Attached files
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EX-32 - STUDIO II BRANDS INC | studioiibrandsexh321.htm |
EX-32 - STUDIO II BRANDS INC | studioiibrandsexh322.htm |
EX-31 - STUDIO II BRANDS INC | studioiibrandsexh311.htm |
EX-31 - STUDIO II BRANDS INC | studioiibrandsexh312.htm |
EXCEL - IDEA: XBRL DOCUMENT - STUDIO II BRANDS INC | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
[] 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
Registrants telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X ] Yes [] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes
[X] No
As of August 14, 2014, the Issuer had 22,233,208 shares of common stock issued and outstanding.
1
QUARTERLY REPORT ON FORM 10-Q
OF STUDIO II BRANDS, INC.
FOR THE PERIOD ENDED JUNE 30, 2014
TABLE OF CONTENTS
PART I
-
FINANCIAL INFORMATION
Item 1. | Financial Statements | 3 |
Item 2. | Managements Discussion and Analysis of Financial Condition | 14 |
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 18 |
Item 4. | Controls and Procedures | 18 |
PART II
-
OTHER INFORMATION
Item 1. | Legal Proceedings | 18 |
Item 1A. | Risk Factors | 19 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
Item 3. | Defaults Upon Senior Securities | 19 |
Item 4. | Removed and Reserved | 19 |
Item 5. | Other Information | 19 |
Item 6. | Exhibits | 19 |
Signatures |
| 19 |
2
PART I-FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
3
STUDIO II BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, 2014 (Unaudited) | March 31, 2014 |
| ||
ASSETS | ||
Current assets | ||
Cash | $ 22,410 | $ 19,837 |
Other receivables | 6,252 | 7,624 |
Inventories | 5,562 | 4,706 |
| ─────── | ─────── |
Total current assets | 34,224 | 32,167 |
| ─────── | ─────── |
| ||
Property and equipment, net | 97,974 | 57,691 |
Security deposits | 117,277 | 135,769 |
Goodwill | 387,675 | 311,291 |
Tax recoverable | 1,130 | 1,129 |
| ─────── | ─────── |
Total assets | $ 638,280 | $ 538,047 |
| ======== | ======== |
| ||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||
CURRENT LIABILITIES | ||
Accounts payable and accrued expenses | $ 129,704 | $ 151,149 |
| ─────── | ─────── |
Total current liabilities | 129,704 | 151,149 |
| ||
Payable to stockholder | 10,405 | 509,519 |
| ─────── | ─────── |
Total liabilities | 140,109 | 660,668 |
| ─────── | ─────── |
| ||
COMMITMENTS AND CONTINGENCIES | ||
STOCKHOLDER'S EQUITY | ||
Common stock, 100,000,000 shares authorized with par value $0.001; 22,233,208 shares issued and outstanding as of June 30, 2014 and 14,838,018 as of March 31, 2014 | 22,233 | 14,838 |
Additional paid-in capital | 1,179,059 | 446,935 |
Accumulated deficit | (703,121) | (584,394) |
| ─────── | ─────── |
Total stockholders equity | 498,171 | (122,621) |
| ─────── | ─────── |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ 638,280 | $ 538,047 |
| ======== | ======== |
|
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 June 30, 2014 | For the three-months ended June 30, 2013 |
|
|
|
|
|
Revenue |
|
|
|
|
Food and beverage income |
|
| $ 161,037 | $ 192,820 |
Franchise and management fee income |
|
| 3,293 | - |
|
|
| ──────── | ──────── |
Operating costs and expenses |
|
| 164,330 | 192,820 |
|
|
|
|
|
Food and supplies |
|
| 40,579 | 40,788 |
Payroll and employee benefits |
|
| 50,348 | 60,645 |
Rental expenses |
|
| 60,699 | 70,386 |
Fixed assets written off |
|
| 30,300 | - |
Impairment on goodwill |
|
| 54,244 | - |
Selling, general and administrative expenses |
|
| 47,813 | 63,720 |
Other operating (income)/expense, net |
|
