Attached files
| file | filename |
|---|---|
| EX-21.1 - SUBSIDIARIES - Royal Bakery Holdings, Inc. | f10k2015ex21i_royalbakery.htm |
| EX-32.1 - CERTIFICATION - Royal Bakery Holdings, Inc. | f10k2015ex32i_royalbakery.htm |
| EX-31.1 - CERTIFICATION - Royal Bakery Holdings, Inc. | f10k2015ex31i_royalbakery.htm |
| EX-31.2 - CERTIFICATION - Royal Bakery Holdings, Inc. | f10k2015ex31ii_royalbakery.htm |
| EX-32.2 - CERTIFICATION - Royal Bakery Holdings, Inc. | f10k2015ex32ii_royalbakery.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Commission File No. 333-193143
ROYAL BAKERY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
| Delaware | 45-2509555 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
407 Old County Road
Belmont, California 94002
(Address of principal executive offices, zip code)
(650) 530-0368
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 such 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. 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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. (Check one):
| Large accelerated filer | ☐ | Non-accelerated filer | ☐ |
| Accelerated filer | ☐ | Smaller reporting company | ☒ |
| (Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting common stock held by non-affiliates of the Registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) was approximately $277,607. At April 10, 2015, there were 14,383,000 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.
ROYAL BAKERY HOLDINGS INC.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K of Royal Bakery Holdings Inc., a Delaware corporation, contains “forward-looking statements,” as defined in the United States Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements. The economic environment within which we operate could materially affect our actual results.
Our management has included projections and estimates in this Form 10-K, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the SEC or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
All references in this Form 10-K to the “Company”, “Royal Bakery”, “we”, “us,” or “our” are to Royal Bakery Holdings Inc.
| ITEM 1. | BUSINESS |
Description of Business
Royal Bakery Holdings, Inc. (“Royal Bakery”), a Delaware corporation, was incorporated on June 7, 2011. We operate as a franchisor of branded restaurants and as a seller of bakery and food products. We entered into a Sub-Franchisor Agreement with Egg Tart Café United Holdings, LLC (“Egg Tart Café”) which has and will sign an agreement with each sub-franchisee. Egg Tart Café will collect franchisee fees and monthly royalty fees from these sub-franchisees and distribute the fees collected between Royal Bakery and Egg Tart Café based on the Sub-Franchisor Agreement signed between the Company and Egg Tart Café. For the near future, Egg Tart Café’s sub-franchisee will operate their business in California only. These sub-franchisees will go to our Sub-franchisor office at Belmont, California to get training and learn our food and drink products, our business principles, our services and any matters related to operating our franchise restaurant.
Franchises
Our Sub-franchisee has sold its operations – its food truck and the restaurant, therefore, we decided not to further develop the Ovo Café brand. On April 6, 2015, we sold the brand to Parc Valencia LLC, a company which has bought the Ovo Café restaurant at 171 2 nd Street, San Francisco. We are working with Egg Tart Café to build another franchise operation and to explore an online catering operation.
The Company signed a Sub-Franchisor Agreement with Egg Tart Café on October 3, 2012. The Sub-Franchisor Agreement, which has a term of ten years, grants Egg Tart Café an exclusive license to sub-franchise bakeries and cafes under the Ovo brand and or other brand name that we are going to use in North America and South America in exchange for payments totaling $50,000, a monthly royalty equal to thirty percent of all royalty proceeds Sub-franchisor receives from its unit sub-franchises and the one-time sub-franchise fees ranging from $5,000 to $14,500 depending on the physical size of the sub-franchisee. Royal Bakery will build another brand to support Egg Tart Café to carry on the sub-franchisor operation and or to build an online operation for Egg Tart Café with the know-how of the bakery and café trade.
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On December 31, 2014, our sub-franchisee sold its food truck to JP Concepts and on January 31, 2015, sold the Ovo Café restaurant to Parc Valencia, LLC. Both buyers are not related to any of our existing directors and or shareholders.
In the 12 months ended December 31, 2015, we recorded royalty fees of $402 in connection with the food truck and restaurant.
As our sub-franchisor, Egg Tart Café is planning to sign up more sub-franchisees and assist them to open deli, restaurants and or food trucks. An emphasis on an online operation will give us the edge to win over customers to be part of the revenue stream for the Company.
Food and Product Sales
Royal Bakery has a wholly-owned subsidiary, Royal Bakery Sourcing and Trading Corp. (“RBSTC”), which was incorporated on August 20, 2013, under the laws of the State of California. RBSTC is an operating arm to purchase the bakery and bistro products from the suppliers and resell the bakery and bistro products to food retailers and sub-franchisees. We buy these products primarily from Majestic Production of Peninsula LLC, (“Majestic Production”), a central food producer located in Belmont, California. Majestic Production is wholly-owned by Egg Tart Café. Majestic Production produces the food products under the direction of Egg Tart Café. Royal Bakery advises on the quality control of the products as needed to Majestic Production. On September 1, 2013, RBSTC signed an agreement with Majestic Production, which is subject to a ten-year term. Some of the terms of this agreement are non-binding, including the terms that Majestic Production is to sell us products at a 5% discount to the regular sales price at which Majestic Production sells to other third parties, and that from September 1, 2013, we are to purchase no less than $500,000 of products from Majestic Production in the first year and no less than $750,000 in the second year ended August 31, 2015 and $1,000,000 in the third year ended August 31, 2016 and thereafter. We have no obligations to fulfill these purchase targets during the first, second, and third 12-month periods and Majestic Production has no obligation to sell to us at the 5% purchase discount. As these terms are non-binding, there are no consequences to the agreement if they are not met.
We intend to sell the products to Egg Tart Café’s sub-franchisees and other food retailers. In the year ended December 31, 2015, we sold $157,062 of bakery and bistro products and shipping supplies of which $79,796 was sold to Aw2gether (d/b/a Hongrykong), a related party. In the year ended December 31, 2014, we sold $197,417 of bakery and bistro products and packaging supplies to Aw2gether LLC and Ovo Café, Inc., both related parties. There is no written agreement governing these purchases and sales.
Our Business Strategies
Our mission is to introduce and promote Hong Kong style cuisine to the U.S. market. Royal Bakery and its sub-franchisor, Egg Tart Café, will continuously develop signature products and sign up sub-franchisees or an online catering operation by Egg Tart Café.
Description of Current Operations
The Department of Corporations in California approved our franchisor application on September 12, 2012. We signed up Egg Tart Café as our sub-franchisor on October 3, 2012. Egg Tart Café also received its sub-franchisor status which was approved by the California Department of Business Oversight (previously known as California Department of Corporation) on December 4, 2013.
However, after our sub-franchise sold its restaurant operation we agreed to sell the brand name to the same buyer. We are no longer committed to promote Ovo Café’s franchise operation. Egg Tart Café still owns Majestic Production of Peninsula LLC (“Majestic Production”) the central producer that produces bakery and café products. RBSTC purchases products produced at Majestic Production and resells them at a profit to food retailers, including Egg Tart Café’s sub-franchisees restaurants and food truck.
On October 3, 2012, we entered into a Sub-Franchisor Agreement for $50,000 with Egg Tart Café which grants it an exclusive right to sign up sub-franchisees using Ovo Cafés brand for their restaurants in the United States. Royal Bakery will collect $10,000 of the franchise fee from Egg Tart Café on the anniversary date of the agreement or when Egg Tart Café opens a new restaurant or signs up a sub-franchisee and opens a new restaurant. Under the terms of an amended agreement dated April 11, 2014, Royal Bakery is entitled to (i) a monthly royalty of 30% of all royalty proceeds that Egg Tart Café receives from its sub-franchisee restaurants and (ii) one-time sub-franchisee fees ranging from $5,000 to $14,500 depending on the physical size of the sub-franchisee. These one-time sub-franchisee sign up fees are not received until they exceed the $50,000 sub-franchisor fee received from Egg Tart Café. The agreement is for a term of ten years. We earned royalty fees totaling $402 and $8,012 for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015, we recorded a direct write-off to accounts receivable related parties and bad debt expense for the remaining $20,000 due from Egg Tart Cafe.
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Competition
The restaurant industry, including the quick service restaurant segment, is highly competitive. Our restaurants will compete with a large number of other fast food restaurants in the areas in which they operate. Many of these restaurants are owned and operated by regional and national restaurant chains, many of which have greater financial resources and experience than we do.
We may be at a competitive disadvantage to other restaurant chains with greater name recognition and marketing capability. Furthermore, most of our competitors in the fast-food business operate more restaurants, have been established longer, and have greater financial resources and name recognition than we do. There is also active competition for management personnel, as well as for attractive commercial real estate sites suitable for restaurants.
Government Regulation
Each restaurant will be subject to the regulations of various health, sanitation, safety and fire agencies in the jurisdiction in which the restaurant is located. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant. We do not anticipate that federal and state environmental regulations will have a material effect on our operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations. We are subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime, and other working conditions. In addition, our sub-franchisees will be subject to the Americans With Disabilities Act, which requires restaurants and other facilities open to the public to provide for access and use of facilities by the handicapped.
