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EXCEL - IDEA: XBRL DOCUMENT - STUDIO II BRANDS INC | Financial_Report.xls |
EX-31 - EXHIBIT 31.1 - STUDIO II BRANDS INC | studioiibrands_exh311.htm |
EX-32 - EXHIBIT 32.1 - STUDIO II BRANDS INC | studioiibrands_exh321.htm |
EX-31 - EXHIBIT 31.2 - STUDIO II BRANDS INC | studioiibrands_exh312.htm |
EX-32 - EXHIBIT 32.2 - STUDIO II BRANDS INC | studioiibrands_exh322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File Number: 0-51355
STUDIO II BRANDS, INC.
(Exact name of registrant as specified in its charter)
Florida |
| 65-0664963 |
(State or other jurisdiction of incorporation) |
| (IRS Employer Identification Number) |
| ||
16F/ Honest Motors Building 9-11 Leighton Road Causeway Bay, Hong Kong | ||
(Address of principal executive offices) | ||
(852) 2890-1818 | ||
Registrants telephone number, including area code: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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. [ X ] Yes [ ] 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 [X ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions 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 [ ] (Do not check if a smaller reporting company) | 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
[X] No
As of August 18, 2011, the Issuer had 11,899,276 shares of common stock issued and outstanding.
1
EXPLANATORY NOTE
Studio II Brands Inc. (the Company) is filing this Amendment No. 1 on Form 10-Q/A (this Amendment 1) to its periodic report on Form 10-Q, which was originally filed with the Securities and Exchange Commission on August 18, 2011 (the Original Filing). This Amendment 1 is being filed to: (i) restate and reissue its unaudited interim financial statements for the fiscal period ended June 30, 2011 contained in the Original Filing; and (ii) to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T and (ii);
Pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain currently-dated certifications from our principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our principal executive officer and our principal financial officer are attached to this form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
Except as described above, no other changes have been made to the Original Filing. Except as described above, this Amendment No. 1 on Form 10-Q/A does not reflect events occurring after the filing of the Original Filing, or modify or update those disclosures, including any exhibits to the Original Filing affected by subsequent events. Information not affected by the changes described above is unchanged and reflects the disclosures made at the time of the Original Filing. Accordingly, this Amendment No. 1 on Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing.
PART I-FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
The financial statements of Studio II Brands, Inc. (the "Company"), a Florida corporation, included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission. Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company in the Company's Form 10-K, and all amendments thereto, for the fiscal period ended March 31, 2011.
STUDIO II BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
| Page |
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and March 31, 2011 | 3 |
|
|
Consolidated Statements of Operations for Three-months ended June 30, 2011 and 2010 (unaudited) | 4 |
|
|
Consolidated Statement of Stockholders Equity for the Three-months ended June 30, 2011 (unaudited) | 5 |
|
|
Consolidated Statements of Cash Flows for Three-months ended June 30, 2011 and 2010 (unaudited) | 6 |
|
|
Notes to Consolidated Financial Statements (unaudited) | 7-19 |
2
STUDIO II BRANDS, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED BALANCE SHEETS | ||||
| ||||
Successor: |
|
|
| |
| June 30, 2011 (unaudited) | March 31, 2011 | ||
ASSETS |
|
| ||
CURRENTS ASSETS |
|
|
|
|
Cash |
|
| $ 11,365 | $ 23,945 |
Due from related party |
|
| 27,387 | 12,984 |
Accounts receivable |
|
| 10,722 | 16,886 |
Inventories |
|
| 2,333 | 2,058 |
Total current assets |
|
| 51,807 | 55,873 |
|
|
|
|
|
Property and equipment, net |
|
| 100,037 | 105,478 |
Security deposits |
|
| 41,345 | 41,216 |
Goodwill |
|
| 55,484 | 55,484 |
|
|
|
|
|
TOTAL ASSETS |
|
| $ 248,673 | $ 258,051 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDER'S EQUITY |
|
| ||
CURRENT LIABILITIES |
|
|
|
|
Accounts payable and accrued expenses |
|
| $ 53,118 | $ 51,987 |
Income tax payable |
|
| 4,873 | 6,006 |
Due to related party |
|
| 3,852 | 5,923 |
TOTAL CURRENT LIABILITIES |
|
| 61,843 | 63,916 |
Payable to stockholder |
|
| 147,890 | 131,688 |
TOTAL LIABILITIES |
|
| 209,733 | 195,604 |
COMMITMENS AND CONTINGENCIES STOCKHOLDER'S EQUITY |
|
|
|
|
Common stock, 100,000,000 shares authorized with par value $0.001; |
|
| ||
11,899,276 shares issued and outstanding as of June 30, 2011 and March 31, 2011 |
| 11,900 | 11,900 | |
Additional paid-in capital |
|
| 258,871 | 258,871 |
Accumulated deficit |
|
| (231,831) | (208,324) |
TOTAL STOCKHOLDER'S EQUITY |
|
| 38,940 | 62,447 |
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ 248,673 | $ 258,051 | ||
See accompanying notes to consolidated financial statements (unaudited). |
3
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) | |||||
| |||||
|
|
| Successor Three-months ended June 30, 2011 | Predecessor Three-months ended June 30, 2010 | Successor Three-months ended June 30, 2010 |
|
|
|
|
|
|
REVENUE |
|
|
|
|
|
Food and beverage income |
|
| $ 94,216 | $ 76,309 | $ - |
Franchise and management fee income |
|
| 16,482 | 22,152 | - |
|
|
| $ 110,698 | $ 98,461 | $ - |
|
|
|
|
|
|
Cost of goods sold (exclusive of depreciation) |
|
| (37,296) | (33,622) | - |
|
|
|
|
|
|
Gross profit |
|
| 73,402 | 64,839 | - |
|
|
|
|
|
|
Operating expenses |
|
| (96,055) | (60,494) | (1,887) |
OPERATING (LOSS)/INCOME | (22,653) | 4,345 | (1,887) | ||
|
|
|
|
|
|
OTHER INCOME/(EXPENSES) |
|
|
|
|
|
Other income |
|
| 927 | 1,245 | - |
Other expenses |
|
| (492) | (111) | - |
TOTAL OTHER INCOME, NET |
| 435 | 1,134 |
| |
|
|
|
|
|
|
NET (LOSS)/INCOME BEFORE INCOME TAXES |
| (22,218) | 5,479 | (1,887) | |
|
|
|
|
|
|
Income tax expenses |
|
| (1,289) | (1,510) | - |
NET (LOSS)/INCOME |
| $ (23,507) | $ 3,969 | $ (1,887) | |
Net (loss)/income per common share |
|
|
|
|
|
Basic and fully diluted |
| $ - | $ 3,969 | $ - | |
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | 11,899,276 | 1 | 3,745,676 | ||
See accompanying notes to consolidated financial statements (unaudited). |
4
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED) | |||||
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock, Par value of $0.001 |
|
| Total | |
| Additional | Accumulated | stockholder's | ||
