The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
1.
|
Organization, Recapitalization and Nature of Business
|
China Internet Cafe
Holdings Group, Inc. (“China Internet Cafe”)
China
Internet Cafe Holdings Group, Inc. (formerly known as China Unitech Group, Inc.) (“the Company”, “we”,
“us”, “our”) was incorporated in the State of Nevada on March 14, 2006. On July 2, 2010, the Company successfully
closed a share exchange transaction with the shareholders of Classic Bond Development Limited, a British Virgin Islands corporation
(" Classic Bond"). The Company, through its variable interest entities in China, is currently engaged in the operation
of a chain of China-based internet cafes. On February 1, 2011, the Company changed its name from China Unitech Group, Inc. to China
Internet Cafe Holdings Group, Inc.
Recapitalization
of Classic Bond Development Limited
On
July 2, 2010, the Company entered into a share exchange transaction with Classic Bond Development Limited, a British Virgin Islands
corporation (“Classic Bond”), and the shareholders of Classic Bond. Pursuant to the Share Exchange Agreement, the Company
acquired 100% of the issued and outstanding capital stock of Classic Bond in exchange for 19,000,000 newly issued shares of the
Company’s common stock, which represented approximately 94% of the 20,200,000 issued and outstanding shares of common stock
after the transaction and after the coincident cancellation of 4,973,600 shares of common stock held by the Company’s former
majority stockholder which have a net effect of increase of 1,200,000 shares. The business, assets and liabilities did not change
as a result of the reverse acquisition.
This
share exchange transaction resulted in those shareholders obtaining a majority voting interest in the Company. Generally accepted
accounting principles require that the Company whose shareholders retain the majority interest in a combined business be treated
as the acquirer for accounting purposes, resulting in a reverse acquisition with Classic Bond as the accounting acquirer and the
Company as the acquired party. Accordingly, the share exchange transaction has been accounted for as a recapitalization of Classic
Bond whereby Classic Bond is deemed to be the continuing, surviving entity for accounting purposes, but through reorganization,
has deemed to have adopted the capital structure of the Company. The equity section of the accompanying financial statements has
been restated to reflect the recapitalization of the Company due to the reverse acquisition as of the first day of the first period
presented.
Accordingly,
all references to common shares of Classic Bond’s common stock have been restated to reflect the equivalent number of shares
of common stock of the Company. In other words, the 2,000,000 Classic Bond shares outstanding are restated as 20,200,000 common
shares, as of July 2, 2010. Each share of Classic Bond is restated to 10.10 shares of the Company.
The
book value of the net assets that for accounting purposes, were deemed to have been acquired by Classic Bond from the Company,
as of the date of acquisition (July 2, 2010) were $3,333.
During
the recapitalization, the Company incurred restructuring expenses of $300,000, related legal and professional fee of $ 129,033
and the interest expenses of $6,053 related to the short term loan for paying restructuring expenses. All of these expenses amounting
to $435,086 in total which was recorded as reorganizational expenses in the statement of income.
Classic Bond Development
Limited (“Classic Bond”)
Classic
Bond Development Limited was incorporated on November 2, 2009 in the British Virgins Islands with 50,000 authorized common stock
with no par value. On November 2, 2009, 50,000 shares of common stock were issued at $0.129 (HK$1) each for cash consideration
of $6,452 (HK$50,000) to several shareholders including Mr. Guo Dishan who is a shareholder, officer and director of the Company.
On
June 23, 2010, the Company further issued 1,950,000 shares of common stock to 42 individuals to raise funds of $84,093 (HK$651,721)
for 651,721 shares and 1,308,954 shares associated with the reorganization of the Company at a value of $167,519 (HK$1,308,954)
which is reflected as contributed capital by existing shareholders of Junlong (as defined below) and the total amount was $251,612.
At June 30, 2013 and December 31, 2012, the issued and outstanding of common stock was
25,689,524
and
21,414,821
shares, respectively.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
1.
|
Organization, Recapitalization and Nature of Business (continued)
|
Classic
Bond is in the business of operating internet cafés, throughout the Longang District of Shenzhen in Province of Guangdong
of People's Republic of China ("PRC"). The Company conducts its operations through the following entities: (a) a wholly-owned
subsidiary of the Company located in the PRC: Shenzhen Zhonghefangda Network Technology Co., Ltd. (“Zhonghefangda”)
and (b) an entity located in the PRC: Shenzhen Junlong Culture Communication Co., Ltd. (“Junlong’), which is controlled
by the Company through contractual arrangements between Zhonghefangda and Junlong, as if Junlong were a wholly-owned subsidiary
of the Classic Bond.
Shenzhen Zhonghefangda
Network Technology Co., Ltd. (“Zhonghefangda”)
Zhonghefangda
, Classic Bond’s wholly-owned subsidiary, was incorporated in People’s Republic of China (“PRC”) on June
10, 2010 with a registered capital of $129,032 (HK$1 million). Zhonghefangda is engaged in provision of management and consulting
services.
On
June 11, 2010, to protect the Company’s shareholders from possible future foreign ownership restrictions, Zhonghefangda and
Junlong entered into a series of agreements. Under these agreements Zhonghefangda obtained the ability to direct the operations
of Junlong and to receive a majority of the residual returns. Therefore, management determined that Junlong became a variable interest
entity (“VIE”) under the provisions of Financial Accounting Standards Board (“FASB”) ASC 810-10 and Zhonghefangda
was determined to be the primary beneficiary of Junlong. Accordingly, beginning June 11, 2010, Zhonghefangda is able to consolidate
the assets, liabilities, results of operations and cash flows of Junlong in the financial statements. Because the legal representative
and ultimate major stockholder of Zhonghefangda and Junlong was the same person, Mr. Guo Dishan, Zhonghefangda and Junlong were
deemed, until June 11, 2010, to be under the common control.
