Attached files
file | filename |
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EX-10.18 - Wonhe High-Tech International, Inc. | v188577_ex10-18.htm |
EX-99.7 - Wonhe High-Tech International, Inc. | v188577_ex99-7.htm |
EX-23.1 - Wonhe High-Tech International, Inc. | v188577_ex23-1.htm |
EX-99.4 - Wonhe High-Tech International, Inc. | v188577_ex99-4.htm |
EX-23.3 - Wonhe High-Tech International, Inc. | v188577_ex23-3.htm |
EX-99.6 - Wonhe High-Tech International, Inc. | v188577_ex99-6.htm |
EX-99.5 - Wonhe High-Tech International, Inc. | v188577_ex99-5.htm |
EX-10.19 - Wonhe High-Tech International, Inc. | v188577_ex10-19.htm |
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 7 TO FORM S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
BABY
FOX INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
|
5621
(Primary Standard Industrial
Classification Code Number)
|
26-0775642
(I.R.S. Employer
Identification Number)
|
Shanghai
Minhang, District,
89
Xinbang Road, Suite 305-B5, PRC
86
21 5415 3855
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Jieming
Huang
President
and Chief Executive Officer
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
86
21 5415 3855
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Mark
E. Crone
The
Crone Law Group
101
Montgomery Street, Suite 1950
San
Francisco, CA 94104
(415)
955-8900
(415)
955-8910 FAX
Approximate Date of Commencement of
Proposed Sale to the Public: from time to time after the
effective date of this Registration Statement as determined by market conditions
and other factors.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
x
|
(Do
not check if a smaller reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title Of Each
Class of Securities
To be Registered
|
Amount To
Be Registered
|
Proposed
Maximum
Offering Price
Per Share
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount of
Registration Fee
|
||||||||||||
Common
Stock, par value $.001
|
868,262
|
$
|
0.20
|
$
|
173,653
|
$
|
6.78
|
*
|
*
Previously paid
The
offering price has been estimated solely for the purpose of computing the amount
of the registration fee in accordance with Rule 457(c). Our common stock is not
traded on any national exchange and in accordance with Rule 457, the offering
price was determined by the price of the shares that were sold to our
shareholders in a private placement memorandum. The price of $0.20 is a fixed
price at which the selling security holders may sell their shares until our
common stock is quoted on the OTC Bulletin Board at which time the shares may be
sold at prevailing market prices or privately negotiated prices.
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
securities act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said section 8(a),
may determine.
PROSPECTUS
Subject
to completion, dated June 22, 2010
868,262
shares of Common Stock
BABY
FOX INTERNATIONAL, INC.
The
selling stockholders named in this prospectus are offering all of the shares of
common stock offered through this prospectus. Our common stock is presently not
traded on any market or securities exchange. The 868,262 shares of our common
stock can be sold by selling security holders at a fixed price of $.20 per share
until our shares are quoted on the OTC Bulletin Board and thereafter at
prevailing market prices or privately negotiated prices. We will receive no
proceeds from the sale or other disposition of the shares, or interests therein,
by the selling stockholders.
An investment in shares of our common
stock involves a high degree of risk. We urge you to carefully consider
the Risk Factors beginning on page 5.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
2
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
1
|
RISK
FACTORS
|
5
|
FORWARD
LOOKING STATEMENTS
|
18
|
USE
OF PROCEEDS
|
18
|
DIVIDEND
POLICY
|
18
|
MARKET
FOR OUR COMMON STOCK
|
19
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
19
|
BUSINESS
|
32
|
MANAGEMENT
|
42
|
SECURITY
OWNERSHIP
|
47
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
48
|
DESCRIPTION
OF SECURITIES
|
50
|
SELLING
STOCKHOLDERS
|
51
|
PLAN
OF DISTRIBUTION
|
52
|
LEGAL
MATTERS
|
53
|
EXPERTS
|
53
|
AVAILABLE
INFORMATION
|
53
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
55
|
3
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information that you
should consider before investing in the common stock. You should carefully
read the entire prospectus, including “Risk Factors”, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and the
Consolidated Financial Statements, before making an investment decision.
THE
COMPANY
Company
Structure
Baby
Fox International, Inc. (“Baby Fox”) is a Nevada corporation organized on August
13, 2007 by Hitoshi Yoshida, a Japanese citizen, as a listing vehicle to acquire
Shanghai Baby Fox Fashion Co., Ltd. (“Shanghai Baby Fox”) and to be quoted on
the Over-The-Counter Bulletin Board (“OTCBB”). Shanghai Baby Fox, a wholly owned
China-based subsidiary of Baby Fox, was originally founded by our board
director, Fengling Wang, in March 2006 under Chinese laws. On September 20,
2007, we entered into an Equity Share Acquisition Agreement with Fengling Wang.
Pursuant to the Equity Share Acquisition Agreement, we purchased 100% of the
equity shares of Shanghai Baby Fox in exchange for 5.72 million RMB,
approximately equivalent to $806,608. Since at the time of the acquisition,
Hitoshi Yoshida and Fengling Wang were married to each other, this transaction
is deemed between entities under common control, the financial statements in
this registration statement are those of Shanghai Baby Fox. The transaction was
treated as a reverse merger and, accordingly, Shanghai Baby Fox is the
accounting acquireror and Baby Fox is the legal Acquireror. The acquisition was
consummated on November 26, 2007 when we received the Certificate of Approval
from Shanghai Foreign Economic Relation & Trade Commission.
On
January 18, 2008, we issued a total of 37,957,487 shares of our common stock,
$.001 par value per share to Baby Fox Limited, a British Virgin Islands entity
controlled by Hitoshi Yoshida, our former officer and director, as founder’s
shares.
On May
6, 2008, Hitoshi Yodshida entered into stock option agreements with our
directors, Jieming Huang and Jieping Huang, and Linyin Wang, respectively, to
purchase all of the shares of Baby Fox Limited. The option agreements were
entered into to permit the acquisition of equity in Baby Fox Limited over time
by Jieming Huang, Jieping Huang and Linyin Wang under the PRC merger and
acquisition, or M&A, related regulations. These M&A regulations were
promulgated on August 8, 2006 by six Chinese regulatory agencies (including the
PRC Ministry of Commerce, or MOFCOM, and China Securities Regulatory Commission,
or CSRC). The jointly issued M&A regulations, known as Circular 10, were
captioned “Regulation on Mergers and Acquisition of Domestic Enterprises by
Foreign Investors” and they became effective on September 6, 2006. Under
Circular 10, an offshore special purpose vehicle, or SPV, formed for purposes of
overseas listing of equity interests in China-based companies and controlled
directly or indirectly by Chinese companies or individuals must obtain the
approval of the CSRC prior to the listing of such SPV’s securities on an
overseas stock exchange. Circular 10 also requires approval from MOFCOM for
“round-trip” investment transactions in which a China-based company or a PRC
resident, or Acquirer, using an offshore entity controlled by the Acquirer,
acquires any PRC local company that is an affiliate of the Acquirer. Mr.
Yoshida is not a Chinese resident; therefore, no approval was required by either
CSRC or MOFCOM in connection with the listing of our stock on the OTCBB or the
business combination transaction among Baby Fox, Shanghai Baby Fox and Baby Fox
Limited. In addition there is no registration requirement of the stockownership
of Mr. Yoshida. The options granted pursuant to the three stock option
agreements were exercisable until December 31, 2018 in accordance with the
Exercise Schedule attached to each agreement. Mr. Yoshida is the owner of
10,000 shares of Baby Fox Limited which represent 100% of the issued and
outstanding common stock of Baby Fox Limited. Subsequently, on June 17,
2010, Mr. Yoshida entered into rescission agreements with Jieming Huang, Jieping
Huang, and Linyin Wang rescinding the stock option agreements. No options had
been exercised by Jieming Huang, Jieping Huang, or Linyin Wang as of the
effective date of the rescission agreements.
Pursuant
to the Chinese Company Law, Shanghai Baby Fox is a wholly foreign owned
enterprise (“WFOE”). WFOE is a limited liability company wholly owned by foreign
investor(s), which were originally created to encourage manufacturing business
that was either export-oriented or related to the introduction of advanced
technology. However, with China's entry into the WTO, WFOE has been increasingly
adopted by service providers, including, but not limited to consulting and
management services, software development, retail and trading.
1
The
following flow chart illustrates our Company’s organizational
structure:
The
advantages of establishing a WFOE include, but are not limited to:
|
1.
|
Independence and freedom to
implement the worldwide strategies of its parent company without having to
consider the involvement of Chinese
partner(s);
|
|
2.
|
Ability to formally carry out
business rather than just function as a representative office and being
able to issue invoices to their customers in RMB and receive revenues in
RMB;
|
|
3.
|
Capability of converting RMB
profits into US dollars for remittance to its parent company outside of
China;
|
|
4.
|
Protection of intellectual
know-how and technology;
|
|
5.
|
No requirement for Import /
Export license for its own
products;
|
|
6.
|
Full control of human
resources;
|
|
7.
|
Greater efficiency in operations,
management and future
development.
|
2
Our
Business
Baby
Fox is a growing specialty retailer, developer, and designer of fashionable,
value-priced women’s apparel and accessories. Our products are aimed to
target women aged 20 to 40 in China. Our management team is experienced with
fashion design, operations management, apparel sales and marketing. We
continuously update our fashions and clothing designs to stay in sync with the
latest fashions and trends in Korea, Japan, & Europe. As of March 31, 2010,
the Baby Fox brand has gained exposure in leading women’s magazines, which has
helped us open 170 stores in over 30 cities.The Baby Fox brand was initially
registered in Italy in May of 2003 and it is promoted as an international brand
in China (i.e. designs based on current fashions in Europe, Japan, etc.).
Foreign apparel brands from France, Italy, U.S, Japan, and the U.K have
traditionally dominated the high end fashion scene in China. China’s GDP reached
4,326 billion dollars or 6.98% of the world economy, according to the World Bank
in the first quarter of 2010 which represented a growth rate of 11.9%, while the
annual GDP growth rate is 8.58% for 2009 and 9.13% in 2008. The World Bank
reports that China’s GDP grew 6.2% in first quarter of 2009, 7.9% in the second
quarter of 2009 followed by 9.1%% in the third quarter and 10.7% for the last
quarter of 2009. This quarterly rise in the GDP growth rate indicated the
bottoming out of the Chinese economy following the global financial crisis.
(Source: http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY#ixzz0qPX3q6Cx)
China
embraces one of the most promising apparel markets in the world. According to Li
& Fung Research Center’s Report, China’s apparel market is listed after
Brazil as the second-most attractive among emerging economies. Li & Fung
Research Center’s research report “Latest Developments of China’s Apparel
Market,” (Issue Number 15 in December 2009), shows that China’s apparel market
had experienced significant growth over the past years, though growth pace slows
down a bit after the global financial crisis. According to the National Bureau
of Statistics (NBS), the total retail value of clothing, shoes, hats and
textiles by wholesale and retail enterprises above designated size in 2008 grew nominally by
25.9% year-on-year to achieve 377.55 billon RMB Yuanm compared with the growth
of 28.7% to achieve 302.41 billion Yuan (approximately 44.4 billion USD). In the
first half of 2009, the nominal retail value growth slowed to 18.0% and further
down to 16.9% for the first three quarters same year. Declining consumer
confidence over the past year has contributed to the slower growth - hit by the
global financial crisis, Facing poorer consumption sentiment, retailers have
tried to get the money out of consumers’ pocket by offering deeper discounts.
Since the end of 2008, retailers have been launching aggressive promotion
campaigns besides the regular and seasonal promotions; discounts were deeper
than in the past, even for newly launched products. Discount-driven promotions
and lower average ticket consumption are casting pressure on margins.
Nonetheless, apparel retail sales was expected to regain its momentum in the
second half of 2009, as consumer confidence was anticipated to gradually
improve in October 2009. Most of the sub-sectors
witnessed negative growth rate in 2008, except a few such as ladies’ wear with
year-on-year increase of 13.03% or overall 405.6 Million pieces. In the first
half of 2009, growth rate of ladies’ wear was 5.58% with overall 212.6 Million
pieces.
We lease
our offices and distribution facilities, and utilize strategic relationships
with leading manufactures in China. Our flexible organizational structure,
strong relationships and core focus on design enables us to launch a
garment from concept to distribution in just weeks.
We lease
our store space from mall operators generally for an initial term of one year.
The lease generally includes provisions providing that the mall operator can
cancel or modify the lease if the sales of the store are below the mall
operator’s expected levels for any three consecutive months. Approximately 25%
of the store leases require payment of a fixed minimum rental plus percentage
rentals if sales of such stores exceed certain levels. The remaining 75% of the
leases require payment of percentage rentals with no minimum fixed rental. The
percentage of sales paid as rent ranges from 16% to 39% depending upon, among
other things, the location of the store, with rentals being higher in large
cities. As of the date of this registration statement, none of our corporate
stores has been closed by mall operators due to its lower than expected
sales.
We
began generating revenue in August 2006. For the three months ended March 31,
2010 and 2009, we generated revenues of $7,085,242 and $6,390,717, respectively.
For the nine months ended March 31, 2010 and 2009, we generated revenues of
$19,954,322 and $17,590,749, respectively. We generated sales of $24,272,432,
and a net loss of $4,482,629 for the year ended June 30, 2009. Our sales
for the fiscal year ended June 30, 2008 were $15,055,727, with a net loss of
$1,459,435.
As of
March 31, 2010, the Company’s current liabilities exceeded its current assets by
$6,137,355 and the Company’s total liabilities exceeded its total assets by
$6,661,929. The Company generated a net loss for the nine months ended March 31,
2010 and the Company’s cash position on March 31, 2010 was $256,797. 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, 2009.
The Company has taken steps to improve its cash position by slowing down the
rate of new store openings, selling inventory from prior seasons at its discount
stores and warehouse sales, negotiate longer payment terms from a related party
manufacturer and stepping up efforts in collecting past due accounts
receivables. In addition, the Company is seeking future equity and debt
financing, although there is no assurance that such financing will be available
or be available at terms acceptable to the Company.
3
Because
all of our sales are generated in China, our business operations are subject to
applicable Chinese laws and regulations. There is no special restriction on
apparel distribution in China. Our everyday business activities are subject to
laws and regulations governing domestic trade, which are mainly promulgated by
the Ministry of Commerce. We operate in compliance with various applicable laws
and regulations include, but not limited to, labor and employment law, taxation,
environmental laws and regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central government or
local governments and agencies of the jurisdictions where we operate our
business may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts from us to
ensure our compliance with such regulations or interpretations.
Our
internal and vendor operating guidelines promote compliance with laws and our
sourcing personnel periodically visits and monitors the operations of our
independent manufacturers. The violation of labor or other laws by one of our
related party and independent manufacturers, or the divergence of our related
party and independent manufacturers’ labor practices from those generally
accepted as ethical, could result in adverse publicity for us and could have a
material adverse effect on us.
Since
January 2008, China began to implement its new corporate tax rates which range
from 15% to 25%. The actual tax rate depends on where a company is registered
and the industry that such company engages in. Our subsidiary, Shanghai Baby
Fox, is currently subject to a corporate tax rate of 25%.
As a
foreign invested enterprise, Shanghai Baby Fox is permitted to remit profits
offshore and such remittance does not require any prior approval from the SAFE.
Pursuant to the applicable laws and regulations, a foreign invested enterprise,
such as Shanghai Baby Fox, cannot distribute dividends offshore if the losses of
previous years have not been covered, but dividends that were not distributed in
previous years may be distributed together with those of the current year.
Repatriating registered capital offshore, however, is always forbidden during
the term of business operation.
Summary of the
Offering
The
selling stockholders named in this prospectus are offering all of the shares of
common stock offered through this prospectus. The selling stockholders are
selling shares of common stock covered by this prospectus for their own
account.
We will
not receive any of the proceeds from the sale of these shares. The offering
price of $.20 was determined by the price shares were sold to our shareholders
in a private placement offering. The offering price of $.20 is a fixed price at
which the selling security holders may sell their shares until our common stock
is quoted on the OTC Bulletin Board, at which time the shares may be sold at
prevailing market prices or privately negotiated prices. We have agreed to bear
the expenses relating to the registration of the shares for the selling security
holders.
There is
currently no public market for our securities and you may not be able to
liquidate your investment since there is no assurance that a public market will
develop for our common stock or that our common stock will ever be approved for
trading on a recognized exchange. After this document is declared
effective by the Securities and Exchange Commission, we intend to seek a market
maker to apply for a quotation on the OTC BB in the United States. Our shares
are not and have not been listed or quoted on any exchange or quotation system.
We cannot assure you that a market maker will agree to file the necessary
documents with the OTC BB, nor can there be any assurance that such an
application for quotation will be approved or that a regular trading market will
develop or that if developed, will be sustained. In the absence of a trading
market, an investor may be unable to liquidate its investment.
We intend
to apply for quoting of our common stock on the OTCBB, which we estimate will
cost around $470,000. The breakdown of such costs is estimated as
following:
Legal
Counsel
|
$
|
100,000
|
||
Auditor
|
$
|
110,000
|
||
Other
consultants
|
$
|
260,000
|
||
Total:
|
$
|
470,000
|
4
We
estimate that to maintain a quoting status will cost us $200,000 to $300,000
annually which will include legal, auditing and Chief Financial Officer’s salary
expenses.
We
will rely on professional services to carry out this plan, which includes, but
is not limited to, a U.S. law firm with corporate and securities practice, a
PCAOB registered auditor and consultants. In addition, we also expect to employ
a Chief Financial Officer (CFO) who is familiar with US generally accepted
accounting principles and the requirements related to public company listing. We
have already started searching for a CFO with such qualification, but as of the
date of this registration statement, we have not located such a CFO. We engaged
the Crone Law Group as our legal counsel and Friedman LLP. as our auditor. We
filed our initial registration statement on May 12, 2008, and will use our best
efforts to work with our professional consultants until the registration
statement is declared effective.
To be
quoted on the OTCBB, we must engage a market maker to file an application for a
trading symbol on our behalf with the Financial Industry Regulatory Authority
(FINRA). This process may take between three (3) to six (6) months. We plan to
engage a market maker after our registration statement is declared effective by
the Securities and Exchange Commission (the “SEC”).
Where You Can Find
Us
We
presently maintain our principal office at Minhang District, 89 Xinbang Road,
Suite 305-B5, Shanghai, P.R. China. Our telephone number is +86 21 5415 3855. We
maintain a website at www.babyfoxstyle.com
.
RISK
FACTORS
See “RISK
FACTORS” for a discussion of the above factors and certain additional factors
that should be considered in evaluating an investment in the common
stock.
SUMMARY
OF FINANCIAL AND OPERATING INFORMATION
The
following selected financial information is derived from the Consolidated
Financial Statements appearing elsewhere in this prospectus and should be read
in conjunction with the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this prospectus.
Summary of Operations
|
Three Months Ended
March 31, 2010
|
Three Months Ended
March 31, 2009
|
||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Total sales
|
$ | 7,085,242 | $ | 6,390,717 | ||||
Net
income (loss)
|
$ | 816,002 | $ | (1,127,166 | ) | |||
Net
income (loss) per common share (basic and diluted)
|
$ | 0.02 | $ | (0.03 | ) | |||
Weighted
average common shares outstanding, basic and diluted
|
40,427,500 | 40,427,500 |
Summary of Operations
|
Nine Months Ended
March 31, 2010
|
Nine Months Ended
March 31, 2009
|
||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Total sales
|
$ | 19,954,322 | $ | 17,590,749 | ||||
Net
(loss) income
|
$ | (92,745 | ) | $ | (757,606 | ) | ||
Net
(loss) per common share (basic and diluted)
|
$ | (0.00 | ) | $ | (0.02 | ) | ||
Weighted
average common shares outstanding, basic and diluted
|
40,427,500 | 40,427,500 |
5
Year Ended
June 30, 2009
|
Year Ended
June 30, 2008
|
|||||||
Total sales
|
$ | 24,272,432 | $ | 15,055,727 | ||||
Net
(loss)
|
$ | (4,482,629 | ) | $ | (1,459,435 | ) | ||
Net
(loss) per common share (basic and diluted)
|
$ | (0.11 | ) | $ | (0.04 | ) | ||
Weighted
average common shares outstanding, basic and diluted
|
40,427,500 | 39,068,722 |
Statement of Financial Position
|
As of
March 31,2010
|
As of
June 30, 2009
|
||||||
(Unaudited)
|
||||||||
Cash
and cash equivalents
|
$ | 256,797 | $ | 312,397 | ||||
Total
assets
|
$ | 10,902,923 | $ | 10,591,682 | ||||
Current
Liabilities
|
$ | 16,754,692 | $ | 16,350,984 | ||||
Long-term
debt
|
$ | 810,160 | $ | 810,160 | ||||
Stockholders’
deficiency
|
$ | (6,661,929 | ) | $ | (6,569,462 | ) |
Our
wholly-owned subsidiary, Shanghai Baby Fox, declared dividends on August 8, 2007
and December 10, 2007 in the amount of approximately $401,900 and $433,700,
respectively to Fengling Wang, its sole shareholder of record on the dates the
dividends were declared. We plan to pay the dividends only when our net income
exceeds the total amount due and when the payment will not have a significant
impact on our financial position. Our Nevada corporation, Baby Fox
International, Inc., has not declared any dividend since its inception on August
13, 2007.
RISK
FACTORS
The
shares of our common stock being offered for resale by the selling stockholders
are highly speculative in nature, involve a high degree of risk and should be
purchased only by persons who can afford to lose the entire amount invested in
the common stock. Before purchasing any of the shares of common stock, you
should carefully consider the following factors relating to our business and
prospects. If any of the following risks actually occurs, our business,
financial condition or operating results could be materially adversely affected.
In such case, the trading price of our common stock could decline and you may
lose all or part of your investment. This Risk Factors section has
addressed all material risks that should be considered in evaluating an
investment in the common stock.
Risks
Relating to Our Business
WE
MUST SUCCESSFULLY GAUGE FASHION TRENDS AND CHANGING CONSUMER PREFERENCES, AND
PROVIDE MERCHANDISE THAT SATISFIES CUSTOMER DEMAND IN A TIMELY MANNER TO
INCREASE OUR SALE VOLUME AND IMPROVE OUR OPERATING RESULTS.
Our
success is largely dependent upon our ability to gauge the fashion tastes of our
customers and to provide merchandise that satisfies customer demand in a timely
manner. The global specialty retail business fluctuates according to changes in
consumer preferences dictated, in part, by fashion and season. To the extent we
misjudge the market for our merchandise or the products suitable for local
markets, our sales will be adversely affected and the markdowns required to move
the resulting excess inventory will adversely affect our operating results. Some
of our past product offerings have not been well received by our broad and
diverse customer base. Merchandise misjudgments could have a material adverse
effect on our operating results.
Our
ability to anticipate and effectively respond to changing fashion trends depends
in part on our ability to attract and retain key personnel in our design,
merchandising, marketing and other functions. Competition for this personnel is
intense, and we cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods.
Fluctuations
in the global specialty retail business especially affect the inventory owned by
apparel retailers, since merchandise usually must be ordered well in advance of
the season and frequently before fashion trends are evidenced by customer
purchases. In addition, the cyclical nature of the global specialty retail
business requires us to carry a significant amount of inventory, especially
prior to peak back-to-school and holiday selling seasons when we build up our
inventory levels. We must enter into contracts for the purchase and manufacture
of merchandise well in advance of the applicable selling season. As a result, we
are vulnerable to demand and pricing shifts and to suboptimal selection and
timing of merchandise purchases. In the past, we have not always predicted our
customers’ preferences and acceptance levels of our fashion items with accuracy.
In addition, lead times for many of our purchases are long, which may make it
more difficult for us to respond to new or changing fashion trends or consumer
acceptance for our products. If sales do not meet expectations, too much
inventory may cause excessive markdowns and, therefore, lower than planned
margins.
6
OUR
BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON CONSUMER SPENDING PATTERNS.
INTERNATIONAL AND CHINA DOMESTIC ECONOMIC DOWNTURN MAY CAUSE DECLINES IN
CONSUMER SPENDING ON APPAREL AND ACCESSORIES, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR OPERATING RESULTS.
The
global specialty apparel retail industry is highly competitive. In Chinese
market, we compete with China’s national and local department stores, specialty
and discount store chains, independent retail stores and internet businesses
that market similar lines of merchandise. We face a variety of competitive
challenges including:
·
|
anticipating and quickly
responding to changing consumer
demands;
|
·
|
maintaining favorable brand
recognition and effectively marketing our products to consumers in several
diverse market segments;
|
·
|
developing innovative,
high-quality products in sizes, colors and styles that appeal to consumers
of varying age groups and
tastes;
|
·
|
sourcing merchandise
efficiently;
|
·
|
competitively pricing our
products and achieving customer perception of
value;
|
·
|
providing strong and effective
marketing support; and
|
·
|
attracting consumer
traffic.
|
Our
business is sensitive to a number of factors that influence the levels of
consumer spending, including political and economic conditions such as
recessionary environments, the levels of disposable consumer income, consumer
debt, interest rates and consumer confidence. Declines in consumer spending on
apparel and accessories could have a material adverse effect on our operating
results. Short-term sector outlook is not quite promising with slower income
growth and poorer consumer sentiment. Urbanites, the major driving force of
apparel sales, have witnessed their disposable income growth in real terms down
to 8.4% year-over-year in 2008; in 2007, it
increased by 12.2%. Besides, macroeconomic concerns, property and stock market
slump have harmed consumer confidence. China’s consumer confidence index dropped
to 88.5 in October of 2009, declining dramatically after the index peaked at
94.5 in July 2008 because of the global financial crisis a few months later;
sales of discretionary fashion items have shown signs of
slowdown.
We
also face competition with European, American, Japanese and Canadian
manufacturers with established regional and national chains in China. Meanwhile,
softer global demand has posed huge challenges to clothing exporters within
China. Export growth of garment and clothing accessories decreased by 16%
year-over-year in August 2009 compared to 3.2% year-over-year in Sepember, 2008.
An increasing number of export-oriented clothing enterprises now attempt to
engage in China domestic sales. Our success in China’s domestic markets depends
on our ability to determine a sustainable profit formula to build brand loyalty
and gain market share in these challenging retail environments. If we cannot
effectively take advantage of both domestic and international growth
opportunities, our results of operations could be adversely
affected.
7
EXISTING
AND INCREASED COMPETITION IN THE SPECIALTY RETAIL, DIRECT-TO-CONSUMER AND
WHOLESALE APPAREL BUSINESS MAY REDUCE OUR NET REVENUES, PROFITS AND MARKET
SHARE.
The
specialty retail, direct-to-consumer and the wholesale apparel businesses are
each highly competitive. Our retail stores compete on the basis of, among other
things, the location of our stores, the breadth, quality, style, and
availability of merchandise, the level of customer service offered and
merchandise price. Many of our competitors have substantially greater name
recognition as well as financial, marketing and other resources. We cannot
assure you that we will continue to be able to compete successfully against
existing or future competitors. Our competitors may force a markdown or
promotional sales environment which could hurt our ability to achieve our
historical profit margins. Our expansion into markets served by our competitors
and entry of new competitors or expansion of existing competitors into our
markets could have a material adverse effect on our business, financial
condition and results of operations.
WE
EXPECT THAT STORE OPENING COSTS WILL REDUCE NET INCOME IN FUTURE
PERIODS.
Due to
the initial term of the leases with mall operators and the cancellation
provisions in the store leases, the cost of leasehold improvements and store
fixtures averaging $21,750 per store are charged to expense as incurred. The
effect of store openings could potentially reduce reported net income in the
period of store openings.
OUR
NEW STORES MAY NOT BE SUCCESSFUL AND WILL EXPOSE US TO ADDITONAL RISK AND COULD
NEGATIVELY AFFECT OUR BUSINESS.
