40,430,761 | 40,427,500 |
On September 16, 2010, the Company issued 20,000 shares to The Crone Law Group for legal services valued at $70,000.
14
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
15. | COMMITMENTS AND CONTINGENCIES |
Leases
The Company is obligated under operating leases for their headquarters facilities, distribution center and certain stores located in malls. Aggregate minimum annual rentals under non-cancelable leases are as follows:
Fiscal year | |||
2011 | $ | 977,843 | |
2012 | 46,941 | ||
2013 | 8,894 | ||
2014 | 4,447 | ||
2015 | - | ||
Thereafter | - |
Approximately 33% of our corporate stores in malls are required to pay minimum annual rents for the spaces leased plus additional rents calculated based on certain percentage of actual sales over minimum amount of sales required. The remaining stores do not have minimum annual rent requirement but are required to pay rents based on certain percentage of actual sales over minimum sales required. These leases can be terminated if performance does not meet certain predetermined levels stipulated by mall operators. Rental expense charged to operations aggregated $1,063,095 and $963,039 for the three months ended September 30, 2010 and 2009, respectively.
16. | RISKS AND UNCERTAINTIES |
Vulnerability due to Operations in PRC
The Companys operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRCs political, economic and social conditions. There is also no guarantee that the PRC governments pursuit of economic reforms will be consistent or effective.
Substantially all of the Companys businesses are transacted in RMB, which is not freely convertible. The Peoples Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the Peoples Bank of China. Approval of foreign currency payments by the Peoples Bank of China or other institutions requires submitting a payment application form together with suppliers invoices, shipping documents and signed contracts.
Since the Company has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Companys ability to use revenue generated in RMB to pay any dividend payments to its shareholders may be limited.
Lack of Business Insurance
The Company is potentially exposed to risks of losses that may result from business interruptions, injury to others (including employees) and damage to property. These losses may be uninsured, especially due to the fact that the Companys operations are in China, where business insurance is not readily available. If: (i) information is available before the Companys financial statements are issued or are available to be issued indicates that such loss is probable and (ii) the amount of the loss can be reasonably estimated, an estimated loss will be accrued by a charge to income. If such loss is probable but the amount of loss cannot be reasonably estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. As of September 30, 2010, the Company has not experienced such loss.
15
BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2010 (UNAUDITED) |
16. | RISKS AND UNCERTAINTIES (continued) |
Concentration of Vendors and Customers
For the three months ended September 30, 2010 and 2009, the Company made 100% and 95% of its total purchase of merchandise from CTS, an affiliated company and balance of payables to CTS represented 96% and 95% of the Companys outstanding accounts payable at September 30, 2010 and June 30, 2010, respectively.
No single customer accounted for more than 10% for the total sales for the three months ended September 30, 2010 and 2009.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
The following discussion and analysis of the results of operations and financial condition of Baby Fox International, Inc. (Baby Fox) for the three months ended September 30, 2010 and 2009 should be read in conjunction with Baby Fox consolidated financial statements, and the notes to those financial statements that are included elsewhere in this quarterly report. 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 Business sections in this annual report. We use words such as anticipate, estimate, plan, project, continuing, ongoing, expect, believe, intend, may, will, should, could, and similar expressions to identify forward-looking statements.
Our Company
Baby Fox International Inc., a Nevada corporation organized on August 13, 2007, is a holding company whose primary business operations are conducted through our wholly-owned China subsidiary Shanghai Baby Fox Fashion Co., Ltd. (together Baby Fox or the Company). Shanghai Baby Fox Fashion Co., Ltd. (Shanghai Baby Fox) was originally founded by our board director, Fengling Wang, under Chinese law in March of 2006. On September 20, 2007, we entered into an Equity Share Acquisition Agreement with Fengling Wang in which we purchased 100% of the equity shares of Shanghai Baby Fox in exchange for RMB 5.72 million (approximately US$806,608). The acquisition was consummated on November 26, 2007 when we received the Certificate of Approval from the Shanghai Foreign Economic Relation & Trade Commission.