Exclusive Management
and Consulting Agreement
On
June 11, 2010, Zhonghefangda signed an exclusive management and consulting services agreement with Junlong. Pursuant to the
agreement, Zhonghefangda agreed to provide management and consulting services to Junlong, upon request, in connection with
the operation of the Business. The agreement provides that Junlong will compensate Zhonghefangda in consideration for its
right to receive the aggregate net profit of Junlong for a period of twenty (20) years and for succeeding periods of the same
duration until terminated by both parties under agreed conditions. Zhonghefangda will reimburse to Junlong the full amount of
any net losses incurred by Junlong during the term of this agreement. As a result of entering into the exclusive management
and consulting agreement, Zhonghefangda is deemed to control Junlong as a Variable Interest Entity and
is consolidated with Junlong in the accompanying financial statements.
Shenzhen Jun Long
Culture Communication Co., Ltd. (“Junlong”)
Junlong
is a Chinese enterprise organized in the People’s Republic of China (“PRC”) on December 26, 2003 in accordance
with the Laws of the People’s Republic of China with a registered capital of $0.136 million (equivalent to RMB 1 million).
In 2001, the Chinese government imposed higher capital (RMB10 million for regional internet café chain and RMB50 million
for national internet café chain) and facility requirements for the establishment of internet cafes. On August 19, 2004,
Junlong was granted approval from Shenzhen Municipal People’s Government to increase its registered capital by $1,230,500
from $136,722 to $1,367,222 (increased by RMB 9 million, from RMB 1 million to RMB 10 million) The capital verification
process has been completed.
In
2005, Junlong obtained internet cafe licenses to operate an internet café chain from the Ministry of Culture,
and opened its first internet cafe in April, 2006 and our members can access the internet at our venues. We started our
internet cafes in 2006 and we opened 7 internet cafes in 2006, 5 internet cafes opened in 2007, 11 internet cafes opened in
2008, 5 internet cafes opened in 2009, 16 internet cafes opened in 2010, 15 internet cafes opened in 2011, and 3 internet
cafes opened during the year of 2012. In total, we own 62 internet cafes within Shenzhen, Guangdong as of June 30, 2013.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
2.
|
Summary of Significant Accounting Policies
|
|
(a)
|
Basis of presentation
|
The
Company’s accounting policies used in the preparation of the accompanying financial statements conform to accounting principles
generally accepted in the United States of America ("US GAAP") and have been consistently applied.
|
(b)
|
Principle of consolidation
|
The
consolidated financial statements include the accounts of China Internet Cafe Holdings Group, Inc., Classic Bond Development Limited,
Zhonghefangda and the VIE-Junlong. All intercompany balances and transactions have been eliminated in the consolidation. The consolidated
financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated
in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission.
In
preparing financial statements in conformity with accounting principles generally accepted in the United states of America, management
makes estimates and assumptions that affect the reported amounts of assets and liabilities an disclosures of contingent assets
and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting
periods. These accounts and estimates include, but are not limited to, the valuation of due from related parties, inventories and
the estimation on useful lives of plant and machinery and intangibles assets. Actual results could differ from those estimates.
Warrants that could require cash settlement
or have anti-dilution price protection provisions are recorded as liabilities at their estimated fair value at the date of issuance,
with subsequent changes in estimated fair vale recorded in other income (expense) in our statement of loss and comprehensive loss
in each subsequent period. In general, warrants with anti-dilution provisions are measured using the binomial valuation model.
The methodology based, in part, upon inputs for which there is little or no observable market date requiring the Group to develop
its own assumptions. The assumptions used in calculating the estimate fair value of the warrants represent our best estimates,
however these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change
and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different.
Also see Note 11.
Internet
café members purchase prepaid IC cards which include stored value that will be deducted based on time usage of computer
at the internet cafe. Revenues derived from the prepaid IC cards at the internet café are recognized when services are provided.
This is based upon the usage of computer time at the internet cafe. Outstanding customer balances in the IC cards are included
in deferred revenue on the balance sheets. The Company does not charge any service fees that cause a decrement to customer balances.
There is no expiration date for IC cards.
The
Company also records revenue from commission received from the sale of third parties on-line gaming cards, snacks and drinks. Commission
revenue amounted to 20% of the value of the on-line gaming cards, snacks and drinks is recognized at the time the gaming cards,
etc. are sold to customers. For the six months ended June 30, 2013 and 2012, the commission income was $226,456 and $
$151,743
,
respectively.
Cost
of revenue consists primarily of depreciation of each internet café’s computer equipment and hardware and overhead
associated with the internet cafes including rental payments, utilities, business taxes, value added taxes, and surcharges. Our
internet surfing business tax is 20% on gross revenue generated from our internet cafes. Our other surcharges are an education
surcharge of 3%, city development surcharge of 1%, a culture development surcharge of 3%, and a snacks and drinks business tax
of 5%. All surcharges are calculated on the basis of business tax amount. Our value added taxes is 3% on gross revenue generated
from selling time of internet surfing in our internet cafes. Since November 2012, the Company has paid value added taxes instead
of business taxes.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
2.
|
Summary of Significant Accounting Policies (continued)
|
The
Company may be exposed to credit risk from its cash at bank. An allowance has been considered for estimated irrecoverable amounts
determined by reference to past default experience and the current economic environment. No allowance is considered necessary for
the period.
|
(g)
|
Cash and cash equivalents
|
Cash
and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with
a maturity of three months or less when purchased.
Inventory
represented the IC cards we purchased from IC cards manufacturer. Inventories are stated at the lower of cost or market value.
Cost is determined using the first-in, first-out (FIFO) method.
|
(i)
|
Fair Value of Financial Instruments
|
The Company applies the provisions of accounting
guidance, FASB Topic ASC 820 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value
of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
As of June 30, 2013, the fair value of cash and cash equivalents, accounts payable, and accrued expenses approximated carrying
value due to the short maturity of the instruments, or are based on quoted market prices or interest rates which fluctuate with
market rates except for related party debt or receivables for which it is not practicable to estimate fair value.
