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EX-31 - STUDIO II BRANDS INCstudioiibrands_exh311.htm
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EX-31 - STUDIO II BRANDS INCstudioiibrands_exh312.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 December 31, 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

(State or other jurisdiction of incorporation)

65-0664963

(IRS Employer Identification Number)


16/F Honest 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).  

[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 February 19, 2013, 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 DECEMBER 31, 2012


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

21

Item 3

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29



PART II

-

OTHER INFORMATION

  


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

29

Item 4.

Removed and Reserved

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

Signatures



























30






2



PART I-FINANCIAL INFORMATION


ITEM 1.

   FINANCIAL STATEMENTS.





























































3



STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


 

December 31, 2012

(Unaudited)



March 31, 2012

 



ASSETS



Current assets



Cash

$   34,173

$  25,912

Due from related party

248,558

320,796

Inventories

5,760

3,950

 

Total current assets

288,491

 350,658

 

 



Property and equipment, net

102,847

 121,784

Security deposits

111,915

105,514

Goodwill

311,291

311,291

 

Total assets

$  814,544

$ 889,247

 

========

========

 



LIABILITIES AND STOCKHOLDER'S EQUITY



CURRENT LIABILITIES



Accounts payable and accrued expenses

$  101,607

$ 109,222

Income tax payable

3,190

4,072

Payable to stockholder

22,250

88,998

Due to related party

18,239

26,072

 

Total current liabilities

145,286

 228,364

 



Payable to stockholder

535,997

538,296

 

Total liabilities

681,283

  766,660

 

 



COMMITMENS AND CONTINGENCIES



STOCKHOLDER'S EQUITY



Common stock, 100,000,000 shares authorized

with par value $0.001; 14,838,018 shares issued

and outstanding as of December 31, 2012 and

March 31, 2012




14,838




 14,838

Additional paid-in capital

446,935

446,935

Accumulated deficit

(328,512)

(339,186)

 

Total stockholder’s equity

133,261

122,587

 

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$  814,544

$  889,247

 

========

========

 




See accompanying notes to consolidated financial statements (unaudited)








4




STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


 

For the three-months ended December

31, 2012


For the three- months ended December

30, 2011

For the nine-months ended December 31, 2012

For the nine-months ended December   31, 2011

 

 

 

 

 

REVENUE

 

 

 

 

Food and beverage income

 $     168,735

 $   118,231

 $   607,554

 $  301,990

Franchise and management fee income

 

 -

 

 2,199

 

 -

 

 12,471

 

 

 

 

 

 

 168,735

 120,430

 607,554

 314,461

Cost of goods sold (exclusive of depreciation)

 

 (37,850)

 

 (26,709)

 

    (135,898)    

 

 (84,578)

 

 

 

 

 

Gross profit

 130,885

 93,721

 471,656

 229,883

Operating expenses

 (141,515)

 (62,902)

 (466,199)

 (240,630)

 

 

 

 

 

Operating (loss)/profit

 (10,630)

 30,819

 5,457

 (10,747)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME/(EXPENSES)

 

 

 

 

Other income

 2,490

 900

 5,217

 2,671

Other expenses

  

 -

 (806)

 -

 (1,372)

 

 

 

 

 

TOTAL OTHER INCOME, NET

 2,490

 94

 5,217

 1,299

 

 

 

 

 

NET (LOSS)/INCOME BEFORE INCOME TAXES

 

 (8,140)

 

 30,913

 

 10,674

 

 (9,448)

Income tax expenses

 -

   (2)

   -

 (1,291)

 

 

 

 

 

NET (LOSS)/INCOME FROM CONTINUING OPERATIONS  

 

 (8,140)

 

 30,911

 

 10,674

 

 (10,739)

Discontinued operations, net of taxes

 -

 -

 -

 897

 

 

 

 

 

NET (LOSS)/INCOME

 $    (8,140)    

 $    30,911

 $    10,674

 $    (9,842)

 

 

 

 

 

Basic and fully diluted (loss)/income per common share

 

 $        -

 

 $        -

 

 $        -

 

 $        -

 

 =========

 =========

 =========

 =========

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

   14,838,018

   11,899,276

 

  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 NINE MONTHS ENDED DECEMBER 31, 2012 (UNAUDITED)



 

