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China Internet Cafe Holdings Group Announces Third Quarter 2011 Financial Results
Nov 21, 2011 (03:11 PM EST)


-- Q3 2011 revenue increased 47% year-over-year to $8.6 million

-- Membership cards up 83% from September 30, 2010 to 2.2 million

-- Added 13 internet cafes in first nine months of 2011, bringing total to 57

-- Cash of $20.6 million on September 30; Cash per common share of approximately $0.98

SHENZHEN, China, Nov. 21, 2011 /PRNewswire-Asia-FirstCall/ -- China Internet Cafe Holdings Group, Inc. ("CICC" or the "Company") (OTCQB: CICC), one of the largest owners and chain operators of internet cafes in Southern China, today announced its financial results for its third quarter ended September 30, 2011.

SUMMARY FINANCIALS


Third Quarter 2011 Results


Q3 2011

Q3 2010

CHANGE

Sales

$8.6 million

$5.8 million

+47%

Gross Profit

$3.5 million

$2.7 million

+29%

GAAP Net Income

$2.3 million

$1.6 million

+42%

Adjusted Net Income

$2.0 million(1)

$1.6 million

+25%

GAAP EPS (Diluted)

$0.11

$0.08

+38%

Adjusted EPS (Diluted)

$0.09(1)

$0.08

+13%

(1) Excludes $0.3 million non-cash gain related to changes in fair value of derivative instruments




Third Quarter of 2011 Financial Results

For the quarter ended September 30, 2011, net revenue increased 47% to $8.6 million, compared to $5.8 million in the third quarter of 2010. The increase was mainly due to the revenue generated by the 13 new cafes opened in the first three quarters of 2011. Revenue growth from locations opened at least one year was 1.3% and represented approximately $4.2 million in total revenues. In the quarter ended September 30, 2011, the Company issued over 182,000 membership cards, a 282.8% increase from 47,000 in the third quarter 2010.




Q3 2011

Q3 2010

YOY % Change

Same Store Sales(1)

5.5m

5.4m

1.3%

IC Cards Issued

182k

47k

282.8%

Active Customers(2)

91k

24k

282.8%

(1) Average monthly revenue per cafe, of cafes open more than 1 year
(2) Customers who have used a CICC IC card during the corresponding periods




"We are seeing balanced growth in our new and existing cafes," explained Mr. Dishan Guo, Chief Executive Officer of China Internet Cafe. "Revenues from our cafes opened one year or longer increased 1.3%, representing 66% of total sales. More customers are coming to our cafes because of our convenient locations, high speed connectivity and new games and movies at an affordable price. With strong economic growth and migrant flows in Shenzhen, we expect to maintain solid growth for the remainder of 2011 and into 2012."

Gross profit for the third quarter of 2011 increased by $0.8 million to $3.5 million, up 29% from the third quarter of 2010. Gross margin decreased from 46.6% to 40.7% due to the increases in salaries, depreciation and other costs as compared to the same period in 2010.

Operating expenses increased 16% to $0.6 million in the third quarter of 2011 from $0.5 million in the third quarter of 2010. The increase was primarily due to higher expenses related to being a public company and $0.2 million in non-cash stock-based compensation expenses.

Operating income for the third quarter of 2011 was $2.9 million compared to $2.2 million in the comparable period of 2010, and increase of 32%. Operating margin was 33.7% in the third quarter of 2011 compared to 37.9% in the third quarter of 2010.

Income tax expense for the third quarter of 2011 to $0.8 million compared to $0.6 million in the same period last year. The effective tax rate in the third quarter of 2011 was 24% as compared to 22% in 2010.

Net income attributable to common shareholders for the three months ended September 30, 2011 was $2.3 million, or $0.11 per diluted share. Non-GAAP adjusted net income for the period was $2.0 million, a 25% increase from the $1.6 million for the year ago period. Non-GAAP adjusted earnings per share were $0.09 compared to $0.08 for the third quarter of 2011 and 2010, respectively. Diluted earnings per share were calculated using weighted average shares of 21.1 million and 20.2 million for the quarters ended September 30, 2011 and September 30, 2010, respectively.

First nine months of 2011 Financial Results


YTD 2011 Results


YTD 2011

YTD 2010

CHANGE

Sales

$23.7 million

$14.1 million

+68%

Gross Profit

$9.5 million

$6.3 million

+50%

GAAP Net Income

$4.9 million

$4.2 million

+17%

Adjusted Net Income

$5.2 million(1)

$4.2 million

+24%

GAAP EPS (Diluted)

$0.24

$0.22

+9%

Adjusted EPS (Diluted)

$0.25(1)

$0.22

+14%

(1) Excludes $0.3 million non-cash loss related to changes in fair value of derivative instruments




For the nine months September 30, 2011, net revenue increased 68% to $23.7 million, compared to $14.1 million in the first nine months of 2010. Revenue growth from locations opened at least one year was 2.9% and represented approximately $12.2 million in total revenues. At September 30, 2011, the Company issued over 2.2 million membership cards, a 82.9% increase from 1.2 million at the end of the first nine months of 2011.

