UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
¨ |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from ______________ to _____________
Commission file number: 333-199619
CHINA INTERNET CAFÉ HOLDINGS
GROUP, INC.
(Exact name of Company as specified in its
charter)
Nevada |
|
98-0500738 |
(State or other jurisdiction of incorporation or |
|
(I.R.S. Employer Identification No.) |
organization) |
|
|
505 Lianheng Commercial Building, 5th Floor, |
|
|
Ainan Road No. 391, Nanlian Community, |
|
|
Longgang Street Office, Longgang District, |
|
|
Shenzhen, Guangdong Province, People’s Republic of China |
|
518116 |
(Address of principal executive offices) |
|
(Zip Code) |
|
+86-755-8989-6008 |
|
|
(Registrant’s telephone number, including area code) |
|
#1707, Block A, Genzon Times Square,
Longcheng Blvd, Centre City
Longgang District, Shenzhen
Guangdong Province, People’s
Republic of China 518172
(Former name, former address and former
fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed 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 x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
|
|
|
|
Non-accelerated filer |
¨ |
Smaller reporting company |
x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No
x
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE
YEARS
Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
¨ No
¨
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s
classes of common equity, as of the latest practicable date:
As of August 13, 2015, there were 5,538,002
shares of $0.00001 par value common stock issued and outstanding.
CHINA INTERNET CAFÉ HOLDINGS GROUP,
INC.
FORM 10-Q
INDEX
PART I –FINANCIAL INFORMATION
Item 1. Financial Statements
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
(UNAUDITED)
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS
ASSETS | |
June 30,
2015 | | |
December 31,
2014 | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 23,219,084 | | |
$ | 23,789,211 | |
Rental deposit | |
| 75,206 | | |
| 62,222 | |
Equipment deposit | |
| 3,252 | | |
| 3,226 | |
Total current assets | |
| 23,297,542 | | |
| 23,854,659 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 1,213,341 | | |
| 1,882,823 | |
Rental deposit-long-term portion | |
| 8,179 | | |
| 32,255 | |
Total assets | |
$ | 24,519,062 | | |
$ | 25,769,737 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 26,639 | | |
$ | 45,283 | |
Registration penalties payable | |
| 641,200 | | |
| 641,200 | |
Deferred revenue | |
| 158,271 | | |
| 131,013 | |
Payroll and payroll related liabilities | |
| 88,163 | | |
| 349,866 | |
Income and other taxes payable | |
| 20,432 | | |
| 134,773 | |
Accrued expenses | |
| 244,332 | | |
| 287,666 | |
Amount due to a shareholder | |
| 1,893,477 | | |
| 1,711,061 | |
Dividend payable on preferred stock | |
| 186,565 | | |
| 186,565 | |
Total current liabilities | |
| 3,259,079 | | |
| 3,487,427 | |
| |
| | | |
| | |
Stockholders' Equity: | |
| | | |
| | |
| |
| | | |
| | |
Common stock ($0.00001 par value, 20,000,000 shares authorized, 5,538,002 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively) | |
| 55 | | |
| 55 | |
Additional paid-in capital | |
| 6,232,961 | | |
| 6,232,961 | |
Statutory surplus reserves | |
| 718,744 | | |
| 718,744 | |
Retained earnings | |
| 11,538,039 | | |
| 12,760,296 | |
Accumulated other comprehensive income | |
| 2,770,184 | | |
| 2,570,254 | |
Total stockholders’ equity | |
| 21,259,983 | | |
| 22,282,310 | |
Total liabilities and stockholders’ equity | |
$ | 24,519,062 | | |
$ | 25,769,737 | |
The accompanying notes are an integral part
of the condensed consolidated financial statements
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
| |
For The Six Months Ended | | |
For The Three Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenue | |
$ | 661,272 | | |
$ | 12,365,107 | | |
$ | 284,408 | | |
$ | 4,705,765 | |
Cost of revenue | |
| 1,571,028 | | |
| 8,371,806 | | |
| 766,317 | | |
| 4,284,254 | |
Gross profit (loss) | |
| (909,756 | ) | |
| 3,993,301 | | |
| (481,909 | ) | |
| 421,511 | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| 316,501 | | |
| 250,000 | | |
| 174,103 | | |
| 139,471 | |
Loss on disposal of property and equipment | |
| 23,012 | | |
| 2,932,867 | | |
| 23,012 | | |
| 2,932,867 | |
Total operating expenses | |
| 339,513 | | |
| 3,182,867 | | |
| 197,115 | | |
| 3,072,338 | |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (1,249,269 | ) | |
| 810,434 | | |
| (679,024 | ) | |
| (2,650,827 | ) |
| |
| | | |
| | | |
| | | |
| | |
Non-operating income | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 40,505 | | |
| 68,880 | | |
| 20,567 | | |
| 33,514 | |
Interest expense | |
| - | | |
| (7,044 | ) | |
| - | | |
| (3,365 | ) |
Other expenses | |
| (13,493 | ) | |
| (46,851 | ) | |
| (13,468 | ) | |
| (46,534 | ) |
Total non-operating income (loss) | |
| 27,012 | | |
| 14,985 | | |
| 7,099 | | |
| (16,385 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income (Loss) before income taxes | |
| (1,222,257 | ) | |
| 825,419 | | |
| (671,925 | ) | |
| (2,667,212 | ) |
Income taxes | |
| - | | |
| 882,362 | | |
| - | | |
| - | |
Net loss | |
| (1,222,257 | ) | |
| (56,943 | ) | |
| (671,925 | ) | |
| (2,667,212 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss attributable to China Internet Cafe Holdings Group, Inc. common stockholders | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) | |
$ | (671,925 | ) | |
$ | (2,667,212 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) | |
$ | (671,925 | ) | |
$ | (2,667,212 | ) |
Foreign currency translation | |
| 199,930 | | |
| (322,655 | ) | |
| 81,718 | | |
| 67,459 | |
Total comprehensive loss | |
$ | (1,022,327 | ) | |
$ | (379,598 | ) | |
$ | (590,207 | ) | |
$ | (2,599,753 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per share | |
| | | |
| | | |
| | | |
| | |
- Basic | |
$ | (0.22 | ) | |
$ | (0.10 | ) | |
$ | (0.12 | ) | |
$ | (0.52 | ) |
- Diluted | |
$ | (0.22 | ) | |
$ | (0.10 | ) | |
$ | (0.12 | ) | |
$ | (0.52 | ) |
Weighted average common stock outstanding | |
| | | |
| | | |
| | | |
| | |
- Basic | |
| 5,538,002 | | |
| 5,138,002 | | |
| 5,538,002 | | |
| 5,138,002 | |
- Diluted | |
| 5,538,002 | | |
| 5,138,002 | | |
| 5,538,002 | | |
| 5,138,002 | |
The accompanying notes are an integral part
of the condensed consolidated financial statements
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2015
| |
Common Stock | | |
Additional | | |
| | |
| | |
Accumulated
Other | | |
Total | |
| |
Number of
Shares | | |
Amount | | |
Paid-in
Capital | | |
Statutory
Reserves | | |
Retained
Earnings | | |
Comprehensive
Income | | |
Stockholders'
Equity | |
Balance at January 1, 2015 | |
| 5,538,002 | | |
$ | 55 | | |
$ | 6,232,961 | | |
$ | 718,744 | | |
$ | 12,760,296 | | |
$ | 2,570,254 | | |
$ | 22,282,310 | |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,222,257 | ) | |
| - | | |
| (1,222,257 | ) |
Foreign currency translation difference | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 199,930 | | |
| 199,930 | |
Balance at June 30, 2015 | |
| 5,538,002 | | |
$ | 55 | | |
$ | 6,232,961 | | |
$ | 718,744 | | |
$ | 11,538,039 | | |
$ | 2,770,184 | | |
$ | 21,259,983 | |
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
| |
For The Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | | |
| | |
Depreciation | |
| 661,841 | | |
| 2,492,974 | |
Amortization | |
| - | | |
| 23,177 | |
Loss on disposal of property and equipment | |
| 23,012 | | |
| 2,932,867 | |
Deferred tax assets | |
| - | | |
| 77,275 | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Rental deposit | |
| 11,790 | | |
| 32,480 | |
Inventory | |
| - | | |
| 36,027 | |
Accounts payable | |
| (18,937 | ) | |
| (127,146 | ) |
Deferred revenue | |
| 26,086 | | |
| (651,589 | ) |
Payroll and payroll related liabilities | |
| (263,520 | ) | |
| (12,107 | ) |
Income and other taxes payable | |
| (114,988 | ) | |
| (800,583 | ) |
Accrued expenses | |
| (43,758 | ) | |
| (128,686 | ) |
Amount due to a shareholder | |
| 182,213 | | |
| (1,408,688 | ) |
Net cash provided (used) by operating activities | |
| (758,518 | ) | |
| 2,409,058 | |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Increase of property, plant and equipment | |
| (2,692 | ) | |
| (17,596,414 | ) |
Proceeds from the sale of equipment | |
| - | | |
| 458,752 | |
Deposits paid for property, plant and equipment | |
| - | | |
| (292,563 | ) |
Net cash used by investing activities | |
| (2,692 | ) | |
| (17,430,225 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Short term loan repayments | |
| - | | |
| (162,874 | ) |
Net cash flows used by financing activities: | |
| - | | |
| (162,874 | ) |
| |
| | | |
| | |
Effect of foreign currency translation on cash | |
| 191,083 | | |
| (254,558 | ) |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (570,127 | ) | |
| (15,438,599 | ) |
Cash and cash equivalents - beginning of period | |
| 23,789,211 | | |
| 40,241,459 | |
Cash and cash equivalents - end of period | |
$ | 23,219,084 | | |
$ | 24,802,860 | |
| |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest paid | |
$ | - | | |
$ | 7,044 | |
Income taxes paid | |
$ | - | | |
$ | 1,447,073 | |
The accompanying notes are an integral part
of the condensed consolidated financial statements
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(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.) (“China Internet Café”, “the
Company”, “we”, “us”, “our”) was incorporated in the State of Nevada on March 14, 2006.