Common Stock, Par value of $0.001


Additional


Accumulated

Total stockholder's

 

Number

Amount

paid-in capital

deficit

equity

 


 

 

 

 

Balance as of March 31, 2012


 14,838,018

 

 $  14,838

 

 $  446,935

 

 $ (339,186)

 

 $  122,587

Net income

-

 -

 -

 10,674

 10,674

 

 

 

 

 

 

Balance as of December 31, 2012


 14,838,018

 

 $  14,838

 

 $  446,935

 

 $ (328,512)

 

 $  133,261

 

 ==========

 =========

 =========

 =========

 =========




See accompanying notes to consolidated financial statements (unaudited)










































6




STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


 

Nine months ended

December 31, 2012

Nine months ended

December 31, 2011

CASH FLOWS FROM OPERATING ACTIVITIES



Net income/(loss) from continuing operations

$   10,674

$  (10,739)

Adjustments to reconcile net income/(loss) to net cash

used in operating activities:





 Depreciation

20,523

18,304

Changes in operating assets and liabilities:



 Due from related party

72,238

(25,087)

 Account receivables

-

(9,591)

 Inventories

(1,810)

(1,320)

 Security deposits

(6,401)

(450)

 Account payables and accrued expenses

(7,615)

3,972

 Due to related party

(7,833)

(5,923)

 Income tax payable

(884)

  (1,132)

 

Net cash generated from/(used in) operating activities-continuing operations


78,892


(31,966)

Net cash used in operating activities-discontinued operations

-

(5,136)

 

NET CASH GENERATED FROM/(USED IN) OPERATING ACTIVITIES

78,892

(37,102)

 

CASH FLOWS FROM INVESTING ACTIVITIES



 Purchase of property and equipment

(1,584)

(657)

 

NET CASH USED IN INVESTING ACTIVITIES

(1,584)

(657)

 

CASH FLOWS FROM FINANCING ACTIVITIES



 (Advance to)/from stockholder

(69,047)

32,760

 

NET CASH (USED IN)/GENERATED FROM FINANCING ACTIVITIES

(69,047)

32,760

 


NET INCREASE/(DECREASE) IN CASH


8,261


(4,999)

Beginning of period

25,912

23,945

 

End of period

$   34,173

$   18,946

 

=========

=========

 



Supplemental disclosures of cash flow information:



Cash paid for interest

$       -

$       -

Cash paid for income taxes

$     884

 $    2,421


=========

=========

 



 




See accompanying notes to consolidated financial statements (unaudited)






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 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 stockholder loan owed to Gu Yao by HLL.  Accordingly, after completion of the transaction described above, the outstanding stockholder 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 Vivian’s 100% interests of Sino Wish which is incorporated and domiciled in Hong Kong as a Company’s franchisee to operate Caffé Kenon restaurant at Tai Yau Plaza, Hong Kong, and (ii) repay the stockholder’s loan from Vivian to HLL. The purchase price for the acquisition of Sino Wish amounted to $280,000, and was determined through arm’s 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 stockholder loan owed by Sino Wish to the seller. The stockholder 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 December 31, 2012, and with the entire unpaid balance due on or before March 31, 2013.  HLL or its designees may also prepay the stockholder 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 MANAGEMENT’S PLANS


The Company’s independent registered public accounting firm’s report of the financial statements for the year ended March 31, 2012 contained an explanatory paragraph regarding the Company’s ability to continue as a going concern.


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 on continuing funding from its stockholders raise substantial doubt 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


In the opinion of the management, our financial statements reflect all adjustments, which are of a normal, recurring nature necessary for a fair statement of the results for the periods presented in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and with the instructions to Form 10-Q in Article 10 of SEC Regulation S-X. The results of operations for the interim periods presented are not necessarily indicative of results for the full year.






8



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 3, 2012.


(b)

Principles of consolidation


The balance sheets as of December 31 and March 31, 2012 include 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 U.S. 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 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 stockholders’ 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.


 

December 31, 2012

December

31, 2011

March 31, 2012

 

 

 

 

Period end HK$:US$ exchange rate

$  7.7507

$  7.7688

$  7.7642

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

$  7.7503

$  7.7748

-

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

$  7.7529

$  7.7817

-


(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 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

Leasehold 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 value. 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)



(g)

Accounts receivables


Accounts receivable are shown net of allowance for doubtful accounts. During the period, there were no bad debts incurred and no allowance for doubtful accounts recorded as of December 31 and March 31, 2012. 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.


