10-Q 1 form10q.htm FORM 10-Q Baby Fox International, Inc. - Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to ____________

Commission file number 333-150835

BABY FOX INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)

Nevada 26-0775642
(State of other jurisdiction of incorporation or (IRS Employer identification No.)
organization)  

Shanghai Minhang District
89 Xinbang Road, Suite 305-B5
The People's Republic of China
(Address of principal executive offices)

+ 86 21 5415 3855
(Registrant's telephone number, including area code)

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ]      No [  ]

Indicate by check mark whether the registrant is a large accelerate filer, an accelerate filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]      No [X]

Number of shares of common stock outstanding as of May 2, 2011: 40,447,500


INDEX

  Page No.  
PART I FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Consolidated Balance Sheets (unaudited) as of March 31, 2011 and as of June 30, 2010 3
Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2011 and 2010 (unaudited) 4
Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months Ended March 31, 2011 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (unaudited) 6
  Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 31
Item 4. Controls and Procedures 31
PART II OTHER INFORMATION  
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 5. Other Information 32
Item 6. Exhibits 32
SIGNATURES   33

1


FORWARD LOOKING STATEMENTS

Information included or incorporated by reference in this quarterly report may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.

This quarterly report contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our plans for growth, (c) our relationship with our key manufacturers, (d) the regulation to which we are subject, (e) anticipated trends in our industry and (f) our needs for working capital. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as in this quarterly report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" in our prior annual report and matters described in this quarterly report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this quarterly report will in fact occur.

Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements described in the quarterly report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this quarterly report.

2


PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED )

    March 31,     June 30,  
    2011     2010  
             
ASSETS    
CURRENT ASSETS:            
Cash $  82,056   $  180,476  
Accounts receivable, net   3,465,270     2,863,542  
Inventory, net   8,803,917     6,808,309  
Prepaid expenses and other current assets   333,158     158,536  
             
TOTAL CURRENT ASSETS   12,684,401     10,010,863  
             
Property and equipment, net   50,205     51,037  
Deposits   208,204     207,101  
             
TOTAL ASSETS $  12,942,810   $  10,269,001  
             
LIABILITIES AND STOCKHOLDERS' DEFICIT   
             
CURRENT LIABILITIES:            
Accounts payable - trade $  615,732   $  515,298  
Advances from affiliated company   12,508,424     9,510,853  
Deposits payable and customer advances   1,635,019     1,263,502  
Accrued expenses and other current liabilities   2,727,268     2,751,220  
Short-term loan   1,067,659     -  
Loans payable - officer and stockholder   43,469     35,341  
Current portion of long-term debt   762,614     1,575,638  
Dividends payable   872,845     842,704  
             
TOTAL CURRENT LIABILITIES   20,233,030     16,494,556  
             
LONG-TERM DEBT   810,160     810,160  
             
TOTAL LIABILITIES   21,043,190     17,304,716  
             
STOCKHOLDERS' DEFICIT            
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, -0- shares issued and outstanding   -     -  
Common Stock, $0.001 par value, 90,000,000 shares authorized, 40,447,500 and 40,427,500 shares issued and outstanding as of March 31, 2011 and June 30, 2010, respectively   40,447     40,427  
Additional paid-in capital   69,980     -  
Accumulated deficit   (7,995,522 )   (7,095,053 )
Accumulated other comprehensive income (loss)   (215,285 )   18,911  
             
TOTAL STOCKHOLDERS' DEFICIT   (8,100,380 )   (7,035,715 )
             
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $  12,942,810   $  10,269,001  

See accompanying notes to unaudited consolidated financial statements

3


BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

    FOR THREE MONTHS ENDED     FOR NINE MONTHS ENDED  
    MARCH 31,     MARCH 31,  
    2011     2010     2011     2010  
                         
SALES                        
 Corporate stores $  6,219,065   $  6,475,430   $  17,419,990   $  17,800,827  
 Non-corporate stores   203,990     609,812     1,023,137     2,153,495  
         TOTAL SALES   6,423,055     7,085,242     18,443,127     19,954,322  
                         
COST OF GOODS SOLD                        
 Corporate stores   3,897,450     2,399,152     8,278,021     8,689,067  
 Non-corporate stores   231,547     322,855     821,006     1,398,443  
         TOTAL COST OF GOODS SOLD   4,128,997     2,722,007     9,099,027     10,087,510  
                         
GROSS PROFIT   2,294,058     4,363,235     9,344,100     9,866,812  
                         
                         
OPERATING EXPENSES:                        
 Selling expenses   2,603,276     3,030,093     8,302,056     9,064,223  
 General & administrative expenses   1,662,563     486,279     1,851,970     802,325  
TOTAL OPERATING EXPENSES   4,265,839     3,516,372     10,154,026     9,866,548  
                         
INCOME (LOSS) FROM OPERATIONS   (1,971,781 )   846,863     (809,926 )   264  
                         
Other income (expense)   (1,021 )   -     7,841     -  
Interest expense   (23,949 )   (30,861 )   (86,697 )   (93,009 )
                         
TOTAL OTHER EXPENSE   (24,970 )   (30,861 )   (78,856 )   (93,009 )
                         
INCOME (LOSS) BEFORE TAXES   (1,996,751 )   816,002     (888,782 )   (92,745 )
                         
INCOME TAX PROVISION   11,687     -     11,687     -  
                         
NET INCOME (LOSS) $  (2,008,438 ) $  816,002   $  (900,469 ) $  (92,745 )
                         
OTHER COMPREHENSIVE INCOME (LOSS):                        
   Foreign currency translation gain (loss)   (93,261 )   (1,319 )   (234,196 )   278  
                         
COMPREHENSIVE INCOME (LOSS) $  (2,101,699 ) $  814,683   $  (1,134,665 ) $  (92,467 )
                         
                         
BASIC AND DILUTED INCOME (LOSS) PER SHARE   (0.05 )   0.02     (0.02 )   (0.00 )
                         
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING   40,447,500     40,427,500     40,441,900     40,427,500  

See accompanying notes to unaudited consolidated financial statements

4


BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)

                                        ACCUMULATED        
                                        OTHER     TOTAL  
    PREFERRED STOCK     COMMON STOCK     ADDITIONAL     ACCUMULATED     COMPREHENSIVE     STOCKHOLDERS'  
  Shares     Amount     Shares     Amount     PAID-IN CAPITAL     DEFICIT     INCOME     DEFICIT  
BALANCE- June 30, 2010     $ -     40,427,500   $  40,427   $  -   $  (7,095,053 ) $  18,911   $  (7,035,715 )
                                                 
Common stock issued for legal services               20,000     20     69,980                 70,000  
                                                 
Net loss                           -     (900,469 )         (900,469 )
                                                 
Foreign currency translation adjustment                                       (234,196 )   (234,196 )
                                                 
BALANCE- March 31, 2011     $  -     40,447,500   $  40,447   $  69,980   $  (7,995,522 ) $  (215,285 ) $  (8,100,380 )