We are also subject to federal and state laws regulating franchise operations, which vary from registration and disclosure requirements in the offer and sale of franchises to the application of statutory standards regulating franchise relationships. Many state franchise laws impose restrictions on the franchise agreements, including limitations on non-competition provisions and the termination or non-renewal of a franchise. Some states require that franchise materials be registered before franchises can be offered or sold in that state.
Liability and Insurance
We have not purchased any liability insurance at this moment.
Employees
We currently have no full or part-time employees. All of the Board members are helping to develop the Company.
Raw Materials
The provision of our services does not depend on any raw materials. Our subsidiary RBSTC is placing orders to Majestic of Peninsula, the central kitchen to prepare the raw materials for our customers.
Properties
We do not own any real estate or other properties. We began leasing our office from Majestic Production for $3,500 a month pursuant to a month-to-month lease. We began to pay monthly lease payments on April 1, 2013. From March 1, 2014, the monthly lease payment was changed from $3,500 to $2,000. The leased space is approximately 3,600 square feet, including 1,000 square office space and 2,600 square feet of warehouse for our subsidiary RBSTC to store merchandise for reselling to other parties. From October 1, 2014, we have reduced further to only sub-lease 500 sq ft of office space from Majestic Production of Peninsula, LLC and the monthly rent has been reduced to $500.
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Legal Proceedings
Management is not aware of any legal proceedings contemplated by any government authority or any other party involving our business. As of the date of this filing, no director, officer or affiliate is: (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceeding. Management is not aware of any other legal proceedings pending or threatened against us.
OUR EXECUTIVE OFFICES
Our executive offices are located at 407A Old County Road, Belmont, California 94002.
| ITEM 1A. | RISK FACTORS |
As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Our current business address is 407A Old County Road, Belmont, California 94002. We believe that this space is adequate for our current needs. Our telephone number is (650) 530-0368.
| ITEM 3. | LEGAL PROCEEDINGS |
We are not currently involved in any legal proceedings and we are not aware of any pending or potential legal actions.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not Applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION
Since December 28, 2014 our shares of common stock have been quoted on the OTC Bulletin Board and the OTCPink tier of the OTC Markets Group, Inc. under the stock symbol “RYBH”. The following table shows the reported high and low closing bid prices per share for our common stock based on information provided by the OTCPink. The over-the-counter market quotations set forth for our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| BID PRICE PER SHARE | ||||||||
| HIGH | LOW | |||||||
| Three Months Ended December 31, 2015 | $ | 0.61 | $ | 0.61 | ||||
| Three Months Ended September 30, 2015 | $ | 0.61 | $ | 0.61 | ||||
| Three Months Ended June 30, 2015 | $ | 0.00 | $ | 0.00 | ||||
| Three Months Ended March 31, 2015 | $ | 0.00 | $ | 0.00 | ||||
| Three Months Ended December 31, 2014 | $ | 0.00 | $ | 0.00 | ||||
HOLDERS
As of December 31, 2015 the Company had 14,383,000 shares of common stock issued and outstanding held by approximately 65 holders of record.
DIVIDENDS
Historically, we have not paid any dividends to the holders of our common stock and we do not expect to pay any such dividends in the foreseeable future as we expect to retain our future earnings for use in the operation and expansion of our business.
TRANSFER AGENT
Our transfer agent is VStock Transfer, LLC (“VStock Transfer”), whose address is 18 Lafayette Place, Woodmere, New York. VStock Transfer’s telephone number is (212) 828-8436.
RECENT SALES OF UNREGISTERED SECURITIES
None.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have not established any compensation plans under which equity securities are authorized for issuance.
PURCHASES OF EQUITY SECURITIES BY THE REGISTRANT AND AFFILIATED PURCHASERS
We did not purchase any of our shares of common stock or other securities during the year ended December 31, 2015.
SHAREHOLDERS AGREEMENT
All of the Company’s current shareholders are party to a shareholders’ agreement, dated June 8, 2011 (the “Shareholders Agreement”). The following is a summary of the material terms of the Shareholders Agreement:
| ● | The number of Directors is set at three (3), subject to modification by a resolution of the Board of Directors. | |
| ● | The Board has broad discretionary powers subject to no limitations save applicable sections of the Shareholders Agreement. | |
| ● | Any knowing violations or intentional/willful/wanton act that causes damage to the Company could result in the forced sale of your Shares. | |
| ● | The inability of the Company to lawfully make purchases back shall not excuse either the Company or the seller from that provision, instead it tolls until the Company is legally able to make such purchase. | |
| ● | The authorization of new Shares is contingent on an affirmative vote of a super majority (67% of the board of directors). | |
| ● | Arbitration is the exclusive method by which any and all disputes are to be resolved. | |
| ● | In order to amend the shareholders agreement a super majority (67%) of the Company’s outstanding voting stock is required. |
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| ITEM 6. | SELECTED FINANCIAL DATA |
As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
Royal Bakery Holdings, Inc. was incorporated in the State of Delaware on June 7, 2011. Royal Bakery is currently located in Belmont, California, and is a holding company with its core business as a bakery and bistro and is also a franchisor.
Royal Bakery Holdings, Inc. has a wholly-owned subsidiary, Royal Bakery Sourcing and Trading Corp. (“RBSTC”), which was incorporated on August 20, 2013 under the laws of the State of California. RBSTC is an operating arm to purchase the bakery and bistro products from suppliers and resell the bakery and bistro products to the food retailers and franchisees. Currently, the principal supplier is Majestic Production of Peninsula, LLC (“Majestic Production”), the operator of Royal Bakery’s acting central kitchen and which is 100% owned by Egg Tart Café United Holdings, LLC (“Egg Tart Café”) with whom Royal Bakery has a sub-franchisor agreement, and which beneficially owns about 18% of our common stock.
RECENT ACTIVITIES
Our franchisee, Ovo Café, Inc. sold its food truck on December 31, 2014 and its restaurant at 171 Second Street, San Francisco on February 1, 2015.
The Hongrykong food truck and the Ovo Café restaurant order their food and drink products through our subsidiary Royal Bakery Sourcing and Trading, Inc. Therefore, we still placed orders to Majestic Production of Peninsula to support the food truck and Ovo Café through November 2, 2015 at which time we ceased sales activity. However, we are still working with Egg Tart Café United Holdings to identify other opportunities for food distribution.
We are considering initiating another food distribution operation to utilize our existing central kitchen. We presently plan that the prospective distribution could go through mobile units and or through online ordering services.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management 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 statements, and reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from these estimates.
Principles of Consolidation
The books and records of the parent company Royal Bakery Holdings, Inc. have been consolidated with the records of the wholly-owned subsidiary, Royal Bakery Sourcing and Trading Corp. as of December 31, 2015 and 2014. All of the inter-company transactions have been eliminated, upon consolidation.
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Franchise and License Operations
The Company executes franchise or license agreements for each unit operated by other parties which set out the terms of our arrangement with the franchisee or licensee. The franchise and license agreements typically require the franchisee or licensee to pay an initial, non-refundable fee and continuing fees based upon a percentage of sales. Subject to the Company’s approval and franchisee’s payment of renewal fee, a franchisee may generally renew the franchise agreement upon its expiration.
Revenue Recognition
Income from the franchisees includes initial fees, continuing fees and renewal fees. The Company recognizes initial fees received from a franchisee as revenue when the Company has performed substantially all initial services required by the franchise agreement, which is generally upon the opening of a restaurant. The Company recognizes continuing fees based upon a percentage of franchisee sales. The Company recognizes renewal fees when a renewal agreement with a franchisee becomes effective. Revenue from product sales are recognized when the food, beverage products, and packaging supplies are sold.
Inventory
Inventories consist of finished goods (packaging supplies) and are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management’s analysis of inventory levels and future sales forecasts. At December 31, 2015, the company wrote off $15,541 of obsolete and slow moving inventory. There was no provision recorded for the year ended December 31, 2014. Shipping costs are included in the cost of products purchased.
Amortization
Intangible assets are stated at cost and are amortized using the straight-line method over their estimated useful lives.
Impairment of Long-Lived Asset
We review our long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the future use and disposal of the related assets or group of assets to their respective carrying amounts. Impairment, if any, is measured as the excess of the carrying amount over the fair value based on market value (when available) or discounted cash flows of those assets, and is recorded in the period in which the determination is made. These tests were performed for the year ended December 31, 2014 and it was determined that the carrying value of the asset was impaired. Accordingly, an impairment expense for the year ended December 31, 2014 amounting to $15,187 was recognized.
RESULTS OF OPERATIONS
For the years ended December 31, 2015 and 2014
For the year ended December 31, 2015, we generated revenues of $157,464. The revenues are derived from wholesale revenues of $157,062 and royalty revenues of $402. For the year ended December 31, 2014, we generated revenues of $255,855, and such revenues were derived from wholesale revenues of $197,843, franchise revenues of $50,000, and royalty revenues of $8,012.