Opening
new retail stores will lead to an increase in fixed costs and operating
expenses. These investments expose us to the additional risk that some of the
chosen locations may turn out to be inadequate because of changes in the area’s
demographic profile or the location of shopping districts. Failure or changes in
any areas in which we have stores could have a material adverse effect on our
business and results of operations.
WE
NEED TO MANAGE GROWTH IN OPERATIONS TO MAXIMIZE OUR POTENTIAL GROWTH AND ACHIEVE
OUR EXPECTED REVENUES AND OUR FAILURE TO MANAGE GROWTH WILL CAUSE A DISRUPTION
OF OUR OPERATIONS RESULTING IN THE FAILURE TO GENERATE REVENUE.
In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our sourcing of apparel and accessories and marketing
operations. This expansion will place a significant strain on our management and
our operational, accounting, and information systems. We expect that we will
need to continue to improve our financial controls, operating procedures, and
management information systems. We will also need to effectively train,
motivate, and manage our employees. Our failure to manage our growth could
disrupt our operations and ultimately prevent us from generating the revenues we
expect.
In order
to achieve the above mentioned targets, our general strategies are to maintain
and search for hard-working employees who have innovative initiatives; on the
other hands, we will also keep a close eye on expanding opportunities, for
example, acquisition of state-owned enterprises.
WE
MAY NOT BE SUCCESSFUL IN EXPANDING OUR BUSINESS AND OPENING NEW RETAIL
STORES.
Our
growth strategy depends on our ability to open and operate new retail stores on
a profitable basis. Our operating complexity will increase as our store base
grows, and we may face challenges in managing our future growth. Such growth
will require that we continue to expand and improve our operating capabilities,
and expand, train and manage our employee base. We may be unable to hire and
train a sufficient number of qualified personnel or successfully manage our
growth. Our expansion prospects also depend on a number of other factors, many
of which are beyond our control, including, among other things, competition, the
availability of financing for capital expenditures and working capital
requirements, the availability of suitable sites for new stores locations on
acceptable lease terms, and the availability of inventory. There can be no
assurance that we will be able to achieve our store expansion goals, nor can
there be any assurance that our newly opened stores will achieve revenue or
profitability levels comparable to those of our existing stores in the time
periods estimated by us, or at all. If our stores fail to achieve, or are unable
to sustain, acceptable revenue and profitability levels, we may incur
significant costs associated with closing those stores.
8
OUR
INDEPENDENT AUDITORS HAVE EXPRESSED THEIR CONCERN AS TO OUR ABILITY
TO CONTINUE AS A GOING CONCERN.
Our
independent auditors, Paritz & Company, P.A., have expressed substantial
doubt concerning our ability to continue as a going concern. As of March 31,
2010, we had a stockholders’ deficiency of $6,661,929, a working capital deficit
of $6,137,355 and a net loss of $92,745 for the nine months ended March 31,
2010. We will continue incurring additional expenses as we implement our
growth and expansion plan for the remainder of fiscal year of 2010, which will
reduce our net income in 2010. If we are not able to achieve profit, then we
likely will be forced to cease operations and investors will likely lose their
entire investment.
WE
PLAN TO MAKE PAYMENTS OF THE UPDAID DIVIDEND THAT WAS DECLARED BY OUR WHOLY
OWNED SUBSIDIARY, SHANGHAI BABY FOX IN 2007. THIS PAYMENT WILL SUBSTANTIALLY
DECREASE OUR CASH POSITION.
Our
wholly owned subsidiary, Shanghai Baby Fox, declared cash dividends on August 8,
2007 and December 10, 2007 in the amount of $401,973 at $4.01 per share, and
$433,757, at $4.34 per share, respectively, to Fengling Wang, its sole
shareholder of record on the dates the dividends were declared. The dividends
have not been paid as of the date of this registration statement. We plan to pay
these dividends only when our net income exceeds the total amount due and when
the payment will not have a significant impact on our financial position. The
payment of the dividends will substantially decrease our cash position, and may
consequently reduce the number of corporate stores that we plan to open in the
future.
We
entered into various material agreements with our shareholders, our officers and
directors, the family members of our shareholders or officers and directors, and
enterprises in which one or more of our shareholders or officers and directors
hold substantial interests. Our business operations and development rely upon
the belief that our counterparties to these agreements will execute their
responsibilities and obligations as set forth in these agreements. A substantial
portion of our purchase also derive from our transactions with related
parties.
It is
possible that in the future, we will not able to generate revenues with related
parties at the current level or at all. If and to the extent such related party
transactions also occur in the future, they could result in a conflict of
interests between their duties as our shareholders or members of our executive
group, and their interests as representatives and/or shareholders of parties
that benefit from business relationships with us. Such conflicts of interest
could have a material adverse effect on our business, financial condition and
results of operations.
WE SOURCED
78% OF OUR PRODUCT MANUFACTURING FROM A RELATED PARTY, CHANGZHOU CTS FASHION
CO., LTD, PURSUANT TO A PURCHASE AGREEMENT. IF THE RELATED PARTY CANCELS THE
PURCHASE AGREEMENT, IT WILL TAKE US CONSIDERABLE TIME AND EFFORT TO LOCATE NEW
QUALIFIED SUPPLIERS.
In the
fiscal year ended June 30, 2009, we sourced 78% of our product from a related
party, Changzhou CTS Fashion Co., Ltd. (the “Changzhou CTS”). Pursuant to the
purchase agreement with Changzhou CTS, we pay 30% of the total price of the
value as down payment upon placing an order, pay 60% upon our receipt of the
order, and pay the remaining balance within 25 days following the receipt of the
products. Besides delivery time and location, the agreement specifies that the
products must be manufactured strictly as confirmed samples and in accordance
with national standards and should be shipped only upon approval of our quality
control director. Should such a purchase agreement be cancelled, it will take us
considerable time and effort to locate new qualified suppliers.
9
OUR
AGREEMENTS WITH RELATED PARTIES COULD CREATE CONFLICTS OF INTEREST AND ADVERSELY
AFFECT US.
We
believe that the transactions and agreements that we have entered into with
related parties are on terms that are at least as favorable as could reasonably
have been obtained at such time from third parties. However, the relationship
could create, or appear to create, potential conflicts of interest when our
board of directors is faced with decisions that could have different
implications for us and our related parties or their affiliates. The appearance
of conflicts, even if such conflicts do not materialize, might adversely affect
the public's perception of us, as well as our relationship with other companies
and our ability to enter into new relationships in the future, which could have
a material adverse effect on our ability to do business. In addition, conflicts
of interest may arise between us and our related parties and their affiliates.
Our related parties may favor their own interests over our and your
interests.
SUBSTANTIALLY
ALL OF OUR BUSINESS, ASSETS AND OPERATIONS ARE LOCATED IN CHINA. THE CHINESE
GOVERNMENT MAY TAKE MEASURES THAT BENEFIT THE OVERALL ECONOMY OF CHINA, WHICH
MAY HAVE ADVERSE EFFECTS ON OUR OPERATIONS.
Substantially
all of our business, assets and operations are located in China. The economy of
China differs from the economies of most developed countries in many respects.
The economy of China has been transitioning from a planned economy to a
market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry by imposing industrial policies. It also exercises
significant control over China's economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. Some of these measures benefit the overall economy of
China, but may have a negative effect on us.
One of
our strategies is to grow organically through increasing the distribution and
sales of our products by penetrating existing markets in PRC and entering new
geographic markets in PRC as well as other parts of Asia and the United States.
However, many obstacles to entering such new markets exist, including, but not
limited to, international trade and tariff barriers, shipping and delivery
costs, costs associated with marketing efforts abroad and maintaining attractive
foreign exchange ratios. We cannot, therefore, assure you that we will be able
to successfully overcome such obstacles and establish our products in any
additional markets. Our inability to implement this organic growth strategy
successfully may have a negative impact on our growth, future financial
condition, results of operations or cash flows.
IF
WE NEED ADDITIONAL CAPITAL TO FUND OUR GROWING OPERATIONS, WE MAY NOT BE ABLE TO
OBTAIN SUFFICIENT CAPITAL ON TERMS ACCEPTABLE TO US AND MAY BE FORCED TO LIMIT
THE SCOPE OF OUR OPERATIONS.
If
adequate additional financing is not available on acceptable terms, we may not
be able to undertake store expansion, purchase additional machinery and purchase
equipment for our operations and we would have to modify our business plans
accordingly. There is no assurance that additional financing will be available
to us.
In
connection with our growth strategies, we may experience increased capital needs
and accordingly, we may not have sufficient capital to fund our future
operations without additional capital investments. Our capital needs will depend
on numerous factors, including (i) our profitability; (ii) the release of
competitive products by our competition; (iii) our research and development
expenses; and (iv) the amount of our capital expenditures, including
acquisitions. We cannot assure you that we will be able to obtain capital in the
future to meet our needs.
10
In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies has experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If we need additional funding, the market
fluctuations affecting our stock price could limit our ability to obtain equity
financing.
If we
cannot obtain additional funding, we may be required to: (i) limit our store
expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate
capital expenditures.
Such
reductions could materially adversely affect our business and our ability to
compete.
Even if
we do find a source of additional capital, we may not be able to negotiate terms
and conditions for receiving the additional capital that are acceptable to us.
Any future capital investments could dilute or otherwise materially and
adversely affect the holdings or rights of our existing shareholders. In
addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to our common
stock. We cannot give you any assurance that any additional financing will be
available to us, or if available, will be on terms favorable to us.
Baby Fox
Limited beneficially owns the majority of our outstanding common stock as of the
date of this filing. It has the ability to substantially influence our
management, policies, and business operations. It will have the ability to
control all matters submitted to the stockholders for approval, including the
election and removal of directors and the approval of any merger and
consolidation, or sale of all or substantially all of our assets. It could
take actions detrimental to your investment in the future for which you would
have no remedy.
WE
DEPEND ON KEY PERSONNEL AND MAY NOT BE ABLE TO REATIAN OR REPLACE THESE
EMPLOYEES OR RECURT ADDTIIONAL QUALIFED PERSONNEL, WHICH WOULD HARM OUR
BUSINESS.
Our
future success also depends upon our continuing ability to attract and retain
highly qualified personnel. Our business expansion, management and
operation will require additional managers and employees with industry
experience, and our success will be highly dependent on our ability to
attract and retain skilled management personnel and other employees. Competition
for such personnel is intense. There can be no assurance that we will be able to
attract or retain highly qualified personnel. Competition for skilled personnel
in the fashion industry is significant. This competition may make it more
difficult and expensive to attract, hire and retain qualified managers and
employees. Our inability to attract skilled management personnel and other
employees as needed could have a material adverse effect on our business,
operating results and financial condition. Our arrangement with our current
employees is at will, meaning its employees may voluntarily terminate their
employment at any time. We anticipate that the use of stock options, restricted
stock grants, stock appreciation rights, and phantom stock awards will be
valuable in attracting and retaining qualified personnel. However, there is no
assurance that this plan can achieve such effect.
OUR
INTERNATIONAL OPERATIONS REQUIRE US TO COMPLY WITH A NUMBER OF UNITED STATES AND
INTERNATIONAL REGULATIONS WHICH MAY INCREASE OUR OPERATING COSTS, LIMIT THE
SCOPE OF OUR TRANSACTIONS AND REDUCE OUR ABILITY TO CONTINUOUSLY INCREASE OUR
PROFITS.
We are
required to comply with a number of international regulations in countries
outside of the United States, which may increase our operating costs. In
addition, we must comply with the Foreign Corrupt Practices Act, or FCPA, which
prohibits U.S. companies or their agents and employees from providing anything
of value to a foreign official for the purposes of influencing any act or
decision of these individuals in their official capacity to help obtain or
retain business, direct business to any person or corporate entity or obtain any
unfair advantage. Any failure by us to adopt appropriate compliance procedures
and ensure that our employees and agents comply with the FCPA and applicable
laws and regulations in foreign jurisdictions could result in substantial
penalties and/or restrictions in our ability to conduct business in certain
foreign jurisdictions. We believe we are currently in compliance with such
regulations. The U.S. Department of The Treasury's Office of Foreign Asset
Control, or OFAC, administers and enforces economic and trade sanctions against
targeted foreign countries, entities and individuals based on U.S. foreign
policy and national security goals. As a result, we are restricted from entering
into transactions with certain targeted foreign countries, entities and
individuals except as permitted by OFAC which may reduce our ability to increase
our profits.
11
WE
MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH UNITED STATES CORPORATE
GOVERNANCE AND ACCOUNTING REQUIREMENTS.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission. We expect all
of these applicable rules and regulations to significantly increase our legal
and financial compliance costs and to make some activities more time consuming
and costly. We also expect that these applicable rules and regulations may make
it more difficult and more expensive for us to obtain director and officer
liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring developments with respect
to these newly applicable rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
THE
PRC LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD LIMIT THE LEGAL PROTECTIONS
AVAILABLE TO YOU AND US.
Unlike
common law systems, the PRC legal system is based on written statutes and
decided legal cases have little precedential value. In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation since then has
been to significantly enhance the protections afforded to various forms of
foreign investment in China. Our PRC operating subsidiaries are subject to
laws and regulations applicable to foreign investment in China. Our PRC
affiliated entities are subject to laws and regulations governing the
formation and conduct of domestic PRC companies. Relevant PRC laws, regulations
and legal requirements may change frequently, and their interpretation and
enforcement involve uncertainties. For example, we may have to resort to
administrative and court proceedings to enforce the legal protection that we
enjoy either by law or contract. However, since PRC administrative and court
authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal
protection we enjoy than under more developed legal systems. Such uncertainties,
including the inability to enforce our contracts and intellectual property
rights, could materially and adversely affect our business and operations.
Accordingly, we cannot predict the effect of future developments in the PRC
legal system, particularly with respect to the natural gas sector, including the
promulgation of new laws, changes to existing laws or the interpretation or
enforcement thereof, or the preemption of local regulations by national laws.
These uncertainties could limit the legal protections available to us and
other foreign investors.
FAILURE
TO COMPLY WITH PRC REGULATIONS RELATED TO THE ESTABLISHMENT OF OFFSHORE SPECIAL
PURPOSE COMPANIES BY PRC RESIDENTS MAY SUBJECT OUR PRC RESIDENT STOCKHOLDERS TO
PERSONAL LIABILITY, LIMIT OUR ABILITY TO ACQUIRE PRC COMPANIES OR TO INJECT
CAPITAL INTO OUR PRC SUBSIDIARIES, AND LIMIT OUR PRC SUBSIDIARIES’ ABILITY TO
DISTRIBUTE PROFITS TO US.
The PRC
State Administration of Foreign Exchange, or SAFE, has promulgated several
regulations, including Circular 75 issued in November 2005 and
implementation rules issued in May 2007, requiring registrations with, and
approvals from, PRC government authorities in connection with direct or indirect
offshore investment activities by PRC residents. These regulations apply to our
shareholders and beneficial owners who are PRC residents.
The SAFE
regulations require registration of direct or indirect investments made by PRC
residents in offshore companies. In the event that a PRC shareholder with a
direct or indirect stake in an offshore parent company fails to make the
required SAFE registration, the PRC subsidiaries of that offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Further, failure to
comply with the various SAFE registration requirements described above could
result in liability under PRC law for foreign exchange evasion.
12
We
believe our controlling stockholder, Hitoshi Yoshida, a Japanese national, who
is not a PRC resident as defined in Circular 75 is not required to register with
the relevant branch of SAFE, in connection with his equity interests in us and
our acquisitions of equity interests in our PRC subsidiary. We further believe
other PRC individuals, who are either purchasers of our March 2008 private
placement or individuals and controlling shareholders of certain BVI companies
in receiving our January 18, 2008 share issue, are not required to register with
the relevant branch of SAFE in connection with their equity interest in us and
with our acquisitions of equity interests in our PRC subsidiary, because they
hold total less than five percent (5%) of our issued and outstanding
shares.
WE
MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL
CONTROLS IN THE PEOPLE’S REPUBLIC OF CHINA.
The PRC
historically has been deficient in Western style management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
EVEN
THOUGH WE HAVE OBTAINED THE GOVERMENTAL APPROVALS WHICH ALLOW US TO CHANGE OUR
ENTITY FROM A CHINESE DOMESTIC ENTERPRISE TO A WHOLLY FOREIGN OWNED ENTERPRISE
AND TO CONTINUE OUR BUSINESS IN CHINESE WOMEN APPAREL INDUSTRY AS A WHOLLY
FOREIGN OWNED ENTERPRISE WITHOUT ANY RESTRICTIONS, THERE IS SUBSTANTIAL
UNCERTAINTY WITH RESPECT TO THE FUTURE INTERPRETATION AND APPLICATION OF THE
RELEVANT LAWS AND REGULATIONS.
Under PRC
laws and regulations, an industry is considered a “key industry” if the
acquisition of the industry by an foreign entity may have an impact on “national
economic security” or result in a transfer of actual control of a domestic
enterprise that owns a well-known trademark or historic Chinese brand name. The
women's apparel industry is not considered as a “key industry” in China.
Accordingly, PRC laws and regulations do not restrict foreign investment in
China’s women apparel industry.
When we
acquired Shanghai Baby Fox on September 20, 2007, we received the Certificate of
Approval from Shanghai Foreign Economic Relation & Trade Commission and the
approval from SAFE Shanghai local branch. The approvals gave us the permission
to change our entity from a domestic enterprise to a WFOE, and to continue our
business in the women apparel industry in China as a WFOE without being subject
to any restrictions.
Although
we believe that our operations are in compliance with current, applicable PRC
regulations in all material aspects, many PRC laws and regulations are subject
to extensive interpretive power of governmental agencies and commissions, and
there is substantial uncertainty regarding the future interpretation and
application of these laws or regulations.
13
CERTAIN
POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO THE PRC COULD ADVERSELY AFFECT
OUR OPERATIONS. OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY CHANGES IN
THE PRC’S ECONOMIC AND SOCIAL CONDITIONS AS WELL AS BY CHANGES IN THE POLICES OF
THE PRC GOVERNMENT.
The PRC
is transitioning from a planned economy to a market economy. While the PRC
government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the PRC economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such
reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development. Our operating
results may be adversely affected by changes in the PRC's economic and social
conditions as well as by changes in the policies of the PRC government, such as
changes in laws and regulations (or the official interpretation thereof),
measures which may be introduced to control inflation, changes in the interest
rate or method of taxation, and the imposition of additional restrictions on
currency conversion.
IF
THE CHINA SECURITIES REGULATORY COMMISSION, OR CSRC, OR ANOTHER PRC REGULATORY
AGENCY, DETERMINES THAT CSRC APPROVAL IS REQUIRED IN CONNECTION WITH THIS
OFFERING, THIS OFFERING MAY BE DELAYED OR CANCELLED, OR WE MAY BECOME SUBJECT TO
PENALTIES.
On August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, which became effective on September 8, 2006. This new
regulation, among other things, has certain provisions that require SPVs formed
for the purpose of acquiring PRC domestic companies and controlled by PRC
individuals, to obtain the approval of the CSRC prior to publicly listing their
securities on an overseas stock market. In our case, the formation on August 13,
2007 by Hitoshi Yoshida, a Japanese national, of Baby Fox International, Inc., a
Nevada State corporation and subsequent acquisition of Shanghai Baby Fox Fashion
Co., Ltd. from Fengling Wang, should not be seen as a PRC individual’
acquisition of a PRC domestic company as contemplated by the new regulation and
we therefore have not applied to the CSRC for approval under this regulation.
Nonetheless, if the CSRC or another PRC regulatory agency subsequently
determines that the CSRC’s approval is required for this offering, we may face
sanctions by the CSRC or another PRC regulatory agency. If this happens, these
regulatory agencies may impose fines and penalties on our operations in the PRC,
limit our operating privileges in the PRC, delay or restrict the repatriation of
the proceeds from this offering into the PRC, restrict or prohibit payment or
remittance of dividends to us or take other actions that could have a material
adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our shares. The CSRC
or other PRC regulatory agencies may also take actions requiring us, or making
it advisable for us, to delay or cancel this offering before settlement and
delivery of the shares being offered by us.”
THE
RECENT NATURE AND UNCERTAIN APPLICATION OF MANY PRC LAWS APPLICABLE TO US CREATE
AN UNCERTAIN ENVIRONMENT FOR BUSINESS OPERATIONS AND THEY COULD HAVE A NEGATIVE
EFFECT ON US.
The PRC
legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, the PRC began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in the PRC and to regulate foreign
investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. The promulgation of new laws,
changes of existing laws and the abrogation of local regulations by national
laws could have a negative impact on our business and business
prospects.
14
The PRC
government imposes control over the conversion of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs,
for use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in the PRC. Conversion of
Renminbi into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still under certain restrictions.
On January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
Enterprises
in the PRC (including FIEs) which requires foreign exchange for transactions
relating to current account items, may, without approval of the SAFE, effect
payment from their foreign exchange account or convert and pay at the designated
foreign exchange banks by providing valid receipts and proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
Furthermore,
the Renminbi is not freely convertible into foreign currencies nor can be freely
remitted abroad. Under the PRC’s Foreign Exchange Control Regulations and the
Administration of Settlement, Sales and Payment of Foreign Exchange Regulations,
foreign invested enterprises are permitted either to repatriate or distribute
its profits or dividends in foreign currencies out of its foreign exchange
accounts, or exchange Renminbi for foreign currencies through banks authorized
to conduct foreign exchange business. The conversion of Reminbi into foreign
currencies for capital items, such as direct investment, loans and security
investment, is subject, however, to more stringent controls.
Since
1994, the exchange rate for Renminbi against the United States dollar has
remained relatively stable, most of the time in the region of approximately
RMB8.28 to $1.00. However, in 2005, the Chinese government announced that it
would begin pegging the exchange rate of the Chinese Renminbi against a number
of currencies, rather than just the U.S. dollar and, the exchange rate for the
Renminbi against the U.S. dollar became RMB8.02 to $1.00. As our operations are
primarily in PRC, any significant revaluation or devaluation of the Chinese
Renminbi may materially and adversely affect our cash flows, revenues and
financial condition. We may not be able to hedge effectively against in any such
case. For example, to the extent that we need to convert United States dollars
into Chinese Renminbi for our operations, appreciation of this currency against
the United States dollar could have a material adverse effect on our business,
financial condition and results of operations. Conversely, if we decide to
convert Chinese Renminbi into United States dollars for other business purposes
and the United States dollar appreciates against this currency, the United
States dollar equivalent of the Chinese Renminbi we convert would be reduced.
There can be no assurance that future movements in the exchange rate of Renminbi
and other currencies will not have an adverse effect on our financial condition.
Our operating companies are FIEs to which the Foreign Exchange Control
Regulations are applicable. There can be no assurance that we will be able to
obtain sufficient foreign exchange to pay dividends or satisfy other foreign
exchange requirements in the future.
15
As our
operations are presently based in PRC and a majority of our directors and all of
our officers reside in PRC, our service of process and such directors and
officers may be difficult to effect within the United States. Also, our main
assets are located in PRC and any judgment obtained in the United States against
us may not be enforceable outside the United States.
SINCE
ALL OF OUR OPERATIONS ARE IN PRC. ANY FUTURE OUTBREAK OF PATHOGENIC ASIAN BIRD
FLU IN CHICKENS AND DUCKS, OR ANY OTHER EPIDEMIC IN PRC COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS OPERATIONS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Since
mid-December 2003, a number of Asian countries have reported outbreaks of highly
pathogenic avian bird flu in chickens and ducks. Since all of our operations are
in PRC, an outbreak of the Asian Bird Flu in PRC in the future may disrupt our
business operations and have a material adverse effect on our financial
condition and results of operations. For example, a new outbreak of Asian Bird
Flu, or any other epidemic, may reduce the level of economic activity in
affected areas, which may lead to a reduction in our revenue if our clients
cancel existing contracts or defer future expenditures. In addition, health or
other government regulations may require temporary closure of our offices, or
the offices of our customers or partners, which will severely disrupt our
business operations and have a material adverse effect on our financial
condition and results of operations.
WE
MAY EXPERIENCE CURRENCY FLUCTUATION AND LONGER EXCHANGE RATE PAYMENT CYCLES
WHICH WILL NEGATIVELY AFFECT THE COSTS OF OUR PRODUCTS SOLD AND THE VALUE OF OUR
LOCAL CURRENCY.
The local
currencies in the countries in which we sell our products may fluctuate in value
in relation to other currencies. Such fluctuations may affect the costs of our
products sold and the value of our local currency profits. While we are not
conducting any meaningful operations in countries other than PRC at the present
time, we may expand to other countries and may then have an increased risk of
exposure of our business to currency fluctuation.
WE
HAVE NO PLAN TO DECLARE ANY DIVIDENDS TO SHAREHOLDERS IN THE NEAR
FUTURE.
We
currently intend to retain our future earnings, if any, to support our
operations and to finance expansion. However, we plan to make payments of the
unpaid dividend declared by our wholly-owned subsidiary, Shanghai Baby Fox on
August 8, 2007 and December 10, 2007 in the amount of $401,973 and $433,757,
respectively, to Fengling Wang, its sole shareholder of record at that time,
when our net income exceeds the total amount due. The declaration, and amount of
any future dividends will be made at the discretion of the board of directors,
and will depend upon, among other things, the results of our operations, cash
flows and financial condition, operating and capital requirements, and other
factors as the board of directors considers relevant. There is no assurance that
future dividends will be paid, and, if dividends are paid, there is no assurance
with respect to the amount of any such dividend.
SINCE
MOST OF OUR ASSETS ARE LOCATED IN PRC, ANY DIVIDENDS OR PROCEEDS FROM
LIQUIDATION IS SUBJECT TO THE APPROVAL OF THE RELEVANT CHINESE GOVERNMENT
AGENCIES.
Our
assets are predominantly located inside PRC. Under the laws governing foreign
invested enterprises in PRC, dividend distribution and liquidation are allowed
but subject to special procedures under the relevant laws and rules. Any
dividend payment will be subject to the decision of the board of directors and
subject to foreign exchange rules governing such repatriation. Any liquidation
is subject to the relevant government agency's approval and supervision as well
as the foreign exchange control. This may generate additional risk for our
investors in case of dividend payment and liquidation.
16
YOU
MAY NOT BE ABLE TO LIQUIDATE YOUR INVESTMENT SINCE THERE IS NO ASSURANCE THAT A
PUBLIC MARKET WILL DEVELOP FOR OUR COMMON STOCK OR THAT OUR COMMON STOCK WILL
EVER BE APPROVED FOR TRADING ON A RECOGNIZED EXCHANGE.
There is
no established public trading market for our securities. After this document is
declared effective by the Securities and Exchange Commission, we intend to seek
a market maker to apply for a quotation on the OTC BB in the United States. Our
shares are not and have not been listed or quoted on any exchange or quotation
system. We cannot assure you that a market maker will agree to file the
necessary documents with the OTC BB, nor can there be any assurance that such an
application for quotation will be approved or that a regular trading market will
develop or that if developed, will be sustained. In the absence of a trading
market, an investor may be unable to liquidate its investment, which will result
in the loss of your investment.
THE
OFFERING PRICE OF THE SHARES WAS ARBITRARILY DETERMINED, AND THEREFORE SHOULD
NOT BE USED AS AN INDICATOR OF THE FUTURE MARKET PRICE OF THE SECURITIES.
THEREFORE, THE OFFERING PRICE BEARS NO RELATIONSHIP TO OUR ACTUAL VALUE, AND MAY
MAKE OUR SHARES DIFFICULT TO SELL.
The
offering price of $.20 for the shares of common stock was based upon the sale
price in our recent private placement. The sale price in the private placement
was arbitrarily determined. The facts considered in determining the sale price
were our financial condition and prospects, our limited operating history and
the general condition of the securities market. Therefore, the offering price is
not an indication of and is not based upon our actual value. The offering price
bears no relationship to our book value, assets or earnings or any other
recognized criteria of value. The offering price should not be regarded as an
indicator of the future market price of the securities.
