Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - STUDIO II BRANDS INCFinancial_Report.xls
EX-32 - EXHIBIT 32.1 - STUDIO II BRANDS INCstudioiibrands_exh322.htm
EX-31 - EXHIBIT 31.2 - STUDIO II BRANDS INCstudioiibrands_exh312.htm
EX-32 - EXHIBIT 32.1 - STUDIO II BRANDS INCstudioiibrands_exh321.htm
EX-31 - EXHIBIT 31.1 - STUDIO II BRANDS INCstudioiibrands_exh311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



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

For the quarterly period ended September 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

Registrant’s 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 November __, 2011, the Issuer had 11,899,276 shares of common stock issued and outstanding.




1







 QUARTERLY REPORT ON FORM 10-Q

          OF STUDIO II BRANDS, INC.

               FOR THE PERIOD ENDED SEPTEMBER 30, 2011


TABLE OF CONTENTS

 

PART I

-

FINANCIAL INFORMATION

  

  

  

  

  

Item 1.

  

Financial Statements

3

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

  

Controls and Procedures

30

  

  

  

  

PART II

-

OTHER INFORMATION

  

  

  

  

  

Item 1.

  

Legal Proceedings

31

Item 1A.

  

Risk Factors

31

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

  

Defaults Upon Senior Securities

31

Item 4.

  

Removed and Reserved

31

Item 5.

  

Other Information

31

Item 6.

  

Exhibits

31

Signatures

32



2







PART I-FINANCIAL INFORMATION


ITEM 1.

FINANCIAL STATEMENTS.





3






 

STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

Successor:

 

 

 

 

September 30, 2011

 (unaudited)

March 31, 2011

ASSETS

 

 

CURRENTS ASSETS

 

 

 

 

Cash

 

 

 $       12,598

 $        23,945

Due from related party

 

 

27,169

12,984

Accounts receivable

 

 

10,272

16,886

Inventories

 

 

          2,353

          2,058

Total current assets

 

 

        52,392

            55,873

 

 

 

 

 

Property and equipment, net

 

 

93,934

105,478

Security deposits

 

 

41,666

41,216

Goodwill

 

 

        55,484

        55,484

 

 

 

 

 

TOTAL ASSETS

 

 

 $    243,476

 $   258,051

 

 

 

 

 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable and accrued expenses

 

 

$       52,283

$      51,987

Income tax payable

 

 

5,051

6,006

Due to related party

 

 

                 -

          5,923

TOTAL CURRENT LIABILITIES

 

 

57,334

63,916


Payable to stockholder

 

 

      164,448

      131,688


TOTAL LIABILITIES

 

 

      221,782

      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 September 30, 2011 and March 31, 2011

 

11,900

11,900

Additional paid-in capital

 

 

258,871

258,871

Accumulated deficit

 

 

    (249,077)

    (208,324)

TOTAL STOCKHOLDER'S EQUITY

 

 

         21,694

         62,447

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

 $    243,476

 $   258,051


See accompanying notes to consolidated financial statements



4









STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

Successor

Three-months ended

 September 30, 2011

Three Months Ended


Predecessor

Three-months ended

September 30, 2010

Successor Three-months ended

 September 30, 2010

Successor

Six-months ended

September 30,

 2011

Six Months Ended


Predecessor

Six-months

ended

 September 30,

2010

Successor Six-months ended

 September 30,

2010

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

Food and beverage income

$      89,543

$      90,914

$                -

$      183,759

 $     167,223

 $               -

Franchise and management fee income

                 -

             114

                  -

       16,482

       22,266

                 -

 

$     89,543

$     91,028

$                -

$    200,241

$    189,489

$                -

 

 

 

 

 

 

 

Cost of goods sold (exclusive of depreciation)

    (25,709)

    (26,005)

                  -

     (63,005)

       (59,627)

                  -

 

 

 

 

 

 

 

Gross profit

       63,834

       65,023

                 -

      137,236

      129,862

                 -

 

 

 

 

 

 

 

Operating expenses

      (81,673)

     (64,526)

       (6,881)

     (177,728)

      (125,020)

      (8,768)

OPERATING (LOSS)/INCOME

     (17,839)

          497

       (6,881)

    (40,492)

         4,842 

      (8,768)

 

 

 

 

 

 

 

OTHER INCOME/(EXPENSES)

 

 

 

 

 

 

Other income

844

947

-

1,771 

 2,192

  -

Other expenses

            (74)

         (498)

                 -

         (566)

             (609)  