For the years ended December 31, 2015 and 2014, our costs of wholesale revenues amounted to $164,606 and $189,998, respectively resulting in a gross loss of $7,142 and a gross profit of $ $65,857 for the years then ended.
For the year ended December 31, 2015, we incurred expenses of $127,792, consisting of legal and professional of $75,562, rent of $6,000, and general and administrative expenses of $46,230. For the year ended December 31, 2014, we incurred expenses of $241,121, consisting of legal and professional of $148,941, rent of $22,500, general and administrative expenses of $54,593 and impairment of intangible asset of $15,187.
We incurred net losses of $134,762 and $174,797 for the years ended December 31, 2015 and 2014, respectively.
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The following table provides selected financial data about our company for the years ended December 31, 2015 and 2014.
| December 31 | ||||||||
| Balance Sheet Data | 2015 | 2014 | ||||||
| Cash | $ | 15,773 | $ | 5,780 | ||||
| Total Assets | $ | 18,089 | $ | 142,002 | ||||
| Total Liabilities | $ | 45,351 | $ | 39,192 | ||||
| Shareholders’ Equity (deficiency) | $ | (27,262 | ) | $ | 102,810 | |||
GOING CONCERN
Royal Bakery Holdings Inc. is a development stage company and currently has limited operations. Our independent auditor has issued an audit opinion for Royal Bakery which includes a statement raising substantial doubt as to our ability to continue as a going concern.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance at December 31, 2015 was $15,773, our total current assets were $18,089 and our total current liabilities were $45,351 resulting in a working capital deficit of $27,262. Total expenditures over the next 12 months are expected to be approximately $230,000. If we experience a shortage of funds prior to generating revenues from operations we may utilize funds from our director, who has informally agreed to advance funds to allow us to pay for operating costs, however they have no formal commitment, arrangement or legal obligation to advance or loan funds to us. Management believes our current cash balance will not be sufficient to fund our operations for the next twelve months.
PLAN OF OPERATION
Our plan of operations over the 12-month period consists of creating a new brand and reselling bakery and food products to wholesalers and retailers. We are planning to get into the online catering businesses since we have contracted the central kitchen in Belmont, California.
In connection with our business of reselling bakery and food products, we will monitor the quality of the products we purchase, a substantial portion of which are produced by Majestic Production, which is owned by Egg Tart Café. If necessary, we will assist Majestic Production in refining the menu and providing technical assistance to improve its productivity. Although we are not required to do so, we believe that it is in our best interest to coordinate closely with Majestic Production and share our expertise if it can improve the quality of the food offered to our customers.
On a timing level, we anticipate that we will take the following actions over the following periods:
| ● |
In the 180days from December 31, 2015, we will work with Egg Tart Café to find a brand to develop our franchise operation. We expect to develop a smaller operation then a full services restaurant, such as a deli and café type of food business. We have developed the website and will be ready for online catering operation. |
| ● | In the 270 days, we hope we can establish another brand for our catering operation, and review the performance of this online catering business. |
| ● | In the 360 days, management hopes to evaluate the result of our planning operation and assist Egg Tart Café to fine tune this business model, particular the online catering operation. |
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We plan to develop an online food delivery service and a line of grocery items. We plan to bottle our sauces, such as curry sauce, cream sauce, tomato sauce and black pepper sauce as grocery items. We believe that these products will help maintain operations. We plan to work with a mobile grocery truck operator to sell the sauces and our existing frozen food items. We currently provide food and grocery products to this mobile grocery operator and use online ordering to pre-arranged pick up locations for the customers.
We believe the above mentioned programs have the potential to help Royal Bakery to generate income to maintain operations.
Our future is dependent upon our ability to obtain further financing, the successful development of our planned Food services, a successful marketing and promotion program, and achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There are no assurances that we will be able to obtain further funds required for our continued operations. Even if additional financing is available, it may not be available on terms we find favorable. At this time, there are no anticipated sources of additional funds in place. Failure to secure the needed additional financing will have an adverse effect on our ability to remain in business.
OFF BALANCE SHEET TRANSACTIONS
We have had no off balance sheet transactions.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| Financial Statements | |
| Index to Consolidated Financial Statements | |
| Report of Independent Registered Public Accounting Firm | F-1 |
| Consolidated Balance Sheets | F-2 |
| Consolidated Statements of Operations | F-3 |
| Consolidated Statements of Changes in Stockholders' Equity (Deficiency) | F-4 |
| Consolidated Statements of Cash Flows | F-5 |
| Notes to Consolidated Financial Statements | F-6 |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Royal Bakery Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Royal Bakery Holdings, Inc. and Subsidiary as of December 31, 2015 and 2014, the related consolidated statements of operations, changes in stockholders’ equity (deficiency), and cash flows for each of the years in the two-year period ended December 31, 2015. Royal Bakery Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Bakery Holdings, Inc. and Subsidiary as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred a net loss of $134,762 for the year ended December 31, 2015 and has an accumulated deficit of $530,052 at December 31, 2015, and there are uncertain conditions the Company faces relative to its ability to obtain capital, generate revenue, and generate profits and cash flows from operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Cowan, Gunteski & Company, P.A.
April 14, 2016
Tinton Falls, NJ
Reply to: 730 Hope Road Tinton Falls NJ 07724 Phone: 732.676.4100 Fax: 732.676.4101
40 Bey Lea Road, Suite A101 Toms River NJ 08753 Phone: 732.349.6880 Fax: 732.349.1949
Member of CPAmerica International
Auditors of SEC Registrants Under the PCAOB
www.CowanGunteski.com
| F-1 |
Royal Bakery Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 15,773 | $ | 5,780 | ||||
| Accounts Receivable - Related Parties | 15 | 116,036 | ||||||
| Inventory | 2,301 | 17,616 | ||||||
| Total Current Assets | 18,089 | 139,432 | ||||||
| Other Assets | ||||||||
| Intangible Asset, net | - | 2,570 | ||||||
| Total Other Assets | - | 2,570 | ||||||
| Total Assets | $ | 18,089 | $ | 142,002 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses - Related Parties | $ | 16,316 | $ | 29,215 | ||||
| Accounts Payable and Accrued Expenses - Others | 29,035 | 9,977 | ||||||
| Total Current Liabilities | 45,351 | 39,192 | ||||||
| Total Liabilities | 45,351 | 39,192 | ||||||
| Stockholders' Equity (Deficiency) | ||||||||
| Common Stock, authorized 25,000,000 shares, par value $0.0001, 14,383,000 shares issued and outstanding at December 31, 2015 and 2014, respectively | 1,438 | 1,438 | ||||||
| Additional paid-in-capital | 501,352 | 496,662 | ||||||
| Accumulated deficit | (530,052 | ) | (395,290 | ) | ||||
| Total Stockholders' Equity (Deficiency) | (27,262 | ) | 102,810 | |||||
| Total Liabilities and Stockholders' Equity (Deficiency) | $ | 18,089 | $ | 142,002 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-2 |
Royal Bakery Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Wholesale Revenues, Related Parties | $ | 79,796 | $ | 197,843 | ||||
| Wholesale Revenues, Others | 77,266 | - | ||||||
| Franchise Revenues, Related Party | - | 50,000 | ||||||
| Royalty Revenues, Related Party | 402 | 8,012 | ||||||
| Total Revenues | 157,464 | 255,855 | ||||||
| Costs of Wholesale Revenues | (164,606 | ) | (189,998 | ) | ||||
| Gross Profit (Loss) | (7,142 | ) | 65,857 | |||||
| Operating Expenses | ||||||||
| Legal and Professional | 75,562 | 148,841 | ||||||
| Rents | 6,000 | 22,500 | ||||||
| General and Administrative | 46,230 | 54,593 | ||||||
| Impairment of Intangible Asset | - | 15,187 | ||||||
| Total Operating Expenses | 127,792 | 241,121 | ||||||
| Operating Loss | (134,934 | ) | (175,264 | ) | ||||
| Interest Income, Related Party | 172 | 467 | ||||||
| Net Loss | $ | (134,762 | ) | $ | (174,797 | ) | ||
| Net Loss per share - | ||||||||
| Basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average number of common shares outstanding | 14,383,000 | 14,383,000 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-3 |
Royal Bakery Holdings, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
For the Years Ended December 31, 2015 and 2014
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders' Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficiency) | ||||||||||||||||
| Balance as of January 1, 2014 | 14,383,000 | $ | 1,438 | $ | 496,662 | $ | (220,493 | ) | $ | 277,607 | ||||||||||
| Net loss for the year ended December 31, 2014 | - | - | - | (174,797 | ) | (174,797 | ) | |||||||||||||
| Balance as of December 31, 2014 | 14,383,000 | 1,438 | 496,662 | (395,290 | ) | 102,810 | ||||||||||||||
| Accounts Payable and accrued expenses-related party forgiven | - | - | 2,365 | - | 2,365 | |||||||||||||||
| Contributed Services | - | - | 2,325 | - | 2,325 | |||||||||||||||
| Net loss for the year ended December 31, 2015 | - | - | - | (134,762 | ) | (134,762 | ) | |||||||||||||
| Balance as of December 31, 2015 | 14,383,000 | $ | 1,438 | $ | 501,352 | $ | (530,052 | ) | $ | (27,262 | ) | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-4 |
Royal Bakery Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (134,762 | ) | $ | (174,797 | ) | ||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
| Amortization | 70 | 1,614 | ||||||
| Bad debt expense | 42,235 | - | ||||||
| Inventory write-down to fair market value | 15,541 | - | ||||||
| Impairment of intangible asset | - | 15,187 | ||||||
| Contributed services | 2,325 | - | ||||||
| Changes in Assets and Liabilities: | ||||||||
| (Increase) Decrease in Accounts receivable - related parties | 96,021 | (115,504 | ) | |||||
| (Increase) Decrease in Accounts receivable - others | (22,235 | ) | - | |||||
| (Increase) Decrease in Inventory | (226 | ) | (17,616 | ) | ||||
| Increase (Decrease) in Accounts payable and accrued expenses - related parties | (10,534 | ) | 29,215 | |||||
| Increase (Decrease) in Accounts payable and accrued expenses - others | 19,058 | (38,931 | ) | |||||
| Increase (Decrease) in Unearned revenue - related parties | - | (20,000 | ) | |||||
| Net cash provided by (used in) operating activities | 7,493 | (320,832 | ) | |||||
| Cash Flows from Investing Activities | ||||||||
| Payments for intangible asset | - | (7,750 | ) | |||||
| Proceeds from sale of intangible asset | 2,500 | - | ||||||
| Net cash provided by (used in) investing activities | 2,500 | (7,750 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Net cash provided by financing activities | - | - | ||||||
| Net increase (decrease) in cash | 9,993 | (328,582 | ) | |||||
| Cash, at beginning of year | 5,780 | 334,362 | ||||||
| Cash, at end of year | $ | 15,773 | $ | 5,780 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | - | $ | - | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Noncash financing activities: | ||||||||
| Accounts payable and accrued expenses-related parties converted to additional paid-in-capital | $ | 2,365 | $ | - | ||||
| Contributed services credited to additional paid-in-capital | $ | 2,325 | $ | - | ||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-5 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 1. | Nature of Operations and Going Concern |
Royal Bakery Holdings, Inc. (“Royal Bakery”, or “Company”) was incorporated in the State of Delaware on June 7, 2011. Royal Bakery is currently located in Belmont, California, and is a holding company with its core business as a bakery and bistro franchisor.
