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
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(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
MARCH 31, 2016 AND DECEMBER 31, 2015
(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 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 March 31, 2016, the Company owned 9 internet
cafes within Shenzhen, Guangdong.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Basis
of presentation
|
The Company’s accounting policies
used in the preparation of the accompanying financial statements conform to accounting principles generally accepted in the United
States of America (“US GAAP”) and have been consistently applied.
|
(b)
|
Principle
of consolidation
|
The consolidated financial statements
include the accounts of China Internet Cafe Holdings Group, Inc., Classic Bond Development Limited, Zhonghefangda and the VIE-Junlong.
All 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.
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 three months ended March 31, 2016 and 2015, the commission income was $10,584 and $13,132, respectively, less than
4% of total revenue.
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.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies (continued)
|
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.
|
(h)
|
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 March 31, 2016, the fair value of cash and cash equivalents, accounts payable, and accrued expenses approximated
carrying value due to the short maturity of the instruments, or are based on quoted market prices or interest rates which fluctuate
with market rates except for related party debt or receivables for which it is not practicable to estimate fair value.
The Company adopted the provisions of
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1
– Inputs
are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2
– Inputs
are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or
corroborated by observable market data.
Level 3
– Inputs
are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information.
The 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.
|
(i)
|
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.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(j)
|
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.
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.
Deferred revenue represents unused balances
of the prepaid amounts received for ID cards. The Outstanding customer balances are $174,241 and $147,103 as of March 31, 2016
and December 31, 2015, 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
March 31, 2016.
|
(l)
|
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.
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.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(n)
|
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:
|
|
March
31,
2016
|
|
|
December
31,
2015
|
|
Current assets and Long term rental deposit
|
|
$
|
19,327,790
|
|
|
$
|
19,363,492
|
|
Property, plant and equipment
|
|
|
1,219,739
|
|
|
|
1,584,744
|
|
Total assets
|
|
|
20,547,529
|
|
|
|
20,948,236
|
|
Total liabilities
|
|
|
(5,788,214
|
)
|
|
|
(5,805,683
|
)
|
Net assets
|
|
$
|
14,759,315
|
|
|
$
|
15,142,553
|
|
|
(o)
|
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:
|
|
March
31,
2015
|
|
|
March
31,
2015
|
|
|
December 31,
2015
|
|
Period-end RMB : USD exchange rate
|
|
|
6.4479
|
|
|
|
-
|
|
|
|
6.4908
|
|
Three months average RMB : USD exchange rate
|
|
|
6.5395
|
|
|
|
6.1358
|
|
|
|
-
|
|
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.
|
(p)
|
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.
|
(q)
|
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 14 for details.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies (continued)
|
|
(r)
|
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.
|
(s)
|
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 March 31, 2016 and December 31,
2015, 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.
|
(t)
|
Recent
Accounting Pronouncements
|
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Board is issuing
this Update as part of its Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate,
and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining
or improving the usefulness of the information provided to users of financial statements. The areas for simplification in this
Update were identified through outreach for the Simplification Initiative, pre-agenda research for the Private Company Council,
and the August 2014 Post-Implementation Review Report on FASB Statement No. 123(R), Share-Based Payment. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas
for simplification apply only to nonpublic entities. For public business entities, the amendments in this Update are effective
for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities,
the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning
after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts
the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption of
this guidance is not expected to have a material impact on our condensed consolidated financial statements.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
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.
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. 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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at bank
|
|
$
|
19,261,778
|
|
|
$
|
19,301,246
|
|
Cash on hand
|
|
|
11,886
|
|
|
|
3,254
|
|
|
|
$
|
19,273,664
|
|
|
$
|
19,304,500
|
|
Financial instruments that potentially
subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of March 31,
2016 and December 31, 2015, $19,256,409 and $19,299,626 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 $4,865 and $1,116 of the Company’s cash and
cash equivalents were held by Chase Bank, respectively.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
5.
|
Property,
Plant and Equipment, net
|
Property, plant and equipment, net, consist of the following:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
Carrying
amount
(no Impairment)
|
|
|
Carrying
amount
before Impairment
|
|
|
Impairment
|
|
|
Carrying
Amount
after Impairment
|
|
Leasehold improvement
|
|
$
|
1,278,692
|
|
|
$
|
2,093,886
|
|
|
$
|
823,644
|
|
|
$
|
1,270,242
|
|
Cafe computers equipment and hardware
|
|
|
1,499,535
|
|
|
|
1,740,415
|
|
|
|
250,791
|
|
|
|
1,489,624
|
|
Cafe furniture and fixtures
|
|
|
238,543
|
|
|
|
236,966
|
|
|
|
-
|
|
|
|
236,966
|
|
Office furniture, fixtures and
equipment
|
|
|
138,226
|
|
|
|
137,312
|
|
|
|
-
|
|
|
|
137,312
|
|
Motor vehicles
|
|
|
461,228
|
|
|
|
458,179
|
|
|
|
-
|
|
|
|
458,179
|
|
|
|
$
|
3,616,224
|
|
|
$
|
4,666,758
|
|
|
$
|
1,074,435
|
|
|
$
|
3,592,323
|
|
Less: Accumulated
depreciation
|
|
|
(2,396,484
|
)
|
|
|
(2,007,578
|
)
|
|
|
|
|
|
|
(2,007,578
|
)
|
Property,
plant and equipment, net
|
|
$
|
1,219,740
|
|
|
$
|
2,659,180
|
|
|
$
|
1,074,435
|
|
|
$
|
1,584,745
|
|
For the three months ended March 31, 2016,
depreciation expense amounted to $370,290, of which $357,210 and $13,080 were recorded as cost of sales and general and administrative
expense, respectively.