               -

TOTAL OTHER INCOME, NET

             770

           449

                -

         1,205

        1,583  

                -

NET (LOSS)/INCOME BEFORE INCOME TAXES

(17,069)

946

(6,881)

(39,287) 

6,425

(8,768)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expenses

      (177)

         (734)

                -

      (1,466)

        (2,244)

                -

NET (LOSS)/INCOME

  $  (17,246)

 $         212

$    (6,881)

$   (40,753) 

 $      4,181

$    (8,768)

Net (loss)/income per common share

 

 

 

 

 

 

Basic and fully diluted                

$               -                 $         212

 $              -

$                -

 $       4,181

$              -

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

   11,899,276

                 1

  3,745,676

  11,899,276

                1

 3,745,676


See accompanying notes to consolidated financial statements



5









STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock, Par value of $0.001

 

 

Total

 

Additional

Accumulated

Stockholders’

 

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

                  -

                  -

                    -

        (40,753)

         (40,753)

Balance as of  September 30, 2011

 11,899,276

 $     11,900

 $     258,871

 $  (249,077)

 $        21,694



See accompanying notes to consolidated financial statements



6








STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

Successor

Six months

ended

 September 30,2011

Predecessor

Six months

ended

September 30,2010

Successor

Six months

ended

September 30,2010

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

   Net (loss)/income

 

$ (40,753)

$      4,181

$   (8,768)

Adjustments to reconcile net (loss)/income to

net cash used in operating activities:

 

 

 

 

  Depreciation and amortization

 

12,201

12,040

-

Changes in operating assets and liabilities:

 

 

 

 

 Due from related party

 

(14,185)

(12,984)

-

 Account receivable

 

6,614

(10,272)

-

 Other receivable

 

-

-

-

Inventory

 

(295)

815

-

 Security deposits

 

(450)

(257)

-

 Account payable and accrual expenses

 

296

(8,207)

1,411

Due to related party

 

(5,923)

5,745

-

Provision for taxation

 

 (955)

       2,245

              -

NET CASH USED IN OPERATING ACTIVITIES

 

   (43,450)

    (6,694)

   (7,357)


CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

 (657)

    (3,109)

              -

NET CASH USED IN INVESTING ACTIVITIES

        (657)

    (3,109)

              -


CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

  Proceeds from stockholder’s loan

 

              -

       6,420

              -

  Proceeds from stockholder

 

     32,760

              -

      7,357

NET CASH PROVIDED BY FINANCING ACTIVITIES

      32,760

       6,420

      7,357

NET DECREASE IN CASH

 

   (11,347)

    (3,383)

              -

Beginning of period

$    23,945

$   15,322

$            -

End of period


$      12,598

$   11,939

$            -

Supplemental disclosures of cash flow information:

 

 

 

 

  Cash paid for interest

 

$             -

$            -

$            -

Cash paid for income taxes

 

$   (2,421)

$             -

$            -


Additional supplemental cash flow information is set out in note 3 Business acquisition.


See accompanying notes to consolidated financial statements.



7




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 1 ORGANIZATION


Studio II Brands, Inc. (the “Company”) was formed on May 6, 1996 in the State of Florida. The Company’s 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 Gu’s 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 consolidated financial statements as of September 30, 2011 and for the three and six month periods ended September 30, 2011 and 2010 are unaudited. The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial reporting.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) have been made that are necessary to present fairly the financial position of the Company as of September 30, 2011 and the results of its operations and cash flows for the three and six month periods ended September 30, 2011 and 2010.  Operating results as presented are not necessarily indicative of the results to be expected for a full year.  These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2011.


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 Company’s 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.


(b)

Principles of Consolidation


The balance sheets as of September 30 and March 31, 2011 include the Company and its wholly-owned subsidiaries, HLL and Legend Sun.  Additionally, the results of operations and cash flows for the six months ended September 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)

Going concern and management’s plans


These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, they do not include any adjustments that might result from the outcome of this uncertainty.  The Company’s minimal revenues, its dependency from continued funding from its stockholders and the net cash used in operating activities raise substantial double about its ability to continue as a going concern.    The Company's business plan includes raising funds from outside potential investors.  However, there is no assurance that it will be able to do so.




8




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d/…)


(d)

Use of estimates


The preparation of consolidated financial statements in conformity with US GAAP 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 Company’s significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets, realizable values for inventories and accrued expenses.


(e)

Foreign currency translation


Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date; 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.