Royal Bakery Holdings, Inc. has a wholly-owned subsidiary, Royal Bakery Sourcing and Trading Corp. (“RBSTC”), which was incorporated on August 20, 2013 under the laws of the State of California. RBSTC is an operating arm to purchase the bakery and bistro products from suppliers and resell the bakery and bistro products to the food retailers located in California. Currently, the principal supplier is Majestic Production of Peninsula, LLC (“Majestic Production”), the operator of Royal Bakery’s acting central kitchen and which is 100% owned by Egg Tart Café United Holdings, LLC (“Egg Tart Café”) with whom Royal Bakery has a franchise agreement to operate Ovo Cafes, and which beneficially owns about 18% of our common stock. On April 6, 2015, the Company sold the Ovo Cafe brand.
The Company is planning on developing another theme-styled restaurant business and to sell Franchises. The Company also plans to raise additional capital through the equity markets to support the development of the theme-styled restaurant.
The Company's activities are subject to significant risks and uncertainties, including failing to secure additional funding to develop the theme-styled restaurant.
Going Concern
As indicated in the accompanying consolidated financial statements, the Company incurred a net loss of $134,762 for the year ended December 31, 2015 and has an accumulated deficit of $530,052 at December 31, 2015. Management’s plans include the raising of capital through the equity markets to fund future operations and the generating of revenue through its franchise business. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations.
Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenues will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management 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 reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from these estimates.
| F-6 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 2. | Summary of Significant Accounting Policies (continued) |
Principles of Consolidation
The books and records of the parent company Royal Bakery Holdings, Inc. have been consolidated with the records of the wholly-owned subsidiary, Royal Bakery Sourcing and Trading Corp. as of December 31, 2015 and December 31, 2014. All of the inter-company transactions have been eliminated, upon consolidation.
Variable Interest Entities
The Company applies the guidance in ASC 810 relating to the accounting for variable interest entities (“VIE”). The enterprise that consolidates the VIE (the primary beneficiary) is defined as the enterprise with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The Company does not possess any ownership interests in its franchise entity or other entities. The franchise agreement is designed for the franchisor to provide the franchisee with technical support, know-how; thus, enabling the franchisee to control and oversee its operations, while the Company’s decision-making is related to protecting Royal Bakery’s brand and exploration of market elsewhere. On an ongoing basis, the Company evaluates its business relationships with its franchisee, suppliers, and other entities to identify potential variable interest entities. The Company has concluded that consolidation of any such entities is not appropriate for the periods presented.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2015 and 2014.
Accounts Receivable
Accounts receivable consist primarily of amounts due for franchise fees and royalties, and sales of wholesale food and packaging supplies, which are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts. The Company evaluates the trends in franchisee’ payment patterns, including review of specific delinquent accounts, changes in business conditions and external communications available about franchisee to estimate the level of allowance that is needed to address potential losses that the Company may incur due to the franchisee’s inability to pay. Accounts are considered delinquent or past due, if they have not been paid within the terms provided on the invoice. Delinquent account balances are written off after management has determined that the likelihood of collection is not probable.
The Company has recorded an allowance for doubtful accounts on accounts receivable others in the amount of $22,235 as of December 31, 2015. The allowance represents the entire balance of accounts receivable others at December 31, 2015. No allowance for doubtful accounts was recorded as of December 31, 2014 as all amounts were deemed collectible.
At December 31, 2015, the Company recorded a direct write-off to accounts receivable related parties and bad debt expense for the remaining $20,000 due from Egg Tart Cafe. There was no allowance for doubtful accounts receivable on accounts receivable related parties as of December 31, 2014.
| F-7 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 2. | Summary of Significant Accounting Policies (continued) |
Franchise and License Operations
The Company executes franchise or license agreements for each unit operated by other parties which set out the terms of our arrangement with the franchisee or licensee. The franchise and license agreements typically require the franchisee or licensee to pay an initial, non-refundable fee and continuing fees based upon a percentage of sales.
Subject to the Company’s approval and franchisee’s payment of a renewal fee, a franchisee may generally renew the franchise agreement upon its expiration.
Revenue Recognition
Income from the franchisees includes initial fees, continuing fees and renewal fees. The Company recognizes initial fees received from a franchisee as revenue when the Company has performed substantially all initial services required by the franchise agreement, which is generally upon the opening of a restaurant. The Company recognizes continuing fees based upon a percentage of franchisee sales. The Company recognizes renewal fees when a renewal agreement with a franchisee becomes effective. Revenues from product sales are recognized when the food, beverage products, and packaging supplies are sold.
Inventory
Inventories consist of finished goods (packaging supplies) and are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management’s analysis of inventory levels and future sales forecasts. At December 31, 2015, the Company wrote-off $15,541 of obsolete and slow moving inventory. There was no provision recorded for the year ended December 31, 2014.
Shipping costs are included in the cost of products purchased.
Amortization
Intangible assets are stated at cost and are amortized using the straight-line method over their estimated useful lives.
Impairment of Long-Lived Asset
We review our long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the future use and disposal of the related assets or group of assets to their respective carrying amounts. Impairment, if any, is measured as the excess of the carrying amount over the fair value based on market value (when available) or discounted cash flows of those assets, and is recorded in the period in which the determination is made. These tests were performed for the year ended December 31, 2014 and it was determined that the carrying value of the intangible asset was impaired. Accordingly, an impairment expense for the year ended December 31, 2014 amounting to $15,187 was recognized.
Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate estimated fair value because of the relatively short maturity of the instruments.
| F-8 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 2. | Summary of Significant Accounting Policies (continued) |
Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with the “Accounting for Income Taxes” Topic of the FASB ASC 740. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured by applying enacted tax rates and laws and are released in the years in which the 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 income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2015 and December 31, 2014, the Company had no recognized tax benefits.
The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits in interest expense and operating expenses respectively. The Company has not recorded any interest and penalties since its inception.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date was the first quarter of the Company’s year ending December 31, 2017. In August 2015, the FASB issued ASU No. 2015-14, "Revenue From Contracts with Customers" (Topic 606), which defers the effective date of ASU No. 2014-09 by one year. As a result, the effective date will now be the first quarter of the Company's year ending December 31, 2018. We have not determined the potential effect on the consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (ASU 2014-10). ASU 2014-10 removes all incremental financial reporting requirements regarding development-stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. In addition, ASU 2014-10 adds an example disclosure in Risks and Uncertainties (Topic 275) to illustrate one way that an entity that has not begun planned operations could provide information about risks and uncertainties related to the company’s current activities. ASU 2014-10 also removes an exception provided to development-stage entities in Consolidations (Topic 810) for determining whether an entity is a variable interest entity. The Company adopted the provisions of Topic 915 as of June 30, 2015. Topic 915 had no effect on the amounts reported in the consolidated financial statements. The revisions to Consolidation (Topic 810) are effective the first quarter of the Company’s year ending December 31, 2016. Early adoption is permitted.
| F-9 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 2. | Summary of Significant Accounting Policies (continued) |
Recently Issued Accounting Pronouncements (continued)
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" (ASU 2015-11). ASU 2015-11 requires inventory measured using the First-in, First-out ("FIFO") or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value being the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date will be the first quarter of the Company's year ending December 31, 2017. We have not determined the potential effect on the consolidated financial statements.