The Company was a development company from incorporation until the quarter ended June 30, 2010. 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 will operate through its variable interest entities in China to execute the current business
plan of those affiliates which involves the operation of a chain of China-based internet cafes, the “Business.” 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, China
Internet Cafe acquired 100% of the issued and outstanding capital stock of Classic Bond in exchange for 3,800,000 newly issued
shares of the Company’s common stock, which represented approximately 94% of the 4,040,000 issued and outstanding shares
of common stock after the transaction and after the coincident cancellation of 994,720 shares of common stock held by the Company’s
former majority stockholder. The business, assets and liabilities did not change as a result of the reverse acquisition.
This
share exchange transaction resulted in the shareholders of Classic Bond 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 China Internet Cafe 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 China Internet Cafe. 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 China
Internet Cafe‘s common shares. In other words, the 2,000,000 Classic Bond shares outstanding are restated as 4,040,000 common
shares, as of July 2, 2010. Each share of Classic Bond is restated to 2.2 shares of China Internet Cafe.
The
book value of the net assets that for accounting purposes, were deemed to have been acquired by Classic Bond from China Internet
Cafe, 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 were recorded as reorganizational expenses in statement of income.
Classic Bond Development
Limited (“Classic Bond”)
Classic
Bond Development Limited was incorporated on November 2, 2009 in the British Virgins Islands (“BVI”) with 50,000 authorized
common shares with no par value. On November 2, 2009, 50,000 common shares at $0.129 (HK$1) each were issued for $6,452 (HK$50,000)
cash to several shareholders including Mr. Guo Dishan who is the 65% equity interest shareholder and the sole director of the Company.
On
June 23, 2010, the Company issued 1,950,000 shares of common stock of Classic Bond to 42 individuals for an aggregate of $84,093
(HK$651,721) for 641,046 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 and the total amount was $251,612. As of June
30, 2010, 2,000,000 shares of Common Stock were issued and outstanding.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(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 subsidiaries: (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 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 registered capital of $129,032 (HK$1 million). Zhonghefangda is engaged in provision of management and consulting
services and Mr. Guo Dishan is the legal representative of Zhonghefangda.
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 its financial statements. Because the legal representatives
and ultimate major stockholder of Zhonghefangda and Junlong is the same person, Mr. Guo Dishan, Zhonghefangda and Junlong were
deemed, until June 11, 2010, to be under 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 by paying an amount equal to the aggregate net
profit of Junlong for a period of twenty (20) years and for succeeding periods of the same duration until the agreement is terminated
by both parties under agreed conditions. Zhonghefangda will reimburse 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
should be deemed to control Junlong as a Variable Interest Entity and Junlong is consolidated 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 the 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 million (increased by RMB 9 million, from RMB 1 million to RMB 10 million) The capital verification
process has been completed. In April and July of 2010, Junlong acquired three internet cafes in Shenzhen.
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 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 in 2012. The Company closed 51 internet cafes during the year
of 2014. In total, as of June 30, 2015, the Company owned 11 internet cafes within Shenzhen, Guangdong.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 2. | Summary
of Significant Accounting Policies |
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 significant 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, management makes
estimates and assumptions that affect the reported amounts of assets and liabilities and 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 receivables due from related parties, inventories
and the estimation of 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 value 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 data requires the Group to develop
its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates,
however these estimates involve inherent uncertainties and the application of 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
10.
Internet
café members purchase prepaid IC cards which include stored value or deposit money into member’s accounts associated
with their ID cards directly that will be deducted based on time usage of computers at the internet cafe. Revenues derived from
the prepaid IC cards and ID card’s accounts 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 and ID card’s accounts
are included in deferred revenue on the balance sheets. The Company does not charge any service fees that cause a decrease to customer
balances. There is no expiration date for IC cards and ID card’s accounts. During 2014, the company began to use members’
ID card’s accounts instead of prepaid IC cards.
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 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 in 2012. The Company closed 51 internet cafes during the year
of 2014. In total, as of March 31, 2015, the Company owned 11 internet cafes within Shenzhen, Guangdong.
The
Company also records revenue from commissions received from the sale of third parties on-line gaming cards, snacks and drinks.
Commission revenue amounting 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. During the six months ended June 30, 2015 and 2014, the commission income was $25,337 and $203,995,
respectively, less than 4% and 1% of total revenue.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 2. | Summary
of Significant Accounting Policies (continued) |
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, value added taxes, and surcharges. Our value added taxes
is 3% on gross revenue generated from selling time of internet surfing in our internet cafes. Our other surcharges are an education
surcharge of 3% of value added tax amount, city development surcharge of 7% of value added tax amount, a culture development surcharge
of 3% of gross revenue, and a snacks and drinks business tax of 5% of gross revenue.
The
Company may be exposed to credit risk from its cash at banks. 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
represents the IC cards we purchased from IC card manufacturers. Inventories are stated at the lower of cost or market value. Cost
is determined using the first-in, first-out (FIFO) method. In 2014, the Company changed its booking system from IC cards to ID
cards and disposed all unused IC cards.
| (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.
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 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 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:
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 2. | Summary
of Significant Accounting Policies (continued) |
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 equipment deposits amount of $3,241 to purchase fire protection systems for its headquarters in Shenzhen in 2012
and the provider did not obtain the inspection of the fire protection system as of June 30, 2015.
| (l) | Property,
plant and equipment |
Property,
plant and equipment, comprising computer equipment and hardware, leasehold improvements, 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 | |
2-5 years |
Cafe furniture and fixtures | |
5 years |
Office furniture, fixtures and equipment | |
5 years |
Motor vehicles | |
5 years |
Leasehold
improvements mainly result from decoration expense. All of the Company’s leases have terms of 5 years and leasehold improvements
are 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 amortize the customer lists over 5 years. We calculate amortization of definite-lived
intangible assets on a straight-line basis over the useful lives of the intangible assets. Development cost of internal-use software
is insignificant and is recorded as expense in the period such cost occurs.