 

 

September 30,

 

 

September 30,

 

 

March 31,

 

 

 

2011

 

 

2010

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

Period end HK$:US$ exchange rate

 

$

7.7929

 

 

 

-

 

 

$

7.7884

 

Average three-months ended HK$:US$ exchange rate

 

$

7.7931

 

 

$

7.7676

 

 

 

-

 

Average six-months ended HK$:US$ exchange rate

 

$

7.7865

 

 

$

7.7733

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(f)

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 asset’s 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


(g)

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 management’s 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.








9




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d/…)


 (h)

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 as of  March 31 and September 30, 2011. The Company’s 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.  Management’s 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 $10,272 at September 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.


(i)

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.

 

(j)

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.


(k)

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 September 30 and March 31, 2011.


(l)

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 Company’s assessment, there were no events or changes in circumstances that would indicate any impairment of long-lived assets as of September 30 and March 31, 2011.








10




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d/…)


(m)

Accounts payable and accrued expenses consist of the following:


 

 

September 30, 2011

(Unaudited)

 

March 31, 2011

Accounts payable

$

19,120

 

$

8,516

Accrued expenses

 

 

 

 

 

 

Legal and professional fees

 

26,206

 

 

32,361

 

Payroll and other operating expenses

 

6,957

 

 

11,110

 

 

$

52,283

 

$

51,987


(n)

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 evaluates its hierarchy disclosures each quarter.


The carrying values of cash, accounts receivables, accounts payable and accrued expenses, short-term borrowings from related party and payable to stockholder 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 September 30 and March 31, 2011.


(o)

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.





11




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d/…)


(o)

Income Taxes   (Cont’d/…)


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.


(p)

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.


(q)

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 seller’s 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. 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 six months ended September 30, 2011 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).


(r)

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.


(s)

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 Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s 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 Company’s franchise operations in Hong Kong and Beijing are two operating segments and geographic information has been presented.







12




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d/…)


(t)

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 September 30 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.


(u)

Recent Accounting Pronouncements


In June 2011, the FASB issued ASU 2011-05, which is an update to Topic 220, “Comprehensive Income.” This update eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity, requires consecutive presentation of the statement of net income and other comprehensive income and requires reclassification adjustments from other comprehensive income to net income to be shown on the financial statements.  ASU 2011-05 is effective for all interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial position or results of operations.


In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, (“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. We do not expect that the adoption of ASU 2011-08 will have a material impact on our consolidated financial statements.


Except for the above, 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.


















13




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




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 Gu’s 100% interests of HLL and its wholly owned subsidiary, Legend Sun.


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.


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 Company’s consolidated results of operations as if the acquisition had occurred on April 1, 2010:

 

 

Six months ended September 30,

 

 

2011

 

 

2010

Revenue

 

 

 

 

 

Food and beverage income

$

183,759

 

$

167,223

Franchise and management fee income

 

16,482

 

 

22,266

Total revenue

 

200,241

 

 

189,489

Pro forma net loss

$

(40,753)

 

$

(4,587)

Pro forma net loss per share-basic and diluted

 

-

 

 

-



14




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)






NOTE 4 PROPERTY AND EQUIPMENT


Property and equipment are summarized as follows:

 

 

September 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

 

 (51,625)

 

 

(39,424)

Balance as at period ended

$

93,934

 

$

105,478


Depreciation and amortization expense for the six months ended September 30 2011 and 2010 were $12,201 and $12,040, respectively.


NOTE 5 SECURITY DEPOSITS


Security deposits are summarized as follows:

 

 

September 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

 

1,220

 

 

962

Other deposit

 

192

 

 

-

 

$

41,666

 

$

41,216


NOTE 6 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 7 Operating Expenses.


NOTE 7 OPERATING EXPENSES


Operating expenses consist of the following for the three and six months ended September 30, 2011 and 2010:


 

 

 

 

Successor

 

Predecessor

 

Successor

 

 

 

 

Three months

Six months

 

Three months

Six months

 

Three months

Six months

 

 

 

 

ended

ended

 

ended

ended

 

ended

ended

 

 

 

 

September 30, 2011

 

September 30, 2010

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

Staff costs

 

 

          19,568

       39,581

 

           20,252

       42,812

 

-

                 -

Property rent, rate and management fee

          23,112

       46,224

 

           22,958

       45,916

 

-

                 -

Electricity and utilities

 

            5,853

       10,536

 

            6,104

       10,706

 

-

                 -

Depreciation

 

 

            6,103

       12,201

 

            6,041

       12,040

 

-

                 -

Professional and audit fee

 

          16,630

       42,285

 

               129

           129

 

