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EXCEL - IDEA: XBRL DOCUMENT - STUDIO II BRANDS INCFinancial_Report.xls
EX-31 - EXHIBIT 31.2 - STUDIO II BRANDS INCstudioiibrandsexh312.htm
EX-32 - EXHIBIT 32.1 - STUDIO II BRANDS INCstudioiibrandsexh321.htm
EX-32 - EXHIBIT 32.2 - STUDIO II BRANDS INCstudioiibrandsexh322.htm
EX-31 - EXHIBIT 31.1 - STUDIO II BRANDS INCstudioiibrandsexh311.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, 2013


[] 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 14, 2014, 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, 2013


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

18

Item 3

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23



PART II

-

OTHER INFORMATION

  


Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

24

Signatures



























25






2


PART I-FINANCIAL INFORMATION


ITEM 1.

   FINANCIAL STATEMENTS.





























































3


STUDIO II BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


 

December 31,     2013

(Unaudited)

March 31, 2013

 

 

 

ASSETS

 

 

Current assets

 

 

Cash

$  20,568

 $  22,705

Due from related party

 -

 52,120

Accounts receivable

 3,399

 -

Inventories

 5,074

 6,010

 

 

 

Total current assets

 29,041

 80,835

 

 

 

 

 

 

Property and equipment, net

 67,812

 90,415

Security deposits

 135,226

 135,226

Goodwill

Tax recoverable

 311,291

 1,125

 311,291

 4,751

 

 

 

Total assets

 $ 544,495

 $ 622,518

 

 ========

 ========

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

CURRENT LIABILITIES

 

 

Accounts payable and accrued expenses

 $ 147,358

 $ 147,028

 

 

 

Total current liabilities

 147,358

 147,028

 

 

 

Payable to stockholder

 474,536

 442,722

 

 

 

Total liabilities

 621,894

 589,750

 

 

 

 

 

 

COMMITMENTS 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, 2013 and

March 31, 2013

 

 

 

 14,838

 

 

 

 14,838

Additional paid-in capital

 446,935

 446,935

Accumulated deficit

 (539,172)

 (429,005)

 

 

 

Total stockholder’s equity

 (77,399)

 32,768

 

 

 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

 $  544,495

 $  622,518

 

 ========

 ========

 

 

 


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, 2013

For the three-months ended December 31, 2012

For the nine-months ended December 31, 2013

For the nine-months ended December 31, 2012

 

 

 

 

 

REVENUE

 

 

 

 

Food and beverage income

 $   180,057

 $  168,735

 $   588,096

 $   607,554

Franchise and management fee income

 

 3,399

 

 

 -

 

 

 21,376

 

 

 -

 

 

 183,456

 168,735

 609,472

 607,554

Cost of goods sold (exclusive of depreciation)

 

 (39,991)

 

 (37,850)

 

 (127,794)

 

 (135,898)

 

 

 

 

 

Gross profit

 143,465

 130,885

 481,678

 471,656

Operating expenses

 (203,061)

 (141,515)

 (596,423)

 (466,199)

 

 

 

 

 

Operating (loss)/profit

 (59,596)

 (10,630)

 (114,745)

 5,457

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

Other income

 1,423

 2,490

 4,578

 5,217

 

 

 

 

 

TOTAL OTHER INCOME

 1,423

 2,490

 4,578

 5,217

 

 

 

 

 

NET (LOSS)/INCOME BEFORE INCOME TAX

 

 (58,173)

 

 (8,140)

 

 (110,167)

 

 10,674

Income tax expenses

 -

 -

 -

 -

 

 

 

 

 

NET (LOSS)/INCOME

 $  (58,173)

 $    (8,140)

 $  (110,167)

 $    10,674

 

 

 

 

 

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

 

 $        -

 

 $        -

 

 $    (0.01)

 

 $        -

 

 =========

 =========

 =========

 =========

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 14,838,018

 

  14,838,018

 

 14,838,018

 

  14,838,018

 

 =========

 =========

 =========

 =========



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, 2013 (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, 2013


14,838,018

 

 $  14,838

 