(h)

Security deposits


Security deposits mainly consist of five months rental and management fee security deposits, electricity and water meter deposits for company owned restaurants.

 

(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 December 31 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 Company’s assessment, there were no events or changes in circumstances that would indicate any impairment of long-lived assets as of December 31 and March 31, 2012.


(l)

Accounts payable and accrued expenses consist of the following:


 

December 31, 2012

(Unaudited)

March

31, 2012

 

 

 

Accounts payable

 $    25,938

 $   44,025

Accrued expenses

 

 

 Legal and professional fees

 42,489

 22,324

 Payroll and other operating expenses

 33,180

 42,873

 

 

 

 

$   101,607

 $  109,222

 

 =========

 =========






10



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



(m)

Fair value measurements


ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:


Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company 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 December 31 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.  As of December 31 and March 31, 2012, there is no significant accumulated other comprehensive income.








11



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 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.


(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 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 two operating subsidiaries in Hong Kong. As such, management has determined that the two subsidiaries are the Company’s only operating segment. As the Company’s 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 December 31 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.










12



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE 4 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 December 31 and March 31, 2012 are summarized as follows:


 

December 31, 2012

(Unaudited)

March

31, 2012

 

 

 

Furniture & equipment

 $    76,644

 $   75,058

Leasehold improvement

 113,150

 113,150

Computer equipment

 14,703

 14,703

 

 

 

Total

 204,497

 202,911

Accumulated depreciation and amortization

 (101,650)

 (81,127)

 

 

 

Balance as at period ended

 $   102,847

 $  121,784

 

 =========

 =========


Depreciation and amortization expense for the nine months ended December 31, 2012 and 2011 were $20,523 and $18,304, respectively.



NOTE 5 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 December 31 and March 31, 2012 are summarized as follows:


 

December 31, 2012

(Unaudited)

March

31, 2012

 

 

 

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

 2,149

 2,953

Other deposit

 229

 1,449

 

 

 

 

 $  111,915

 $  105,514

 

 =========

 =========



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.











13



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE 7 OPERATING EXPENSES


Operating expenses consist of the following for the three and nine months ended December 31, 2012 and 2011:


 

Three months ended

Nine months ended

Three months ended

Nine months ended

 

31 December, 2012

December 31,2011

 

 

 

 

 

Staff costs

$   40,433

$   160,903

$  18,155

$  57,736

Property rent, rate and management fee

  

    67,944

    162,401

   23,112

   69,336

Electricity and utilities

     8,330

     31,407

    5,682

   16,218

Depreciation

     4,047

     20,523

    6,103

   18,304

Professional and audit fee

    15,064

     37,245

    2,816

   45,101

Others

     5,697

     53,720

    7,034

   33,935

 

Total

$  141,515

$   466,199

$  62,902

$  240,630

 

==========

=========

=========

=========



NOTE 8 FRANCHISE ARRANGEMENTS


Franchise arrangements are pursuant to franchise agreements entered by the Company as the franchisee and Sizegenic Holdings Limited as the franchisor, including payment to Sizegenic of franchise fee payable on anniversary basis and monthly management fee base upon a percent of franchisees’ net income after tax 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 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.


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.

(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.





14



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Revenues from franchised Caffe Kenon are as follows:


 

Nine months

Ended

December 31, 2012

Nine months

Ended

December 31, 2011

 

 

 

Subfranchise annual fee income

 $        -

 $  16,482

Subfranchise management fee income

 -

 2,199

 

 

 

 

     $        -     

 $  18,681

 

 =========

 =========


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


 

December 31, 2012

March 31, 2012

 

 

 

Subfranchise annual and management fee due to the Company:

 

 

Beijing Kenon (included in due from related party)

 $       -

 $  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 nine months ended December 31, 2012, the franchise annual fee expense amounting to $5,136 for Hong Kong was owed by Sino Wish to Sizegenic.


The first 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 9 SEGMENT INFORMATION


A)

Business segment reporting – by services


The Company has one reportable segment as of December 31, 2012 and two as of December 31, 2011 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 and nine months ended December 31, 2012.