6,881

          8,768

Others

 

 

 

           10,407

       26,901

 

            9,042

       13,417

 

            -

                 -

Total

 

 

 

          81,673

      177,728

 

           64,526

     125,020

 

              6,881

          8,768




15




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 8 FRANCHISE ARRANGEMENTS


Franchise arrangements are pursuant to franchise agreements entered by the Company as the franchisee and Sizegenic Holdings Limited (“Sizegenic”) as the franchisor, The Agreements require payment of franchise fees 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 were 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 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 Franchisor’s 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:


 

 

Successor

 

 

Predecessor

 

 

Successor

 

 

Six months

Ended

September 30, 2011

 

 

Six months

Ended

September 30, 2010

 

 

Six months

Ended

September 30, 2010

Subfranchise annual fee income

$

16,482

 

$

22,152

 

$

-

Subfranchise management fee income

 

-

 

 

114

 

 

-

 

$

16,482

 

$

22,266

 

$

-


Franchise and management fee income due to the Company are as follows:

               

 

 

September 30,

 2011

 

 

March 31, 2011

Subfranchise annual and management fee due to the Company:

 

 

 

 

 

Sino Wish (included in accounts receivable)

$

10,272

 

$

10,272

Beijing Kenon (included in due from related party)

 

18,090

 

 

11,880

 

$

28,362

 

$

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



16




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)






NOTE 8 FRANCHISE ARRANGEMENTS (CONT’D/…)


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


The first year franchise annual fee owed to Sizegenic for the Company-owned restaurant at $5,136 was after a special 50% discount and full amount of $10,272 which is due per annum beginning in the second year and throughout the term of the agreement.


NOTE 9 SEGMENT INFORMATION


A)

Business segment reporting – by services


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.


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 the summary of relevant information relating to each segment reconciled to amounts on the accompanying consolidated financial statements for the three and six months ended September 30, 2011. The Company has transitioned from its development stage to operational activities as of February 10, 2011.  The segment information disclosed for three and six months ended September 30, 2010 represents predecessor’s information.


Three Months ended September 30, 2011 (unaudited)

Successor:

 

Franchise

 

Subfranchise

 

Total

 

 

 

 

 

 

 

Revenue

 

$89,543

 

$ -

 

$89,543

 

 

 

 

 

 

 

Depreciation and amortization

 

(6,103)

 

-

 

(6,103)

 

 

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

(100,201)

 

(1,078)  

 

(101,279)

 

 

 

 

 

 

 

Operating loss

 

(16,761)

 

(1,078)

 

(17,839)


Other income

 

844

 

-

 

844

 

 

 

 

 

 

 

Other expenses

 

(74)

 

-

 

(74)

 

 

 

 

 

 

 

Total other income (net)

 

770

 

-

 

770

 

 

 

 

 

 

 

Income tax (expenses)/credit

 

(355)

 

178

 

(177)

 

 

 

 

 

 

 

Net loss after tax

 

$(16,346)

 

$(900)

 

$(17,246)



17




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)






 

 

 

 

 

 

 

Total assets, excluding goodwill

 

158,526

 

29,466

 

187,992

Goodwill

 

55,484

 

-

 

55,484

Capital expenditure

 

-

 

-

 

-


Six Months ended September 30, 2011 (unaudited)

Successor:

 

Franchise

 

Subfranchise

 

Total

 

 

 

 

 

 

 

Revenue

 

$183,759

 

$16,482

 

$200,241

 

 

 

 

 

 

 

Depreciation and amortization

 

(12,201)

 

-

 

(12,201)

 

 

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

(217,182)

 

(11,350)  

 

(228,532)

 

 

 

 

 

 

 

Operating (loss)/income

 

(45,624)

 

5,132

 

(40,492)


Other income

 

1,771

 

-

 

1,771

 

 

 

 

 

 

 

Other expenses

 

(566)

 

-

 

(566)

 

 

 

 

 

 

 

Total other income (net)

 

1,205

 

-

 

1,205

 

 

 

 

 

 

 

Income tax expenses

 

(619)

 

(847)

 

(1,466)

 

 

 

 

 

 

 

Net (loss)/income after tax

 

$(45,038)

 

$4,285

 

$(40,753)

 

 

 

 

 

 

 

Total assets, excluding goodwill

 

158,526

 

29,466

 

187,992

Goodwill

 

55,484

 

-

 

55,484

Capital expenditure

 

657

 

-

 

657


Three Months ended September 30, 2010 (unaudited)

Predecessor:

 

Franchise

 