FUTURE
SALES BY OUR STOCKHOLDERS MAY NEGATIVELY AFFECT OUR STOCK PRICE AND OUR ABILITY
TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales
of our common stock in the public market could lower the market price of our
common stock. Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable or at all. Of the 40,427,500 shares of common
stock outstanding as of March 31, 2010, 868,262 shares are, or will be, freely
tradable without restriction upon the effective date of this registration
statement, unless held by our “affiliates”. The remaining 39,559,238 shares of
common stock, which will be held by existing stockholders, including the
officers and directors, are “restricted securities” and may be resold in the
public market only if registered or pursuant to an exemption from registration.
Some of these shares may be resold under Rule 144.
“PENNY
STOCK” RULES MAY MAKE BUYING OR SELLING OUR COMMON STOCK DIFFICULT.
Trading
in our securities will be subject to the “penny stock” rules. The SEC has
adopted regulations that generally define a penny stock to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. These rules require that any broker-dealer who recommends
our securities to persons other than prior customers and accredited investors,
must, prior to the sale, make a special written suitability determination for
the purchaser and receive the purchaser’s written agreement to execute the
transaction. Unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated with trading
in the penny stock market. In addition, broker-dealers must disclose commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities they offer. The additional burdens imposed upon
broker- dealers by such requirements may discourage broker-dealers from
effecting transactions in our securities, which could severely limit the market
price and liquidity of our securities. Broker-dealers who sell penny stocks to
certain types of investors are required to comply with the Commission’s
regulations concerning the transfer of penny stocks. These regulations require
broker- dealers to:
|
·
|
Make a suitability determination
prior to selling a penny stock to the
purchaser;
|
|
·
|
Receive the purchaser’s written
consent to the transaction;
and
|
17
|
·
|
Provide certain written
disclosures to the
purchaser.
|
These
requirements may restrict the ability of broker-dealers to sell our common stock
and may affect your ability to resell our common stock.
FORWARD
LOOKING STATEMENTS
Information
included or incorporated by reference in this prospectus 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
prospectus contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our
technology, (c) our manufacturing, (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 “Management’s Discussion and Analysis or
Plan of Operations” and “Business,” as well as in this prospectus
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 prospectus generally. In light of these risks
and uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus 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 prospectus, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this
prospectus.
USE
OF PROCEEDS
The
selling stockholders are selling shares of common stock covered by this
prospectus for their own account. We will not receive any portion of the
proceeds from the sale or other disposition of the shares of common stock
covered hereby, or interests therein, by the selling stockholders.
We have
agreed to bear the expenses of the registration of the shares. We anticipate
that these expenses will be $52,507.
DIVIDEND
POLICY
The
holders of our common stock are entitled to receive dividends when, as and if
declared by the board of directors out of funds legally available therefore. To
date, we have not declared nor paid any cash dividends. The board of directors
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in our business operations.
Our wholly-owned subsidiary, Shanghai Baby Fox, however, declared dividends
on August 8, 2007 and December 10, 2007 in the amount of $401,973 and $433,757
respectively, to Fengling Wang, its sole shareholder of record at that time. We
plan to pay these dividends only when our net income exceeds the total amount
due and when the payment will not have a significant impact on our financial
position. The payment may have a significant impact on our financial
position and reduce our cash position, and may consequently reduce the number of
corporate stores we plan to open in the future.
DETERMINATION
OF OFFERING PRICE
No market
currently exists for our common stock. Therefore, the offering price of $.20 was
based on the offering price of shares sold pursuant to our Regulation D, Rule
506 offering completed in March, 2008 in which we issued a total of 427,500
shares of our common stock to 32 shareholders at a price per share of $.20 for
an aggregate offering price of $85,500.
18
DILUTION
The
common stock to be sold by the selling stockholders is common stock that is
currently issued and outstanding. Accordingly, there will be no dilution to our
existing shareholders.
PENNY
STOCK CONSIDERATIONS
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
certain penny stock rules adopted by the Securities and Exchange Commission.
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
quoted on the NASDAQ system). Penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer’s account. The broker-dealer must also make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction.
These requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security that becomes subject to
the penny stock rules.
MARKET
FOR OUR COMMON STOCK
No
Public Market for Common Stock
There is
presently no public market for our common stock. We anticipate applying for
trading of our common stock on the Over the Counter Bulletin Board upon the
effectiveness of the registration statement of which this prospectus forms a
part. However, we can provide no assurance that our shares will be traded on the
Bulletin Board or, if traded, that a public market will
materialize.
Holders
of Our Common Stock
As of the
date of this registration statement, we had 42 registered
shareholders.
Registration
Rights
We
have not granted registration rights to the selling stockholders or to any other
persons.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of Baby Fox International, Inc. (“Baby Fox”) for the three and nine
months ended March 31, 2010 and 2009 and for the years ended June 30, 2009 and
2008 should be read in conjunction with the selected consolidated financial
data, Baby Fox’ consolidated financial statements, and the notes to those
financial statements that are included elsewhere in this Form S-1. 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 Registration Statement. 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.
19
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 Shanghai Foreign Economic
Relation & Trade Commission.
Shanghai
Baby Fox is a China-based specialty retailer, developer, and designer of
fashionable, value-priced women’s apparel and accessories. The company’s
products are aimed to target women aged 20 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 women’s
magazines and the company has opened 170 stores in over 30 cities as of March
31, 2010.
Principal
Factors Affecting Our Financial Performance
We
believe that the following factors will continue to affect our financial
performance:
Continued growth of Chinese women’s
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 28.3% of the retail volume sales in 2007 and 28.8% during the
first eight months of 2008. 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 cycle 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 Company’s 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.
Store expansion
plan. Since inception in 2006, the Company has opened 170 corporate
and non-corporate stores in over 30 cities as of March 31, 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 to over 200 stores 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, management’s 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 People’s
Republic of China concerning Foreign Investment Enterprises (“FIE”) and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
20
Results
of Operations
The
following table sets forth key components of our results of operations for the
periods indicated, in US dollars:
Three Months Ended March 31
|
||||||||
(Unaudited)
|
||||||||
2010
|
2009
|
|||||||
Total
sales
|
$ | 7,085,242 | $ | 6,390,717 | ||||
Cost
of goods sold
|
2,722,007 | 4,445,533 | ||||||
Gross
profit
|
4,363,235 | 1,945,184 | ||||||
Selling,
general and administrative expenses
|
3,516,372 | 3,041,342 | ||||||
Income
(Loss) before income taxes
|
816,002 | (1,127,166 | ) | |||||
Income
taxes
|
- | - | ||||||
Net
income (loss)
|
$ | 816,002 | $ | (1,127,166 | ) |
Nine Months Ended March 31
|
Year Ended June 30
|
|||||||||||||||
(Unaudited)
|
||||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Total
sales
|
$ | 19,954,322 | $ | 17,590,749 | $ | 24,272,432 | $ | 15,055,727 | ||||||||
Cost
of goods sold
|
10,087,510 | 9,819,833 | 17,372,064 | 10,048,681 | ||||||||||||
Gross
profit
|
9,866,812 | 7,770,916 | 6,900,368 | 5,007,046 | ||||||||||||
Selling,
general and administrative expenses
|
9,886,548 | 8,435,506 | 11,258,984 | 6,442,799 | ||||||||||||
Loss
before provision for income taxes
|
(92,745 | ) | (757,606 | ) | (4,482,629 | ) | (1,459,435 | ) | ||||||||
Income
taxes
|
- | - | - | - | ||||||||||||
Net
loss
|
$ | (92,745 | ) | $ | (757,606 | ) | $ | (4,482,629 | ) | $ | (1,459,435 | ) |
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total sales:
Three Months Ended March 31,
|
||||||||
(Unaudited)
|
||||||||
As
a percentage of Revenue
|
2010
|
2009
|
||||||
Total
sales
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
of goods sold
|
38.4
|
%
|
69.6
|
%
|
||||
Gross
profit
|
61.6
|
%
|
30.4
|
%
|
||||
Selling,
general and administrative expenses
|
49.6
|
%
|
47.6
|
%
|
||||
Income
(loss) before provision for income taxes
|
11.5
|
%
|
-17.6
|
%
|
||||
Income
taxes
|
-
|
-
|
||||||
Net
income (loss)
|
11.5
|
%
|
-17.6
|
%
|
21
Nine Months Ended March
31,
|
Year Ended June 30,
|
|||||||||||||||
(Unaudited)
|
||||||||||||||||
As
a percentage of Revenue
|
2010
|
2009
|
2009
|
2008
|
||||||||||||
Total
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||
Cost
of goods sold
|
50.6
|
%
|
55.8
|
%
|
71.6
|
%
|
66.7
|
%
|
||||||||
Gross
profit
|
49.4
|
%
|
44.2
|
%
|
28.4
|
%
|
33.3
|
%
|
||||||||
Selling,
general and administrative expenses
|
49.4
|
%
|
48.0
|
%
|
46.4
|
%
|
42.8
|
%
|
||||||||
Loss
before provision for income taxes
|
-0.5
|
%
|
-4.3
|
%
|
-18.5
|
%
|
-9.7
|
%
|
||||||||
Income
taxes
|
-
|
-
|
-
|
-
|
||||||||||||
Net
loss
|
-0.5
|
%
|
-4.3
|
%
|
-18.5
|
%
|
-9.7
|
%
|
Comparable
Store Sales
The
percentage change in comparable store sales by stores type for the three and
nine months ended March 31, 2010 as compared to the same periods in FY2009 are
as follows:
Three months ended
March 31 |
Nine months
ended March 31
|
|||||||
Corporate
stores
|
8 | % | 12 | % | ||||
Non-corporate
stores
|
-12 | % | 4 | % |
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 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:
Three months ended
March 31
|
Nine months ended
March 31
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
per average square foot (1)
|
$ | 34 | $ | 32 | $ | 108 | $ | 96 |
(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.
22
Store
count, openings and closings for our stores are as follows:
FY2010
|
FY2009
|
|||||||||||||||||||||||
Three-month Period
|
Corporate
Stores
|
Non-
corporate
Stores
|
Total
|
Corporate
Stores
|
Non-
corporate
Stores
|
Total
|
||||||||||||||||||
Number
of stores as of January 1
|
134 | 40 | 174 | 123 | 52 | 175 | ||||||||||||||||||
Number
of stores opened
|
3 | 2 | 5 | 1 | 4 | 5 | ||||||||||||||||||
Number
of stores closed
|
8 | 1 | 9 | 7 | 3 | 10 | ||||||||||||||||||
Number
of stores as of March 31
|
129 | 41 | 170 | 117 | 53 | 170 |
FY2010
|
FY2009
|
|||||||||||||||||||||||
Nine-month Period
|
Corporate
Stores
|
Non-
corporate
Stores
|
Total
|
Corporate
Stores
|
Non-
corporate
Stores
|
Total
|
||||||||||||||||||
Number
of stores as of July 1
|
127 | 53 | 180 | 106 | 47 | 153 | ||||||||||||||||||
Number
of stores opened
|
37 | 12 | 49 | 35 | 20 | 55 | ||||||||||||||||||
Number
of stores closed
|
35 | 24 | 59 | 24 | 14 | 38 | ||||||||||||||||||
Number
of stores as of March 31
|
129 | 41 | 170 | 117 | 53 | 170 |
Fewer
stores were opened than closed during current period as compared to the same
period last year because 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. The
Company has successfully established 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 with in 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 mall operator expires, we will
evaluate again and if a Class B store’s sales performance still doesn’t improve,
we will close the store instead of renewing the lease. In FY 2010, many of our
leases with malls expired and after evaluations, we decided not to renew leases
for some of the Class B stores that kept missing expected sales performance. We
will continue to monitor individual store performance for downgrading or closure
decision in order to improve our overall store sales
performance.
Sales
Discussion
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 March
31, 2010 and 2009, the Company generated revenues of $7,085,242 and $6,390,717,
respectively, reflecting an increase of 10.9%. Sales at corporate stores
increased 14.2% and sales to non-corporate stores declined 15.3%. The increase
in corporate store sales is mainly due to the increase in average number of
stores during the period. In addition, the warehouse clearance sales during the
Chinese New Year also contributed to the increase. Decline in non-corporate
store sales is mainly due to fewer stores partially offset by an increase in
sales of 2007 and 2008 products because of significant discount offered on cash
purchase. For the three months ended March 31, 2010, sales at corporate
stores contributed 91.4% of total sales, while sales to non-corporate stores
contributed 8.6% compared to 88.7% and 11.3% for the same period in
FY2009.
For
the nine months ended March 31, 2010 and 2009, the Company generated revenues of
$19,954,322 and $17,590,749, respectively, reflecting an increase of 13.4%.
Sales at corporate stores increased 12.6% and sales to non-corporate stores
increased 20.9%. The increase in corporate store sales is mainly due to the
increase in the average store number. The warehouse sales introduced in FY2010
to liquidate ageing inventories also contributed to the increase. The increase
in non-corporate store sales is mainly a result of significant discount offered
on cash purchase of 2007 and 2008 products despite lower number of stores during
the period. For the nine months ended March 31, 2010, sales at corporate
stores contributed 89.2% of total sales, while sales to non-corporate stores
contributed 10.8% compared to 89.9% and 10.1%, respectively for the same period
in FY2009.
23
Cost
of Goods Sold and Gross Margin
Cost
of goods sold was $2,722,007 for the three months ended March 31, 2010 as
compared to $4,445,533 for the three months ended March 31, 2009, a decrease of
38.8% while the gross margin increased from 30.4% to 61.6%. Cost of goods sold
at corporate stores declined 41.0% in spite of increase in sales at corporate
stores mainly because of better than expected revenue recovered from the
liquidation of 2007 and 2008 products through warehouse clearance sales during
the Chinese New Year. Higher amount of provision had been accrued for those
goods in prior periods, resulting in higher margin from the liquidation. Cost of
goods sold to non-corporate stores decreased 14.8% as compared to the three
months ended March 31, 2009, which is in line with the change in sales at
non-corporate stores. The gross margin from sales at non-corporate stores
remained stable as compared to the same period in FY2009.
Cost
of goods sold was $10,087,510 for the nine months ended March 31, 2010 as
compared to $9,819,833 for the nine months ended March 31, 2009, an increase of
2.7% while the gross margin increased from 44.2% to 49.4%. Cost of goods sold at
corporate stores declined 2.7% in spite of increase in sales at corporate stores
mainly because of better than expected revenue recovered from the liquidation of
2007 and 2008 products through a series of warehouse sales starting in December
2009. Higher amount of provision had been accrued for those goods in prior
periods. Cost of goods sold to non-corporate stores increased 57.7% as compared
to the nine months ended March 31, 2009, higher than the increase in sales at
non-corporate stores mainly because the Company offered significant discount on
2007 and 2008 inventory to non-corporate store owners for cash purchase, which
reduced the gross margin from sales at non-corporate stores from 50.2% to 35.1%
for the same period in FY2009.
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 March 31, 2010, the Company incurred selling, general and
administrative expenses of $3,516,372, an increase of 15.6% as compared to
$3,041,342 for the same period ended March 31, 2009.
Our
general and administrative expenses increased 419.3% as compared to the same
period 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.
For the three and nine months ended March 31, 2009, no bad debt allowance was
provided, because the total amount overdue by 30 days (aged more than 90 days)
was not material. As of June 30, 2009, we saw some increase in the overdue
amount and to be prudent, $176,803 was provided as allowance for doubtful
accounts, about 5% of the total accounts receivable balance as of June 30, 2009.
As of December 31, 2009, we further accrued $99,901 allowance for the increase
in accounts receivable balances. The bad debt allowance balance was $276,704 as
of December 31, 2009 and continued to be around 5% of the total accounts
receivable balance. Despite most of our accounts receivable balances being
current (within 60 days), we have seen an increase in the percentage of balance
aged more than 90 days. The majority of the increase was due from parties, to
whom we also owed agency fees. We are trying to reach agreements with those
parties to offset the balances. Expect for this amount, we have provided full
allowance for the remainder. For the three months ended March 31, 2010, the
additional allowance provided was $411,196 and $511,097 for the nine months
ended March 31, 2010. The balance of bad debt allowance was $687,900,
representing 13% of the total accounts receivable balance as of March 31, 2010.
The Company was founded not long ago and had 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 although we have never had any actual bad debt losses so
far.
We
incurred selling expenses of $3,030,093 for the three months ended March 31,
2010, an increase of 2.8% as compared to $2,947,694 for the three months ended
March 31, 2009. Of all the selling expenses, store rent in the amount of
$1,306,098 constituted 43.1% and increased 4.0% compared to the same period last
year due to increase in corporate store sales. Agency fees constituted 26.4% of
total selling expenses for the period and increased 39.9% when compared to the
same period last year. The increase was mainly due to the increase in sales. In
addition, starting first quarter of FY2010, the agency fee the Company paid will
cover the store staff salary in the region, which also contributed to the
increase in agency fees. The arrangement shifts the management responsibility of
the store staff to the local agents, who will hire and train the store staff and
set up appropriate incentive plans on a performance basis for them. As a result,
salaries and benefits, which constituted 13.1% of total selling expenses for the
period, decreased 24.1% as compared to the same period in FY2009. Other selling
expenses constituted 17.5% of total selling expenses, of which $226,953 was
spent on store promotion and $210,429 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.
24
Other
Expenses
We had
the same interest-bearing loans for the three and nine months ended March 31,
2010 and 2009, therefore, interest expense for the three and nine months ended
March 31, 2010 amounted to $30,861 and $93,009 as compared to $31,008 and
$93,016 for the same periods in FY2009.
Provision
for Income Taxes
The
Company did not have any provision for income taxes for the three months and
nine months ended March 31, 2010 due to the net operating loss carry forward,
for which the Company has set up 100% valuation allowance, because it is more
likely than not that some portion of the deferred tax asset will not be
realized.
Net Income /
Loss
We had
net income of $816,002 and net loss of $92,745 for the three and nine
months ended March 31, 2010 as compared to net loss of $1,127,166 and $757,606
for the three and nine months ended March 31, 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. Besides, as we cover most of our target regions, future increase in
regional agents’ fees will start to align with sales increase.
Comparison
of Years Ended June 30, 2009 and 2008
In the
fiscal year of 2009, we continued to focus on implementing our strategy of
building a design and marketing workforce, and an independent distributor and
retail store sales network to design, develop market and distribute Baby Fox
brands product line. We had 180 stores open as of June 30, 2009 including 127
corporate stores and 53 non-corporate stores, as compared to 153 stores as of
June 30, 2008, of which 106 are corporate stores and 47 non-corporate. During
the fiscal year of 2009, we opened 50 new corporate stores and closed 29
corporate stores. We also opened 23 new non-corporate stores and closed 17
non-corporate stores. We closed 7 corporate stores and 7 non-corporate stores
during 2008. The reason for more stores being closed during fiscal 2009 is,
after rapid store growth during the first two years in business, we formally
adopted the Class A and B stores system 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 mall operator expires, we will evaluate
again and if a Class B store’s sales performance still doesn’t improve, we will
close the store instead of renewing the lease. During fiscal 2009, many of our
leases with malls expired and after evaluations, we decided not to renew leases
for some of the Class B stores that kept missing expected sales performance. We
will continue to employ the Class A & B store system in future and keep
monitoring individual store performance for downgrading or closure decision in
order to improve our overall store sales performance.
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 year ended June 30, 2009
as compared to the year ended June 30, 2008, the Company generated revenues of
$24,272,432 and $15,055,727, respectively, reflecting an increase of
61.2%, of which approximately 51.5% is attributable to increased sales,
with the rest being due to the exchange rate effect of appreciating RMB against
USD. Excluding currency rate effect, sales at corporate stores increased 43.6%
and sales to non-corporate stores increased 130.9% as compared to the year ended
June 30, 2008. The increase in sales revenue is due to increased sales at
existing stores as well as new stores being opened during this period. For the
year ended June 30, 2009, sales at corporate stores contributed 86.2% of total
sales, while sales to non-corporate stores contributed 13.8%, for the same
period last year sales at corporate and non-corporate stores contributed 91.0%
and 9.0% of total sales, respectively.
The
following table shows increase in our sales at existing stores, increase in
sales due to stores opened during the year ended June 30, 2009, and the effect
of change in rate used for the currency conversion in 2009 and
2008.
|
Total Sales
|
Corporate
Stores
|
Non-Corporate
Stores
|
|||||||||
Increased
sales at existing stores
|
$ | 1,359,543 | $ | 26,902 | $ | 1,332,641 | ||||||
Sales
at new stores opened in FY2009
|
6,893,832 | 6,332,243 | 561,589 | |||||||||
Effect
of currency conversion
|
963,330 | 876,306 | 87,024 | |||||||||
Total
increase in sales
|
$ | 9,216,705 | $ | 7,235,451 | $ | 1,981,254 |
25
Comparable Store
Sales The
percentage change in comparable store sales by brand and region and for total
Company for the six months ended December 31, 2009 as compared to the same
period in 2008 are as follows:
Change in Average Store Sales
|
||||
Corporate
stores
|
(30 | )% | ||
Non-corporate
stores
|
126 | % |
A store
is included in comparable store sales (“Comp”) when it has been open for at
least twelve months and the square footage has not materially changed within the
period. 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 period sales.
A store
is considered non-comparable (“Non-comp”) when it has been open for less than
twelve months or it has changed its square footage materially within the
period.
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:
FY2009
|
FY2008
|
|||||||
Sales
per average square foot (1)
|
$ | 123 | $ | 97 |
(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
Cost of Goods
Sold. Cost of goods sold was $17,372,064 for the year ended June 30,
2009 as compared to $10,048,681 for the year ended June 30, 2008, an increase of
72.9%, of which approximately 10.4% is due to exchange rate effect. Excluding
exchange rate effect, cost of goods sold at corporate stores increased 56.7% and
cost of goods sold to non-corporate stores increased 140.0% as compared to the
year ended June 30, 2008. The increases in cost of goods sold are because of
increased sales both at the existing corporate and non-corporate stores and due
to more stores being opened during this period as well as increased inventory
markdown during this period.
Gross
Profit. Our gross profit is equal to the difference between our sales
revenue and cost of goods sold. Gross profit was $6,900,368 for the year ended
June 30, 2009 as compared to $5,007,046 for the year ended June 30, 2008,
representing gross margin of approximately 28.4% and 33.3%, respectively. The
37.8% increase in gross profit is due to increased sales, contributing 29.5%,
with the rest being due to appreciating RMB against USD. The gross profits
increased less than revenue increase in percentage term as compared to last
period because of lower gross margin for current period. Our gross margins at
both corporate and non-corporate stores decreased from last period for 6.2% and
2.0%, respectively. In fiscal year 2009, we took significant markdown on our
inventory products, especially for ’07 and ’08 seasons, totaling approximately
49% of inventory cost, while in fiscal 2008 this percentage stood at 10%. Fiscal
2007 and 2008 are the first two years since our business’ inception and we
experienced rapid growth in both sales and inventory buildup. We don’t expect
such significant markdown of inventory will continue into future as we better
manage our inventory level through more experiences and grow stores in a
measured manner, respond to fashion trends more quickly and employ the Class A
and B store system to better match price and product demand by different target
market segments.
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. The company
incurred selling, general and administrative expenses of $11,258,984 for the
year ended June 30, 2009, an increase of 74.8% (64.2% after excluding exchange
rate effect), as compared to $6,442,799 for the year ended June 30, 2008. While
our general and administrative expenses decreased 16.5% as compared to the same
period last year because of consulting fee paid in FY08 for OTC.BB listing, we
incurred selling expenses of $10,839,079 for the year ended June 30, 2009, an
increase of 82.5% (71.5% after excluding exchange rate effect), as compared to
$5,940,035 for the year ended June 30, 2008. Of all the selling expenses, store
rent in the amount of $4,496,528 constituted 41.5% and increased 63.2% compared
to the same period last year, which is in line with our sales increase. The
increase is primarily because of more stores being open this period and many of
our stores’ rent based on percentage of sales. We expect the store rent will
continue to increase as our sales revenue increases. Salaries and benefits,
constituting 16.8% of total selling expenses for the period, increased 70.0% as
compared to the same period last year. Many of our store staff have incentive
compensation based on sales and we increased sales and had more stores open this
period. Other selling expenses totaling $2,144,589 constituted 19.8% of total
selling expenses and increased 62.4% from the same period last year, of which
$457,080 and $302,404 were spent on new store opening / build-out and existing
stores’ maintenance / decoration, respectively. The rest of other selling
expenses included utilities, phone, supplies and mall maintenance charges for
opened stores. We expect such expense will continue to increase as we open more
corporate stores in future.
26
Agency
fees constituted 18.9% of total selling expenses for the period and increased
198.4% when compared to the same period last year. As we expanded to more
regions, we contracted more local expertise as our regional agents and their
compensation are based on percentage of sales in the region, averaging $170,000
per month for the twelve months ended June 30, 2009. For the same period last
year, we were in the exploration stage of the agency mechanism of selling and
marketing and only incurred $686,685 in agency fee, 11.6% of total selling
expenses for the period. As we have contracted sales agents that cover most of
our target regions, future increase in such expense will mostly come from
commission due to increased sales in each region, i.e. will be more in line with
sales increase. The aforementioned four accounts constituted over 96.9% of our
total selling expenses for current period and accounted for most of the increase
in selling expenses from the same period last year.
Other Income
(Expenses). Interest expense for the year ended June 30, 2009 increased
to $124,013 from $23,682 for the year ended June 30, 2008 as a result of two
loans entered into in the second half of 2008.
Provision for
Income Taxes. Provision for income taxes amounted to zero
for periods ended June 30, 2009 and 2008 because we incurred net loss for
both periods.
Net Loss.
We had net loss of $4,482,629 for the year ended June 30, 2009 as compared
to net loss of $1,459,435 for the year ended June 30, 2008, an increase of
207%. The increase in net loss is primarily attributable to the significant
inventory markdown we took in this period on products of ’07 and ’08 seasons
totaling 49% of our inventory cost, higher selling expenses especially regional
agent fees and increase of interest expenses. For the reasons, our net margin
decreased from -9.7% for the period ended June 30, 2008 to -18.5% for the
period ended June 30, 2009. We expect our net margin will improve as we
better manage our inventory level through more experiences and grow stores in a
more measured manner, and as we cover most of our target regions so future
increase in regional agents’ fees will be commensurate with sales increase.
However, discount and clearance sales we may offer from time to time due to
various external and internal factors such as market demand, fashion trend,
design out of season could have a detrimental effect on our margin.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $256,797 and negative
working capital of $6,137,355. The following table provides detailed information
about our net cash flows for financial statement periods presented in this Form
S-1:
Cash
Flow
|
Nine Months Ended
|
Year Ended
|
||||||||||||||
March
31,
|
June 30,
|
|||||||||||||||
(unaudited)
|
||||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Net
cash provided by (used in) operating activities
|
$ | (787,106 | ) | $ | 223,494 | $ | 303,253 | $ | (1,152,131 | ) | ||||||
Net
cash used in investing activities
|
(10,085 | ) | (26,393 | ) | (26,828 | ) | (837,883 | ) | ||||||||
Net
cash provided by (used in) financing activities
|
741,629 | (76,673 | ) | (74,502 | ) | 1,825,199 | ||||||||||
Effect
of foreign currency translation on cash and cash
equivalents
|
(38 | ) | (126 | ) | 334 | (46,924 | ) | |||||||||
Net
increase (decrease) in cash and cash equivalent
|
$ | (55,600 | ) | $ | 120,302 | $ | 202,257 | $ | (211,739 | ) |
Principal
demands for liquidity are for expansion and opening new stores, working capital
and general corporate purposes.
27
Comparison
of Nine Months Ended March 31, 2010 and 2009
Net Cash Provided
by (used in) Operating Activities. Net cash used in operating activities
totaled $787,106 for the nine months ended March 31, 2010 as compared to net
cash provided by operating activities of $223,494 for the nine months ended
March 31, 2009. The decrease in net cash from operating activities was primarily
due to the settlement of accounts payable to third party suppliers as the
Company shifted all the purchases from the related party supplier. Besides, due
to better inventory management and control of store expansion, total purchase
declined in the first three months of 2010, resulting in slower growth of
accounts payable to affiliated company. Impact of decline of accounts payable
balances on the operating cash flow was partially offset by reduction in net
loss and inventory balance as a result of our efforts to clear 2007 and 2008
inventories. We expect our cash flow from operating activities to improve as we
continue to improve inventory management.