There are several other new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results.
| 3. | Intangible Asset |
Intangible asset consists of fees of $19,371 paid to an unrelated company to design and develop the Company’s franchisee branding asset. It is amortized on the straight-line method for 10 years. The Company began to amortize this asset from March 2014. The accumulated amortization was $1,684 as of April 6, 2015 (date of sale) and $1,614 as of December 31, 2014. An impairment expense of $15,187 was recorded as of December 31, 2014.
Amortization expense for the year ended December 31, 2015 and 2014 was $70 and $1,614, respectively.
On April 6, 2015, the Company entered into an agreement to sell the trademark and brand name Ovo Café for $2,500.
| 4. | Commitments |
The Company currently sub-leases from a related company its office in Belmont, CA. From April 1, 2013 to February 28, 2014, the monthly rental rate was $3,500. From March 1, 2014 through September 30, 2014, the monthly rate was $2,000. From October 1, 2014, the monthly rental rate was changed from $2,000 to $500. The Company had $6,000 and $22,500 of lease expense during the year ended December 31, 2015 and 2014, respectively.
On September 1, 2013, we entered into a ten-year agreement with Majestic Production under which we agree to buy and Majestic Production agrees to sell us products at a 5% discount off the regular sales price at which Majestic Production would sell to other third parties. To maintain this discount, the Company has agreed to purchase no less than $500,000 of products from Majestic Production during the first year, $750,000 the second year, and $1,000,000 the third year and thereafter, beginning from September 1, 2013. To date, the Company has not been able to meet these commitments.
| F-10 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 5. | Loss per Common Share |
Basic earnings (loss) per common share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Since the Company has only incurred losses, basic and diluted loss per share is the same. Furthermore, as of December 31, 2015 and 2014, there were no diluted shares outstanding.
| For the years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (134,762 | ) | $ | (174,797 | ) | ||
| Denominator: | ||||||||
| Weighted average common shares | 14,383,000 | 14,383,000 | ||||||
| Net loss attributable to the Company's common shares - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| 6. | Stockholders’ Equity |
Common Stock
On June 7, 2011, the Company authorized 25,000,000 shares of common stock at par value of $0.0001. The holders of common stock are entitled to one vote per share. As of December 31, 2015 and December 31, 2014, shares issued and outstanding are 14,383,000.
On November 30, 2015, the Company recorded an increase to additional paid-in-capital in the amount of $2,365 upon the forgiveness of accounts payable and accrued expenses-related parties by a shareholder in Egg Tart Cafe, which were accrued at December 31, 2014.
At December 31, 2015, the Company recorded an increase to additional paid-in-capital in the amount of $2,325 for professional services fees for the year ended December 31, 2015, which were contributed by a shareholder in Egg Tart Cafe.
| 7. | Related Party Transactions |
The Company incurred $7,054 and $32,204 for food product purchases from Wide J2 International for the year ended December 31, 2015 and 2014, respectively. Wide J2 International also provided consulting services to the Company amounting to $15,291 for the year ended December 31, 2014. No consulting services were provided for the year ended December 31, 2015. Wide J2 International is 100% owned by 7 individual shareholders of the Company (40% owned by Yam Ming Chong, 35% owned by Yue Kwan Chong, and 5% each owned by 5 other individual shareholders of the Company).
A shareholder in Egg Tart Cafe provided tax services to the Company. Tax service fees for the year ended December 31, 2015 in amount of $2,325 has been charged to additional paid-in-capital as they have been waived by this shareholder. Accounts payable and accrued expenses-related parties at December 31, 2014 included $2,365 due to this Egg Tart Cafe shareholder for prior tax services, of which $1,870 was charged to expense in the year ended December 31, 2014. On November 30, 2015, the amount payable of $2,365 was forgiven and the Company recorded an increase to additional paid-in-capital.
| F-11 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 7. | Related Party Transactions (continued) |
One staff from another shareholder owned company provided accounting service for the Company. The service fees amounted to $5,200 and $6,000 for the year ended December 31, 2015 and 2014. At December 31, 2015 and 2014, accounts payable and accrued expenses-related parties included $0 and $1,500 due to this company as service fee reimbursement.
The Company purchased $142,328 and $162,328 of food products from a food production wholesaler (“Majestic Production”) which is owned by Egg Tart Cafe for the year ended December 31, 2015 and 2014, respectively. Also, the Company sub-leases the office from Majestic Production and incurred $6,000 and $22,500 in lease expense during the year ended December 31, 2015 and 2014, respectively (see note 4). $16,316 and $25,112 are included in accounts payable and accrued expenses-related parties as of December 31, 2015 and 2014, respectively.
The Company has sales of $77,479 and $49,413 for the year ended December 31, 2015 and 2014, respectively to Aw2gether LLC, which is majority-owned by Nikki Ma, one of our Directors, our Secretary and our COO. The Company additionally has a receivable balance of $0 and $357 at December 31, 2015 and 2014, respectively.
The Company had sales of $148,004 and a receivable of $74,389 for the year ended December 31, 2014 and as of December 31, 2014, respectively from Ovo Cafe, Inc.. Ovo Cafe, Inc. was owned 9.4% by Winnie Sze Wing Cheung, one of our directors and shareholders and our Chief Financial Officer, 9.4% by Tommy Cheung, one of our directors and shareholders and our Chief Executive Officer, and 18.8% by Yam Ming Chong and Yue Kwan Chong, two major shareholders of the Company. Ovo Cafe, Inc. ceased to be a related party of the Company in January 2015 as these individuals sold their interest in Ovo Cafe, Inc.
The Company had sales of $2,317 and $423 to Majestic Production for the year ended December 31, 2015 and 2014, respectively. Included in accounts receivable at December 31, 2015 and 2014, was $0 and $626, respectively.
The Company has franchise revenues of $50,000 for the year ended December 31, 2014, and royalty revenues of $402 and $8,012 for the year ended December 31, 2015 and 2014, respectively from Egg Tart Cafe. Through December 31, 2015, Egg Tart Cafe has paid $30,000 of the $50,000 franchise fee. At December 31, 2015, the remaining $20,000 of accounts receivable has been written-off to bad debt expense as it will not be received. Included in accounts receivable at December 31, 2014 was $32,832. Egg Tart Cafe owns about 18% of the Company's common stock.
As of December 31, 2015, the Company has a receivable balance of $15 from a related affiliate.
| 8. | Income Taxes |
The Company’s deferred tax assets consist of the following at:
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Deferred income tax assets: | ||||||||
| Net operating loss carryforward | $ | 210,592 | $ | 156,172 | ||||
| Valuation allowance | (210,592 | ) | (156,172 | ) | ||||
| Deferred income tax assets | $ | 0 | $ | 0 | ||||
As of December 31, 2015, the Company had a net operating loss carry forward of $526,481, which is available to offset future taxable income through 2035. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon historical net losses and the Company being in the development stage, management believes that it is not more likely than not that the deferred tax assets will be realized and has provided a valuation allowance of 100% of the deferred tax assets. The valuation allowance increased by $54,420 and $67,975 in the year-ended December 31, 2015 and 2014, respectively.
| F-12 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 8. | Income Taxes (continued) |
A reconciliation of the statutory Federal tax rate to the effective tax rate is as follows:
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Statutory Federal tax rate | (34 | %) | (34 | %) | ||||
| State income taxes (net of Federal benefit) | (6 | %) | (6 | %) | ||||
| Effect of valuation allowance | 40 | % | 40 | % | ||||
| Effective tax rate | 0 | % | 0 | % | ||||
Management feels that the Company does not have any tax positions that will result in a material impact on the Company’s consolidated financial statements because of the adoption of ASC 740. However, management’s conclusion may be subject to adjustment at a later date based on factors including additional implementation guidance from the Financial Accounting Standards Board and ongoing analysis of tax laws, regulations and related interpretations.
The Company and its subsidiaries file U.S. federal and state income tax returns. There are no on-going examinations of income tax returns filed by the Company. U.S. federal income tax returns ending after 2011 are subject to examination by the Internal Revenue Service. State income tax returns for tax years ending after 2011 are subject to examination by related state tax authorities.
| 9. | Franchise Agreement with Egg Tart Café |
The Company had a franchise agreement with Egg Tart Café, a shareholder of Royal Bakery that has an 18% interest in the Company and is classified as a related party, for the development of Hong Kong style cafes under brand named Ovo Café. The agreement is for 10 years and is renewable by Egg Tart Café. The agreement, which was dated October 3, 2012, called for a non-refundable sub-franchise fee of $50,000 to be paid to the Company upon signing the sub-franchise agreement. All initial expenditures to begin operations are the responsibilities of Egg Tart Café.