Subfranchise

 

Total

 

 

 

 

 

 

 

Revenue

 

$90,914

 

$114

 

$91,028

 

 

 

 

 

 

 

Depreciation and amortization

 

(6,041)

 

-

 

(6,041)

 

 

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

(84,490)

 

-  

 

(84,490)

 

 

 

 

 

 

 

Operating income

 

383

 

114

 

497


Other income

 

947

 

-

 

947

 

 

 

 

 

 

 

Other expenses

 

(498)

 

-

 

(498)

 

 

 

 

 

 

 

Total other income (net)

 

449

 

-

 

449

 

 

 

 

 

 

 

Income tax expenses

 

(715)

 

(19)

 

(734)

 

 

 

 

 

 

 

Net income after tax

 

$117

 

$95

 

$212

 

 

 

 

 

 

 

Total assets, excluding goodwill

 

207,471

 

23,256

 

230,727



18




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)






Goodwill

 

32,560

 

-

 

32,560

Capital expenditure

 

3,109

 

-

 

3,109


Six Months ended September 30, 2010 (unaudited)

Predecessor:

 

Franchise

 

Subfranchise

 

Total

 

 

 

 

 

 

 

Revenue

 

$167,223

 

$22,266

 

$189,489

 

 

 

 

 

 

 

Depreciation and amortization

 

(12,040)

 

-

 

(12,040)

 

 

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

(162,335)

 

(10,272)  

 

(172,607)

 

 

 

 

 

 

 

Operating (loss)/income

 

(7,152)

 

11,994

 

4,842


Other income

 

2,192

 

-

 

2,192

 

 

 

 

 

 

 

Other expenses

 

(609)

 

-

 

(609)

 

 

 

 

 

 

 

Total other income (net)

 

1,583

 

-

 

1,583

 

 

 

 

 

 

 

Income tax expenses

 

(265)

 

(1,979)

 

(2,244)

 

 

 

 

 

 

 

Net (loss)/income after tax

 

$(5,834)

 

$10,015

 

$4,181

 

 

 

 

 

 

 

Total assets, excluding goodwill

 

207,471

 

23,256

 

230,727

Goodwill

 

32,560

 

-

 

32,560

Capital expenditure

 

3,109

 

-

 

3,109

 

 

 

 

 

 

 

B)

Business segment reporting – by geography


As its secondary segments, the Company reports two geographical areas, which are the main market areas: Hong Kong and Beijing.  There is no any single foreign country market accounting for more than 10% of total revenues for the three or six months ended September 30, 2011 and 2010, respectively.


The following tables set forth revenues from customers of products sold by geographic segment:

Geographical information:

Three months ended September 30,

Six months ended September 30,

 

 

 

2011

2010

2011

2010

 

 

 

Successor

Predecessor

Successor

Predecessor

Hong Kong

 

89,543

91,028

194,031

177,609

Beijing

 

 

-

-

6,210

11,880

Total

 

 

89,543

91,028

200,241

189,489


All the long lived assets of the Company are located in Hong Kong.










19




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 10 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 Company’s income before income tax expenses is generated by its operating subsidiary, Legend Sun, in Hong Kong.


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%. The unrecognized temporary difference of $891 and $1,157 for the six months ended September 30, 2011 and 2010, respectively represent the difference between depreciation expenses and depreciation tax allowance for the plant and equipment. No deferred tax liability has been provided as the amount involved is immaterial.


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

 

Six Months

Ended

September 30, 2011

 

Six Months

Ended

September 30, 2010

 

Six Months

Ended

September 30, 2010

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

(Loss)/income before tax

$

(39,287)

 

$

6,425

 

$

(8,768)

HK income tax rate

 

16.50%

 

 

16.50%

 

 

16.50%

Expected income tax (credit)/expenses calculated

 

 

 

 

 

 

 

 

 at HK income tax rate

 

(6,482)

 

 

1,060

 

 

(1,447)

Expenses not deductible for tax purposes

 

7,057

 

 

27

 

 

1,447

Temporary difference not recognized

 

891

 

 

1,157

 

 

-

Actual income tax expenses

$

1,466

 

$

2,244

 

$

-


The Company’s effective income tax rate is 3.7% and nil for the six months ended on September 30, 2011 and 2010, respectively.



NOTE 11 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.