| Number | Amount | Paid-in capital | deficit | equity |
Successor: |
|
|
|
|
|
Balance as of March 31, 2011 | 11,899,276 | $11,900 | $258,871 | $ (208,324) | $ 62,447 |
Net loss | - | - | - | (23,507) | (23,507) |
Balance as of June 30, 2011 | 11,899,276 | $ 11,900 | $ 258,871 | $ (231,831) | $ 38,940 |
See accompanying notes to consolidated financial statements (unaudited). |
5
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||
|
| Successor Three months ended June 30,2011 | Predecessor Three months ended June 30,2010 | Successor Three months ended June 30,2010 | |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
| ||
Net (loss)/income |
| $ (23,507) | $ 3,969 | $ (1,887) | |
Adjustments to reconcile net (loss)/income to net cash used in operating activities: |
|
|
|
| |
Depreciation |
| 6,098 | 5,999 | - | |
Changes in operating assets and liabilities: |
|
|
|
| |
Due from related party |
| (14,403) | (11,880) | - | |
Account receivable |
| 6,163 | (10,272) | - | |
Other receivable |
| - | 145 | - | |
Inventory |
| (275) | 834 | - | |
Security deposits |
| (128) | (257) | - | |
Account payable and accrual expenses |
| 1,132 | 1,791 | (4,720) | |
Due to related party |
| (2,070) | 13,207 | - | |
Provision for taxation |
| (1,133) | 1,511 | - | |
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES |
| (28,123) | 5,047 | (6,607) | |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
| |
Purchase of property and equipment |
| (657) | (1,447) | - | |
NET CASH USED IN INVESTING ACTIVITIES | (657) | (1,447) | - | ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
| ||
Proceeds from stockholders loan |
| - | 6,420 | - | |
Proceeds from payable to stockholder |
| 16,200 | - | 6,607 | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 16,200 | 6,420 | 6,607 | ||
|
|
|
|
| |
NET (DECREASE)/INCREASE IN CASH |
| (12,580) | 10,020 | - | |
Beginning of period | $ 23,945 | $ 15,322 | $ - | ||
End of period | $ 11,365 | $ 25,342 | $ - | ||
Supplemental disclosures of cash flow information: |
|
|
|
| |
Cash paid for interest |
| $ - | $ - | $ - | |
Cash paid for income taxes |
| $ - | $ - | $ - |
Additional supplemental cash flow information is set out in note 3 Business acquisition.
See accompanying notes to consolidated financial statements (unaudited).
6
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
NOTE 1 ORGANIZATION
Studio II Brands, Inc. (the Company) was formed on May 6, 1996 in the State of Florida. The Companys activities before February, 2011 were primarily directed towards the raising of capital and seeking business opportunities.
The Company has transitioned from its development stage to operational activities as of February 10, 2011. On February 10, 2011, the Company entered into and consummated a share exchange agreement with Hippo Lace Limited (HLL), a BVI corporation and Mr. Gu Yao (Gu), the sole stockholder of HLL to acquire Gus 100% interests of HLL and its wholly owned subsidiary, Legend Sun Limited (Legend Sun) a limited liability company incorporated and domiciled in Hong Kong and its principal activity is to provide catering services in Hong Kong. In conjunction with the acquisition, the Company completed the closing of the exchange transaction under the terms of the Exchange Agreement on February 10, 2011 by issued 2,291,100 shares of its Common Stock to Gu which amounted to $218,676 or approximately $0.09 per share to acquire all of the issued and outstanding shares of Common Stock in HLL.
Successor company references herein are referring to consolidated information pertaining to the Company. Predecessor company references herein relate to HLL and its subsidiary.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Companys functional currency is the United States Dollar.
The predecessor financial statements include the accounts of HLL and its subsidiary. The accompanying financial statements have been prepared to present the statements of financial position of HLL and its subsidiary and statements of operations and cash flows of HLL and its subsidiary for inclusion in the Companys Form 10-Q for purposes of complying with the rules and regulations of the Securities and Exchange Commission as required by S-X Rule 8-02. These statements include only those assets, liabilities and related operations of HLL and its subsidiary. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and footnotes included in the Companys Form 10-K filed on August 9, 2011.
(b)
Principles of Consolidation
The balance sheet as of June 30 and March 31, 2011 includes the Company and its wholly-owned subsidiaries, HLL and Legend Sun. Additionally, the results of operations and cash flows for the three months ended June 30, 2011 and 2010 include the operations of HLL and Legend Sun from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
(c)
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Companys significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets and realizable values for inventories.
(d)
Foreign currency translation
Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date;
7
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
income and expenses are translated at the average rate of exchange prevailing during the period; and the shareholders equity is translated at historical exchange rate. The related transaction adjustments are reflected in Accumulated other comprehensive income / (loss) in the equity section of the consolidated balance sheet.
The period-end rates for June 30, 2011 and Mar 31, 2011 of Hong Kong dollar to one US dollar were $7.7832 and $7.7884 respectively; average rates for the three months ended June 30, 2011 and 2010 were $7.7773 and $7.7789 respectively.
(e)
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and impairment losses. Improvements to leased assets or fixtures are amortized over their estimated useful lives or lease period, whichever is shorter. Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.
Depreciation expense is recorded over the assets estimated useful lives or lease period, using the straight line method, at the following annual rates:-
Furniture and equipment: 10% - 20%, per annum
Computer equipment: 10%, per annum
Leaseholder improvements: over the lease term
(f)
Inventories
Inventories consist of finished goods which include food and beverage materials and products for catering service. Inventories are measured at the lower of cost or market. The cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition and is assigned by using a first-in first-out basis. Market value is determined by reference to selling prices after the balance sheet date or to managements estimates based on prevailing market conditions. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.