Shanghai Baby Fox is a China-based specialty retailer, developer, and designer of fashionable, value-priced womens apparel and accessories. The companys products are aimed to target women aged 18 to 40 in China. It continuously updates its fashions and clothing designs to stay in sync with the latest fashions and trends in Korea, Japan, & Europe. Since the launch of its first retail mall store in July 2006, the brand has gained exposure in leading womens magazines and the company has 158 stores in over 30 cities as of September 30, 2010.
Listing on the OTC Bulletin Board
On August 6, 2010, the Companys S-1/A was approved by SEC. On October 6, 2010, the Companys common stock was approved by FINRA for listing on the OTC Bulletin Board under the ticker symbol BBYF.OB, which was subsequently changed to BBFX.OB on October 29, 2010.
Principal Factors Affecting Our Financial Performance
We believe that the following factors will continue to affect our financial performance:
Continued growth of Chinese womens apparel industry. While China has one of the most promising apparel markets in the world, ladies wear remains the largest sub-sector of this market. According to surveys conducted by China National Commercial Information Center (CNCIC) to over 260 major department stores across China, ladies wear continued to be the largest contributor to total apparel sales. Ladies wear accounted for 27.4% in first half of 2009 and 28.5% in 2008 (the most recent available data from Li & Fung Research Centers research report Latest Developments of Chinas Apparel Market, (Issue Number 15 in December 2009). We believe our strong knowledge of local markets, media contacts and brand image we have built, and award winning design experience give the organization significant competitive advantages in this rapidly growing market.
Experienced management and design team. Women in China have become increasingly selective in their choice of clothing and the Chinese fashion industry is trending towards shorter product life cycles and better designs and development. The ability to respond to instantaneous fashion trends is a key attribute to the success of an apparel company. Baby Fox is at the forefront of trends by having an experienced management and designer team to launch a garment from design to production, and finally to distribution in just weeks. The Company brings together a complimentary mix of industry expertise, management know-how, and product innovation. Collectively, the management team has strong fashion design, operations, and apparel sales experience. Through the Companys extensive relationships with leading fashion magazines, apparel manufacturers, and related industry leaders, the Company also has access to a large pool of experienced managers and knowledgeable advisors.
17
Store expansion plan. Since inception in 2006, the Company has 158 corporate and non-corporate stores in over 30 cities as of September 30, 2010. Corporate stores are primarily opened in major metropolitan areas and non-corporate or licensed stores are mostly established in suburban communities. We plan to continue growing retail store locations over next few years but due to liquidity constraint, we will be more focused on location selections. We will also increase our efforts to improve sales at current stores and remove non-performing store locations in a timely fashion.
While Baby Fox could rapidly scale non-corporate stores with minimal capital requirement, managements preference is to expand via corporate owned stores in major cities and use licensed non-corporate stores in the 2nd and 3rd tier cities. The economics of this strategy help the Company better manage overall cash flow and inventory levels and rapidly scale the business in a measured manner. By covering greater geographical regions, the store expansion plan will increase our sales and add to the reach of our brand image.
PRC Taxation
Our subsidiary Shanghai Baby Fox is governed by the Income Tax Law of the Peoples Republic of China concerning Foreign Investment Enterprises (FIE) and Foreign Enterprises and various local income tax laws (the Income Tax Laws).