As of September 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

$

40,002

2013

 

96,664

Total

$

136,666









20




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 12 RELATED PARTY TRANSACTIONS


 

September 30, 2011

(Unaudited)

 

March 31, 2011

Payable to stockholder:

 

 

 

 

 

Cheung Ming, stockholder (a)

 

$

164,448

 

 

$

131,688

 

 

 

 

 

 

Due from related party:

 

 

 

 

 

Beijing Kenon Bistro Catering Limited (“BJ Kenon”) (Common stockholder, Gu Yao) (b)

 

$

19,194

 

 

$

12,984

 

 

 

 

 

 

 

 

Due from/(to) related party:

 

 

 

 

 

Sizegenic Holdings Limited (“Sizegenic”) (Common stockholder, Cheung Ming) (c)

 

$

5,664

 

 

$

(5,923)


Subfranchise fee income charged to BJ Kenon

 

$

6,210

 

 

$

11,880

 

 

 

 

 

 

Management fee paid in advance to Ever Lucid Limited (“Ever Lucid”) (Common stockholder, Cheung Ming) (d)

 

$

2,311

 

 

$

-

 

 

 

 

 

 

Management fee charged by Ever Lucid

 

$

13,098

 

 

$

-

 

 

 

 

 

 

Frascona, Joiner, Goodman and Greenstein, P.C (“FJGG”) (Common officer, director and shareholder, Gary Joiner)

Professional fee paid (e)

 

$

27,760

 

 

$

17,144


(a) 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.


(b) 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.


(c) 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.


(d) 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 one-year management services agreement entered and effective from April 1, 2011 at a monthly charge of approximately $2,568.  In September, 2011, Ever Lucid agreed to provide 30% discount to the monthly charge from July to September 2011 as the Company is increasingly capable to contribute its own efforts to those functions and the future charge will be reviewed on quarterly basis.


(e) The amount paid to FJGG mainly represents the legal and professional services provided by FJGG.









21




STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 13 CERTAIN RISK AND CONCENTRATION


Credit risk


As of September 30 and March 31, 2011, substantially all of the Company’s 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 Company’s revenues or purchases during the periods presented.



22






ITEM 2.

 MANAGEMENT’S 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 Hippo Lace Limited (“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, HLL’s subsidiary, Legend Sun Limited, a Hong Kong corporation (“Legend Sun”), which HLL acquired in February, 2010, became the Company’s operating subsidiary.



Corporate Structure


The Chart below depicts our corporate structure. As depicted below, Studio II Brands owns 100% of HLL and HLL owns 100% of Legend Sun Limited.







23







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 September 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 restaurant is 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 Company’s 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.




24






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 US GAAP 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 and Six Months Ended September 30, 2011 compared to Three and Six Months Ended September 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 and six months ended September 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.


The following unaudited pro forma information presents the Company’s 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:


 

 

 

 

For the three months ended September 30,

For the six months ended September 30,

 

 

 

 

2011

2010

2011 to 2010

2011

2010

2011 to 2010

Revenue

 

 

 

 

 

 

 

 

 

Food and beverage income

 

      89,543

      90,914

      (1,371)

    183,759

    167,223

      16,536

Franchise and management fee income

 

                -

           114

         (114)

      16,482

      22,266

      (5,784)

Total revenue

 

 

      89,543

      91,028

      (1,485)

    200,241

    189,489

      10,752

Cost of goods sold

 

 

    (25,709)

    (26,005)

           296

    (63,005)

    (59,627)

      (3,378)

Gross profit

 

 

      63,834

      65,023

      (1,189)

    137,236

    129,862

        7,374

Operating expenses

 

 

    (81,673)

    (71,407)

    (10,266)

  (177,728)

  (133,788)

    (43,940)

Operating loss

 

 

    (17,839)

      (6,384)

    (11,455)

    (40,492)

      (3,926)

    (36,566)

Other income

 

 

           844

           947

         (103)

        1,771

        2,192

         (421)

Other expenses

 

 

           (74)

         (498)

           424

         (566)

         (609)

             43

Total other income, net

 

 

           770

           449

           321

        1,205

        1,583

         (378)

Income tax expenses

 

 

         (177)

         (734)

           557

      (1,466)

      (2,244)

           778

Net loss

 

 

    (17,246)

      (6,669)

    (10,577)

    (40,753)

      (4,587)

    (36,166)

Net loss per share-basic and diluted

                -

                -

                -

                -

                -

                -









25







 

Three Months Ended September 30,

 

2011

2010

2011 to 2010

2011 to 2010

 

Franchise

Subfranchise

Franchise

Subfranchise

Franchise

Subfranchise

 

Revenue

             89,543

                       -

             90,914

                  114

              (1,371)

             (114)