Our
account receivable increased from $3,261,343 at June 30, 2009 to $4,563,722 at
March 31, 2010 mainly due to business expansion and sales increase, which
exerted the impact in two ways. On the one hand, sales increase contributed to
the larger amount outstanding accounts receivable to be collected from shopping
malls, with which we generally have established 60-day collection terms. On the
other hand, sales increase led to additional agency fees payable to agents,
which is accrued based on store sales. Some of those agents are, at the same
time, shopping mall operators that owe us the retail sales proceeds. As of March
31, 2010, we have identified over $1 million accounts receivable that can be
offset against the agent fees payable. We are trying to reach agreements with
those counterparties for this matter. In view of the rapid expansion of our
business since inception, the Company has put in place a very rigorous view
process of outstanding accounts receivable balances. We believe that we have
been very prudent and have provided sufficient allowance for ageing accounts
receivable balances although we have never had any actual bad debt losses so
far.
Net Cash Used in
Investing Activities. Net cash used in investing activities was
$10,085 for the nine months ended March 31, 2010 and $26,393 for the same period
last year.
Net Cash Provided
by (used in) Financing Activities. Net cash provided by financing
activities totaled $741,629 for the nine months
ended March 31, 2010, mainly representing the long-term loan of RMB5,000,000 we
borrowed on July 22, 2009. The loan is due on January 31, 2011. During the nine
months ended March 31, 2009, net cash used in financing activities to pay down
some short-term loan totaled $76,673.
Cash. As of March 31, 2010,
we had cash of $256,797, as compared to $230,443 as of March 31, 2009. Cash used
in operating activities increased significantly as compared to the same period
last year, which was partially offset by cash provided by financing activities
during current period, resulting in net total cash outflow for the nine months
ended March 31, 2010 comparing to net total cash inflow for the same period last
year.
Comparison
of Years Ended June 30, 2009 and 2008
Net Cash Provided
by (used in) Operating Activities. Net cash provided by operating
activities totaled $303,253 for the year ended June 30, 2009 as compared to net
cash used in operating activities of $1,152,131 for the year ended June 30,
2008. The increase in net cash from operating activities was primarily due to
decreases in ending inventory and advance to vendors, and increases in accrued
expenses as well as payables to affiliated company as compare to the same period
last year, partially offset by increase in accounts receivable and changes in
accounts payable as well as decrease in deposit payable. Specifically, for the
year ended June 30, 2009, we took significant non-cash markdown of our
inventory, especially for ’07 and ’08 season products, totaling $5,524,159 or
approximately 49% of ending inventory value, while in fiscal 2008 this
percentage was 10%. Advance to vendors decreased because we have been building
good business relationship with our suppliers since inception and they now
require less advance payment for our purchases. Increase in accrued expenses
were mostly due to agency fees and interests accrued but not yet paid, we had
not formally adopted the agency system of marketing and selling for the same
period last year and we entered into two loans in the second half of 2008.
Payables to affiliated company Changzhou CTS increased significantly in 2009
because we have better payment terms with Changzhou CTS and we purchased
approximately 78% of our merchandise from Changzhou CTS this year, this
percentage stood at 46% for the same period last year. For the same reason, our
purchases and change in accounts payables to other vendors decreased for current
period. Balance of accounts receivable increased at end of current period as
compared to fiscal year ended June 30, 2008, this is in line with our increased
sales.
28
Customer
deposits and advances, which had a balance of $1,518,981 at end of the period
($1,890,937 as of June 30, 2008), consists of customer advances and deposits
payable. Customer advances, which had a balance of $594,262 at end of the
period, is the minimum balance a non-corporate store must maintain in our
account at all time before we accept any orders from him. As our business
relationship with non-corporate store owners evolve and customers build credit
with us, this minimum balance requirement will be decreased or even eliminated.
Deposits payable, with a balance of $924,719 on June 30, 2009, consist of two
parts: security deposit with a balance of $791,380 which a non-corporate store
deposits with us when signed up with Baby Fox and will be returned to the store
owner when the contract expires, and purchase deposit with a balance of $133,339
which a non-corporate store makes to us when placing a purchase order and will
be applied to total purchase price when the order is executed. Increase of
security deposit depends on the pace we sign up new non-corporate stores (net)
and we now require less deposit than before. Purchase deposit will depend on
orders non-corporate stores place with us each reporting period and how
fast the orders will be executed thus can vary from period to period. The trend
will be decreasing purchase deposit required from same non-corporate stores as
they establish credit with us.
We expect
our cash flow from operating activities to improve as we exercise better
management of inventories based on increasing experience and strengthen our
efforts to negotiate better terms with our suppliers and customers.
Net Cash Used in
Investing Activities. Net cash used in investing activities was
$26,828 for the
year ended June 30, 2009 and $837,883 for the year ended June 30,
2008.
Net Cash Provided
by (Used in) Financing Activities. Net cash used in financing activities
totaled $74,502 for
the year ended June 30, 2009. The cash was used to pay down some related party
loans, the balance of which stood at $23,490 as of June 30, 2009. During the
period ended June 30, 2008, we borrowed from our shareholders for $894,648 and
entered into a long-term loan with an unrelated party for $831,915.
Cash. As of June 30, 2009,
we had cash of $312,397, as compared to $110,140 as of June 30, 2008. Cash
provided by operating activities increased significantly as compared to the same
period last year, which was partially offset by cash used in investing and
financing activities during current period, resulting in higher ending cash
balance comparing to the same period last year.
As of
March 31, 2010, the Company’s current liabilities exceeded its current assets by
$6,137,355 and the Company’s total liabilities exceeded its total assets by
$6,661,929. The Company generated a net loss for the nine months ended March 31,
2010 and the Company’s cash position on March 31, 2010 was $256,797. 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,
2009.
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. The Company has successfully
established 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 with in 24 months
after production. The Company held a series of large warehouse sales and cleared
the entire 2007 inventory and realized around 66% of the 2008 inventory and
generated around $1 million in cash. Additional warehouse sales scheduled in the
second half of 2010 are expected to generate around $1 million and sales from
Class A and Class B stores are expected to be around $20 million. We believe
that cash generated from the stores and warehouse sales in the next 12 months
will be sufficient to cover inventory purchases and SG&A expenses of around
$17.5 million. In concurrent with the establishment of tiered inventory
digesting structure to increase sales and liquidate the inventory in a timely
fashion, the Company also strives to encourage cash purchase 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 Company’s liquidity
profile. This policy will effectively prevent further deterioration of the
Company’s cash position.
The
Company has successfully amended its loan due in March and extended the term.
The Company is in the process of working with another lender to extend the terms
of the loan due in June of 2010.
29
In
addition, the Company believes it can meet its liquidity requirements for
working capital and general corporate purposes during the 2010 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
As of
March 31, 2010, we had $810,160 in long-term debts. The long-term debts
consisted of the following:
March 31,
2010
|
June 30, 2009
|
|||||||
Amount
borrowed from shareholder, 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, 2010
|
835,006 | 835,050 | ||||||
Amount
borrowed from Changzhou Tianfa, bearing zero interest and due January 31,
2011
|
732,461 | - | ||||||
Subtotal
|
2,377,627 | 1,645,210 | ||||||
Less:
current portion
|
1,567,467 | 835,050 | ||||||
Total
|
$ | 810,160 | $ | 810,160 |
Long-term
debts mature as follows:
Fiscal
year ended June 30,
|
||||
2010
|
$
|
835,006
|
||
2011
|
732,461
|
|||
2013
|
810,160
|
Total
interest expense on loans amounted to $93,009 for the nine months ended March
31, 2010 and $124,013 for the fiscal year ended June 30, 2009.
Obligations
Under Material Contracts
Below
is a table setting forth our contractual obligations as of March 31,
2010:
Payment due in year ended June 30,
|
||||||||||||||||||||
Total
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||
Long term debt obligations
(including current portion)
|
$
|
2,377,627
|
$
|
835,006
|
$
|
732,461
|
$
|
-
|
$
|
810,160
|
||||||||||
Operating
lease obligations
|
976,274
|
345,466
|
608,843
|
8,786
|
13,179
|
|||||||||||||||
Purchase
obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total
|
$
|
3,353,901
|
$
|
1,180,472
|
$
|
1,341,304
|
$
|
8,786
|
$
|
823,339
|
Seasonality
Since we
are in fashion clothing retail industry, store traffic is usually heavier at
calendar year end’s 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.
30
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, its subsidiary Shanghai Baby Fox together
are referred to as the Company.
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 1 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 cycle and return
period we allow for non-corporate stores are relatively long, current reserve
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.
Store Opening
Expenses. Due to
the short initial term of the leases with mall operators and the cancellation
provisions contained in the store leases, the cost of leasehold improvements and
store fixtures 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 Company’s
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.
31
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. Currently this percentage
stands at 49% of ending inventory level 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.
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.
BUSINESS
China’s Economy and its Apparel
Industry
Within
the next three decades, China's population is estimated to increase by
another 260 million. China's current population is approximately 1.3
billion and the UN Population Division estimates that China's population will
increase to 1.5 billion by 2025.
With
the rapid growth of China’s economy and urbanization across the region, consumer
trends and preferences are quickly evolving. Chinese consumers, especially urban
citizens, are purchasing more apparel goods than before. China is undergoing an
astonishing socioeconomic transformation from agriculture to industry and from a
rural society to an urbanized one. The economic benefits are enormous as some
400 million people have left the ranks of the impoverished since the early
1980s. China’s GDP reached 4,326 billion dollars or 6.98% of the world economy,
according to the World Bank in the first quarter of 2010 which represented a
growth rate of 11.9%, while the annual GDP growth rate is 8.58% for 2009 and
9.13% in 2008. The World Bank reports that China’s GDP grew 6.2% in first
quarter of 2009, 7.9% in the second quarter of 2009 followed by 9.1%% in the
third quarter and 10.7% for the last quarter of 2009. This quarterly rise in the
GDP growth rate indicated the bottoming out of the Chinese economy following the
global financial crisis. (Source: http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY#ixzz0qPX3q6Cx)
Since we
sell our products exclusively in the Chinese domestic market, we do not expect
the downturn in the global economy to have significant effects on our
business.
Following
the announcement of the 4 trillion Yuan (approximately $588 billion in USD)
stimulus plan in November 2008, the Chinese government has published and is
considering a series of packages to boost the economy, especially, the support
plans for ten key industries, that have been heavily hurt by the global
recession, including Auto & Steel, textile, equipment manufacturing,
non-ferrous metal, petrochemical, shipbuilding, electronics & Information,
logistics and light industries. These concentrated policy initiatives aim at
boosting investment and domestic consumption and help China’s economy to recover
faster from the current global economic crisis. Those
policies have played a critical role to mitigate the impact of a global
recession and quickly turned around China’s economy.
China
embraces one of the most promising apparel markets in the world. According to Li
& Fung Research Center’s Report, China’s apparel market is listed after
Brazil as the second-most attractive among emerging economies. Li & Fung
Research Center’s research report “Latest Developments of China’s Apparel
Market,” (Issue Number 15 in December 2009), shows that China’s apparel market
had experienced significant growth over the past years, though growth pace slows
down a bit after the global financial crisis. According to the National Bureau
of Statistics (NBS), the total retail value of clothing, shoes, hats and
textiles by wholesale and retail enterprises above designated size in 2008 grew nominally by
25.9% year-on-year to achieve 377.55 billon RMB Yuan compared with the growth of
28.7% to achieve 302.41 billion Yuan (approximately 44.4 billion USD). In the
first half of 2009, the nominal retail value growth slowed to 18.0% and further
down to 16.9% for the first three quarters same year. Declining consumer
confidence over the past year has contributed to the slower growth - hit by the
global financial crisis. Facing poorer consumption sentiment, retailers have
tried to get the money out of consumers’ pocket by offering deeper discounts.
Since the end of 2008, retailers have been launching aggressive promotion
campaigns besides the regular and seasonal promotions; discount was deeper than
in the past, even for newly launched products. Discount-driven promotions and
lower average ticket consumption are casting pressure on margins. Nonetheless,
apparel retail sales was expected to regain its momentum in the second half of
2009, as consumer confidence was anticipated to gradually improve in October
2009. Most of the sub-sectors witnessed negative growth rate in 2008, except a
few such as ladies’ wear with year-on-year increase of 13.03% or overall 405.6
Million pieces. In the first half of 2009, growth rate of ladies’ wear was 5.58%
with overall 212.6 Million pieces.
32
The
Company
Baby Fox
International, Inc. is a Nevada corporation organized on August 13, 2007, and
its wholly owned China-based subsidiary 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 Shanghai Foreign Economic
Relation & Trade Commission. This acquisition was deemed between entities
under common control because at the time of the acquisition our controlling
shareholder Mr, Hitoshi Yoshida was married to Ms. Fengling Wang who was the
sole shareholder of Shanghai Baby Fox.
On
January 18, 2008, we issued a total of 37,957,487 shares of our common
stock, $.001 par value per share to Baby Fox Limited, a British Virgin Islands
entity controlled by Hitoshi Yoshida, our former officer and director, as
founder’s shares. Hitoshi Yoshida is the sole shareholder of Baby Fox
Limited. On May 6, 2008, Hitoshi Yoshida entered into option agreements with
Jieping Huang, Linyin Wang, and Jieming Huang to purchase all of the shares of
Baby Fox Limited until December 31, 2018. Mr. Yoshida is the owner of
10,000 shares of the common stock of Baby Fox Limited which represents 100% of
the issued and outstanding common stock. Subsequently, on June 17, 2010, Mr.
Yoshida entered into rescission agreements with Jieming Huang, Jieping Huang,
and Linyin Wang rescinding the stock option agreements. No options had been
exercised by Jieming Huang, Jieping Huang, or Linyin Wang as of the effective
date of the rescission agreements.
We are
a growing specialty retailer, developer, and designer of fashionable,
value-priced women’s apparel and accessories. Our products target women aged
between 20 and 40. The “Baby Fox style” appeals to a modern, sexy,
sophisticated, body-conscious woman who takes pride in her appearance. Shanghai
Baby Fox was founded by our lead designer and board director, Fengling Wang, in
March of 2006 and launched its first mall based retail store in July of 2006.
Since opening up the first store, we have expanded our retail store. As of
March 31, 2010, we have expanded to a total of 170 mall based stores (129
corporate, 41 non-corporate) located across more than 30 major cities
within China, and is continuing its expansion.
We intend
to apply for quoting of our common stock on the OTCBB, which we estimate will
cost around $470,000. The breakdown of such costs is estimated as
following:
Legal
Counsel
|
$
|
100,000
|
||
Auditor
|
$
|
110,000
|
||
Other
consultants
|
$
|
260,000
|
||
Total:
|
$
|
470,000
|
We
estimate that to maintain a listing status it will cost us from $200,000 to
$300,000 annually which will include legal, auditing and CFO salary
expenses.
We
will rely on professional services to carry out this plan, which includes, but
is not limited to, a U.S. law firm with corporate and securities practice, a
PCAOB registered auditor and some consultants. In addition, we also expect to
employ a CFO who is familiar with US generally accepted accounting principles
and the requirements related to public company listing. We already started
searching for such a CFO but as of the date of this registration statement, we
have not located such a CFO. We engaged the Crone Law Group as our legal counsel
and Friedman LLP as our auditor. We filed our initial registration
statement on May 12, 2008, and will use our best efforts to work with our
professional consultants until the registration statement is declared
effective.
33
To be
quoted on the OTCBB, we must engage a market maker to file an application for a
trading symbol on our behalf to the Financial Industry Regulatory Authority
(FINRA). The market maker will create a market for our common stock. This
process can take between three (3) to six (6) months. We have not engaged a
market maker to apply for quoting on the OTC Bulletin Board, but we plan to
engage such a market maker after our registration statement is declared
effective by SEC. Once our stock is quoted on the OTC Bulletin Board
shareholders will have a market to liquidate their equity holdings as
desired.
Competition
Women’s
retail apparel is highly fragmented in China, offering excellent growth
opportunities for well positioned brands. Baby Fox’s brand cache and style puts
us ahead of larger mall stores, and the company views its competition as leading
international brands entering the Chinese market and fast fashion forward
domestic companies. Other specialty retailers currently active in China include
foreign entrants Zara China, ELLE China, Esprit China, as well as domestic
competitors Etam, Only, Elite, Fairy Fair, and Mokuba. The market opportunity is
large and can support several competitors, however we believe our strong
knowledge of local markets, domestic media contacts, and award winning design
experience give the organization significant competitive
advantages.
The
Chinese fashion industry is trending towards shorter product life cycle and
better designs and development. The ability to respond to instantaneous fashion
trends is a key attribute to the success of an apparel industry. Baby Fox
is at the forefront of trends by having the unique ability to launch a garment
from design to production, and finally to distribution in just weeks.
Product flexibility allows us to not become too vested in a single trend or line
of products. Utilizing a fast product cycle will ensure Baby Fox a strong
position in China’s apparel industry.
We view
us as leading international brands entering the Chinese market and fast fashion
forward domestic companies. Other specialty retailers currently active in China
include foreign entrants Zara China, ELLE China, Esprit China, as well as
domestic competitors Etam, Only, Elite, Fairy Fair, and Mokuba. The market
opportunity is large and can support several competitors, however we believe our
strong knowledge of local markets, strong media contacts, and award winning
design experience give the organization significant competitive
advantages.
Our
business model and strategy is very similar to some of the leading U.S.
specialty retailers, however, we are exclusively focused on serving the needs of
China’s modern and sophisticated women. By utilizing a globally focused design
team and local manufacturers, we quickly adapt to shifting market trends and
fashions. In China, it is a common practice for stores to use multi-level
agents. Conversely, we have adopted a flat management model that mirrors Western
business models. This model accelerates store and customer feedback as our
operations center deals directly with each store. This organizational structure
along with enterprise resource planning (“ERP”) and point-of-sale (“POS”)
systems allow us to maintain optimal inventories, pricing, customer service, and
brand imaging across all stores. We believe our direct point-to-point “one-stop
service” sales model allows us to maintain higher standards than many of its
domestic peers.
Our
business strategy combines several elements to create a merchandise assortment
that appeals to the markets’ high-spending consumers; primarily women age 20 to
40. The principal elements of our business strategy include:
Active
Style & Design Management : Extensive monitoring of
global trends, market research and fast design development (concept to store
floor in weeks)
Active
Inventory Monitoring & Management : Outstanding supply-chain
management, inventory monitoring & sales tracking capabilities
Broad
Merchandise Assortment : Broad assortment allows for “one stop shopping”
for new outfits; promoting mix and match design themes and
accessories
Premium
Brand Image :
Building a differentiated and strong international brand image by using
international models, designs, and stylish and sophisticated merchandise
displays
Value
Offering : High fashion and style at competitive or better prices than
other mall-based specialty retailers
34
Customer
Loyalty & Incentives : Numerous customer loyalty
and rewards programs such as frequent purchaser discounts.
Target
Customers
We have
established our target market as female consumers’ between 18-40 years old. This
draws strong foot traffic and a large base of consumers into our retail
locations. Approximately 60% of our merchandise is geared towards the taste and
fashions favored by women between 20-30 years old. In addition, we seek to
fulfill the need of adolescents aged 18-24 with a more mature mindset, as well
as people between age 30-40 who have a young mindset. About 40% of the products
are designed and developed for these two groups of people. This not only
attracts potential consumers and expands the horizon for profits, but also makes
the brand promotion more flexible by analyzing the different needs of different
psychological age groups.
The bulk
of our frequent buyers are 25-35 year old women with moderate to affluent
economic backgrounds. This age group is mostly comprised of white-collar workers
and career women, who have high sensitivity for fashion, strong consumption
ability and high updating rate per time unit (which means how many clothes they
change during a time unit).
Our
market survey indicated that our targeted customers
have the following income profiles:
Monthly Income Level (US$)
|
as % of Total Customer Base
|
|||
Below
$300
|
8.6 | % | ||
$300
to $600
|
46.2 | % | ||
$600
to $1,200
|
32.7 | % | ||
Above
$1,200
|
12.5 | % | ||
Total
|
100 | % |
China
Laws and Regulations
Under
Chinese laws and regulations, an industry is considered a “key industry” if the
acquisition of the industry by an foreign entity may have an impact on “national
economic security” or result in a transfer of actual control of a domestic
enterprise that owns a well-known trademark or historic Chinese brand name. The
women's apparel industry is not considered as a “key industry” in China.
Accordingly, Chinese laws and regulations do not restrict foreign investment in
China’s women apparel industry.
When we
acquired Shanghai Baby Fox on September 20, 2007, we received the Certificate of
Approval from Shanghai Foreign Economic Relation & Trade Commission and the
approval from the SFAE Shanghai local branch. The approvals gave us the
permission to change our entity status from a domestic enterprise to a WFOE, and
to continue our business in the women apparel industry in China as a WFOE
without being subject to any restrictions.
Business
Strategy
The
elements of Baby Fox's business strategy combine to create a merchandise
assortment that appeals to Chinese women 20-40 years old. Baby Fox provides
stylish fashions at affordable prices, which ultimately distinguish them from
their competitors. The core elements of our business strategy include the
following:
Active Style & Design
Management
Baby Fox
adopts fashion brand management model of “fast in speed to market, less in
quantity, more in design and style”, which keeps us focused on constantly
developing new styles and designs. Baby Fox engages in extensive market research
and analysis, actively monitors global fashion trends, quickly develops new
designs, and works primarily with domestic vendors. All of these components
result in relatively short lead times, with new designs from concept to store
floors in weeks. Close relationships with domestic manufacturers and leading
publications allows for quick production and promotion of trendy
styles.
35
Active Inventory Monitoring
& Management
Our quick
“design to store floor” approach to managing the merchandise mix is helping it
build the Baby Fox brand. Any product in a Baby Fox corporate owned store that
is not sold in two to three weeks is either sent back to our headquarters or
immediately discounted for clearance and popular items are restocked quickly. We
rent a temporary 2,000 square meter space at our headquarters. Three times each
year we conduct special discount sales to public to sell these returned products
at an 80%- 90% discount. Similarly, non-corporate owned stores typically
required to follow similar pricing strategies and inventory policies. This
strategy is successful because of our IT system that supports their responsive
supply-chain management.
Broad Merchandise
Assortment
Baby
Fox’s assortment of apparel and accessories are consistently updated to maintain
style and appeal. Our merchandise includes ready-to-wear apparel such as knit
and woven tops, dresses, shorts, pants and skirts, as well as accessories such
as shoes, handbags and jewelry. This allows customers to create ensembles that
are complemented by our color coordinated and fashion-forward accessory items.
We consistently introduce new fashion merchandise into the stores and regularly
update merchandise displays.
Premium Brand
Image
Baby Fox
is building a focused and differentiated brand image based on fashion nobility,
attitude, value pricing and quality. This image is consistently communicated
throughout our business; including merchandise assortments, in-store visual
merchandising and marketing materials. For example, black and wine-red carpet,
trendy clothes and decoration are sharp contrast to the ordinary storefronts of
competing retailers. Baby Fox’s stores currently make strong use of the four
colors: black, gold, red and green which are passionate, free and exceptional in
elevating each store’s image and perceived level of sophistication. Baby Fox
attracts fashionable women into its stores through its unique design, color
scheme, and fashionable displays. The brand is largely geared towards
metropolitan women who are in pursuit of uniquely trendy designs that are rich
in individuality.
Value
Offering
Baby Fox
focuses on offering highly fashionable merchandise at prices that are
competitive, or better than other mall-based specialty retailers. Baby Fox is
able to create a perception of value among a expanding customer base by
utilizing a variety of pricing techniques such as “buy two get one free” and
“buy one get one free”. Rather than simply discounting merchandise Baby Fox’s
sales strategy is to consistently bring in new fashions at strong price points,
then discount them through offers that encourage and reward larger quantity
purchases.
Customer Loyalty &
Rewards
Baby Fox
is also implementing many customer loyalty and rewards programs such as frequent
purchaser discounts.
Design
& Quality Control
Baby Fox
uses computer aided design systems to develop patterns and production guidelines
as part of its product development process. The design team tests sample
garments before production to ensure patterns are accurate, stylish, and
desirable. Baby Fox and its manufacturing partners adhere to strict quality
control programs. Garments that do not pass inspection are immediately returned
to manufacturers for rework. All of our merchandise is marketed under the Baby
Fox brand name. Baby Fox designs and develops its merchandise in-house, which is
manufactured to our specifications. The majority of Baby Fox’s merchandise is
received, inspected, processed, warehoused and distributed through our
distribution center based in the in the heart of the Changzhou fashion district
in the Jiangsu Province.
Operations
& Distributions Center
We lease
a five story 30,139 square ft. distribution center, storage facilities, and
operations center in Changzhou fashion district in the Jiangsu Province from its
strategic partner and related company Changzhou CTS Fashion Co., Ltd. “CTS”.
With its headquarters and distribution center in the center of the Jiangsu
fashion district and in close proximity to its manufacturers, Baby Fox is able
to continuously monitor quality control and easily collaborate with its key
suppliers.
Baby Fox
has a close strategic relationship with its primary manufacturer CTS which was
originally co-founded by Baby Fox’s lead designer. CTS maintains a number of
large industrial parks and nine large clothing manufacturing facilities in the
Jiangsu Province. CTS’s nine production bases that produce coats, jeans wear,
furs, jackets, coats, skirts, sweaters and other products specific to Baby Fox’s
design specifications. Our strategic relationship with CTS allows Baby Fox
flexibility in bringing its ever evolving range of designs and diversified
styles quickly to the market.
36
Marketing
& Branding
Our
advertising and direct marketing initiatives have been developed to elevate
brand awareness, increase customer acquisition and retention, and support key
merchandising strategies. Our advertising promotes brand awareness and supports
numerous product line expansion opportunities. For fiscal year 2009, we plan to
increase our marketing expenditures. A large portion of these expenditures will
support the launch of our new. We plan to build brand awareness through targeted
advertising campaigns that focus specifically on our core
customers.
From its
inception, Baby Fox has been positioned in China as an international brand with
Italian roots as the brand was originally trademarked in Italy. Foreign apparel
brands from France, Italy, U.S, Japan, and the U.K have dominated the high-end
fashion scene in China. As a foreign owned U.S. retailer with operations in
China, Baby Fox has unique branding and operating advantages.
We have
been able to build a strong international image in China by using multi-cultural
and international models. We have been able to generate an enormous amount of
free publicity through intelligent brand positioning and leveraging key media
contacts. Baby Fox has ties to the fashion industry and leading women’s fashion
magazines. Our latest lines are often featured in articles which generate
substantial store traffic, and prove to be much more effective than traditional
purchased advertising campaigns.
In
addition to advertising we also rely on our agency marketing system to market
our brand. We formally adopted agency marketing system since 2008. Regional
agent is individual or trading company who we contract 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 our
approval), setting up our corporate stores in that area, hiring store staff, and
managing all stores’ day to day operation in the area. The agent can not 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, sales agent is paid a commission called agency fee equal to 13% of the
stores’ sales revenue. As our regional agent is selected local expertise in
sales and marketing in the area, such a 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.
Product
Management
Overview
Baby Fox
consistently maintains and strengthens its brand recognition by offering all of
our modern and classical merchandise under its proprietary Baby Fox label. Our
product offering includes a range of fashion separates, tops, dresses, and
accessories for career, evening, and casual style. Baby Fox designs its clothes
and colors with the goal of allowing items to be mixed and matched. This allows
customers the interchangeability to present different styles for various
occasions.
