UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ______________ to _____________

 

Commission file number:  000-52832

 

CHINA INTERNET CAFÉ HOLDINGS GROUP, INC.

(Exact name of Company as specified in its charter)

 

Nevada   98-0500738
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    

 

2nd Floor Block 1, Xinzhongtai Cultural Pioneer Park, 1 Caiyun Road,

Longcheng Blvd, Longgang District, Shenzhen City, Guangdong Province

People’s Republic of China

  518172
(Address of principal executive offices)   (Zip Code)

 

  +86-755-8989-6008  
  (Registrant’s telephone number, including area code)  

 

505 Lianheng Commercial Building, 5th Floor,

Ainan Road No. 391, Nanlian Community,

Longgang Street Office, Longgang District,

Shenzhen, Guangdong Province, People’s Republic of China 518116

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

 

As of June 15, 2016, there were 5,538,002 shares of $0.00001 par value common stock issued and outstanding.

  

   

 

 

CHINA INTERNET CAFÉ HOLDINGS GROUP, INC.

FORM 10-Q

INDEX

 

    Page
     
PART I. Financial Information 3
     
  Item 1.  Financial Statements (Unaudited). 3
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and results of Operation. 26
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 30
     
  Item 4.  Controls and Procedures. 30
     
PART II. Other Information 31
     
  Item 1.  Legal Proceedings. 31
     
  Item 1A. Risk Factors. 31
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 31
     
  Item 3.  Defaults Upon Senior Securities. 31
     
  Item 4.  Mine Safety Disclosures. 31
     
  Item 5.  Other Information. 31
     
  Item 6.  Exhibits. 31
     
  Signatures 32

  

 2 

 

 

PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2016

 

(UNAUDITED) 

     

 3 

 

 

Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Operations and Comprehensive loss 6
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2016 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Condensed Consolidated Financial Statements 9-25

 

 4 

 

  

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

ASSETS  March 31,
2016
   December 31,
2015
 
   (Unaudited)   (Audited) 
Current assets:          
Cash and cash equivalents  $19,273,664   $19,304,500 
Rental deposit   3,333    10,112 
Total current assets   19,276,997    19,314,612 
           
Property, plant and equipment, net   1,219,740    1,584,745 
Rental deposit-long-term portion   59,495    53,833 
Total assets  $20,556,232   $20,953,190 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $21,226   $107,310 
Registration penalties payable   641,200    641,200 
Deferred revenue   174,241    147,103 
Payroll and payroll related liabilities   70,023    70,254 
Income and other taxes payable   20,140    15,326 
Accrued expenses   349,118    367,538 
Amount due to a shareholder   1,957,894    1,907,649 
Dividend payable on preferred stock   186,565    186,565 
Total current liabilities   3,420,407    3,442,945 
           
Stockholders’ Equity:          
Common stock ($0.00001 par value, 20,000,000 shares authorized, 5,538,002 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively)   55    55 
Additional paid-in capital   6,232,961    6,232,961 
Statutory surplus reserves   718,744    718,744 
Retained earnings   8,705,821    9,210,369 
Accumulated other comprehensive income   1,478,244    1,348,116 
Total stockholders’ equity   17,135,825    17,510,245 
Total liabilities and stockholders’ equity  $20,556,232   $20,953,190 

 

 The accompanying notes are an integral part of the condensed consolidated financial statements                

 

 

 

 5 

 

 

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   For The Three Months Ended 
   March 31, 
   2016   2015 
Revenue  $279,974   $376,864 
Cost of revenue   722,582    804,711 
Gross loss   (442,608)   (427,847)
Operating Expenses          
General and administrative expenses   78,492    142,398 
Total operating expenses   78,492    142,398 
           
Loss from operations   (521,100)   (570,245)
           
Non-operating income          
Interest income   16,583    19,938 
Other expenses   (31)   (25)
Total non-operating income   16,552    19,913 
           
Loss before income taxes   (504,548)   (550,332)
Income taxes   -    - 
Net loss   (504,548)   (550,332)
           
Net loss attributable to China Internet Cafe Holdings Group, Inc. common stockholders  $(504,548)  $(550,332)
           
Other comprehensive loss          
Net loss  $(504,548)  $(550,332)
Foreign currency translation   130,128    118,212 
Total comprehensive loss  $(374,420)  $(432,120)
           
Loss per share          
- Basic  $(0.09)  $(0.10)
- Diluted  $(0.09)  $(0.10)
Weighted average common stock outstanding          
- Basic   5,538,002    5,538,002 
- Diluted   5,538,002    5,538,002 
           

 