Cost of revenue

            (25,709)

                       -

            (26,005)

                       -

                  296

                    -

Gross profit

             63,834

                       -

             64,909

                  114

              (1,075)

            (114)

Operating expenses

            (80,595)

              (1,078)

            (64,526)

                       -

            (16,069)

          (1,078)

Operating (loss)/income

            (16,761)

              (1,078)

                  383

                  114

            (17,144)

            (1,192)

Net (loss)/income after income tax by Segment

            (16,346)

                 (900)

                  117

                    95

            (16,463)

             (995)


Revenues


Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

Revenue is attributed to food and beverage income from company-owned restaurant and slightly less than the same period in 2010.  Franchise income for 2010 represents the subfranchise management fee income.


Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

Revenue consists of operating revenue from company-owned restaurant ($183,759), second year  subfranchise annual fee ($10,272), and early termination fee of subfranchisee from Beijing Kenon Bistro Catering Limited (“BJ Kenon”) located in Beijing ($6,210).  The increase of food and beverage income as compared to the same period in 2010 ($167,223) was mainly due to increased sales volume and price adjustments which are generally done 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 decreased by $5,784 during six months ended September 30, 2011 as compared to the same period in 2010.


Cost of Revenues


Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

Cost of revenues represents finished goods including food and beverage materials and products for catering services sold by our company-owned restaurant.  The increase as compared to the same period in 2010 is mainly due to increased legal and professional expenses after acquired HLL and management service fee commenced from April 2011.  The decrease of cost of revenues from restaurant operation for 2011 as compared to the same period in 2010 was in line with the slightly decreased sales volume.


Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

Cost of revenues amounting to $63,005 represents finished goods, including food and beverage materials and products for catering services sold by our company-owned restaurant, as well as the subfranchise annual fee expenses charged by Sizegenic.  The increase of cost of revenues from restaurant operation for the six months ended September 2011  as compared to the same period in 2010 was in line with increased sales volume.


Gross Profit


Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

Gross profit amounting to $63,834 represents the result of the revenues and costs of revenues from our company owned restaurant.  The decrease of gross profit from restaurant operations as compared to the same



26






period in 2010 ($65,023) is mainly due to decreased sales volume in 2011 as compared to 2010.


Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

Gross profit amounting to $137,236 includes the result of our company owned restaurant ($131,026) as well as subfranchise fee income and expenses ($6,210).  The increase of gross profit from restaurant operations as compared to the same period in 2010 ($117,868) is mainly due to increased sales volume in 2011 as compared to 2010, as well as price increases in 2011.   The decrease of gross profit from subfranchise operations for the six months ended September 2011 as compared to the same period of 2010 is due to the fact that early termination fee charged to subfranchisee BJ Kenon ($6,210) in 2011 was less than the first year subfranchise annual fee of BJ Kenon ($11,880) charged in 2010.



Operating Expenses


Operating expenses for the Company and subsidiaries were $177,728 and $133,788 for six months ended September 30, 2011 and 2010, respectively.


They consist of the following items:


 

 

 

For the three months ended September 30,

For the six months ended September 30,

 

 

 

2011

2010

2011 to 2010

2011

2010

2011 to 2010

 

 

 

 

 

 

 

 

 

Staff costs

 

 

      19,568

      20,252

         (684)

      39,581

      42,812

    (3,231)

Rent, government fee, management fee

      23,112

      22,958

           154

      46,224

      45,916

         308

Electricity, gas and utilities

        5,853

        6,104

         (251)

      10,536

      10,706

       (170)

Depreciation

 

        6,103

        6,041

             62

      12,201

      12,040

         161

Professional and audit fee

      16,630

        7,010

        9,620

      42,285

        8,897

    33,388

Others

 

 

      10,407

        9,042

        1,365

      26,901

      13,417

    13,484

 

 

 

      81,673

      71,407

      10,266

    177,728

    133,788

    43,940


Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

The increase of operating expenses for 2011 as compared to the same period for 2010 is mainly due to increased legal and professional expenses by $9,620 for accounting and legal fees related to review of our financial statements and completion of statutory filings of required forms and documentation after the acquisition of HLL.


Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

The increase of operating expenses for 2011 as compared to the same period for 2010 is mainly due to (i) increased legal and professional expenses by $33,388 for accounting and legal fees related to  review of our financial statements and completion of statutory filings of required forms and documentation after the acquisition of HLL , and (ii) the management service fee by $13,098.