15



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



 

Three Months ended December 31, 2012 (unaudited)


 

Franchise

Subfranchise

Corporate

Total

 

 

 

 

 

Revenue

 $   168,735

 $         -

$          -

 $    168,735

 

 

 

 

 

Depreciation and amortization

 (4,047)

 -

 -

 (4,047)

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

 (144,805)

 

 -

 

 (30,513)

 

 (175,318)

 

 

 

 

Operating income/(loss)

 19,883

 -

 (30,513)

 (10,630)

 

 

 

 

 

Other income

 2,490

 -

 -

 2,490

 

 

 

 

 

Other expenses

 -

 -

 -

 -

 

 

 

 

 

Total other income (net)

 2,490

 -

 -

 2,490

 

 

 

 

 

Income tax expenses

 -

 -

 -

 -

 

 

 

 

Net income/(loss) after tax

 $    22,373

 $          -

$    (30,513)       

 $    (8,140)

 

 ==========

=========

 =========

 =========

 

 

 

 

 

Total assets, excluding goodwill

 $   536,410

 $     18,090

 $     23,134

 $   577,634

Goodwill

 $   311,291

 $          -

 $          -

 $   311,291

Capital expenditure

 $     1,582

 $          -

 $          -

 $     1,582

 

 ==========

 =========

 =========

 =========


Nine Months ended December 31, 2012 (unaudited)


 

Franchise

Subfranchise

Corporate

Total

 

 

 

 

 

Revenue

 $    607,554

 $          -

 $         -

 $    607,554

 

 

 

 

 

Depreciation and amortization

 (20,523)

 -

 -

 (20,523)

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

 (512,810)

 

 -

 

 (68,764)

 

 (581,574)

 

 

 

 

Operating income/(loss)

 74,221

 -

 (68,764)

 5,457

 

 

 

 

 

Other income

 5,217

 -

 -

 5,217

 

 

 

 

 

Other expenses

 -

 -

 -

 -

 

 

 

 

Total other income (net)

 79,438

 -

 (68,764)

 10,674

 

 

 

 

 

Income tax expenses

 -

 -

 -

 -

 

 

 

 

 

Net income/(loss) after tax

 $     79,438

 $         -

 $   (68,764)

 $    10,674

 

 ==========

=========

 =========

 =========

 

 

 

 

 

Total assets, excluding goodwill

 $   536,410

 $     18,090

 $     23,134

 $   577,634

Goodwill

 $   311,291

 $          -

 $          -

 $   311,291

Capital expenditure

 $     1,582

 $          -

 $          -

 $     1,582

 

 ==========

 =========

 =========

 =========




16



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Three Months ended December 31, 2011 (unaudited)


 

Franchise

Subfranchise

Corporate

Total

 

 

 

 

 

Revenue

 $ 118,231

  $ 2,199

 $     -

 $ 120,430

 

 

 

 

 

Depreciation and amortization

 (6,103)

 -

 -

 (6,103)

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

 (79,308)

 

 -

 

 (4,200)

 

 (83,508)

 

 

 

 

Operating income/(loss)

 32,820

 2,199

 (4,200)

 30,819

 

 

 

 

 

Other income

 900

 -

 -

 900

 

 

 

 

 

Other expenses

 (806)

 -

 -

 (806)

 

 

 

 

 

Total other income (net)

 94

 -

 -

 94

 

 

 

 

 

Income tax expenses

 538

 (540)

 -

 (2)

 

 

 

 

Net income/(loss) after tax

 $ 33,452

 $ 1,659

 $ (4,200)

 $ 30,911

 

 ==========

=========

 =========

 =========

 

 

 

 

 

Total assets, excluding goodwill

 $  195,280

 $ 27,299

 $     -

 $ 222,579

Goodwill

 $   55,484

 $     -

 $     -

 $ 55,484

Capital expenditure

 $       -

 $     -

 $     -

 $     -

 

 ==========

 =========

 =========

 =========



Nine Months ended December 31, 2011 (unaudited)


 

Franchise

Subfranchise

Corporate

Total

 

 

 

 

 

Revenue

 $ 301,990

 $ 18,681

$      -

 $  320,671

 

 

 

 

 

Depreciation and amortization

 (18,304)

 -

 -

 (18,304)

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

 (241,700)

 

 (10,272)

 

 (60,068)

 

 (312,040)

 

 

 