Design
Approach
Baby Fox
continuously updates its fashions and clothing designs to stay in sync with the
latest fashion designs and trends from around the world. Our design concepts
follow the market trend in Italy, France, Japan and China. This prevents any one
business from dominating a specific design or style. This is what Baby Fox calls
its “three-in-one” design concept as they use multiple designers to develop
current fashions that can be mixed and matched. As a result of the joint effort,
we are able to choose more than 1,500 from about 3,000 pieces of new designs
every year to put into the stores.
Existing
Product Lines
Every
season Baby Fox strives to bring its customers unlimited surprises by offering
fashionable evening wear, business suits, casual wear and accessories. Baby Fox
offers its customers the latest fashions with exceptionally low prices. Baby
Fox’s designs break free from traditional styles and bring out youth and
passion. We are committed on providing exciting fashion options and constantly
updating its product lines.
37
Casual
Wear
One of
Baby Fox’s most popular design categories is “Stylish Casual”, which is
appropriate for Fridays in the office or the weekends. As people’s life styles
change, the market for casual wear has great development potential. The market
demand for casual wear is also increasing every year.
Evening
Wear
Baby Fox
designs elegant suits and dresses appropriate for elegant yet fashionable
special occasions such as dinner parties, banquets, weddings and other important
occasions.
Business
Wear
Our
business wear category is appropriate for formal occasions such as negotiations,
business talks, or meeting customers in office. As working environments and the
nature of business changes, plain, stiff business suits can no longer fulfill
consumers’ needs. More people will choose appropriate but also comfortable and
natural clothes in their daily work. Some of the domestic business suits brands
have started to change positioning moving towards business casual
style.
Accessories
Accessories
consist primarily of jewelry, belts and handbags intended to complement our
sportswear and dress selections.
The most
effective strategy for penetrating the Chinese market thus far has been to
position oneself at the mid-high to premium segments as they enter the market.
As a foreign retailer, Baby Fox has the unique advantage to enter a market that
has a high desire for high quality products at affordable prices. Based on our
initial success and management’s assessment of future opportunities, Baby Fox is
positioned for continued growth over the next several years.
Inventory
Monitoring & Management
Merchandise
is received, inspected, processed, warehoused and distributed through our
distribution center based in Jiangsu Province. Our distribution center located
in Changzhou city in Jiangsu province is segregated both physically and
operationally from our related party Changzhou CTS which is our major supplier.
We rent separate warehouse and office from Changzhou CTS and have our own
personnel, from management to staff, to manage and operate the distribution
center. Any product in a Baby Fox corporate owned store that is not sold in more
than two or three weeks is sent back to our distribution center or
immediately discounted for clearance. Similarly, non-corporate owned stores are
encouraged to follow similar pricing strategies and inventory procedures. This
strategy succeeds because of our outstanding supply-chain management and the
application of point of sale monitoring systems. Management responds quickly to
what’s occurring in each region, and more importantly at each store. The
merchandise planning and allocation team works closely with both corporate and
non-corporate store personnel to meet the requirements of individual stores. As
of March 31, 2010, approximately 52% of our total inventory is at our
distribution center compared to our store locations and, for inventory at our
distribution center; approximately 18% are returned
merchandise.
38
Current
Retail Locations
Overview
Baby Fox
retail stores are located predominantly in well-positioned mall locations within
spaces that average approximately 1,000 square feet. The stores are designed to
create an environment that accentuates Baby Fox’s fashions, breadth, and value
of merchandise selection.
Both
corporate owned stores and non-corporate owned stores use bold, exaggerated
colors, such as eye-catching gold, noble black or passionate red. The use of
settings and decorations create a sense of nobility. The key is to achieve the
unity and balance between color and material. Our merchandise planning and
allocation team works closely with both corporate and non-corporate store
personnel to meet the requirements of individual stores for appropriate
merchandise in sufficient quantities. This team is also responsible for managing
inventory levels, allocating merchandise to stores, and replenishing
inventory.
Our
management team monitors and tracks the store sales via our Enterprise Resource
Planning (ERP) computer system store by store on both daily and monthly basis.
In addition, the ERP system can also sort our sales and inventory
geographically, city by city and province by province, on both a monthly and
yearly base. A typical sales metric is included in Exhibit 99.4 attached hereto,
which can track the monthly sales by store and by per square meter.
Baby
Fox Store Footprint – As of March 31, 2010
Since
the launch of its first retail mall store in July of 2006, the Baby Fox has been
a success story in China’s fashion industry. The brand has gained exposure in
leading women’s magazines. We opened 170 store locations as of March 31, 2010,
of which 129 are corporate stores and 41 non corporate
stores.
39
Corporate
Owned Stores
As of
March 31, 2010, Baby Fox had 129 corporate stores in China. We also
test new markets with seasonal stores in additional locations during peak
apparel shopping months. Baby Fox seeks to instill enthusiasm and dedication in
its corporate owned store management personnel and sales associates through
incentive programs and regular communication with the stores. Sales associates
receive commissions on sales with a guaranteed minimum hourly compensation.
Store managers receive base compensation plus incentive compensation based on
sales and inventory control.
Non-Corporate
Stores
As of
March 31, 2010, we had 41 non-corporate stores in China. Currently we are able
to use our point-of-sale systems to track non-corporate owned
sales.
Typically,
all licensed non-corporate retail stores must only carry the Baby Fox brand
merchandise, the store floor must be designed according to corporate standards,
and all employees must represent the Baby Fox brand image via their customer
service attitude, attire, and other relevant procedures. This is a separate
business entity from us. With respect to non-corporate stores, Baby Fox
maintains authority and approval rights with respect to store locations, store
designs, license renewals, merchandise orders, and the right to conduct random
store audits and monitoring.
Upon
agreeing to open a non-corporate Baby Fox store the licensee must open the store
within a limited time frame, otherwise the contract will terminate immediately.
The licensee must agree to comply with our policies with non corporate stores,
including, but not limited to, having the same computer management software,
using our set prices, maintaining a set number of employees, and hiring
employees with the required qualifications. Without our permission, the
licensee cannot transfer the license to a third party or sell products of other
brand names in the licensed store. If the licensee violates any of our
regulations, it shall be fined, and we reserve the right to cancel the contract
which can also be terminated if necessary.
The terms
of the license with non-corporate store are normally of two years, which is
renewable 60 days prior to expiration. Non-corporate store owners pay 30% down
payment to order our products, and the balance of 70% anytime before we ship our
products to them. We do not collect any license fee from non-corporate store
owners. Upon signing the contract, we charge the non-corporate store a one-time
non-refundable alliance fee of RMB 20,000 (approximately US$2,918) for using our
brand name. The fee is accounted as revenue from non-corporate
stores.
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, the delivery is completed, and no other significant
obligations of us exist and collectability is reasonably
assured. Non-corporate stores have the right to return unsold merchandise
for up to sixty days after receipt of the merchandise for
exchange. Reserves are established to reflect anticipated losses resulting
from the return of 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.
Growth
Plan
Overview
Based
on our initial success and the assessment of the future opportunity, we are
positioned for continued growth over the next several years. We plan to grow
retail store locations to over 200 stores over the next few years; but due to a
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. Corporate stores will
primarily be opened in major metropolitan areas and non-corporate or “licensed”
stores will be established in suburban communities.
Specialty
stores are popular in China because they have good control over operations,
store decorations, and the products and services offered. Furthermore, smaller
focused stores can well adapt to China’s growing demand for “fast fashion” and
changing fashion trends (i.e. shorter product lifecycles and shifting demand for
designs). Baby Fox is currently focusing on expanding in larger cities via
corporate owned stores; smaller cities are ideal targets for non-corporate or
“licensed” stores. There is huge market potential for women's apparel in less
developed cities in China. Owner operated stores in less developed cities are
ideal as local managers have a good understanding of malls and locations with
high foot traffic patterns and are highly incentivized to capture still less
tapped market of emerging cities while also benefiting from the lower operating
costs of these areas.
40
While
Baby Fox could scale non-corporate stores with minimal capital, management’s
preference is to expand via corporate owned stores in major cities and use
licensed stores in less metropolitan areas. The economics of this strategy help
us better manage overall cash flow and inventory levels and scale the business
in a measured manner. We have kept abundant inventory to support its store
expansion plan.
Corporate
Owned Stores
Pros:
|
Cons:
|
|
Gross
margins figures per store are substantially better
|
Higher
working capital and administrative costs due to inventory, store set up,
and operating costs
|
|
Greater
flexibility in experimenting with displays, promotions, and new marketing
concepts
|
Initial
store opening costs, fixtures, etc. are absorbed by
us.
|
Non-Corporate
Owned Stores
Pros:
|
Cons:
|
|
No
working capital required, instantly profitable (inventory and fixture
purchases are made by independent owners / licensees)
|
Careful
screening and consistent monitoring of stores are needed to insure Baby
Fox standards and policies are being adhered to
properly
|
|
Minimal
risk with respect to expanding in less urban markets and improves
inventory turnover
|
||
Allows
for growth with minimal investment capital
|
Additional
Growth Initiatives
In
addition to expanding store locations, Baby Fox is developing several
initiatives to further accelerate sales, increase margins, and widen its
customer base throughout mainland China. These initiatives include discount
outlets, and a line of Baby Fox Active Sport stores.
Discount
Outlets
A
discount outlet is a store in which excess inventory can be sold to the public
at a fraction of its original retail prices. This form of venue for businesses
is becoming increasingly popular and lucrative. Discount stores provide an
effective means to generate revenues from otherwise outdated fashion apparel.
There is consensus that this newly emerging apparel distribution channel has
been successful throughout China. It comes as no surprise that many Chinese
women relish the concept of purchasing “last year’s” trend for a lower purchase
price. Discount outlets are classified as Class B corporate stores. As of March
31, 2010, we had 143 Class A and 27 Class B stores. Our Class B stores are
carefully selected to target different market segments from Class A stores. We
made careful consideration when choosing the locations of Class B stores. Our
Class A stores are located in the major cities, such as Beijing, Shanghai and
Shenzhen while our Class B stores are located in secondary cities and
non-mainstream shopping area of those tier-1 cities. We believe that our Class B
stores will not cannibalize our current Class A store sales. The product style
and design at our Class B store are more or less out of season and target areas
where customers have both fashion sense and economic consideration. For the same
reason, we believe that our Class A brand, price and discount expectation will
not be affected by Class B stores because they target different market segments
both economically and geographically.
41
Active Wear
Stores
Long term
aspirations include the launch of a Baby Fox Active Sport wear line of boutique
stores. We have not launched any Active Wear Stores as of the filing
date.
Employees
As of
March 31, 2010, we have 565 full-time employees, and no part-time
employees.
Properties
Our
executive office is located at Minhang District, 89 Xinbang Road, Suite 305-B5,
Shanghai, P.R.China, and consists of approximately 3,340 square feet (310 square
meters). The owner of this office is one of our board directors, Fengling Wang.
The lease term is from January 1, 2008 to December 31, 2012 for five years. The
lease (attached herein as Exhibit 10.5) is provided to us at an annual rental of
RMB 60,000 (approximately US$8,759), which is at market level of monthly rent of
RMB 15 per square meters in close area in Shanghai.
We
also have a 41,979 square feet (3,900 square meters) warehouse located in
Jiafang Yuan, Building 7, 3rd floor,
No.88 North Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The
lease is between Shanghai Baby Fox Fashion Co., Ltd. and a related party,
Changzhou CTS Fashion Co., Ltd. The original lease term was from January 1, 2007
to December 30, 2009 for three years, with rent of approximately $21,898 (RMB
150,000) per year, which approximates market rate at RMB 3.20 per square meters
per month, payable every six months in Changzhou. On January 1, 2010, the lease
term was extended to December 31, 2010 on the same terms as the original lease
agreement. Changzhou CTS Fashion Co., Ltd. is owned by our chief executive
officer, Jieming Huang.
In
addition, we have a 16,146 square feet (1,500 square meters) office space at
Jiafang Yuan, Buiding 5, 1st floor,
No.88 North Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The
lease is between Shanghai Baby Fox Fashion Co., Ltd. and a related party,
Changzhou CTS Fashion Co., Ltd. The original lease term was from January 1, 2007
to December 31, 2010 for three years, with rent of approximately $11,429 (RMB
80,000) per year payable every six months which approximates the market rate at
RMB 4.50 per square meters per month in this area of Changzhou. On January 1,
2010, the lease term was extended to December 31, 2010 on the same terms as the
original lease agreement.
We do not
own any other properties. We lease our store space from mall operators. Instead
of paying the mall operators rent at a fixed rate, the mall operators are
entitled to a percentage of our gross sales as compensation for the store space
provided, and other facilities and services. The percentage ranges from 16% to
39%, dependent upon the specific condition of each store. At any time,
some mall operators have the right to terminate the lease unilaterally if
our gross sales fail to meet their expectations.
Litigation
We are
from time to time subject to claims and litigation arising in the ordinary
course of business. Currently, our management is not aware of any claims and
litigation against us.
MANAGEMENT
Executive
Officers and Directors
On
January 18, 2008, our founder, then sole shareholder and member of the board of
director, Mr. Hitoshi Yoshida, made a unanimous written consent to elect and
appoint the three individuals set forth as members of our board of directors and
management. The following table sets forth, as of March 31, 2010 the names and
ages of our three (3) directors. The directors will hold such office until the
next annual meeting of shareholders and until his or her successor has been
elected and qualified.
42
Name
|
Age
|
Position
|
||
Jieming
Huang
|
31
|
Chief
Executive Officer, President & Chairman of the
Board
|
||
Fengling
Wang
|
58
|
Director
|
||
Jieping
Huang
|
32
|
Director
|
||
Ping
Chen
|
63
|
Vice
President of Finance and Controller
|
||
Liling
Zhong
|
32
|
Vice
President of Public and Media Relations
|
||
Lingdi
Wu
|
31
|
Vice
President of Promotions & Strategic Planning
|
||
Jianwei
Shen
|
35
|
Vice
President of Retail Store Sales
|
||
Yang
Liu
|
34
|
Vice
President of Marketing
|
There are
no employment agreements between us and our executive officers.
Business
Experience
The
following summarizes the occupation and business experience for our officers,
directors, key employees and consultants
Jieming
Huang, Chief Executive Officer, President & Chairman of the
Board
Mr. Huang
is the innovator behind the development and success of the emerging Baby Fox
brand. He has over 7 years of executive experience in fashion design, apparel
manufacturing, marketing and logistics. Mr. Huang worked in Japan from 1994 to
2000 with leading apparel companies. He returned to China in 2000 to co-found
CTS, a leading clothing manufacturer. From 2000 to present, Jieming Huang was
Chief Executive Officer, President & Chairman of the Board, Changzhou CTS
Fashion Co., Ltd.and Changzhou E.I.S. Fashion Co., Ltd. He became our CEO at
Shanghai Baby Fox Fashion Co., Ltd. since March 2006.
Fengling
Wang, Lead Designer & Member of Board of Directors
Fengling
Wang is a leading and highly recognized fashion designer and apparel industry
executive, with over 35 years of experience in fashion and apparel industry.
Wang is the recipient of several prestigious fashion design awards in China,
Japan and Europe, including China’s National “Golden Scissors Award”, and
Japan’s Fashion & Garment Award for “Best Suit-Dress Cut.” Wang is often
featured as a leading fashion industry expert in magazines, news, TV shows and
radio programs. Since 2008, Ms. Fenling Wang has been our Lead Designer at Baby
Fox Internnational, Inc. From March, 2006 to present, Ms. Wang has been on the
board of directors of Shanghai Baby Fox Fashion Co., Ltd., Changzhou CTS and
Changzhou E.I.S. Fashion Co., Ltd. From May, 1999 to February, 2006, Ms. Wang
served as General Manager at Changzhou Diamond Garments Co., Ltd.
Jieping
Huang, Supervisor & Board Member
From 1994
to 2000, Mr. Huang was engaged in Japanese apparel industry. He came back to
China in the year 2000. He has great knowledge about the apparel manufacturing
and good sense of the fashion trend. From 2000 to present, Jieping Huang has
been our Deputy General Manager at Shanghai Baby Fox Fashion Co., Ltd. From 2000
to February 2006, Jieping Huang was a Board of Director and Deputy General
Manager at Changzhou CTS Fashion Co., Ltd. and at Changzhou E.I.S. Fashion Co.,
Ltd.
Ping
Chen, Vice President of Finance
Ping Chen
is the former Senior Vice President of Finance for Jiangsu Changzhou City’s
E.I.S Fashion Clothing Company. Chen is the previous Senior Financial Department
Manager for Changzhou Industry Investment Company, and the prior Financial
Department Manager for Jiangsu Changzhou City’s Corduroy Corporation. Chen was
the Chief Accountant for Jiangsu Wujin Electrical Machinery Financial Department
from 1971 to 1980, and the former Committee Member of the Tenth Annual Chinese
People’s Political Consultative Committee (CPPCC). Chen has a Bachelor’s Degree
in Enterprise Economy Management from Jiangsu TV Broadcast University. From
February 2006 to Present, Ms. Chen has been our Vice President. From April 2001
to February 2006, Ms. Chen was Vice President of Finance at Changzhou CTS
Fashion Co., Ltd.
Liling
Zhong, Vice President of Public and Media Relations
Liling
Zhong is the former Editor and Fashion Expert for Beijing Ruili Magazine
Society’s “Clothing Design” magazine, and a previous Manager at Jean-Louis
Scherrer, a leading French fashion company. Zhong has a strong knowledge of
floor-plan design, employee training, and media relations. Zhong has a
Bachelor’s in Fashion Design from Beijing Clothing Technology Institute; design
study at the Theater & Arts School. From January 2004 to May 2006, Ms. Zhong
was Senior Editor at Beijing Ruilie Magazine House. She has been with us as Vice
President of Public and Media Relations since May 2006.
43
Lingdi
Wu, Vice President of Promotions & Strategic Planning
Lingdi
Wu is skilled in development and planning of new product releases, promotional
events, press conferences, and fashion exhibitions / shows. Wu is the former
Director of Client Relations Department for Diamond Fashion Company, Ltd. From
2001 to 2006, Lingdi was President of Planning department at Changzhou Diamond
Garments Co., Ltd. Wu has been at current postion since March
2006.
Jianwei
Shen, VP of Retail Store Sales
Mr. Shen
was engaged as Marketing Manager of Shanghai Babyfox Apparel Co., Ltd. since
2006. He has great experience in marketing, and has brilliant marketing strategy
in the apparel industry. He was the marketing manager of Diamond Apparel Co.,
Ltd. from 1999 to 2006. He has been at his current position since March
2006.
Yang
Liu, Vice President of Marketing
Yang Liu
was the former IT Manager with Baby Fox, responsible for development of ERP
systems and supply chain management). She is also the former Marketing Manager
of Beijing Oubosi Product Co., a leading China fashion magazine publisher, and
the previous Assistant to the General Manager at Beijing Bilingual Advertising
Times Company, Ltd. Liu has a Bachelor’s Degree in Computer Science and
Technology from Northeast University, Qinghuangdao Campus. From March 2005 to
April 2006, she was Executive Marketing Manager at Beijing OPUS Productions Co.,
Ltd. From May 2002 to March 2005, she was an Assistant to General Manager at
Beijing Bilingual Time Advertising Co., Ltd. From May 2006 to April 2007, she
was Vice President of IT at Shanghai Baby Fox Fashion Co., Ltd. From April 2007
to Present, she has been our Vice President of Marketing.
Employment
Agreements/ Terms of Office
None of
the members of the Board of Directors or members of the management team
presently have employment agreements with us.
Option
Plan
On
January 18, 2008, we issued a total of 37,957,487shares of our common stock,
$.001 par value per share to Baby Fox Limited, a British Virgin Islands entity
controlled by Hitoshi Yoshida, our founder, former officer and director, as
founder’s shares.
On May
6, 2008, Hitoshi Yodshida entered into stock option agreements with our
directors, Jieming Huang and Jieping Huang, and Linyin Wang, respectively, to
purchase all of the shares of Baby Fox Limited. The option agreements were
entered into to permit the acquisition of equity in Baby Fox Limited over time
by Jieming Huang, Jieping Huang and Linyin Wang under the PRC merger and
acquisition, or M&A, related regulations. These M&A regulations were
promulgated on August 8, 2006 by six Chinese regulatory agencies (including the
PRC Ministry of Commerce, or MOFCOM, and China Securities Regulatory Commission,
or CSRC). The jointly issued M&A regulations, known as Circular 10, were
captioned “Regulation on Mergers and Acquisition of Domestic Enterprises by
Foreign Investors” and they became effective on September 6, 2006. Under
Circular 10, an offshore special purpose vehicle, or SPV, formed for purposes of
overseas listing of equity interests in China-based companies and controlled
directly or indirectly by Chinese companies or individuals must obtain the
approval of the CSRC prior to the listing of such SPV’s securities on an
overseas stock exchange. Circular 10 also requires approval from MOFCOM for
“round-trip” investment transactions in which a China-based company or a PRC
resident, or Acquirer, using an offshore entity controlled by the Acquirer,
acquires any PRC local company that is an affiliate of the Acquirer. Mr.
Yoshida is not a Chinese resident; therefore, no approval was required by either
CSRC or MOFCOM in connection with the listing of our stock on the OTCBB or the
business combination transaction among Baby Fox, Shanghai Baby Fox and Baby Fox
Limited. In addition there is no registration requirement of the stockownership
of Mr. Yoshida. The options granted pursuant to the three stock option
agreements were exercisable until December 31, 2018 in accordance with the
Exercise Schedule attached to each agreement. Mr. Yoshida is the owner of
10,000 shares of Baby Fox Limited which represent 100% of the issued and
outstanding common stock of Baby Fox Limited. Subsequently, on June 17,
2010, Mr. Yoshida entered into rescission agreements with Jieming Huang, Jieping
Huang, and Linyin Wang rescinding the stock option agreements. No options had
been exercised by Jieming Huang, Jieping Huang, or Linyin Wang as of the
effective date of the rescission agreements.
44
Family
relationships
Fengling
Wang, our director, is the mother of Jieming Huang, our Chief Executive Officer,
President and Chairman of the Board, and Jieping Huang, Supervisor and Board
Member. Jieming Huang and Jieping Huang are brothers. Therefore, none of our
directors are independent. Hitoshi Yoshida, the majority shareholder of Baby Fox
Limited which holds a majority of the outstanding shares of common stock of our
Company was married to Fengling Wang but divorced in October 2008.
Involvement
in certain legal proceedings
No
bankruptcy petition has been filed by or against any business of which any of
our executive officers was a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that time.
No
director has been convicted in a criminal proceeding and is not subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses).
No
director has been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking
activities.
No
director has been found by a court of competent jurisdiction (in a civil
action), the Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, that has not been
reversed, suspended, or vacated.
Director
Compensation
Our
directors receive salary compensation as disclosed in the Summary Compensation
Table on page 27 in this registration statement. Our directors will not receive
a fee for attending each board of directors meeting or meeting of a committee of
the board of directors. All directors will be reimbursed for their reasonable
out-of-pocket expenses incurred in connection with attending board of director
and committee meetings.
Audit
Committee and Audit Committee Financial Expert
Our board
of directors functions as an audit committee and performs some of the same
functions as an audit committee including: (1) selection and oversight of our
independent accountant; (2) establishing procedures for the receipt, retention
and treatment of complaints regarding accounting, internal controls and auditing
matters; and (3) engaging outside advisors. We are not a "listed company" under
SEC rules and is therefore not required to have an audit committee comprised of
independent directors. Our board of directors has determined that its members do
not include a person who is an "audit committee financial expert" within the
meaning of the rules and regulations of the SEC. Our board of directors has
determined that each of its members is able to read and understand fundamental
financial statements and has substantial business experience that results in
that member's financial sophistication. Accordingly, the board of directors
believes that each of its members have the sufficient knowledge and experience
necessary to fulfill the duties and obligations that an audit committee would
have.
Code
of Ethics
A code of
ethics relates to written standards that are reasonably designed to deter
wrongdoing and to promote:
|
●
|
Honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest
between personal and professional
relationships;
|
|
●
|
Full, fair, accurate, timely and
understandable disclosure in reports and documents that are filed with, or
submitted to, the SEC and in other public communications made by an
issuer;
|
|
●
|
Compliance with applicable
governmental laws, rules and
regulations;
|
45
|
●
|
The prompt internal reporting of
violations of the code to an appropriate person or persons identified in
the code; and
|
|
●
|
Accountability for adherence to
the code.
|
We have
adopted a corporate code of ethics that applies to our principal executive
officer, principal accounting officer, and persons performing similar functions,
as set forth in Exhibit 14.1 hereto.
Indemnification
Under
Nevada law and pursuant to our articles of incorporation and bylaws, we may
indemnify our officers and directors for various expenses and damages resulting
from their acting in these capacities. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to our
officers or directors pursuant to those provisions, our counsel has informed us
that, in the opinion of the SEC, this indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable.
Executive
Compensation
The
following table sets forth all compensation awarded to, earned by or paid to our
named executive officers. We do not anticipate adjusting our compensations to
executive officers and directors in the foreseeable future.
SUMMARY
COMPENSATION TABLE
Name and
principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||||||||
Jieming
Huang,
|
|||||||||||||||||||||||||||||||||||
Chief
Executive Officer,
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
President (1)
|
2008
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Fengling
Wang,
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Director (1)
|
2008
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Jieping
Huang
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Director (1)
|
2008
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Ping
Chen, Vice
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
President
of Finance
|
2008
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Liling
Zhong, Vice
|
|||||||||||||||||||||||||||||||||||
President
of Public and
|
2009
|
6,857 | 6,857 | ||||||||||||||||||||||||||||||||
Media
Relations
|
2008
|
6,857 | 6,857 | ||||||||||||||||||||||||||||||||
Lingdi
Wu, Vice
|
|||||||||||||||||||||||||||||||||||
President
of Promotions
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
&
Strategic Planning
|
2008
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Jianwei
Shen, Vice
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
President
of Retails Store Sales
|
2008
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
Yang
Liu, Vice
|
2009
|
5,143 | 5,143 | ||||||||||||||||||||||||||||||||
President
of Marketing
|
2008
|
5,143 | 5,143 |
(1)
Jieming Huang, Fengling Wang and Jieping Huang, each receive compensation in the
amount of RMB 3,000 from Shanghai Baby Fox and RMB 4,800 from Changzhou CTS for
services rendered to the Company in 2009 and 2008.
46
Employment
Agreements
None of
the members of the Board of Directors or members of the management team
presently has employment agreements with us. We do not anticipate entering into
employment agreements with the members of the Board of Directors in the
foreseeable future.
SECURITY
OWNERSHIP
The
following table sets forth, as of June 10, 2010, certain information regarding
the beneficial ownership of Common Stock by (i) each person who is known by us
to own beneficially more than five percent of the outstanding Common Stock, (ii)
each of our director and executive officer, and (iii) all directors and
executive officers as a group:
Name and Address of
|
Amount and Nature of
|
|||||||||
Title of Class
|
Beneficial Owner
|
Beneficial Owner
|
Percent of Class (1)
|
|||||||
Officers
and Directors
|
||||||||||
Common
Stock
|
Jieming
Huang (2)
Chief
Executive Officer
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
286,313 | 0.71 | % | ||||||
Common
Stock
|
Fengling
Wang
Director
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | 0 | % | ||||||
Common
Stock
|
Jieping
Huang
Director
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | % | |||||||
Common
Stock
|
Ping
Chen
Vice
President of Finance
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | 0 | % | ||||||
Common
Stock
|
Liling
Zhong
Vice
President of Public and
Media
Relations
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | 0 | % | ||||||
Common
Stock
|
Lingdi
Wu
Vice
President of Promotions
and
Strategic Planning
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | 0 | % | ||||||
Common
Stock
|
Jianwei
Shen
Vice
President of Retail Store Sales
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | 0 | % | ||||||
Common
Stock
|
Yang
Liu
Vice
President of Marketing
Minhang
District
89
Xinbang Road, Suite 305-B5
Shanghai,
P.R. China
|
0 | 0 | % | ||||||
Common
Stock
|
All
executive officers and directors (8) as a group
|
286,313 | 0.71 | % | ||||||
5%
Beneficial Owners
|
||||||||||
Common
Stock
|
Baby
Fox Limited (3)
No.