On March 16, 2007, the National Peoples Congress of the PRC passed the new EIT Law, which took effect as of January 1, 2008. The new EIT Law imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiary, unless they qualify under certain limited exceptions. The previous tax rate was 33.0% . In addition, under the new EIT Law, dividends from our PRC subsidiary to us will be subject to a withholding tax. The rate of the withholding tax is 10%. Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of the PRC subsidiary.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, in US dollars:
For the three months ended Se ptember 30, | ||||||
2010 | 2009 | |||||
(unaudited) | (unaudited) | |||||
Total sales | $ | 5,254,938 | $ | 5,359,439 | ||
Cost of goods sold | 1,966,484 | 3,547,465 | ||||
Gross profit | 3,288,454 | 1,811,974 | ||||
Selling, general and administrative expenses | 3,000,552 | 2,518,843 | ||||
Income (loss) before provision for income taxes | 263,382 | (737,971 | ) | |||
Income taxes | - | - | ||||
Net income (loss) | $ | 263,382 | $ | (737,971 | ) |
18
The following table sets forth the results of our operations for the periods indicated as a percentage of total sales:
For the three months ended September 30, | ||||||
2010 | 2009 | |||||
(unaudited) | (unaudited) | |||||
Total sales | 100.0% | 100.0% | ||||
Cost of goods sold | 37.4% | 66.2% | ||||
Gross profit | 62.6% | 33.8% | ||||
Selling, general and administrative expenses | 57.1% | 47.0% | ||||
Income (loss) before provision for income taxes | 5.0% | -13.8% | ||||
Income taxes | 0.0% | 0.0% | ||||
Net income (loss) | 5.0% | -13.8% |
Starting from the beginning of FY2010, the Company has adjusted its strategy to slow down the new store openings and focus on digesting inventory of past seasons and improving revenue and margin from existing stores. The Company has also established a tiered inventory digesting structure through Class A stores, Class B stores and warehouse sales. Class A stores sell current season products at full price, Class B stores sell one-year-old products at a 30-50% discount while warehouse sales digest products aged more than one year at a 80-90% discount. Class A stores are expected to sell 70% of products of each season with the rest sold through Class B stores and warehouse sales. The tiered structure would ensure that most, if not all of the inventory can be digested within 24 months after production. Also based on the Class A and B stores system formally adopted in fiscal 2009 to better match price and product demand by different target market segments, a Class A store that does not meet our sales expectation will first be downgraded to Class B store which are being used to provide discounted merchandise that did not sell well during the season at Class A stores. When the lease with the mall operator expires, we will evaluate again and if a Class B stores sales performance still doesnt improve, we will close the store instead of renewing the lease.
Sales. Our sales are generated from sales of products to end customers in our corporate stores and sales to non-corporate store owners. For the three months ended September 30, 2010 and 2009, the Company generated revenues of $5,254,938 and $5,359,439, respectively, reflecting a decrease of 1.9% . Excluding exchange rate effect, sales at corporate stores increased 8.0% while sales to non-corporate stores declined 55.2% . The increase in corporate store sales is mainly due to the increase in per-store sales as a result of strategy to improve revenue and margin of existing stores. The increase in the average number of stores during the period as compared to the same period in FY2010 also contributed to the increase in corporate store sales. The significant decline in non-corporate store sales is mainly due to the stock replenishment issue as a result of a nation-wide restriction on power supply to achieve the energy saving and emission reduction target for the Chinese governments 11th Five-Year Plan. The restriction led to raw material replenishment issues for CTS, the company's major supplier and impacted the replenishment of goods in non-corporate stores. Fewer number of non-corporate stores also contributed to the decline. For the three months ended September 30, 2010, sales at corporate stores contributed 92.1% of total sales, while sales to non-corporate stores contributed 7.9%, compared to 82.9% and 17.1%, respectively, in fiscal year 2010.
The following table shows changes in our sales at existing stores, changes in sales due to stores opened during the three months ended September 30, 2010 and 2009, and the effect of change in rate used for the currency conversion in three months ended September 30, 2010 and 2009:
19
Corporate | Non-Corporate | ||||||||
Total Sales | Stores | Stores | |||||||
Change in sales at existing stores | (225,041 | ) | 285,658 | (510,699 | ) | ||||
Sales at new stores opened in FY2011 | 61,100 | 61,100 | - | ||||||
Effect of currency conversion | 59,440 | 49,298 | 10,142 | ||||||
Total increase (decrease) in sales | (104,501 | ) | 396,056 | (500,557 | ) |
Comparable Store Sales. The percentage change in comparable store sales by stores type for the three months ended September 30, 2010 as compared to 2009 is as follows:
2011 | |||
Corporate stores | 6% | ||
Non-corporate stores | -65% |
A store is included in comparable store sales (Comp) when it has been open for at least 12 months and the square footage has not changed by 15 percent or more within the past year. A store is included in Comp on the first day it has comparable prior year sales. Stores in which square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from Comp until the first day they have comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year Comp store sales to achieve a consistent basis for comparison.
A store is considered non-comparable (Non-comp) when it has been open for less than 12 months or it has changed its square footage by 15 percent or more within the past year. Non-store sales such as online revenues are also considered Non-comp.