The Company adopted the provisions of Accounting
Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair
value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring
fair value as follows:
Level 1
– Inputs
are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2
– Inputs
are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or
corroborated by observable market data.
Level 3
– Inputs
are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information.
The following are the major categories
of assets and liabilities measured at fair value on a recurring basis as of June 30, 2013, using quoted prices in active markets
for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
Description
|
|
Level 1:
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Level 2:
Significant
Other
Observable
Inputs
|
|
|
Level 3:
Significant
Unobservable
Inputs
|
|
|
Total
June 30, 2013
|
|
Derivative Liability - Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,204
|
|
|
$
|
21,204
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,204
|
|
|
$
|
21,204
|
|
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
2.
|
Summary of Significant Accounting Policies (continued)
|
The availability of inputs observable in
the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the
instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing
inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the
valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable
in the market and may require management judgment.
|
(j)
|
Stock-Based Compensation
|
Our
advisor assists the Company for ongoing corporate compliance and development are accounted for under ASC 505-50. ASC 505-50-30-11
(previously EITF 96-18) further provides that an issuer shall measure the fair value of the equity instruments in these transactions
using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement
date:
i.
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment);
and
ii.
The date at which the counterparty’s performance is complete.
The
Company prepaid the equipment deposits to the computer suppliers for the purchase of computer and equipment for the new internet
cafes.
|
(l)
|
Property, plant and equipment
|
Property,
plant and equipment, comprising computer equipment and hardware, leasehold improvement, office furniture and vehicles are stated
at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives
listed below.
|
|
Estimated Useful Lives
|
Leasehold improvements
|
|
5 years
|
Cafe computer equipment and hardware
|
|
5 years
|
Cafe furniture and fixtures
|
|
5 years
|
Office furniture, fixtures and equipment
|
|
5 years
|
Motor vehicles
|
|
5 years
|
Leasehold
improvements mainly results from the decoration expense. All of the Company’s lease contracts state lease terms of 5 years
and leasehold improvement is amortized over 5 years, which represents the shorter of useful life and lease term.
Our
intangible assets consist of definite-lived assets subject to amortization such as Business License and Customer Lists. The useful
lives of the Business License are 9 to 15 years and we amortized the customer lists by 5 years. We calculate amortization of the
definite-lived intangible assets on a straight-line basis over the useful lives of the related intangible assets. Development cost
of internal-use software is insignificant and has been recorded as expense in the period such cost occurs.
Deferred
revenue represents unused balances of the prepaid amounts from the IC cards that are unused balance. The outstanding customer balances
were $1,839,129 and $1,505,699 as of June 30, 2013 and December 31, 2012, respectively, and are included in deferred revenue on
the balance sheets. Management has evaluated the deferred revenue balance and has determined any potential revenue from the unused
balance to be immaterial at June 30, 2013.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
2.
|
Summary of Significant Accounting Policies (continued)
|
The
Company follows the FASB’s accounting standard. Comprehensive income is defined as the change in equity of a company during
a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and
distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency
translation adjustments.
Income
taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based
on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose
and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 740-10-50-2 requires deferred tax assets
and liabilities be recognized for future tax consequence attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that
includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items
will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Losses incurred
by the Company in prior years provide for a net operating loss carry-forward. However, due to the fact that all net operating losses
are from the U.S. shell company which we currently anticipate insufficient income to utilize in the future, the assets balance
has been fully reserved for.
|
(q)
|
Consolidation of Variable Interest Entities
|
According
to the requirements of Statement of Financial Accounting Standards No. 810-10, “Variable interest Entities”, the Company
has evaluated the economic relationships of its wholly owned subsidiary, Zhonghefangda with Junlong and has determined that it
is required to consolidate Zhonghefangda and Junlong pursuant to the rules of FASB ASC Topic 810-10. Therefore Junlong is considered
to be a VIE, as defined by FASB ASC Topic 810-10 , of which Classic Bond is the primary beneficiary as a result of its wholly owned
subsidiary Zhonghefangda. Classic Bond, as mentioned above, will absorb a majority of the economic risks and rewards of all of
these VIE that are being consolidated in the accompanying financial statements.
The
carrying amount of the VIEs’ assets and liabilities are as follows:
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
Current assets and long term rental deposit
|
|
$
|
34,099,042
|
|
|
$
|
26,392,390
|
|
Property, plant and equipment
|
|
|
11,089,872
|
|
|
|
12,730,766
|
|
Intangible assets
|
|
|
107,396
|
|
|
|
124,275
|
|
Total assets
|
|
|
45,296,310
|
|
|
|
45,296,310
|
|
Total liabilities
|
|
|
(11,061,259
|
)
|
|
|
(11,061,259
|
)
|
Net assets
|
|
$
|
34,235,051
|
|
|
$
|
29,117,600
|
|
|
(r)
|
Foreign currency translation
|
Assets
and liabilities of the Company with a functional currency other than US$ are translated into US$ using period end exchange rates.
Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation
differences are included as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.
The
exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Six months-end RMB : USD exchange rate
|
|
|
6.1732
|
|
|
|
-
|
|
Six months average RMB : USD exchange rate
|
|
|
6.2395
|
|
|
|
6.5316
|
|
Three months average RMB : USD exchange rate
|
|
|
6.2025
|
|
|
|
6.3078
|
|
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
2.
|
Summary of Significant Accounting Policies (continued)
|
|
|
December 31, 2012
|
|
Year-end RMB : USD exchange rate
|
|
|
6.3011
|
|
The
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
|
(s)
|
Post-retirement and post-employment benefits
|
The
Company contributes to a state pension plan in respect of its PRC employees. Other than the above, neither the Company nor its
subsidiary provides any other post-retirement or post-employment benefits.
|
(t)
|
Earnings per share (EPS)
|
Earnings
per share is calculated in accordance with ASC 260-10 which requires the Company to calculate net income (loss) per share based
on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income
(loss) by the weighted average number of shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents
the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, preferred stock and warrants)
as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that
have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation
of diluted EPS.