Prior to opening, the Company provided Egg Tart Café a defined territory, which includes North and South America. The training period is up to 15 hours. Egg Tart Café received a loaned copy of the Company’s Confidential Policy Manual, and samples of advertising and marketing materials.
The agreement was amended to indicate that, due to delays in Egg Tart Café signing up its sub-franchisees, the sub-franchise fee will consist of $10,000 due upon signing the agreement and remainder as Egg Tart Café signs up additional sub-franchisees to open the cafes under brand named Ovo Cafés. In September 2013, this agreement was further amended to indicate that upon payment of the $10,000 made in January 2013, Egg Tart Café will pay the greater of $10,000 or $10,000 per franchisees established by Egg Tart Café by the end of each year, until the remaining $40,000 sub-franchise fee is paid off. Egg Tart Café paid another $10,000 sub-franchise fee to the Company in December 2013 and April 2015. The remaining balance of $20,000 was written-off to bad debt expense at December 31, 2015 as it will not be received.
On January 10, 2014, Egg Tart Café signed a food truck as sub-franchisee. On January 31, 2014, Egg Tart Café signed a café restaurant as sub-franchisee. This food truck began its business operation in January 2014 and this café restaurant began its business operation in February 2014. Egg Tart Café performed all the required pre-opening services for this food truck and this café restaurant, and recognized the revenue from these two sub-franchisees. As such, the Company recognized the $50,000 revenue from Egg Tart Café in January 2014.
| F-13 |
Royal Bakery Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2015
| 9. | Franchise Agreement with Egg Tart Café (continued) |
On April 11, 2014, the Company and Egg Tart Café agreed to amend the Franchise Agreement entered on October 3, 2012 to indicate that, the Company is entitled to (i) a monthly royalty equal to thirty percent (30%) of all royalty proceeds Egg Tart Café receives from Egg Tart Café’s sub-franchisee and (ii) one-time sub-franchisee fees ranging from $5,000 to $14,500 depending on the physical size of the sub-franchisee.
On April 6, 2015, upon the Company's sale of the Ovo Cafe trademark and brand name, the Company no longer holds the rights to the Franchise Agreement signed by Egg Tart Cafe.
| 10. | Concentrations |
The Company had one sub-franchisor Egg Tart Café accounting for 100% of the franchise revenues and royalty revenues for the year ended December 31, 2015 and 2014, and this sub-franchisor accounted for $0 and $32,832 representing 0% and 28% of accounts receivable as of December 31, 2015 and 2014, respectively. This former sub-franchisor is a related party of the Company (see Note 7).
The Company purchased $142,328 and $162,328 accounting for 95% and 79% of food and beverage products and packaging supplies from a food production wholesaler, Majestic Production, for the year ended December 31, 2015 and 2014, respectively. Majestic Production accounts for $16,316 and $25,112, amounting to 54% and 64% of accounts payable and accrued expenses at December 31, 2015 and December 31, 2014, respectively. Majestic Production is a related party of the Company (see Note 7).
The Company purchased $7,054 and $32,204 accounting for 5% and 16% of its food, beverage and packaging supplies from Wide J2 International, Ltd. for the year ended December 31, 2015 and 2014, respectively (see Note 7).
The Company sold $77,479 and $49,413 to a food truck, Aw2gether (“Aw2gether”) DBA Hongry Kong, accounting for 49% and 25% of wholesale revenue for the year ended December 31, 2015 and 2014, respectively, and Aw2gether accounted for $0 and $357, amounting to 0% of accounts receivable as of December 31, 2015 and 2014, respectively. Aw2gether is an indirectly related party of the Company (see Note 7).
The Company sold $68,276 and $148,004 to Ovo Cafe, Inc. accounting for 43% and 75% of total wholesale revenues for the year ended December 31, 2015 and 2014, respectively. Ovo Cafe, Inc. accounted for $21,652 and $82,221 representing 51% and 71% of total accounts receivable at December 31, 2015 and 2014, respectively. Ovo Cafe, Inc. was a related party until January 2015 at which time shareholders of the Company divested themselves of their interests in Ovo Cafe, Inc.
| 11. | Subsequent Events |
The Company evaluated subsequent events, which are events or transactions that occurred after December 31, 2015 through the date of the issuance of the accompanying consolidated financial statements.
| F-14 |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal financial officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our internal controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the fiscal year covered by this report. Disclosure controls and procedures means that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective as of December 31, 2015.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
As of December 31, 2015, management assessed the effectiveness of our internal control over financial reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s Principle Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles (“US GAAP”) and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; |
| ● | Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on that evaluation, completed only by Winnie Sze Wing Cheung, our Chief Financial Officer, who also serves as our principal financial officer and principal accounting officer, Ms. Cheung concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below.
| 13 |
This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses. The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (i) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (ii) inadequate segregation of duties consistent with control objectives; and (iii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements, (iv) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by Ms. Chueng, our Chief Financial Officer, who also serves as our principal financial officer and principal accounting officer, in connection with the review of our financial statements as of December 31, 2015.
Management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year ended December 31, 2015 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
| 14 |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Our executive officers and directors and their respective ages as of December 31, 2015 are as follows:
| Name | Age | Position with the Company | ||
| Tommy Yu Yan Cheung | 64 | CEO and Chairman of the Board | ||
| Winnie Sze Wing Cheung | 44 | Chief Financial Officer, Director | ||
| Nikki Ma | 28 | Secretary of the Board, Chief Operating Officer, Director |
Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years.
Tommy Yu Yan Cheung, CEO and Chairman of the Board
Mr. Tommy Cheung is the Chairman of Royal Bakery Holdings, Inc. since June 2011. Mr. Cheung has been in the food and beverage industry for over 30 years and is currently a member of the Legislative Council of Hong Kong representing the catering industry in functional constituencies seats. Mr. Cheung received his M.B.A at Pepperdine University. He is a businessman and chairman of trading and investment companies. In addition, he is involved in numerous food and beverage associations such as The Association of Restaurant Managers Ltd, The Hong Kong Catering Industries Association Ltd and the Confre'reie De La Chaine des Rotisseurs. Mr. Cheung's knowledge and experience has led him to be named the Chairman of Royal Bakery Holdings, Inc. Mr. Cheung’s appointment as our CEO is temporary until we are able to locate a CEO based in the United States.
Winnie Sze Wing Cheung, Chief Financial Officer, Director
Ms. Winnie Sze Wing Cheung is the Chief Financial Officer for Royal Bakery Holdings, Inc. since June 2011. Ms. Cheung graduated at the University of South Australia majoring in Business Computing. She started her own career in the China Down Center Group Ltd. specializing in the down outerwear business since 1978. In 1992, the company reconstructed and started Dickinson Garment Group Ltd and has become known for exporting to the United States and other countries. Dickinson has branded Arctica and now sells to the United States, Hong Kong and China. The Company sells over the Internet with sales in Moscow and Sweden. Ms. Cheung is also the Executive Director of CDSR Development Group Ltd., an investment company involved in supply chain businesses that links Hong Kong, China & Southeast Asia together. Currently, Ms. Cheung holds several directorships in several private companies in the United States, Hong Kong, and China engaged primarily in production and marketing. Ms. Cheung’s appointment as our CFO is temporary until we are able to locate a CFO based in the United States.
| 15 |
Nikki Ma, Chief Operation Officer, Secretary of the Board, Director
Ms. Nikki Ma is the Secretary of the Board for Royal Bakery Holdings, Inc. since June 2011 and its Chief Operating Officer since February 2014. Ms. Ma holds a Bachelor's Degree in Marketing from San Francisco State University. Ms. Ma was the marketing manager for South Bay division of Infinitel Communications, one of the largest Asian owned cellular communication retail chain stores in Northern California. She is the founder and director of Genik Real Estate & Investment licensed with the State of California as a Real Estate Broker. Additionally, Genik consults their clients in becoming a publicly trading company. In January 2012, Ms. Ma started Aw2gether LLC, specializing in the mobile food catering industry.
TERM OF OFFICE
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until they resign or are removed from the board in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until they resign or are removed from office by the Board of Directors.
DIRECTOR INDEPENDENCE
Our board of directors is currently composed of three members, and such members do not qualify as independent directors in accordance with the published listing requirements of the NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our board of directors has not made a subjective determination as to each director that no relationships exist which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our board of directors made these determinations, our board of directors would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.