 $  446,935

 

 $ (429,005)

 

 $  32,768

Net loss

-

 -

 -

 (110,167)

 (110,167)

 

 

 

 

 

 

Balance as of December 31, 2013


14,838,018


 $  14,838


 $  446,935


 $ (539,172)


 $ (77,399)

 

 ==========

 =========

 =========

 =========

 =========




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, 2013

Nine months ended

December 31, 2012

CASH FLOWS FROM OPERATING ACTIVITIES


 

Net (loss)/income from operations

$  (110,167)

$     10,674

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

used in operating activities:



 Depreciation

22,603

20,523

Changes in operating assets and liabilities:


 

 Due from related party

52,120

72,238

 Inventories

936

(1,810)

 Accounts receivable

(3,399)

-

 Security deposits

-

(6,401)

 Account payables and accrued expenses

330

(7,615)

 Due to related party

-

(7,833)

 Income tax payable

3,626

  (884)

 

NET CASH (USED IN)/GENERATED FROM OPERATING ACTIVITIES

(33,951)

78,892

 

CASH FLOWS FROM INVESTING ACTIVITIES


 

 Purchase of property and equipment

-

(1,584)

 

NET CASH USED IN INVESTING ACTIVITIES

-

(1,584)

 

CASH FLOWS FROM FINANCING ACTIVITIES


 

 Advance from / (payment to) a stockholder

31,814

(69,047)

 

NET CASH GENERATED FROM / (USED IN) FINANCING ACTIVITIES

31,814

(69,047)

 


NET (DECREASE)/INCREASE IN CASH


(2,137)


8,261

Beginning of period

22,705

25,912

 

End of period

$     20,568

$     34,173

 

=========

=========

 


 

Supplemental disclosures of cash flow information:


 

  Cash paid for interest

$          -

$          -

  Cash paid for income taxes

$          -

$        884


=========

=========

 


 

 




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 issuing 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) acquired Vivian’s 100% interests of Sino Wish which was 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 were 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 was 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 had been fully repaid in four equal quarterly installments.



NOTE 2 GOING CONCERN AND MANAGEMENT’S PLANS


The Company’s independent registered public accounting firm’s report on the financial statements for the year ended March 31, 2013 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 Companys 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.


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 1, 2013.




8


STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



(b)

Principles of consolidation


The balance sheets as of December 31 and March 31, 2013 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, 2013

December 31, 2012

March 31, 2013

 

 

 

 

Period end HK$:US$ exchange rate

$  7.7552

$  7.7507

$  7.7742

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

$  7.7585

$  7.7503

       -

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

$  7.7575

$  7.7529

       -


(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 receivable


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, 2013. 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 collection efforts are exhausted.


(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 Companys cash deposits are held with financial institutions located in the 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, 2013.


(k)

Impairment of long-lived assets


Long-lived assets are comprised of property and equipment. Pursuant to the provisions of ASC 360-10, “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, 2013.


(l)

Accounts payable and accrued expenses consist of the following:


 

December 31, 2013

(Unaudited)

March 31, 2013

 

 

 

Accounts payable

 $   23,803

 $   26,145

Accrued expenses

 

 

 Legal and professional fees

 18,595

 15,324

 Payroll and other operating expenses

 104,960

 105,559

 

 

 

 

 $   147,358

 $  147,028

 

 =========

 =========






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 long-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, 2013.


(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 follows 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 ASC section 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.









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 have been rendered.

(iii)

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

(iv)

Collectability 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 subfranchisee 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 Companys contributions to the scheme are expensed as incurred and are vested in accordance with the scheme’s 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 and the subfranchised store in Hong Kong. As such, management has determined that the franchise and subfranchise operations in Hong Kong are two operating segments.  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 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, 2013, 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 COST OF GOODS SOLD


Cost of goods sold consists of finished goods including food and beverage materials and products for catering services sold by company-owned restaurants.