See Note 15 for details.
|
(u)
|
Retained earnings-appropriated
|
In
accordance with the relevant PRC regulations and the Company’s PRC articles of association, Junlong is required to allocate
their respective net income to statutory surplus reserve.
|
(v)
|
Statutory surplus reserves
|
In
accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, Junlong is required
to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to
the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital
of the subsidiaries, any further allocation is optional.
As
of June 30, 2013 and December 31, 2012, the statutory surplus reserves of the subsidiary already reached 50% of the registered
capital of the subsidiary and the Company did not have any further allocation on it.
The
statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital,
provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory
surplus reserve is non-distributable.
|
(w)
|
Recent Accounting Pronouncements
|
In October 2012, FASB issued ASU 2012-06,
Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition
of a Financial Institution. In summary, the ASU requires post-acquisition date changes in the value of an indemnification asset
to be accounted for on the same basis as the change in the underlying asset subject to the indemnification. Its adoption of ASU
2012-06 is not expected to have a material impact on its consolidated financial statements.
In October 2012, the FASB issued Accounting
Standards Update (ASU) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04.
The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical
corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements.
The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04
is not expected to have a material impact on the Company’s financial position or results of operations.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
2.
|
Summary of Significant Accounting Policies (continued)
|
In August 2012, the FASB issued ASU 2012-03,
“Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
(SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update
2010-22 (SEC Update)” in Accounting standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the
issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on the Company’s financial
position or results of operations.
In July 2012, the FASB issued ASU 2012-02,
“Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in
Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether
it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary
to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles
Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date
before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet
been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected
to have a material impact on the Company’s financial position or results of operations.
|
3.
|
Cash and cash
equivalents
|
Cash and cash equivalents
are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at bank
|
|
$
|
33,250,507
|
|
|
$
|
25,800,930
|
|
Cash on hand
|
|
|
250,177
|
|
|
|
17,111
|
|
|
|
$
|
33,500,684
|
|
|
$
|
25,818,041
|
|
Financial
instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash
equivalents. As of June 30, 2013 and December 31, 2012, $33,245,816 and $25,794,334 of the Company’s cash and cash equivalents
were held by major banks located in the PRC, respectively, which management believes are of high credit quality, and $49 and $1,951
of the Company's cash and cash equivalents were held by Chase bank and JP Morgan Chase bank in USA, respectively.
|
4.
|
Property, Plant
and Equipment, net
|
Property, plant and equipment,
net, consist of the following:
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
4,485,176
|
|
|
$
|
4,394,136
|
|
Cafe computers equipment and hardware
|
|
|
17,190,560
|
|
|
|
16,770,575
|
|
Cafe furniture and fixtures
|
|
|
2,140,442
|
|
|
|
2,096,595
|
|
Office furniture, fixtures and equipment
|
|
|
345,063
|
|
|
|
338,059
|
|
Motor vehicles
|
|
|
481,752
|
|
|
|
471,973
|
|
|
|
$
|
24,642,993
|
|
|
$
|
24,071,738
|
|
Less: Accumulated depreciation
|
|
|
(13,553,122
|
)
|
|
|
(11,340,972
|
)
|
Property, plant and equipment, net
|
|
$
|
11,089,871
|
|
|
$
|
12,730,766
|
|
For
the six months ended June 30, 2013, depreciation expense amounted to $1,956,172, of which $1,903,024 and $53,148 were recorded
as cost of sales and general and administrative expense, respectively.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
The
short term loan due within one year as of June 30, 2013 and December 31, 2012 consist of the following:
|
|
|
|
Interest
|
|
|
June 30,
|
|
|
December 31,
|
|
Bank
|
|
Loan Period
|
|
rate
|
|
|
2013
|
|
|
2012
|
|
China Construction Bank
|
|
April 1, 2012 to March 26, 2013
|
|
|
12.5
|
%
|
|
$
|
-
|
|
|
$
|
158,702
|
|
China Construction Bank
|
|
June 13, 2013 to June 12, 2014
|
|
|
9
|
%
|
|
$
|
161,991
|
|
|
$
|
-
|
|
On March 27, 2012, the Company entered
into a loan agreement with China Construction Bank for $158,702 (RMB 1,000,000), which was secured by a director’s guarantee.
The annual interest rate was approximately 12.46% and was due on March 26, 2013. The loan has been paid in full on March 26, 2013.
On June 13, 2013, the Company entered into
a loan agreement with China Construction Bank for $161,991 (RMB 1,000,000), which was secured by a director’s personal guarantee.
The loan carries an annual interest rate of approximately 9% and is due on June 12, 2014.
For the three and six months ended June
30, 2013, the interest expense is $152 and $5,392, respectively.
|
6.
|
Income and Other Taxes Payable
|
Income and other tax payables
consist of the following:
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
Value added taxes
|
|
$
|
69,399
|
|
|
$
|
78,013
|
|
Income tax
|
|
|
728,832
|
|
|
|
586,908
|
|
Withholding individual income tax payable
|
|
|
3,436
|
|
|
|
2,208
|
|
Other tax payable
|
|
|
23,637
|
|
|
|
87,580
|
|
Total
|
|
$
|
825,304
|
|
|
$
|
754,709
|
|
|
7.
|
Due To a Shareholder, Director and Officer
|
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2013
|
|
|
2012
|
|
Mr. Guo Di Shan, a shareholder, director and officer of the Company
|
|
$
|
2,873,725
|
|
|
$
|
2,634,163
|
|
The
amount due to Mr. Di Shan Guo is unsecured with no stated interest and is payable on demand. As of June 30, 2013, the total amounts
of $2.87 million were accumulated amount since 2007 and used to pay daily operating expenses and professional fees.