22-23, 5 Chome
Nakano,
Nakanoku,
Tokyo,
Japan
|
37,957,487 | 93.89 | % |
47
(1)
Based on 40,427,500 outstanding as of June 10, 2010.
(2)
286,313 shares are held in the name of Favor Jumbo Enterprises Limited,
controlled by Qian Wang. Qian Wang is wife of Chief Executive Officer, Jieming
Huang.
(3)
Baby Fox Limited is under the sole control of Hitoshi Yoshida, No. 22-23, 5
Chome Nakano, Nakanoku, Tokyo, Japan.
Change in
Control
On May
6, 2008, Hitoshi Yoshida, the owner of 10,000 shares of Baby Fox Limited
representing 100% of the issued and outstanding common stock of Baby Fox
Limited, entered into stock option agreements with two of our directors, Jieming
Huang and Jieping Huang, and Linyin Wang, respectively, to purchase all of the
shares of Baby Fox Limited. The options granted pursuant to the three stock
option agreements were exercisable until December 31, 2018 in accordance with
the Exercise Schedule attached to each agreement. June 17, 2010, Mr. Yoshida
entered into rescission agreements with Jieming Huang, Jieping Huang, and Linyin
Wang rescinding the stock option agreements. No options had been exercised by
Jieming Huang, Jieping Huang, or Linyin Wang as of the effective date of the
rescission agreements.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We lease
office and warehouse space from our board director, Fengling Wang and Changzhou
CTS Fashion Co., Ltd. Changzhou CTS Fashion Co., Ltd. is owned by our chief
executive officer, Jieming Huang.
Our
executive office is located at MinhangDistrict, 89 Xinbang Road, Suite 305-B5,
Shanghai, P.R.China,and consists of approximately 3,340square feet (310 square
meters). The owner of this office is one of our board directors, Fengling Wang.
The lease term is from January 1, 2008 to December 31, 2012 for five years. The
lease is provided to us at annual rate of RMB 60,000, approximately $8,759,
which is at market level of monthly rent of RMB 15 per square meters in a close
area in Shanghai city.
We
also have a 41,979 square feet (3,900 square meters) warehouse located in
Jiafang Yuan, Building 7, 3rd floor,
No.88 North Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The
lease is between Shanghai Baby Fox Fashion Co., Ltd. and a related party,
Changzhou CTS Fashion Co., Ltd. The leasing term is from January 1, 2007 to
December 31, 2010 for three years. The rent is RMB 150,000 per year,
approximately $21,898, payable every six months, which approximates market
rate at RMB 3.20 per square meters per month for warehouse in Changzhou.
Changzhou CTS Fashion Co., Ltd. is owned by our chief executive officer, Jieming
Huang. The rent is at market rate.
In
addition, we have a 16,146 square feet (1,500 square meters) office space at
Jiafang Yuan, Buiding 5, 1st floor,
No.88 North Hubin Road, Wujing District, Changzhou, Jiangsu province, China. The
lease is between Shanghai Baby Fox Fashion Co., Ltd. and a related party,
Changzhou CTS Fashion Co., Ltd. The leasing term is from January 1, 2007 to
December 31, 2010 for three years. The rent is approximately $11,429 (RMB
80,000) per year payable every six months, which approximates the market rate at
RMB 4.50 per square meters per month in this area of
Changzhou
48
We
purchase a significant portion of its merchandise from Changzhou CTS which is
owned by our CEO. Products we buy from Changzhou include overcoat, wind coat,
jacket, shirt, trouser, skirt and knitwear etc. Products and designs ordered by
Baby Fox are manufactured exclusively for us and not allowed to be sold to third
parties. Quantity of purchase is based upon orders from Baby Fox stores and
price is based on cost of production confirmed by our supervisors plus 10-15%
markup covering general & administrative expenses. Other materials terms
such as delivery time are determined by our purchasing managers based on market
condition and store demand. Changzhou CTS cannot modify purchase terms without
our prior approval. Total purchases from Changzhou CTS for the three and nine
months ended March 31, 2010 approximated $2,125,464 and $8,852,195,
respectively, for the years ended June 30, 2009 and 2008 they approximated
$13,327,797 and $6,774,736, respectively. Total accounts payable to Changzhou
CTS as of March 31, 2010 aggregated $8,401,213. They aggregated $8,281,174 and
$801,080 as of June 30, 2009 and 2008, respectively. This amount is non-interest
bearing and due on demand.
We
made payment to Changzhou CTS in the amount of $4,632,701 and 8,788,532 for the
three and nine months ended March 31, 2010, respectively. Total payment we made
to Changzhou CTS for the years ended June 30, 2009 and 2008 were $7,947,146 and
$5,850,448, respectively.
On
February 18, 2008, we entered into a loan agreement with our CEO, Jieming Huang,
pursuant to which, we borrowed $810,160. The loan agreement is subject to a
five-year term with five percent annual interest (5%). Pursuant to the loan
agreement, we covenant, among others, that during the term of the loan, we will
(i) not sell, transfer, mortgage, dispose of in any other way, or create other
security interest on, any of our legal right of equity or equity interest
without Mr. Huang’s prior written consent, (ii) not sell, transfer, mortgage,
dispose of in any other way, or to create other security interest on, any of Mr.
Huang’s legal right of equity or equity interest without Mr. Huang’s prior
written consent, except that the counterparty is Mr. Huang or those designated
by Mr. Huang; and (iii) not agree to merge or combine with, buy or invest in,
any person without Mr. Huang’s prior consent. The loan agreement is attached to
this registration agreement as Exhibit 10.8.
Our board
of directors approved these transactions listed above. We have no disinterested
board members.
On
January 18, 2007, we and Qian Wang, the spouse of our CEO, Jieming Huang,
entered into a consulting agreement. Qian Wang and our CEO, Jieming Huang, were
not married yet at that time. There was no family relationship between Qian Wang
and Jieming Huang then. On January 18, 2007, we entered into a consulting
agreement with Qian Wang. Among other things, Qian Wang agreed to introduce and
supervise Beijing Allstar Business Consulting, Inc., provide both verbal and
written translation between English and Chinese for our executives, and provide
strategic consulting and advice to Baby Fox’s executives regarding U.S. capital
market and related issues regarding our private placement and application for
quotation of the common stock on OTC Bulletin Board. Qian Wang’s services were
valued at $96,263 which defined in her agreement with us. Among her total
compensation, approximate 40% or $39,000 is in cash payment and the rest 60% is
in common shares. We paid Qian Wang $9,750 on May 21, 2007 and $11,250 on
May 29, 2008. We will owe Qian Wang $10,500 cash upon the effectiveness of our
common stock registration statement and $7,500 cash upon our common stock being
quoted on the OTC Bulletin Board. On January 18, 2008, we awarded Qian Wang
286,313 shares as compensation for her services rendered. Qian Wang designated
Favor Jumbo Enterprises Limited as the holder of the 286,313 shares. These
shares are valued at $.20 per share, the same valuation as it was in our private
placement in March 2008.
In
addition, as of the date hereof, we have entered into over 100 purchase
agreements with related parties in the ordinary course of business. Products we
buy from related parties include overcoat, wind coat, jacket, shirt, trouser,
skirt and knitwear etc. Products and designs ordered by Baby Fox are
manufactured exclusively for us and not allowed to be sold to third parties.
Quantity of purchase is based upon orders from Baby Fox stores and price is
based on cost of production confirmed by our supervisors plus 10-15% markup
covering general & administrative expenses. Other materials terms such as
delivery time are determined by our purchasing managers based on market
condition and store demand. The supplier cannot modify purchase terms without
our prior approval. As all of the purchase agreements are in essentially the
same form which we have filed as Exhibit 10.2 of this registration statement. We
do not have any master agreement which govern the relationship between the
parties generally.
49
Other
than our officers and directors, we have not had a promoter at any time since
inception. Therefore, we have never entered into transactions with a
promoter.
Besides
related party transaction stated above, none of the following persons has any
direct or indirect material interest in any transaction to which we are a party
since our incorporation or in any proposed transaction to which we are proposed
to be a party:
|
(A)
|
Any of our directors or
officers;
|
|
(B)
|
Any proposed nominee for election
as our director;
|
|
(C)
|
Any person who beneficially owns,
directly or indirectly, shares carrying more than 10% of the voting rights
attached to our Common Stock;
or
|
|
(D)
|
Any relative or spouse of any of
the foregoing persons, or any relative of such spouse, who has the same
house as such person or who is a director or officer of any parent or
subsidiary of us.
|
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue 90,000,000 shares of common stock, $.001 par value, of which
40,427,500 shares were issued and outstanding as of June 10,
2010.
The
holders of common stock are entitled to one vote for each share held of record
on all matters to be voted by stockholders. There is no cumulative voting with
respect to the election of directors with the result that the holders of more
than 50% of the shares of common stock and other voting shares voted for the
election of directors can elect all of the directors.
The
holders of shares of common stock are entitled to dividends when and as declared
by the Board of Directors from funds legally available therefore, and, upon
liquidation are entitled to share pro rata in any distribution to holders of
common stock, subject to the right of holders of outstanding preferred stock.
Our wholly-owned subsidiary, Shanghai Baby Fox, declared dividends on August 8,
2007 and December 10, 2007 in the amount of $401,973 and $433,757, respectively
to Fengling Wang, its sole shareholder at that time. Holders of our common stock
have no preemptive rights. There are no conversion rights or redemption or
sinking fund provisions with respect to our common stock.
Preferred
Stock
We are
authorized to issue 10,000,000 shares of preferred stock, $.001 par value, of
which no shares were issued and outstanding as of June 10, 2010.
Preferred
stock may be authorized and issued in the future in connection with
acquisitions, financings, or other matters, as the Board of Directors deems
appropriate. In the event that we determine issue any shares of preferred
stock, a certificate of designation containing the rights, privileges and
limitations of this series of preferred stock will be filed with the Secretary
of State of the State of Nevada. The effect of this preferred stock
designation power is that our Board of Directors alone, subject to Federal
securities laws, applicable blue sky laws, and Nevada law, may be able to
authorize the issuance of preferred stock which could have the effect of
delaying, deferring, or preventing a change in control without further action by
our stockholders, and may adversely affect the voting and other rights of the
holders of our common stock.
Rule
144 Shares
As of
the date of this registration statement, we do not have any issued and
outstanding common shares that are available for resale to the public market in
accordance with Rule 144.
50
SELLING
STOCKHOLDERS
The
shares being offered for resale by the selling stockholders consist of the
868,262 shares of our common stock held by 40 shareholders. Such shareholders
include the holders of the 427,500 shares sold in our Regulation D Rule 506
offering which was completed in March 2008. We are also registering a total of
440,762 shares for eight shareholders who received shares for services rendered.
The following table sets forth the name of the selling stockholders, the number
of shares of common stock beneficially owned by each of the selling stockholders
as of February 4, 2009 and the number of shares of common stock being offered by
the selling stockholders. The shares being offered hereby are being registered
to permit public secondary trading, and the selling stockholders may offer all
or part of the shares for resale from time to time. However, the selling
stockholders are under no obligation to sell all or any portion of such shares
nor are the selling stockholders obligated to sell any shares immediately upon
effectiveness of this prospectus. All information with respect to share
ownership has been furnished by the selling stockholders.
Amount
|
Percent
|
|||||||||||||||
Shares
|
Beneficially
|
Beneficially
|
||||||||||||||
Beneficially
|
Shares
|
Owned
|
Owned
|
|||||||||||||
Owned Prior
|
to be
|
After
|
After
|
|||||||||||||
Name
|
To Offering
|
Offered
|
Offering
|
Offering
|
||||||||||||
Lan Yu
|
12,500 | 12,500 | 0 | 0.00 | % | |||||||||||
Qianfan
Wang
|
12,500 | 12,500 | 0 | 0.00 | % | |||||||||||
Xianjiang
Liu
|
10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
Ran
Li
|
10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
Chen
Chen
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Cheng
Long Cheng
|
25,000 | 25,000 | 0 | 0.00 | % | |||||||||||
Jing
Tao
|
25,000 | 25,000 | 0 | 0.00 | % | |||||||||||
Transworld Consulting Group Inc. (1)
|
12,500 | 12,500 | 0 | 0.00 | % | |||||||||||
Xiaobo
Wu
|
12,500 | 12,500 | 0 | 0.00 | % | |||||||||||
Allan
M. Dyson
|
7,500 | 7,500 | 0 | 0.00 | % | |||||||||||
Terauchi
Yasutada
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Toshiyuki
Tatsuda
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Satomi
Abe
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Naoya
Abe
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Norihiko
Mabuchi
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Kengo
Kato
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Hiroshi
Ito
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Yoshimi
Litsuka
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Bruce
Irish
|
12,500 | 12,500 | 0 | 0.00 | % | |||||||||||
Jing
Tang
|
10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
Johann
Tse
|
5,000 | 5,000 | 0 | 0.00 | % | |||||||||||
Qiangfei
Xia
|
10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
Haruo
Nishizawa
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Yuezhi
Zhao
|
5,000 | 5,000 | 0 | 0.00 | % | |||||||||||
Masaro
Fucuyamo
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Tri
Superior Trading (2)
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Takashi
Yamaguchi
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Hayashi
Kazuo
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Xue
Tao Peng
|
12,500 | 12,500 | 0 | 0.00 | % | |||||||||||
Keiko
Kizu
|
15,000 | 15,000 | 0 | 0.00 | % | |||||||||||
Hao
Xia
|
10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
Liang
He
|
10,000 | 10,000 | 0 | 0.00 | % | |||||||||||
Favor Jumbo Enterprises Limited (3)
|
286,313 | 100,000 | 186,313 | 0.46 | % | |||||||||||
First
Prestige, Inc. (4)
|
665,180 | 100,000 | 565,180 | 1.40 | % | |||||||||||
JD
Infinity Holdings, Inc. (5)
|
475,129 | 100,000 | 375,129 | 0.93 | % | |||||||||||
Catalpa
Holdings, Inc. (6)
|
475,129 | 100,000 | 375,129 | 0.93 | % | |||||||||||
Avenndi,
LLC (7)
|
20,000 | 20,000 | 0 | 0.00 | % | |||||||||||
Ying
Yue Song
|
13,762 | 13,762 | 0 | 0.00 | % | |||||||||||
Wei
Zhuang
|
5,000 | 5,000 | 0 | 0.00 | % | |||||||||||
Jing
Jin
|
2,000 | 2,000 | 0 | 0.00 | % |
51
|
(1)
|
Transworld Consulting Group Inc.
is controlled by Jack Chen.
|
|
(2)
|
Tri Superior Trading is
controlled by Iwabuchi
Yoshitumi.
|
|
(3)
|
Favor Jumbo Enterprises Limited
is controlled by Qian Wang, Qian Wang is wife of Chief Executive Officer,
Jieming Huang.
|
|
(4)
|
First Prestige, Inc. is
controlled by Hongtao Shi.
|
|
(5)
|
JD Infinity Holdings, inc. is
controlled by Liuyi Zhang.
|
|
(6)
|
Catalpa Holdings, Inc. is
controlled by Fred Chang.
|
|
(7)
|
Avenndi, LLC is controlled by
John Kennedy.
|
None
of the Selling Stockholders are broker-dealers or affiliates of broker
dealers.
Transfer
Agent
The
transfer agent and registrar for our common stock is: Interwest Transfer
Company, Inc., 1981 East Murray Holladay Road, Suite 100, Salt Lake City, UT
84117. Their telephone number is: (801) 272-9294.
PLAN
OF DISTRIBUTION
This
prospectus relates to the registration of the resale of 868,262 shares of our
common stock on behalf of the selling stockholders named herein.
The
selling security holders may sell some or all of their shares at a fixed price
of $.20 per share until our shares are quoted on the OTC Bulletin Board and
thereafter at prevailing market prices or privately negotiated prices. Prior to
being quoted on the OTCBB, shareholders may sell their shares in private
transactions to other individuals.
There is
no established public trading market for our securities. Our shares are not and
have not been listed or quoted on any exchange or quotation system. In order for
our shares to be quoted, a market maker must agree to file the necessary
documents with the National Association of Securities Dealers, which operates
the OTC Electronic Bulletin Board. In addition, it is possible that, such
application for quotation may not be approved and even if approved it is
possible that a regular trading market will not develop or that if developed,
will be sustained.
Once a
market has been developed for our common stock, the shares may be sold or
distributed from time to time by the selling stockholders directly to one or
more purchasers or through brokers or dealers who act solely as agents, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices, which may be
changed. The distribution of the shares may be effected in one or more of the
following methods:
|
·
|
ordinary brokers transactions,
which may include long or short
sales,
|
|
·
|
Transactions involving cross or
block trades on any securities or market where our common stock is
trading,
|
|
·
|
through direct sales to
purchasers or sales effected through
agents,
|
|
·
|
through transactions in options,
swaps or other derivatives (whether exchange listed or otherwise),
or
|
|
·
|
any combination of the
foregoing.
|
The
selling stockholders named in this
prospectus must comply with the requirements of the
Securities Act and the Exchange Act in the offer and sale of the
common stock being offered by them.
The
selling stockholders and any broker-dealers who execute sales for the
selling stockholders may be deemed to be an "underwriter" within the meaning of
the Securities Act in connection with such sales. In particular, Favor Jumbo
Enterprises Limited controlled by Qian Wang, wife of our Chief Executive
Officer, is an underwriter. During such times as the selling stockholders
may be deemed to be engaged in a distribution of the common stock, and
therefore be considered to be an underwriter, they must comply with
applicable laws and may among other things:
52
1.
Not engage in any
stabilization activities in connection with our common
stock;
2.
Furnish each broker or dealer through
which common stock may be offered, such copies of this
prospectus from time to time, as may be required by such broker or dealer,
and
3.
Not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities permitted under the Exchange
Act.
Any
commissions received by broker-dealers and any profit on the resale of shares
sold by them while acting as principals might be deemed to be underwriting
discounts or commissions under the Securities Act.
In
addition, the selling stockholders may enter into hedging transactions with
broker-dealers who may engage in short sales, if short sales were permitted, of
shares in the course of hedging the positions they assume with the selling
stockholders. The selling stockholders may also enter into option or other
transactions with broker-dealers that require the delivery by such
broker-dealers of the shares, which shares may be resold thereafter pursuant to
this prospectus. The selling stockholders may be deemed to be underwriters with
respect to the shares that they are offering for resale.
Brokers,
dealers, or agents participating in the distribution of the shares may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of shares for whom such
broker-dealers may act as agent or to whom they may sell as principal, or both
(which compensation as to a particular broker-dealer may be in excess of
customary commissions). Neither the selling stockholders nor we can presently
estimate the amount of such compensation. We know of no existing arrangements
between the selling stockholders and any other stockholder, broker, dealer or
agent relating to the sale or distribution of the shares.
We will
not receive any proceeds from the sale of the shares of the selling security
holders pursuant to this prospectus. We have agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be approximately $40,000.
LEGAL
MATTERS
Holland
& Hart LLP, Reno, Nevada passed upon the validity of the common stock being
offered hereby.
EXPERTS
Included
in the prospectus constituting part of this registration statement are
consolidated financial statements for fiscal years ended June 30, 2009 and 2008,
which have been audited by Paritz & Company, P.A., an independent registered
public accounting firm, to the extent and for the periods set forth in their
respective report appearing elsewhere herein. In the audit report, our auditor
has expressed their concern as to our ability to continue as a going concern.
The financial statements are included in reliance upon such report given upon
the authority of such firms as experts in accounting and auditing.
AVAILABLE
INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
with respect to the common stock offered hereby. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto, certain parts of which are omitted in accordance with the
rules and regulations of the SEC. For further information regarding our common
stock and us, please review the registration statement, including exhibits,
schedules and reports filed as a part thereof. Statements in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement, set forth the material terms of such contract or other
document but are not necessarily complete, and in each instance reference is
made to the copy of such document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
53
We are
also subject to the informational requirements of the Exchange Act which
requires us to file reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information along with the
registration statement, including the exhibits and schedules thereto, may be
inspected at public reference facilities of the SEC at 100 F Street N.E,
Washington D.C. 20549. Copies of such material can be obtained from the Public
Reference Section of the SEC at prescribed rates. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
room. Because we file documents electronically with the SEC, you may also obtain
this information by visiting the SEC’s Internet website at http://www.sec.gov.
No
dealer, salesperson or other person has been authorized to give any information
or to make any representations other than those contained in this prospectus in
connection with the offering made by this prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the selling stockholders. This prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than those specifically offered hereby or an offer to sell or a
solicitation of an offer to buy any of these securities in any jurisdiction to
any person to whom it is unlawful to make such offer or solicitation.
Except where otherwise indicated, this prospectus speaks as of the effective
date of the registration statement.
54
FINANCIAL
STATEMENTS
Index
to Financial Statements
Page
|
|
CONSOLIDATED
FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2010
(UNAUDITED)
|
|
Consolidated
Balance Sheets as of March 31, 2010 and June 30, 2009
|
F-1
|
Consolidated
Statements of Operations and Other Comprehensive Income (Loss) for the
Three and Nine Months Ended March 31, 2010 and 2009
|
F-2
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency) for the Nine
Months Ended March 31, 2010
|
F-3
|
Consolidated
Statements of Cash Flows for the Nine Months Ended March 31, 2010 and
2009
|
F-4
|
Notes
to Consolidated Financial Statements
|
F-5
|
CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(AUDITED)
|
|
Report
of Paritz & Company, P.A.
|
F-13
|
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
F-14
|
Consolidated
Statements of Operations and Other Comprehensive Income (Loss) for the
years ended June 30, 2009 and 2008
|
F-15
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency) for the years
ended June 30, 2009 and 2008
|
F-16
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2009 and
2008
|
F-17
|
Notes
to Consolidated Financial Statements
|
F-18
|
55
BABY FOX
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
March 31, 2010
|
June 30, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 256,797 | $ | 312,397 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $687,900 and
$176,803, respectively
|
4,563,722 | 3,261,343 | ||||||
Inventories
|
5,322,202 | 6,222,993 | ||||||
Advance
to vendors
|
28,701 | 26,341 | ||||||
Prepaid
expenses and sundry current assets
|
445,915 | 578,053 | ||||||
Total
current assets
|
10,617,337 | 10,401,127 | ||||||
PROPERTY
AND EQUIPMENT, net
|
54,941 | 56,659 | ||||||
SECURITY
DEPOSITS
|
230,645 | 133,896 | ||||||
Total
assets
|
$ | 10,902,923 | $ | 10,591,682 | ||||
LIABILITIES AND STOCKHOLDERS’
DEFICIENCY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable - trade
|
$ | 808,525 | $ | 2,891,419 | ||||
Accounts
payable - affiliated company
|
8,401,213 | 8,281,174 | ||||||
Customer
deposits and advances
|
1,631,143 | 1,518,981 | ||||||
Accrued
expenses and other current liabilities
|
3,475,049 | 1,962,492 | ||||||
Loans
payable – officer and stockholder
|
32,961 | 23,490 | ||||||
Current
portion of long-term debt
|
1,567,467 | 835,050 | ||||||
Dividends
payable
|
838,334 | 838,378 | ||||||
Total
current liabilities
|
16,754,692 | 16,350,984 | ||||||
LONG-TERM
DEBT
|
810,160 | 810,160 | ||||||
Total
liabilities
|
17,564,852 | 17,161,144 | ||||||
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 40,427,500 shares
issued and outstanding
|
40,427 | 40,427 | ||||||
Accumulated
deficit
|
(6,752,267 | ) | (6,659,522 | ) | ||||
Accumulated
other comprehensive income
|
49,911 | 49,633 | ||||||
Total
stockholders' deficiency
|
(6,661,929 | ) | (6,569,462 | ) | ||||
Total
liabilities and stockholders' deficiency
|
$ | 10,902,923 | $ | 10,591,682 |
See
accompanying notes to consolidated financial statements
F-1
BABY FOX
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
March 31,
|
March 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
SALES:
|
||||||||||||||||
Corporate
stores
|
$ | 6,475,430 | $ | 5,670,387 | $ | 17,800,827 | $ | 15,809,095 | ||||||||
Non-corporate
stores
|
609,812 | 720,330 | 2,153,495 | 1,781,654 | ||||||||||||
Total
sales
|
7,085,242 | 6,390,717 | 19,954,322 | 17,590,749 | ||||||||||||
COST
OF SALES:
|
||||||||||||||||
Corporate
stores
|
2,399,152 | 4,066,503 | 8,689,067 | 8,933,133 | ||||||||||||
Non-corporate
stores
|
322,855 | 379,030 | 1,398,443 | 886,700 | ||||||||||||
Total
cost of sales
|
2,722,007 | 4,445,533 | 10,087,510 | 9,819,833 | ||||||||||||
GROSS
PROFIT
|
4,363,235 | 1,945,184 | 9,866,812 | 7,770,916 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling
expenses
|
3,030,093 | 2,947,694 | 9,064,223 | 8,093,618 | ||||||||||||
General
and administrative expenses
|
486,279 | 93,648 | 802,325 | 341,888 | ||||||||||||
Total
operating expenses
|
3,516,372 | 3,041,342 | 9,886,548 | 8,435,506 | ||||||||||||
OPERATING
INCOME (LOSS)
|
846,863 | (1,096,158 | ) | 264 | (664,590 | ) | ||||||||||
OTHER
EXPENSES:
|
||||||||||||||||
Interest
expense
|
30,861 | 31,008 | 93,009 | 93,016 | ||||||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
816,002 | (1,127,166 | ) | (92,745 | ) | (757,606 | ) | |||||||||
INCOME
TAXES PROVISION
|
- | - | - | - | ||||||||||||
NET
INCOME (LOSS)
|
816,002 | (1,127,166 | ) | (92,745 | ) | (757,606 | ) | |||||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||||||||||
Foreign
currency translation adjustment
|
(1,319 | ) | (6,720 | ) | 278 | (5,566 | ) | |||||||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | 814,683 | $ | (1,133,886 | ) | $ | (92,467 | ) | $ | (763,172 | ) | |||||
BASIC
AND DILUTED INCOME (LOSS)
|
||||||||||||||||
PER
COMMON SHARE
|
$ | 0.02 | $ | (0.03 | ) | $ | (0.00 | ) | $ | (0.02 | ) | |||||
BASIC
AND DILUTED WEIGHTED AVERAGE
|
||||||||||||||||
SHARES
OUTSTANDING
|
40,427,500 | 40,427,500 | 40,427,500 | 40,427,500 |
See
accompanying notes to consolidated financial statements
F-2
BABY FOX
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Number
|
Par
|
Owners’
|
Paid-In
|
Earnings
|
Other Comprehensive
|
|||||||||||||||||||||||
of Shares
|
Value
|
Capital
|
Capital
|
(Deficit)
|
Income
|
Total
|
||||||||||||||||||||||
BALANCE,
June 30, 2008
|
40,427,500 | $ | 40,427 | $ | (2,176,893 | ) | $ | 54,451 | (2,082,015 | ) | ||||||||||||||||||
Net
Income (loss)
|
- | - | - | - | (4,482,629 | ) | - | (4,482,629 | ) | |||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | (4,818 | ) | (4,818 | ) | ||||||||||||||||||||
BALANCE,
June 30, 2009
|
40,427,500 | $ | 40,427 | $ | - | $ | - | $ | (6,659,522 | ) | $ | 49,633 | $ | (6,569,462 | ) | |||||||||||||
Net
Income (loss)
|
- | - | - | - | (92,745 | ) | - | (92,745 | ) | |||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 278 | 278 | ||||||||||||||||||||||
BALANCE,
March 31, 2010 (unaudited)
|
40,427,500 | $ | 40,427 | $ | - | $ | - | $ | (6,752,267 | ) | $ | 49,911 | $ | (6,661,929 | ) |
See
accompanying notes to consolidated financial statements
F-3
BABY FOX
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine
Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (92,745 | ) | $ | (757,606 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used
in) operating activities:
|
||||||||
Depreciation
|
11,799 | 9,046 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,302,017 | ) | (515,874 | ) | ||||
Inventories
|
900,092 | (2,704,840 | ) | |||||
Advance
to vendors
|
(2,360 | ) | 248,475 | |||||
Prepaid
expenses and sundry current assets
|
132,053 | (388,933 | ) | |||||
Deposits
|
(96,716 | ) | 32,806 | |||||
Accounts
payable
|
(1,961,458 | ) | 2,964,383 | |||||
Accrued
expenses, taxes and sundry current liabilities
|
1,512,050 | 715,206 | ||||||
Customer
deposits and advances
|
112,196 | 620,831 | ||||||
Net
cash (used in) provided by operating activities
|
(787,106 | ) | 223,494 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property and equipment
|
(10,085 | ) | (26,393 | ) | ||||
Net
cash used in investing activities
|
(10,085 | ) | (26,393 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Payment
of related party loans
|
- | (76,673 | ) | |||||
Proceeds
from related party loans
|
9,468 | - | ||||||
Proceeds
from long-term debt
|
732,161 | - | ||||||
Net
cash provided by (used in) financing activities
|
741,629 | (76,673 | ) | |||||
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
(38 | ) | (126 | ) | ||||
(DECREASE)
INCREASE IN CASH
|
(55,600 | ) | 120,302 | |||||
CASH,
beginning of period
|
312,397 | 110,140 | ||||||
CASH,
end of period
|
$ | 256,797 | $ | 230,442 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | - | $ | - | ||||
Income
tax paid
|
$ | 15,210 | $ | - |
See
accompanying notes to consolidated financial statements
F-4
BABY
FOX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
1.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
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 women’s apparel
and accessories. The Company sells merchandise at its corporate-owned
stores located within malls in 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
Company’s accounting policies used in the preparation of the accompanying
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 Company’s 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 nine month period ended March 31, 2010 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2010.