Deferred
revenue represents unused balances of the prepaid amounts received for ID cards. The Outstanding customer balances are $158,271
and $131,013 as of June 30, 2015 and December 31, 2014, 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 the quarter ended June 30, 2015.
| (o) | Comprehensive
income (loss) |
The
Company follows the FASB’s accounting standard. Comprehensive income (loss) 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 (loss) for the periods presented includes net income (loss)
and foreign currency translation adjustments.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 2. | Summary
of Significant Accounting Policies (continued) |
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 that 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, all net operating losses are from the U.S.
shell company and we currently anticipate insufficient income to utilize these losses in the future, so the asset 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, Shenzhen Zhonghefangda Network Technology Co., Ltd. (“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 the VIE that are being consolidated in the accompanying financial statements.
The
carrying amount of the VIE’s’ assets and liabilities are as follows:
| |
June 30, 2015 | | |
December 31, 2014 | |
Current assets and Long term rental deposit | |
$ | 23,290,676 | | |
$ | 23,871,651 | |
Property, plant and equipment | |
| 1,213,342 | | |
| 1,882,823 | |
Total assets | |
| 24,504,018 | | |
| 25,754,474 | |
Total liabilities | |
| (6,130,759 | ) | |
| (6,453,674 | ) |
Net assets | |
$ | 18,373,259 | | |
$ | 19,300,800 | |
| (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, 2015 | | |
June 30, 2014 | | |
December 31, 2014 | |
Period-end RMB : USD exchange rate | |
| 6.0888 | | |
| - | | |
| 6.1385 | |
Six months average RMB : USD exchange rate | |
| 6.1128 | | |
| 6.1397 | | |
| - | |
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.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 2. | Summary
of Significant Accounting Policies (continued) |
| (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 or the consolidated VIE’s provides any other post-retirement or post-employment benefits.
| (t) | Earnings
(loss) per share (EPS) |
Earnings(loss)
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 Zhonghefangda and Junlong’s articles of association, Zhonghefangda and Junlong
are 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 Zhonghefandaand Junlong, each
is required to allocate 10% of its 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 company, no further allocation is optional.
As
of June 30, 2015 and December 31, 2014, the statutory surplus reserves of Zhonghefanda and Junlong reached 50% of the registered
capital of the subsidiary and the Company was not required to allocate any further amount to 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 August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which are intended to define management’s responsibility to evaluate whether there
is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.
Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as
a going concern, except in limited circumstances. It lacks guidance about management’s responsibility to evaluate whether
there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote
disclosures. This amendment provides guidance to an organization’s management, with principles and definitions that are intended
to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial
statement footnotes.
The amendment is effective for annual periods
ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application
is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. Currently,
the Company is evaluating the impact of the pending adoption of ASU 2014-14 on the disclosure of the consolidated financial statements.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 2. | Summary
of Significant Accounting Policies (continued) |
In January 2015, the FASB issued ASU 2015-01,
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating
the Concept of Extraordinary Items. It eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement
- Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and
transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless
evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary
classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the
item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose
applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.
The amendment is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively.
A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early
adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of
ASU 2015-01 is not expected to have any material impact on the Company's consolidated financial statements.
| 3. | Cash
and cash equivalents |
Cash and cash equivalents are summarized as follows:
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash and cash equivalents at bank | |
$ | 23,204,066 | | |
$ | 23,770,744 | |
Cash on hand | |
| 15,018 | | |
| 18,467 | |
| |
$ | 23,219,084 | | |
$ | 23,789,211 | |
Financial instruments that potentially
subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of June 30,
2015 and December 31, 2014, $23,192,354 and $23,758,813 of the Company’s cash and cash equivalents were held by major banks
located in the PRC, which management believes are of high credit quality, and $313 and $528 of the Company's cash and cash equivalents
were held by Chase Bank, respectively.
| 4. | Property,
Plant and Equipment, net |
Property, plant and equipment, net, consist of the following:
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Leasehold improvements | |
$ | 720,381 | | |
$ | 774,906 | |
Cafe computers equipment and hardware | |
| 2,242,379 | | |
| 2,224,223 | |
Cafe furniture and fixtures | |
| 186,737 | | |
| 185,225 | |
Office furniture, fixtures and equipment | |
| 140,680 | | |
| 139,541 | |
Motor vehicles | |
| 488,429 | | |
| 484,475 | |
| |
$ | 3,778,606 | | |
$ | 3,808,370 | |
Less: Accumulated depreciation | |
| (2,565,265 | ) | |
| (1,925,547 | ) |
Property, plant and equipment, net | |
$ | 1,213,341 | | |
$ | 1,882,823 | |
For the six months ended June 30, 2015,
depreciation expense amounted to $661,841, of which $591,853 and $69,988 were recorded as cost of sales and general and administrative
expense, respectively.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 5. | Loss on Disposal of Equipment |
On June 9, 2015, the Company relocated
its headquarter and disposed all leasehold improvements of previous headquarter. As of June 30, 2015, the loss of disposal of leasehold
improvements as following:
| |
June 30, 2015 | |
Disposal of leasehold improvements | |
$ | 63,304 | |
Accumulated deprecation | |
| 40,292 | |
Loss on disposal of leasehold improvements | |
$ | 23,012 | |
On June 13, 2013, the Company entered into
a loan agreement with China Construction Bank for $162,288 (RMB 1,000,000), which was secured by a director’s guarantee.
The annual interest rate is approximately 9%. The loan was paid in full on June 12, 2014.
For the six months ended June 30, 2015
and 2014, the interest expense on this loan was nil and $7,044, respectively.
For the three months ended June 30, 2015
and 2014, the interest expense on this loan was nil and $3,365, respectively.
| 7. | Income
and Other Taxes Payable |
Income and other tax payables consist of the following:
| |
June 30, 2015 | | |
December 31, 2014 | |
Value added taxes | |
$ | 8,523 | | |
$ | 60,917 | |
Income tax | |
| - | | |
| - | |
Withholding individual income tax payable | |
| 2,363 | | |
| 5,629 | |
Other tax payable | |
| 9,546 | | |
| 68,227 | |
Total | |
$ | 20,432 | | |
$ | 134,773 | |
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
Mr. Dishan Guo | |
$ | 1,893,477 | | |
$ | 1,711,061 | |
The amount due to Mr. Dishan Guo is unsecured
with no stated interest and is payable on demand. The amount due as of June 30, 2015, represents amounts accumulated since 2007
used to pay daily operating expenses and professional fees. In May of 2014, $1,507,429 was paid to Mr. Dishan Guo per his demand.
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% of its net income.
For the six months ended June 30, 2015
and 2014, the Company did not record any uncertain tax benefits.
Aggregate undistributed earnings of approximately
$14.5 million as of June 30, 2015 of the Company’s affiliated entity 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, 2009 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
CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
The Company contributes to a state pension
scheme organized by municipal and provincial governments in respect of 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 $8,506 and $6,321 for the six months
ended June 30, 2015 and 2014, respectively. The pension expense was $4,096 and $3,112 for the three months ended June 30, 2015
and 2014, respectively.
Common Stock
On
July 2, 2010, China Internet Cafe entered into a share exchange transaction with Classic Bond and the shareholders of Classic Bond.
Pursuant to the Share Exchange Agreement, China Internet Cafe acquired 100% of the issued and outstanding capital stock of Classic
Bond in exchange for 3,800,000 newly issued shares of the Company’s common stock, which represented approximately 94% of
the 4,040,000 issued and outstanding shares of common stock after the transaction and after the coincident cancellation of 994,720
shares of common stock held by the Company’s former majority stockholder The business, assets and liabilities did not change
as a result of the reverse acquisition.
On June 16, 2014 the Company effected a
one (1)-for-five (5) reverse stock split of the Company’s issued and outstanding shares of common stock, decreasing the number
of outstanding shares from 25,689,524 to 5,138,002. These statements have been adjusted to reflect this reverse split on a historical
pro-forma basis.
As
of June 30, 2015 and December 31, 2014, there were 5,538,002 shares of Common Stock issued and outstanding, respectively.
