For the transition period from ______________________ to _______________________
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter.
The aggregate market value of the voting
and non-voting common stock of the issuer held by non-affiliates as of June 30, 2015 was approximately $560,964.81 (2,671,261 shares
of common stock held by non-affiliates) based upon the closing price of $0.21 per share of common stock as quoted by OTCQB on June
30, 2015.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date.
As of May 12, 2016, there are 5,538,002
shares of common stock, par value $0.00001 issued and outstanding.
The accompanying notes are an integral
part of the condensed consolidated financial statements
The accompanying notes are an integral
part of the condensed consolidated financial statements
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral
part of the condensed consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
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 19,000,000 newly issued shares of the Company’s common stock,
which represented approximately 94% of the 20,200,000 issued and outstanding shares of common stock after the transaction and
after the coincident cancellation of 4,973,600 shares of common stock held by the Company’s former majority stockholder.
The business, assets and liabilities 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 20,200,000 common shares, as of July
2, 2010. Each share of Classic Bond is restated to 10.10 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 stock with no par value.
On November 2, 2009, 50,000 common stock at $0.129 (HK$1) each were issued for cash at $6,452 (HK$50,000) 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 further
issued 1,950,000 shares of common stock of classic bond to 42 individuals to raise fund 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 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
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 in 2007, 11 internet
cafes in 2008, 5 internet cafes in 2009, 16 internet cafes in 2010, 15 internet cafes in 2011, and 3 internet cafes in 2012. The
Company closed 51 internet cafes in 2014 and 2 internet cafes in 2015. In total, as of December 31, 2015, the Company owned 9
internet cafes within Shenzhen, Guangdong.
|
2.
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Basis
of presentation
|
The Company’s accounting policies
used in the preparation of the accompanying financial statements conform to accounting principles generally accepted in the United
States of America ("US GAAP") and have been consistently applied.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(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 of America, 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 vale recorded in other income (expense) in our statement of loss and comprehensive loss
in each subsequent period. In general, warrants with anti-dilution provisions are measured using the binomial valuation model.
The methodology based, in part, upon inputs for which there is little or no observable market 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
15.
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.
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.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
Inventory represented the IC cards we
purchased from IC cards manufacturer. Inventories are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out (FIFO) method. 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. As of December 31, 2015, the fair value of cash and cash equivalents, accounts payable, short-term loans, and
accrued expenses approximated carrying value due to the short maturity of the instruments, or are based on quoted market prices
or interest rates which fluctuate with market rates except for related party debt or receivables for which it is not practicable
to estimate fair value.
The Company adopted the provisions of
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1
– Inputs
are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2
– Inputs
are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or
corroborated by observable market data.
Level 3
– Inputs
are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information.
The 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:
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 $3,226 to purchase fire protection systems for its new headquarters in Shenzhen in 2012, the provider did not obtain
the inspection of the fire protection till the moving of headquarter in 2015. The deposits amount of $3,226 was recorded in other
expenses.
|
(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.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
|
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 equipments
|
|
5
years
|
Motor
vehicles
|
|
5
years
|
Leasehold improvements mainly result from
decoration expense. All of the Company’s lease contracts state lease terms of 5 years and leasehold improvements are amortized
over 5 years, which represents the shorter of useful life and lease term.
An asset’s carrying amount is written
down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
The gain or loss arising on retirement
or disposal is determined as the difference between its sales proceeds and the carrying amount of the asset and is recognized
in profit or loss.
Our intangible assets consist of definite-lived
assets subject to amortization such as Business License and Customer Lists. The useful lives of the Business License are 9 to
15 years and we amortized the customer lists over 5 years. We calculate amortization of the definite-lived intangible assets on
a straight-line basis over the useful lives of the related intangible assets. Development cost of internal-use software is insignificant
and is recorded as expense in the period such cost occurs.
Deferred revenue represents unused balances
of the prepaid amounts from the IC cards that are unused balance. The Outstanding customer balances are $147,103 and $131,013
as of December 31, 2015 and 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 year ended
December 31, 2015.