NOTE 5 OPERATING EXPENSES


Operating expenses consist of the following for the three and nine months ended December 31, 2013 and 2012:


 

Three months ended

Three months ended

Nine months ended

Nine months ended

 

December 31

2013         2012

December 31

 2013         2012

Staff costs

$   59,302

$   40,433

$  183,893

$  160,903

Property rent, rate and management fee

  

 63,664

67,944

 203,512

162,401

Electricity and utilities

10,365

8,330

32,244

31,407

Depreciation

6,126

4,047

22,603

20,523

Professional and audit fee

42,754

15,064

94,759

37,245

Others

20,850

5,697

59,412

53,720

 

Total

$  203,061

$  141,515

$  596,423

$  466,199

 

=========

=========

=========

=========



NOTE 6 FRANCHISE ARRANGEMENTS


As of December 31 and March 31, 2013, the right to the use of brand name and trademark “Caffe Kenon” of the Company’s two operating restaurants are granted by Sizegenic Holdings Limited (“Sizegenic”) under a Franchise Arrangement entered into by the Company as the franchisee and Sizegenic as the franchisor.  The agreement commenced on February 10, 2010, with a three year term and included a right of renewal for a second three year term, which was exercised by the Company on February 10, 2013.  The annual payment is HK$40,000 (approximately $5,136), and payment of a monthly management fee of 10% of the franchisee’s net income.  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.


In December 2013, the Company entered into a subfranchise agreement with Golden Spring Limited (the subfranchisee), in which the Company granted the subfranchisee the right to operate a restaurant at Causeway Bay, Hong Kong.  Under the terms of the franchise agreement the subfranchisee paid an initial non-refundable franchise fee of HK$100,000 (approximately US$12,850), and is obligated to pay a monthly management fee equal to 10% of its gross income.



NOTE 7 SEGMENT INFORMATION


The Company has two reportable segments that include (1) ownership of Caffe Kenon coffee shop restaurants operated in Hong Kong under the terms of a franchise agreement, and (2) granting of a subfranchise to operate one Caffe Kenon coffee shop restaurant in Hong Kong.


Each reportable segment is separately organized and focuses on different customer groups.  Each reportable segment prepares a stand-alone 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, 2013 and 2012.




13


STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Three months ended December 31, 2013 (unaudited)


 

Franchise

Subfranchise

Corporate

Total

 

 

 

 

 


Revenue


$    180,057

 

 $     3,399

 

 

 $       -

 

 $  183,456

Depreciation and amortization

(6,126)

 -

 -

 (6,126)

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization


(194,763)

 

 -

 

 (42,163)

 

 (236,926)

 

 

 

Operating income/(loss)

(20,832)

 3,399

 (42,163)

 (59,596)

 

 

 

 

 

Other income

1,423

 -

 -

 1,423

 

 

 

 

 

Income tax expenses

-

 -

 -

 -

 

 

 

Net income/(loss) after tax

$   (19,409)

 $    3,399

$   (42,163)

 $  (58,173)

 

==========

=========

 =========

 =========

 

 

 

 

 

Total assets, excluding goodwill

$   216,759

 $    3,399

 $    13,046

 $   233,204

Goodwill

$   311,291

 $        -

 $         -

 $   311,291

Capital expenditure

$         -

 $        -

 $         -

 $         -

 

==========

 =========

 =========

 =========


Nine months ended December 31, 2013 (unaudited)


 

Franchise

Subfranchise

Corporate

Total

 

 

 

 

 


Revenue

 

 $   588,096

 

 $  21,376

 

 $         -

 

 $   609,472

 

 

 

 

 

Depreciation and amortization

 (22,603)

 -

 -

 (22,603)

 

 

 

 

 

Cost of revenues and operating expenses excluding depreciation and amortization

 

 (608,187)

 

 -

 

 (93,427)

 

 (701,614)

 

 

 

 

Operating income/(loss)

 (42,694)

 21,376

 (93,427)

 (114,745)

 

 

 

 

 

Other income

 4,578

 -

 -

 4,578

 

 

 

 

 

Income tax expenses

 -

 -

 -

 -

 

 

 

 

Net income/(loss) after tax

 $   (38,116)

 $  21,376

 $   (93,427)

 $ (110,167)

 

 ==========

=========

 =========

 =========

 

 

 

 

 

Total assets, excluding goodwill

 $   216,759

 $    3,399

 $    13,046

 $   233,204

Goodwill

 $   311,291

 $        -

 $         -

 $   311,291

Capital expenditure

 $         -

 $        -

 $         -

 $         -

 

 ==========

 =========

 =========

 =========











14


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

 

 $         -

 

 $         -

 

 $    168,73

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

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

 

 ==========

 =========

 =========

 =========










15


STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE 8 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.