See accompanying notes to unaudited consolidated financial statements

5


BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

    FOR THE NINE MONTHS ENDED MARCH 31,  
    2011     2010  
             
OPERATING ACTIVITIES:            
Net loss $  (900,469 ) $  (92,745 )
Adjustments to reconcile net loss to net cash used in operating activities:        
   Depreciation expense   13,567     11,799  
   Bad debt expense   1,182,867     -  
   Accrual (Reversal) of inventory reserve   (465,013 )   1,012,822  
   (Decrease) increase of valuation allowance on deferred tax assets   265,894     (36,633 )
   Common stock issued for legal services   70,000     -  
   Change in operating assets and liabilities:            
     Accounts receivable   (1,673,403 )   (1,302,017 )
     Inventory   (1,256,302 )   (112,730 )
     Advance to vendors   -     (2,360 )
     Prepaid expenses and other current assets   (165,983 )   132,053  
     Deposits   6,193     (96,716 )
     Deferred tax   (265,894 )   36,633  
     Accounts payable-trade   80,563     (2,081,497 )
     Accrued expenses, taxes and other current liabilities   (116,309 )   1,512,050  
     Deposits payable and customer advances   320,593     112,196  
             
NET CASH USED IN OPERATING ACTIVITIES   (2,903,696 )   (907,145 )
             
INVESTING ACTIVITIES:            
   Acquisition of property and equipment   (10,956 )   (10,085 )
             
NET CASH USED IN INVESTING ACTIVITIES   (10,956 )   (10,085 )
             
FINANCING ACTIVITIES:            
   Advances from affiliated company   2,610,712     120,039  
   Proceeds of stockholder loan   6,743     9,468  
   Proceeds from short-term loan   1,048,901     -  
   Proceeds from long-term debt   -     732,161  
   Repayment of long-term debt   (854,105 )   -  
             
NET CASH PROVIDED BY FINANCING ACTIVITIES   2,812,251     861,668  
             
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS   3,981     (38 )
             
INCREASE ( DECREASE ) IN CASH   (98,420 )   (55,600 )
             
CASH - BEGINNING OF THE PERIOD   180,476     312,397  
             
CASH - END OF THE PERIOD $  82,056   $  256,797  
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION            
Income tax paid $  11,687   $  15,210  
Interest expense paid $  236,967   $  -  

See accompanying notes to unaudited consolidated financial statements

6


BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

Business description

Baby Fox International, Inc. (the “Company”), through its wholly-owned subsidiary Shanghai Baby Fox Fashion Co., Ltd. (“Shanghai Baby Fox”), is a specialty retailer, developer and designer of fashionable, value-priced women’s apparel and accessories. The Company primarily sells merchandise through its corporate-owned stores located within upscale shopping malls across China. The mall operator collects the proceeds of sales from customers and remits the proceeds, net of rent and other charges, to the Company.

In addition, the Company sells merchandise to licensed non-corporate owned stores which only carry the Baby Fox brand merchandise.

Basis of presentation

The Company’s accounting policies used in the preparation of the accompanying unaudited consolidated financial statements conform to accounting principles generally accepted in the United States of America ("US GAAP") and have been consistently applied.

In the opinion of management, the 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 three months and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.

The balance sheet at June 30, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principal of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Shanghai Baby Fox. All significant inter-company balances and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. The Company’s significant estimates include estimates for reserves for inventory markdowns, allowance for doubtful accounts and useful lives of property and equipment. Actual results could differ from those estimates.

7


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currency translation

The reporting currency of the Company is the US dollar. The functional currency of Baby Fox International is the US dollar. Shanghai Baby Fox uses its local currency, the Chinese Renminbi (“RMB”) as its functional currency. In accordance with accounting standards regarding foreign currency translation, results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Gains and losses from foreign currency transactions are included in the results of operations. The Company did not have any material transaction gain or loss for the three months and nine months ended March 31, 2011 and 2010.

Revenue recognition and return policy

The Company recognizes revenue in accordance with accounting standards regarding revenue recognition, which specifies that revenue is realized or realizable and earned when four criteria are met:

  • Persuasive evidence of an arrangement exists;

  • Delivery has occurred or services have been rendered;

  • The seller’s price to the buyer is fixed or determinable; and

  • Collectability 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. The 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 defective 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 defective 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 a shorter product life cycles and the return period we allow for non-corporate stores is relatively long, the current reserve already takes into account the effect of introducing new products on expected returns of previous products. The return reserve based on this percentage of sales has been consistent with actual returns in our operating history. The balances of the return reserve as of March 31, 2011 and 2010 were $19,015 and $121,799, respectively. We will closely monitor returns for existing and new stores and adjust reserve for returns if necessary. We do not offer early payment discounts, incentive discounts based on volume or credit for products that do not sell well at non-corporate stores.

8


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition and return policy (continued)

Shipping and handling of merchandise sold to non-corporate stores is included in revenue and not separately billed to customers or paid directly by the customer.

Cost of goods sold

Cost of goods sold includes the cost of merchandise sold and related costs including purchasing, receiving, warehousing and related costs.

Advertising expense

Advertising expense is charged to operations as incurred and totaled approximately $-0- and $16,434 for the three months ended March 31, 2011 and 2010 and $-0- and $38,513 for the nine months ended March 31, 2011 and 2010, respectively.

Fair value of financial instruments

The Company adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, loan receivables, other receivables, advance to suppliers, short-term loan, accounts payable, advance from customers, other payables and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The carrying value of the long-term debt approximates fair value based on market rates and terms currently available to the Company. The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.

Cash and cash equivalents

The Company includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months of their acquisition date. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts and liquidity funds with financial institutions and are stated at cost, which approximates fair value.

The Company maintains cash with financial institutions in the People’s 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.

9


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounts receivable

Accounts receivable consist of amounts due from mall operators which are generally received within sixty days and amounts due from sales to non-corporate stores. The risk of credit loss in the 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. On March 31, 2011 and June 30, 2010, the balances of bad debt allowance represented 38% and 24%, respectively, of the outstanding accounts receivable balances.

Inventories

Inventories, consisting of finished goods and accessories, are valued at the lower of cost, as determined by the average cost, or market. Cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. Due to the high style nature of the Company’s merchandise, slow moving, out of season and broken style merchandise is sold to discount stores substantially below cost. Reserves are recorded to reduce the carrying value of these items to market value and as additional cost of sales.

The Company maintains a perpetual inventory and sales report by store location. This is updated daily based upon shipping and sales reports. A weekly review is made by the merchandising group and management to identify slow moving merchandise. Merchandise, which is slow moving during the first month at a store is reported to the head office, and is sometimes moved to other stores, due to varying style demand in the diverse markets in China. Unsold merchandise is then marked down, and if not sold within 90 days of receipt, it is shipped back to the warehouse. The company then has periodic discount warehouse sales and uses certain liquidators.