(g)
Accounts receivables
Accounts receivable are shown net of allowance for doubtful accounts. During the period, there were no bad debts incurred and no allowance for doubtful accounts recorded at both March 31, 2011 and June 30, 2011. The Companys management has established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The allowance for doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted write-offs, aging of the accounts receivable portfolios, industry norms, regulatory decisions and other factors. Management reviews the composition of accounts receivable and analyzes any historical bad debts, customer concentrations, and customer credit worthiness. Managements policy is to record a reserve primarily on a specific identification basis. Accounts are written off after use of a collection agency is deemed to be no longer useful. The accounts receivable balance as of March 31, 2011 is $16,886 mainly represents the first year annual fee and March 2011 management fee income from Sino Wish, the subfranchisee located in Hong Kong commenced in April 2010. The accounts receivable balance of $10,722 at June 30, 2011 mainly represents the second year franchise annual fee and last year management fee income from Sino Wish. After reviewing and analyzing the account receivable from Sino Wish, management believes that the company is trustworthy and no allowance is required because there was no historical bad debt, the business and the economy are in a growing trend and we are not aware of any credibility problem of the company.
(h)
Security deposits
Security deposits mainly consist of five months rental and management fee security deposits, electricity and water meter deposits for company owned restaurant, and was recorded by the time of payment.
8
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
(i)
Cash
Cash consist of cash on hand and at banks. The Company's cash deposits are held with financial institutions located in United States and Hong Kong. Management believes these financial institutions are of high credit quality.
(j)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in an acquisition. Accounting Standards Codification (ASC)-350-30-50 Goodwill and Other Intangible Assets requires the testing of goodwill and indefinite-lived intangible assets for impairment at least annually. The Company tests goodwill for impairment in the fourth quarter each year. Goodwill impairment is computed using the expected present value of associated future cash flows. There was no impairment of goodwill as of June 30 and March 31, 2011.
(k)
Impairment of long-lived assets
Long-lived assets are comprised of property and equipment. Pursuant to the provisions of ASC360-10, Property, plant and equipment, long-lived assets to be held and used are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable by comparing the undiscounted cash flows associated with the assets to their carrying amounts. If such a review indicates an impairment, the carrying amount would be reduced to fair value.
Based on the Companys assessment, there were no events or changes in circumstances that would indicate any impairment of long-lived assets as of June 30 and March 31, 2011.
(l)
Accounts payable and accrued expenses consist of the following:
|
| June 30, 2011 (Unaudited) |
| March 31, 2011 | ||
Accounts payable | $ | 15,668 |
| $ | 8,516 | |
Accrued expenses |
|
|
|
|
| |
| Legal and professional fees |
| 26,128 |
|
| 32,361 |
| Payroll and other operating expenses |
| 11,322 |
|
| 11,110 |
|
| $ | 53,118 |
| $ | 51,987 |
(m)
Fair value measurements
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company
9
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
evaluates its hierarchy disclosures each quarter.
The carrying values of cash, accounts and other receivables, accounts payable and accrued expenses, and short-term borrowings from related party approximate fair values due to their short maturities.
There was no asset or liability measured at fair value on a non-recurring basis as of June 30 and March 31, 2011.
(n)
Income Taxes
Income taxes are provided for using the liability method of accounting in accordance with ASC 740 Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period that includes the enactment date.
The Company adopted ASC 740 which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
(o)
Other comprehensive income
The Company has adopted ASC 220 Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments.
(p)
Revenue recognition
Revenue represents the invoiced value of goods sold or services provided. Revenue is recognized when all the following criteria are met:
(i)Persuasive evidence of an arrangement exists.
(ii)Services had been rendered.
(iii)The sellers price to the buyer is fixed or determinable, and
(iv)Collectivity is reasonably assured.
Revenue from sales is recognized when food and beverage products are sold. Other income from tips is recognized on cash basis. Franchise fee income on the annual fee for sublicensing of the brand name and trademark Caffe Kenon and the 10% management fee on eligible monthly net income of subfranchiee are recognized after granting the non-exclusive rights and all contractual obligations are performed and report of net income from subfranchisee respectively. The franchise fee income of $16,482 recognized for the three months ended June 30 represents the subfranchise second annual fee from Sino Wish (HK$80,000, approximately US$10,272) and the early termination fee from BJ Kenon (RMB40,000, approximately US$6,210).
10
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
(q)
Employee benefits
The Company operates a Mandatory Provident Fund Scheme (the "MPF Scheme") under the Hong Kong Mandatory Provident Fund Schemes Ordinance for those employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF Scheme is a defined contribution scheme, the assets of which are held in separate trustee-administered funds. The Company's contributions to the scheme are expensed as incurred and are vested in accordance with the scheme' vesting scales.
(r)
Segment information
The Company uses the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Companys chief operating decision maker for making operating decisions and assessing performance as the source for determining the Companys operating segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue and operating results of the Company. As such, management has determined that Companys franchise operations in Hong Kong and Beijing are two operating segments and geographic information has been presented.
(s)
Commitments and contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and environmental claims arising out of the normal course of businesses that relate to a wide range of matters, including among others, contracts breach liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history, scientific evidence and the specifics of each matter.
As of June 30, 2011 and March 31, 2011, the Company's management has evaluated all such proceedings and claims. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, liquidity or results of operations.
(t)
Recent Accounting Pronouncements
There is no recently issued accounting pronouncements adopted by the Company. Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
NOTE 3 BUSINESS ACQUISITION
On February 10, 2011, the Company entered into and consummated a Share Exchange Agreement with HLL and Mr. Gu Yao (Gu), the sole shareholder of HLL to acquire Gus 100% interests of HLL and its wholly owned subsidiary, Legend Sun, a limited liability company incorporated and domiciled in Hong Kong and its principal activity is to provide catering services in Hong Kong.
Closing of the exchange transaction under the terms of the above-mentioned Exchange Agreement was completed on February 10, 2011. As a result of closing of the share exchange transaction, the Company acquired HLL and Legend Sun, both of which became wholly-owned subsidiaries of the Company and consolidates HLL as of February 10, 2011 in accordance with ASC 810.