The Company follows the FASB’s accounting
standard. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events
and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company,
comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Income taxes are provided on an asset
and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from
ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using
tax rates that have been enacted or substantively enacted at the balance sheet date. Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 740-10-50-2 requires deferred tax assets and liabilities be recognized for
future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied
to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future deductibility is uncertain. Losses incurred by the Company in prior
years provide for a net operating loss carry-forward. However, due to the fact that all net operating losses are from the U.S.
shell company which we currently anticipate insufficient income to utilize in the future, the assets balance has been fully reserved
for.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(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:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Current assets and Long term rental deposit
|
|
$
|
19,363,492
|
|
|
$
|
23,871,651
|
|
Property, plant and equipment
|
|
|
1,584,744
|
|
|
|
1,882,823
|
|
Total assets
|
|
|
20,948,236
|
|
|
|
25,754,474
|
|
Total liabilities
|
|
|
(5,805,683
|
)
|
|
|
(6,453,674
|
)
|
Net assets
|
|
$
|
15,142,553
|
|
|
$
|
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:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Year-end RMB : USD exchange rate
|
|
|
6.4908
|
|
|
|
6.1385
|
|
Average yearly RMB : USD exchange rate
|
|
|
6.2166
|
|
|
|
6.1432
|
|
The RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
|
(s)
|
Post-retirement
and post-employment benefits
|
The Company contributes to a state pension
plan in respect of its PRC employees. Other than the above, neither the Company nor its subsidiary or the consolidated VIE’s
provides any other post-retirement or post-employment benefits.
|
(t)
|
Earnings
per share (EPS)
|
Earnings per share is calculated in accordance
with ASC 260-10 which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss)
per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number
of shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis
of potential common shares (e.g., convertible securities, preferred stock and warrants) as if they had been converted at the beginning
of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that
increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. See Note 13 for details.
|
(u)
|
Retained
earnings-appropriated
|
In accordance with the relevant PRC regulations
and Zhonghefangda and Junlong’s articles of association, Junlong is required to allocate their respective net income to
statutory surplus reserve.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(v)
|
Statutory
surplus reserves
|
In accordance with the relevant laws and
regulations of the PRC and the articles of associations of the Company, Junlong is required to allocate 10% of their net income
reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an
annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further
allocation is optional.
As of December 31, 2015 and 2014, the
statutory surplus reserves of the subsidiary already 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.
|
(x)
|
Recent
Accounting Pronouncements
|
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09
for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should
apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods
within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting period. Currently, the Company is evaluating the impact of our
pending adoption of ASU 2014-09 and ASU 2015-14 on its consolidated financial statements and has not yet determined the method
by which it will adopt the standard in year 2018.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update require an entity to measure inventory
within the scope of ASU 2015-11 (the amendments in ASU 2015-11 do not apply to inventory that is measured using last-in, first-out
or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in,
first-out or average cost) at the lower of cost and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent
measurement is uncharged for inventory measured using last-in, first-out or the retail inventory method. The amendments in ASU
2015-11 more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial
Reporting Standards (“IFRS”). ASU 2015-11 is effective for public business entities for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. The amendments in ASU 2015-11 should be applied prospectively
with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this guidance
is not expected to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU
2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740): Changes to the balance sheet classification of deferred taxes.
These changes simplify the presentation of deferred income taxes by requiring all deferred income tax assets and liabilities to
be classified as noncurrent in a classified balance sheet. The Company has elected to early adopt ASU 2015-17 as of December 31,
2015 and retrospectively applied ASU 2015-17 to all periods presented. As of December 31, 2015, the Company did not have any deferred
tax assets and liabilities previously classified as current in the consolidated balance sheet. The early adoption of ASU 2015-17
did not result any impact on the Company's consolidated balance sheet.
|
3.
|
Critical
Accounting Estimates and Judgements
|
The preparation of the Company’s
consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts
of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods.
