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EX-32 - STUDIO II BRANDS INC | studioiibrandsexh32210qjun30.htm |
EX-31 - STUDIO II BRANDS INC | studioiibrands_exh31110qjun3.htm |
EX-32 - STUDIO II BRANDS INC | studioiibrands_exh32110qjun3.htm |
EX-31 - STUDIO II BRANDS INC | studioiibrands_exh31210qjun3.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 June 30, 2012
[] 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 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).
[X ] Yes [] 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 14, 2012, the Issuer had 14,838,018 shares of common stock issued and outstanding.
1
QUARTERLY REPORT ON FORM 10-Q
OF STUDIO II BRANDS, INC.
FOR THE PERIOD ENDED JUNE 30, 2012
TABLE OF CONTENTS
PART I | - | FINANCIAL INFORMATION |
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Item 1. |
| Financial Statements | 3 |
Item 2. |
| Managements Discussion and Analysis of Financial Condition and Results of Operations | 23 |
Item 3 |
| Quantitative and Qualitative Disclosures About Market Risk | 28 |
Item 4. |
| Controls and Procedures | 28 |
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PART II | - | OTHER INFORMATION |
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Item 1. |
| Legal Proceedings | 29 |
Item 1A. |
| Risk Factors | 29 |
Item 2. |
| Unregistered Sales of Equity Securities and Use of Proceeds | 29 |
Item 3. |
| Defaults Upon Senior Securities | 30 |
Item 4. |
| Removed and Reserved | 30 |
Item 5. |
| Other Information | 30 |
Item 6. |
| Exhibits | 30 |
Signatures | 31 |
2
PART I-FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
3
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED BALANCE SHEETS | |||||
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| June 30, 2012 (unaudited) |
| March 31, 2012 |
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ASSETS |
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CURRENTS ASSETS |
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Cash |
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| $ 24,257 |
| $ 25,912 |
Due from related party |
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| 379,929 |
| 320,796 |
Inventories |
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| 3,456 |
| 3,950 |
Total current assets |
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| 407,642 |
| 350,658 |
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Property and equipment, net |
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| 114,458 |
| 121,784 |
Security deposits |
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| 113,906 |
| 105,514 |
Goodwill |
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| 311,291 |
| 311,291 |
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TOTAL ASSETS |
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| $ 947,297 |
| $ 889,247 |
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LIABILITIES AND STOCKHOLDER'S EQUITY |
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CURRENT LIABILITIES |
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Accounts payable and accrued expenses |
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| $ 111,936 |
| $ 109,222 |
Income tax payable |
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| 3,190 |
| 4,072 |
Payable to stockholder |
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| 88,998 |
| 88,998 |
Due to related party |
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| 18,239 |
| 26,072 |
TOTAL CURRENT LIABILITIES |
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| 222,363 |
| 228,364 |
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Payable to stockholder |
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| 593,170 |
| 538,296 |
TOTAL LIABILITIES |
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| 815,533 |
| 766,660 |
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COMMITMENS AND CONTINGENCIES STOCKHOLDER'S EQUITY |
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Common stock, 100,000,000 shares authorized with par value $0.001; |
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14,838,016 shares issued and outstanding as of June 30, 2012 and March 31, 2012 |
| 14,838 |
| 14,838 | |
Additional paid-in capital |
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| 446,935 |
| 446,935 |
Accumulated deficit |
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| (330,009) |
| (339,186) |
TOTAL STOCKHOLDER'S EQUITY |
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| 131,764 |
| 122,587 |
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ 947,297 |
| $ 889,247 | ||
See accompanying notes to consolidated financial statements (unaudited). |
4
STUDIO II BRANDS, INC. AND SUBSIDIARIES | ||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | ||||||||||||
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| Three-months ended June 30, 2012 |
| Three-months ended June 30, 2011 | |||||||
REVENUE |
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Food and beverage income |
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| $ 213,187 |
| $94,216 | |||||||
Franchise and management fee income |
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| - |
| 10,272 | |||||||
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| 213,187 |
| 104,488 | |||||||
Cost of goods sold (exclusive of depreciation) |
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| (53,351) |
| (32,160) | |||||||
Gross profit |
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| 159,836 |
| 72,328 | |||||||
Operating expenses |
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| (151,981) |
| (96,055) | |||||||
OPERATING INCOME/(LOSS) | 7,855 |
| (23,727) | |||||||||
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OTHER INCOME/(EXPENSES) |
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Other income |
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| 1,322 |
| 927 | |||||||
Other expenses |
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| - |
| (492) | |||||||