The Companys income tax provision is calculated at the applicable tax rates on the estimated assessable profits for the period based on existing legislation, interpretations and practices in respect thereof. The standard tax rate applicable to the Company was 16.5%.



NOTE 9 OPERATING LEASE COMMITMENTS


The Company entered into rental agreements on June 1, 2009 and March 1, 2010 to lease premises for operation of two restaurants located at the ground floor of Nam Hing Fong, Causeway Bay and shop no. 208 and 209 of Tai Yau Plaza, Wanchai respectively.  The lease at Nam Hing Fong was for a term of 5 years at a monthly rental rate of $8,333.  The lease at Tai Yau Plaza was for a term of 6 years at a monthly rental rate of $11,250.


As of December 31, 2013, the total future minimum lease payments under operating lease in respect of leased premises are payable as follows:


Year ending March 31,

2014 (three months)

 $    64,916

2015

    170,767

2016

 140,238

 

 

Total

 $   375,921

 

==========



NOTE 10 RELATED PARTY TRANSACTIONS




Balance with related party

December 31,

2013

(Unaudited)


March 31,2013

 

 

 

Payable to stockholders:

 

 

(a)  Cheung Ming, stockholder

 $  474,536

 $  442,722

 

 ==========

=========

Due from related party:

 

 

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

      Common stockholder, Cheung Ming

 

 $         -

 

 $   52,120

 

 ==========

=========


(a) The payables to Cheung Ming mainly represent payment by Cheung Ming on behalf of the Company for primarily legal and professional expenses.  This advance is unsecured, non-interest bearing and without fixed repayment term.


(b) The amount receivable from Sizegenic represents cash advance to Sizegenic which is unsecured, non-interest bearing.








16


STUDIO II BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE 11 CERTAIN RISK AND CONCENTRATION


Credit risk


As of December 31 and March 31, 2013, 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.


For the period ended December 31, 2013, the Company has significant concentration of credit risk as all the accounts receivable are solely due from one customer, which also contribute to 100% of the subfranchise income of $3,399.



17




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.


Corporate history


Studio II Brands, INC. (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, the Company remained in the development stage. The Company’s only activities during this period were organizational activities, compliance with SEC reporting obligations, and seeking a suitable business acquisition.


On February 10 2011, the Company acquired all of the issued and outstanding shares of Hippo Lace Limited, a BVI corporation (“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 our operating subsidiary.


The Company completed the share exchange transaction with HLL in order to acquire the business operations carried on through its subsidiary, Legend Sun, and with the intent of focusing our business activity exclusively on those operations.


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 (“Sino Wish”), which was incorporated in November, 2009 and became the franchisee of the Company to operate Caffé Kenon restaurant at Tai Yau Plaza, Hong Kong in March, 2010.   As a result of completion of this share exchange transaction, Sino Wish became our wholly-owned subsidiary.



Corporate Structure


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








18




[studioii10qdec312013v4fin001.jpg]


Current operations


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”), a British Virgin Islands corporation. The Company has entered into a subfranchise agreement with Golden Spring Limited (“GSL”) in December 2013, pursuant to which GSL operates a Caffe Kenon restaurant in Hong Kong, and pays the Company franchise and management fees.  Therefore, as of the fourth quarter of calendar year 2013, the Company has a total of two owned Caffe Kenon stores in Hong Kong and one subfranchised Caffe Kenon store in Hong Kong.