The Company is subject to U.S. federal
income tax, and the Company’s subsidiary and affiliated entity incorporated in the PRC are subject to enterprise income taxes
in the PRC.
The Company’s applicable enterprise income tax rate in PRC is 25%.
For the six months ended June 30, 2013
and 2012, the Company did not record any uncertain tax benefits.
Aggregate undistributed earnings of approximately
$32 million as of June 30, 2013 of the Group's PRC subsidiaries that are available for distribution to the Company are considered
to be indefinitely reinvested, and, accordingly, no provision has been made for the Chinese dividend withholding taxes that would
be payable upon distribution to the Company. Additionally, the Chinese tax authorities have clarified that distributions made out
of pre-January 1, 2008 retained earnings would not be subject to the withholding tax.
The tax authorities may examine the tax
returns of the Company three years after its fiscal year ended.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
The Company contributes to a state pension
scheme organized by municipal and provincial governments with respect to its employees in PRC. The pension expense related to this
plan is calculated at a range of 8% of the average monthly salary.
The pension expense was $5,970 and
$6,507 for the six months ended June 30, 2013 and 2012, respectively. The pension expense was $3,370 and $3,055 for the three months
ended June 30, 2013 and 2012, respectively.
Common Stock
On
July 2, 2010, the Company entered into a share exchange transaction with Classic Bond, and the shareholders of Classic Bond. Pursuant
to the Share Exchange Agreement, the Company acquired 100% of the issued and outstanding capital stock of Classic Bond in exchange
for 19,000,000 newly issued shares of the Company’s common stock, which represented approximately 94% of the 20,200,000 issued
and outstanding shares of common stock after the transaction and after the coincident cancellation of 4,973,600 shares of common
stock held by the Company’s former majority stockholder.. The business, assets and liabilities of the Company did not change
as a result of the reverse acquisition.
As
of June 30, 2013 and December 31, 2012, there were
25,689,524 and
21,414,821 shares,
respectively, of common stock issued and outstanding.
Series A Preferred Stock
On February 16, 2011, the Company filed
with the Secretary of State of Nevada, as an amendment to its Articles of Incorporation, a Certificate of Designation, Preferences
and Rights for the 5% Series A Convertible Preferred Stock,
par value $0.00001 per share
(the “Series A Preferred Stock”). On February 22, 2011, the Company issued 4,274,703 shares of its Series A Preferred
Stock.
For each outstanding share of Series A
Preferred Stock, dividends are payable quarterly, at the rate of 5% per annum ($0.675 per share), on or before each date that is
thirty days following the last day of March, June, September, and December of each year, commencing September 30, 2011. Dividends
on the Series A Preferred Stock accrue and are cumulative from and after the date of initial issuance. For the quarter ended September
30 and December 31 of 2012 and from January 1, 2013 to February 22, 2013, dividends have been accrued as dividends payable and
are not paid as of June 30, 2013.
The Series A Preferred Stock was not subject
to mandatory redemption (except on liquidation) but was redeemable in certain circumstances. Because of the possible redemption
conditions, the Series A Preferred Stock was classified as mezzanine equity.
Each share of Series A Preferred Stock
may be converted at any time, at the option of the holder, into a number of fully paid and non-assessable shares of Common Stock
equal to the quotient of (i) the Series A Liquidation Preference of $1.35 per share divided by (ii) the conversion price in effect
as of the date of the Conversion Notice. The initial conversion price of the Series A Preferred Stock was $1.35 per share.
In addition to the holder’s right
to convert the Series A Preferred Stock at any time, provided that the Common Stock underlying the Series A Preferred Stock is
registered under an effective registration statement or is available for resale under Rule 144, without limitation, all outstanding
shares of the Series A Preferred Stock automatically converted into shares of Common Stock at the earlier to occur of (i) February
22, 2013, the 24 month anniversary of the Closing Date of the issuance of the Series A Preferred Stock, or (ii) at such time that
the volume-weighted average price of the Company’s Common Stock is equal to or greater than $3.00 (as may be adjusted for
any stock splits or combinations of the Common Stock) for a period of ten consecutive trading days and such Common Stock has an
average daily trading volume, for ten consecutive trading days, equal to or greater than 50,000 shares.
On
February 22, 2013, in accordance with its terms, all 4,274,703 shares of Series A Preferred Stock outstanding were automatically
converted into 4,274,703 shares of common stock.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
11.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants
|
Securities Purchase Agreement
On February 22, 2011 (the “Closing
Date”), the Company completed a private placement (the “Offering”) of 474,967 units at a purchase price of $13.50
per unit, each unit consisting
of:(i) nine shares of the Company’s Series A Preferred
Stock, convertible on a one to one basis into nine shares of the Company’s common stock; (ii) one share of Common Stock;
(iii) two three-year Series A Warrants (the “Series A Warrants”), each exercisable for the purchase of one share of
Common Stock, at an exercise price of $2.00 per share; and (iv) two three-year Series B Warrants (the “Series B Warrants”),
each exercisable for the purchase of one share of Common Stock, at an exercise price of $3.00 per share.
The Company received
aggregate gross proceeds of $6,412,055. The Offering was conducted pursuant to a Securities Purchase Agreement (the “Agreement”)
between the Company and various accredited investors (the “Investors).
The Company reviewed the features of the
Series A Preferred Stock, other than the conversion feature, and concluded that, on balance, the terms and features of the host
contract should be considered to be more akin to a debt instrument.
The conversion price of the Series A Preferred
Stock is subject to adjustment if the Company subsequently sells Common Stock at a lower price. Also, as described below for the
Warrants, the conversion option is denominated in U.S. dollars, a currency other than the Company’s functional currency.