The Company values inventory at the lower of cost or market, and maintains a reserve for inventory markdowns. This encompasses current goods held for liquidation and markdown, and application of historical percentages of current inventory which is anticipated to be marked down and /or liquidated. The percentage of inventory reserved was 34% and 42% of ending inventory level as of March 31, 2011 and June 30, 2010, respectively, based on historical experience and current goods held for liquidation, and reserves are made accordingly at each reporting period. The Company periodically adjusts the percentage based on a review of changing ratios and the percentage of selling prices recovered through liquidation.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets less the estimated residual value over their useful lives using the straight line method for financial reporting purposes. Total depreciation for the nine months ended March 31, 2011 and 2010 were $13,567 and $11,799, respectively. The useful life and estimated residual value are as follows:

  Office equipment
Useful life 5 years
Residual value 5%

Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized.

10


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

Deferred tax assets and liabilities are 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, the Company recognizes future tax benefits, such as carryforwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance is 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 Company uses 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 Company consists of one reportable business segment, the sale of merchandise.

Recent accounting pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Level 1 and 2, separate disclosures of purchases, sales, issuance, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Company’s fiscal year 2011); early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2010-06 on its financial statements.

11


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

In February 2010, FASB issued new standards in ASC 855, Subsequent Events. 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 adoption of this amendment did not have a material impact on its consolidated financial statements.

Subsequent events

The Company evaluated events subsequent to March 31, 2011 through the date the financial statements were issued and no items required additional disclosure.

3. GOING CONCERN

As reflected in the accompanying financial statements, the Company has an accumulated deficit of $8,100,380, and a net loss for the three-month and nine-month periods ended March 31, 2011 of $2,008,438 and $900,469, respectively. Also as of March 31, 2011, the Company’s current liabilities exceeded its current assets by $7,548,629 and the Company’s total liabilities exceeded its total assets by $8,100,380. These factors raise substantial doubt about our ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital and implement its business plan. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.

4. ACCOUNTS RECEIVABLE

    As of     As of  
    March 31, 2011     June 30, 2010  
Accounts receivable $  5,623,441   $  3,784,745  
Less: bad debt allowance   (2,158,171 )   (921,203 )
Accounts receivable, net $  3,465,270   $  2,863,542  

5. INVENTORIES

    As of     As of  
    March 31, 2011     June 30, 2010  
Inventories $  13,368,883   $  11,672,624  
Less: reserve for inventory markdown   (4,564,966 )   (4,864,315 )
Inventories, net $  8,803,917   $  6,808,309  

12


6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

    As of     As of  
    March 31, 2011     June 30, 2010  
Employee advances $  3,813   $  3,682  
Prepaid expenses   329,345     154,854  
Total $  333,158   $  158,536  

7. RELATED PARTY TRANSACTIONS

The Company purchased 100% of its merchandise for the three and nine months ended March 31, 2011 from Changzhou CTS Fashion Co., Ltd. (“CTS”) which is owned by the majority shareholder and Chief Executive Officer (“CEO”) of the Company. Total purchases from CTS amounted to $4,241,219 and $2,125,464 for the three months and $15,793,770 and $8,852,195 for the nine months ended March 31, 2011 and 2010, respectively.

Total advances payable to CTS as of March 31, 2011 and June 30, 2010 were $12,508,424 and $9,510,853, respectively. These payables do not bear interest and are due upon demand during the normal course of business operations.

The Company also rents warehouse and office space from CTS and one of its board directors, Ms. Fengling Wang. Total rent to CTS and Fengling Wang, respectively, were $8,701 and $2,270 for the three months and $25,848 and $6,743 for the nine months ended March 31, 2011, and $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, the Company entered into a loan agreement with its CEO, Jieming Huang, pursuant to which, the Company borrowed $810,160 from Mr. Jieming Huang. The loan agreement is subject to a five-year term with five percent (5%) annual interest payable in arrears with payment due at maturity.

8. 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.

9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

    As of     As of  
    March 31, 2011     June 30, 2010  
Employee benefits payable $  104,047   $  101,971  
Salary payable   102,764     109,678  
Store expense   50,079     67,171  
Agency fee   1,605,020     1,607,950  
Interest payable   126,046     273,198  
Other current liabilities   739,312     591,252  
Total $  2,727,268   $  2,751,220  

13


9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (continued)

We formally adopted an agency marketing system in October 2008. Regional agents are an individual or a trading company who is contracted to have exclusive and nontransferable rights to sell and promote our products in designated areas such as a city or province. The contract term is usually for a year and renewable 60 days prior to expiration. The agent is selected from our target area and responsible for determining store locations within the area (contingent upon Company approval), setting up the corporate stores in that area, hiring store staff, and managing all stores’ day-to-day operation in the area. The agent does not have authority to raise the standard prices of our products or offer discounts 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, a sales agent is paid a commission called an agency fee ranging from 5% to 38% of the stores’ sales revenue. As our regional agent is selected based on his or her local expertise in sales and marketing in the area, such marketing system helps us penetrate a target market more rapidly and provides proper incentive for the agent to increase our market share in that area. For the three months ended March 31, 2011 and 2010, we incurred agency fees of $402,018 and $584,774, respectively. For the nine months ended March 31, 2011 and 2010, we incurred agency fees of $1,740,022 and $2,243,482, respectively.

10. 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 $420,076 and $452,769, respectively, to Fengling Wang, its sole shareholder on record on the dates the dividends were declared.

11. SHORT-TERM LOAN

On January 12, 2011, the Company entered into a short-term loan agreement with Industrial Bank Co., Ltd. to borrow RMB7,000,000 (USD1,067,659) for the purpose of purchasing inventory from Changzhou CTS Fashion Co., Ltd. The principal is due on January 11, 2012 with interest payable on a quarterly basis at 1.2 times the standard borrowing rate published by People’s Bank of China.

12. LONG-TERM DEBT

Long-term debt consists of the following:

    As of     As of  
    March 31, 2011     June 30, 2010  
Amount borrowed from our CEO, bearing interest at 5% per annum and due February 17, 2013 $  810,160   $  810,160  
Amount borrowed from an unrelated party, bearing interest at 10% per annum and due June 16, 2011   -     839,359  
Amount borrowed from an unrelated party, bearing zero interest and due June 30, 2011, guaranteed by CTS   762,614     736,279  
Subtotal   1,572,774     2,385,798  
Less: current portion   762,614     1,575,638  
Total $  810,160   $  810,160  

Long-term debt matures as follows:

As of March 31, 2011      
       
2011 $  762,614  
2012 $  -  
2013 $  810,160  

The total interest expense for the three months ended March 31, 2011 and 2010 were $23,949 and $30,861, respectively and were $86,697 and $93,009 for the nine months ended March 31, 2011 and 2010, respectively.