Estimates and judgments are continually
evaluated and are based on historical experience and other factors, including expectations of future events that are believed
to be reasonable under the circumstances.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
3.
|
Critical
Accounting Estimates and Judgements (continued)
|
The Company makes estimates and assumptions
concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The key
sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting period, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed
below:
|
(a)
|
Useful lives
and impairment assessment of property, plant and equipment
|
Property, plant and equipment are stated
at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual
depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset basis
or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated
by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
|
(b)
|
Impairment
loss recognized in respect of property, plant and equipment
|
As of December 31, 2015, the carrying
amount of property, plant and equipment was $1,584,745. An impairment loss amount of $1,074,435 recognized against the original
carrying amount of café equipment, software, and leasehold improvements. There was no impairment loss recognized for the
year ended December 31, 2014. Determining whether property, plant and equipment are impaired requires an estimation of the recoverable
amount of the property, plant and equipment. Such estimation was based on certain assumptions, which are subject to uncertainty
and might materially differ from the actual results.
|
4.
|
Cash
and cash equivalents
|
Cash and cash equivalents are summarized as follows:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Cash and cash equivalents at bank
|
|
$
|
19,301,246
|
|
|
$
|
23,770,744
|
|
Cash in hand
|
|
|
3,254
|
|
|
|
18,467
|
|
|
|
$
|
19,304,500
|
|
|
$
|
23,789,211
|
|
Financial instruments that potentially
subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents (Note 2). As of
December 31, 2015 and 2014, $19,299,626 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 $1,116 and $528 of the Company's cash and cash equivalents
were held by Chase bank and JP Morgan Chase bank in USA, respectively.
|
5.
|
Property,
Plant and Equipment, net
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Carrying
amount before
Impairment
|
|
|
Impairment
|
|
|
Carrying
Amount after
Impairment
|
|
|
Carrying amount
(no Impairment in
2014)
|
|
Leasehold improvement
|
|
$
|
2,093,886
|
|
|
$
|
823,644
|
|
|
$
|
1,270,242
|
|
|
$
|
774,906
|
|
Cafe computers equipment and hardware
|
|
|
1,740,415
|
|
|
|
250,791
|
|
|
|
1,489,624
|
|
|
|
2,224,223
|
|
Cafe furniture and fixtures
|
|
|
236,966
|
|
|
|
-
|
|
|
|
236,966
|
|
|
|
185,225
|
|
Office furniture, fixtures and equipment
|
|
|
137,312
|
|
|
|
-
|
|
|
|
137,312
|
|
|
|
139,541
|
|
Motor vehicles
|
|
|
458,179
|
|
|
|
-
|
|
|
|
458,179
|
|
|
|
484,475
|
|
|
|
$
|
4,666,758
|
|
|
$
|
1,074,435
|
|
|
$
|
3,592,323
|
|
|
$
|
3,808,370
|
|
Less: Accumulated depreciation
|
|
|
(2,007,578
|
)
|
|
|
|
|
|
|
(2,007,578
|
)
|
|
|
(1,925,547
|
)
|
Property, plant and equipment, net
|
|
$
|
2,659,180
|
|
|
$
|
1,074,435
|
|
|
$
|
1,584,745
|
|
|
$
|
1,882,823
|
|
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
5.
|
Property,
Plant and Equipment, net (continued)
|
During the year ended December 31, 2015,
depreciation expenses amounted to $1,217,119, of which $1,119,605 and $97,514 were recorded as cost of sales and general and administrative
expense, respectively.
During the year ended December 31, 2014,
depreciation expenses amounted to $7,473,992, of which $7,389,107 and $84,885 were recorded as cost of sales and general and administrative
expense, respectively.
At
the end of the reporting period, the Company assessed the recoverable amount of property, plant and equipment, and determined that
carrying amount was impaired by $1,074,435 (2014: nil).
|
6.
|
Loss
on Disposal of Property and Equipment
|
On June 9, 2015, the Company relocated
its headquarter and disposed leasehold improvements at previous location.
In September 2015, the Company renovated
two internet cafes, disposed their leasehold improvements, and disposed computers equipment and furniture at the two cafes with
proceeds amount of $127,182.
In October 2015, the Company renovated
one internet café and closed two internet cafes. The Company disposed leasehold improvements of these three cafes, and
disposed computers equipment and furniture at these three cafes with proceeds amount of $114,307.
In the second quarter of 2014, the Company
has disposed all of its café computers purchased before 2012 and installed 12,659 new café computers. All disposed
café computers were sold for RMB 200 each. The proceeds from the disposal of café computers were $458,490 in total.