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 854,941 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, 2012, dividends have been accrued as dividends payable and
are not paid as of June 30, 2014.
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 convert 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.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 11. | Stockholders’
Equity (continued) |
On
February 22, 2013, in accordance with its terms, all 854,941 shares of Series A Preferred Stock outstanding automatically converted
into 854,941shares of common stock.
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).
Because certain of the instruments issued
in the Offering are derivative instruments which will be initially and continuously carried at fair value, we believe the aggregate
proceeds received should be allocated following the principles implicit in the guidance at ASC 815-15-30-2. The proceeds are first
allocated to those derivative instruments that will initially and continuously be carried at fair value. The remaining proceeds,
if any, are then allocated between the non-derivative host contract and other non-derivative instruments on a relative fair value
basis.
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. Accordingly, the embedded conversion option may be required
to be bifurcated and accounted for as a derivative instrument unless it meets the exemption provided by ASC 815-10-15-74a.
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 is 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 is not available
and the embedded conversion option has been bifurcated and accounted for as a derivative liability. Because the embedded conversion
option has been bifurcated and accounted for as a derivative liability, no beneficial conversion option was required to be recognized.
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 expired 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 15,000 shares per day.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 11. | Stockholders’
Equity (continued) |
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.
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 June 30, 2015, 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 expenses 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 as is 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) 85,548 Warrants - $1.35 per share (ii) 17,099 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 85,548 Warrants do not permit the Company
to call the Warrants.
Securities Escrow Agreement
In connection with the Offering, we also
entered into a Securities Escrow Agreement with the Investors and Mr. Dishan Guo (the “Stockholder”), the Company’s
chairman and principal stockholder, pursuant to which the Stockholder placed in escrow one share of our Common Stock for each $10
of Units sold to the Investors, equal to 641,205 shares of Common Stock (the “Escrow Shares”). The escrow agreement
establishes a performance threshold for the Company based on net income (as defined and subject to certain non-cash adjustments)
for the year ending December 31, 2011 of $10,000,000. If the Company achieves 95% or more of the performance threshold, the shares
will be returned to the Stockholder. If the Company’s net income is less than $9,500,000, then the shares will be delivered
to the Investors in the amount of 10% of the escrow shares for each full percentage point by which such performance threshold was
not achieved, up to a maximum of the 641,205 shares placed in escrow.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 11. | Stockholders’
Equity (continued) |
The Stockholder’s agreement to place
the shares in escrow was undertaken in his capacity as a major stockholder of the Company. In accordance with the guidance at ASC
718-10-S99-2, the Company does not believe the potential return of the shares to the Stockholder is compensatory because such return
is not contingent on his continued employment with the Company. The Investors who may receive shares under the escrow arrangement
have no relationship with the Company other than in their capacity as shareholders.
The shares are outstanding and are included
in the weighted average shares outstanding for purposes of computing basic earnings per share.
Lock-up Agreement
On the Closing Date, the Company entered
into a lock-up agreement (the “Lock-Up Agreement”) with the Stockholder whereby the Stockholder is prohibited from
selling our securities that he directly or indirectly owns (the “Lock-Up Shares”) until nine months after the Registration
Statement is declared effective (the “Lock-Up Period”). 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.
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 are 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. This determination
is subjective. However, in complying with the guidance provided in FASB ASC 815, we concluded, based upon the preponderance and
weight of all terms, conditions and features of the host contract, that the Series A Preferred Stock was more akin to a debt instrument
for purposes of considering the clear and close relationship of the embedded derivative features to the host contract. ASC 815
requires bifurcation when the embedded derivative features and the host contract have risks that are not clearly and closely related.
Certain exemptions to this rule, such as that for conventional convertible instruments that are convertible into a fixed number
of shares, were not available to us because the conversion price of the Series A Preferred Stock is not fixed and will be adjusted
if the Company sells shares of Common Stock at a price lower than the conversion price. Also, because the conversion price of the
Series A Preferred Stock is denominated in U.S. Dollars, as for the warrants discussed above, the embedded conversion option is
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 if it is unable to deliver registered shares on conversion. Accordingly, the exemption in FASB ASC 815-10-15-74
is not available and 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.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 11. | Stockholders’
Equity (continued) |
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 December 31, 2013, the Warrants, the
Placement Agent Warrants and the embedded derivative instrument related to the Series A Preferred Stock were re-valued at $-0-,
$-0- and $-0-, respectively, because of their short remaining life with expiration date on February 14, 2014 and the recent low
volatility of the stock price. The aggregate change in the fair value of the derivative liabilities between December 31, 2012 and
December 31, 2013 of $393,534 has been credited to income.
On February 14, 2014, the Warrants, the
Placement Agent Warrants and the embedded derivative instrument related to the Series A Preferred Stock expired.
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 854,940 shares of Series A Preferred Stock have
a liquidation value of $5,770,849. Because the Series A Preferred Stock has conditions for its redemption that are outside our
control, it is classified outside of Stockholders’ Equity, in the mezzanine section of our balance sheet, in accordance with
ASC 480-10-S99-3A. Because the Series A Preferred Stock is not currently redeemable and the Company currently believes that it
is not probable that it will become redeemable, no adjustment of the carrying value of the Series A Preferred Stock has been recognized.
If it becomes probable that the Series A Preferred Stock will be redeemed, it will be adjusted to its redemption value.
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, have been charged to additional paid-in capital.
Advisory Fees
On November 22, 2010, the Company entered
into a 12 month Advisory Agreement with an affiliate of its placement agent, under which the affiliate agreed to render on-going
financial advisory and investment banking services to the Company. As compensation for its services, the Company agreed to pay
a monthly fee of $10,000, payable on the first day of each month after the completion of a Transaction, as defined in the agreement
between the Company and its placement agent. Payment of these fees commenced on March 1, 2011, following completion of the sale
of the Units.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 11. | Stockholders’
Equity (continued) |
The Company also agreed to place in escrow
for issuance to the affiliate a total of 80,000 shares of Common Stock, with 40,000 shares to be released following the completion
of a Transaction, 20,000 shares to be released six months after the completion of a Transaction and 20,000 shares to be released
12 months after the completion of a Transaction. In accordance with ASC 505-50-25-7, the Company concluded that the value of the
shares should be measured at the date the Transaction was completed because the shares are effectively fully vested as of that
date and non-forfeitable and the agreement does not provide for any further specific performance criteria to be met. The Company
valued the shares issued at $1.00 per share (based on the quoted market price), resulting in compensation expense for the services
rendered and to be rendered of $400,000. The expense related to the services provided and to be provided was recognized over the
period from November 22, 2010, the date from which services commenced under the agreement, to the one year anniversary, when the
agreement expired. At December 31, 2011, the expense has been fully recognized.
In addition to the above fees, the Company
issued 10,000 shares to its legal counsel, in consideration for their introducing the Company to the placement agent. The cost
of these shares, which were valued at $5.00 per share (determined as described above) were expensed during the year ended December
31, 2011.
On January 31, 2014, the Company entered
into a 12 month Consultancy Agreement with Apex Marketing holding, under which Apex Marketing holding agreed to render financial
advisory, acquisitions, and related matter services to the Company. As compensation for its services, the Company issued 400,000
shares to Apex Marketing holding for paying its fees $500,000. Payment of its fees commenced on July 10, 2014.
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.
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.
Options
On February 27, 2014, the Board approved
the Company’s 2014 Incentive Stock Plan (the “2014” Plan). The 2014 Plan provides for grant of incentive stock
options, non-statutory stock options, restricted stock, restricted stock purchase offers and other types of stock-based awards
to the Company’s employees, officers, directors and consultants. Up to 499,666 shares of common stock are issuable pursuant
to awards the 2014 Plan. Unless terminated earlier by the Board, the 2014 Plan shall terminate at the close of business on February
26, 2024. As of the date of this report, 400,000 shares have been issued under the 2014 Plan.
| 12. | Commitments
and Contingencies |
Operating Leases
In
the normal course of business, the Company leases office space and internet cafes under operating leases agreements, which expire
through 2017. The Company rents internet cafe 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.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 12. | Commitments
and Contingencies (continued) |
As
of June 30, 2015, the Company was obligated under operating leases requiring minimum rentals as follows:
Fiscal year |
|
|
|
|
Remainder of 2015 |
|
$ |
144,927 |
|
2016 |
|
|
31,413 |
|
|
|
$ |
176,340 |
|
During the three and six months ended June
30, 2015, rent expenses amounted to $128,697 and $262,215, respectively, of which $118,922 and $236,955 was recorded as cost of
sales, respectively
During the three and six months ended June
30, 2014, rent expenses amounted to $637,013 and $1,293,813, respectively, of which $619,430 and $1,258,935 was recorded as cost
of sales, respectively.