CERTAIN LEGAL PROCEEDINGS
No director, person nominated to become a director, executive officer, promoter or control person of our company has, during the last ten years: (i) been convicted in or is currently subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any federal or state securities or banking or commodities laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy or for the two years prior thereto.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
Other than our officers and directors, we currently have no other significant employees.
| 16 |
AUDIT COMMITTEE AND CONFLICTS OF INTEREST
Since we do not have an audit or compensation committee comprised of independent directors, the functions that would have been performed by such committees are performed by our directors. The Board of Directors has not established an audit committee and does not have an audit committee financial expert, nor has the Board of Directors established a nominating committee. The Board is of the opinion that such committees are not necessary since the Company is an early development stage company and has only three directors, and to date, such directors have been performing the functions of such committees. Thus, there is a potential conflict of interest in that our directors and officers have the authority to determine issues concerning management compensation, nominations, and audit issues that may affect management decisions.
There are no family relationships among our directors or officers. Other than as described above, we are not aware of any other conflicts of interest with any of our executive officers or directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. Based on our review of filings made on the SEC website, and the fact of us not receiving certain forms or written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the year ended December 31, 2015, none of our executive officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
We have not implemented a formal policy or procedure by which our stockholders can communicate directly with our Board of Directors. Nevertheless, every effort has been made to ensure that the views of stockholders are heard by the Board of Directors or individual directors, as applicable, and that appropriate responses are provided to stockholders in a timely manner. We believe that we are responsive to stockholder communications, and therefore have not considered it necessary to adopt a formal process for stockholder communications with our Board. During the upcoming year, our Board will continue to monitor whether it would be appropriate to adopt such a process.
CODE OF ETHICS
Our Board of Directors adopted our Code of Ethics in June 2013. The Code of Ethics states the principles and expectations governing the behavior of individuals within our organization. It describes the minimum requirements for conduct, and behavioral expectations rather than specific activities.
The purpose of the Code is to provide guidance and set common ethical standards that each of Royal Bakery’s management and employees must adhere to with highest professional standard and on a consistent basis. Many of the policies in this Code are based on various federal and state laws and regulations. Others are based on business and ethical principles. The Code helps Royal Bakery to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of our business.
Code of Ethics of our Business
Duties to Employees: It is the policy of Royal Bakery to be an equal opportunity employer, and we welcome diversity in our workforce. All terms and conditions of employment will be made without consideration of religion, race, color, age, national origin, marital status, and any other classifications protected by federal, state or local law and regulation. Our policy is to treat every employee with dignity and respect.
Duties to Sub-Franchisor and Sub-Franchisees: Royal Bakery will be fair and truthful and maintain positive relationships with our sub-franchisor, Egg Tart Café United Holdings, LLC, and Egg Tart Café’s sub-franchisees. We expect our management and employees to understand the importance of using professional integrity in our business dealings with our franchisor and franchisees. We will create a culture of leadership and also, provide an open, supportive environment to encourage franchisees to share their ideas with us and to build up a team work between Royal Bakery and the franchisee community.
| 17 |
Duties to the Public: We will dedicate our effort to advancing our restaurants while promoting the highest professional and ethical standards to serve our customers. Our commitment to our customers is as follows:
| 1. | Food–Safety - We will have a firm commitment to food safety, always placing food safety above financial concerns, and provide the highest product quality standards. |
| 2. | Supplier Standards - We shall be familiar with our suppliers and perform due diligence before signing a contract with a new supplier. |
| 3. | Public Health – We shall use fresh, healthy ingredients for our products and not use harmful additives to minimize the growing health epidemic. |
| 4. | Friendly Environment – We shall present a clean, attractive, comfortable and friendly service to our customers. In keeping with this spirit, we strive to avoid unsafe, unhealthy or hazardous environments. |
Internal Auditing: The purpose of internal auditing is to establish trust that will provide the basis for reliance on management’s judgment. Internal audits shall be of the highest professional objectivity and shall make a balanced assessment of all the relevant circumstances. They shall not be unduly influenced by management’s own interests. They shall promote the value of information that all of Royal Bakery staff receive and shall not disclose information without appropriate authority unless there is a legal or professional obligation to do so. Management shall apply their knowledge, skills and experience needed in the performance of conducting internal auditing process.
Code of Ethics of our Employees:
Harassment: It is Royal Bakery's policy to prohibit intentional and unintentional harassment of any individual by another person on the basis of any protected classification including, but not limited to, religion, color, race, sex, national origin, age, disability, marital status, citizenship, veteran status or sexual orientation, and any other classifications protected by federal, state or local law, rule, regulation or ordinance. This policy is intended to ensure no one harasses another individual in our workplace.
Honest and Ethical Conduct: Royal Bakery expects all employees to act with the highest standards of honesty and ethical conduct, while working on the Company premises. Employees must treat fellow workers, supervisors and customers with respect. All employees are expected to abide by policies of fairness toward customers, suppliers and other competitors. It is the employee's responsibility to help create an environment that is not offensive. Employees cannot utter slurs or offend others with words or actions. An employee must practice safety at all times to ensure not only his well-being but that of others. Alcohol or illegal drugs are forbidden inside the Company.
Health and Safety: Employees must report to work free from the influence of illegal drugs or alcohol. Company personnel must adhere to practices that encourage cleanliness and promote the safe use of all work tools. All employees who handle food processing and or work in the kitchen shall be certified by appropriate regulatory agencies. Accidents and defective equipment should be reported immediately. Violence or threats of violence against workers or customers are not tolerated.
Duties to the Company: Our employees shall act in the best interests of the Company. We require employees to promptly report any illegal behavior or violations of the Code to senior management. We all must assist in this process by reporting anything that could damage our reputation for service quality and food safety. We shall strive to improve the restaurant profession by continuing training and sharing our experience for the benefit of all.
Confidential Information: All employees may have access to information related to the Company that is not known to the general public. Such information must be kept confidential. It can only be used for appropriate business purposes. Inappropriate disclosure of confidential information can cause irreparable harm to the company and will not be tolerated.
Additional Provision: The provisions of this Code of Ethics may not include all situations or events likely to occur in the conduct of Royal Bakery's operation. Additional statements might be added from time to time, either to address topics not covered or to provide greater detail on topics already covered by the Code.
| 18 |
| ITEM 11. | EXECUTIVE COMPENSATION |
SUMMARY COMPENSATION TABLE
The table below summarizes all compensation awarded to, earned by, or paid to our Officers for all services rendered in all capacities to us as of the year ended December 31, for the fiscal years ended as indicated.
| Non-Equity | ||||||||||||||||||||||||||||||||||||
| Incentive | Nonqualified | |||||||||||||||||||||||||||||||||||
| Name and | Stock | Option | Plan | Deferred | All Other | |||||||||||||||||||||||||||||||
| Principal Position | Year | Salary ($) | Bonus ($) | Awards ($) | Awards ($) | Compensation ($) | Compensation ($) | Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Tommy Yu | 2015 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Yan Cheung (1) | 2014 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Winnie Sze | 2015 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Wing Cheung (2) | 2014 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Nikki Ma (3) | 2015 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| 2014 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
| (1) | Chief Executive Officer and Chairman of the Board of Directors. |
| (2) | Chief Financial Officer, and Director. |
| (3) | Secretary of the Board, Chief Operating Officer, and Director |
None of our directors have received monetary compensation since our inception through December 31, 2015. We currently do not pay any compensation to our directors serving on our board of directors.
STOCK OPTION GRANTS
We have not granted any stock options to the executive officers since our inception.
EMPLOYMENT AGREEMENTS
The Company is not a party to any employment agreement and has no compensation agreement with any of its officers and directors.
| 19 |
DIRECTOR COMPENSATION
The following table sets forth director compensation as of December 31, 2015:
| Fees | Non-Equity | Nonqualified | ||||||||||||||||||||||||||
| Earned | Incentive | Deferred | ||||||||||||||||||||||||||
| Paid in | Stock | Option | Plan | Compensation | All Other | |||||||||||||||||||||||
| Name | Cash ($) | Awards ($) | Awards ($) | Compensation ($) | Earnings ($) | Compensation ($) | Total ($) | |||||||||||||||||||||
| Tommy Yu Yan Cheung (1) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| Winnie Sze Wing Cheung (2) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| Nikki Ma (3) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| (1) | Chief Executive Officer and Chairman of the Board of Directors. |
| (2) | Chief Financial Officer, and Director. |
| (3) | Secretary of the Board, Chief Operating Officer, and Director |
All directors receive reimbursement for reasonable out-of-pocket expenses in attending board of directors meetings and for promoting our business. From time to time we may engage certain members of the board of directors to perform services on our behalf. In such cases, we compensate the members for their services at rates no more favorable than could be obtained from unaffiliated parties.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth, as of December 31, 2015 certain information regarding the ownership of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, (ii) each of our directors, (iii) our principal executive officer and (iv) all of our executive officers and directors as a group. Unless otherwise indicated, the address of each person shown is c/o Royal Bakery Holdings, Inc., 407 Old County Road, Belmont, California 94002. Beneficial ownership, for purposes of this table, includes options to purchase common stock that are either currently exercisable or will be exercisable within 60 days of the date of this Prospectus.