| (926) | - |
|
|
| ──────── | ──────── |
|
|
| 283,057 | 235,539 |
|
|
| ──────── | ──────── |
Net loss before income tax |
|
| (118,727) | (41,324) |
Income tax expenses |
|
| - | - |
|
|
| ──────── | ──────── |
Net loss |
|
| (118,727) | (41,324) |
|
|
| ──────── | ──────── |
Basic and fully diluted loss per common share |
|
| $ - | $ - |
|
|
| ========= | ========= |
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING |
|
|
16,536,141 |
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 THREE MONTHS ENDED JUNE 30, 2014 (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, 2014 | 14,838,018 |
$ 14,838 |
$ 446,935 |
$ (584,394) |
$ (122,621) |
|
|
|
|
| |
Issue of shares upon conversion of stockholders loan | 5,095,190 |
5,095 |
504,424 | -
- | 509,519 |
|
|
|
| ||
Issue of shares for acquisition of a subsidiary | 2,300,000 |
2,300 |
227,700 |
- | 230,000 |
|
|
|
|
| |
Net loss for the period | - | - | - | (118,727) | (118,727) |
| ───────── | ──────── | ──────── | ──────── | ───────── |
Balance as of June 30, 2014 | 22,233,208 |
$ 22,233 |
$ 1,179,059 |
$ (703,121) |
$ 498,171 |
| ========== | ========= | ========= | ========= | ========= |
See accompanying notes to consolidated financial statements (unaudited)
6
STUDIO II BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three months ended June 30, 2014 | Three months ended June 30, 2013 |
CASH FLOWS FROM OPERATING ACTIVITIES | ||
Net loss from operations | $ (118,727) | $ (41,324) |
Adjustments to reconcile net loss to net cash (used in)/generated from operating activities: | ||
Depreciation | 6,227 | 8,266 |
Fixed assets written off | 28,851 | - |
Impairment of goodwill | 54,244 | - |
Changes in operating assets and liabilities: | ||
Due from related party | - | 52,120 |
Other receivables | 1,372 | - |
Inventories | 1,737 | 349 |
Security deposits | 50,725 | - |
Account payables and accrued expenses | (36,338) | 5,096 |
Due to related party | - | 16,653 |
| ──────── | ──────── |
NET CASH (USED IN)/GENERATED FROM OPERATING ACTIVITIES | (11,909) | 41,160 |
| ──────── | ──────── |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Cash acquired from acquisition of a subsidiary | 4,077 | - |
| ──────── | ──────── |
NET CASH GENERATED FROM INVESTING ACTIVITIES | 4,077 | - |
| ──────── | ──────── |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Advance from/(to) stockholder | 10,405 | (63,779) |
| ──────── | ──────── |
NET CASH GENERATED FROM / (USED IN) FINANCING ACTIVITIES | 10,405 | (63,779) |
| ──────── | ──────── |
NET INCREASE/(DECREASE) IN CASH | 2,573 | (22,619) |
Beginning of period | 19,837 | 22,705 |
| ──────── | ──────── |
End of period | $ 22,410 | $ 86 |
| ========= | ========= |
| ||
Supplemental disclosures of cash flow information: | ||
Cash paid for interest | $ - | $ - |
Cash paid for income taxes | $ - | $ - |
========= | ========= |
Supplemental cash flow information regarding the Companys acquisitions in 2014 is as follows:
(a) Issuance of common shares for acquisition of a subsidiary:
|
|
| 2014 |
Fair value of assets acquired |
|
| $110,190 |
Less liabilities assumed |
|
| (14,895) |
Net assets acquired |
|
| 95,295 |
Less shares issued |
|
| (230,000) |
Add cash acquired |
|
| 4,077 |
Value of excess of purchase price allocated to goodwill |
|
| $130,628 |
(b) Conversion of stockholders loan into common shares |
|
| $509,519 |
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 Companys activities before February, 2011 were primarily directed towards the raising of capital and seeking business opportunities.