A store is considered Closed if it is temporarily closed for 15 or more full consecutive days or is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for 15 or more days in the prior year then the store will be in Non-comp status for the same days in the following year.
Sales per average square foot is as follows:
2011 | 2010 | |||||
Sales per average square foot (1) | $ | 29 | $ | 27 |
(1) Sales per average square foot is calculated based on the total sales divided by the average total store area of stores in existence throughout the period.
Store count, openings and closings for our stores are as follows:
Three months ended 30 September, 2010 | Three months ended 30 September, 2009 | |||||||||||||||||
Corporate | Non-corporate | Corporate | Non-corporate | |||||||||||||||
Stores | Stores | Total | Stores | Stores | Total | |||||||||||||
Number of stores as of July 1 | 131 | 34 | 165 | 127 | 53 | 180 | ||||||||||||
Number of stores opened | 9 | 1 | 10 | 14 | 7 | 21 | ||||||||||||
Number of stores closed | 14 | 3 | 17 | 15 | 10 | 25 | ||||||||||||
Number of stores as of September 30 | 126 | 32 | 158 | 126 | 50 | 176 |
Cost of Goods Sold and Gross Margin
Cost of goods sold was $1,966,484 for the three months ended September 30, 2010 as compared to $3,547,465 for the same period in FY2010, a decrease of 44.6% while the gross margin increased from 33.8% to 62.6% . Cost of goods sold at corporate stores declined 41.7% in spite of increase in sales at corporate stores mainly because of a reversal of $365,548 inventory markdown in FY2011 as compared to an increase of $273,788 in inventory reserve in FY2010 due to better inventory management and liquidation of prior year products. Besides, the company used to offer significant discount for prior year products to buyers for cash payment. The practice was significantly reduced since the introduction of warehouse sales, which led to decline in the retail sales revenue but improved margin. As a result, the gross margin for corporate store sales increased by 30.3% . Cost of goods sold to non-corporate stores decreased 57.5% as compared to the three months ended September 30, 2009, which is in line with the decline in non-corporate store sales due to the stock replenishment issue as a result of nationwide restriction on power supply resulting in shortage of raw material to CTS, the Companys major supplier and impacting on the replenishment of stocks at non-corporate store sales. The gross margin from sales at non-corporate stores increased by 4.3% as compared to the gross margin for the same period in FY2010.
20
Warehouse sales, as an integral part of the Companys newly established tiered sales system, will be held on a seasonal basis going forward. As a result, we do not expect that the margin will return to the historical level. Neither do we expect that the margin will stay at the current level because it benefited from the one-time reversal of the write-down as a result of the better than expected warehouse sales result. We do not have enough historical data to predict the future margin, but as the new system is implemented, we should improve our estimates of inventory mark-downs and we expect the future margin to stabilize around somewhere between the old margin and the current margin.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist of store rent, agency fees, maintenance and new store opening expenses, freight, advertising and marketing costs, office rent and expenses, costs associated with store staff and support personnel who manage our business activities, and professional and legal fees paid to third parties.
For the three months ended September 30, 2010, the Company incurred selling, general and administrative expenses of $3,000,552, an increase of 19.1% as compared to $2,518,843 for FY2010.
Our general and administrative expenses increased 295.8% as compared to last year mainly because of additional bad debt allowance provided for the increase in the balance of accounts receivable. The Company in general has arranged 60-day collection terms with shopping malls if not otherwise specified. Despite most of our accounts receivable balances being current (within 60 days), we have seen an increase in the percentage of balances aged more than 90 days starting from September 30, 2009 as a result of significant expansion of the Companys business. Therefore, a full allowance of 100% of the amount of such balances aged more than 90 days is being provided. For the three months ended September 30, 2010, the additional allowance provided was $113,649 compared to $-0- for the same period last year. The balance of bad debt allowance was $1,047,959 and $177,044 on September 30, 2010 and 2009, representing 23.1% and 4.3% of the total accounts receivable balance, respectively. For the three months ended September 30, 2010, the Company incurred $82,820 bad debt as a result of closing of three non-corporate stores. The Company was founded not long ago and has a short operation history. In view of the rapid expansion of our business since inception, we believe that we have been very prudent in providing sufficient allowance for ageing accounts receivable balances.