Accordingly, the embedded conversion option was not considered to be indexed only to the Company’s common stock. In addition,
the Company may be required to redeem the Series A Preferred Stock for cash if, on receipt of a conversion request, it is unable
to issue shares registered for resale for any reason. In addition, the conversion price of the Series A Preferred Stock is subject
to adjustment if the Company subsequently sells Common Stock at a lower price but there is no explicit limit on the number of shares
that the Company may be required to issue. As a result of the foregoing, the exemption provided by ASC 815-10-15-74a was not available
and the embedded conversion option was bifurcated and accounted for as a derivative liability. As noted above, o
n
February 22, 2013, in accordance with its terms, all 4,274,703 shares of Series A Preferred Stock outstanding automatically converted
into 4,274,703 shares of common stock. As a result of the conversion, the carrying value of the Series A Preferred Stock has been
transferred to equity.
Warrants
The Series A and Series B Warrants are
exercisable at any time and from time to time at an exercise price of $2.00 and $3.00 per share, respectively, and expire on February
22, 2014. The holder may elect a cashless exercise of the Warrants beginning 12 months after the issuance date but only if the
shares underlying the Warrants are not registered for sale.
The Warrants contain standard anti-dilution
adjustments for stock splits and similar events but the exercise price is not otherwise subject to adjustment.
The Company may call the Series A and Series
B Warrants for redemption at a redemption price of $0.01 per Warrant share if the shares underlying the Warrants are registered
for sale and the volume-weighted average price of the Company’s Common Stock is equal to or greater than $6.00 per share
or $9.00 per share, respectively, for a period of ten consecutive trading days and such Common Stock has an average daily trading
volume, for ten consecutive trading days, equal to or greater than 75,000 shares per day.
The Warrants are free-standing derivative
instruments. Although the Company is a U.S. entity, the Company has no U.S. operations and all of its operations are conducted,
through its subsidiaries, in the People’s Republic of China. Accordingly, because the Company is fully invested in China
and those operations in China represent the Company’s only source of future revenues or income, the Company concluded that
its functional currency should be considered to be the RMB. As a result, because the Warrants are denominated in U.S. dollars,
they are denominated in a currency different from the Company’s functional currency and therefore, in accordance with the
guidance at ASC 815-40-15-7I, the Warrants are not considered to be indexed only to the Company’s common stock. As a result,
the exemption provided by ASC 815-10-15-74a is not available and the Warrants are recorded as a derivative liability.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
11.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (Continued)
|
Registration Rights Agreement
In connection with the Offering, the Company
entered into a Registration Rights Agreement with the Investors, in which the Company agreed to file a registration statement to
register for resale the Common Stock and the Common Stock issuable upon conversion of the Series A Preferred Stock and exercise
of the Series A and Series B Warrants, within 45 calendar days of the Closing Date, and to have the registration statement declared
effective within 150 calendar days of the Closing Date or within 180 calendar days of the Closing Date in the event of a full review
of the registration statement by the Securities and Exchange Commission. If the Company does not comply with the foregoing obligations
under the Registration Rights Agreement, the Company will be required to pay cash liquidated damages to each Investor, at the rate
of 1% of the applicable subscription amount for each 30 day period or part thereof in which we are not in compliance; provided,
that such liquidated damages will be capped at 10% of the subscription amount of each Investor and will not apply to any securities
that may be sold pursuant to Rule 144 under the Securities Act, or which are subject to an SEC restriction with respect to Rule
415 under the Securities Act.
The required registration statement was
filed by the required due date. However, the Company did not meet the deadline to render its S-1 registration statement effective.
At March 31, 2013, the Company has accrued $641,200 for the estimated liquidated damages it expects to pay.
Placement Agent Fees
In connection with the Offering, the Company
paid its placement agents (i) a cash fee of 7% of the gross proceeds from sale of the Units, (ii) a cash management fee of 1% and
(iii) a 0.5% non-accountable expense allowance. In addition to these placement agent cash fees aggregating $545,025, the Company
paid $181,415 in legal fees and other expense related to the Offering. After payment of the placement agent cash fees and legal
and other expenses, the Company received net proceeds of $5,675,614.
In addition, the placement agents received
warrants to purchase such number of securities equal to 9% of the aggregate number of shares of common stock issuable in connection
with the Units (the “Placement Agent Warrants”). The Placement Agent Warrants expire after three years and are exercisable
at the following prices: (i) 427,740 Warrants - $1.35 per share (ii) 85,494 Series A Warrants - $2.00 per share and (iii) 85,494
Series B Warrants - $3.00 per share. The terms of the Warrants, including anti-dilution protection for stock splits and similar
events, are similar to the Warrants issued to the Investors, except that the 427,740 Warrants do not permit the Company to call
the Warrants.
Lock-up Agreement
On the Closing Date, the Company entered
into a lock-up agreement (the “Lock-Up Agreement”) with Mr. Dishan Guo (the “Stockholder”), the Company’s
chairman and principal stockholder, whereby the Stockholder is prohibited from selling our securities that they directly or indirectly
own (the “Lock-Up Shares”) until nine months after the Registration Statement is declared effective (the “Lock-Up
Period”). The Registration Statement became effective on August 31, 2012 and the Lock-Up period ends on May 31, 2013. In
addition, the Stockholder further agreed that during the 12 months immediately following the Lock-Up Period, the Stockholder will
not offer, sell, contract to sell, assign or transfer more than 0.833% of the Lock-Up Shares during each calendar month following
the Lock-Up Period, other than engaging in a transfer in a private sale of the Lock-Up Shares if the transferee agrees in writing
to be bound by and subject to the terms of the Lock-Up Agreement.