14


13. INCOME TAXES

The Company’s earnings from continuing operations before income taxes are as follows:

    For the three months ended March 31,  
    2011     2010  
Earnings (loss) from continuing operation before income taxes-China   (1,985,812 )   826,132  
Earnings (loss) from continuing operation before income taxes-US   (10,939 )   (10,130 )

    For the nine months ended March 31,  
    2011     2010  
Earnings (loss) from continuing operation before income taxes-China   (786,093 )   (62,194 )
Earnings (loss) from continuing operation before income taxes-US   (102,688 )   (30,551 )

The income tax expense (benefit) are as follows:

    For the three months ended March 31,     For the nine months ended March 31,  
    2011     2010     2011     2010  
Current-China $  -    $  -   $  -    $  -  
Deferred-China   11,687     -     11,687     -  
Subtotal-China   11,687     -     11,687     -  
                         
Current-US   -     -     -     -  
Deferred-US   -     -     -     -  
Subtotal-US   -     -     -     -  
                         
Current-Total   -     -     -     -  
Deferred-Total   11,687     -     11,687     -  
Total $  11,687   $  -   $  11,687   $  -  

Deferred tax assets at March 31, 2011 and June 30, 2010 amounted to $-0- and $-0-, respectively, net of valuation allowance recorded. The tax effects of temporary differences that give rise to significant portions of deferred tax assets at March 31, 2011 and June 30, 2010 are as follows:

    As of     As of  
    March 31, 2011     June 30, 2010  
Bad debt allowance $  539,543   $  235,815  
Inventory provision   1,141,242     1,216,079  
Net loss carried forward-China   326,044     258,644  
Net loss carried forward-US   79,765     44,852  
Total deferred tax assets   2,086,594     1,755,390  
Valuation allowance   (2,086,594 )   (1,755,390 )
Net deferred tax assets $  -   $  -  

15


13. INCOME TAXES (continued)

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.

The reconciliation of income tax computed at the statutory rates to the total income tax for the three and six months ended March 31, 2011 and 2010 is as follows:

    For the three months ended March 31,  
    2011     2010  
Income tax expense (benefit) at federal statutory rate   (678,895 )   277,441  
Adjustment due to:            
Foreign rate differential   178,723     (74,352 )
Other   (8,754 )   29,550  
Usage of loss carried forward   -     (232,639 )
Increase in valuation allowance   520,613     -  
Income tax expense   11,687     -  
             
    For the nine months ended March 31,  
    2011     2010  
Income tax expense (benefit) at federal statutory rate   (302,186 )   (31,533 )
Adjustment due to:            
Foreign rate differential   70,748     5,597  
Other   (22,769 )   62,569  
Usage of loss carried forward   -     (36,633 )
Increase in valuation allowance   265,894     -  
Income tax expense   11,687     -  

14. EARNINGS PER SHARE

Basic and diluted income (loss) per share is computed as net income divided by the weighted-average number of common shares outstanding for the period.

Weighted-average number of shares are as follows:

    For the three months ended March 31,  
    2011     2010  
Weighted-average number of shares-basic and diluted   40,447,500     40,427,500  
             
    For the nine months ended March 31,  
    2011     2010  
Weighted-average number of shares-basic and diluted   40,441,900     40,427,500  

On September 16, 2010, the Company issued 20,000 shares to The Crone Law Group for legal services valued at $70,000. The shares consisted of 10,000 shares for the firm’s work on the registration statement on Form S-1 and 10,000 shares for the reduced hourly rate offered for the firm’s on-going work.

16


15. COMMITMENTS AND CONTINGENCIES

Leases

The Company is obligated under operating leases for their headquarters facilities, distribution center and certain stores located in malls. Aggregate minimum annual rentals under non-cancelable leases are as follows:

Fiscal year      
2011 $  536,032  
2012   871,366  
2013   8,991  
2014   4,495  
2015   -  
Thereafter   -  

Approximately 29% of our corporate stores in malls are required to pay minimum annual rents for the spaces leased plus additional rents calculated based on certain percentage of actual sales over minimum amount of sales required. The remaining stores do not have minimum annual rent requirements but are required to pay rents based on a certain percentage of actual sales over minimum sales required. These leases can be terminated if performance does not meet certain predetermined levels stipulated by mall operators. Rental expense charged to operations aggregated $1,284,062 and $1,306,098 for the three months and $3,643,482 and $3,651,068 for the nine months ended March 31, 2011 and 2010, respectively, and is included in selling expenses.

16. RISKS AND UNCERTAINTIES

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.

Lack of Business Insurance

The Company is potentially exposed to risks of losses that may result from business interruptions, injury to others (including employees) and damage to property. These losses may be uninsured, especially due to the fact that the Company’s operations are in China, where business insurance is not readily available. If: (i) information is available before the Company’s financial statements are issued or are available to be issued indicates that such loss is probable and (ii) the amount of the loss can be reasonably estimated, an estimated loss will be accrued by a charge to income. If such loss is probable but the amount of loss cannot be reasonably estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. As of March 31, 2011, the Company has not experienced such loss.

17


16. RISKS AND UNCERTAINTIES (continued)

Concentration of Vendors and Customers

For the three months ended March 31, 2011 and 2010, the Company made 100% of its total purchases of merchandise from CTS, an affiliated company. For the nine months ended March 31, 2011 and 2010, the Company purchased 100% and 93% of its merchandise from CTS. The balance of payables to CTS represented 95% and 95% of the Company’s outstanding accounts payable at March 31, 2011 and June 30, 2010, respectively.

No single customer accounted for more than 10% for the total sales for the three and nine months ended March 31, 2011 and 2010.

18


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

The following discussion and analysis of the results of operations and financial condition of Baby Fox International, Inc. (“Baby Fox”) for the three and nine months ended March 31, 2011 and 2010 should be read in conjunction with Baby Fox’ consolidated financial statements, and the notes to those financial statements that are included elsewhere in this quarterly report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in our most recent annual report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

Our Company

Baby Fox International Inc., a Nevada corporation organized on August 13, 2007, is a holding company whose primary business operations are conducted through our wholly-owned China subsidiary Shanghai Baby Fox Fashion Co., Ltd. (together “Baby Fox” or “the Company”). Shanghai Baby Fox Fashion Co., Ltd. (“Shanghai Baby Fox”) was originally founded by our board director, Fengling Wang, under Chinese law in March of 2006. On September 20, 2007, we entered into an Equity Share Acquisition Agreement with Fengling Wang in which we purchased 100% of the equity shares of Shanghai Baby Fox in exchange for RMB 5.72 million (approximately US$806,608). The acquisition was consummated on November 26, 2007 when we received the Certificate of Approval from the Shanghai Foreign Economic Relation & Trade Commission.

Shanghai Baby Fox is a China-based specialty retailer, developer, and designer of fashionable, value-priced women’s apparel and accessories. The Company’s products are aimed to target women aged 18 to 40 in China. It continuously updates its fashions and clothing designs to stay in sync with the latest fashions and trends in Korea, Japan and 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 148 stores in over 30 cities as of March 31, 2011.