The Company has transitioned from its development stage to operational activities as of February 10, 2011. On February 10, 2011, the Company entered into and consummated a share exchange agreement with Hippo Lace Limited (HLL), a BVI corporation and Mr. Gu Yao (Gu), the sole stockholder of HLL to acquire Gus 100% interests of HLL and its wholly owned subsidiary, Legend Sun Limited (Legend Sun) a limited liability company incorporated and domiciled in Hong Kong and its principal activity is to provide catering services in Hong Kong. In conjunction with the acquisition, the Company completed the closing of the exchange transaction under the terms of the Exchange Agreement and Supplementary Agreement on February 10, 2011 by issued 2,291,100 shares of its Common Stock to Gu as consideration (i) to acquire all of the issued and outstanding shares of HLL owned by Gu valued at $34,450 or approximately $0.015 per share, and (ii) to pay off the outstanding 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 Vivians 100% interests of Sino Wish which is incorporated and domiciled in Hong Kong as a Companys franchisee to operate Caffé Kenon restaurant at Tai Yau Plaza, Hong Kong, and (ii) repay the stockholders loan from Vivian to HLL. The purchase price for the acquisition of Sino Wish amounted to $280,000, and was determined through arms length negotiation. A total of $191,002 was paid through issuance to the seller of a total of 2,938,742 shares of common stock of the Company valued at $0.065 per share. Such shares are restricted securities as defined in Rule 144 under the Securities Act of 1933. The balance of the purchase price in the amount of $88,998 is payable through the assumption of the outstanding balance of a 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, the loan of $88,998 had been fully repaid as of March 31, 2013.
On June 30, 2014, through HLL, the Company completed the acquisition of Golden Spring Limited (Golden Spring), a Hong Kong corporation, by purchasing all of the issued and outstanding shares of Golden Spring. Prior to its acquisition, Golden Spring was a subfranchisee of HLL, operating a Caffe Kenon restaurant in Hong Kong under the terms of a subfranchise agreement dated September, 2013. The operations of the Caffé Kenon coffee shop owned by Golden Spring are similar to the operations of the Caffé Kenon coffee shop currently operated by HLL in Hong Kong. Both restaurants serve Italian-style espresso drinks using Kenon brand coffee imported from Italy, as well as breakfast, lunch, and dinner with a moderately-priced Italian style standard menu which includes pizza, spaghetti, risotto, salads, sandwiches and desserts. As a result of the acquisition of Golden Spring by HLL, the subfranchise agreement between HLL and Golden Spring was cancelled. Golden Spring now continues its operation of Caffe Kenon restaurant as a company-owned store. The purchase price for the acquisition of Golden Spring was a total of $230,000, which was paid through issuance to the seller of a total of 2,300,000 shares of common stock of the Registrant valued at $0.10 per share. Such shares are restricted securities as defined in Rule 144 under the Securities Act of 1933.
NOTE 2 GOING CONCERN AND MANAGEMENTS PLANS
The Companys independent registered public accounting firms report of the consolidated financial statements for the years ended March 31, 2014 and 2013 contained an explanatory paragraph regarding the Companys 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 Companys 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.
8
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Companys presentation currency is the United States Dollar.
(b)
Principles of consolidation
The audited consolidated financial statements as of March 31, 2014 and 2013 include the Company and its wholly-owned subsidiaries, HLL, Legend Sun, Sino Wish and Golden Spring. 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 Companys significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets and realizable values for inventories.
(d)
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.
In accordance with FASB ASC 350, we perform goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting units goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
As of June 30, 2014, we performed our annual goodwill impairment test and estimated the fair value of each of our reporting units based on the income approach (also known as the discounted cash flow (DCF) method, which utilizes the present value of cash flows to estimate fair value). As one of our owned restaurants operated by Legend Sun was closed on May 28, 2014, there were no future cash flows for this reporting unit. As a result, there was impairment of goodwill of $54,244 for June 30 and $Nil for March 31, 2014.