 

Operating income/(loss)

 41,986

 8,409

 (60,068)

 (9,673)

 

 

 

 

 

Other income

 2,671

 -

 -

 2,671

 

 

 

 

 

Other expenses

 (1,372)

 -

 -

 (1,372)

 

 

 

 

Total other income (net)

 1,299

 -

 -

 1,299

 

 

 

 

 

Income tax expenses

 (81)

 (1,387)

 -

 (1,468)

 

 

 

 

 

Net income/(loss) after tax

 $  43,204

 $  7,022

 $ (60,068)

 $   (9,842)

 

 ==========

=========

 =========

 =========

 

 

 

 

 

Total assets, excluding goodwill

 $ 195,280

 $ 27,299

 $      -

 $ 222,579

Goodwill

 $ 55,484

 $     -

 $      -

 $ 55,484

Capital expenditure

 $   657

 $     -

 $      -

 $   657

 

 ==========

 =========

 =========

 =========




17



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 and nine months ended December 31, 2012 and 2011.


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



Geographical information:

Three months ended December 31,

Nine months ended

December 31,

 

2012

2011

2012

2011

 

 

 

 

 

Hong Kong

 $  168,735

 $  120,430

 $  607,554

 $  314,461

Beijing

 -

 -

 -

 6,210

 

 

 

 

 

 

 $  168,735

 $  120,430

 $   607,554

 $  320,671

 

 =========

========

 =========

 =========


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



NOTE 10 INCOME TAX


The Company and its subsidiaries are subject to income tax on an entity basis for 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 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 December 31, 2012

(Unaudited)

Three months ended

December 31, 2011

(Unaudited)

Nine months ended December 31, 2012

(Unaudited)

Nine months ended December 31, 2011

(Unaudited)

 

 

 

 

 

(Loss)/Income before tax

 $     (8,140)

 $    30,913

 $    10,674

 $  (9,448)

HK income tax rate

16.5%

16.5%

16.5%

16.5%

Expected income tax (credit)/expenses

  calculated at HK income tax rate

 

 (1,343)

 

 5,101

 

 1,761

 

 (1,559)

Corporate expenses not deductible for

  tax purposes

 5,035

 694

 11,346

 7,750

Tax exemption

 -

 -

 (3,082)

 -

Temporary differences not recognized

 (3,692)

 (5,793)

 (10,025)

 (4,900)

 

 

 

 

 

Total

 $         -

 $        2

 $        -

 $  1,291

 

==========

=========

=========

=========


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.








18



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 11 OPERATING LEASE COMMITMENTS


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.


As of December 31, 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 12 RELATED PARTY TRANSACTIONS




Balance with related party

December 31,

2012

(Unaudited)


March 31,2012

 

 

 

Payable to stockholders:

 

 

(a)  Cheung Ming, stockholder

$   535,997

 $  525,455

 

 ==========

=========

(b)  Gu Yao, stockholder

 $         -

 $   12,841

 

 ==========

=========

(c)  Vivian Choi, stockholder

 $    22,250

 $   88,998

 

 ==========

=========

Due from related party:

 

 

(d)  Beijing Kenon Bristro Catering Limited ("BJ Kenon")

      Common stockholder, Gu Yao

 

 $     6,353

 

 $   19,194

 

 ==========

=========

(e)  Sizegenic Holdings Limited group companies ("Sizegenic group")

      Common stockholder, Cheung Ming

 

 $   242,205

 

 $  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

 

 ==========

=========


 

 




19



STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



(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 was fully repaid during the period.


(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 is repayable by four installments.


(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.


(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 13 CERTAIN RISK AND CONCENTRATION


Credit risk


As of December 31 and March 31, 2012, 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.






20





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 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.


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 was 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 Company’s wholly-owned subsidiary.
























21





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.

[studioii10qdec312012final001.jpg]




Through the Company’s 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”).  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 stockholder of Sino Wish on March 29, 2012, HLL terminated the subfranchise agreement with Sino Wish on April 1, 2012.


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.





22









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.


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 and Nine Months Ended December 31, 2012 compared to Three and Nine Months Ended December 31, 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 December 31, 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.