The accompanying notes are an integral part of the condensed consolidated financial statements

 

 

 6 

 

 

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016

 

 

 

   Common Stock                     
   Number
of Shares
   Amount   Additional
Paid-in
Capital
   Statutory
Reserves
   Retained Earnings   Accumulated
Other Comprehensive
Income
   Total
Stockholders’ Equity
 
Balance at January 1, 2016   5,538,002   $55   $6,232,961   $718,744   $9,210,369   $1,348,116   $17,510,245 
Net loss for the period   -    -    -    -    (504,548)   -    (504,548)
Foreign currency translation difference   -    -    -    -    -    130,128    130,128 
Balance at March 31, 2016   5,538,002    55    6,232,961    718,744    8,705,821    1,478,244    17,135,825 

 

 

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 7 

 

 

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For The Three Months Ended 
   March 31, 
   2016   2015 
Cash flows from operating activities          
Net loss  $(504,548)  $(550,332)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation   370,290    331,071 
           
Changes in operating assets and liabilities:          
Rental deposit   1,499    - 
Accounts payable   (85,582)   (17,222)
Deferred revenue   25,792    39,113 
Payroll and payroll related liabilities   (689)   (262,194)
Income and other taxes payable   4,647    (108,557)
Accrued expenses   (18,679)   (34,219)
Amount due to a shareholder   50,344    99,975 
Net cash used by operating activities   (156,926)   (502,365)
           
Effect of foreign currency translation on cash   126,090    112,169 
           
Net decrease in cash and cash equivalents   (30,836)   (390,196)
Cash and cash equivalents - beginning of year   19,304,500    23,789,211 
Cash and cash equivalents - end of period  $19,273,664   $23,399,015 

 

The accompanying notes are an integral part of the condensed consolidated financial statements                

 

 

 8 

 

  

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

 

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.

 

 9 

 

 

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.

 

 10 

 

 

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.

 

  (c) Use of estimates

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.

 

  (d) Revenue recognition

Internet café members purchase prepaid IC cards which include stored value or deposit money into member’s accounts associated with their ID cards directly that will be deducted based on time usage of computers at the internet cafe. Revenues derived from the prepaid IC cards and ID card’s accounts at the internet café are recognized when services are provided. This is based upon the usage of computer time at the internet cafe. Outstanding customer balances in the IC cards and ID card’s accounts are included in deferred revenue on the balance sheets. The Company does not charge any service fees that cause a decrease to customer balances. There is no expiration date for IC cards and ID card’s accounts. During 2014, the company began to use members’ ID card’s accounts instead of prepaid IC cards.

 

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.

 

  (e) Cost of 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.

 

 

 11 

 

 

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)

 

  (f) Credit risk

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.

 

 12 

 

 

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.

 

  (k) Deferred Revenue

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.

 

  (m) Income taxes

Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10-50-2 requires that deferred tax assets and liabilities be recognized for future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Losses incurred by the Company in prior years provide for a net operating loss carry-forward. However, all net operating losses are from the U.S. shell company and we currently anticipate insufficient income to utilize these losses in the future, so the asset balance has been fully reserved for.

 

 13 

 

 

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.

 

 14 

 

 

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.

 

 15 

 

 

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.

 

 

 16 

 

 

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 

 

7.Due To Related Party

 

   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.

 

8. Income Tax

 

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.

 

 17 

 

 

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016 AND DECEMBER 31, 2015

(UNAUDITED)

 

 

9. Employee Benefits

 

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.

 

10. Stockholders’ Equity

 

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.

 

 18 

 

 

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.

 

 19 

 

 

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.

 

 20 

 

  

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.

 21 

 

 

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.

 

 22 

 

 

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.

 

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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.

 

12. Concentrations

 

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.

 

 24 

 

 

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)

 

15. Segment Information

 

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.

 

16. Subsequent Events

 

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.

 

 25 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.

 

Overview

 

Prior to the consummation of the share exchange transaction described below, we were a shell company with nominal operations and nominal assets. Currently, through our wholly-owned subsidiary, Junlong Culture Communication Co. Ltd. (“Junlong”), we operate an Internet Café chain in Shenzhen, People’s Republic of China (“PRC”), consisting of 9 internet cafes in high traffic areas. Our focus is on providing top quality internet café facilities that offer a one-stop entertainment and media venue for customers, typically mature students and migrant workers, at reasonable prices. Although our cafes sell snacks, drinks, and game access cards, more than 97% of our revenue comes directly from selling internet access time to our customers.

 

During the first quarter of 2016, our business environment remains very challenging. We continue to lose members over the popularity of the 4G network, more free Wi-Fi services in public places and the increased usage of smart phones and mobile games.