Certain
prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
Basis
of consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary after elimination of significant inter-company balances
and transactions.
Company
reporting year end
For US
financial statement reporting purposes, the Company has adopted June 30 as its
fiscal year end.
Use
of estimates in the preparation of financial statements
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. Actual results could differ from those estimates.
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. According to
FASB issued 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.
F-5
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. No material transaction
gain or loss for the three months and nine months ended March 31, 2010 and
2009.
Revenue
recognition and return policy
The
Company recognizes revenue in accordance with FASB issued accounting standards
regarding revenue recognition, which specifies that revenue is realized or
realizable and earned when four criteria are met:
Ÿ
|
Persuasive
evidence of an arrangement exists;
|
Ÿ
|
Delivery
has occurred or services have been
rendered;
|
Ÿ
|
The
seller’s price to the buyer is fixed or determinable;
and
|
Ÿ
|
Collectibility
of payment is reasonably
assured.
|
The
Company’s 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, current reserve 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 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.
Store
opening expenses
Due to
the short initial term of the leases with mall operators and the cancellation
provisions contained in the store leases, the cost of leasehold improvements and
store fixtures are charged to expense as incurred.
F-6
Advertising
expense
Advertising
expense is charged to operations as incurred and aggregated approximately
$16,434 and $2,056 for the three months ended March 31, 2010 and 2009 and
$38,513 and $11,546 for the nine months ended March 31, 2010 and 2009,
respectively.
Financial
instruments
The
Company considers the carrying amount of cash, accounts receivable, other
receivables, prepayments, accounts payable, accrued liabilities, other payables,
taxes payable, and loans to approximate their fair values because of the short
period of time between the origination of such instruments and their expected
realization and their current market rate of interest.
Cash
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 Company’s 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.
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 Company’s trade receivables is
substantially mitigated by the Company’s 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
management’s expectations.
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 Company’s 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. Currently this percentage
stands at 49% of ending inventory level 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 over their useful lives
using the straight line method for financial reporting purposes.
Maintenance,
repairs and minor renewals are charged to expense when incurred.
Replacements and major renewals are capitalized.
F-7
Deferred
income taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards 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 Company’s
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 FASB
issued Accounting Standard requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a
company’s 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 standard has
an immaterial effect on the Company’s financial statements, as the Company
consists of one reportable business segment, the sale of
merchandise.
Recent
accounting pronouncements
In
January 2010, the FASB issued new standards in ASC 820, Fair Value Measurements
and Disclosures: Improving Disclosures About Fair Value Measurements. This
amendment clarifies existing disclosures, require new disclosures, and include
conforming amendments to guidance on employers’ disclosures about postretirement
benefit plan assets. This disclosure is effective for interim and annual periods
beginning after December 15, 2009, except for disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company has determined the adoption of this rule does not have
a material impact on its consolidated financial statements.
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.
F-8
2.
GOING CONCERN
As of
March 31, 2010, the Company’s current liabilities exceeded its current assets by
$6,137,355 and the Company’s total liabilities exceeded its total assets by
$6,661,929. The Company generated a net loss for the nine months ended March 31,
2010 and the Company’s cash position on March 31, 2010 was $256,797. 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,
2009.
3.
PREPAID EXPENSES AND SUNDRY CURRENT ASSETS
Prepaid
expenses and sundry current assets consist of the following:
As of March 31,
2010
|
As of June 30,
2009
|
|||||||
Employee
advance
|
$ | 3,662 | $ | 4,656 | ||||
Prepaid
expenses
|
258,966 | 221,065 | ||||||
Prepaid
value-added tax
|
- | 169,036 | ||||||
Other
prepaid expenses
|
183,287 | 183,296 | ||||||
Total
|
$ | 445,915 | $ | 578,053 |
4.
RELATED PARTY TRANSACTIONS
The
Company purchased approximately 100% and 93% of its merchandise for the three
and nine months ended March 31, 2010 from ChangZhou CTS Fashion Co., Ltd.
(“CTS”) which is owned by the CEO of the Company. Total purchases from CTS
approximated $2,125,464 and $2,155,187 for the three months and $8,852,195and
$7,760,841 for the nine months ended March 31, 2010 and 2009.
Total
accounts payable to CTS as of March 31, 2010 and as of June 30, 2009 were
$8,401,213 and $8,281,174, respectively. The payables do not bear interest and
are due during normal course of business operation.
The
Company rents warehouse and office space from CTS and board director Fengling
Wang. Total rent to CTS and Fengling Wang, respectively, were $8,423 and $2,197
for the three months and $25,260 and $6,589 for the nine months ended March 31,
2010.
On
February 18, 2008, we entered into a loan agreement with our CEO, Jieming Huang,
pursuant to which, we borrowed $810,160. The loan agreement is subject to a
five-year term with five percent annual interest.
5.
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.
6.
ACCRUED EXPENSES AND SUNDRY CURRENT LIABILITIES
Accrued
expenses and sundry current liabilities consist of the following:
|
March 31,
|
|
|
June 30,
|
|
|||
|
2010
|
|
|
2009
|
|
|||
Employee
benefits payable
|
$
|
102,311
|
$
|
107,801
|
||||
Salary
payable
|
112,702
|
105,686
|
||||||
Store
expense
|
31,771
|
77,563
|
||||||
Agency
fee
|
2,465,498
|
1,501,204
|
||||||
Interest
payable
|
241,303
|
148,273
|
||||||
Sundry
current liabilities
|
521,464
|
21,965
|
||||||
Total
|
$
|
3,475,049
|
$
|
1,962,492
|
F-9
We
formally adopted agency marketing system in October 2008. Regional agent is
individual or trading company who we contract 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 our
approval), setting up our corporate stores in that area, hiring store staff, and
managing all stores’ day to day operation in the area. The agent can not 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 local expertise in sales and marketing in the area, such a
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 March 31, 2010 and 2009, we incurred agency fee of
$799,261 and $571,496, respectively, and $2,243,482 and $1,443,837 for the nine
months ended March 31, 2010 and 2009, respectively.
7.
DIVIDENDS PAYABLE
The
Company’s wholly-owned subsidiary, Shanghai Baby Fox Fashion Co., Ltd. declared
dividends on August 8, 2007 and December 10, 2007 in the amount of approximately
$401,900 and $433,700, respectively, to Fengling Wang, its sole shareholder on
record on the dates the dividends were declared.
8. LONG-TERM
DEBTS
Long-term
debt consists of the following, of which, $835,006 became current as of June 30,
2009 and $732,461 became current as of March 31, 2010.
March 31,
2010
|
June 30,
2009
|
|||||||
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, 2010
|
835,006 | 835,050 | ||||||
Amount
borrowed from an unrelated party, bearing zero interest and due January
31, 2011, the loan is guaranteed by CTS
|
732,461 | - | ||||||
Subtotal
|
2,377,627 | 1,645,210 | ||||||
Less:
current portion
|
1,567,467 | 835,050 | ||||||
Total
|
$ | 810,160 | $ | 810,160 |
Long-term
debt matures as follows:
Fiscal
year ended June 30,
|
||||
2010
|
$
|
835,006
|
||
2011
|
732,461
|
|||
2013
|
810,160
|
9. INCOME TAXES
The
Company did not have any provision for U.S. income taxes for the periods ended
March 31, 2010 due to the net operating loss carry forward in the United States,
for which the Company has set up 100% valuation allowance.
The
Company’s 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.
F-10
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended March 31, 2010 and 2009:
2010
|
2009
|
|||||||
U.S.
Federal income tax rate
|
35.0 | % | 35.0 | % | ||||
Foreign
income not recognized in U.S.
|
(35.0 | ) | (35.0 | ) | ||||
China
income taxes
|
25.0 | 25.0 | ||||||
Loss
not available for tax purposes
|
(25.0 | ) | (25.0 | ) | ||||
Effective
income tax rate
|
- | % | - | % |
Deferred
income taxes reflect the net effects of temporary difference between the
carrying amounts of assets and liabilities for financial statements purposes and
the amounts used for income tax purposes, and operating loss
carry-forwards.
The
components of net deferred tax assets and liabilities as of March 31, 2010 are
as follows:
March 31,
|
June 30,
|
|||||||
2010
|
2009
|
|||||||
Deferred
tax assets
|
||||||||
Inventory
markdown allowance
|
$ | 1,196,707 | $ | 1,381,040 | ||||
Bad
debt allowance
|
171,975 | 44,201 | ||||||
Net
loss carryforward
|
319,385 | 299,459 | ||||||
Gross
deferred tax assets
|
1,688,067 | 1,724,700 | ||||||
Valuation
allowance
|
(1,688,067 | ) | (1,724,700 | ) | ||||
Total
deferred tax assets
|
$ | - | $ | - |
10. COMMITMENTS AND
CONTINGENCIES
Leases
The
Company is obligated under operating leases for their headquarter facilities,
distribution center and certain stores located in malls. Aggregate minimum
annual rentals under non-cancelable leases are as follows:
Fiscal
year
|
||||
2010
|
$ | 345,466 | ||
2011
|
608,843 | |||
2012
|
8,786 | |||
2013
|
8,786 | |||
2014
|
4,393 | |||
Thereafter
|
- |
Approximately
23% of corporate stores in malls have minimum annual rentals plus percentage
rents. The remaining stores do not have minimum rentals, but have
percentage rent requirements. These leases can be terminated if performance does
not meet certain predetermined levels. Rental expense charged to operations
aggregated approximately $1,306,098 and $1,255,655 for the three months ended
March 31, 2010 and 2009 and $3,651,068 and $3,424,781 for the nine months ended
March 31, 2010 and 2009.
11.
RISK FACTORS
Vulnerability
due to Operations in PRC
The
Company’s 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 PRC’s political, economic and social
conditions. There is also no guarantee that the PRC government’s pursuit
of economic reforms will be consistent or effective.
F-11
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible. The People’s 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 People’s 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 Company’s ability to use revenue
generated in RMB to pay any dividend payments to its shareholders may be
limited.
Competition
The sale
of women’s fashion and accessories through retail stores is a highly competitive
business with numerous competitors, including individual and chain fashion
specialty stores, department stores and discount retailers. Brand image,
marketing, fashion design, price, service, fashion assortment and quality are
the principal competitive factors in retail store sales. A failure to
compete effectively could adversely affect growth and
profitability.
F-12
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Baby Fox
International, Inc. and Subsidiary
We have
audited the accompanying consolidated balance sheets of Baby Fox International,
Inc. and Subsidiary as of June 30, 2009 and 2008 and the related consolidated
statements of operations and other comprehensive income (loss), changes in
stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of is internal control
over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown on the accompanying balance
sheet, the Company’s current liabilities exceeded its current assets by
$5,949,857, the Company’s total liabilities exceeded its total assets by
$6,569,462 and the Company generated a net loss for the years ended June 30,
2009 and 2008. These circumstances raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Baby Fox International, Inc.
and Subsidiary as of June 30, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Hackensack,
New Jersey
October
23, 2009
F-13
CONSOLIDATED
BALANCE SHEETS
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$
|
312,397
|
$
|
110,140
|
||||
Accounts
receivable, net of allowance for doubtful accounts of
$176,803
|
||||||||
and
$179,168, respectively
|
3,261,343
|
1,855,639
|
||||||
Inventories
|
6,222,993
|
6,467,519
|
||||||
Advance
to vendors
|
26,341
|
279,024
|
||||||
Prepaid
expenses and sundry current assets
|
578,053
|
346,841
|
||||||
Total
current assets
|
10,401,127
|
9,059,163
|
||||||
PROPERTY
AND EQUIPMENT, net
|
56,659
|
42,408
|
||||||
DEPOSITS
|
133,896
|
138,372
|
||||||
Total
assets
|
$
|
10,591,682
|
$
|
9,239,943
|
||||
LIABILITIES AND STOCKHOLDERS’
(DEFICIENCY) EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable - trade
|
$
|
2,891,419
|
$
|
3,083,808
|
||||
Accounts
payable - affiliated company
|
8,281,174
|
2,900,523
|
||||||
Customer
deposits and advances
|
1,518,981
|
1,890,937
|
||||||
Accrued
expenses and sundry current liabilities
|
1,962,492
|
871,760
|
||||||
Loans
payable – officer and stockholder
|
23,490
|
97,624
|
||||||
Current
portion of long-term debt
|
835,050
|
-
|
||||||
Dividends
payable
|
838,378
|
835,231
|
||||||
Total
current liabilities
|
16,350,984
|
9,679,883
|
||||||
LONG-TERM
DEBT
|
810,160
|
1,642,075
|
||||||
Total
liabilities
|
17,161,144
|
11,321,958
|
||||||
STOCKHOLDERS’
(DEFICIENCY) EQUITY:
|
||||||||
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
|
||||||||
40,427,500
shares issued and outstanding
|
40,427
|
40,427
|
||||||
Accumulated
deficit
|
(6,659,522
|
)
|
(2,176,893
|
)
|
||||
Accumulated
other comprehensive income
|
49,633
|
54,451
|
||||||
Total
stockholders' (deficiency) equity
|
(6,569,462
|
)
|
(2,082,015
|
)
|
||||
Total
liabilities and stockholders' (deficiency) equity
|
$
|
10,591,682
|
$
|
9,239,943
|
See
accompanying notes to consolidated financial statements
F-14
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008
2009
|
2008
|
|||||||
SALES:
|
||||||||
Corporate
stores
|
$
|
20,931,091
|
$
|
13,695,640
|
||||
Non-corporate
stores
|
3,341,341
|
1,360,087
|
||||||
Total
sales
|
24,272,432
|
15,055,727
|
||||||
COST
OF SALES:
|
||||||||
Corporate
stores
|
15,576,153
|
9,345,365
|
||||||
Non-corporate
stores
|
1,795,911
|
703,316
|
||||||
Total
cost of sales
|
17,372,064
|
10,048,681
|
||||||
GROSS
PROFIT
|
6,900,368
|
5,007,046
|
||||||
OPERATING
EXPENSES:
|
||||||||
Selling
expenses
|
10,839,079
|
5,940,035
|
||||||
General
and administrative expenses
|
419,905
|
502,764
|
||||||
Total
operating expenses
|
11,258,984
|
6,442,799
|
||||||
OPERATING
INCOME (LOSS)
|
(4,358,616
|
)
|
(1,435,753
|
)
|
||||
OTHER
EXPENSES:
|
||||||||
Interest
expense
|
124,013
|
23,682
|
||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
(4,482,629
|
)
|
(1,459,435
|
)
|
||||
INCOME
TAXES
|
-
|
-
|
||||||
NET
INCOME (LOSS)
|
(4,482,629
|
)
|
(1,459,435
|
)
|
||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||
Foreign
currency translation adjustment
|
(4,818
|
)
|
18,167
|
|||||
COMPREHENSIVE
INCOME (LOSS)
|
$
|
(4,487,447
|
)
|
$
|
(1,441,268
|
)
|
||
BASIC
AND DILUTED INCOME (LOSS)
|
||||||||
PER
COMMON SHARE
|
$
|
(0.11
|
)
|
$
|
(0.04
|
)
|
||
BASIC
AND DILUTED WEIGHTED AVERAGE
|
||||||||
SHARES
OUTSTANDING
|
40,427,500
|
39,068,722
|
F-15
BABY FOX
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock
|
Additional
|
Retained
|
Accumulated
Other
|
|||||||||||||||||||||||||
Number
|
Par
|
Owners’
|
Paid-In
|
Earnings
|
Comprehensive
|
|||||||||||||||||||||||
of Shares
|
Value
|
Capital
|
Capital
|
(Deficit)
|
Income
|
Total
|
||||||||||||||||||||||
BALANCE,
June 30, 2007
|
-
|
-
|
626,000
|
-
|
253,308
|
36,284
|
915,592
|
|||||||||||||||||||||
Sale
of common stock
|
427,500
|
427
|
-
|
85,073
|
-
|
-
|
85,500
|
|||||||||||||||||||||
Sale
of common stock
|
37,957,487
|
37,957
|
-
|
(37,957
|
)
|
-
|
-
|
-
|
||||||||||||||||||||
Founder
shares issued for no consideration
|
100,000
|
100
|
(100
|
)
|
-
|
-
|
||||||||||||||||||||||
Common
stock issued for merger-related expenses
|
1,942,513
|
1,943
|
-
|
(1,943
|
)
|
-
|
-
|
-
|
||||||||||||||||||||
Effect
of acquisition
|
-
|
(626,000
|
)
|
(45,073
|
)
|
(135,535
|
)
|
-
|
(806,608
|
)
|
||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
18,167
|
18,167
|
|||||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(1,459,435
|
)
|
-
|
(1,459,435
|
)
|
|||||||||||||||||||
Dividends
declared
|
-
|
-
|
-
|
-
|
(835,231
|
)
|
-
|
(835,231
|
)
|
|||||||||||||||||||
BALANCE,
June 30, 2008
|
40,427,500
|
$
|
40,427
|
$
|
-
|
$
|
-
|
$
|
(2,176,893
|
)
|
$
|
54,451
|
$
|
(2,082,015
|
)
|
|||||||||||||
Net
Income (loss)
|
-
|
-
|
-
|
-
|
(4,482,629
|
)
|
-
|
(4,482,629
|
)
|
|||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
(4,818
|
)
|
(4,818
|
)
|
||||||||||||||||||||
BALANCE,
June 30, 2009
|
40,427,500
|
$
|
40,427
|
$
|
-
|
$
|
-
|
$
|
(6,659,522
|
)
|
$
|
49,633
|
$
|
(6,569,462
|
)
|
See
accompanying notes to consolidated financial statements
F-16
BABY FOX
INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
(loss) income
|
$
|
(4,482,629
|
)
|
$
|
(1,459,435
|
)
|
||
Adjustments
to reconcile net (loss) income to net cash provided by
|
||||||||
(used
in) operating activities:
|
||||||||
Depreciation
|
12,737
|
6,785
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,398,712
|
)
|
(717,403
|
)
|
||||
Inventories
|
268,898
|
(4,877,601
|
)
|
|||||
Due
from affiliated company
|
2,904,615
|
1,414,766
|
||||||
Advance
to vendors
|
253,735
|
(279,024
|
)
|
|||||
Prepaid
expenses and sundry current assets
|
(229,905
|
)
|
(261,404
|
)
|
||||
Store
deposits
|
4,997
|
(110,934
|
)
|
|||||
Accounts
payable
|
2,261,096
|
4,161,863
|
||||||
Accrued
expenses, taxes and sundry current liabilities
|
1,087,503
|
433,390
|
||||||
Customer
deposits and advances
|
(379,082
|
)
|
536,866
|
|||||
Net
cash provided by (used in) operating activities
|
303,253
|
(1,152,131
|
)
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property and equipment
|
(26,828
|
)
|
(31,275
|
)
|
||||
Investment
in subsidiary
|
-
|
(806,608
|
)
|
|||||
Net
cash used in investing activities
|
(26,828
|
)
|
(837,883
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from related party loans
|
(74,502
|
)
|
13,136
|
|||||
Proceeds
of stockholder loan
|
-
|
894,648
|
||||||
Proceeds
from issuance of long-term debt
|
831,915
|
|||||||
Proceeds
from sale of stock
|
-
|
85,500
|
||||||
Net
cash provided by (used in) financing activities
|
(74,502
|
)
|
1,825,199
|
|||||
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
334
|
(46,924
|
)
|
|||||
INCREASE
(DECREASE) IN CASH
|
202,257
|
(211,739
|
)
|
|||||
CASH,
beginning of period
|
110,140
|
321,879
|
||||||
CASH,
end of period
|
$
|
312,397
|
$
|
110,140
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$
|
-
|
$
|
-
|
||||
Income
tax paid
|
$
|
14,053
|
$
|
281,157
|
||||
Noncash
financing activities:
|
||||||||
Dividends
declared and not paid
|
$
|
-
|
$
|
835,231
|
See
accompanying notes to consolidated financial statements
F-17
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEAR
ENDED JUNE 30, 2009
1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis
of presentation
The
Company’s accounting policies used in the preparation of the accompanying
consolidated financial statements conform to accounting principles generally
accepted in the United States of America ("US GAAP") and have been consistently
applied.
Business
description
Baby Fox
International, Inc. (the “Company”), through its wholly-owned subsidiary
Shanghai Baby Fox Fashion Co., Ltd., is a specialty retailer, developer and
designer of fashionable, value-priced women’s apparel and accessories. The
Company sells merchandise at its corporate-owned stores located within malls in
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 consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary after elimination of significant inter-company balances
and transactions.
Certain
amounts included in the 2008 financial statement have been reclassified to
conform to the 2009 financial statement presentation.
Company
reporting year end
For US
financial statement reporting purposes, the Company has adopted June 30 as its
fiscal year end.
Use
of estimates in the preparation of financial statements
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. Actual results could differ from those estimates.
F-18
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 use its local
currency Chinese Renminbi (“RMB”) as its functional currency. According to
Statement of Financial Accounting Standards (“SFAS”) No. 52, “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. No material transaction
gain or loss for the years ended June 30, 2009 and 2008.
The
Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”)
No. 101, “Revenue Recognition
in Financial Statements” as amended by SAB No. 104 (together, “SAB 104”),
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
seller’s price to the buyer is fixed or determinable;
and
|
·
|
Collectibility
of payment is reasonably assured.
|
The
Company’s 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. Non-corporate stores have
the right to return unsold merchandise for up to sixty days after receipt of the
merchandise for exchange. Reserves are established to reflect actual and
anticipated losses resulting from the return of 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 return period we allow for non-corporate stores are relatively
long (2 months), current reserve 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 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.
F-19
Store
opening expenses
Due to
the short initial term of the leases with mall operators and the cancellation
provisions contained in the store leases, the cost of leasehold improvements and
store fixtures are charged to expense as incurred.
Advertising
expense
Advertising
expense is charged to operations as incurred and aggregated approximately
$20,717 and $25,000 for the years ended June 30, 2009 and 2008,
respectively.
Financial
instruments
SFAS 107,
“Disclosures about Fair Value
of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value of
the financial instruments as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The Company
considers the carrying amount of cash, accounts receivable, other receivables,
prepayments, accounts payable, accrued liabilities, other payables, taxes
payable, and loans to approximate their fair values because of the short period
of time between the origination of such instruments and their expected
realization and their current market rate of interest.
Cash
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 Company’s 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.
Accounts
receivable
Accounts
receivable consist of amounts due from mall operators which are generally
received within thirty days and amounts due from sales to non-corporate
stores. The risk of credit loss in the Company’s trade receivables is
substantially mitigated by the Company’s 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
management’s expectations.
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 Company’s 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. Currently this percentage
stands at 49% of ending inventory level based on historical experience 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.
F-20
Property
and equipment
Property
and equipment are recorded at cost. Depreciation is provided in amounts
sufficient to amortize the cost of the related assets over their useful lives
using the straight line method for financial reporting purposes.
Maintenance,
repairs and minor renewals are charged to expense when incurred.
Replacements and major renewals are capitalized.
Deferred
income taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109) 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, SFAS 109 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 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 Statement of Financial Accounting Standards No. 95, “Statement
of cash Flows,” cash flows from the Company’s 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
Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about Segments of an
Enterprise and Related Information ” requires use of the “management
approach” model for segment reporting. The management approach model is
based on the way a company’s 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. SFAS 131 has an immaterial effect on the Company’s financial
statements, as the Company consists of one reportable business segment, the sale
of merchandise.
Recent
accounting pronouncements
Effective
January 1, 2009, the Company adopted Financial Accounting Standards Board's
(FASB) Statement No. 160 (FAS 160), “Noncontrolling Interests in Consolidated
Financial Statements – an Amendment of ARB No. 51.” FAS 160 changed the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. FAS 160
required retrospective adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of FAS 160 will be
applied prospectively. The adoption of FAS 160 did not have a material impact on
the Corporation’s financial statements
F-21
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “
The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”), which identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of non-governmental
entities that are presented in conformity with U.S. GAAP. SFAS 162 is
effective for the Company sixty days following the SEC’s approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles”.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations ”
(“SFAS 141R”), which requires most identifiable assets, liabilities,
non-controlling interests and goodwill acquired in a business combination to be
recorded at “full fair value”. Under SFAS 141R, all business combinations
will be accounted for under the acquisition method. Significant changes,
among others, from current guidance resulting from SFAS 141R include the
requirement that contingent assets and liabilities and contingent consideration
shall be recorded at estimated fair value as of the acquisition date, with any
subsequent changes in fair value charged or credited to earnings. Further,
acquisition-related costs will be expensed rather than treated as part of the
acquisition. SFAS 141R is effective for periods beginning on or after
December 15, 2008.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115 ”. SFAS No. 159 allows companies to choose to measure eligible
financial instruments and certain other items at fair value that are not
required to be measured at fair value. SFAS No. 159 requires that
unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings at each reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and will be adopted
by the Company beginning in the first quarter of fiscal 2009.
The
adoption of these standards is not expected to have a material impact on the
Company’s results of operations or financial position.
2.
ACQUISITION
On
September 20, 2007, Baby Fox International, Inc. entered into an equity share
acquisition agreement with Fengling Wang, who owns 100% of Shanghai Baby Fox
Fashion Co., Ltd., (“Shanghai”). Pursuant to the agreement, the Company
purchased 100% of the equity shares of Shanghai in exchange for RMB 5.72 Million
(equivalent to $806,608), which was borrowed from an officer of the
Company.
3.
PREPAID EXPENSES AND SUNDRY CURRENT ASSETS
Prepaid expenses and
sundry current assets consist of the following:
June 30,
|
June 30,
|
|||||||
|
2009
|
2008
|
||||||
Employee
advance
|
$
|
4,656
|
$
|
4,816
|
||||
Prepaid
expenses
|
221,065
|
173,417
|
||||||
Prepaid
value-added tax
|
169,036
|
-
|
||||||
Prepaid
income tax
|
183,296
|
168,608
|
||||||
Total
|
$
|
578,053
|
$
|
346,841
|
F-22
4.