(e)
Impairment of long-lived assets
Long-lived assets are comprised of property and equipment. Pursuant to the provisions of ASC360-10, Property, plant and equipment, long-lived assets to be held and used are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable by comparing the undiscounted cash flows associated with the assets to their carrying amounts. If such a review indicates an impairment, the carrying amount would be reduced to fair value. Based on the Companys assessment, there were no events or changes in circumstances that would indicate any impairment of long-lived assets as of June 30 and March 31, 2014.
As one of our owned restaurants operated by Legend Sun was closed on May 28, 2014, the related fixed assets were disposed of and result in a loss on write off of fixed assets of $28,851 for June 30, 2014.
9
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(f)
Accounts payable and accrued expenses consist of the following:
| June 30, 2014 (Unaudited) | March 31, 2014 |
|
|
|
Accounts payable | $ 42,223 | $ 27,969 |
Payroll and rental expenses | 45,034 | 80,107 |
Other operating expenses | 42,447 | 43,073 |
| ──────── | ──────── |
| $ 129,704 | $ 151,149 |
| ========= | ========= |
(g)
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.
(h)
Revenue recognition
Revenue represents the invoiced value of goods sold or services provided. Revenue is recognized when all the following criteria are met:
(i)
Persuasive evidence of an arrangement exists.
(ii)
Services had been rendered.
(iii)
The sellers price to the buyer is fixed or determinable, and
(iv)
Collectivity is reasonably assured.
Revenue from sales is recognized when food and beverage products are sold. Franchise fee income on the annual fee for sublicensing of the brand name and trademark Caffe Kenon and the 10% management fee on eligible monthly net income of subfranchiee are recognized after granting the non-exclusive rights and all contractual obligations are performed and report of net income from subfranchisee respectively.
(i)
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.
10
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(j)
Segment information
The Company uses the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Companys chief operating decision maker for making operating decisions and assessing performance as the source for determining the Companys operating segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue and operating results of the three operating subsidiaries in Hong Kong. As such, management has determined that the three subsidiaries are the Companys only operating segment. As the Companys operations and customers are principally all located in Hong Kong, no geographic information has been presented.
(k)
Commitments and contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and environmental claims arising out of the normal course of businesses that relate to a wide range of matters, including among others, contracts breach liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history, scientific evidence and the specifics of each matter.
As of June 30 and March 31, 2014, 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.
(l)
Recent accounting pronouncements
There is no recently issued accounting pronouncements adopted by the Company. Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.
NOTE 4 BUSINESS ACQUISITION
On June 30, 2014, through HLL, the Company completed the acquisition of Golden Spring Limited (Golden Spring), a Hong Kong corporation, by purchasing all of the issued and outstanding shares of Golden Spring. Prior to its acquisition by the Registrant, Golden Spring was a subfranchisee of HLL, operating a Caffe Kenon restaurant in Hong Kong under the terms of a subfranchise agreement dated September, 2013. The operations of the Caffé Kenon coffee shop owned by Golden Spring are similar to the operations of the Caffé Kenon coffee shop currently operated by HLL in Hong Kong. Both restaurants serve Italian-style espresso drinks using Kenon brand coffee imported from Italy, as well as breakfast, lunch, and dinner with a moderately-priced Italian style standard menu which includes pizza, spaghetti, risotto, salads, sandwiches and desserts. As a result of the acquisition of Golden Spring by HLL, the subfranchise agreement between HLL and Golden Spring was cancelled. Golden Spring now continues its operation of Caffe Kenon restaurant as a company-owned store.