The Company did not have any customer constituting
greater than 10% of net sales for the three and six months ended June 30, 2015 and 2014.
At June 30, 2015 and December 31, 2014,
there was one supplier of consignment snacks and drinks in the amount of $26,639 and $45,283, respectively, which accounted for
100% and 100% of the Company’s accounts payable.
| 14. | Operating
Risk and Uncertainties |
Interest
rate risk
The
interest rates and terms of repayment of bank and other borrowings are disclosed in Note 5. Other financial assets and liabilities
do not have material interest rate risk.
Foreign
currency risk
Most
of the transactions of the Company were settled in Renminbi. In the opinion of the directors, the Company does not have significant
foreign currency risk exposure.
Company’s
operations are substantially in foreign countries
Substantially
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 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 (RMB 10,000,000 is required for a regional
internet café chain and RMB 50,000,000 is required for a national internet café chain) and facility requirements
for the establishment of internet cafes. 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 internet cafes.
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 other service providers
are available to the Company.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| 15. | Earnings
(loss) per Share |
Basic
earnings(loss) per share is computed by dividing net income(loss) attributable to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings(loss) 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 (loss) per share are presented in the following table:
| |
For The Three Months Ended | | |
For The Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
BASIC | |
| | | |
| | | |
| | | |
| | |
Numerator for basic loss per share attributable to the Company’s common stockholders: | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (671,925 | ) | |
$ | (2,667,212 | ) | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) |
Net loss used in computing basic earnings per share | |
$ | (671,925 | ) | |
$ | (2,667,212 | ) | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic weighted average shares outstanding | |
| 5,538,002 | | |
| 5,138,002 | | |
| 5,538,002 | | |
| 5,138,002 | |
Basic loss per share | |
$ | (0.12 | ) | |
$ | (0.52 | ) | |
$ | (0.22 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
For The Three Months Ended | | |
For The Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
DILUTED | |
| | | |
| | | |
| | | |
| | |
Numerator for diluted earnings (loss) per share attributable to the Company’s common stockholders: | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (671,925 | ) | |
$ | (2,667,212 | ) | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) |
Net loss used in computing diluted earnings per share | |
$ | (671,925 | ) | |
$ | (2,667,212 | ) | |
$ | (1,222,257 | ) | |
$ | (56,943 | ) |
| |
| | | |
| | | |
| | | |
| | |
Diluted weighted average shares outstanding | |
| 5,538,002 | | |
| 5,138,002 | | |
| 5,538,002 | | |
| 5,138,002 | |
Diluted loss per share | |
$ | (0.12 | ) | |
$ | (0.52 | ) | |
$ | (0.22 | ) | |
$ | (0.01 | ) |
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.
As of the date of this report, the Company
has evaluated subsequent events for potential recognition and disclosure through the date of the financial statement issuance.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion
and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks
and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports
we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking
statements.
Overview
We, through our wholly-owned
subsidiary, Junlong Culture Communication Co. Ltd. (“Junlong”), operate an internet café chain in Shenzhen city,
People’s Republic of China (“PRC”), consisting of 11 internet cafes in high traffic areas. Our focus is on providing
top quality internet café facilities that offer a one-stop entertainment and media venue for customers, typically mature
students and migrant workers, at reasonable prices. Although our cafes do sell snacks, drinks, and game access cards, more than
96% of our revenue comes directly from selling internet access time to our computers.
During the second quarter
of 2015, our focus was on existing cafes. However, our business environment had been very challenging. We are gradually losing
members due to the expanded coverage of 4G network and free Wi-Fi services, the availability of smart phones and tablets and the
increasing popularity of mobile games. We expect our future growth to be driven by a number of factors and trends including:
1. Our ability to improve our service to
our customers by providing enjoyable entertainment environment.
2. Our ability to optimize our existing
internet cafes.
3. Our ability to identify and acquire target
companies for joint venture in the coming years.
4. Our ability to identify and invest in
other business opportunities.
For the three months
ended June 30, 2015, our revenue was approximately $0.28 million and our net loss was roughly $0.67 million, representing decreases
of 94% and 75%, respectively, from the revenue of roughly $4.7 million and net loss of approximately $2.67 million for the three
months ended June 30, 2014.
The
discussion below of our performance is based upon our unaudited financial statements for the second quarter ended June 30, 2015
and 2014, which are included in this report.
We
believe that the following factors will continue to affect our financial performance:
Improved Disposable
Income. We believe as the Shenzhen municipal government increases the minimum wage, migrant workers, who are
our major customers, will have more disposable income. We are expecting the inflow of migrant workers to continue to contribute
to our revenue growth.
Continued Internet
Café Use. Our business may be adversely affected by increased 4G network. We believe, however, people prefer
playing videos and games on a computer’s screen than on the smaller screen of a cell phone. In addition, young people in
the PRC prefer internet cafes because they are also a social place for them. We expect the preference will continue and provide
sustainable business.
Customer Loyalty. As
we expand our operations, developing and maintaining customer loyalty will be critical to revenue growth.
Expansion into
South Western Provinces. The Company currently holds an internet café chain license. Because the Company
believes that a national license is imperative for its goal to develop a national market, the Company's original primary objective
was to acquire and open at least 20 internet cafes in two provinces other than Guangdong province by the end of calendar year 2015.
The Company conducted research in the south-western provinces and cities including Chongqing, Sichuan, Guizhou, and Yunnan and
targeted internet cafes in these areas for acquisition purposes. Our plan is to acquire existing internet cafes by purchasing them
through cash and/or stock. We also plan to organically grown our own network of cafes. Accordingly, whether or not we will be successful
in our expansion plans will depend on the availability of cash from our revenues and the price of our stock.
However, our expansion plans have
been affected by the following trends:
Internet Café
Industry Recession. Since 2013, the PRC has experienced a recession in the internet café industry resulting in a decrease
of customers (Source: http://www.cnnic.cn/gywm/xwzx/rdxw/2014/201401/W020140116475324694244.pdf, page 26). We believe that this
recession stems from the availability of more modern and affordable information and technology and communication tools such as
mobile phones. If this trend were to continue and there is no discernible value proposition in or relevance for internet cafes,
then the demand for them will fall and we will not pursue our acquisition plans as aggressively.
Slowdown in Economy.
Because most of our customers comprise migrant, low income workers, if the GDP growth in the PRC were to stall or continue its
decline, manufacturing demand may fall, leading to less migrant workers and a decline in customer demand for our services. Unfortunately,
the trend is that the PRC will likely see economic expansion in 2015 decelerate to 7.1% as slowdown in real estate investment continues
resulting in more factories being shuttered (Source:http://www.bloomberg.com/news/articles/2014-12-14/china-pboc-economist-says-2015-gdp-growth-to-slow-to-7-1-percent).
The Surge of Non-licensed
Internet Cafes. Recently we have noticed a surge in non-licensed internet cafes which are a direct threat to our business.
These unlicensed cafes offer a cheaper alternative to our services because of lower overheads and if they are allowed to continue
to proliferate, this will result in less customer demand for our services and accordingly impact our growth plans.
At present, we have
shelved our expansion plans temporarily but shall continue to monitor the market for our services and adjust our plans accordingly.
We shall err on the side of caution as our expansion plans are cost-intensive. If the demand for our services decreases, we will
pursue our expansion plans less aggressively and/or perhaps extend our original deadline.