Listing on the OTC Bulletin Board

On August 6, 2010, the Company’s registration statement on Form S-1/A was declared effective by the SEC. On October 6, 2010, the Company’s common stock was approved by FINRA for trading on the OTC Bulletin Board under the ticker symbol “BBYF.OB”, which was subsequently changed to “BBFX.OB” on October 29, 2010.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

Continued growth of Chinese 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 27.4% in the first half of 2009 and 28.5% in 2008 (the most recent available data from Li & Fung Research Center’s research report “Latest Developments of China’s Apparel Market,” (Issue Number 15 in December 2009)). We believe our strong knowledge of local markets, media contacts and brand image we have built, and award winning design experience give the organization significant competitive advantages in this rapidly growing market.

19


Experienced management and design team. Women in China have become increasingly selective in their choice of clothing and the Chinese fashion industry is trending towards shorter product life cycles and better designs and development. The ability to respond to instantaneous fashion trends is a key attribute to the success of an apparel company. Baby Fox is at the forefront of trends by having an experienced management and designer team to launch a garment from design to production, and finally to distribution in just weeks. The Company brings together a complimentary mix of industry expertise, management know-how, and product innovation. Collectively, the management team has strong fashion design, operations, and apparel sales experience. Through the 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. The Company has 148 corporate and non-corporate stores in over 30 cities as of March 31, 2011. Corporate stores are primarily opened in major metropolitan areas and non-corporate or “licensed” stores are mostly established in suburban communities. We plan to continue growing retail store locations over the next few years but due to liquidity constraints, we will be more focused on location selection. 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 requirements, 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 should 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).

On March 16, 2007, the National People’s Congress of the PRC passed the new EIT Law, which took effect as of January 1, 2008. The new EIT Law imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiary, unless they qualify under certain limited exceptions. The previous tax rate was 33.0% . In addition, under the new EIT Law, dividends from our PRC subsidiary to us will be subject to a withholding tax. The rate of the withholding tax is 10%. Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of the PRC subsidiary.

20


Results of Operations

The following table sets forth key components of our results of operations for the periods indicated, in US dollars:

    For the three months ended March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Total sales $  6,423,055   $  7,085,242  
Cost of goods sold   4,128,997     2,722,007  
             
Gross profit   2,294,058     4,363,235  
             
Selling, general and administrative expenses   4,265,839     3,516,372  
             
Income (loss) before provision for income taxes   (1,971,781 )   846,863  
Income taxes   11,687     -  
             
Net income (loss) $  (2,008,438 ) $  816,002  
             
             
             
    For the nine months ended March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Total sales $  18,443,127   $  19,954,322  
Cost of goods sold   9,099,027     10,087,510  
             
Gross profit   9,344,100     9,866,812  
             
Selling, general and administrative expenses   10,154,026     9,866,548  
             
Income (loss) before provision for income taxes   (888,782 )   (92,745 )
Income taxes   11,687     -  
             
Net income (loss) $  (900,469 ) $  (92,745 )

The following table sets forth the results of our operations for the periods indicated as a percentage of total sales:

21



    For the three months ended March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Total sales   100.0%     100.0%  
Cost of goods sold   64.3%     38.4%  
             
Gross profit   35.7%     61.6%  
             
Selling, general and administrative expenses   66.4%     49.6%  
             
Income (loss) before provision for income taxes   -30.7%     12.0%  
Income taxes   0.2%     0.0%  
             
Net income (loss)   -31.3%     11.5%  
             
             
    For the nine months ended March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Total sales   100.0%     100.0%  
Cost of goods sold   49.3%     50.6%  
             
Gross profit   50.7%     49.4%  
             
Selling, general and administrative expenses   55.1%     49.4%  
             
Income (loss) before provision for income taxes   -4.8%     -0.5%  
Income taxes   0.1%     0.0%  
             
Net income (loss)   -4.9%     -0.5%  

22


Comparison of Three Months and Nine Months ended March 31, 2011

Starting from the beginning of FY2010, the Company has adjusted its strategy to slow down new store openings and focus on digesting inventory of past seasons and improving revenue and margin from existing stores. The Company has also established a tiered inventory digesting structure through Class A stores, Class B stores and warehouse sales. Class A stores sell current season products at full price, Class B stores sell one-year-old products at a 30-50% discount while warehouse sales digest products aged more than one year at an 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 is meant to ensure that most, if not all of the inventory can be digested within 24 months after production. Also based on the Class A and B stores system formally adopted in fiscal 2009 to better match price and product demand by different target market segments, a Class A store that does not meet our sales expectation will first be downgraded to Class B store which are being used to sell discounted merchandise that did not sell well during the season at Class A stores. When the lease of such a store with the 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.

Sales. Our sales are generated from sales of products to end customers in our corporate stores and sales to non-corporate store owners. For the three months ended March 31, 2011 and 2010, the Company generated revenues of $6,423,055 and $7,085,242, respectively, reflecting a decrease of 9.3% . Excluding exchange rate effects, sales at corporate stores decreased 4.0% while sales to non-corporate stores declined 66.6% . The decline in sales from corporate stores is generally in line with the decline in the number of corporate stores. The company accelerated the consolidation of corporate stores and as a result, 18 underperforming corporate stores were closed during the period in 2011 as compared to 8 for the same period last year. A decline in the number of non-corporate stores contributed to the decline in non-corporate store sales in 2011. For the three months ended March 31, 2011, sales at corporate stores contributed 96.8% of total sales, while sales to non-corporate stores contributed 3.2%, compared to 91.4% and 8.6%, respectively, in fiscal year 2010.

For the nine months ended March 31, 2011 and 2010, the Company generated revenues of $18,443,127 and $19,954,322, respectively, reflecting a decrease of 7.6% . Excluding exchange rate effects, sales at corporate stores decreased 2.1% while sales to non-corporate stores declined 52.5% . Besides a fewer number of corporate and non-corporate stores as a result of store consolidation, the stock replenishment issue caused by a nation-wide restriction on power supply to achieve the energy saving and emission reduction target for the Chinese government's "11th Five-Year Plan" affected both corporate and non-corporate store sales. For the nine months ended March 31, 2011, sales at corporate stores contributed 94.5% of total sales, while sales to non-corporate stores contributed 5.5%, compared to 89.2% and 10.8%, respectively, in fiscal year 2010.