TOTAL OTHER INCOME, NET |
| 1,322 |
| 435 | ||||||||
NET INCOME/(LOSS) BEFORE INCOME TAXES |
| 9,177 |
| (23,292) | ||||||||
Income tax expenses |
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| - |
| (1,112) | |||||||
NET INCOME/(LOSS) FROM CONTINUING OPERATIONS |
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| 9,177 |
| (24,404) | |||||||
Discontinued operations, net of taxes |
| - |
| 897 | ||||||||
NET INCOME/(LOSS) |
| $ 9,177 |
| $ (23,507) | ||||||||
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Basic and fully diluted loss from continuing operations per common share |
| $ - |
| $ - | ||||||||
Basic and fully diluted income from discontinued operations per common share |
| $ - |
| $ - | ||||||||
Basic and fully diluted (loss)/income per common share |
| $ - |
| $ - | ||||||||
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | 14,838,018 |
| 11,899,276 | |||||||||
See accompanying notes to consolidated financial statements (unaudited). |
5
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 2012 (UNAUDITED) | |||||
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| Common Stock, Par value of $0.001 |
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| Total | |
| Additional | Accumulated | stockholder's | ||
| Number | Amount | Paid-in capital | deficit | equity |
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Balance as of March 31, 2012 | 14,838,018 | $ 14,838 | $446,935 | $ (339,186) | $ 122,587 |
Net income | - | - | - | 9,177 | 9,177 |
Balance as of June 30, 2012 | 14,838,018 | $ 14,838 | $ 446,935 | $ (330,009) | $ 131,764 |
See accompanying notes to consolidated financial statements (unaudited). |
6
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||
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| Three months ended June 30,2012 |
| Three months ended June 30,2011 | |
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income/(loss) from continuing operations |
| $ 9,177 |
| $ (24,404) | |
Adjustments to reconcile net income/(loss) to net cash used in operating activities: |
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Depreciation |
| 8,238 |
| 6,098 | |
Changes in operating assets and liabilities: |
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Due from related party |
| (59,133) |
| (8,193) | |
Account receivable |
| - |
| 6,163 | |
Inventory |
| 494 |
| (275) | |
Security deposits |
| (8,392) |
| (128) | |
Account payable and accrued expenses |
| 2,715 |
| 1,132 | |
Due to related party |
| (7,833) |
| (2,070) | |
Income tax payable |
| (882) |
| (1,310) | |
Cash used in operating activities-continuing operations |
| (55,616) |
| (22,987) | |
Cash used in operating activities-discontinued operations |
| - |
| (5,136) | |
NET CASH USED IN OPERATING ACTIVITIES |
| (55,616) |
| (28,123) | |
CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property and equipment |
| (913) |
| (657) | |
NET CASH USED IN INVESTING ACTIVITIES | (913) |
| (657) | ||
CASH FLOWS FROM FINANCING ACTIVITIES |
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Advance from stockholder |
| 54,874 |
| 16,200 | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 54,874 |
| 16,200 | ||
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NET DECREASE IN CASH |
| (1,655) |
| (12,580) | |
Beginning of period | $ 25,912 |
| $ 23,945 | ||
End of period | $ 24,257 |
| $ 11,365 | ||
Supplemental disclosures of cash flow information: |
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Cash paid for interest |
| $ - |
| $ - | |
Cash paid for income taxes |
| $ (884) |
| $ (2,421) |
7
STUDIO II BRANDS, INC. AND SUBSIDIARIES | |||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||||||
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Cash acquired from acquisition of subsidiary: | |||||||||
Consideration: |
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Equity instruments (2,938,742 common stock of the Company) |
| $ 191,002 | |||||||
Cash acquired |
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| (7,724) | |||
Consideration, net of cash acquired |
| $ 183,278 | |||||||
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Allocated to: |
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| Inventory |
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| 4,571 | |||
| Due from related parties |
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| 103,128 | |||
| Security deposit |
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| 63,848 | |||
| Property and equipment |
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| 40,125 | |||
| Accounts payable and accrued expenses |
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| (74,941) | |||
| Due to related party |
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| (15,297) | |||
| Stockholders loan payable |
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| (193,964) | |||
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| Net tangible liabilities |
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| $ (72,530) | |||
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Value of excess of purchase price over net liabilities |
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| Acquired allocated to: |
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| Goodwill |
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| $ 255,808 |
See accompanying notes to consolidated financial statements (unaudited).
8
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 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 and Supplementary Agreement on February 10, 2011 by issued 2,291,100 shares of its Common Stock to Gu as consideration (i) to acquire all of the issued and outstanding shares of HLL owned by Gu valued at $34,450 or approximately $0.015 per share, and (ii) to pay off the outstanding shareholder loan owed to Gu Yao by HLL. Accordingly, after completion of the transaction described above, the outstanding shareholder loan in the amount of $184,226 was owed by HLL to the Company.