23





On March 29, 2012, the Company consummated its acquisition of Sino Wish.  The following unaudited pro forma information presents the Company’s 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:


 

Pro Forma Comparisons

 

Three Months Ended

 



As Reported December 31, 2011




Sino Wish

Three months

Pro Forma December 31, 2011

(including

Sino Wish)

 

 

 

 

Revenue

 120,430

 109,015

 229,445

Cost of revenue

 (26,709)

 (37,774)

 (64,483)

 

 

 

 

Gross profit

 93,721

 71,241

 164,962

 

 

 

 

Operating expense:

 

 

 

Staff cost

 18,155

 30,219

 48,374

Rent, government fee, management fee

 23,112

 27,460

 50,572

Electricity, gas and utilities

 5,682

 4,604

 10,286

Depreciation

 6,103

 2,109

 8,212

Professional and audit fee

 2,816

 381

 3,197

Others

 7,034

 9,225

 16,259

 

 

 

 

Total operating expense

 62,902

 73,998

 136,900

(Loss)/Income from operation

 30,819

 (2,757)

 28,062

Interest & other income/ (expense)

 

 

 

  Other income

 900

 615

 1,515

  Other expenses

 (806)

 -

 (806)

 

 

 

 

(Loss)/Income before income taxes

 30,913

 (2,142)

 28,771

Income tax benefit

 (2)

 -

 (2)

 

 

 

 

Net (loss)/income

 30,911

 (2,142)

 28,769

 

 

 

 


 

Pro Forma Comparisons

 

Nine Months Ended

 



As Reported December 31, 2011




Sino Wish

Nine months

Pro Forma December 31, 2011

(including

Sino Wish)

 

 

 

 

Revenue

 314,461

 356,370

 670,831

Cost of revenue

 (84,578)

 (107,513)

 (192,091)

 

 

 

 

Gross profit

 229,883

 248,857

 478,740

 

 

 

 

Operating expense:

 

 

 

Staff cost

 57,736

 92,283

 150,019

Rent, government fee, management fee

 69,336

 82,385

 151,721

Electricity, gas and utilities

 16,218

 14,756

 30,974

Depreciation

 18,304

 6,323

 24,627

Professional and audit fee

 45,101

 381

 45,482

Others

 33,935

 42,538

 76,473

 

 

 

 

Total operating expense

 240,630

 238,666

 479,296

(Loss)/Income from operation

 (10,747)

 10,191

 (556)

Interest & other income/ (expense)

 

 

 

  Other income

 2,671

 3,028

 5,699

  Other expenses

 (1,372)

 -

 (1,372)

 

 

 

 

(Loss)/Income before income taxes

 (9,448)

 13,219

 3,771

Income tax benefit

 (1,291)

 -

 (1,291)

 

 

 

 

Net (loss)/income

 (10,739)

 13,219

 2,480

 

 

 

 




24






 

For the three months ended December 31,

For the Nine months ended December 31,

 


2012

2011

Pro forma

2012 to

 2011


2012

2011

Pro forma

2012 to

 2011

 

 

 

 

 

 

 

Revenue




 

 

 

Food and beverage income

 168,735

 227,246

 (58,511)

 607,554

 658,360

 (50,806)

Franchise and management fee income

 

 -

 

 2,199

 

 (2,199)

 

 -

 

 12,471

 

 (12,471)

 

 

 

Total revenue

 168,735

 229,445

 (60,710)

 607,554

 670,831

 (63,277)

Cost of goods sold

 (37,850)

 (64,483)

 26,633

 (135,898)

 (192,091)

 56,193

 

 

 

 

Gross profit

 130,885

 164,962

   (34,077)

471,656

478,740

(7,084)

Operating expenses

 (141,515)

 (136,900)

    (4,615)

(466,199)

(479,296)

13,097

 

 

 

 

Operating income/(loss)

 (10,630)

 28,062

 (38,692)

 5,457

 (556)

 6,013

 

 

 

 

Other income

 2,490

 1,515

 975

 5,217

 5,699

 (482)

Other expenses

 -

 (806)

 806

 -

 (1,372)

 1,372

 

 

 

 

 

 

 

Total other income, net

 2,490

 709

 1,781

 5,217

 4,327

 890

 

 

 

 

 

 

 

Income tax expenses

 -

 (2)

 2

 -

 (1,291)

 1,291

 

 

 

 

 

 

 

Net income/(loss)

 (8,140)

     28,769

(36,909)