The following table shows changes in our sales at existing stores, changes in sales due to stores opened during the three and nine months ended March 31, 2011 and 2010, and the effect of change in rate used for the currency conversion in three and nine months ended March 31, 2011 and 2010:

    Three months ended March 31     Nine months ended March 31  
          Corporate     Non-Corporate           Corporate     Non-Corporate  
    Total Sales     Stores     Stores     Total Sales     Stores     Stores  
Change in sales at existing stores $  (1,394,807 ) $  (811,110 ) $  (583,697 ) $  (2,997,505 ) $  (1,640,019 ) $  (1,357,486 )
Sales at new stores opened in FY2011   420,598     264,516     156,082     937,795     760,828     176,967  
Effect of currency conversion   312,022     290,229     21,793     548,515     498,354     50,161  
Total increase (decrease) in sales $  (662,187 ) $  (256,365 ) $  (405,822 ) $  (1,511,195 ) $  (380,837 ) $  (1,130,358 )

23


Comparable Store Sales. The percentage change in comparable store sales by store type for the three and nine months ended March 31, 2011 as compared to 2010 is as follows:

    Three months ended     Nine months ended  
    March 31     March 31  
Corporate stores   -27%     -29%  
Non-corporate stores   -33%     -24%  

A store is included in comparable store sales (“Comp”) when it has been open for at least 12 months and the square footage has not changed by 15 percent or more within the past year. A store is included in Comp on the first day it has comparable prior year sales. Stores in which square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from Comp until the first day they have comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year Comp store sales to achieve a consistent basis for comparison.

A store is considered non-comparable (“Non-comp”) when it has been open for less than 12 months or it has changed its square footage by 15 percent or more within the past year. Non-store sales such as online revenues are also considered Non-comp.

A store is considered “Closed” if it is temporarily closed for 15 or more full consecutive days or is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for 15 or more days in the prior year then the store will be in Non-comp status for the same days in the following year.

Sales per average square foot is as follows:

    For the three months ended March 31,     For the nine months ended March 31,  
    2011     2010     2011     2010  
Sales per average square foot (1) $  25   $  34   $  79   $  108  

(1) Sales per average square foot is calculated based on the total sales divided by the average total store area of stores in existence throughout the period.

Store count, openings and closings for our stores are as follows:

    Three months ended March 31, 2011     Three months ended March 31, 2010  
    Corporate     Non-corporate           Corporate     Non-corporate        
    Stores     Stores     Total     Stores     Stores     Total  
Number of stores as of January 1   134     28     162     134     40     174  
Number of stores opened   4     0     4     3     2     5  
Number of stores closed   (18 )   0     (18 )   (8 )   (1 )   (9 )
Number of stores as of March 31   120     28     148     129     41     170  
                                     
                                     
    Nine months ended March 31, 2011     Nine months ended March 31, 2010  
    Corporate     Non-corporate           Corporate     Non-corporate        
    Stores     Stores     Total     Stores     Stores     Total  
Number of stores as of July 1   131     34     165     127     53     180  
Number of stores opened   27     2     29     37     12     49  
Number of stores closed   (38 )   (8 )   (46 )   (35 )   (24 )   (59 )
Number of stores as of March 31   120     28     148     129     41     170  

24


Cost of Goods Sold and Gross Margin

Cost of goods sold was $4,128,997 for the three months ended March 31, 2011 as compared to $2,722,007 for the same period in FY2010, an increase of 51.7% while the gross margin decreased from 61.6% to 35.7% . Excluding exchange rate effect, cost of goods sold at corporate stores increased 62.5% despite the decrease in sales at corporate stores mainly because of an increase of $465,013 inventory markdown in FY2011 as compared to a reversal of $1,012,822 in inventory reserve in FY2010 due to additional markdowns on winter season merchandise aged more than two years. As a result, the gross margin for corporate store sales decreased by 25.6% . Excluding exchange rate effect, cost of goods sold to non-corporate stores decreased 28.4% as compared to the three months ended March 31, 2010, which is less than the decline in non-corporate store sales due to higher discounts offered to non-corporate store owners as a result of the stock replenishment issue. The gross margin from sales at non-corporate stores decreased by 33.6% as compared to the gross margin for the same period in FY2010.

Cost of goods sold was $9,099,027 for the nine months ended March 31, 2011 as compared to $10,087,510 for the same period in FY2010, a decrease of 9.8% while the gross margin increased from 49.4% to 50.7% . Excluding exchange rate effect, cost of goods sold at corporate stores declined 4.7%, more than the decrease in sales at corporate stores mainly because of a lower portion of warehouse sales among corporate store sales in FY2011 versus FY2010. Warehouse sales usually have negative margins. As a result, the gross margin for corporate store sales increased by 1.3% . Excluding exchange rate effect, cost of goods sold to non-corporate stores decreased 41.3% as compared to the nine months ended March 31, 2010, which is less than the decline in non-corporate store sales due to more discounts offered to non-corporate store owners as a result of the inventory replenishment issues. The gross margin from sales at non-corporate stores decreased by 15.3% as compared to the gross margin for the same period in FY2010.

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, 2011, the Company incurred selling, general and administrative expenses of $4,265,839, an increase of 21.3% as compared to $3,516,372 for FY2010.

Our general and administrative expenses increased 241.9% as compared to last year mainly because of additional bad debt allowance provided based on accounts receivable ageing. The Company in general has arranged 60-day collection terms with shopping malls if not otherwise specified. As of March 31, 2011, 44.7% of accounts receivable balances were aged more than 90 days as compared to 26.0% at June 30, 2010 mainly because of delays in settlement of outstanding accounts receivable balances with customers, to whom the Company also owed agency fees. The Company normally reconciles the outstanding accounts receivable balances and agency fee payable balances with those customers on a half-year basis and settles the amount through offsetting of payments. The Company provided full allowance balances aged more than 90 days after taking into account the subsequent settlement. For the three months ended March 31, 2011, the Company provided additional allowances of $1,616,896 compared to $411,196 for the same period last year. The balance of bad debt allowance was $2,158,171 and $921,203 on March 31, 2011 and June 30, 2010, representing 38.4% and 24.3% of the total accounts receivable balance, respectively.

We incurred selling expenses of $2,603,276 for the three months ended March 31, 2011, a decrease of 14.1% as compared to $3,030,093 for the three months ended March 31, 2010. Of all the selling expenses, store rent in the amount of $1,284,062 constituted 49.3% and decreased by 1.7% compared to the same period of last year due to decrease in corporate store sales. Agency fees constituted 15.4% of total selling expenses for the three months ended March 31, 2011 and decreased by 31.3% when compared to the same period in 2010 mainly due to the change to exclude the store rent from the sales basis to calculate agency fees. A decrease in corporate store sales also contributed to the decline of agency fees. Salaries and benefits, which constituted 15.3% of total selling expenses for the three months ended March 31, 2011, increased by 0.7% as compared to the same period in 2010. Other selling expenses constituted 20.0% of total selling expenses, of which $213,887 was spent on store charges and promotion and $170,577 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.

25


For the nine months ended March 31, 2011, the Company incurred selling, general and administrative expenses of $10,154,026, an increase of 2.9% as compared to $9,866,548 for FY2010.

Our general and administrative expenses increased 130.8% as compared to last year mainly because of additional bad debt allowance provided based on accounts receivable ageing. For the nine months ended March 31, 2011, the Company provided an additional allowance of $1,236,968 versus $511,097 for the same period last year. For the nine months ended March 31, 2011, the Company incurred $82,820 bad debt as a result of closing of three non-corporate stores. The Company was founded not long ago and has a short operating history. In view of the rapid expansion of our business since inception, we believe that we have been very prudent in providing sufficient allowance for ageing accounts receivable balances.