On March 29, 2012, the Company through its subsidiary HLL entered into and consummated a stock purchase agreement with Sino Wish Limited (Sino Wish) and Ms Vivian Choi (Vivian), the sole stockholder of Sino Wish to (i) acquire Vivians 100% interests of Sino Wish which is incorporated and domiciled in Hong Kong as a Companys franchisee to operate Caffé Kenon restaurant at Tai Yau Plaza, Hong Kong, and (ii) repay the stockholders loan from Vivian to HLL. The purchase price for the acquisition of Sino Wish amounted to $280,000, and was determined through arms length negotiation. A total of $191,002 was paid through issuance to the seller of a total of 2,938,742 shares of common stock of the Company valued at $0.065 per share. Such shares are restricted securities as defined in Rule 144 under the Securities Act of 1933. The balance of the purchase price in the amount of $88,998 is payable through the assumption of the outstanding balance of a shareholder loan owed by Sino Wish to the seller. The shareholder loan assumed by HLL is due and payable, without interest, in four equal quarterly installments, with payments due as of the last day of each calendar quarter following the Closing Date hereunder, with the first such installment due on or before June 30, 2012, and with the entire unpaid balance due on or before March 31, 2013. HLL or its designees may also prepay the shareholder loan in whole or in part at any time during the fiscal year from April 1 2012 to March 31, 2013.
NOTE 2 GOING CONCERN AND MANAGEMENTSS PLANS
The Company received going concern opinion as of March 31, 2012 from its auditors, UHY Vocation HK CPA Limited.
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 Companys minimal revenues, its dependency on continuing funding from its stockholders 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.
NOTE 3 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.
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
9
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The balance sheet as of June 30 and March 31, 2012 includes the Company and its wholly-owned subsidiaries, HLL, Legend Sun and Sino Wish. Additionally, the results of operations and cash flows include the operations of HLL, Legend Sun and Sino Wish 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; 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.
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| June 30, 2012 |
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| March 31, 2012 |
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Period end HK$:US$ exchange rate |
| $ | 7.7570 |
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| 7.7832 |
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| $ | 7.7642 |
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Average three-months ended HK$:US$ exchange rate |
| $ | 7.7595 |
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| $ | 7.7773 |
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(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
10
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 June 30 and March 31, 2012. 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.
(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.
(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, 2012.
(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, 2012.
(l)
Accounts payable and accrued expenses consist of the following:
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| June 30, 2012 (Unaudited) |
| March 31, 2012 | ||
Accounts payable | $ | 43,771 |
| $ | 44,025 | |
Accrued expenses |
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| Legal and professional fees |
| 18,080 |
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| 22,324 |
| Payroll and other operating expenses |
| 50,085 |
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| 42,873 |
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| $ | 111,936 |
| $ | 109,222 |
(m)
Fair value measurements
11
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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, 2012.
(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.
12
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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. 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.
(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 two operating subsidiaries in Hong Kong. As such, management has determined that the two subsidiaries are the Companys only operating segment. As the Companys operations and customers are principally all located in Hong Kong, no 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, 2012 and March 31, 2012, 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.
13
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 BUSINESS ACQUISITION
On March 29, 2012, the Company entered into and consummated a Stock Purchase Agreement with Sino Wish and Ms. Vivian Choi (Vivian), the sole shareholder of Sino Wish to (i) acquire Vivians 100% interests of Sino Wish incorporated and domiciled in Hong Kong as a Companys franchisee to operate Caffé Kenon restaurant at Tai Yau Plaza, Hong Kong, and (ii) pay off the stockholders loan from Vivian to HLL. The purchase price for the acquisition of Sino Wish was a total of $280,000, and was determined through arms length negotiation. A total of $191,002 was paid through issuance to the seller of a total of 2,938,742 shares of common stock of the Registrant valued at $0.065 per share. Such shares are restricted securities as defined in Rule 144 under the Securities Act of 1933. The balance of the purchase price in the amount of $88,998 is payable through the agreement of HLL to assume and pay the outstanding balance of a shareholder loan owed by Sino Wish to the seller. The shareholder loan assumed by HLL is due and payable, without interest, in four equal quarterly installments, with payments due as of the last day of each calendar quarter following the Closing Date hereunder, with the first such installment due on or before June 30, 2012, and with the entire unpaid balance due on or before March 31, 2013. HLL or its designees may also prepay the shareholder loan in whole or in part at any time during the fiscal year from April 1 2012 to March 31, 2013.
Closing of the exchange transaction under the terms of the above-mentioned Exchange Agreement was completed on March 29, 2012. As a result of closing of the stock purchase transaction, the Company acquired Sino Wish which became wholly-owned subsidiaries of the Company and consolidates Sino Wish as of March 29, 2012 in accordance with ASC 810.
In conjunction with the acquisition, the Company issued 2,938,742 shares of its common stock to Vivian as consideration (i) to acquire all of the issued and outstanding shares of Sino Wish owned by Vivian valued at $191,002 or approximately $0.065 per share, and (ii) to pay off the outstanding shareholder loan amounting to $88,998 owed to Vivian by Sino Wish. Accordingly, after completion of the transaction described above, the outstanding shareholder loan in the amount of $88,998 was owed by Sino Wish to the Company or its designee. As a result of the issuance of common stock under the Stock Purchase Agreement, the Company has a total of 14,838,018 shares of its common stock issued and outstanding, of which 11,899,276 shares, or approximately 80.2%, are owned by previously existing shareholders of the Company, with the balance of 2,938,742 shares, or approximately 19.8%, are owned by Vivian.