 

We therefore focused on upgrading our café computers and renovating our existing cafes for a more enjoyable experience by our customers. We expect our future growth to be driven by a number of factors and trends including:

 

1.Our ability to improve our service to our customers by providing an enjoyable entertainment environment.
2.Our ability to optimize our current 9 internet cafes
3.Our ability to identify and acquire target companies for joint ventures in the coming years

 

For the three months ended March 31, 2016, our revenue was approximately $279,974 and our net loss was $504,548, representing decreases of 26% and 8%, respectively, from the revenue of $376,864 and net loss of $550,332 for the three months ended March 31, 2015.

 

The discussion below of our performance is based upon our unaudited financial statements for the three months ended March 31, 2016 and 2015, which are included in this report.

 

We believe that the following factors will continue to affect our financial performance:

 

·Improved Disposable Income. We believe that as the Shenzhen municipal government increases the minimum wage, migrant workers, who are our major customers, will have more disposable income. We are expecting the inflow of migrant workers to continue to contribute to our business.

 

·Continued Internet Café Use. Our business may be adversely affected by an increase in the availability of the 4G network. We believe, however, that people prefer to play videos and games on a computer’s screen than on the small screen of a cell phone. In addition, young people in the PRC prefer internet cafes since they are a social place for them. We expect the preference will continue and provide us sustainable business.

 

·Customer Loyalty. As we continue to expand our operations, developing and maintaining customer loyalty will be critical to continued revenue growth.

 

·Expansion into South Western Provinces. The Company currently holds a regional internet café chain license. In order to meet the basic requirements of a national internet chain license, the Company’s will seek to acquire and open at least 20 internet cafes in two provinces other than Guangdong province. The Company has conducted research in provinces and cities in southwestern China, including Chongqing, Sichuan, Guizhou and Yunnan, and is targeting internet cafes in these areas for acquisition. The Company believes a national license is imperative for the development of a national market.

 

 26 

 

 

Results of Operations

 

The following tables set forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.

 

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

   For The Three Months Ended         
   March 31,         
   2016   2015   Amount   % 
       As percentage of revenue       As percentage of revenue   change   change 
                         
Revenue  $279,974    100%  $376,864    100%   -96,890    -26%
Cost of revenue   722,582    258%   804,711    214%   -82,129    -10%
Gross loss   -442,608    -158%   -427,847    -114%   -14,761    3%
                               
Operating Expenses                              
General and administrative expenses   78,492    28%   142,398    38%   -63,906    -45%
Total operating expenses   78,492    28%   142,398    38%   -63,906    -45%
                               
Loss from operations   -521,100    -186%   -570,245    -151%   49,145    -9%
                               
Non-operating income                              
Interest income   16,583    6%   19,938    5%   -3,355    -17%
Other expenses   -31    0%   -25    0%   -6    24%
Total non-operating income   16,552    6%   19,913    5%   -3,361    -17%
                               
Net loss before income taxes   -504,548    -180%   -550,332    -146%   45,784    -8%
Income taxes   -    0%   0    0%   0    0%
Net loss attributable to China Internet Cafe Holdings Group, Inc.   -504,548    -180%   -550,332    -146%   45,784    -8%
                               
Net loss attributable to China Internet Cafe Holdings Group, Inc. Common stockholders  $-504,548    -180%  $-550,332    -146%   45,784    -8%
                               
Other comprehensive loss                              
Net loss  $-504,548    -180%   -550,332    -146%   45,784    -8%
Foreign currency translation   130,128    46%   118,212    31%   11,916    10%
Net Comprehensive loss  $-374,420    -134%  $-432,120    -115%   57,700    -13%

 

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Comparison of Three Months Ended March 31, 2016 and 2015

 

Revenue

 

Our revenue is primarily generated from prepaid fees for time usage at our internet cafes. The prepaid fees are stored in member accounts associated with a member’s ID card. Amounts are deducted based on time usage of computers at our Internet cafes. Our revenue decreased $96,890, or 26%, from $376,864 for the three months ended March 31, 2015 to $279,974 for the three months ended March 31, 2016. The decrease in revenue was due to the closure of 2 less profitable internet cafes, which were located in areas where there many newer internet cafes. The closure allowed us to save on operating expenses and to improve our other outlets’ equipment and enhance our other customers’ experience there.