We incurred selling expenses of $8,302,056 for the nine months ended March 31, 2011, a decrease of 8.4% as compared to $9,064,223 for the nine months ended March 31, 2010. Of all the selling expenses, store rent in the amount of $3,643,482 constituted 43.9% and decreased by 0.2% compared to the same period of last year in line with the change in corporate store sales. Agency fees constituted 21.0% of total selling expenses for the nine months ended March 31, 2011 and decreased by 22.4% when compared to the same period in 2010 mainly due to the change to exclude the store rent from the sales basis to calculate agency fees. Salaries and benefits, which constituted 13.7% of total selling expenses for the nine months ended March 31, 2011, increased by 4.7% as compared to the same period in 2010 due to increase in store assistants and staff compensation in the first quarter of FY2011 partially offset by a temporary reduction of store assistants in the second quarter of FY2011 as a result of the replenishment issues and decline in corporate store sales. Other selling expenses constituted 21.4% of total selling expenses, of which $724,862 was spent on store charges and promotion and $478,246 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.

Other Expenses

In January 2011, the Company entered into an interest-bearing loan of $1,048,901 (RMB7,000,000) from Industrial Bank. The amount was used to repay the long-term loan of $854,105 (RMB5,700,000) borrowed from an unrelated party and for general operating purposes. Interest expense amounted to $23,949 and $30,861, respectively, for the three months ended March 31, 2011 and 2010 and $86,697 and $93,009 for the nine months ended March 31, 2011 and 2010, respectively.

Provision for Income Taxes

The Company recognized $-0- current income tax expense due to the net loss for the three and nine months ended March 31, 2011. $-0- current income tax expense was also recognized for the same periods in 2010 as a result of loss carried forward to offset the income before tax or a net loss. Income tax expense for the three and nine months ended March 31, 2011 was also $11,687 because of the valuation allowance the Company set up for deferred tax assets. As of March 31, 2011 and June 30, 2010, the Company recognized $11,687 and $-0- of net deferred tax assets after valuation allowance, respectively.

26


Net Income

We had a net loss of $2,008,438 for the three months ended March 31, 2011 as compared to a net income of $816,002 for the three months ended March 31, 2010. We had a net loss of $900,469 and a net loss of $92,745 for the nine months ended March 31, 2011 and 2010, respectively. The change of the performance result was mainly because of the additional allowance provided for accounts receivable balances aged more than 90 days.

Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of $82,056 and negative working capital of $7,548,629. The following table provides detailed information about our net cash flows for the financial statement periods presented in this annual report:

Cash Flow   For the nine months ended March 31,  
    2011     2010  
Net cash used in operating activities $  (2,903,696 ) $  (907,145 )
Net cash used in investing activities   (10,956 )   (10,085 )
Net cash provided by financing activities   2,812,251     861,668  
Effect of foreign currency translation on cash and cash   3,981     (38 )
Net decrease in cash and cash equivalent $  (98,420 ) $  (55,600 )

Our principal demands for liquidity are for expansion and opening new stores, working capital and general corporate purposes.

Net Cash Used in Operating Activities. Net cash used in operating activities totaled $2,903,696 for the nine months ended March 31, 2011 as compared to $907,145 for the nine months ended March 31, 2010. The increase in net cash used in operating activities was primarily due to the increase in the net loss as compared to the same period in FY2010. The difference was also attributable to an increase in the inventory balance by $1,256,302 for the nine months ended March 31, 2011 versus $112,730 for the same period in FY2010 as a result of a delay in the receipt of merchandise delivery from suppliers as a result of a nation-wide restriction on power supply to achieve the energy saving and emission reduction target for the Chinese government’s “11th Five-Year Plan”.

Our accounts receivable increased from $3,784,745 at June 30, 2010 to $5,623,441 at March 31, 2011 mainly due to business expansion and sales increases during major sales seasons in October and December through February due to the National Day, Christmas and New Year holidays and Chinese New Year holidays. Sales increases contributed to the larger amount of outstanding accounts receivable to be collected from shopping malls, with which we generally have established 60-day collection terms. The Company has put in place a very rigorous review process of outstanding accounts receivable balances. At March 31, 2011, we had $3,126,147 in accounts receivable aged in excess of 60 days, among which $2,512,294 was aged over 90 days, compared to $1,204,393 in excess of 60 days including $985,067 over 90 days at June 30, 2010. Full allowance has been provided for the balance over 90 days and not subsequently collected. As a result, allowance for doubtful accounts increased from $921,203 as of June 30, 2010 to $2,158,171 as of March 31, 2011 due to increase in balances aged over 90 days. For the nine months ended March 31, 2011, the Company incurred $82,820 bad debt as a result of closing of three non-corporate stores. We believe that we have been conservative and have provided sufficient allowance for ageing accounts receivable balances.

Net Cash Used in Investing Activities. Net cash used in investing activities were $10,956 and $10,085 for the nine months ended March 31, 2011 and 2010, respectively.

27


Net Cash Provided by Financing Activities. Net cash provided by financing activities totaled $2,812,251 and $861,668 for the nine months ended March 31, 2011 and 2010, respectively. The increase in net cash provided by financing activities mainly resulted from an increase of $120,039 in accounts payable to an affiliated company for the nine months ended March 31, 2010 versus an increase of $2,610,712 for the same period in FY2011. In addition, the Company borrowed $1,048,901 and repaid $854,105 for the nine months ended March 31, 2011 compared to $732,161 borrowing and $-0- repayment for the same period in FY2010.

Cash. At March 31, 2011, we had cash of $82,056, as compared to $180,476 as of June 30, 2010. Cash used in operating activities increased significantly as compared to the same period last year, which was partially offset by the increase of cash provided by financing activities, resulting in increased cash outflow for the nine months ended March 31, 2011 as compared to the same period last year.

As of March 31, 2011, the Company’s current liabilities exceeded its current assets by $7,548,629 and the Company’s total liabilities exceeded its total assets by $8,100,380. The Company’s cash position on March 31, 2011 was $82,056. Our auditor has expressed their concern as to our ability to continue as a going concern in the audit opinion of our financial statements for the year ended June 30, 2010.