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 (2,938,742 common stock of the Company) |
| $ 191,002 | ||||||
Cash acquired |
|
|
|
|
| (7,724) | ||
Consideration, net of cash acquired |
| $ 183,278 | ||||||
|
|
|
|
|
|
|
|
|
Allocated to: |
|
|
|
|
|
| ||
| Inventory |
|
|
|
| 4,571 | ||
| Due from related parties |
|
|
|
| 103,128 | ||
| Security deposit |
|
|
|
| 63,848 | ||
| Property and equipment |
|
|
|
| 40,125 | ||
| Accounts payable and accrued expenses |
|
|
|
| (74,941) | ||
| Due to related party |
|
|
|
| (15,297) | ||
| Stockholders loan payable |
|
|
|
| (193,964) | ||
|
| Net tangible liabilities |
|
|
|
|
| $ (72,530) |
|
|
|
|
|
|
|
|
|
Value of excess of purchase price over net liabilities |
|
|
14
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Acquired allocated to: |
|
|
|
|
| ||
|
| Goodwill |
|
|
|
|
| $ 255,808 |
NOTE 5 DISCONTINUED OPERATIONS
HLL and Beijing Kenon Bistro Catering Limited (BJ Kenon), the subfranchisee located in Beijing, 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 (approximately $6,200). In this conjunction, no subfranchise fee income of RMB80,000 (approx. $11,880) for each of the remaining two year term of the agreement to be recognized in April of 2011 and 2012 respectively.
The result of subfranchise operation of BJ Kenon for the three months ended June 30, 2012 and 2011 are separately reported as discontinued operation. The net income from discontinued operation for the three months ended June 30, 2012 and 2011 are as follows:
|
|
|
| Three-months ended | ||
|
|
|
| June 30, 2012 |
| June 30, 2011 |
Revenue |
|
| $ - |
| $ 6,210 | |
Cost of revenue and operating expenses | - |
| (5,136) | |||
Operating income |
|
| - |
| 1,074 | |
Income tax |
|
| - |
| (177) | |
Net income |
|
| $ - |
| $ 897 |
The carrying amounts of the major classes of assets and liabilities of subfranchise of BJ Kenon as of June 30, 2012 and March 31, 2012 are amount due from related party as discussed in note 15 below, and as follows:
| June 30, 2012 |
| March 31, 2012 |
Current assets (included in due from related party in consolidated balance sheet) | $ 19,194 |
| $ 19,194 |
Net income of Beijing Kenon subfranchise operation for the three months ended June 30, 2012 and 2011 are as follows:
|
|
|
| June 30, 2012 |
| June 30, 2011 |
Income before income tax |
| $ - |
| $ 1,074 | ||
Income tax |
|
|
| - |
| (177) |
Net income |
|
| $ - |
| $ 897 |
15
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 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 7 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, 2012 are summarized as follows:
|
| June 30, 2012 (Unaudited) |
| March 31, 2012 | |
Furniture & equipment | $ | 75,971 |
| $ | $ 75,058 |
Leasehold improvement |
| 113,150 |
|
| 113,150 |
Computer equipment |
| 14,703 |
|
| 14,703 |
Total |
| 203,824 |
|
| 202,911 |
Accumulated depreciation and amortization |
| (89,366) |
|
| (81,127) |
Balance as at period ended | $ | 114,458 |
| $ | $ 121,784 |
Depreciation and amortization expense for the three months ended June 30 2012 and 2011 were $8,238and 6,098, respectively.
NOTE 8 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, 2012are summarized as follows:
|
| June 30, 2012 |
| March 31, 2012 |
|
| (Unaudited) |
|
|
Rental and management fee security deposit | $ | 98,622 |
| $ 90,198 |
Electricity deposit |
| 7,448 |
| 7,447 |
Water deposit |
| 1,541 |
| 1,541 |
Gas deposit |
| 1,926 |
| 1,926 |
Food supplies deposit |
| 3,018 |
| 2,953 |
Other deposit |
| 1,351 |
| 1,449 |
| $ | 113,906 |
| $ 105,514 |
NOTE 9 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 10 Operating Expenses.
16
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10 OPERATING EXPENSES
Operating expenses consist of the following for the three months ended June 30, 2012 and 2011:
|
| Three months ended June 30, 2012 |
|
|
| Three months ended June 30, 2011 |
|
|
|
|
|
|
|
Staff costs | $ | 57,669 |
|
| $ | 20,013 |
Property rent, rate and management fee |
| 54,300 |
|
|
| 23,112 |
Electricity and utilities |
| 10,474 |
|
|
| 4,683 |
Depreciation |
| 8,238 |
|
|
| 6,098 |
Professional and audit fee |
| 10,026 |
|
|
| 25,655 |
Others |
| 11,274 |
|
|
| 16,494 |
Total | $ | 151,981 |
|
| $ | 96,055 |
NOTE 11 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.
After acquisition of Sino Wish by HLL, HLL and Sino Wish agreed to terminate the franchise agreement signed on April 1, 2010 with effect from April 1, 2012. In this connection, HLL agreed, based on a supplementary agreement entered with Sizegenic in March 2010, to grant the right to Sino wish to operate the caffé Kenon restaurant at Tai Yau Plaza, Hong Kong at an annual fee of $5,136 for the third year of the term.