In the fourth quarter, the Company closed
its 51 internet cafes and disposed all computers, equipment, furniture, and leasehold improvements. The proceeds from the disposal
of property and equipment were $2,580,356
As of December 31, 2015 and 2014, the
loss of disposal of leasehold improvements as following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Disposal of café computers and equipment
|
|
$
|
994,328
|
|
|
$
|
34,151,977
|
|
Disposal of leasehold improvements
|
|
|
363,054
|
|
|
|
4,993,428
|
|
Accumulated deprecation
|
|
|
(1,022,350
|
)
|
|
|
(21,022,422
|
)
|
Disposal of property and equipment, net
|
|
|
335,032
|
|
|
|
18,122,983
|
|
Proceeds from disposal of café computers and equipment
|
|
|
241,489
|
|
|
|
3,038,846
|
|
Loss on disposal of property and equipment
|
|
$
|
93,543
|
|
|
$
|
15,084,137
|
|
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 years ended December 31, 2015
and 2014, the interest expense on this loan was nil and $7,040, respectively.
|
8.
|
Income and Other Taxes Payable
|
Income and other tax payables consist of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Value added taxes
|
|
$
|
6,250
|
|
|
$
|
60,917
|
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Withhold individual income tax payable
|
|
|
2,076
|
|
|
|
5,629
|
|
Other tax payable
|
|
|
7,000
|
|
|
|
68,227
|
|
Total
|
|
$
|
15,326
|
|
|
$
|
134,773
|
|
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Mr. Guo Di Shan, a shareholder of the Company
|
|
$
|
1,907,649
|
|
|
$
|
1,711,061
|
|
The amount due to Mr. Di Shan Guo is unsecured with no stated
interest and is payable on demand. The amount due as of December 31, 2015, represents amounts accumulated since 2007 and 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.
Cost of revenue consists of the following:
|
|
For The Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,119,604
|
|
|
$
|
7,431,575
|
|
Salary
|
|
|
701,947
|
|
|
|
3,522,627
|
|
Rent
|
|
|
446,971
|
|
|
|
2,446,590
|
|
Utility
|
|
|
294,957
|
|
|
|
1,317,418
|
|
Business taxes
|
|
|
71,512
|
|
|
|
1,006,380
|
|
Others
|
|
|
314,320
|
|
|
|
2,763,360
|
|
|
|
$
|
2,949,311
|
|
|
$
|
18,487,950
|
|
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 years ended December 31, 2015
and 2014, the Company did not record any uncertain tax benefits.
Aggregate undistributed earnings of approximately
$12.3 million as of December 31 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, 2010 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 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
Basic earnings per share is computed by
dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including
convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the period,
if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in
the following table:
|
|
For The Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
BASIC
|
|
|
|
|
|
|
|
|
Numerator for basic loss per share attributable to the Company’s common stockholders:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,549,927
|
)
|
|
$
|
(19,787,811
|
)
|
Net loss used in computing basic earnings per share
|
|
$
|
(3,549,927
|
)
|
|
$
|
(19,787,811
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
5,538,002
|
|
|
|
5,328,686
|
|
Basic loss per share
|
|
$
|
(0.64
|
)
|
|
$
|
(3.71
|
)
|
|
|
For The Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
DILUTED
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per share attributable to the Company’s common stockholders:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,549,927
|
)
|
|
$
|
(19,787,811
|
)
|
Net loss used in computing diluted earnings per share
|
|
$
|
(3,549,927
|
)
|
|
$
|
(19,787,811
|
)
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
5,538,002
|
|
|
|
5,328,686
|
|
Diluted loss per share
|
|
$
|
(0.64
|
)
|
|
$
|
(3.71
|
)
|
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 $15,820 and $12,843 for the years ended
December 31, 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 19,000,000 newly
issued shares of the Company’s common stock, which represented approximately 94% of the 20,200,000 issued and outstanding
shares of common stock after the transaction and after the coincident cancellation of 4,973,600 shares of common stock held by
the Company’s former majority stockholder The business, assets and liabilities did not change as a result of the reverse
acquisition.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
14.
|
Stockholders’ Equity (continued)
|
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 December 31, 2015 and 2014, there
were 5,538,002 shares of Common Stock issued and outstanding.