We believe that we can satisfy our cash requirements during the next 12 months through reduction of expenses associated with retail store openings, better management of our inventory and realization of our accounts receivables. We have experienced a rapid growth in both sales and store numbers since 2008. The Company has adjusted its strategy to slow down the new store openings and focus on digesting inventory of past seasons and improving revenue and margin from existing stores in the fiscal year 2010, which is expected to continue in fiscal year 2011. The Company has successfully established a tiered inventory digesting structure through Class A stores, Class B stores and warehouse sales. Class A stores sell current season products at full price, Class B stores sell one-year-old products at a 30-50% discount while warehouse sales digest products aged more than one year at a 80-90% discount. Class A stores are expected to sell 70% of products of each season with the rest sold through Class B stores and warehouse sales. The tiered structure is meant to ensure that most, if not all of the inventory can be digested within 24 months after production. In addition, warehouse sales scheduled in the next twelve months are expected to generate revenue of about $1.5 million. Sales from Class A and Class B stores during the next twelve months are expected to be around $23 million. We believe that cash generated from the stores and warehouse sales in the next 12 months will be sufficient to cover payment for inventory purchases and Selling, General & Administrative expenses of around $21 million. Concurrent with the establishment of a tiered inventory digesting structure to increase sales and liquidate the inventory in a timely fashion, the Company is also striving to encourage cash purchases from non-corporate store owners, settle long-aged account balances and maintain the realization of new accounts receivable from shopping malls within 60 days.

Our accounts payable are mainly due to our related party with which we have negotiated and have established a favorable six-month payment term with an additional extension if the payment would materially impact the Company’s liquidity profile. This policy should effectively prevent further deterioration of the Company’s cash position.

The Company has successfully refinanced its borrowing from an unrelated party through a bank loan before the due date. The Company has successfully amended its loans due in January 2011 and extended the term with the lenders to June 2011.

In addition, the Company believes it can meet its liquidity requirements for working capital and general corporate purposes during the 2011 fiscal year from a variety of other sources. These sources include renewal of outstanding debts when due, new short or long-term borrowings from both related and unrelated parties and financial institutions, and future equity financings although there is no assurance that additional financings, whether debt or equity, will be available.

28


Loan Facilities

At March 31, 2011, we had $810,160 in long-term debts. The long-term debts consisted of the following:

    As of     As of  
    March 31, 2011     June 30, 2010  
Amount borrowed from our CEO, bearing interest at 5% per annum and due February 17, 2013 $  810,160   $  810,160  
Amount borrowed from an unrelated party, bearing interest at 10% per annum and due June 16, 2011   -     839,359  
Amount borrowed from an unrelated party, bearing zero interest and due June 30, 2011, guaranteed by CTS   762,614     736,279  
Subtotal   1,572,774     2,385,798  
Less: current portion   762,614     1,575,638  
Total $  810,160   $  810,160  

Long-term debts mature as follows:

As of March 31, 2011      
       
2011 $  762,614  
2012 $  -  
2013 $  810,160  

Interest expense amounted to $23,949 and $30,861, respectively for the three months ended March 31, 2011 and 2010 and $86,697 and $93,009 for the nine months ended March 31, 2011 and 2010, respectively.

Obligations Under Material Contracts

Below is a table setting forth our contractual obligations as of March 31, 2011:

          Payment due in year ended June 30,  
    Total     2011     2012     2013     Thereafter  
                               
Long term debt obligations (including current portion) $  1,572,774   $  762,614   $  -   $  810,160   $  -  
Operating lease obligations   1,420,884     536,032     871,366     8,991     4,495  
Purchase obligations   -     -     -     -     -  
Total $  2,993,658   $  1,298,646   $  871,366   $  819,151   $  4,495  

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.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements include the financial statements of Baby Fox International and its wholly owned subsidiary Shanghai Baby Fox. All significant inter-company transactions and balances have been eliminated in consolidation. Baby Fox International and its subsidiary Shanghai Baby Fox together are referred to as the Company.

29


Our management's discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included herein, 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. The period allowed for return is short (two weeks) and based on historical experience, and 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, 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 defective merchandise within ten days of receipt. The return of unsold merchandise for current style is determined by our headquarters and full cooperation from non-corporate stores is required. Reserves are established to reflect actual and anticipated returns of defected and unsold merchandise based on historical information. Currently, we estimate returns to be 20% of our sales to non-corporate stores and relevant reserves have been made accordingly each reporting period. Since fashion clothing is trending towards shorter product life cycles and the return period we allow for non-corporate stores is relatively long, current reserves already take into account 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 our reserves for returns if necessary. We do not offer early payment discounts, incentive discounts based on volume or credit for products that do not sell well at non-corporate stores. Shipping and handling of merchandise sold to non-corporate stores is not separately billed to customers or paid directly by the customer.

Marketing Expenses. Due to the short initial term of the leases with mall operators and the cancellation provisions contained in the store leases, the initial costs of store opening expenses are typically accounted as marketing expenses and are charged to expense as incurred. The cost of leasehold improvements and store fixtures averaging $21,750 are charged to expense as incurred. The effect of store openings could potentially reduce our reported net income in the period of store openings.

30


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.

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 maintains a reserve for inventory markdowns. This encompasses current goods held for liquidation and markdown, and application of historical percentages of current inventory which is anticipated to be marked down and /or liquidated. The percentages were 34% and 42% of ending inventory levels as of March 31, 2011 and June 30, 2010, respectively based on historical experience and current goods held for liquidation, and reserves are made accordingly at each reporting period. The company periodically adjusts the percentage based on a review of changing ratios and the percentage of selling prices recovered through liquidation.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Level 1 and 2, separate disclosures of purchases, sales, issuance, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Company’s fiscal year 2011); early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2010-06 on its financial statements.

Off Balance Sheet Treatment for Store Opening and Rent Expenses

Because mall operators can terminate our leases any time and have no obligation for renewal of our leases, we did not capitalize our leasehold improvements and store fixtures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, Mr. Huang and Ms. Chen, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Mr. Huang and Ms. Chen concluded that as of March 31, 2011, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.

31


Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There has been no material change in the Company's risk factors as previously disclosed in the Company's Annual Report on Form 10-K filed with the SEC on September 28, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

On January 12, 2011, the Company entered into a short-term loan agreement with Industrial Bank Co. Ltd, to borrow RMB7,000,000 (USD1,067,659) for the purpose of purchasing inventory from Changzhou CTS Fashion Co. Ltd. The principal is due on January 11, 2012 with interest payable on a quarterly basis at 1.2 times the standard borrowing rate published by People’s Bank of China.

ITEM 6. EXHIBITS

Exhibit No. Description 
10.1 Loan Agreement dated January 12, 2011 between Shanghai Baby Fox Fashion Co., Ltd. and Industrial Bank Co., Ltd. (English translation)
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32


SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  BABY FOX INTERNATIONAL, INC.
   
Date: May 23, 2011 By: /s/ Jieming Huang         
           Jieming Huang
           Chief Executive Officer
           (Principal Executive Officer)
   
Dated: May 23, 2011 By: /s/ Ping Chen                  
           Ping Chen
           Chief Financial Officer
         (Principal Financial Officer and Principal Accounting Officer)

33


EXHIBIT INDEX

Exhibit No. Description 
10.1 Loan Agreement dated January 12, 2011 between Shanghai Baby Fox Fashion Co., Ltd. and Industrial Bank Co., Ltd. (English translation)
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

34