We have also started
exploring the possibility of acquiring profitable businesses that are complementary to our business. We are still in the exploratory
stages but suffice it to say, any future acquisition will be premised on (i) synergies between both businesses, (ii) the potential
to cross market services and products, (iii) lowering our operating costs and (iv) increasing our profit margins.
Results of Operations
The
following tables set forth key components of our results of operations for the periods indicated, in dollars and as a percentage
of revenue.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
UNAUDITED
| |
For The Three Months Ended June 30, | | |
| | |
| |
| |
2015 | | |
2014 | | |
Amount | | |
% | |
| |
| | |
As percentage of revenue | | |
| | |
As percentage of revenue | | |
change | | |
change | |
Revenue | |
$ | 284,408 | | |
| 100 | % | |
$ | 4,705,765 | | |
| 100 | % | |
| -4,421,357 | | |
| -94 | % |
Cost of revenue | |
| 766,317 | | |
| 269 | % | |
| 4,284,254 | | |
| 91 | % | |
| -3,517,937 | | |
| -82 | % |
Gross profit (loss) | |
| -481,909 | | |
| -169 | % | |
| 421,511 | | |
| 9 | % | |
| -903,420 | | |
| -214 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| 174,103 | | |
| 61 | % | |
| 139,471 | | |
| 3 | % | |
| 34,632 | | |
| 25 | % |
Loss on disposal of equipment | |
| 23,012 | | |
| 0 | % | |
| 2,932,867 | | |
| 62 | % | |
| -2,909,855 | | |
| -99 | % |
Total operating expenses | |
| 197,115 | | |
| 69 | % | |
| 3,072,338 | | |
| 65 | % | |
| -2,875,223 | | |
| -94 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| -679,024 | | |
| -239 | % | |
| -2,650,827 | | |
| -56 | % | |
| 1,971,803 | | |
| -74 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-operating income (expenses) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 20,567 | | |
| 7 | % | |
| 33,514 | | |
| 1 | % | |
| -12,947 | | |
| -39 | % |
Interest expenses | |
| - | | |
| 0 | % | |
| -3,365 | | |
| 0 | % | |
| 3,365 | | |
| -100 | % |
Other expenses | |
| -13,468 | | |
| -5 | % | |
| -46,534 | | |
| -1 | % | |
| 33,066 | | |
| -71 | % |
Total non-operating income (expenses) | |
| 7,099 | | |
| 2 | % | |
| -16,385 | | |
| 0 | % | |
| 23,484 | | |
| -143 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss before income taxes | |
| -671,925 | | |
| -236 | % | |
| -2,667,212 | | |
| -57 | % | |
| 1,995,287 | | |
| -75 | % |
Income taxes | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Net loss attributable to China Internet Cafe Holdings Group, Inc. | |
| -671,925 | | |
| -236 | % | |
| -2,667,212 | | |
| -57 | % | |
| 1,995,287 | | |
| -75 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss attributable to China Internet Cafe Holdings Group, Inc. Common stockholders | |
$ | -671,925 | | |
| -236 | % | |
$ | -2,667,212 | | |
| -57 | % | |
| 1,995,287 | | |
| -75 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | -671,925 | | |
| -236 | % | |
| -2,667,212 | | |
| -57 | % | |
| 1,995,287 | | |
| -75 | % |
Foreign currency translation | |
| 81,718 | | |
| 29 | % | |
| 67,459 | | |
| 1 | % | |
| 14,259 | | |
| 21 | % |
Net Comprehensive loss | |
$ | -590,207 | | |
| -208 | % | |
$ | -2,599,753 | | |
| -55 | % | |
| 2,009,546 | | |
| -77 | % |
Comparison of Three Months Ended June 30, 2015 and 2014
Revenue
Our revenue is primarily generated from
prepaid fees in IC cards and member accounts which include stored value
that will be deducted based on time usage of computers at our internet cafes. Our revenue
decreased approximately $4.42 million, or 94%, from approximately $4.71 million for the three months ended June 30, 2014 to $0.28
million for the three months ended June 30, 2015. The decrease in revenue was due to a substantial decrease in the number
of our internet cafes. During the year of 2014, we closed five internet cafes located in areas with many new internet cafes
in April due to deteriorating business resulting from fierce competitions from these new internet cafes, and temporarily closed
17 internet cafes for renovation during the second quarter which were further suspended in the third quarter for incompliance with
fire control regulations along with additional 20 internet cafes. As of December 2014, we had closed an aggregate of 51 internet
cafes. In order to adapt to market changes and improve our revenue, we will focus on optimizing our existing profitable internet
cafes and expanding our businesses to other cities and provinces during 2015. We expect a recover in revenue once the optimization
and expansion of our business take effect.
Cost of Revenue
Cost of revenue is primarily composed of
depreciation and amortization, salary, rent, utility value added tax and surcharge. Among the components of cost of revenue, depreciation
and amortization, salary and rent are fixed costs while utility and value added tax and surcharge are variable costs, which change
in proportion to the change in revenue. Our cost of sales for the three months ended
June 30, 2015 decreased approximately $3.52 million, or 82%, to approximately $0.77 million from approximately $4.28 million for
the same period in 2014. The decrease was mainly attributed to decrease in the number
of our internet cafes.
Gross Profit
Gross
profit is the difference between revenue and cost of revenue. Our gross profit decreased by approximately $0.90 million, or 214%,
to a loss of approximately $0.48 million for the three months ended June 30, 2015 from a profit of approximately $0.42 million
for the same period in 2014. Gross loss as a percentage of sales was 169% for the three months ended June 30, 2015, as compared
to gross profit margin of 9% for 2014. The decrease in our gross profit margin was because there was a significant decrease in
revenue while the cost of revenue did not decrease proportionately.
Operating Expenses
Operating expenses are composed of general
and administrative expenses. General and administrative expenses mainly consist of overhead of our headquarters in Shenzhen and
fees paid to legal counsel, auditor, and consultants. Our operating expenses decreased by approximately $2.88 million, or 94%,
to approximately $0.20 million for the three months ended June 30, 2015 from approximately $3.07 million for the same period in
2014.
The decrease was primarily due to a decrease
of approximately $2.9 million in loss on disposal of property and equipment. During the second quarter of 2014, we installed 12,659
new computers in our cafes and disposed of all café computers installed before 2012. We expect our operating expenses to
remain at the current level.
Non-Operating Income/Expenses
Our other income was $7,099 for the three
months ended June 30, 2015 as compared to a loss of approximately $16,385for the same period in 2014. The change was due to the
decrease in other expenses.
Income (Loss) before Income Taxes
Loss
before income taxes for the three months ended June 30, 2015 was approximately $0.67 million, a decrease of approximately $2 million,
or 75%, from approximately $2.67 million for the same period in 2014. The change was mainly attributable to the decrease in operating
expenses.
Income Taxes
Our
income taxes were $0 for the three months ended June 30, 2015 and 2014 primarily due to the loss from operations.
Net Loss
Our
net loss for the three months ended June 30, 2015 was approximately $0.67 million, a decrease of approximately $2 million, or 75%,
from net loss of approximately $2.67 million for the same period in 2014 as a result of the factors described above.