The purchase price for the acquisition of Golden Spring was a total of $230,000, which was paid through issuance to the seller of a total of 2,300,000 shares of common stock of the Registrant valued at $0.10 per share. Such shares are restricted securities as defined in Rule 144 under the Securities Act of 1933. As a result of the issuance of common stock under the Stock Purchase Agreement, the Company has a total of 22,233,208 shares of its common stock issued and outstanding, of which 19,933,208 shares, or approximately 89.65%, are owned by previously existing shareholders of the Company, with the balance of 2,300,000 shares, or approximately 10.34%, are owned by shareholder of Golden Spring.
11
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The fair values of the assets acquired and liabilities assumed at the date of acquisition as determined in accordance with ASC 805, and the purchase price allocation at the date of acquisition, were as follows:
Consideration: |
|
|
|
|
|
| ||
Equity instruments (2,300,000 common stock of the Company) |
| $ 230,000 | ||||||
Cash acquired |
|
|
|
|
| (4,077) | ||
Consideration, net of cash acquired |
| $ 225,923 | ||||||
|
|
|
|
|
|
|
|
|
Allocated to: |
|
|
|
|
|
| ||
| Inventory |
|
|
|
| (2,594) | ||
| Security deposit |
|
|
|
| (30,838) | ||
| Property and equipment |
|
|
|
| (76,757) | ||
| Accounts payable and accrued expenses |
|
|
|
| 14,894 | ||
|
| Net tangible liabilities |
|
|
|
|
| $ 95,295 |
Value of excess of purchase price over net liabilities |
|
| ||||||
| Acquired allocated to: |
|
|
|
|
| ||
|
| Goodwill |
|
|
|
|
| $ 130,628 |
NOTE 5 FRANCHISE ARRANGEMENTS
As of June 30 and March 31, 2014, the right to the use of brand name and trademark Caffe Kenon of the Companys three operating restaurants are granted by Sizegenic Holdings Limited (Sizegenic) under a Franchise Arrangement entered by the Company as the franchisee and Sizegenic as the franchisor. The agreement commenced on February 10, 2010, with three years 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 franchisees net income including payment to Sizegenic of franchise fee payable on anniversary basis and monthly management fee base upon a percent of franchisees 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.
NOTE 6 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 Companys income before income tax expenses is generated by its operating subsidiaries, Legend Sun, Sino Wish and Golden Spring, in Hong Kong.
The Company's income tax provision in respect of operations in Hong Kong is calculated at the applicable tax rates on the estimated assessable profits for the year based on existing legislation, interpretations and practices in respect thereof. The standard tax rate applicable to the Company was 16.5%. No deferred tax liability has been provided as the amount involved is immaterial.
12
STUDIO II BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 OPERATING LEASE COMMITMENTS
For Sino Wishs operating restaurant, the Company entered into rental agreement on March 1, 2010 to lease the premise located at shop no. 208 and 209 of Tai Yau Plaza, Wanchai, HK for a term of 6 years at a monthly rental rate of $11,250.
For Golden Spring, the Company entered into rental agreement on September 15, 2013 to lease premise for operation located at Flat A, Ground Floor, Tak Cheong Building, No.44 Yiu Wa street, Nos. 28 & 29 Canal Road Street, HK. The lease of premises was for a term of 3 years at a monthly rental rate of $8,767 for the first two years and $9,024 for the last one year.
As of June 30, 2014, the total future minimum lease payments under operating lease in respect of leased premises are payable as follows:
Year ending March 31,
2015 (nine months) | $ 180,203 |
2016 | 218,289 |
2017 | 81,287 |
| ───────── |
Total | $ 479,779 |
| ========== |
NOTE 8 RELATED PARTY TRANSACTIONS
Balance with related party | June 30, 2014 (Unaudited) | March 31,2014 |
|
|
|
Payable to stockholders: |
|
|
(a) Cheung Ming, stockholder | $ 10,405 | $ 509,519 |
| ========== | ========= |
(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. As disclosed in the Companys annual report on Form 10K for the fiscal year ended March 31, 2014, on May 26, 2014, the Board of Directors approved payment in full of the amount due and payable to its shareholder as of March 31, 2014, through issuance to Cheung Ming of 5,095,190 shares of the Companys common stock at a price of $0.10 per share. The issuance price of $0.10 per share was established by mutual agreement of Cheung Ming and the Companys Board of Directors, and does not bear any relationship to the assets, book value or net worth of the Company.