We incurred selling expenses of $2,535,749 for the three months ended September 30, 2010, an increase of 5.6% as compared to $2,401,404 for the three months ended September 30, 2009. Of all the selling expenses, store rent in the amount of $1,063,095 constituted 41.9% and increased by 11.0% compared to the same period of last year due to increase in corporate store sales. Agency fees constituted 20.4% of total selling expenses for the three months ended September 30, 2010 and decreased by 12.2% when compared to the same period in 2009 mainly due to the change to exclude the store rent from the sales basis to calculate agency fee. Salaries and benefits, which constituted 13.9% of total selling expenses for the three months ended September 30, 2010, increased by 18.7% as compared to the same period in 2009 due to more store assistants hired to improve the per-store sales as well as an increase in the staff compensation. Other selling expenses constituted 23.8% of total selling expenses, of which $239,945 was spent on store charges and promotion and $151,974 was spent on new store opening / build-out and existing stores maintenance / decoration. The rest of other selling expenses included utilities, phone, supplies and mall maintenance charges for opened stores.
21
Other Expenses
We had the same interest-bearing loans for the three months ended September 30, 2010 and 2009 and such interest expense amounted to $31,251 and $31,102, respectively.
Provision for Income Taxes
The Company recognized $-0- current income tax expense due to the loss carried forward, which offset the income before tax for the three months ended September 30, 2010. $-0- current income tax expense was also recognized for the same period in 2009 as a result of net loss. Income tax expense for the three months ended September 30, 2010 and 2009 was also $-0-because of the valuation allowance the Company set up for deferred tax assets. As of September 30, 2010 and June 30, 2010, the Company recognized $-0- of net deferred tax assets after valuation allowance.
Net Income
We had a net income of $263,382 for the three months ended September 30, 2010 as compared to a net loss of $737,971 for the three months ended September 30, 2009. Our net margin improved mainly because of better-than-expected revenue recovered from the liquidation of the inventory of prior seasons as well as better managed inventory level through the newly established tiered system and growth of stores in a more measured manner.
Liquidity and Capital Resources
As of September 30, 2010, we had cash and cash equivalents of $130,763 and negative working capital of $6,246,741. The following table provides detailed information about our net cash flows for the financial statement periods presented in this annual report:
Cash Flow | For the three months ended Se ptember 30, | |||||
2010 | 2009 | |||||
Net cash used in operating activities | (1,155,761 | ) | (2,600,584 | ) | ||
Net cash used in investing activities | (1,824 | ) | (1,762 | ) | ||
Net cash provided by financing activities | 1,106,048 | 2,362,650 | ||||
Effect of foreign currency translation on cash and cash | 1,824 | 252 | ||||
Net decrease in cash and cash equivalent | (49,713 | ) | (239,444 | ) |
Our principal demands for liquidity are for expansion and opening new stores, working capital and general corporate purposes.
Net Cash Used in Operating Activities. Net cash used in operating activities totaled $1,155,761 for the three months ended September 30, 2010 as compared to $2,600,584 for the three months ended September 30, 2009. The decrease in net cash used in operating activities was primarily due to the net income of $263,382 for the three months ended September 30, 2010 as compared to the net loss of $737,971 for the same period last year. For the three months ended September 30, 2009, the Company settled $1,050,780 accounts payable to third party suppliers as we gradually shifted all the purchases from third party suppliers to CTS, a related party supplier. For the three months ended September 30, 2010, the balance of accounts payable to third party suppliers increased slightly by $77,901. The difference, partially offset by the higher growth of the inventory balance, also contributed to the decrease of the net cash used in operating activities.