Accounting for Derivative Instruments
The Warrants and Placement Agent Warrants
are derivative instruments as defined in ASC 815-10-15-83. ASC 815-10-15-74 provides that a contract that would otherwise meet
the definition of a derivative instrument but that is both (a) indexed to a company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a derivative financial instrument. FASB ASC 815-40-15 and
815-40-25 provide guidance for determining whether those two criteria are met. For purposes of this evaluation, the Company has
concluded that the Company’s functional currency is the Renminbi. Because the Warrants are denominated in U.S. Dollars, FASB
ASC 815-40-15-7I provides that they are not considered to be indexed only to the Company’s Common Stock. Accordingly, the
exemption in FASB ASC 815-10-15-74 is not available and the Warrants are classified as a derivative instrument liability.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
11.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (Continued)
|
The Series A Preferred Stock is a hybrid
financial instrument that embodies the risks and rewards typically associated with both equity and debt instruments. Accordingly,
we were required to evaluate the features of this contract to determine its nature as either an equity-type contract or a debt-type
contract. We determined that the Series A Preferred Stock is generally more akin to a debt-type contract, principally due to its
potential redemption requirements, its fixed rate quarterly dividend requirement and its lack of voting rights. We concluded that
the exemption in FASB ASC 815-10-15-74 was not available and that the embedded conversion option, along with certain other features
of the Series A Preferred Stock that have risks of equity, required bifurcation and classification in liabilities as a compound
embedded derivative financial instrument.
Derivative financial instruments are initially
measured at their fair value and are then re-valued at each reporting date, with changes in the fair value reported as charges
or credits to income.
Valuation of Derivative Instruments
The Warrants and the Placement Agent Warrants
were initially valued, using a binomial model, at $649,821 and $262,966, respectively, based on the quoted market price of the
Common Stock of $1.00 per share, a term equal to the remaining life of the Warrants, an expected dividend yield of 0%, a risk-free
interest rate of 1.32% based on constant maturity rates published by the U.S. Federal Reserve applicable to the remaining life
of the Warrants and estimated volatility of 85%, based on a review of the historical volatility of publicly-traded companies considered
by management to be comparable to the Company.
The compound embedded derivative financial
instrument related to the Series A Preferred Stock, consisting primarily of the embedded conversion option, was initially valued,
using a binomial model, at $1,604,794, based on the quoted market price of the Common Stock of $1.00, a term equal to the expected
life of the conversion option, an expected dividend yield of 0%, a risk-free interest rate of 0.78% based on constant maturity
rates published by the U.S. Federal Reserve applicable to the expected life and estimated volatility of 85%.
After allocating a portion of the proceeds
received to the fair value of the Warrants and the embedded derivative instrument in the Series A Preferred Stock, the remaining
proceeds were allocated to the Common Stock component of the Units and the carrying value of the Series A Preferred Stock host
contract.
On February 22, 2013, all outstanding shares
of the Series A Preferred Stock were converted to common stock. As of that date, the conversion feature of the Series A Preferred
Stock was out-of-the-money and accordingly had no value. The aggregate change in the fair value of the embedded derivative instrument
related to the Series A Preferred Stock between December 31, 2012 and February 22, 2013 of $64,280 has been credited to income.
At June 30, 2013, the Warrants, were re-valued
at $21,204, using a binomial model, based on the quoted market price of $0.21, a term equal to the remaining life of the instruments,
an expected dividend yield of 0%, risk-free interest rates of 0.11% based on constant maturity rates published by the U.S. Federal
Reserve applicable to the remaining life of the instruments and estimated volatility of 153%. The aggregate change in the fair
value of the derivative liabilities between December 31, 2012 and June 30, 2013 of $308,050 has been credited to income.
Accounting for Series A Preferred Stock
$3,682,473 of the proceeds received was
allocated to the carrying value of the Series A Preferred Stock host contract. The 4,274,703 shares of Series A Preferred Stock
had a liquidation value of $5,770,849. Because the Series A Preferred Stock had conditions for its redemption that are outside
our control, it was classified outside of Stockholders’ Equity, in the mezzanine section of our balance sheet, in accordance
with ASC 480-10-S99-3A. All outstanding shares of Series A Preferred Stock were converted to common stock on February 22, 2013
and the carrying value of the Series A Preferred Stock was transferred to equity.
Placement Agent Fees
The placement agent cash fees of $545,025,
other expenses related to the sale of the Units of $181,415 and the initial fair value of the Placement Agent Warrants of $262,966,
aggregating $989,406, were charged to additional paid-in capital.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
11.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (Continued)
|
Consulting services and compensation
On January 1, 2012, the Company issued
300,000 common stock options exercisable at $0.64 per share vesting on January 1, 2012 to Potomac Investments, LLC for its service
rendered. The options are exercisable until November 15, 2014. The company records the expense of the stock options over the related
vesting period. The options were valued using the Binomial Model at the date of grant. The total fair market value at grant date
is $108,000 based on the following assumptions: dividend yield: 0%; volatility: 164.33%, risk free rate: 0.36%, expected term:
3 years. All options remain outstanding at June 30, 2013.
Fair Value Considerations
As required by FASB ASC 820, assets and
liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their
fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis under FASB ASC
815 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or liabilities.
The following represents a reconciliation
of the changes in fair value of financial instruments measured at fair value using Level 3 inputs during the year ended June 30,
2013:
|
|
Preferred –
Embedded
Derivative
|
|
|
Warrants
|
|
|
Total
|
|
Beginning balance, December 31, 2012
|
|
$
|
64,280
|
|
|
$
|
329,254
|
|
|
$
|
393,534
|
|
Fair value adjustments
|
|
|
(64,280
|
)
|
|
|
(308,050
|
)
|
|
|
(372,330
|
)
|
Ending balance, June 30, 2013
|
|
$
|
-
|
|
|
$
|
21,204
|
|
|
$
|
21,204
|
|
Estimating fair values of derivative financial
instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration
of the instrument with related changes in internal and external market factors. In addition, valuation techniques are sensitive
to changes in the estimated fair value of our common stock and our estimates of its volatility. Because derivative financial instruments
are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption
changes.
|
12.
|
Commitments and Contingencies
|
Operating Leases
In the normal course of business, the Company
leases office space and internet cafes under operating lease agreements, which expire through 2017. The Company rents internet
cafes venues and office space, primarily for regional sales administration offices that are conducive to administrative operations.