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ITEM. 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS," "INTENDS," "WILL," "HOPES," "SEEKS," "ANTICIPATES," "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD LOOKING STATEMENT. SUCH FORWARD LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
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 Companys 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, HLLs 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 since March, 2010. As a result of completion of this share exchange transaction, Sino Wish became our wholly-owned subsidiary.
On June 30, 2014, through HLL, the Company completed the acquisition of Golden Spring Limited (Golden Spring), a Hong Kong corporation, by purchasing all of the issued and outstanding shares of Golden Spring. Prior to its acquisition by the Registrant, Golden Spring was a subfranchisee of HLL, operating a Caffe Kenon restaurant in Hong Kong under the terms of a subfranchise agreement dated September, 2013. The operations of the Caffé Kenon coffee shop owned by Golden Spring are similar to the operations of the Caffé Kenon coffee shop currently operated by HLL in Hong Kong. Both restaurants serve Italian-style espresso drinks using Kenon brand coffee imported from Italy, as well as breakfast, lunch, and dinner with a moderately-priced Italian style standard menu which includes pizza, spaghetti, risotto, salads, sandwiches and desserts. As a result of the acquisition of Golden Spring by HLL, the subfranchise agreement between HLL and Golden Spring was cancelled. Golden Spring now continues its operation of Caffe Kenon restaurant as a company-owned store.
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Corporate Structure
The Chart below depicts our corporate structure. As depicted below, Studio II Brands owns 100% of Hippo Lace Limited and Hippo Lace Limited owns 100% of Legend Sun Limited, Sino Wish Limited and Golden Spring Limited.
Current operations
Through the Companys operating subsidiaries, Sino Wish and Golden Spring, 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. These shops are operated under the terms of a franchise agreement between HLL and Sizegenic Holdings Limited (Sizegenic), a British Virgin Islands corporation. Legend Suns lease agreement with landlord was expired on May 31, 2014 and the Company did not renew the contract. As a result, the restaurant located at Nam Hing Fong, 38 Yiu Wa Street, Causeway Bay, Hong Kong was closed down and May 28, 2014 was the last business day.
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 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 shop no. 208 and 209 of the 2nd floor of the Tai Yau Plaza shopping center in Wanchai, HK and Flat A, Ground Floor, Tak Cheong Building, No.44 Yiu Wa street, Nos. 28 & 29 Canal Road Street, HK.
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.
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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 30 to 80 guests.
Future Plan of Operations
The Companys future plan of operations is to seek to continue to expand by adding additional Café Kenon locations in Hong Kong and in China. Some of the new locations may be Company owned and operated as franchises of Sizegenic, and some may be subfranchise operations from which the Company receives franchise and management fees. The Company also plans to search possible investment and business opportunities in different potential restaurant and catering service business segments including hotpot and traditional Chinese cuisine restaurants, and possible investment and business opportunities related to ownership and operation of a coffee farm and production of our own brand of packed coffee beans and canned coffee to be sold to wholesale and retail customers. The Company will require additional working capital in order to open new Company owned Café Kenon locations or to pursue other potential investment and business opportunities, and there is no assurance that such additional working capital funding will be available, or will be available on terms which are acceptable to the Company.
Continuously, our management is actively seeking business opportunities in various regions in China, including Beijing, Shanghai and Sichuan Province. As a result of Chinas economic development, accelerated urbanization process and the change of household consumption habits, people's 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.
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, 2014, and filed with the SEC on June 30, 2014. Our officers and directors believe that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about the Company's operating results and financial condition.