 10,674

 2,480

 8,194

 

 ==========

 ==========

========

=========

=========

=======

 




 

 

 


The following tables summarize the unaudited franchise and subfranchise results for three and nine months ended December 31, 2012 and 2011, respectively per note 9 segment information to financial statements:


 

For the three months ended December 31,

 


2012


2011

2012 to

 2011

2012 to

 2011

 

Franchise

Subfranchise

Franchise

Subfranchies

Franchise

Subfranchies

 

 

 

 

 

 

 

Revenue

168,735

-

118,231

 2,199

 50,504

 (2,199)

Cost of revenue

(37,850)

-

(26,709)

 -

 (11,141)

 -

 

Gross profit

130,885

-

91,522

 2,199

 39,363

 (2,199)

Operating expenses

(111,002)

-

(58,702)

 -

 (52,300)

 -

 

 

Operating (loss)/ income

19,883

-

32,820

 2,199

 (12,937)

 (2,199)

 






 

Net (loss)/income after income tax by Segment


22,373


-


33,452

 

 1,659

 

 (11,079)

 

 (1,659)

 

=========

=========

========

=========

=========

 =========

 




 

 

 


 

For the Nine months ended December 31,

 


2012


2011

2012 to

 2011

2012 to

 2011

 

Franchise

Subfranchise

Franchise

Subfranchies

Franchise

Subfranchies

 

 

 

 

 

 

 

Revenue

607,554

-

301,990

 18,681

 305,564

 (18,681)

Cost of revenue

(135,898)

-

(84,578)

 (10,272)

 (51,320)

 10,272

 

 

Gross profit

471,656

-

217,412

 8,409

 254,244

 (8,409)

Operating expenses

(397,435)

-

(175,426)

 -

 (222,009)

 -

 

 

Operating (loss)/ income

74,221

-

41,986

 8,409

 32,235

 (8,409)

 






 

Net (loss)/income after income tax by Segment


79,438


-


43,204

 

 7,022

 

 36,234

 

 (7,022)

 

=========

=========

========

=========

=========

 =========

 




 

 

 






25





Result of continuing operations


Revenues


Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

Revenue for the three months ended December 31, 2012, was $168,735, as compared to revenue of $227,246 (on a pro forma basis) for the three months ended December 31, 2011. The decrease of $58,511, or approximately 26%, was mainly caused by the decoration of the Tai Yau Plaza, where one of the restaurants (Sino Wish) is located, in October 2012, resulting in decrease in number of visitors to the plaza as well as number of customers to the restaurants.


Nine Months Ended December 31, 2012 compared to Nine Months Ended December 31, 2011

Revenue for the nine months ended December 31, 2012, was $607,554, as compared to revenue of $658,360 (on a pro forma basis) for the nine months ended December 31, 2011. The decrease of $50,806, or approximately 8%, the reason is similar to the decrease for the three months period which we mentioned above.


Cost of Revenues


Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

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 December 31, 2012 was $37,850, as compared to cost of revenue of $64,483 (on a pro forma basis) for the three months ended December 31, 2011.  The decrease in cost of revenues of $26,633, or approximately 41%, for the period ended December 31, 2012, as compared to the same period in 2011 was in line with the decrease of income due to the decoration of Tai Yau Plaza mentioned above.


Nine Months Ended December 31, 2012 compared to the Nine Months Ended December 31, 2011

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 nine months ended December 31, 2012 was $135,898, as compared to cost of revenue of $192,091 (on a pro forma basis) for the nine months ended December 31, 2011.  The decrease in cost of revenues of $56,193, or approximately 29%, for the period ended December 31, 2012, as compared to the same period in 2011 was mainly in line with the decrease in income due to the decoration of Tai Yau Plaza mentioned above.


Gross Profit


Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

Gross profit represents the result of the revenues and costs of revenues from our company owned restaurants.  Gross profit for the three months ended December 31, 2012 was $130,885, as compared to gross profit of $164,962 (on a pro forma basis) for the three months ended December 31, 2011.  The decrease of gross profit $34,077, or approximately 21%, in gross profit from restaurant operations for the period ended December 31, 2012, as compared to the same period in 2011 is in line with decrease in sales income.