The operating lease agreements generally contain renewal options that may be exercised in the Company's discretion after the completion
of the base rental terms. In addition, many of the leases provide for regular increases to the base rental rate at specified intervals,
which usually occur on an annual basis.
As of June 30, 2013, the Company was obligated under operating
leases requiring minimum rentals as follows:
Fiscal year
|
|
|
|
Remainder of 2013
|
|
$
|
1,277,221
|
|
2014
|
|
|
2,535,757
|
|
2015
|
|
|
1,448,287
|
|
2016
|
|
|
317,870
|
|
2017
|
|
|
4,808
|
|
|
|
$
|
5,583,943
|
|
During the three and six months ended June
30, 2013, rent expenses amounted to $417,479 and $1,271,197, respectively, of which $403,310 and $1,243,869 was recorded as cost
of sales, respectively
During the three and six months ended June
30, 2012, rent expenses amounted to $655,011 and $1,121,110, respectively, of which $235,781 and $442,480 was recorded as cost
of sales, respectively.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
No sales to any customer constituted greater
than 10% of net sales for the three and six months ended June 30, 2013 and 2012.
At June 30, 2013, the Company had accounts
payable to one supplier of consignment snacks and drinks in the amount of $174,835 accounting for 100% of the Company’s accounts
payable. The Company did not have any outstanding accounts payable as of December 31, 2012.
|
14.
|
Operating Risk and Uncertainties
|
Foreign currency risk
Most of the transactions of the Company
were settled in RMB. In the opinion of the directors, the Company does not have significant foreign currency risk exposure.
Company’s operations are substantially in a foreign
country
All of the Company’s services are
provided in China. The Company’s operations are subject to various political, economic, and other risks and uncertainties
inherent in China. Among other risks, the Company’s operations are subject to the risks of restrictions on the transfer of
funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign
exchange restrictions; and political conditions and governmental regulations.
The Chinese government began tightening
its regulation of internet cafes in 2001. In particular, a large number of unlicensed internet cafes have been closed. In addition,
the Chinese government has imposed higher capital and facility requirements for the establishment of internet cafes (RMB 10,000,000
for regional internet cafe chains and RMB 50,000,000 for national internet cafe chains). Furthermore, the Chinese government’s
policy, which encourages the development of a limited number of national and regional internet cafe chains and discourages the
establishment of independent internet cafes, may slow down the growth of internet cafes. Recently, the Ministry of Culture, together
with other government authorities, issued a joint notice suspending the issuance of new internet cafe chain licenses. Any intensified
government regulation of internet cafes could restrict our ability to maintain and expand our operations.
Currently, the Company uses only one internet
service provider. However, there are other internet service providers available to the Company. The management of the Company believes
that the risk of loss of internet services is not that high because of other service providers available to the Company.
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
Basic earnings per share is computed by
dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including
convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the period,
if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in
the following table:
|
|
For The Three Months Ended
|
|
|
For The Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share attributable to the Company’s common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,225,858
|
|
|
$
|
1,228,610
|
|
|
$
|
4,661,099
|
|
|
$
|
1,557,169
|
|
Dividend on preferred stock
|
|
|
(113,836
|
)
|
|
|
(71,938
|
)
|
|
|
(113,836
|
)
|
|
|
(143,876
|
)
|
Net income used in computing basic earnings per share
|
|
$
|
2,112,022
|
|
|
$
|
1,156,672
|
|
|
$
|
4,547,263
|
|
|
$
|
1,413,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
25,689,524
|
|
|
|
21,335,769
|
|
|
|
24,461,433
|
|
|
|
21,308,691
|
|
Basic earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
0.19
|
|
|
$
|
0.07
|
|
|
|
For The Three Months Ended
|
|
|
For The Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share attributable to the Company’s common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,112,022
|
|
|
$
|
1,156,672
|
|
|
$
|
4,547,263
|
|
|
$
|
1,413,293
|
|
Dividend on preferred stock
|
|
|
113,836
|
|
|
|
71,938
|
|
|
|
113,836
|
|
|
|
143,876
|
|
Net income used in computing diluted earnings per share
|
|
$
|
2,225,858
|
|
|
$
|
1,228,610
|
|
|
$
|
4,661,099
|
|
|
$
|
1,557,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock
|
|
|
25,689,524
|
|
|
|
21,335,769
|
|
|
|
24,461,433
|
|
|
|
21,308,691
|
|
Weighted average preferred stock
|
|
|
-
|
|
|
|
4,274,703
|
|
|
|
1,228,091
|
|
|
|
4,274,703
|
|
Diluted weighted average shares outstanding
|
|
|
25,689,524
|
|
|
|
25,610,472
|
|
|
|
25,689,524
|
|
|
|
25,583,394
|
|
Diluted earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.05
|
|
|
$
|
0.18
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares outstanding as of June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
-
|
|
|
|
4,274,703
|
|
|
|
-
|
|
|
|
4,274,703
|
|
Warrants
|
|
|
2,498,326
|
|
|
|
2,498,326
|
|
|
|
2,498,326
|
|
|
|
2,498,326
|
|
|
|
|
2,498,326
|
|
|
|
6,773,029
|
|
|
|
2,498,326
|
|
|
|
6,773,029
|
|
CHINA INTERNET CAFÉ HOLDINGS,
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2013
AND DECEMBER 31,
2012
(UNAUDITED)
|
15.
|
Earnings per Share
(continued)
|
During the three and six months ended June
30, 2013 and 2012, the average market price of the common stock during the period was less than the exercise price of the Warrants.
Accordingly, the Warrants were anti-dilutive and have not been included in the calculation of diluted earnings per share.
The Company applies the provisions of ASC
280, "Disclosures about Segments of an Enterprise and Related Information". The Company views its operations and manages
its business as one segment: the operation of internet cafe chains. Factors used to identify the Company's single operating segment
include the organizational structure of the Company and the financial information available for evaluation by the chief operating
decision-maker in making decisions about how to allocate resources and assess performance. The Company operates in one geographical
area, the PRC.