By the end of December 31, 2015, the Company
assessed the recoverable amount of property, plant and equipment, and determined that carrying amount was impaired by $1,074,435.
6.
|
Income
and Other Taxes Payable
|
Income and other tax payables consist of the following:
|
|
March
31, 2016
|
|
|
December 31, 2015
|
|
Value added taxes
|
|
$
|
8,519
|
|
|
$
|
6,250
|
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Withholding individual income tax payable
|
|
|
2,081
|
|
|
|
2,076
|
|
Other tax payable
|
|
|
9,540
|
|
|
|
7,000
|
|
Total
|
|
$
|
20,140
|
|
|
$
|
15,326
|
|
|
|
March
31,
2016
|
|
|
December 31,
2015
|
|
Mr. Dishan Guo
|
|
$
|
1,957,894
|
|
|
$
|
1,907,649
|
|
The amount due to Mr. Dishan Guo is unsecured
with no stated interest and is payable on demand. The amount due as of March 31, 2016 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 three months ended March 31, 2016
and 2015, the Company did not record any uncertain tax benefits.
Aggregate undistributed earnings of approximately
$11.9 million as of March 31, 2016 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
MARCH 31, 2016 AND DECEMBER
31, 2015
(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 $3,598 and $4,410 for the three months
ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31,
2015, 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.
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.
CHINA INTERNET CAFE
HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
10.
|
Stockholders’
Equity (continued)
|
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
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
10.
|
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 September 30, 2014, 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
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
10.
|
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
MARCH 31, 2016 AND DECEMBER
31, 2015
(UNAUDITED)
10.
|
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
MARCH 31, 2016 AND DECEMBER 31, 2015
(UNAUDITED)
10.
|
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.
11.
|
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
MARCH 31, 2016 AND DECEMBER 31, 2015
(UNAUDITED)
11.
|
Commitments
and Contingencies (continued)
|
As of March 31, 2016, the Company was
obligated under operating leases requiring minimum rentals as follows:
Fiscal year
|
|
|
|
Reminder of 2016
|
|
$
|
287,285
|
|
2017
|
|
|
332,108
|
|
2018
|
|
|
82,453
|
|
2019
|
|
|
79,089
|
|
2020
|
|
|
60,127
|
|
|
|
$
|
841,060
|
|
During the three months ended March 31,
2016 and 2015, rent expenses amounted to $94,232 and $133,074, respectively, of which $85,057 and $118,033 was recorded as cost
of sales, respectively.
The Company did not have any customer
constituting greater than 10% of net sales for the three months ended March 31, 2016 and 2015.
At March 31, 2016, there was one supplier
of consignment snacks and drinks in the amount of $21,226, which accounted for 100% of the Company’s accounts payable.
At December 31, 2015, there was one supplier
of consignment snacks and drinks with amounts due from the Company of $13,559, which accounted for 13% of the Company’s
accounts payable, and two contractors due to its renovation of internet cafes with amount of $93,750, which accounted for 87%
of the Company’s accounts payable.
13.
|
Operating
Risk and Uncertainties
|
Interest rate risk
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
MARCH 31, 2016 AND DECEMBER 31, 2015
(UNAUDITED)
14.
|
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
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
BASIC
|
|
|
|
|
|
|
|
|
Numerator for basic loss per share
attributable to the Company’s common stockholders:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(504,548
|
)
|
|
$
|
(550,332
|
)
|
Net loss
used in computing basic earnings per share
|
|
$
|
(504,548
|
)
|
|
$
|
(550,332
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
outstanding
|
|
|
5,538,002
|
|
|
|
5,538,002
|
|
Basic loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
DILUTED
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings
(loss) per share attributable to the Company’s common stockholders:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(504,548
|
)
|
|
$
|
(550,332
|
)
|
Net loss
used in computing diluted earnings per share
|
|
$
|
(504,548
|
)
|
|
$
|
(550,332
|
)
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
shares outstanding
|
|
|
5,538,002
|
|
|
|
5,538,002
|
|
Diluted loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
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.