Our accounts receivable increased from $3,784,745 at June 30, 2010 to $4,532,347 at September 30, 2010 mainly due to business expansion and sales increases in September due to the national holidays to observe the Mid-Autumn Festival, the accounts receivable balances of which were not due and collected by September 30, 2010 . The Festival was in October in 2009. Sales increases contributed to the larger amount of outstanding accounts receivable to be collected from shopping malls, with which we generally have established 60-day collection terms. In view of the rapid expansion of our business since inception, the Company has put in place a very rigorous review process of outstanding accounts receivable balances. At September 30, 2010, we had $1,247,806 in accounts receivable aged in excess of 60 days, among which $1,090,433 was aged over 90 days, compared to $1,204,393 in excess of 60 days including $985,067 over 90 days at June 30, 2010. Excluding the amount that can be offset against the agent fees payable, full allowance has been provided for the balance over 90 days and not subsequently settled. As a result, allowance for doubtful accounts increased from $$921,203 as of June 30, 2010 to $1,047,959 as of September 30, 2010 as a result of an increase in balances aged over 90 days. Considering that the accounts receivable balances aged between 60 days and 90 days at September 30, 2010 was not material, and was subsequently settled, no bad debt allowance was accrued with respect to such balances. For the three months ended September 30, 2010, the Company incurred $82,820 bad debt as a result of closing of three non-corporate stores. We believe that we have been very prudent and have provided sufficient allowance for ageing accounts receivable balances.
22
Net Cash Used in Investing Activities. Net cash used in investing activities were $1,824 and $1,762 for the three months ended September 30, 2010 and 2009, respectively.
Net Cash Provided by Financing Activities. Net cash provided by financing activities totaled $1,106,048 and $2,362,650 for the three months ended September 30, 2010 and 2009, respectively. The decrease mainly represented the loan of RMB5,000,000 we borrowed on July 22, 2009. The loan is due on January 31, 2011. Besides, better control on the inventory balance and our store expansion for the three months ended September 30, 2010 resulted in slower growth of our accounts payable to our affiliated company, which also contributed to the decrease.
Cash. At September 30, 2010, we had cash of $130,763, as compared to $180,476 as of June 30, 2010. Cash used in operating activities decreased significantly as compared to the same period last year, which was partially offset by the decline of cash provided by financing activities, resulting in reduced cash outflow for the three months ended September 30, 2010 as compared to the same period last year.
As of September 30, 2010, the Companys current liabilities exceeded its current assets by $6,246,741 and the Companys total liabilities exceeded its total assets by $6,782,427. The Companys cash position on September 30, 2010 was $130,763. Our auditor has expressed their concern as to our ability to continue as a going concern in the audit opinion of our financial statements for the year ended June 30, 2010.
We believe that we can satisfy our cash requirements during the next 12 months through reduction of expenses associated with retail store openings, better management of our inventory and realization of our accounts receivables. We have experienced a rapid growth in both sales and store numbers since 2008. The Company has adjusted its strategy to slow down the new store openings and focus on digesting inventory of past seasons and improving revenue and margin from existing stores in the fiscal year 2010, which is expected to continue in fiscal year 2011. The Company has successfully established a tiered inventory digesting structure through Class A stores, Class B stores and warehouse sales. Class A stores sell current season products at full price, Class B stores sell one-year-old products at a 30-50% discount while warehouse sales digest products aged more than one year at a 80-90% discount. Class A stores are expected to sell 70% of products of each season with the rest sold through Class B stores and warehouse sales. The tiered structure would ensure that most, if not all of the inventory can be digested within 24 months after production. From December 2009 to May 2010, the Company held a series of large warehouse sales and cleared the entire 2007 inventory and realized the majority of the 2008 inventory and generated around $1.5 million in cash. Additional warehouse sales scheduled in the next twelve months are expected to generate similar amount of revenue and sales from Class A and Class B stores are expected to be around $24 million. We believe that cash generated from the stores and warehouse sales in the next 12 months will be sufficient to cover payment for inventory purchases and Selling, General & Administrative expenses of around $21 million. Concurrent with the establishment of a tiered inventory digesting structure to increase sales and liquidate the inventory in a timely fashion, the Company is also striving to encourage cash purchases from non-corporate store owners, settle long-aged account balances and maintain the realization of new accounts receivable from shopping malls within 60 days.
Our accounts payable are mainly due to our related party which we have negotiated and have established a favorable six-month payment term with additional extension if the payment would materially impact the Companys liquidity profile. This policy will effectively prevent further deterioration of the Companys cash position.
The Company has successfully amended its loans due in March and June, 2010 and extended the term with the lenders to January and June 2011, respectively. Those loans are borrowed externally from third parties.