| Name and Address of Beneficial Owner (5) | Amount and Nature of Beneficial Owner | Percent of Class (6) | ||||||
| Yam Ming Chong (1) | 2,583,333 | 18.0 | % | |||||
| Yue Kwan Chong (1) | 2,683,333 | 18.7 | % | |||||
| Winnie Sze Wing Cheung, CFO & Director (2) | 2,260,417 | 15.7 | % | |||||
| Tommy Yu Yan Cheung, Chairman | 2,066,667 | 14.4 | % | |||||
| Egg Tart Café United Holdings, LLC (3) | 2,583,333 | 18.0 | % | |||||
| Nikki Ma, Secretary & Director (4) | 275,000 | 1.9 | % | |||||
| All executive officers and directors as a group (3 persons) | 4,602,084 | 32.0 | % | |||||
| (1) | Yam Ming Chong (John) and Yue Kwan Chong (Jerry) are father and son. |
(2) |
Winnie Sze Wing Cheung’s husband, Alvin Li, is one of the management members of Egg Tart Café United Holdings, LLC |
| 20 |
| (3) | Egg Tart Café United Holdings, LLC is the former sub-franchisor of the Company. Stephen Wan and Suzy Liu, the two management members of Egg Tart Café United Holdings, LLC, together have the voting and dispositive control over the shares owned by Egg Tart Café United Holdings, LLC. Neither Stephen Wan nor Suzy Liu directly own any shares of Royal Bakery Holdings, Inc. |
| (4) | Nikki Ma is one of the two shareholders of Eunik Investment and the daughter of George Ma, one of the management members of Egg Tart Café United Holdings, LLC. Eunik Investment has 275,000 shares of the Company. Nikki Ma owns 50% of Eunik Investment. |
| (5) | Unless otherwise indicated, the address of each person shown is c/o Royal Bakery Holdings, Inc., 407 Old County Road, Belmont, California 94002. | |
| (6) | Percentages are calculated based on the total of 14,383,000 issued and outstanding shares of common stock. |
There are no arrangements or understanding among the parties set out above or their respective associates or affiliates concerning election of directors or any other matters which may require shareholder approval.
Changes in Control
We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our Company.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Except as described below, none of the following parties has had any material interest, direct or indirect, in any transaction with us during our last fiscal year or in any presently proposed transaction that has or will materially affect us:
| 1. | any of our directors or officers; |
| 2. | any person proposed as a nominee for election as a director; |
| 3. | any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock; or |
| 4. | any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the above persons. |
Some of the parties involved with the operation and management of the Company have other relationships that may create disincentives to act in the best interest of the Company and its investors. As previously disclosed, some of our majority shareholders and members of our management have interests in Egg Tart Café, our former sub-franchisor and an 18% holder of our common stock, and Majestic Production, the company with which we entered into a material supply contract. The current management has not established, and has no plans to establish, any procedures or controls to prevent, address or resolve these conflicts. As a result, these conflicts may inhibit or interfere with the sound and profitable operation of the Company.
We had transactions with certain of our officers, directors and shareholders owning more than 10% of our common stock for the years ended December 31, 2015 and 2014 as follows:
| ● | Egg Tart Café United Holdings, LLC had a payable of $10,000 to the Company on December 31, 2012 and paid this $10,000 to the Company in January 2013, as to comply to the agreement signed between the Company and our former sub-franchisor Egg Tart Café United Holdings, LLC. However, we have amended the Sub-Franchisor Agreement regarding the payment schedule, since Egg Tart Café has only identified one restaurant location at San Francisco at the end of 2012. The Company agreed to receive $10,000 from Egg Tart Café as fulfilling one of the payment terms when signing the sub-franchisor agreement, other payment will be $10,000 per year or until the time that Egg Tart Café signs up more sub-franchisees which may be directly owned or independently owned and operated. Egg Tart Café paid the Company $10,000 in January 2013 for its payable to Company as of December 31, 2012 and then paid the Company another $10,000 in December 2013 and April 2015. The remaining balance of $20,000 was written off to bad debt expense at December 31, 2015 as it will not be received. |
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| ● | The Company paid certain franchise professional fees of $30,750 on behalf of Egg Tart Café during the year ended December 31, 2013. Egg Tart Café paid back the full advance amount to the Company at the end of December 2013. The advance was not subject to a written agreement. | |
| ● | The Company purchased$142,328 and $162,328 of food products from a food production wholesaler (“Majestic Production”) which is majority-owned by Egg Tart Cafe, for the years ended December 31, 2015 and 2014, respectively. The term by which Royal Bakery purchases products from Majestic Production is subject to a written agreement. The Company also sub-leases the office from Majestic Production from April 1, 2013 to February 28, 2014 at a monthly rental rate of $3,500 on a month-to-month basis and from March 1, 2014 through September 30, 2014 at a monthly rental rate of $2,000. As of October 1, 2014 the monthly rent was $500. The Company paid $6,000 and $22,500 in lease payments to Majestic Production during the years ended December 31, 2015 and 2014, respectively. Majestic Production is the central producer of bakery and café products. The Company through its subsidiary RBSTC purchases products produced by Majestic Production and resells them at a profit to food retailers, including Egg Tart Café’s sub-franchisees. Our sub-franchisor and sub-franchisees will order food and drinks, and operational related products. | |
| ● | The Company has sales of $77,479 and $49,413, a receivable of $0 and $357 for Aw2gether LLC., which is majority-owned by Nikki Ma, one of our Directors, our Secretary and our COO, for the years ended December 31, 2015 and 2014, respectively. Aw2gether is a customer which buys products through Royal Bakery’s subsidiary RBSTC. There is no agreement entered between us and Ms. Ma for these transactions. | |
| ● | Ovo Café, Inc. our sub-franchisee entered into an agreement with our sub-franchisor to open its own Ovo food truck which was subsequently opened in mid-January 2014. Ovo Café, Inc. entered into another agreement with our sub-franchisor to open an Ovo restaurant which was subsequently opened on February 18, 2014. Ovo Café, Inc. is 9.4% owned by Winnie Sze Wing Cheung, one of our directors and our Chief Financial Officer, 9.4% by Tommy Cheung, one of our directors and our Chief Executive Officer, and 18.8% owned by Yam Ming Chong and Yue Kwan Chong, two individual major shareholders of the Company. For the year ended December 31, 2014, we had sales of $148,004 and a receivable of $74,389 from Ovo Café, Inc. which ceased to be a related party of the company in January 2015 as these individuals sold their interest in Ovo Café Inc. | |
| ● | 1186 Limited: We entered a consulting agreement with 1186 Limited, a Hong Kong entity that is owned by Yam Ming Chong and Yue Kwan Chong, on March 18, 2014. 1186 Limited will advise the Company on operating a Hong Kong style food and beverage business whenever the Company requests such services in exchange for a fee of $100 per hour (with a minimum of 8 hours per training session). This agreement terminates on December 31, 2015. Yam Ming Chong and Yue Kwan Chong together own 36.7% of the Company’s common stock. Yam Ming Chong and Yue Kwan Chong are father and son. |
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Cowan, Gunteski & Co,, P.A. served as our independent registered public accounting firm for the years ended December 31, 2015 and 2014. The following table shows the fees that were billed for the audit and other services provided by such firm for 2015 and 2014.
| 2015 | 2014 | |||||||
| Audit Fees | $ | 52,500 | $ | 65,000 | ||||
| Audit-Related Fees | $ | 0 | $ | 0 | ||||
| Tax Fees | $ | 0 | $ | 0 | ||||
| All Other Fees | $ | 0 | $ | 0 | ||||
| Total | $ | 52,500 | $ | 65,000 | ||||
Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of , the audit or the review of interim financial statements.
Audit-Related Fees – This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees”. The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees – This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees – This category consists of fees for other miscellaneous items.
Our Board of Directors acting as our Audit Committee preapproved each engagement of our independent registered public accounting firm.
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| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE |
| (a) | The following Exhibits, as required by Item 601 of Regulation SK, are attached or incorporated by reference, as stated below. |
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation (1) | |
| 3.2 | Bylaws (1) | |
| 21.1 | Subsidiaries | |
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| (1) | Incorporated by reference to the Registrant’s Form S-1 (File No. 333-193143) filed with the Commission on December 31, 2013. |
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Pursuant to the requirements of Section 13 or 15(d) 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, on April 14, 2016.
| ROYAL BAKERY HOLDINGS, INC. | ||
| By: | /s/ Tommy Cheung | |
| Name: | Tommy Cheung | |
| Title: | Chairman & CEO (Principal Executive Officer) | |
| By: | /s/ Winnie Sze Wing Cheung | |
| Name: | Winnie Sze Wing Cheung | |
| Title: | CFO
(Principal Financial Officer and Principal Accounting Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on April 14, 2016.
| By: | /s/ Tommy Cheung | By: | /s/ Nikki Ma | |
| Name: | Tommy Cheung | Name: | Nikki Ma | |
| Title: | Director, Chairman, CEO (Principal Executive Officer) | Title: | Director, Secretary, COO | |
| By: | /s/ Winnie Sze Wing Cheung | |||
| Name: | Winnie Sze Wing Cheung | |||
| Title: | Director,
CFO (Principal Financial Officer and Principal Accounting Officer) |
|||
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