Series A Preferred Stock
On February 16, 2011, the Company filed
with the Secretary of State of Nevada, as an amendment to its Articles of Incorporation, a Certificate of Designation, Preferences
and Rights for the 5% Series A Convertible Preferred Stock, par value $0.00001 per share (the “Series A Preferred Stock”).
On February 22, 2011, the Company issued 4,274,703 shares of its Series A Preferred Stock.
For each outstanding share of Series A
Preferred Stock, dividends are payable quarterly, at the rate of 5% per annum ($0.675 per share), on or before each date that
is thirty days following the last day of March, June, September, and December of each year, commencing September 30, 2011. Dividends
on the Series A Preferred Stock accrue and are cumulative from and after the date of initial issuance. For the quarter ended September
30 and December 31 of 2012 and from January 1, 2013 to February 22, 2014, dividends have been accrued as dividends payable and
are not paid as of December 31, 2015.
The Series A Preferred Stock was not subject
to mandatory redemption (except on liquidation) but was redeemable in certain circumstances. Because of the possible redemption
conditions, the Series A Preferred Stock was classified as mezzanine equity.
Each share of Series A Preferred Stock
may be converted at any time, at the option of the holder, into a number of fully paid and non-assessable shares of Common Stock
equal to the quotient of (i) the Series A Liquidation Preference of $1.35 per share divided by (ii) the conversion price in effect
as of the date of the Conversion Notice. The initial conversion price of the Series A Preferred Stock was $1.35 per share.
In addition to the holder’s right
to convert the Series A Preferred Stock at any time, provided that the Common Stock underlying the Series A Preferred Stock is
registered under an effective registration statement or is available for resale under Rule 144, without limitation, all outstanding
shares of the Series A Preferred Stock automatically converted into shares of Common Stock at the earlier to occur of (i) February
22, 2013, the 24 month anniversary of the Closing Date of the issuance of the Series A Preferred Stock, or (ii) at such time that
the volume-weighted average price of the Company’s Common Stock is equal to or greater than $3.00 (as may be adjusted for
any stock splits or combinations of the Common Stock) for a period of ten consecutive trading days and such Common Stock has an
average daily trading volume, for ten consecutive trading days, equal to or greater than 50,000 shares.
On February 22, 2013, in accordance with
its terms, all 4,274,703 shares of Series A Preferred Stock outstanding automatically converted into 4,274,703 shares 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).
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
15.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants
|
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 75,000 shares per day.
The Warrants are free-standing derivative
instruments. Although the Company is a U.S. entity, the Company has no U.S. operations and all of its operations are conducted,
through its subsidiaries, in the People’s Republic of China. Accordingly, because the Company is fully invested in China
and those operations in China represent the Company’s only source of future revenues or income, the Company concluded that
its functional currency should be considered to be the RMB. As a result, because the Warrants are denominated in U.S. dollars,
they are denominated in a currency different from the Company’s functional currency and therefore, in accordance with the
guidance at ASC 815-40-15-7I, the Warrants are not considered to be indexed only to the Company’s common stock. As a result,
the exemption provided by ASC 815-10-15-74a is not available and the Warrants are recorded as a derivative liability.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
15.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (continued)
|
Registration Rights Agreement
In connection with the Offering, the Company
entered into a Registration Rights Agreement with the Investors, in which the Company agreed to file a registration statement
to register for resale the Common Stock and the Common Stock issuable upon conversion of the Series A Preferred Stock and exercise
of the Series A and Series B Warrants, within 45 calendar days of the Closing Date, and to have the registration statement declared
effective within 150 calendar days of the Closing Date or within 180 calendar days of the Closing Date in the event of a full
review of the registration statement by the Securities and Exchange Commission. If the Company does not comply with the foregoing
obligations under the Registration Rights Agreement, the Company will be required to pay cash liquidated damages to each Investor,
at the rate of 1% of the applicable subscription amount for each 30 day period or part thereof in which we are not in compliance;
provided, that such liquidated damages will be capped at 10% of the subscription amount of each Investor and will not apply to
any securities that may be sold pursuant to Rule 144 under the Securities Act, or which are subject to an SEC restriction with
respect to Rule 415 under the Securities Act.