Sizegenic entered into an International Exclusive Distribution and Promotion Agreement (the “Café Centro Agreement”) with Café Centro Brazil Wurzburger Vittorio &C. S.a.s., an Italian corporation (“Café Centro”) on June 26, 2009, pursuant to which Sizegenic has the exclusive right to distribute and sell coffee products supplied by Café Centro and the exclusive license to use the brand name and trademark “Caffe Kenon” in business operations for a period of ten (10) years within the region consisting of Hong Kong, Macau, Taiwan and China.  On February 10, 2010 and April 1, 2012, Sizegenic entered into franchise agreements with HLL pursuant to which HLL was granted the right to operate a Caffe Kenon restaurant at 38 Yiu Wa Street, Causeway Bay, Hong Kong and shop no. 208 and 209 of the 2nd floor of the Tai Yau Plaza shopping center in Wanchai, Hong Kong, respectively.


At the two Company-owned restaurants and the subfranchise restaurant 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.



19





Future Plan of Operations


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 seek 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.


In September 2013, the Company entered into a subfranchise agreement with Golden Spring Limited (GSL), a copy of which is filed as an Exhibit to this report on Form 10-Q, pursuant to which GSL is authorized to operate a Caffe Kenon restaurant in Hong Kong. The terms of the subfranchise agreement is 3 years with an option to extend for an additional 3 years.  Management is currently in negotiations with another potential subfranchisee on terms of a subfranchise agreement in Hong Kong for the operation of another Caffe Kenon.  Management will continue to seek opportunities in Hong Kong to build strong networks and brandnames.


Our management is actively seeking business opportunities in various regions in China, including Beijing, Shanghai and Sichuan Province. As a result of China’s economic development, accelerated urbanization process and the change of household consumption habits, peoples demand for restaurant/catering services is increasingly growing. Management believes that the Company can apply its previous experience providing restaurant/catering services in Beijing to explore business opportunities in China. The potential plans include acting as a franchisor, operating Company-owned restaurants, and entering in to joint venture to operate restaurants with potential business partners.


Management believes that the three Caffé Kenon coffee shops currently operating in Hong Kong (including two Company-owned shops and one shop operated as a subfranchise) are not enough in building the image and branding of Caffé Kenon, and believes that expanding the number of shops can improve the performance of the Company, enhance brand building, and ultimately provide a benefit to the Company’s stockholders.  Subsequent to period ended December 31, 2013, management is working on a potential acquisition and an opening of a new Caffé Kenon coffee shop as follows:


(1) To consider the acquisition Sizegenic Holdings Limited:

Management believes the acquisition of Sizegenic, which possesses an International Exclusive Distribution and Promotion Agreement with Café Centro Brazil Wurzburger Vittorio &C. S.a.s., an Italian corporation, can stabilize the future supply of coffee products and reduce the cost of contracting with Sizegenic which incur management expenses.


(2) Opening of a new Caffé Kenon coffee shop in Hong Kong with new operation pattern:

In February 2014, Management has secured the leasing of a shop containing approximately 1,500 feet for the opening of a new shop which would have an updated décor and which would operate differently than the existing shops.  In the new location, customers would queue at the counter for the ordering of food instead of sitting at tables and placing their orders with a waiter.


The source of fund for the above development are satisfied by the advance from Mr Cheung Ming.


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, 2013, and filed with the SEC on July 1, 2013.  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 Companys 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



20




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 December 31, 2013 compared to Three Months Ended December 31, 2012


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 following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this Form.


Result of operations


Revenues


Three Months Ended December 31, 2013 compared to the Three Months Ended December 31, 2012


Revenue for the three months ended December 31, 2013, was $ 183,456 as compared to revenue of $168,735 for the three months ended December 31, 2012. The increase of $11,322, or approximately 9%, was mainly attributable to the new franchise and management fee income of $3,399, generated from its subfranchise during the period.  The other increase as compared with 2012 was mainly caused by temporary closure of one of the restaurant of Legend Sun for remodeling in 2012, which resulted in a decrease in customers in 2012.