Results of Operations for the Six Months
Ended June 30, 2014 and 2013
The following tables
set forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
CHINA INTERNET CAFE HOLDINGS GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
UNAUDITED
| |
For The
Six Months Ended June 30, | | |
| | |
| |
| |
2015 | | |
2014 | | |
Amount | | |
% | |
| |
| | |
As percentage of revenue | | |
| | |
As percentage of revenue | | |
change | | |
change | |
Revenue | |
$ | 661,272 | | |
| 100 | % | |
$ | 12,365,107 | | |
| 100 | % | |
| -11,703,835 | | |
| -95 | % |
Cost of revenue | |
| 1,571,028 | | |
| 238 | % | |
| 8,371,806 | | |
| 68 | % | |
| -6,800,778 | | |
| -81 | % |
Gross profit (loss) | |
| -909,756 | | |
| -138 | % | |
| 3,993,301 | | |
| 32 | % | |
| -4,903,057 | | |
| -123 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| 316,501 | | |
| 48 | % | |
| 250,000 | | |
| 2 | % | |
| 66,501 | | |
| 27 | % |
Loss on disposal of property and equipment | |
| 23,012 | | |
| 3 | % | |
| 2,932,867 | | |
| 24 | % | |
| -2,909,855 | | |
| 10 | % |
Total operating expenses | |
| 339,513 | | |
| 51 | % | |
| 3,182,867 | | |
| 26 | % | |
| -2,843,354 | | |
| -89 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| -1,249,269 | | |
| -189 | % | |
| 810,434 | | |
| 7 | % | |
| -2,059,703 | | |
| -254 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-operating income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 40,505 | | |
| 6 | % | |
| 68,880 | | |
| 1 | % | |
| -28,375 | | |
| -41 | % |
Interest expenses | |
| - | | |
| 0 | % | |
| -7,044 | | |
| 0 | % | |
| 7,044 | | |
| -100 | % |
Other expenses | |
| -13,493 | | |
| -2 | % | |
| -46,851 | | |
| 0 | % | |
| 33,358 | | |
| -71 | % |
Total non-operating income | |
| 27,012 | | |
| 4 | % | |
| 14,985 | | |
| 0 | % | |
| 12,027 | | |
| 80 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) before income taxes | |
| -1,222,257 | | |
| -185 | % | |
| 825,419 | | |
| 7 | % | |
| -2,047,676 | | |
| -248 | % |
Income taxes | |
| - | | |
| 0 | % | |
| 882,362 | | |
| 7 | % | |
| -882,362 | | |
| -100 | % |
Net loss attributable to China Internet Cafe Holdings Group, Inc. | |
| -1,222,257 | | |
| -185 | % | |
| -56,943 | | |
| 0 | % | |
| -1,165,314 | | |
| 2046 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss attributable to China Internet
Cafe Holdings Group, Inc. Common stockholders | |
$ | -1,222,257 | | |
| -185 | % | |
$ | -56,943 | | |
| 0 | % | |
| -1,165,314 | | |
| 2046 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | -1,222,257 | | |
| -185 | % | |
| -56,943 | | |
| 0 | % | |
| -1,165,314 | | |
| 2046 | % |
Foreign currency translation | |
| 199,930 | | |
| 30 | % | |
| -322,655 | | |
| -3 | % | |
| 522,585 | | |
| -162 | % |
Net Comprehensive loss | |
$ | -1,022,327 | | |
| -155 | % | |
$ | -379,598 | | |
| -3 | % | |
| -642,729 | | |
| 169 | % |
Comparison of Six Months Ended June 30, 2015 and 2014
Revenue
Our revenue is primarily generated from
prepaid fees in IC cards and member accounts which include stored value
that will be deducted based on time usage of computers at our internet cafes. Our revenue
decreased approximately $11.70 million, or 95%, from approximately $12.37 million for the six months ended June 30, 2014 to $0.66
million for the six months ended June 30, 2015. The decrease in revenue was due to a substantial decrease in the number of
our internet cafes. During the year of 2014, we closed five internet cafes located in areas with many new internet cafes in
April due to deteriorating business resulting from fierce competitions from these new internet cafes, and temporarily closed 17
internet cafes for renovation during the second quarter which were further suspended in the third quarter for incompliance with
fire control regulations along with additional 20 internet cafes. As of December 2014, we had closed an aggregate of 51 internet
cafes. In order to adapt to market changes and improve our revenue, we will focus on optimizing our existing profitable internet
cafes and expanding our businesses to other cities and provinces during 2015. We expect a recover in revenue once the optimization
and expansion of our business take effect..
Cost of Revenue
Cost of revenue is primarily composed of
depreciation and amortization, salary, rent, utility value added tax and surcharge. Among the components of cost of revenue, depreciation
and amortization, salary and rent are fixed costs while utility and value added tax and surcharge are variable costs, which change
in proportion to the change in revenue. Our cost of sales for the six months ended June
30, 2015 decreased approximately $6.80 million, or 81%, to approximately $1.57 million from approximately $8.37 million for the
same period in 2014. The decrease was mainly attributed to decrease in the number
of our internet cafes.
Gross Profit
Gross
profit is the difference between revenue and cost of revenue. Our gross profit decreased by approximately $4.9 million, or 123%,
to a loss of approximately $0.9 million for the six months ended June 30, 2015 from a profit of approximately $3.99 million for
the same period in 2014. Gross loss as a percentage of sales was 138% for the six months ended June 30, 2015, as compared to gross
profit margin of 32% for 2014. The decrease in our gross profit margin was because there was a significant decrease in revenue
while the cost of revenue did not decrease proportionately.
Operating Expenses
Operating expenses are composed of general
and administrative expenses. General and administrative expenses mainly consist of overhead of our headquarters in Shenzhen and
fees paid to legal counsel, auditor, and consultants. Our operating expenses decreased by approximately $2.84 million, or 123%,
to approximately $0.34 million for the six months ended June 30, 2015 from approximately $3.18 million for the same period in 2014.
The decrease was primarily due to a decrease
of approximately $2.91 million in loss on disposal of property and equipment. During the second quarter of 2014, we installed 12,659
new computers in our cafes and disposed of all café computers installed before 2012. We expect the operating expenses to
remain at the current level.
Non-operating Income/Expenses
Our other income was $27,012 for the six
months ended June 30, 2015 as compared with non-operating income of $14,985 for the same period in 2014. The increase was due to
the decrease in other expenses.
Income (Loss) before Income Taxes
Loss
before income taxes for the six months ended June 30, 2015 was approximately $1.22 million, a decrease of approximately $2.05 million,
or 248%, from net income before income taxes of approximately $0.83 million for the same period in 2014. The change was mainly
attributable to the decrease in revenue.
Income Taxes
Our
income taxes decreased by approximately $0.88 million to approximately $0 for the six months ended June 30, 2015 from approximately
$0.88 million for the same period in 2014, primarily due to the loss from operations.
Net Loss
Our
net loss for the six months ended June 30, 2015 was approximately $1.22 million, an increase of $1.17 million, or 2,046%, from
net loss of approximately $0.06 million for the same period in 2014 as a result of the factors described above.
Liquidity and Capital Resources
As
of June 30, 2015, we had cash and cash equivalents of approximately $23.2 million. The following table provides detailed information
about our cash flow for each financial statement period presented in this report.
Cash Flow | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Net cash provided (used) by operating activities | |
$ | (758,518 | ) | |
$ | 2,409,058 | |
Net cash used by investing activities | |
| (2,692 | ) | |
| (17,430,225 | ) |
Net cash flows used by financing activities | |
| - | | |
| (162,874 | ) |
Effect of foreign currency translation on cash and cash equivalents | |
| 191,083 | | |
| (254,558 | ) |
Net cash flows | |
| (570,127 | ) | |
| (15,438,599 | ) |
Operating Activities
Net cash used in operating activities
was approximately $0.76 million for the six months ended June 30, 2015 as compared to net cash provided by operating activities
of approximately $2.41 million for the same period in 2014. The change was mainly attributable to the net loss in operations in
the second quarter of 2015.
Investing Activities
Net cash used in investing activities
was $2,692 for the six months ended June 30, 2015 compared with approximately $17.4 million for the same period of 2014. The
change was mainly because we purchased 12,659 new café computers for approximately $17.6 million during the
second quarter of 2014.
Financing Activities
Net
cash used in financing activities was $0 for the six months ended June 30, 2015 as compared to $0.16 million for the same period
of 2014. In June of 2014, we paid off our short-term loan of approximately $0.16 million.
Critical Accounting Policies
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our
management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important for an understanding of our financial condition
and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial conditions
and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting
estimates are particularly sensitive because of their significance to financial statements and because of the possibility that
future events affecting the estimate may differ significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.
Revenue recognition
Internet
café members purchase prepaid IC cards which include stored value or deposit money into member’s accounts associated
with their ID cards directly that will be deducted based on time usage of computers at the internet cafe. Revenues derived from
the prepaid IC cards and ID card’s accounts 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 and ID card’s accounts
are included in deferred revenue on the balance sheets. The Company does not charge any service fees that cause a decrease to customer
balances. There is no expiration date for IC cards and ID card’s accounts. During 2014, the company began to use members’
ID card’s accounts instead of prepaid IC cards.