Through the above-mentioned acquisition, the Company engaged in the business of operating a coffee shop restaurant under the renowned Italian Caffe Kenon tradename and proceeds the plan to open additional coffee shop restaurants in Hong Kong, PRC, Macau and Taiwan using the same concept either be company owned or subfranchise operations.
11
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
The fair values of the assets acquired and liabilities assumed at the date of acquisition as determined in accordance with ASC 805, and the purchase price allocation at the date of acquisition, were as follows:
Consideration: |
|
|
|
|
|
| ||
Equity instruments (2,291,100 common stock of the Company) | $ | 218,676 | ||||||
Cash acquired |
| (14,088) | ||||||
Consideration, net of cash acquired | $ | 204,588 | ||||||
Allocated to: |
|
|
|
|
|
| ||
| Accounts receivable |
|
|
|
| 21,792 | ||
| Due from related parties |
|
|
|
| 12,985 | ||
| Security deposit |
|
|
|
| 41,216 | ||
| Property and equipment |
|
|
|
| 108,883 | ||
| Accounts payable and accrued expenses |
|
|
|
| (22,060) | ||
| Due to related party |
|
|
|
| (6,980) | ||
| Provision for taxation |
|
|
|
| (6,732) | ||
|
| Net tangible assets |
|
|
|
| $ | 149,104 |
Value of excess of purchase price over net assets |
|
|
| |||||
| Acquired allocated to: |
|
|
|
|
| ||
|
| Goodwill |
|
|
|
| $ | 55,484 |
The following unaudited pro forma information presents the Companys consolidated results of operations as if the acquisition had occurred on April 1, 2010:
|
| Three months ended June 30, | |||
|
| 2011 |
|
| 2010 |
Revenue |
|
|
|
|
|
Food and beverage income | $ | 94,216 |
| $ | 76,309 |
Franchise and management fee income |
| 16,482 |
|
| 22,152 |
Total revenue |
| 110,698 |
|
| 98,461 |
Pro forma net (loss)/income | $ | (23,507) |
| $ | 2,082 |
Pro forma net (loss)/income per share-basic and diluted |
| - |
|
| - |
12
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
NOTE 4 INVENTORIES
Inventories are stated at lower of cost or market. Inventories represent finished goods include food and beverage materials and products for catering services.
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment of the Company consist primarily of restaurant facilities and equipment owned and operated by the Company's wholly owned subsidiaries. Property and equipment as of June 30 and March 31, 2011 are summarized as follows:
|
| June 30, 2011 (Unaudited) |
| March 31, 2011 | |
Furniture & equipment | $ | 52,492 |
| $ | 51,835 |
Leasehold improvement |
| 86,001 |
|
| 86,001 |
Computer equipment |
| 7,066 |
|
| 7,066 |
Total |
| 145,559 |
|
| 144,902 |
Accumulated depreciation and amortization |
| (45,522) |
|
| (39,424) |
Balance as at period ended | $ | 100,037 |
| $ | 105,478 |
Depreciation and amortization expense for the three months ended June 30 2011 and 2010 were $6,098 and nil, respectively.
NOTE 6 SECURITY DEPOSITS
Security deposits mainly consist of five months rental and management fee security deposits, electricity and water meter deposits for company owned restaurant, and was recorded by the time of payment. Security and deposits as of June 30 and March 31, 2011are summarized as follows:
|
| June 30, 2011 |
|
| March 31, 2011 |
|
| (Unaudited) |
|
|
|
Rental and management fee security deposit | $ | 35,888 |
| $ | 35,888 |
Electricity deposit |
| 3,595 |
|
| 3,595 |
Water deposit |
| 771 |
|
| 771 |
Food supplies deposit |
| 962 |
|
| 962 |
Other deposit |
| 129 |
|
| - |
| $ | 41,345 |
| $ | 41,216 |
NOTE 7 COST OF GOODS SOLD
Cost of goods sold consists of finished goods include food and beverage materials and products for catering services sold by company-owned restaurant and the subfranchise annual fee expenses and exclusive of depreciation expenses shown separately under Note 8 Operating Expenses.
13
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
NOTE 8 OPERATING EXPENSES
Operating expenses consist of the following for the three months ended June 30, 2011 and 2010:
|
| Successor |
|
| Predecessor |
|
| Successor |
|
| Three months ended June 30, 2011 |
|
| Three months ended June 30, 2010 |
|
| Three months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
Staff costs | $ | 20,013 |
| $ | 22,560 |
| $ | - |
Property rent, rate and management fee |
| 23,112 |
|
| 22,958 |
|
| - |
Electricity and utilities |
| 4,683 |
|
| 4,602 |
|
| - |
Depreciation |
| 6,098 |
|
| 5,999 |
|
| - |
Professional and audit fee |
| 9,453 |
|
| - |
|
| 1,887 |
Others |
| 32,696 |
|
| 4,375 |
|
| - |
Total | $ | 96,055 |
| $ | 60,494 |
| $ | 1,887 |
NOTE 9 FRANCHISE ARRANGEMENTS
Franchise arrangements are pursuant to franchise agreements entered by the Company as the franchisee and Sizegenic Holdings Limited as the franchisor include payment of franchise fee payable on anniversary basis and continuing monthly management fee base upon a percent of franchisees net income after tax to Sizegenic throughout the term of franchise. Under this arrangement, two franchise agreements are entered in February and March 2010, respectively in which the Company is granted the right to operate a café bistro using the brand name Caffe Kenon for a term of 3 years and sublicense the right to two subfranchisees in Hong Kong and Beijing respectively to use brand name caffe Kenon to operate a café bistro for a term of 3 years commencing from April 1, 2010. Franchise fee expenses on the use of the license of the brand name and trademark Caffe Kenon is recorded upon the granting of the non-exclusive rights by Sizegenic as the fee is non-refundable to and non-cancellable by the Company. Franchise fee income on the sublicensing of the brand name and trademark Caffe Kenon is recognized upon the granting of the non-exclusive rights to the franchisee as the fee is non-refundable to and non-cancellable by the franchisee and the Company has no further obligations since they are all assumed by franchisee throughout the term.