Nine Months Ended December 31, 2013 compared to Nine Months Ended December 31, 2012


Revenue for the nine months ended December 31, 2013, was $609,472 as compared to revenue of $607,554 for the three months ended December 31, 2012. The increase of $1,918, or approximately 1%, was mainly attributable to the new franchise and management fee income of $21,376, generated from its subfranchise during the period although there were more competitors opening in the same area, which lower the food and beverage income.


Cost of Revenues


Three Months Ended December 31, 2013 compared to the Three Months Ended December 31, 2012


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, 2013 was $39,991 as compared to cost of revenue of $37,850 for the three months ended December 31, 2012.  The cost remained stable for the two periods.


Nine Months Ended December 31, 2013 compared to Nine Months Ended December 31, 2012


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, 2013 was $127,794 as compared to cost of revenue of $135,898 for the nine months ended December 31, 2012.  The decrease of $8,104, or approximately 6%, was due to changing to a more favorable liquor supplier during the period.








21




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

 


2013


2012

2013 to

 2012


2013


2012

2013 to

 2012

 

 

 

 

 

 

 

Staff costs

 $  59,302

 40,433

 46%

$ 183,893

 160,903

 14%

Rent, government fee, management fee

 

 63,664

 

 67,944

 

 (6%)


203,512

 

 162,401

 

 25%

Electricity, gas and utilities

 10,365

 8,330

 24%

32,244

 31,407

 3%

Depreciation

 6,126

 4,047

 51%

22,603

 20,523

 10%

Professional and audit fee

 42,754

 15,064

 184%

94,759

 37,245

 154%

Others

 20,850

 5,697

 265%

59,412

 53,720

 11%

 

 

 

 $ 203,061

 141,515

 43%

$ 596,423

 466,199

 28%

 

 =========

 =========

 =========

=========

 =========

 =========


Three Months Ended December 31, 2013 compared to the Three Months Ended December 31, 2012


The increase of operating expenses to $203,061 for the three months ended December 31, 2013 as compared to $141,515 for the same period for 2012, which represents an increase of $61,546 or approximately 43%, was mainly due to the increase in repairs and maintenance and professional fees during the period as compared to the same period of 2012. The increase of staff costs of $18,869 or approximately 46% was mainly due to the reason of the revised statutory minimum wage rate came into force in this year.


Nine Months Ended December 31, 2013 compared to Nine Months Ended December 31, 2012


The increase of operating expenses to $596,423 for the nine months ended December 31, 2013 as compared to operating expenses of $466,199 for the same period for 2012, which represents an increase of $130,224 or approximately 28%, was for reasons similar to those mentioned above.


Net operating (loss)/income


Three Months Ended December 31, 2013 compared to the Three Months Ended December 31, 2012


As a result of the increase in operating costs, particularly the increase in professional and audit fee, there was an operating loss of $58,173 for the three months ended December 31, 2013 as compared with a loss of $8,140 for the three months ended December 31, 2012.


Nine Months Ended December 31, 2013 compared to Nine Months Ended December 31, 2012


As a result of the decrease in revenue and increase in operating costs, particularly the increase in professional and audit fee, there was an operating loss of $110,167 for the nine months ended December 31, 2013 as compared with a profit of $10,674 for the nine months ended December 31, 2012.


Impact of Inflation

 

Inflation and changing prices have had an effect on our business and we expect that inflation or changing prices could materially affect our business in the foreseeable future. Our management will closely monitor the price change and make efforts to maintain effective cost control in operations.


Liquidity and Capital Resources


Net cash used in operating activities for the nine months ended December 31, 2013 was $33,951.  It mainly represents cash outflow for settling daily operating expenses, the repayment of amount due from related party had compensated part of the daily operating cash outflow.




22




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, 2013 and March 31, 2013, were $474,536 and $442,722, 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 together with fund provided by Cheung Ming as mentioned above, 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 Companys 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, 2013, 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, 2013 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, 2013 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 companys 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 financial controller or financial manager 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 financial controller / finance manager.








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Changes in Internal Control over Financial Reporting


There was no change in the Companys internal control over financial reporting during the period ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Companys 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.


Not Applicable.


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.



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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, Principal Financial Officer


Date: February 14, 2014



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