In conjunction with the termination of subfranchise agreement:
(a)
no subfranchise fee income of HK$80,000 (approx. $10,272) from Sino Wish for the remaining third year term of the agreement to be recognized in April of 2012.
17
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(b)
franchise fee expenses of HK$40,000 (approx. $5,136) for Sino Wish for the remaining third year term of the agreement to be recognized in April of 2012.
Revenues from franchised Caffe Kenon are as follows:
|
|
|
|
|
|
|
|
| Three months Ended June 30, 2012 |
|
|
| Three months Ended June 30, 2011 |
Subfranchise annual fee income | $ | - |
|
| $ | 16,482 |
Subfranchise management fee income |
| - |
|
|
| - |
| $ | - |
|
| $ | 16,482 |
Franchise and management fee income due to the Company are as follows:
|
| June 30, 2012 |
|
| March 31, 2012 |
Subfranchise annual and management fee due to the Company: |
|
|
|
|
|
|
|
|
|
|
|
Beijing Kenon (included in due from related party) |
| $ 18,090 |
|
| $ 11,880 |
Future minimum franchise fee payments due from the Company under existing franchise and subfranchise arrangements are nil.
Future minimum franchise fee payments due to the Company under existing franchise and subfranchise arrangements are nil.
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 three months ended June 30, 2012, the franchise annual fee expense amounting to $5,136 for Hong Kong was owed by Sino Wish to Sizegenic.
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 12 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. The sufranchisee located in Hong Kong has been acquired by the Company in March 2012 and becomes the second owned Caffe Kenon franchised to operate in Hong Kong.
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 months ended June 30, 2012.
18
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| Three Months ended June 30, 2012 (unaudited) | ||||||||
|
| Franchise |
| Subfranchise |
| Corporate |
| Total | ||
|
|
|
|
|
|
|
|
| ||
Revenue |
| $ 213,187 |
| $ - |
| $ - |
| $ 213,187 | ||
|
|
|
|
|
|
|
|
| ||
Depreciation and amortization |
| (8,238) |
| - |
| - |
| (8,238) | ||
|
|
|
|
|
|
|
|
| ||
Cost of revenues and operating expenses excluding depreciation and amortization |
| (183,598) |
| - | | (13,496) |
| (197,094) | ||
|
|
|
|
|
|
|
|
| ||
Operating income/(loss) |
| 21,351 |
| - |
| (13,496) |
| 7,855 | ||
Other income |
| 1,322 |
| - |
| - |
| 1,322 | ||
|
|
|
|
|
|
|
|
| ||
Other expenses |
| - |
| - |
| - |
| - | ||
|
|
|
|
|
|
|
|
| ||
Total other income (net) |
| 1,322 |
| - |
| - |
| 1,322 | ||
|
|
|
|
|
|
|
|
| ||
Income tax expenses |
| - |
| - |
| - |
| - | ||
|
|
|
|
|
|
|
|
| ||
Net income/(loss) after tax |
| $ 22,673 |
| $ - |
| $ (13,496) |
| $ 9,177 | ||
Total assets, excluding goodwill |
| $ 630,830 |
| $ 18,090 |
| $ - |
| $ 648,920 | ||
Goodwill |
| $ 311,291 |
| $ - |
| $ - |
| $ 311,291 | ||
Capital expenditure |
| $ 913 |
| $ - |
| $ - |
| $ 913 |
|
| Three Months ended June 30, 2011 (unaudited) | ||||||||
|
| Franchise |
| Subfranchise |
| Corporate |
| 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 |
| (83,459) |
| (10,272) | | (33,522) |
| (127,253) | ||
|
|
|
|
|
|
|
|
| ||
Operating income/(loss) |
| 4,659 |
| 6,210 |
| (33,522) |
| (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 income/(loss) after tax |
| $ 4,830 |
| $ 5,185 |
| $ (33,522) |
| $ (23,507) | ||
Total assets, excluding goodwill |
| $ 181,309 |
| $ 11,880 |
| $ - |
| $ 193,189 | ||
Goodwill |
| $ 55,484 |
| $ - |
| $ - |
| $ 55,484 | ||
Capital expenditure |
| $ 657 |
| $ - |
| $ - |
| $ 657 |
19
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 months ended June 30, 2012 and 2011, respectively.
The following tables set forth revenues from customers of products sold by geographic segment:
Geographical information: | Three months ended June 30, | |||
|
|
| 2012 | 2011 |
|
|
|
|
|
Hong Kong |
| $ 213,187 | $ 104,488 | |
Beijing |
|
| - | 6,210 |
Total |
|
| $ 213,187 | $ 110,698 |
All the long lived assets of the Company are located in Hong Kong.