The required registration statement was
filed by the required due date. However, the Company did not meet the deadline to render its S-1 registration statement effective.
At December 31, 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 expense related to the Offering. After payment of the placement agent cash fees and legal
and other expenses, the Company received net proceeds of $5,675,614.
In addition, the placement agents received
warrants to purchase such number of securities equal to 9% of the aggregate number of shares of common stock issuable in connection
with the Units (the “Placement Agent Warrants”). The Placement Agent Warrants expire after three years and are exercisable
at the following prices: (i) 427,740 Warrants - $1.35 per share (ii) 85,494 Series A Warrants - $2.00 per share and (iii) 85,494
Series B Warrants - $3.00 per share. The terms of the Warrants, including anti-dilution protection for stock splits and similar
events, are similar to the Warrants issued to the Investors, except that the 427,740 Warrants do not permit the Company to call
the Warrants.
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.
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.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
15.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (continued)
|
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 they directly or indirectly own (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.
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.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
15.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (continued)
|
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 4,274,703 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 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
15.
|
Sale of Common Stock, Series A Preferred Stock and
Warrants (continued)
|
The Company also agreed to place in escrow
for issuance to the affiliate a total of 400,000 shares of Common Stock, with 200,000 shares to be released following the completion
of a Transaction, 100,000 shares to be released six months after the completion of a Transaction and 100,000 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 50,000 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 $1.00 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.
|
16.
|
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 2020. The Company rents
internet cafes venues and office space, primarily for regional sales administration offices that are conducive to administrative
operations. The operating leases agreements generally contain renewal options that may be exercised in the Company's discretion
after the completion of the base rental terms. In addition, many of the leases provide for regular increases to the base rental
rate at specified intervals, which usually occur on an annual basis.
As of December 31, 2015, the Company was
obligated under operating leases requiring minimum rentals as follows:
Fiscal year
|
|
|
|
2016
|
|
$
|
347,402
|
|
2017
|
|
|
297,621
|
|
2018
|
|
|
83,071
|
|
2019
|
|
|
79,682
|
|
2020
|
|
|
60,578
|
|
|
|
$
|
868,354
|
|
During the year ended December 31, 2015,
rent expenses amounted to $480,650, of which $446,971 and $33,679 were recorded as cost of sales and general and administrative
expense, respectively.
CHINA INTERNET CAFE HOLDINGS GROUP,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
|
16.
|
Commitments and Contingencies (continued)
|
During the year ended December 31, 2014,
rent expenses amounted to $2,446,590, of which $2,385,702 and $60,888 were recorded as cost of sales and general and administrative
expense, respectively.
Social Benefits Coverage
We have obtained social benefits coverage
for employees who work at the Junlong headquarters. For other employees, because of the high mobility of their work, and the difficulty
of transferring social benefits coverage from one province to another, they usually work on a probationary basis and do not enter
into long employment relationships with us. Because the cost of social benefits coverage is considerable compared to their total
monthly income, the Company allows the employees to decide whether or not to pay the social benefits coverage. It is reasonable
to assume that the company is subject to administrative fines and penalties as a result of its failure to obtain social insurance
for these employees.
The Company did not have any customer
constituting greater than 10% of net sales for the years ended December 31, 2015 and 2014.
At December 31, 2015 and 2014, there was
one supplier of consignment snacks and drinks with amounts due from the Company of $13,559 and $45,282 respectively, which accounted
for 13% and 100% of the Company’s accounts payable. At December 31, 2015, the Company has accounts payable to two contractors
due to its renovation of internet cafes, amount of $93,750, which accounted for 87% of the Company’s accounts payable.
|
18.
|
Operating Risk and Uncertainties
|
Interest rate risk
The interest rates and terms of repayment
of bank and other borrowings are disclosed in Note 9. 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 (RMB10,000,000 is required for a regional internet café chain and RMB50,000,000
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 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
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 an internet café chain. 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
predominantly 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.