The preparation of financial statements in conformity with generally accepted accounting principles requires our officers and directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ from those estimates.
Results for the Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013
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
Revenue
Revenue for the three months ended June 30, 2014, was $161,037, as compared to revenue of $192,820 for the three months ended June 30, 2013. The decrease of $31,783, or approximately 16.4%, was mainly caused by the fact that, as disclosed in the Companys report on Form 10K for the fiscal year ended March 31, 2014, the Company elected not to renew the lease for one of its restaurant locations which had been operated through its subsidiary Legend Sun, and that restaurant was closed on May 28, 2014.
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Operating Expenses
Operating expenses for the Company and subsidiaries consist of the following items:
|
| For the three months ended June 30 | |||||
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|
| 2014 | 2013 | 2014 to 2013 | |
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| |
Food and supplies | $ 40,579 | $ 40,788 | $ (209) | ||||
Staff costs | 50,348 | 60,645 | (10,297) | ||||
Rent, government fee, management fee | 60,699 | 70,386 | (9,687) | ||||
Electricity, gas and utilities | 8,832 | 13,386 | (4,554) | ||||
Depreciation | 6,005 | 8,266 | (2,261) | ||||
Professional and audit fee | 17,105 | 26,653 | (9,548) | ||||
Fixed assets written off | 28,851 | - | 28,851 | ||||
Impairment on goodwill | 54,244 | - | 54,244 | ||||
Others | 17,320 | 15,415 | 1,905 | ||||
|
|
|
| ───────── | ───────── | ──────── | |
| $ 283,983 | $ 235,539 | $ 48,444 | ||||
| ========= | ========= | ========= |
The increase of operating expenses to $283,983 for the three months ended June 30, 2014 as compared to operating expenses of $235,539 for the same period for 2013, which represents an increase of $48,444 or approximately 20%, was mainly due to the write off of fixed assets of $ 28,851 and related intangible assets of $54,244 associated with the closing on May 28, 2014, of the shop operated by Legend Sun. At the same time, the direct cost including foods, rental and staff cost was dropped comparatively.
Net operating loss
As a result of the write off of fixed assets and related intangible assets associated with the closed shop operated by Legend Sun on May 28, 2014, other operating expenses increased significantly as compared with the same period in 2013, resulting in operating loss of $118,727 for the three months ended June 30, 2014 as compared with a loss of $41,234 for the three months ended June 30, 2013.
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 three months period ended June 30, 2014 was $11,909. It mainly represents cash income on daily operations.
A stockholder of the Company, Cheung Ming, has paid expenses on behalf of the Company with no interest and without a fixed repayment term. As of March 31, 2014, the Company had an outstanding amount due and payable to Mr Cheung of $509,519, which mainly represented amounts advanced by Cheung Ming for payment on behalf of the Company of legal and professional expenses. These advances by Cheung Ming were unsecured, non-interest bearing and without fixed repayment term. On May 26, 2014, the Board of Directors approved payment in full of the outstanding balance of this amount due and payable to its shareholder, through issuance to Cheung Ming of 5,095,190 shares of the Companys common stock at a price of $0.10 per share. Amounts payable to Mr Cheung at June 30, 2014 were $10,405. 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 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.
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The unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, they do not include any adjustments that might result from the outcome of this uncertainty. The Companys minimal revenues and its dependency on continuing funding from its stockholders, raise substantial double about its ability to continue as a going concern. The Company's business plan includes raising funds from outside potential investors. However, there is no assurance that it will be able to do so.
As of June 30, 2014, there were no material commitments for capital expenditures for business operations.
The Companys independent registered public accounting firms report of the financial statements for the year ended March 31, 2014 contained an explanatory paragraph regarding the Companys 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 June 30, 2014 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 internal control over financial reporting in the coming months if we acquire another operating business or assets, and re-consider the need for hiring a consultant.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting during the period ended June 30, 2014, 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.
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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.
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: August 14, 2014
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