Operating Loss/income  


Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

Operating loss amounting to $17,839 for 2011 represents the result of revenues, costs of revenues and operating expenses from our Company-owned restaurant.  The increase of operating loss for three months ended September 30, 2011 as compare to the same period in 2010 is mainly due to increase of legal and professional expenses.



27







Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

Operating loss amounting to $40,492 for 2011 represents the result of revenues, costs of revenues and operating expenses from our Company-owned restaurant ($45,624) and subfranchise operating income ($5,132).  Operating loss of $3,926 for 2010 represents operating loss of Company-owned restaurant ($15,920) and subfranchise operating income ($11,994).  The increase of operating loss for six months ended September 30, 2011 is mainly due to the increase of legal and professional expenses.


In addition, the 50% discounted first year franchise annual fee expenses for our Company-owned restaurant increased operating income by $5,136 for December 11, 2009 (inception) through March 31, 2010.  The full amount of annual franchise fee expenses for the remaining contract years will decrease operating income of $2,568 for each of the six months ended September 30, 2011 and 2012.


Other income and expenses  

Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

Other income and expenses were $844 and $74 for the three months ended September 30, 2011 and $947 and $498 for the same period ended 2010, respectively.  Other income represents the tips received at our Company-owned restaurant. Other expenses represents franchise management fee expenses of our Company-owned restaurant.


Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

Other income and expenses were $1,771 and $566 for the six months ended September 30, 2011, and $2,192 and $609 for the same period in 2010, respectively.  Other income represents the tips received at our Company-owned restaurant. Other expenses represents franchise management fee expenses of our Company-owned restaurant.


Net income or loss   

Three Months Ended September 30, 2011 compared to the Three Months Ended September 30, 2010

Net loss for the three months ended September 30, 2011, amounting to $17,246, represents the net loss of our Company-owned restaurant.  Net loss for the same period in 2010, amounting to $6,669, represents the net loss from our Company-owned restaurant ($6,783), and the net income of our subfranchise operation ($114).


Six Months Ended September 30, 2011 compared to Six Months Ended September 30, 2010

Net loss for the six months ended September 30, 2011, amounting to $40,753, represents the net loss of our Company-owned restaurant ($45,038) and the net income from our subfranchise operation ($4,285).  Net loss for the same period in 2010, amounting to $4,587, represents the net loss from our Company-owned restaurant ($14,602), and the net income of our subfranchise operation ($10,015).



Impact of Inflation

 

We believe that the rate of inflation has had a negligible effect on our operations.


Liquidity and Capital Resources


Net cash used in operating activities for the six months period ended September 30, 2011 was $43,450.  It mainly represents the net loss caused by increased legal and professional expenses for  review of our financial statements and completion of statutory filings of required forms and documentation after the acquisition of HLL.


Franchise annual fee for the Company-owned restaurant owed to Sizegenic was discounted at 50% ($5,136) in the first year.  Full amount of franchise annual fee, $10,272, for the second year and throughout the term



28






of the agreement will be owed to Sizegenic and require additional cash outflow in the fiscal year ended March 31, 2011 and 2012.


Net cash used in investing activities for the six months ended September 30, 2011 was $657, and represents purchase of equipment.

 

Net cash provided by financing activities for the six months ended September 30, 2011 was $32,760, and represents amounts advanced by a 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 with no interest and without a fixed repayment term.  Amounts payable to the aforesaid shareholder at September 30, 2011 and March 31, 2011, were $164,448 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 September 30, 2011 at approximately $12,598, together with approximately $3,000 monthly average net cash inflow generated from the Company-owned restaurant, will be sufficient to meet our working capital requirements for the 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 September 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.


ITEM 4.

CONTROLS AND PROCEDURES.


Disclosure Controls and Procedures


As of the end of the period covered by this report, the Company 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 have identified a material weakness in



29






connection with the preparation of our consolidated financial statements as of and for the period ended September 30 2011 and have thus concluded that our internal controls over financial reporting were not effective.  A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness and control deficiency primarily related to absence of a Chief Financial Officer with appropriate professional experience with U.S. GAAP and SEC rules and regulations.


We believe that the material weakness and other control deficiencies we have identified are temporary because we plan to hire a consultant or CFO in the US with understanding of U.S. GAAP and experience with SEC reporting requirements in the coming few months to remedy the weakness and deficiencies.


Changes in Internal Control over Financial Reporting


There was no change in the Company's internal control over financial reporting during the period ended September 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.


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.



30







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.



31






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: November 18, 2011





By:  /S/ Leung Kin Wah

Leung Kin Wah, Chief Financial Officer

 

Date: November 18, 2011


32