23
In addition, the Company believes it can meet its liquidity requirements for working capital and general corporate purposes during the 2011 fiscal year from a variety of other sources. These sources include renewal of outstanding debts when due, new short or long-term borrowings from both related and unrelated parties and financial institutions, and future equity financings although there is no assurance that additional financings, whether debt or equity, will be available.
Loan Facilities
At September 30, 2010, we had $810,160 in long-term debts. The long-term debts consisted of the following:
As of | As of | |||||
September 30, 2010 | June 30, 2010 | |||||
Amount borrowed from our CEO, bearing
interest at 5% per annum and due February 17, 2013 |
$ |
810,160 |
$ |
810,160 |
||
Amount borrowed from an unrelated party, bearing
interest at 10% per annum and due June 16, 2011 |
850,607 |
839,359 |
||||
Amount borrowed from an unrelated party,
bearing zero interest and due January 31, 2011, the loan is guaranteed by CTS |
746,146 |
736,279 |
||||
Subtotal | 2,406,913 | 2,385,798 | ||||
Less: current portion | 1,596,753 | 1,575,638 | ||||
Total | $ | 810,160 | $ | 810,160 |
Long-term debts mature as follows:
As of September 30, 2010
2011 | $ | 1,596,753 | |
2012 | - | ||
2013 | $ | 810,160 |
Total interest expense on loans amounted to $31,251 and $31,102 for the three months ended September 30, 2010 and 2009, respectively.
Obligations Under Material Contracts
Below is a table setting forth our contractual obligations as of September 30, 2010:
Payment due in year ended June 30, | |||||||||||||||
Total | 2011 | 2012 | 2013 | Thereafter | |||||||||||
Long term debt obligations (including current portion) | $ | 2,406,913 | $ | 1,596,753 | $ | - | $ | 810,160 | $ | - | |||||
Operating lease obligations | 1,038,125 | 977,843 | 46,941 | 8,894 | 4,447 | ||||||||||
Purchase obligations | - | - | - | - | - | ||||||||||
Total | $ | 3,445,038 | $ | 2,574,596 | $ | 46,941 | $ | 819,054 | $ | 4,447 |
Seasonality
Since we are in fashion clothing retail industry, store traffic is usually heavier at calendar year ends shopping season and various public holidays in China throughout the year, especially the Chinese spring festival which usually falls in February, the Labor Day holidays around May 1st and National Day holidays during the week around October 1st.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements include the financial statements of Baby Fox International and its wholly owned subsidiary Shanghai Baby Fox. All significant inter-company transactions and balances have been eliminated in consolidation. Baby Fox International and its subsidiary Shanghai Baby Fox together are referred to as the Company.
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Our management's discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included , we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Revenue Recognition and Return Policy. Our revenues are generated from sales at our company-owned retail stores and from sales of merchandise to licensed non-corporate owned stores. Revenues from sales at company owned retail stores are recognized when the ultimate customer purchases the merchandise in the store and pays for it at the cash register. Customers have the right to return merchandise for credit, exchange or refunds according to department stores policy for up to fourteen days after purchase. The return policy is set by corporate headquarters and consistent among all our corporate stores. Period allowed for return is short (two weeks) and based on historical experience, actual returns by end consumers have been rare and immaterial across all retail stores. Management will keep monitoring returns by end consumers at our corporate stores as we open more stores each period.
Revenues from sales to licensed non-corporate stores are recognized at the date of shipment to the non-corporate stores when a formal arrangement exists, the price is fixed or determinable, and no other significant obligations of the Company exist and collectability is reasonably assured. According to the contract, non-corporate stores have the right to return defected merchandise within ten days of receipt. Return of unsold merchandise for current style is determined by our headquarters and full cooperation from non-corporate stores is required. Reserves are established to reflect actual and anticipated returns of defected and unsold merchandise based on historical information. Currently we estimate returns to be 20% of our sales to non-corporate stores and relevant reserves have been made accordingly each reporting period. Since fashion clothing is trending towards shorter product life cycles and the return period we allow for non-corporate stores is relatively long, current reserves already take into the effect of introducing new products on expected return of previous products. The return reserve based on this percentage of sales has been consistent with actual returns in our operating history. As we continue to open more non-corporate stores, we will closely monitor returns for existing and new stores and adjust reserve for returns if necessary. We do not offer early payment discounts, incentive discounts based on volume or credit for products that do not sell well at non-corporate stores. Shipping and handling of merchandise sold to non-corporate stores is not separately billed to customers or paid directly by the customer.