RELATED PARTY TRANSACTIONS
The
Company purchased approximately 78% of its merchandise in fiscal year 2009 from
ChangZhou CTS Fashion Co., Ltd. (“ChangZhou”) which is owned by the CEO of the
Company. Total purchases from ChangZhou approximated $13,327,797 and $6,774,736
for the years ended June 30, 2009 and 2008.
Total
accounts payable to ChangZhou for the years ended June 30, 2009 and 2008
aggregated $3,708,714 and $801,080, respectively. The payables do not bear
interest and are due during normal course of business operation.
The
Company rents warehouse and office space from ChangZhou and board director
Fengling Wang. Total rent were $11,720 and $8,790 to ChangZhou and Fengling
Wang, respectively, for the year ended June 30, 2009.
On
February 18, 2008, we entered into a loan agreement with our CEO, Jieming Huang,
pursuant to which, we borrowed $810,160. The loan agreement is subject to a
five-year term with five percent annual interest (5%).
5.
CUSTOMBER 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.
6.
ACCRUED EXPENSES AND SUNDRY CURRENT LIABILITIES
Accrued
expenses and sundry current liabilities consist of the following:
June 30,
|
June 30,
|
|||||||
|
2009
|
2008
|
||||||
Employee
benefits payable
|
$
|
107,801
|
$
|
115,785
|
||||
Value
added tax payable
|
-
|
93,061
|
||||||
-
|
-
|
|||||||
Salary
payable
|
105,686
|
114,638
|
||||||
Store
expense
|
77,563
|
301,331
|
||||||
Agency
fee
|
1,501,204
|
219,308
|
||||||
Interest
payable
|
148,273
|
24,224
|
||||||
Sundry
current liabilities
|
21,965
|
3,413
|
||||||
Total
|
$
|
1,962,492
|
$
|
871,760
|
We formally adopted agency
marketing system since 2008. Regional agent is individual or trading company who
we contract 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 our approval), setting up our corporate stores
in that area, hiring store staff, and managing all stores’ day to day operation
in the area. The agent can not 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, sales agent is paid a commission
called agency fee equal to 13% of the stores’ sales revenue. As our regional
agent is selected local expertise in sales and marketing in the area, such a
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 period ended June 30, 2009, we incurred agency fee in the amount of
$2,048,606, approximately 8% of total sales.
7.
DIVIDENDS PAYABLE
The
Company’s wholly-owned subsidiary, Shanghai Baby Fox Fashion Co., Ltd. declared
dividends on August 8, 2007 and December 10, 2007 in the amount of approximately
$401,900 and $433,700, respectively.
F-23
8.
LONG-TERM DEBT
Long-term
debt consists of the following, of which, $835,050 became current as of June 30,
2009.
June 30, 2009
|
June 30, 2008
|
|||||||
Amount
borrowed from shareholder, 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, 2010
|
835,050 | 831,915 | ||||||
TOTAL
|
$ | 1,645,210 | $ | 1,642,075 |
Long-term
debt matures as follows:
Year
ended June 30,
|
||||
2010
|
835,050
|
|||
2013
|
810,160
|
9. INCOME TAXES
The
Company did not have any provision for U.S. income taxesfor the year ended June
30, 2009 and 2008 due to the net operating loss carry forward in the United
States which the Company has set up 100% valuation allowance.
The
Company’ssubsidiary 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
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30, 2009 and 2008:
2009
|
2008
|
|||||||
U.S.
Federal income tax rate
|
35.0
|
%
|
35.0
|
%
|
||||
Foreign
income not recognized in U.S.
|
(35.0
|
)
|
(35.0
|
)
|
||||
China
income taxes
|
25.0
|
25.0
|
||||||
Loss
not available for tax purposes
|
(25.0
|
)
|
(25.0
|
)
|
||||
Effective
income tax rate
|
-
|
%
|
-
|
%
|
Deferred income taxes
reflect the net effects of temporary difference between the carrying amounts of
assets and liabilities for financial statements purposes and the amounts used
for income tax purposes, and operating loss carry-forwards.
The components of net deferred
tax assets and liabilities as of June 30, 2009 and 2008 are as
follows:
As of June 30,
|
||||||||
2009
|
2008
|
|||||||
Deferred tax assets
|
|
|
|
|
|
|
||
Inventory
markdown allowance
|
$
|
1,381,040
|
$
|
216,326
|
||||
Bad
debt allowance
|
44,201
|
-
|
||||||
Net
loss carryforward
|
299,459
|
385,342
|
||||||
Gross
deferred tax assets
|
1,724,700
|
601,668
|
||||||
Valuation
allowance
|
(1,724,700
|
)
|
(601,668
|
)
|
||||
Total
deferred tax assets
|
$
|
-
|
$
|
-
|
F-24
10. COMMITMENTS AND
CONTINGENCIES
Leases
The
Company is obligated under operating leases for their headquarter facilities,
distribution center and certain stores located in malls. Aggregate minimum
annual rentals under non-cancelable leases are as follows:
Fiscal
year ending
|
||||
2010
|
$
|
405,453
|
||
2011
|
8,790
|
|||
2012
|
8,790
|
|||
2013
|
4,395
|
|||
2014
|
-
|
|||
Thereafter
|
-
|
Approximately
32% of company owned stores in malls have minimum annual rentals plus percentage
rents. The remaining stores do not have minimum rentals, but have
percentage rent requirements. These leases can be terminated if performance does
not meet certain predetermined levels. Rental expense charged to operations for
the years ended June 30, 2009 and 2008 aggregated approximately $4,517,038 and
$2,756,000, respectively.
11. RISK
FACTORS
Vulnerability
due to Operations in PRC
The
Company’s 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 PRC’s political, economic and social
conditions. There is also no guarantee that the PRC government’s pursuit
of economic reforms will be consistent or effective.
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible. The People’s 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 People’s 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 Company’s ability to use revenue
generated in RMB to pay any dividend payments to its shareholders may be
limited.
Competition
The sale
of women’s fashion and accessories through retail stores is a highly competitive
business with numerous competitors, including individual and chain fashion
specialty stores, department stores and discount retailers. Brand image,
marketing, fashion design, price, service, fashion assortment and quality are
the principal competitive factors in retail store sales. A failure to
compete effectively could adversely affect growth and profitability.
F-25
868,262
Shares
of
Common
Stock
BABY
FOX
INTERNATIONAL,
INC.
PROSPECTUS
______________,
20__
DEALER
PROSPECTUS DELIVERY OBLIGATION
Until
[____], all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, all of which are to be paid by
the Registrant, are as follows:
Registration
Fee
|
$
|
7
|
||
Legal
Fees and Expenses
|
40,000
|
|||
Accounting
Fees and Expenses
|
7,500
|
|||
Printing
|
5,000
|
|||
Miscellaneous
Expenses
|
0
|
|||
Total
|
$
|
52,507
|
Item
14. Indemnification of Directors and Officers
The only
statue, charter provision, by-law, contract, or other arrangement under which
any controlling person, director or officers of the Registrant is insured or
indemnified in any manner against any liability which he may incur in his
capacity as such, is as follows:
Our articles
of incorporation limits the liability of our directors and officers to the
maximum extent permitted by Nevada law. Nevada law provides that directors and
officers of a corporation will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except liability for: (i) acts or
failure to act which constituted a breach of his or her fiduciary duties as a
director or officer; and (ii) the breach of those duties involved intentional
misconduct, fraud or a knowing violation of the law. Nevada law does not permit
a corporation to eliminate a director’s duty of care, and this provision of
our articles of incorporation has no effect on the availability of
equitable remedies, such as injunction or rescission, based upon a director’s
breach of the duty of care.
The
effect of the foregoing is to require us to indemnify our officers and directors
for any claim arising against such persons in their official capacities if such
person acted in good faith and in a manner that he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. We also maintain officers’ and directors’ liability
insurance coverage.
Insofar
as indemnification for liabilities may be permitted to our directors, officers
and controlling persons pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy and is, therefore,
unenforceable.
Item
15. Recent Sales of Unregistered Securities
In March
2008, we completed a Regulation D, Rule 506 Offering in which we issued a total
of 427,500 shares of our common stock to a total of 32 investors, at a price per
share of $.20 for an aggregate offering price of $85,500.
The 32
investors are direct and indirect business contact of our chief executive
officer, Jieming Huang. The individual receivers and controlling owner of the
receiving entity of below shares are accredited investors.
The
following sets forth the identity of the class of persons to whom we sold these
shares and the amount of shares for each shareholder:
II-1
Lan
Yu
|
12,500
|
|||
Qianfan
Wang
|
12,500
|
|||
Xianjiang
Liu
|
10,000
|
|||
Ran
Li
|
10,000
|
|||
Chen
Chen
|
15,000
|
|||
Long
Cheng
|
25,000
|
|||
Jing
Tao
|
25,000
|
|||
Transworld
Consulting Group Inc.
|
12,500
|
|||
Xiaobo
Wu
|
12,500
|
|||
Allan
M. Dyson
|
7,500
|
|||
Terauchi
Yasutada
|
15,000
|
|||
Toshiyuki
Tatsuda
|
15,000
|
|||
Satomi
Abe
|
15,000
|
|||
Naoya
Abe
|
15,000
|
|||
Norihiko
Mabuchi
|
15,000
|
|||
Kengo
Kato
|
15,000
|
|||
Hiroshi
Ito
|
15,000
|
|||
Yoshimi
Iitsuka
|
15,000
|
|||
Bruce
Irish
|
12,500
|
|||
Jing
Tang
|
10,000
|
|||
Johann
Tse
|
5,000
|
|||
Qiangfei
Xia
|
10,000
|
|||
Haruo
Nishizawa
|
15,000
|
|||
Yuezhi
Zhao
|
5,000
|
|||
Masaro
Fucuyamo
|
15,000
|
|||
Tri
Superior Trading
|
15,000
|
|||
Takashi
Yamaguchi
|
15,000
|
|||
Hayashi
Kazuo
|
15,000
|
|||
Xue
Tao Peng
|
12,500
|
|||
Keiko
Kizu
|
15,000
|
|||
Hao
Xia
|
10,000
|
|||
Liang
He
|
10,000
|
(A) The
Common Stock issued in our Regulation D, Rule 506 Offering was issued in a
transaction not involving a public offering in reliance upon an exemption from
registration provided by Rule 506 of Regulation D of the Securities Act of 1933.
In accordance with Section 230.506 (b)(1) of the Securities Act of 1933, these
shares qualified for exemption under the Rule 506 exemption for this offerings
since it met the following requirements set forth in Reg.
ss.230.506: No general solicitation or advertising was
conducted by us in connection with the offering of any of the
Shares.
(B)
At the time of the offering we
were not: (1) subject to the reporting requirements of Section 13 or 15 (d) of
the Exchange Act; or (2) an investment company” within the meaning of the
federal securities laws.
(C)
Neither we, nor any of our
predecessors, nor any of our directors, nor any beneficial owner of 10% or more
of any class of our equity securitiescurrently connected with us in any capacity
has been convicted within the past ten years of any felony in connection with
the purchase or sale of any security.
(D)
The offers and sales of securities by
us pursuant to the offerings were not to evade any registration or resale
requirements of the securities laws of the United States or any of its
states.
(E) None
of the investors are affiliated with any of our directors, officers or any
beneficial owner of 10% or more of our securities.
Please
note that pursuant to Rule 506, all shares purchased in the Regulation D Rule
506 offering completed in March 2008 were restricted in accordance with Rule 144
of the Securities Act of 1933. We have never utilized an underwriter for an
offering of our securities.
II-2
On
January 18, 2008, we issued a total of 1,942,513 shares of our common stock,
$.001 par value per share to the following individuals for services
rendered:
Favor
Jumbo Enterprises Limited
|
286,313
|
|||
First
Prestige, Inc.
|
665,180
|
|||
JD
Infinity Holdings, Inc.
|
475,129
|
|||
Catalpa
Holdings, Inc.
|
475,129
|
|||
Avenndi,
LLC
|
20,000
|
|||
Ying
Yue Song
|
13,762
|
|||
Wei
Zhuang
|
5,000
|
|||
Jing
Jin
|
2,000
|
These
shares are valued at $0.20 per share, the same valuation as it was in our
private placement closed in March 2008. All of the recipients of our common
stock in the table above are sophisticated investors. These shares were issued
in connection with services provided by each entity as set froth
below:
Favor Jumbo Enterprises
Limited
The
shares issued to Favor Jumbo Enterprise Limited (“Favor Jumbo”) were for
serviced provided to us by Qian Wang. Qian Wang designated Favor Jumbo to hold
the shares issued to her in connection with her consulting services to the
Company. The services included introducing and supervising Beijing Allstar
Business Consulting, Inc., providing both verbal and written translation between
English and Chinese for our executives, and providing strategic consulting and
advice to Baby Fox’s executives regarding U.S. capital market and related issues
regarding our private placement and application for quotation of the common
stock on OTC Bulletin Board.
First Prestige, Inc., JD
Infinity Hodlings, Inc., Catalpa Holdings, Inc., Avenndi LLC, Wei Zhuang and
Jing jin
The above
parties were designated by Beijing Allstar Business Consulting, Inc (“Allstar”)
to hold shares issued by the Company as compensation for services provided
pursuant to a business consulting agreement by and between Allstar and Shanghai
Baby Fox dated May 18, 2007 and amended on January 18, 2008. Pursuant to the
agreement, Allstar and its chosen consultants would provide advice on our
capital structure, financing options, types of financial instruments to be
offered, and the market segment for which the financial instruments are
suitable. In addition, Allstar and its chosen consultants would also provide
linguistic services for Baby Fox, including assisting with translations from
English to Chinese and Chinese to English; introduce professional firms and
individuals to us, including a U.S. law firm, U.S. accounting firm, broker and
dealer, and investment bank. In addition, Allstar would advise us on our
incorporation in the state of Nevada. Allstar and its chosen consultants also
would advise us, with the assistance of our U.S. securities counsel, on our
registration of private placement common stock and related filings with the U.S.
Securities and Exchange Commission and to file our applications with the FINRA
in order to have our common stock quoted on OTC Bulletin Board.
In March
2008, we issued a total of 427,500 shares of our common stock to 32 shareholders
at $.20 per share for an aggregate of $85,500 in a private offering under
Regulation D Rule 506 promulgated under Section 4(2) of the Securities
Act.
Qian Wang
is the sole and controlling shareholder of Favor Jumbo Enterprises Limited, a
British Virgin Islands company. At the time as of January 18, 2007, Qian Wang
and our CEO, Jieming Huang, were not married. There was no family relationship
between Qian Wang and Jieming Huang then. On January 18, 2007, we and Qian Wang
entered into a consulting agreement. Among other things, Qian Wang will
introduce and supervise the work of Beijing Allstar Business Consulting, Inc.,
provide both verbal and written translation between English and Chinese for Baby
Fox executives, and provide strategic consulting and advice to Baby Fox’s
executives to understand U.S. capital market and various related issues
regarding our private placement and related common stock registration with the
U.S. Securities and Exchange Commission (SEC) and to file our applications with
The Financial Industry Regulatory Authority (FINRA) in order to have our common
stock quoted on OTC Bulletin Board. Qian Wang’s services were valued at $96,263
which defined in her agreement with us. Among her total compensation,
approximate 40% or $39,000 is in cash payment and the rest 60% is in common
shares. We paid Qian Wang $9,750 on May 21, 2007; and $11,250 on May 29,
2008. We will owe Qian Wang additional $10,500 cash if our common stock
registration statement is declared effective by SEC and additional $7,500 cash
if the common stock is quoted on the OTC Bulletin Board. On January 18, 2008, we
awarded Qian Wang 286,313 shares as compensation for her services rendered. Qian
Wang designated Favor Jumbo Enterprises Limited, solely owned and controlled by
Qian Wang, as the holder of the 286,313 shares. These shares are valued at $0.20
per share of the same valuation as it was in our private placement in March
2008.
II-3
On May
18, 2007, our wholly-owned subsidiary, Shanghai Baby Fox, entered into a
consulting agreement with Beijing Allstar Business Consulting, Inc. (“Allstar”).
On January 18, 2008, we and Allstar amended and restated the consulting
agreement. According to the Amended and Restated Consulting Agreement, among
other things, Allstar and its chosen consultants provide advice on our capital
structure, financing options, types of financial instruments to be offered, and
the market segment for which the financial instruments are suitable. In
addition, Allstar and its chosen consultants will also provide linguistic
services for Baby Fox, including assisting with translations from English to
Chinese and Chinese to English; introduce professional firms and individuals to
us, including a U.S. law firm, U.S. accounting firm, broker and dealer, and
investment bank. In addition, Allstar will advise us on our incorporation in the
state of Nevada. Allstar and its chosen consultants also advise us, with the
assistance of our U.S. securities counsel, on our registration of private
placement common stock and related filings with the U.S. Securities and Exchange
Commission and to file our applications with the FINRA in order to have our
common stock quoted on OTC Bulletin Board. We paid Allstar $65,000 on May 21,
2007; and $75,000 on May 29, 2008. We will owe Allstar an additional $70,000 if
this registration statement is declared effective and an additional $50,000 if
the common stock is quoted on the OTC Bulletin Board.
On May
22, 2007, Avenndi, LLC (“Avenndi”) entered a consulting agreement with Shanghai
Baby Fox. Avenndi is a corporate strategy and consultancy firm based in Los
Angeles, California. Avenndi recommended various corporate strategies and
actions aimed to improve our overall business image and value. Furthermore,
Avenndi assisted Baby Fox in the development of a business information
memorandum and executive business summary for us. In addition, Avenndi assisted
us in the development of our website. We paid a total of $16,500 as compensation
for Avenndi’s services. In addition, we agreed to deliver Avenndi 10,000 shares
as incentive fees. These shares are valued at $0.20 per share, the same
valuation as it was in our private placement closed in March 2008.
Hongtao
Shi, Liuyi Zhang and Fred Chang are partner consultants at Allstar. Wei Zhuang
and Jing Jin were employees at Allstar. On January 18, 2008, pursuant to the
Revenue and Success Sharing Agreements among Allsar, Hongtao Shi, Liuyi Zhang,
and Avenndi, LLC, these individuals and companies received an allocation of our
common shares when we issued Allstar a total of 1,642,438 our common shares as
payment upon entering into the Amended and Restated Consulting Agreement. These
shares are valued at $0.20 per share, the same valuation as it was in our
private placement in March 2008. Four of the recipients from Allstar had
designees controlled by them to be the record holder of the shares. Hongtao Shi,
Liuyi Zhang and Allstar designated the following companies: First Prestige, Inc,
JD Infinity Holdings, Inc. and Catalpa Holdings, Inc., to hold the common
shares. All of these three companies are the British Virgin Islands’ companies.
First Prestige, Inc. is solely owned and controlled by Hongtao Shi; JD Infinity
Holdings, inc. is solely owned and controlled by Liuyi Zhang; and Catalpa
Holdings, Inc. is solely owned and controlled by Fred Chang. In addition,
Avenndi, LLC is solely owned and controlled by John Kennedy and Beijing Allstar
Business Consulting, Inc. is a People’s Republic of China registered consulting
company solely owned and controlled by Fred Chang.
To
summarize, the designees listed below are the current holders of the 1,642,438
common shares issued by us on January 18, 2008:
First
Prestige, Inc.
|
665,180
|
|||
JD
Infinity Holdings, Inc.
|
475,129
|
|||
Catalpa
Holdings, Inc.
|
475,129
|
|||
Avenndi
LLC
|
20,000
|
|||
Wei
Zhuang
|
5,000
|
|||
Jing
Jin
|
2,000
|
On
January 31, 2008, we entered into an engagement agreement with a People’s
Republic of China licensed law firm, DueBound Offices(“DueBound”). Ying
Yue Song is a partner at DueBound which will provide legal services including
issuance of China Legal Opinion Letter for us. Instead of paying DueBound in the
amount approximately equivalent to $2,752 (RMB20,000), we issued DueBound’s
designee, Ying Yue Song, 13,762 shares of our common stock. These shares were
valued at $0.20 per share, the same price as it was in our private placement in
March 2008.
II-4
These
shares of our common stock qualified for exemption under Section 4(2) of the
Securities Act of 1933 since the issuance shares by us did not involve a public
offering. The offering was not a “public offering” as defined in Section 4(2)
due to the insubstantial number of persons involved in the deal, size of the
offering, manner of the offering and number of shares offered. We did not
undertake an offering in which we sold a high number of shares to a high number
of investors. In addition, the shareholders had the necessary investment intent
as required by Section 4(2) since it agreed to and received a share certificate
bearing a legend stating that such shares are restricted pursuant to Rule 144 of
the 1933 Securities Act. This restriction ensures that these shares would not be
immediately redistributed into the market and therefore not be part of a “public
offering.” Based on an analysis of the above factors, we have met the
requirements to qualify for exemption under Section 4(2) of the Securities Act
of 1933 for this transaction.
On
January 18, 2008, we issued a total of 37,957,488 shares of our common stock,
$.001 par value per share to Baby Fox Limitedas founder’s shares. Baby Fox
Limited is a British Virgin Islands Company solely owned and controlled by Mr.
Hitoshi Yoshida.
These shares of our common stock qualified
for exemption under Section 4(2) of the Securities Act of 1933 since the
issuance shares by us did not involve a public offering. The offering was not a
“public offering” as defined in Section 4(2) due to the insubstantial number of
persons involved in the deal, size of the offering, manner of the offering and
number of shares offered. We did not undertake an offering in which we sold a
high number of shares to a high number of investors. In addition, the
shareholder had the necessary investment intent as required by Section 4(2)
since it agreed to and received a share certificate bearing a legend stating
that such shares are restricted pursuant to Rule 144 of the 1933 Securities Act.
This restriction ensures that these shares would not be immediately
redistributed into the market and therefore not be part of a “public offering.”
Based on an analysis of the above factors, we have met the requirements to
qualify for exemption under Section 4(2) of the Securities Act of 1933 for this
transaction.
II-5
Item
16. Exhibits and Financial Statement Schedules
Number
|
|
Description of Exhibit
|
Exhibit No.
|
Description
|
|
3.1
|
Articles
of Incorporation*
|
|
3.2
|
Bylaws*
|
|
5.1
|
Opinion
of Holland & Hart LLP*****
|
|
10.1
|
Share
Acquisition Agreement*
|
|
10.2
|
Supplementary
Equity Share Acquisition between Fengling Wang and Hitoshi
Yoshida.***
|
|
10.3
|
Shanghai
Baby Fox Ltd. and Changzhou CTS Purchase and Sale Contract
**
|
|
10.4
|
Non-Corporate
Store Sample Agreement **
|
|
10.5
|
Shanghai
Office Lease **
|
|
10.6
|
Changzhou
Warehouse Lease ***
|
|
10.7
|
Changzhou
Office Space Lease **
|
|
10.8
|
Loan
Agreement between Jeming Huang and Baby Fox International effective
February 18, 2008 **
|
|
10.9
|
Loan
Agreement between Zengquan Yu and Shanghai Baby Fox, Inc. effective
January 16, 2008. **
|
|
10.10
|
Baby
Fox Shareholders’ Agreement among Hitoshi Yoshida, and Jieming Huang,
Jieping Huang and Linyin Wang Effective May 6, 2008.
**
|
|
10.11
|
Consulting
Agreement between Shanghai Baby Fox Fashion Co., Ltd. and Qian Wang
Effective January 18, 2007.***
|
|
10.12
|
Consulting
Agreement between Baby Fox International, Inc. and Beijing AllStar
Business Consulting, Inc. Effective April 28,
2008.***
|
|
10.13
|
Revenue
and Success Reward Sharing Agreement between Beijing AllStar Business
Consulting, Inc. and Hongtao Shi Effective January 18,
2007.***
|
|
10.14
|
Revenue
and Success Reward Sharing Agreement between Beijing AllStar Business
Consulting, Inc. and Liuyi Zhang Effective January 18,
2007.***
|
|
10.15
|
Share
Interest Agreement between Beijing Allstar Business Consulting, Inc. and
Avenndi Limited Liability Allstar Effective October 16,
2007.***
|
|
10.16
|
Advisor
Agreement between Shanghai Baby-fox Fashion Co., Ltd. and Avenndi Limited
Liability Company Effective May 22, 2007.***
|
|
10.17
|
Website
Agreement between Shanghai Baby-fix Fashion Co, Ltd, along with its
Subsidiaries and Avenndi Effective September 06,
2007.***
|
|
10.18
|
Changzhou
Warehouse Lease & Office Space Lease Extension
|
|
10.19
|
Termination Agreement and Release among Hitoshi Yoshida, and Jieming Huang, Jieping Huang and Linyin Wang Effective June 17, 2010. | |
14.1
|
Code
of Ethics*
|
|
21.1
|
Subsidiaries
of the registrant*
|
|
23.1
|
Consent
of Paritz & Company, P.A.
|
|
23.2
|
Consent
of Holland & Hart LLP (contained in Exhibit
5.1)*****
|
|
23.3
|
Consent
of Holland & Hart LLP to be named as counsel
|
|
24.1
|
Powers
of Attorney (included on the signature page).***
|
|
99.1
|
Stock
Option Agreement between Hitoshi Yoshida and Linyin
Wang****
|
|
99.2
|
Stock
Option Agreement between Hitoshi Yoshida and Jieping
Huang****
|
|
99.3
|
Stock
Option Agreement between Hitoshi Yoshida and Jieming
Huang****
|
|
99.4
|
Shanghai
Baby Fox Ltd. Store Sales Metrics
|
|
99.5
|
Rescission
of Stock Option Agreement between Hitoshi Yoshida and Linyin
Wang
|
|
99.6
|
Rescission
of Stock Option Agreement between Hitoshi Yoshida and Jieping
Huang
|
|
99.7
|
Rescission
of Stock Option Agreement between Hitoshi Yoshida and Jieming
Huang
|
* Filed
as Exhibits to the Form S-1 filed with the SEC on May 12, 2008.
** Filed
as Exhibits to the Form S-1/A filed with the SEC on February 9, 2009, and
incorporated herein by reference.
*** Filed
as Exhibits to the Form S-1/A filed with the SEC on July 10, 2009, and
incorporated herein by reference.
****
Filed as Exhibits to the Form S-1 filed with the SEC on February 11,
2010.
*****
Filed as Exhibits to the Form S-1 filed with the SEC on April 23,
2010.
II-6
Item
17. Undertakings
(a) The
undersigned registrant will:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i)
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement;
and notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement; and
(iii)
include any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(b) For
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities, the registrant
undertakes that in a primary offering of securities of the registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(1) Any
preliminary prospectus or prospectus of the registrant relating to the offering
required to be filed pursuant to Rule 424;
(2) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(3) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(4) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
(d) The
undersigned registrant hereby undertakes that, for the purpose of determining
liability under the Securities Act of 1933 to any purchaser, each prospectus
filed pursuant to Rule 424(b) as part of a registration statement relating to an
offering shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such a first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Shanghai, China, on the 21 day
of June 2010.
Baby Fox International, Inc.
|
|
|
By:
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/s/
Jieming Huang
|
|
Jieming
Huang
Chief
Executive Officer
|
By:
|
/s/
Ping Chen
|
Ping
ChenVice President of Finance
Principal
Accounting Officer
|
PURSUANT
TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED:
Name
|
Title
|
Date
|
||
/s/
Jieming Huang
|
Chief
Executive Officer,
|
June
21, 2010
|
||
Jieming
Huang
|
President
and Chairman
|
|||
/s/
Ping Chen
|
Vice
President of Finance, Principal
|
June
21, 2010
|
||
Ping
Chen
|
Accounting
Officer and Controller
|
|||
*
|
Director
|
June
21, 2010
|
||
Fengling
Wang
|
||||
*
|
Director
|
June
21, 2010
|
||
Jieping
Huang
|
||||
*
/s/ Jieming Huang
|
June
21, 2010
|
|||
Jieming
Huang, as attorney-in-fact
|
II-8