The franchisee and the subfranchisees pay related occupancy costs including rent, property management fee and government rent and rates, insurance and maintenance for their owned restaurant. Franchisor has no obligation to any legal consequences arose from what the franchisee and subfranchisees assumed.
The franchisee and subfranchisees have the right to renew for one additional term equal to the initial term granted under Franchisors franchise agreement after expiration of the initial term provided that franchisee and subfranchisees have, during the term of the agreement, substantially complied with all its provisions. Franchisee and subfranchisees must pay franchisor, three months prior to the date of renewal, a renewal fee to be agreed between franchisor and the franchisee/subfranchisees.
Revenues from franchised Caffe Kenon are as follows:
14
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
|
| Successor |
|
| Predecessor |
|
| Successor |
|
| Three months Ended June 30, 2011 |
|
| Three months Ended June 30, 2010 |
|
| Three months Ended June 30, 2010 |
Subfranchise annual fee income | $ | 16,482 |
| $ | 22,152 |
| $ | - |
Subfranchise management fee income |
| - |
|
| - |
|
| - |
| $ | 16,482 |
| $ | 22,152 |
| $ | - |
Franchise and management fee income due to the Company are as follows:
|
| June 30, 2011 |
|
| March 31, 2011 |
Subfranchise annual and management fee due to the Company: |
|
|
|
|
|
Sino Wish (included in accounts receivable) | $ | 10,722 |
| $ | 10,272 |
Beijing Kenon (included in due from related party) |
| 18,090 |
|
| 11,880 |
| $ | 28,812 |
| $ | 22,152 |
Future minimum franchise fee payments due from the Company under existing franchise and subfranchise arrangements are:
Year ended March 31, |
|
|
|
|
|
2012 | $ | 10,272 |
| $ | 20,544 |
2013 |
| 5,136 |
|
| 5,136 |
Total | $ | 15,408 |
| $ | 25,680 |
Future minimum franchise fee payments due to the Company under existing franchise and subfranchise arrangements are:
Year ended March 31, |
|
|
|
|
|
2012 | $ | - |
| $ | 16,472 |
2013 |
| 10,272 |
|
| 10,272 |
Total | $ | 10,272 |
| $ | 26,744 |
Franchise fees owe to Sizegenic consist of franchise and subfranchise annual fee and monthly franchise management fee applicable to profit after tax of Company-owned restaurant. For six months ended June 30, 2011, the subfranchise annual fee expense in total of $10,272 for Hong Kong and Beijing owe to Sizegenic partially offset the annual fee and early termination fee in total of $16,482 collected from subfranchisee in HK and Beijing, respectively.
The 1st year franchise annual fee owe to Sizegenic for the Company-owned restaurant at $5,136 was after a special 50% discount and full amount of $10,272 is due per annum beginning in the second year and throughout the term of the agreement.
NOTE 10 SEGMENT INFORMATION
The Company has two reportable segments that include franchised to operate an owned Caffe Kenon in Hong Kong and subfranchise to operate two Caffe Kenon in Hong Kong and Beijing respectively. The subfranchisee located in Beijing has terminated the franchise agreement with effect from May 31, 2011 with an immaterial early termination fee of $6,210, no geographic information has been presented.
15
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
Each reportable segment is separately organized and focuses on different customer groups of consumers and subfranchisees. Each reportable segment prepares a stand-alone set of financial reporting package including information such as revenue, expenses, and goodwill, and the package is regularly reviewed by the Chief Executive Officer.
The following is a summary of relevant information relating to each segment reconciled to amounts on the accompanying consolidated financial statements for the three months ended June 30, 2011. The Company has transitioned from its development stage to operational activities as of February 10, 2011. The segment information disclosed for three months ended June 30, 2010 represents predecessors information.
Three Months ended June 30, 2011 (unaudited) | ||||||
Successor: |
| Franchise |
| Subfranchise |
| Total |
|
|
|
|
|
|
|
Revenue |
| $94,216 |
| $16,482 |
| $110,698 |
|
|
|
|
|
|
|
Depreciation and amortization |
| 6,098 |
| - |
| 6,098 |
|
|
|
|
|
|
|
Cost of revenues and operating expenses excluding depreciation and amortization |
| 116,981 |
| 10,272 |
| 127,253 |
|
|
|
|
|
|
|
Operating (loss)/income |
| (28,863) |
| 6,210 |
| (22,653) |
Other income |
| 927 |
| - |
| 927 |
|
|
|
|
|
|
|
Other expenses |
| (492) |
| - |
| (492) |
|
|
|
|
|
|
|
Total other income (net) |
| 435 |
| - |
| 435 |
|
|
|
|
|
|
|
Income tax expenses |
| (264) |
| (1,025) |
| (1,289) |
|
|
|
|
|
|
|
Net (loss)/income after tax |
| $(28,692) |
| $5,185 |
| $(23,507) |
|
|
|
|
|
|
|
Total assets, excluding goodwill |
| 193,189 |
| - |
| 193,189 |
Goodwill |
| 55,484 |
| - |
| 55,484 |
Capital expenditure |
| 657 |
| - |
| 657 |
16
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
Three Months ended June 30, 2010 (unaudited) | ||||||
Predecessor: |
| Franchise |
| Subfranchise |
| Total |
|
|
|
|
|
|
|
Revenue |
| $76,309 |
| $22,152 |
| $98,461 |
|
|
|
|
|
|
|
Depreciation and amortization |
| 5,999 |
| - |
| 5,999 |
|
|
|
|
|
|
|
Cost of revenues and operating expenses excluding depreciation and amortization |
| 77,845 |
| 10,272 |
| 88,177 |
|
|
|
|
|
|
|
Operating (loss)/income |
| (7,535) |
| 11,880 |
| 4,345 |
Other income |
| 1,245 |
| - |
| 1,245 |
|
|
|
|
|
|
|
Other expenses |
| (111) |
| - |
| (111) |
|
|
|
|
|
|
|
Total other income (net) |
| 1,134 |
| - |
| 1,134 |
|
|
|
|
|
|
|
Income tax credit (expenses) |
| 450 |
| (1,960) |
| (1,510) |
|
|
|
|
|
|
|
Net (loss)/income after tax |
| $(5,951) |
| $9,920 |
| $3,969 |
|
|
|
|
|
|
|
Total assets, excluding goodwill |
| 240,608 |
| 6,633 |
| 247,241 |
Goodwill |
| 32,560 |
| - |
| 32,560 |
Capital expenditure |
| 1,447 |
| - |
| 1,447 |
|
|
|
|
|
|
|
|
| Hong Kong |
| Beijing |
| Total |
Geographic segment revenue |
| $86,581 |
| $11,880 |
| $98,461 |
NOTE 11 INCOME TAX
The Company and its subsidiaries are subject to income tax on an entity basis on income arising in or derived from the tax jurisdictions in which they operate.