NOTE 13 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 subsidiaries, Legend Sun and Sino Wish, 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:
|
|
|
|
| ||
| Three Months Ended June 30, 2012 |
| Three Months Ended June 30, 2011 |
| ||
| (Unaudited) |
| (Unaudited) |
| ||
Income/(Loss) before tax | $ | 9,177 |
| $ | (23,292) |
|
HK income tax rate |
| 16.50% |
|
| 16.50% |
|
Expected income tax expenses/(credit) calculated |
|
|
|
|
|
|
at HK income tax rate |
| 1,514 |
|
| (3,843) |
|
Corporate expenses not deductible for tax purposes |
| 2,227 |
|
| 4,257 |
|
Tax losses not recognized |
| (3,741) |
|
| 698 |
|
Actual income tax expenses | $ | - |
| $ | 1,112 |
|
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 14 OPERATING LEASE COMMITMENTS
20
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company entered into rent agreements on June 1, 2009 and March 1, 2010 to lease premises for operation of two restaurants located at ground floor of Nam Hing Fong, Causeway Bay and shop no. 208 and 209 of Tai Yau Plaza, Wanchai respectively. The lease of premises at Nam Hing Fong was for a term of 5 years at a monthly rental rate of $6,667 for the first three years and $8,333 for the last two years.
The lease of premises at Tai Yau Plaza was for a term of 6 years at a monthly rental rate of $7,451 and monthly service charges of $1,304 for the first three years and at the prevailing current market rate for the last three years.
A of June 30, 2012, the total future minimum lease payments under operating lease in respect of leased premises are payable as follows:-
Year ended March 31, |
|
|
2013 | $ | 145,037 |
2014 |
| 99,996 |
2015 |
| 16,666 |
Total | $ | 261,699 |
NOTE 15 RELATED PARTY TRANSACTIONS
Balance with related party |
|
|
| June 30, 2012 |
| March 31, 2012 | |
|
|
|
|
|
|
|
|
Payable to shareholders: |
|
|
|
|
|
| |
(a) Cheung Ming, stockholder |
|
| $ 580,329 |
| $ 525,455 | ||
|
|
|
|
|
|
|
|
(b) Gu Yao, stockholder |
|
|
| $ 12,841 |
| $ 12,841 | |
|
|
|
|
|
|
|
|
(c)Vivian Choi, stockholder |
|
|
| $ 88,998 |
| $ 88,998 | |
|
|
|
|
|
|
|
|
Due from related party: |
|
|
|
|
|
| |
(d) Beijing Kenon Bristro Catering Limited ("BJ Kenon") |
|
|
|
| |||
Common stockholder, Gu Yao |
|
| $ 19,194 |
| $ 19,194 | ||
|
|
|
|
|
|
|
|
(e) Sizegenic Holdings Limited group companies ("Sizegenic group") |
|
|
| ||||
Common stockholder, Cheung Ming |
|
| $ 360,735 |
| $ 301,602 | ||
|
|
|
|
|
|
|
|
Due to related party: |
|
|
|
|
|
| |
(f) Frascona, Joiner, Goodman and Greenstein, P.C (FJGG) |
|
|
| ||||
Common stockholder, Gary Joiner |
|
| $ 18,239 |
| $ 18,239 | ||
|
|
|
|
|
| ||
(g) Sizegenic Holdings Limited (Sizegenic) |
|
|
|
|
| ||
Common stockholder, Cheung Ming |
|
| $ - |
| $ 7,833 |
21
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company had amount payable to shareholders:
(a) The payables to Cheung Ming 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 payables to Gu Yao mainly represent cash advance by Gu Yao for operation need of Sino Wish. This advance is unsecured, non-interest bearing and without fixed repayment term.
(c)The payables to Vivian Choi mainly represent cash advance by Vivian for operation need of Sino Wish. This advance is unsecured, non-interest bearing and an amount of $88,998 is repayable by four installments due as of the last day of each calendar quarter following the Closing Date of the stock purchase agreement on March 29, 2012 to acquire 100% share of Sino Wish from Vivian, the sole shareholder with the first such installment due on or before June 30, 2012, and with the entire unpaid balance due on or before March 31, 2013. HLL or its designees may also prepay the shareholder loan in whole or in part at any time during the fiscal year from April 1 2012 to March 31, 2013.
The Company had amount receivable from and payable to related parties.
(d) The amount receivable from BJ Kenon mainly represents the franchise annual fee and termination fee income pursuant to the franchise agreement for a term of 3 years entered on April 1, 2010 and terminated on May 31, 2011.
(e) The amount receivable from Sizegenic group represents cash advance to Sizegenic Holdings Limited and its group companies for operation need. These advances are unsecured, non-interest bearing and without fixed repayment term.
(f) The amount payable to FJGG mainly represents the legal and professional fee for provision of legal advice, review and comment, and filing of statutory reports.
(g) The amount payable to Sizegenic mainly represents coffee supplies and franchise annual fee.
NOTE 16 CERTAIN RISK AND CONCENTRATION
Credit risk
As of June 30, 2012 and March 31, 2012, 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.
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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.