 

Cost of Revenue

 

Cost of revenue is primarily composed of depreciation and amortization, salary, rent, utilities, value added tax and surcharge. Among the components of cost of revenue, depreciation and amortization, salary and rent are fixed costs while utilities and value added taxes and surcharges are variable costs, which change in proportion to changes in revenue. Our cost of sales for the three months ended March 31, 2016 decreased $82,129 from $722,582 compared with the same period in 2015 of $804,711. The decrease was mainly attributed to a substantial decrease in depreciation, salary, and rent expenses due to the closure of 2 internet cafés in October of 2015. 

 

Gross Loss

 

Gross profit (loss) is the difference between revenue and cost of revenue. Our gross loss increased by$14,761, or 3%, to a loss $442,608 for the three months ended March 31, 2016 from a loss $427,847 for the same period in 2015. Gross loss as a percentage of sales was 158% for the three months ended March 31, 2016, as compared to gross loss 114% for the same period in 2015. The increase in our gross loss margin was mainly attributable to the decrease in revenue.

 

Operating Expenses

 

Operating expenses are composed of general and administrative expenses. General and administrative expenses mainly consist of the overheads of our headquarters in Shenzhen and fees paid to legal counsel, auditors, and consultants. Our operating expenses decreased by $63,906, or 45%, to $78,492 for the three months ended March 31, 2016 from $142,398 for the same period in 2015. The decrease was due to a decrease of $63,906 in advisory fees, which we no longer pay a consultant company in the first quarter of 2016. We expect that our operating expenses will be stable in the future.

 

Non-operating Income

 

Our non-operating income decreased by $3,361, or 17%, to $16,552 for the three months ended March 31, 2016 from $19,913 for the same period in 2015. The decrease in income was mainly due to a decrease in interest income of $3,355.

 

Loss before Income Taxes

 

Loss before income taxes decreased by $45,784, or 8%, to a $504,548 loss for the three months ended March 31, 2016 from $550,332 loss for the same period in 2015. The decrease in loss before income tax was mainly attributable to the decrease in loss from operations.

 

Income Taxes

 

We did not generate any income taxes in the first quarter of 2016.

 

Net Loss

 

Our net loss decreased by $45,784, or 8%, to $504,548 loss for the three months ended March 31, 2016 from $550,332 loss for the same period in 2015 as a result of the factors described above. We expect we will return to profitability when we adjust our business model, enhance management, improve the environment of our outlets and optimize our services.

  

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Liquidity and Capital Resources

 

As of March 31, 2016, we had cash and cash equivalents of approximately $19.3 million. The following table provides detailed information about our cash flow for each financial statement period presented in this report.

 

Cash Flow

 

   Three Months Ended
March 31,
 
   2016   2015 
Net cash used by operating activities   (156,926)   (502,365)
           
Net cash used by investing activities   -    - 
           
Net cash flows used by financing activities:   -    - 
           
Effect of foreign currency translation on cash   126,090    112,169 
           
Net cash flows   (30,836)   (390,196)

 

Operating Activities

 

Net cash used by operating activities was $156,926 for the three months ended March 31, 2016 compared with $502,365 for the same period of 2015. The decrease in cash used by operating activities resulted mainly from a decrease in amount of payroll and payroll related liabilities by $261,505 and income and other taxes payable by $113,204.

 

 29 

 

  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable. 

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Dishan Guo, the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the quarter ended March 31, 2016. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were not effective as a result of the material weakness identified in our internal control over financial reporting disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015. 

 

Specifically, our management identified certain matters involving internal control and our operations that it considered to be material weaknesses. As defined in the Exchange Act, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified by our management is described below:

  

We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with the complexity of our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result.

 

2016 Planned Remediation 

 

We are committed to improving our financial organization. As part of this commitment, we will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of fiscal year 2016 to resolve non-routine or complex accounting matters.  We have in the past, and will continue to engage outside consultants in the future as necessary in order to ensure proper treatment of non-routine or complex accounting matters.

 

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the material weakness of having insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. 

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

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Changes in Internal Controls over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

  

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

Item 6. Exhibits.

  

Exhibit No.   Description
     
31.1   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
     
101.INS   XBRL Instance Document*
     
101.SCH   XBRL Schema Document*
     
101.CAL   XBRL Calculation Linkbase Document*
     
101.LAB   XBRL Label Linkbase Document *
     
101.PRE   XBRL Presentation Linkbase Document*
     
101.DEF   XBRL Definition Linkbase Document*

 

* File herewith.

** Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CHINA INTERNET CAFÉ HOLDINGS GROUP, INC.
     
     
Date: June 15, 2016 By: /s/ Dishan Guo
    Dishan Guo
    Chief Executive Officer and Chief Financial Officer
    (Principal Executive Officer and Principal
Accounting and Financial Officer)

 

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