Marketing Expenses. Due to the short initial term of the leases with mall operators and the cancellation provisions contained in the store leases, the initial costs of store opening expenses are typically accounted as marketing expenses and are charged to expense as incurred. The cost of leasehold improvements and store fixtures averaging $21,750 are charged to expense as incurred. The effect of store openings could potentially reduce our reported net income in the period of store openings.
Inventories. Inventories, consisting of finished goods and accessories, are valued at the lower of cost as determined by the average cost or market. Cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. Due to the high style nature of the Companys merchandise, slow moving, out of season and broken style merchandise is sometimes sold at warehouse sales below cost. Reserves are created to reduce the carrying value of these items to market value.
The company maintains a perpetual inventory and sales report, by store location. This is updated daily based upon shipping and sales reports. A weekly review is made by the merchandising group and management to identify slow moving merchandise. Merchandise which is slow moving during the first month at a store is reported to the head office, and is sometimes moved to other stores, due to varying style demand in the diverse markets in China. Unsold merchandise is then marked down, and if not sold within 90 days of receipt, it is shipped back to the warehouse. The company then has periodic discount warehouse sales and uses certain liquidators.
25
The company maintains a reserve for inventory markdowns. This encompasses current goods held for liquidation and markdown, and application of historical percentages of current inventory which is anticipated to be marked down and /or liquidated. The percentages were 36% and 42% of ending inventory levels as of September 30, 2010 and June 30, 2010, respectively based on historical experience and current goods held for liquidation, and reserves are made accordingly at each reporting period. The company periodically adjusts the percentage based on a review of changing ratios and the percentage of selling prices recovered through liquidation.
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Level 1 and 2, separate disclosures of purchases, sales, issuance, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Companys fiscal year 2011); early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2010-06 on its financial statements.
Off Balance Sheet Treatment for Store Opening and Rent Expenses
Because mall operators can terminate our leases any time and have no obligation for renewal of our leases, we did not capitalize our leasehold improvements and store fixtures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not required.
ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, Mr. Huang and Ms. Chen, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Mr. Huang and Ms. Chen concluded that as of September 30, 2010, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2010, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There has been no material change in the Companys risk factors as previously disclosed in the Companys Annual Report on Form 10-K filed with the SEC on September 28, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 16, 2010, the Company issued 20,000 shares of its common stock to its outside corporate counsel, the Crone Law Group, as compensation for legal services. The common stock was issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. | Description |
31.1 | |
31.2 | |
32.1 | |
32.2 |
27
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BABY FOX INTERNATIONAL, INC. | ||
Date: November 15, 2010 | By: | /s/ Jieming Huang |
Jieming Huang | ||
Chief Executive Officer | ||
Principal Executive Officer | ||
Dated: November 15, 2010 | By: | /s/ Ping Chen |
Ping Chen | ||
Chief Financial Officer | ||
Principal Financial Officer and Principal Accounting Officer |
28
EXHIBIT INDEX
Exhibit No. | Description |
31.1 | |
31.2 | |
32.1 | |
32.2 |
29
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jieming Huang, certify that:
1. I have reviewed this report on Form 10-Q for the quarter ended September 30, 2010 of Baby Fox International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
| |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
Date: November 15, 2010 | By: | /s/ Jieming Huang |
Jieming Huang | ||
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ping Chen, certify that:
1. I have reviewed this report on Form 10-Q for the quarter ended September 30, 2010 of Baby Fox International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
| |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting. |
Date: November 15, 2010 | By: | /s/ Ping Chen |
Ping Chen | ||
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Baby Fox International, Inc. (the Company) on Form 10-Q for the quarter ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jieming Huang, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| ||
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 15, 2010 | By: | /s/ Jieming Huang |
Jieming Huang | ||
Chief Executive Officer | ||
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quartely Report of Baby Fox International, Inc. (the Company) on Form 10-Q for the year ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ping Chen, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| ||
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 15, 2010 | By: | /s/ Ping Chen |
Ping Chen | ||
Vice President of Finance | ||
(Principal Financial Officer) |