The Company and HLL have not provided for income tax due to continuing loss. Substantially all of the Companys income before income tax expenses is generated by its operating subsidiary, Legend Sun, in Hong Kong.
A reconciliation of the expected income tax expense (based on HK income tax rate) to the actual income tax expense is as follows:
| Successor |
| Predecessor |
| Successor | |||
| Three Months Ended June 30, 2011 |
| Three Months Ended June 30, 2010 |
| Three Months Ended June 30, 2010 | |||
| (Unaudited) |
| (Unaudited) |
| (Unaudited) | |||
(Loss)/income before tax | $ | (22,218) |
| $ | 5,479 |
| $ | (1,887) |
HK income tax rate |
| 16.50% |
|
| 16.50% |
|
| 16.50% |
Expected income tax (credit)/expenses calculated |
|
|
|
|
|
|
|
|
at HK income tax rate |
| (3,666) |
|
| 904 |
|
| (311) |
Expenses not deductible for tax purposes |
| 4,257 |
|
| - |
|
| 311 |
Temporary difference not recognized |
| 698 |
|
| 606 |
|
| - |
Actual income tax expenses | $ | 1,289 |
| $ | 1,510 |
| $ | - |
17
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
The Company's income tax provision in respect of operations in Hong Kong is calculated at the applicable tax rates on the estimated assessable profits for the year based on existing legislation, interpretations and practices in respect thereof. The standard tax rate applicable to the Company was 16.5%. No deferred tax liability has been provided as the amount involved is immaterial.
NOTE 12 OPERATING LEASE COMMITMENTS
The Company entered into a rent agreement on June 1, 2009 to lease premises for operation of the Company-owned restaurant for a term of 5 years (first 3 years non-cancellable and option to extend 2 more years) at a monthly rental rate of $6,667 for the first three years and $8,333 for the last two years.
A of June 30, 2011, the total future minimum lease payments under operating lease in respect of leased premises are payable as follows:-
Year ended March 31, |
|
|
2012 | $ | 60,003 |
2013 |
| 96,664 |
Total | $ | 156,667 |
NOTE 13 RELATED PARTY TRANSACTIONS
Balance with related party
| June 30, 2011 (Unaudited) |
| March 31, 2011 | |||||
|
|
|
|
| ||||
Payable to stockholder: |
|
|
|
|
| |||
Cheung Ming, stockholder |
| $ | 147,890 |
|
| $ | 131,688 | |
|
|
|
|
|
| |||
Due from related party: |
|
|
|
|
| |||
Beijing Kenon Bistro Catering Limited (BJ Kenon) (Common stockholder, Gu Yao) |
| $ | 19,194 |
|
| $ | 12,984 | |
|
|
|
|
|
|
|
| |
Subfranchise fee income charged to BJ Kenon for three months ended June 30, 2011 and year ended March 31, 2011 |
| $ | 6,210 |
|
| $ | 11,880 | |
|
|
|
|
|
| |||
Due from/(to) related party: |
|
|
|
|
| |||
Sizegenic Holdings Limited (Sizegenic) (Common stockholder, Cheung Ming) |
| $ | 8,193 |
|
| $ | (5,923) | |
|
|
|
|
|
| |||
Advance payment of coffee products receivable from Sizegenic for three months ended June 30, 2011 and franchise management fee payable to Sizegenic for the year ended March 31, 2011 |
| $ | 492 |
|
| $ | (1,718) | |
|
|
|
|
|
| |||
Management fee payable to Ever Lucid Limited (Ever Lucid) (Common stockholder, Cheung Ming) |
| $ | (3,852) |
|
| $ | - | |
|
|
|
|
|
| |||
Management fee charged by Ever Lucid for three months ended June 30, 2011 and year ended March 31, 2011 |
| $ | 7,704 |
|
| $ | - | |
|
|
|
|
|
|
18
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
Frascona, Joiner, Goodman and Greenstein, P.C (FJGG) (Common officer, director and shareholder, Gary Joiner) Professional fee paid for the three months ended June 30, 2011 |
| $ | 16,202 |
|
| $ | - |
The payables to stockholder mainly represent payment by Cheung Ming on behalf of the Company for primarily the legal and professional expenses. This advance is unsecured, non-interest bearing and without fixed repayment term.
The Company had amounts charged to and by related parties. The amount charged to BJ Kenon mainly represents the first year annual franchise fee income pursuant to the franchise agreement for a term of 3 years entered on April 1, 2010 and franchise fee income of early termination fee of the franchise agreement pursuant to the termination agreement entered and effective from May 31, 2011.
The receivable from Sizegenic mainly represents balance of advance payment of coffee product supplies less franchise management fee included in operating expenses of Company-owned restaurant pursuant to the related franchise agreements in place.
The amount charged by Ever Lucid, a wholly owned subsidiary of Sizegenic, represents the operating expenses for management services rendered for support functions included information technology, finance, human resources and administrative, design, marketing and promotion to Legend Sun pursuant to the management services agreement entered and effective from April 1, 2011.
The amount paid to FJGG mainly represents the legal and professional services provided by FJGG.
NOTE 14 CERTAIN RISK AND CONCENTRATION
Credit risk
As of June 30 and March 31, 2011, substantially all of the Companys cash included bank deposits in accounts maintained within Hong Kong, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
There were no significant customers or vendors which accounts for 10% or more of the Companys revenues or purchases during the periods presented.
19
ITEM. 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS," "INTENDS," "WILL," "HOPES," "SEEKS," "ANTICIPATES," "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD LOOKING STATEMENT. SUCH FORWARD LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
Background
The Company was incorporated under the laws of the State of Florida on May 6, 1996. The Company was formed as a blank check or shell company for the purpose of seeking, investigating, and, if warranted, acquiring one or more properties or businesses. From inception to February 10, 2011, it remained in the development stage. Our only activities during this period were organizational activities, compliance with SEC reporting obligations, and seeking a suitable business acquisition.