On March 29 2012, the Company acquired through its subsidiary all of the issued and outstanding shares of Sino Wish Limited, a Hong Kong corporation, which was incorporated in November, 2009 and became the franchisee of the Company to operate Caffé Kenon restaurant at Tai Yau Plaza, Hong Kong since March, 2010. As a result of completion of this share exchange transaction, Sino Wish became the Companys wholly-owned subsidiary.
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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 and Sino Wish Limited.
Through the Companys operating subsidiaries, Legend Sun and Sino Wish, the Company is in the business of operating coffee shop restaurants under the tradename Caffe Kenon. The Company currently owns and operates two Caffé Kenon coffee shops located in Hong Kong which have been in operation since June, 2009 and March, 2010 respectively. These shops are operated under the terms of a franchise agreement between HLL and Sizegenic Holdings Limited (Sizegenic), a British Virgin Islands corporation. On May 31, 2011, HLL terminated the subfranchise agreement for the restaurant in Beijing, PRC. Accordingly, the location is no longer operated as a Caffe Kenon restaurant. Subsequent to the share exchange transaction with shareholder of Sino Wish on March 29, 2012, on April 1, 2012, HLL terminated the subfranchise agreement for the restaurant at Tai Yau Plaza, Hong Kong.
At the two restaurants they offer Italian-style espresso drinks using Kenon brand coffee imported from Italy. They also serve breakfast, lunch and dinner with a moderately-priced Italian style standard menu which includes pizza, spaghetti, risotto, salads, sandwiches and desserts. In addition, Caffé 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 comfortably 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 and 80 guests, respectively.
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
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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.
Critical Accounting Policies and Estimates
A summary of significant accounting policies is provided in Note 3 to our financial statements included in our filing on Form 10-K for the fiscal year ended March 31, 2012, and filed with the SEC on July 3, 2012. 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, 2012 compared to Three Months Ended June 30, 2011
The following discussion regarding unaudited results of operation relates to the business operations which are carried on through our operating subsidiaries, Legend Sun and Sino Wish. 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, 2012 and 2011 which is before and after the Company acquired Sino Wish through HLL in March, 2012. The following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this Form.
As discussed in Note 4 to the unaudited consolidated financial statements, on March 29, 2012, the Company consummated its acquisition of Sino Wish. The following unaudited pro forma information presents the Companys consolidated results of continuing operations as if the acquisition had occurred at the beginning of each period presented and is provided for the purpose of comparative analysis since Sino Wish results of operations is significant to the Company:
:
|
|
|
| For the three months ended June 30, | ||
|
|
|
| 2012 | 2011 | 2012 to 2011 |
Revenue |
|
|
|
|
|
|
Food and beverage income |
| $ 213,187 | $ 211,489 | $ 1,698 | ||
Franchise and management fee income | - | - | - | |||
Total revenue |
|
| 213,187 | 211,489 | 1,698 | |
Cost of goods sold |
|
| (53,351) | (61,221) | 7,870 | |
Gross profit |
|
| 159,836 | 150,268 | 9,568 | |
Operating expenses |
|
| (151,981) | (176,750) | 24,769 | |
Operating income/(loss) | 7,855 | (26,482) | 34,337 | |||
Other income |
|
| 1,322 | 2,065 | (743) | |
Other expenses |
|
| - | (1,142) | 1,142 |
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Total other income, net | 1,322 | 923 | 399 | |||
Income tax expenses |
|
| - | (1,112) | 1,112 | |
Net income/(loss) |
|
| $ 9,177 | $ (26,671) | $ 35,848 | |
Net income/loss per share-basic and diluted | - | - | - |
The following tables summarize the unaudited franchise and subfranchise results for three months ended June 30, 2012 and 2011, respectively per note 12 segment information to financial statements:
| Three Months Ended June 30, | |||||
| 2012 | 2011 | 2012 to 2011 | 2012 to 2011 | ||
| Franchise | Subfranchise | Franchise | Subfranchise | Franchise | Subfranchise |
| ||||||
Revenue | $ 213,187 | $ - | $ 94,216 | $ 16,482 | $ 118,971 | $ (16,482) |
Cost of revenue | (53,351) | - | (27,024) | (10,272) | (26,327) | 10,272 |
Gross profit | 159,836 | - | 67,192 | 6,210 | 92,644 | (6,210) |
Operating expenses | (138,485) | - | (62,533) | - | (75,952) | - |
Operating income/(loss) | 21,351 | - | 4,659 | 6,210 | 16,692 | (6,210) |
Net income/(loss) after income tax by Segment | $ 22,673 | $ - | $ 4,830 | $ 5,185 | $ 17,843 | $ (5,185) |
Result of continuing operations
Revenues
Revenue for the three months ended June 30, 2012, was $213,187, as compared to revenue of $211,489 (on a pro forma basis) for the three months ended June 30, 2011. The increase of 1,698, or approximately 0.8%, was mainly attributed to the net increase of sales volume and price adjustment on annual basis.