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 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 in 2012. The Company closed 51 internet cafes during the year
of 2014. In total, as of June 30, 2015, the Company owned 11 internet cafes within Shenzhen, Guangdong.
The
Company also records revenue from commissions received from the sale of third parties on-line gaming cards, snacks and drinks.
Commission revenue amounting 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. During the six months ended June 30, 2015 and 2014, the commission income was approximately
$25,337 and $203,995, respectively, less than 4% and 1% of total revenue.
Cost of goods sold
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, value added taxes, and surcharges. Our value added taxes
is 3% on gross revenue generated from selling time of internet surfing in our internet cafes. Our other surcharges are an education
surcharge of 3% of value added tax amount, city development surcharge of 7% of value added tax amount, a culture development surcharge
of 3% of gross revenue, and a snacks and drinks business tax of 5% of gross revenue.
Property, plant and equipment
Property,
plant and equipment, comprising computer equipment and hardware, leasehold improvements, 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 |
|
2-5 years |
Cafe furniture and fixtures |
|
5 years |
Office furniture, fixtures and equipment |
|
5 years |
Motor vehicles |
|
5 years |
Leasehold
improvements mainly result from decoration expense. All of the Company’s leases have terms of 5 years and leasehold improvements
are amortized over 5 years, which represents the shorter of useful life and lease term.
Deferred Revenue
Deferred
revenue represents unused balances of the prepaid amounts received for ID cards. The outstanding customer balances are $158,271
and $131,013 as of June 30, 2015 and December 31, 2014, 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 the quarter ended June 30, 2015.
Comprehensive income
The
Company follows the FASB’s accounting standard. Comprehensive income (loss) 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 (loss) for the periods presented includes net income (loss)
and foreign currency translation adjustments.
Income taxes
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 that 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, all net operating losses are from the U.S.
shell company and we currently anticipate insufficient income to utilize these losses in the future, so the asset balance has been
fully reserved for.
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, 2015 | | |
June 30, 2014 | | |
December 31, 2014 | |
Period-end RMB : USD exchange rate | |
| 6.0888 | | |
| - | | |
| 6.1385 | |
Six months average RMB : USD exchange rate | |
| 6.1128 | | |
| 6.1397 | | |
| - | |
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.
Recently issued accounting pronouncements
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which are intended to define management’s responsibility to evaluate whether there
is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.
Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as
a going concern, except in limited circumstances. It lacks guidance about management’s responsibility to evaluate whether
there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote
disclosures. This amendment provides guidance to an organization’s management, with principles and definitions that are intended
to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial
statement footnotes.
The amendment is effective for annual periods
ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application
is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. Currently,
the Company is evaluating the impact of the pending adoption of ASU 2014-14 on the disclosure of the consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01,
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating
the Concept of Extraordinary Items. It eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement
- Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and
transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless
evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary
classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the
item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose
applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.
The amendment is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively.
A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early
adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of
ASU 2015-01 is not expected to have any material impact on the Company's consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains
a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the
reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified
by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated
and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, as appropriate,
to allow timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b)
under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including
Dishan Guo, the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s
disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the quarter ended June 30, 2015.
Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s
disclosure controls and procedures were not effective as a result of the material weakness identified in our internal control over
financial reporting disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
Specifically,
our management identified certain matters involving internal control and our operations that it considered to be material weaknesses.
As defined in the Exchange Act, a material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim
financial statements will not be prevented or detected on a timely basis. The material weakness identified by our management is
described below:
We
did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in
the application of GAAP commensurate with the complexity of our financial accounting and reporting requirements. This
control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial
statements including disclosures will not be prevented or detected on a timely basis as a result.
2015
Planned Remediation
We
are committed to improving our financial organization. As part of this commitment, we will look to increase our personnel resources and
technical accounting expertise within the accounting function by the end of fiscal year 2015 to resolve non-routine or complex
accounting matters. We have in the past, and will continue to engage outside consultants in the future as necessary
in order to ensure proper treatment of non-routine or complex accounting matters.
Management
believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the material weakness of
having insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application
of GAAP commensurate with our complexity and our financial accounting and reporting requirements.
We
will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over
financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or
improvements, as necessary and as funds allow.
Changes in Internal Controls over
Financial Reporting
There have been no
changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibit No. |
|
Description |
|
|
|
3.1(2) |
|
Amended and Restated Articles of Incorporation of China Internet Café Holdings Group, Inc. |
|
|
|
3.2(3) |
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Amended and Restated Bylaws, adopted on July 30, 2010 |
|
|
|
3.3(2) |
|
Certificate of Designations Preferences and Rights of the 5% Series A Convertible Preferred Stock of China Internet Café Holdings Group, Inc. |
|
|
|
3.4 (6) |
|
Certificate of Change |
|
|
|
3.5 (7) |
|
Certificate of Correction |
|
|
|
4.1 (8) |
|
China Internet Café Holdings Group, Inc. 2014 Incentive Stock Plan |
|
|
|
31.1 |
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|
|
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32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
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101.INS |
|
XBRL Instance Document* |
101.SCH |
|
XBRL Schema Document* |
|
|
|
101.CAL |
|
XBRL Calculation Linkbase Document* |
|
|
|
101.LAB |
|
XBRL Label Linkbase Document * |
|
|
|
101.PRE |
|
XBRL Presentation Linkbase Document* |
|
|
|
101.DEF |
|
XBRL Definition Linkbase Document* |
*File herewith.
**Furnished herewith.
(1) Incorporated by reference to our Current
Report on Form 8-K filed with the SEC on July 9, 2010.
(2) Incorporated by reference to our Current
Report on Form 8-K filed with the SEC on February 23, 2011.
(3) Incorporated by reference to our Current
Report on Form 8-K filed with the SEC on August 3, 2010.
(4) Incorporated by reference to our Annual
Report on Form 10-K filed with the SEC on June 30, 2008.
(5) Incorporated by reference to our Annual
Report on Form 10-K filed with the SEC on April 19, 2013. (6) Incorporated herein by reference to Exhibit 3.01 to our Current Report
on Form 8-K filed with the SEC on April 29, 2014.
(7) Incorporated herein by reference to
Exhibit 3.01 to our Current Report on Form 8-K filed with the SEC on May 15, 2014.
(8) Incorporated herein by reference
to Exhibit 4.1 to our Registration Statement on Form S-8 filed with the SEC on March 12, 2014.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
CHINA INTERNET CAFÉ HOLDINGS GROUP, INC. |
|
|
|
Date: August 14, 2015 |
By: |
/s/ Dishan Guo |
|
|
Dishan Guo |
|
|
Chief Executive Officer and Chief Financial Officer |
|
|
(Principal Executive Officer and Principal Accounting and Financial Officer) |
Exhibit 31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT
TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Dishan Guo, certify that:
| (1) | I have reviewed this report on Form 10-Q of China Internet Café Holdings Group, Inc. (the “Company”); |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects, the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report; |
| (4) | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d) | Disclosed in the report any change in the Company’s internal control over financial reporting that occurred during the
Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting. |
| (5) | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s
auditors and the Company’s board of directors: |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial
information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s
internal control over financial reporting. |
Date: August 14, 2015 |
|
|
/s/ Dishan Guo |
|
Dishan Guo |
|
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Accounting and Financial
Officer) |
Exhibit 32.1
CERTIFICATION
PURSUANT
TO 18 U.S. C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of China Internet Café Holdings Group, Inc. (the
“Company’’) on Form 10-Q for the quarter ended June 30, 2015 as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Dishan Guo, Chief Executive Officer and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 14, 2015 |
|
|
/s/ Dishan Guo |
|
Dishan Guo |
|
Chief Executive Officer and Chief Financial Officer |
|
(Principal Executive Officer and Principal Accounting and Financial Officer) |