On February 10 2011, the Company acquired all of the issued and outstanding shares of HLL, which was incorporated in December, 2009. As a result of completion of this share exchange transaction, HLL became our wholly-owned subsidiary. Also, as more fully described below, HLLs subsidiary, Legend Sun Limited, a Hong Kong corporation (Legend Sun), which HLL acquired in February, 2010, became the Companys operating subsidiary.
Corporate Structure
The Chart below depicts our corporate structure. As depicted below, Studio II Brands owns 100% of Hippo Lace Limited and Hippo Lace Limited owns 100% of Legend Sun Limited.
20
Studio II Brands, Inc. A Florida Corporation |
↓ 100%
Hippo Lace Limited. A British Virgin Islands Corporation |
↓ 100%
Legend Sun Limited A Hong Kong Corporation |
The Company completed the share exchange transaction with HLL in order to acquire the business operations carried on through its subsidiary, Legend Sun, and with the intent of focusing our business activity exclusively on those operations. Through Legend Sun, the Company is in the business of operating coffee shop restaurants under the tradename Caffe Kenon. The Company currently owns and operates one Caffé Kenon coffee shop located in Hong Kong which has been in operation since July 2009. This shop is operated under the terms of a franchise agreement between HLL and Sizegenic Holdings Limited, a British Virgin Islands corporation (Sizegenic). As of June 30, 2011, one other Caffe Kenon coffee shop located in Hong Kong is operated by a subfranchisee of HLL from which the Company receives franchise and management fees.
At the Company-owned restaurant it offers Italian-style espresso drinks using Kenon brand coffee imported from Italy. It also serves breakfast, lunch and dinner with a moderately-priced Italian style standard menu which includes pizza, spaghetti, risotto, salads, sandwiches and desserts. In addition, Café Kenon Bistro serves periodic specialty meals in addition to the standard menu items. The Company seeks to establish restaurant locations in shopping and commercial areas with significant foot traffic and with easy access to underground railroad or other public transportation. Our restaurants are designed in an L shape design with seating areas for customers around a counter area which includes display cases for pastries and other items and a work area where staff prepare espresso drinks. The Company uses a modern stylish design for the interior with a flexible combination of tables and chairs designed to allow us to host various types of events and to accommodate a total of approximately 50 guests.
The Companys future plan of operations is to seek to continue to expand by adding additional Café Kenon locations in Hong Kong and in China. Some of the new locations may be Company owned and operated as franchises of Sizegenic, and some may be subfranchise operations from which the Company receives franchise and management fees. The Company also plans to search possible investment and business opportunities in different potential restaurant and catering service business segments including hotpot and traditional Chinese cuisine restaurants, and possible investment and business opportunities related to ownership and operation of a coffee farm and production of our own brand of packed coffee beans and canned coffee to be sold to wholesale and retail customers. The Company will require additional working capital in order to open new Company owned Café Kenon locations or to pursue other potential investment and business opportunities, and there is no assurance that such additional working capital funding will be available, or will be available on terms which are acceptable to the Company.
21
Critical Accounting Policies and Estimates
A summary of significant accounting policies is provided in Note 2 to our financial statements included in our filing on Form 10-K for the fiscal year ended March 31, 2011, and filed with the SEC on August 8, 2011. Our officers and directors believe that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition.
The preparation of financial statements in conformity with generally accepted accounting principles requires our officers and directors 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 revenues and expenses during the reporting period. Actual results will differ from those estimates.
Results for the Three Months Ended June 30, 2011 compared to Three Months Ended June 30, 2010
The following discussion regarding unaudited results of operation relates to the business operations which are carried on through our operating subsidiary, Legend Sun. The Company believes the following information is relevant to an assessment and understanding of our results of operation and financial condition for the three months ended June 30, 2011 and 2010 which is before and after the Company acquired HLL and its subsidiary Legend Sun in February, 2011. The following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this Form, and also the unaudited pro forma consolidated results of operations as if the acquisition of HLL and its subsidiary had occurred on April 1, 2010 as shown below.
The following unaudited pro forma information presents the Companys consolidated results of operations
as if the acquisition had occurred on April 1, 2010 for comparative analysis purpose since Studio II Brands, INC., the parent company, had small amounts of income statement activities only:
|
|
| Three months ended June 30, | |
|
|
| 2011 | 2010 |
Revenue |
|
|
|
|
Food and beverage income |
| $94,216 | $76,309 | |
Franchise and management fee income | 16,482 | 22,152 | ||
Total revenue |
|
| 110,698 | 98,461 |
Cost of goods sold |
| (37,296) | (33,622) | |
Gross profit |
|
| 73,402 | 64,839 |
Operating expenses |
| (96,055) | (60,494) | |
Operating (loss)/income |
| (22,653) | 4,345 | |
Other income |
|
| 927 | 1,245 |
Other expenses |
|
| (492) | (111) |
Total other income, net |
| 435 | 1,134 | |
Income tax expenses |
| (1,289) | (1,510) | |
Net (loss)/income |
| $(23,507) | $ 3,969 | |
Net (loss)/income per share-basic and diluted | - | - |
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Revenues
Revenue consists of operating revenue from company-owned restaurant ($94,216), second year annual subfranchise fee from subfranchisee Sino Wish ($10,272), early termination fee of subfranchisee from Beijing Kenon Bistro Catering Limited (BJ Kenon) located in Beijing ($6,210). The increase of operating income as compared to the same period in 2010 ($76,309) mainly due to increased sales volume and price adjustment on an annual basis.
HLL and BJ Kenon agreed to terminate the franchise agreement signed on April 1, 2010 with effect from May 31, 2011 due to restructuring of Beijing subfranchisee who agreed to pay HLL an early termination fee of RMB40,000 ($6,210). As a result, the franchise fee income ($16,482) decreased as compared to $22,152 for 2010.
Cost of Revenues
Cost of revenue amounting to $37,296 represents finished goods include food and beverage materials and products for catering services sold by company-owned restaurant. The increase of cost of revenue from restaurant operation as compared to the same period in 2010 ($33,622) was in line with increased sales volume.