Cost of Revenues
Cost of revenues represents finished goods including food and beverage materials and products for catering services sold by our company-owned restaurants. Cost of revenue for the three months ended June 30, 2012 was $53,351, as compared to cost of revenue of $61,221 (on a pro forma basis) for the three months ended June 30, 2011. The decrease in cost of revenues of $7,870, or approximately 12.9%, for the period ended June 30, 2012, as compared to the same period in 2011 was mainly attributed to the material costs and waste control.
Gross Profit
Gross profit represents the result of the revenues and costs of revenues from our company owned restaurants. Gross profit for the three months ended June 30, 2012 was $159,836, as compared to gross profit of $150,268 (on a pro forma basis) for the three months ended June 30, 2011. The increase of gross profit $9,568, or approximately 6.4%, in gross profit from restaurant operations for the period ended June 30, 2012, as compared to the same period in 2011 is mainly due to the increase of net sales volume and price adjustment as well as material cost and waste control.
Operating Expenses
Operating expenses for the Company and subsidiaries were $151,981 and $176,750 (on a pro forma basis) for three months ended June 30, 2012 and 2011, respectively.
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They consist of the following items:
|
|
| For the three months ended June 30, | ||
|
|
| 2012 | 2011 | 2012 to 2011 |
|
|
|
|
|
|
Staff costs |
|
| $ 57,669 | $ 51,655 | $ 6,014 |
Rent, government fee, management fee | 54,300 | 50,505 | 3,795 | ||
Electricity, gas and utilities | 10,474 | 9,478 | 996 | ||
Depreciation |
| 8,238 | 8,205 | 33 | |
Professional and audit fee |
| 10,026 | 25,655 | (15,629) | |
Others |
|
| 11,274 | 31,252 | (19,978) |
|
|
| $ 151,981 | $ 176,750 | $ (24,769) |
The decrease of operating expenses to $151,981 for the three months ended June 30, 2012 as compared to operating expenses of $176,750 (on a pro forma basis) for the same period for 2011, which represents a decrease of $24,769 or approximately 14%, is mainly due to less accounting and legal fees incurred after completion of statutory filings of required forms and documentation related to the acquisition of HLL and management services fee charged by Ever Lucid Limited, a related company, for the three months ended June 2011 and ceased from October, 2011.
Operating income/(loss)
Operating income amounting to $7,855 for the three months ended June 30, 2012, mainly represents the result of revenues, costs of revenues and operating expenses from our Company-owned restaurants ($21,351) and the corporate expenses of the holding companies ($13,496). The increase in operating income from loss of ($26,482) (on a pro forma basis) for the three months ended June 30, 2011 to profit of $7,855 for the three months ended June 30, 2012, an increase of $34,337, is mainly due to increased gross profit and decreased corporate expenses for legal and professional fees, and management service fee.
Other income and expenses
Other income and expenses were $1,322 and nil for the three months ended June 30, 2012, as compared to $2,065 and $1,142 (on a pro forma basis) for the same period ended 2011, respectively. Other income represents the tips received at our Company-owned restaurants. Other expenses represents franchise management fee expenses of our Company-owned restaurant.
Net income/(loss)
Net income for the three months ended June 30, 2012, amounting to $9,177, mainly represents the result of net income of our Company-owned restaurants ($22,673) and corporate expenses ($13,496). Net loss for the same period in 2011, amounting to $26,671 (on a pro forma basis), represents the result of net income of our Company-owned restaurant ($6,851) and corporate expenses ($33,522).
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 three months period ended June 30, 2012 was $55,616. It mainly represents the advance made to related companies.
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Net cash used in investing activities for the nine months ended June 30, 2012 was $913, and represents purchase of equipment.
Net cash provided by financing activities for the three months ended June 30, 2012 was $54,874, and represents amounts advanced by a stockholder for operation need 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 June 30, 2012 and March 31, 2012, were $593,170 and $538,296, 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, 2012 at approximately $24,257, together with approximately $7,000 monthly average net cash inflow generated from the Company-owned restaurants, 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.
The unaudited 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 Companys minimal revenues and its dependency on continuing funding from its stockholders, 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.
As of June 30, 2012, 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 connection with the preparation of our consolidated financial statements as of and for the period ended June 30, 2012 and have thus concluded that our disclosure controls and procedures were not effective to provide reasonable assurance of the achievement of these objectives. A "material weakness" is a deficiency, or a
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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 our management intends to hire a consultant with experience in U.S. GAAP accounting and SEC rules and regulations, but based on the current size and cashflow of the company, we are not able to do so. Our management intends to conduct an assessment of the effectiveness of our disclosure control and procedures, and internal control over financial reporting in the coming months if we acquire another operating business or assets, and re-consider the need for hiring a consultant.
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, 2012, 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.
MINE SAFETY DISCLOSURS
Not Applicable
ITEM 5.
OTHER INFORMATION.
ITEM 6.
EXHIBITS.
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(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.
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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 Ming
Cheung Ming, President, Principal Executive Officer
Date: August 14, 2012
By: /S/ Leung Kin Wah
Leung Kin Wah, Chief Financial Officer
Date: August 14, 2012
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