Nine Months Ended December 30, 2012 compared to the Nine Months Ended December 31, 2011

Gross profit represents the result of the revenues and costs of revenues from our company owned restaurants. Gross profit for the nine months ended December 31, 2012 was $471,656, as compared to gross profit of $478,740 (on a pro forma basis) for the nine months ended December 31, 2011.  The decrease in gross profit of $7,084, or approximately 1%, for the period ended December 31, 2012, as compared to the same period in 2011 is in line with decrease in sales income.




26





Operating Expenses


Operating expenses for the Company and subsidiaries consist of the following items:


 

For the three months ended December 31

For the nine months ended December 31

 


2012

2011

Pro forma

2012 to 2011


2012

2011

 Pro forma

2012 to

 2011

 

 

 

 

 

 

 

Staff costs

40,433

48,374

(7,941)

 160,903

 150,019

 10,884

Rent, government fee, management fee


67,944


50,572


17,372

 

 162,401

 

 151,721

 

 10,680

Electricity, gas and utilities

8,330

10,286

(1,956)

31,407

30,974

433

Depreciation

4,047

8,212

(4,165)

 20,523

 24,627

 (4,104)

Professional and audit fee

15,064

3,197

11,867

 37,245

 45,482

 (8,237)

Others

5,697

16,259

(10,562)

53,720

76,473

(22,753)

 

 

 

141,515

136,900

4,615

 466,199

 479,296

 (13,097)

 

=========

=========

========

=========

=========

 =========

 




 

 

 


Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

The increase of operating expenses to $141,515 for the three months ended December 31, 2012 as compared to operating expenses of $136,900 (on a pro forma basis) for the same period for 2011, which represents an increase of $4,615 or approximately 3%, is insignificant as our mode of operations remained the same.


Nine Months Ended December 31, 2012 compared to the Nine Months Ended December 30, 2011

The decrease of operating expenses to $466,199 for the nine months ended December 31, 2012 as compared to operating expenses of $479,296 (on a pro forma basis) for the same period for 2011, which represents a decrease of $13,097 or approximately 3%, is mainly due to less professional and audit fees and others occurred comparing to the same period for 2011.


Operating income/(loss)


Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

The decrease in operating income from profit of $28,062 (on a pro forma basis) for the three months ended December 31, 2011 to loss of $10,630 for the three months ended December 31, 2012, an decrease of $38,692, is mainly caused by the decoration of the Tai Yau Plaza, where one of the restaurants (Sino Wish) is located, in October 2012, resulting in decrease in number of visitors to the plaza as well as number of customers to the restaurants.


Nine Months Ended December 31, 2012 compared to the Nine Months Ended December 31, 2011

The difference in operating loss from $556 (on a pro forma basis) for the nine months ended December 31, 2011 to profit of $5,457 for the nine months ended December 31, 2012, an increase of $6,013, is insignificant because our operations remained significantly the same for both periods.


Net income/(loss)


Three Months Ended December 31, 2012 compared to the Three Months Ended December 31, 2011

Net income for the three months ended December 31, 2012 and 2011 remained significantly the same for both periods as our operation remained the same for both periods.


Nine Months Ended December 31, 2012 compared to the Nine Months Ended December 31, 2011

Net income for the nine months ended December 31, 2012 and 2011remained significantly the same for both periods as our operation remained the same for both periods.


Impact of Inflation

 

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




27





Liquidity and Capital Resources


Net cash generated from operating activities for the nine months period ended December 31, 2012 was $85,245.  It mainly represents cash income on daily operations and decrease in amount due from related party.


Net cash used in investing activities for the nine months ended December 31, 2012 was $1,584, and represents purchase of equipment.


A stockholder 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 stockholder at December 31, 2012 and March 31, 2012, were $529,644 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 in Hong Kong as at December 31, 2012 at approximately $34,173 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 Company’s 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 December 31, 2012, there were no material commitments for capital expenditures for business operations.


The Company’s independent registered public accounting firm’s report of the financial statements for the year ended March 31, 2012 contained an explanatory paragraph regarding the Company’s ability to continue as a going concern.


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 December 31, 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 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



28





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 December 31, 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 DISCLOSURES


Not Applicable


ITEM 5.     

OTHER INFORMATION.


ITEM 6.

EXHIBITS.


(a)

The following exhibits are filed herewith:


31.1

Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2

Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101

SCH XBRL Scheme 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.



29






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: February 19, 2013





30