Pursuant to the terms regarding subfranchise stipulated in the supplementary franchise agreement entered between HLL and Sizgenic on March 1, 2010, HLL is payable to Sizegenic for the second year subfranchise fee of HK$40,000 (approximately $5,128) for BJ Kenon due in April 2011 before the termination of franchise agreement with Beijing Kenon with effect from May 31, 2011. HLL is not required to pay third year subfranchise fee following the termination of agreement with Beijing Kenon with effect from May 31, 2011.
Gross Profit
Gross profit amounting to $73,402 represents the result of the revenues and costs of revenues from company owned restaurant ($67,192) and subfranchise fee income and expenses ($6,210). The increase of gross profit from restaurant operation as compared to the same period in 2010 ($52,959) was mainly due to increased sales volume and price adjustment. The decrease of gross profit from subfranchise operation as compared to 2010 was mainly due to lower early termination fee of subfranchisee BJ Kenon ($6,210) than the first year annual subfranchise fee of BJ Kenon ($11,880).
Operating Expenses
Operating expenses for the Company and subsidiaries were $96,055 and $60,494 for three months ended June 30, 2011 and 2010, respectively.
23
They consist of the following items:
| Three months ended June 30, 2011 | Three months ended June 30, 2010 |
|
|
|
Staff costs | 20,012 | 22,560 |
Rent, government fee, management fee | 23,112 | 22,958 |
Electricity, gas and utilities | 4,683 | 4,602 |
Depreciation | 6,098 | 5,999 |
Professional and audit fee | 25,655 | - |
Others | 16,495 | 4,375 |
| 96,055 | 60,494 |
The increase of operating expenses mainly due to legal and professional expenses for CPAs and legal counsels review of financials and statutory filing of the forms and documentation after the acquisition of HLL ($25,655) and the management service fee charged by Ever Lucid Ltd, a subsidiary of Sizegenic, for the provision of support services including information technology, finance, human resources, administrative, design, marketing and promotion at HK$20,000 per month (approximately $2,568).
Operating Loss/income
Operating loss amounting to $22,653 for the three months ended June 30, 2011 represents the result of revenues, costs of revenues and operating expenses from Company-owned restaurant ($28,863) and subfranchise operating income ($6,210). Operating income for 2010 $4,345 represents operating loss of Company-owned restaurant ($7,535) and subfranchise operating income $11,880. The operating loss for three months ended June 30, 2011 mainly due to legal and professional expenses for CPAs and legal counsels review of financials and statutory filing of the forms and documentation after the acquisition of HLL ($25,655).
Other income and expenses
Other income and expenses were $927 and $492 for three months ended June 30, 2011 and $1,245 and $111 for three months ended June 30, 2010 respectively. Other income represents the tip from Company-owned restaurant. Other expenses represents franchise management fee expenses of Company-owned restaurant.
Net income or loss
Net loss for three months ended June 30, 2011 amounting to $23,507 represents the net loss of Company-owned restaurant ($28,692) and net income of subfranchise operation ($5,185). Net income for three months ended June 30, 2010 amounting to $3,969 represents the net loss of Company-owned restaurant ($5,951) and net income of subfranchise operation ($9,920).
Impact of Inflation
We believe that the rate of inflation has had a negligible effect on our operations.
24
Liquidity and Capital Resources
Net cash used in operating activities was 28,123. It mainly represents net loss caused by increased legal and professional expenses for CPAs and legal counsels review of financials and statutory filing of the forms and documentation after the acquisition of HLL.
Net cash used in investing activities was $657 and represents purchase of equipment.
Net cash provided by financing activities was $16,200 and represents the proceeds from payable to stockholder for payment of legal and professional expenses on behalf of the Company.
A shareholder of the Company, Cheung Ming, has paid expenses on behalf of the Company in exchange for a payable bearing no interest and without fixed repayment term. Amounts payable to the aforesaid shareholder at June 30, 2011 and March 31, 2011were $147,890 and $131,688, respectively. The payable is an internal source of liquidity for payment of operational expenses and to provide working capital. Possible external sources of liquidity may include loan borrowing from financial institutions or possible completion of a share exchange transaction to acquire potential and profitable businesses which can generate additional cash flow.
The Company believes that the existing cash and cash equivalents on hand as at June 30, 2011 at approximately $11,365, together with approximately $3,000 monthly average net cash inflow generated from the Company-owned restaurant will be sufficient to meet the working capital requirements for current level of operations and to sustain business operations at the current levels for the next twelve months.
According to the Company cash flow projection for the next five years, based on projections and assumptions of stable growth of annual revenue and maintenance of a consistent cost and expense structure, as well as cash based turnover and payable of supplies on credit, the Company-owned restaurant could generate annual cash surplus of approximately US$38,000 for the first year from April 2011 to March 2012, increasing to approximately US$82,000 for the fifth year from April 2015 to March 2016, and could accumulate sufficient cash balance to self sustain its business operation throughout the five years.
As of June 30, 2011, there were no material commitments for capital expenditures for business operations.
Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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ITEM 4.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
The Securities and Exchange Commission defines the term disclosure controls and procedures to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuers management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to chief executive and chief financial officers to allow timely decisions regarding disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring that such information is recorded, processed, summarized and reported within the time periods specified. Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance of the achievement of these objectives.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting during the period ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated. No director, officer or affiliate of the Company, and no owner of record or beneficial owner of more than 5.0% of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
ITEM 1A.
RISK FACTORS.
Not Applicable.
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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
(REMOVED AND RESERVED).
ITEM 5.
OTHER INFORMATION.
ITEM 6.
EXHIBITS.
(a)
The following exhibits are filed herewith:
31.1
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
SCH XBRL Schema Document.
101
CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101
LAB XBRL Taxonomy Extension Label Linkbase Document.
101
PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101
DEF XBRL Taxonomy Extension Definition Linkbase Document.
27
SIGNATURES
Pursuant to 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.
STUDIO II BRANDS, INC.
By: /S/ Cheung Sing
Cheung Sing, Chief Executive Officer
Date: October 28, 2011
By: /S/ Leung Kin Wah
Leung Kin Wah, Chief Financial Officer
Date: October 28, 2011
28