Gross profit for the nine months ended September 30, 2011 increased 50% to $9.5 million, up from $6.3 million in the first nine months of 2010. Gross margins were 40.1% and 44.7% for the nine months ended September 30, 2011 and 2010, respectively.

Operating expenses increased by $1.1 million to $1.9 million in the first nine months of 2011. Operating income was $7.6 million compared to $5.6 million in the comparable period of 2010, and increase of 37%. Operating margin was 32.1% in the first nine months of 2011 compared to 39.3% in the first nine months of 2010.

Income tax expense for the first nine months of 2011 increased 62% to $2.2 million, equating to an effective tax rate of approximately 30%.

Net income attributable to common shareholders for the nine months ended September 30, 2011 was $4.9 million, or $0.24 per diluted share. Non-GAAP adjusted net income for the period was $5.2 million, a 25% increase from the $4.2 million for the year ago period. Non-GAAP adjusted earnings per share were $0.25 compared to $0.22 for the first nine months of 2011 and 2010, respectively. Diluted earnings per share were calculated using weighted average shares of 20.9 million and 19.4 million for the nine months ended September 30, 2011 and September 30, 2010, respectively.

Financial Condition

As of September 30, 2011, the Company had $20.6 million in cash and cash equivalents, compared to $3.8 million at year-end 2010 due to growth in cash flows from operations and the $3.9 million equity financing completed in the first quarter of 2011. Working capital was $7.1 million and the current ratio was 2.0:1. CICC operates a cash business, with revenue from IC cards credited in its bank account approximately 15 days after a credit is purchased. The Company does not run accounts receivable balances.

Deferred revenue increased 238% from December 31, 2010 to $2.0 million. As of September 30, 2011, shareholders' equity was $18.7 million compared to $13.5 million at the end of 2010.

In the first nine months of 2011, the Company generated $13.0 million in cash from operating activities, compared with $6.0 million for the same period last year due to higher net income and improved working capital management. China Internet Cafe spent approximately $4.8 million on capital expenditures related to the opening of new cafes during the first nine months of 2011.

Business Updates

During the first nine months of 2011, the Company opened 13 new locations, bringing the total number of cafes to 57. The average capital expenditure to open a new store varies by size and location but typically average $250,000. With average annual revenue per store of $500,000 and a 28% net margin, the average payback period is less than 2 years.

Management continues to evaluate potential acquisitions outside Shenzhen in order to expand its geographic footprint and to eventually secure a national internet cafe license. In order to meet the basic requirements to acquire a national internet chain license, the Company has an objective to establish or acquire at least 20 internet cafes in two provinces other than Guangdong Province. In the past twelve months, the Company has conducted research in Chongqing, Sichuan, Guizhou, Yunnan, Hunan and Hubei provinces to evaluate the growth potential in each market. The Company will follow a strict set of criteria for all acquisition candidates in order to maximize returns to shareholders.

About China Internet Cafe Holdings Group, Inc.

Since opening its first internet cafe in 2006 under the name Shenzhen Junlong Culture Communication CO. Ltd., China Internet Cafe Holdings Group, Inc. has expanded quickly to 57 cafes in Shenzhen, Guangdong province, China. The Company provides high quality, affordable internet services to consumers who purchase reloadable cards. Customers can access a range of online services, including email, web surfing, watching movies, online gaming, voice over IP, and social media in a comfortable, friendly and safe environment. CICC offers a variety of internet connectivity stations with varying speeds, monitor sizes and seating arrangements.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. The Company believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that our management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Internet Cafe. Accordingly, management excludes the expenses related to financing and derivative financial instrument. The Company believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand the Company's financial performance in comparison to historical periods. In addition, it allows investors to evaluate the Company's performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, our management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.

Reconciliation of GAAP Net Income (Loss) to Non-GAAP Adjusted Net Income:




Three Months Ended



September 30 (USD)



2011

2010

Net Income attributable to China Internet Café common stockholders


$2,308,900

$1,626,270

Expense related to Changes in fair value of preferred stock and warrants


(332,732)

-

Adjusted Net Income


1,976,168

1,626,270

Basic and diluted adjusted earnings per common share


$0.09

$0.08




Nine Months Ended



September 30 (USD)



2011

2010

Net Income


$4,899,074

$4,214,329

Expense related to Financing & Derivative Financial Instrument


317,788

-

Adjusted Net Income


5,216,862

4,214,329

Basic and diluted adjusted earnings per common share


$0.25

$0.22








Safe Harbor Statements

This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks outlined in the Company's public filings with the Securities and Exchange Commission, including the Company's registration statement on Form F-1, as amended. All information provided in this press release is as of the date hereof. Except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.


Contact Information:


China Internet Cafe Holdings Group, Inc.


Mr. Dishan Guo


Chief Executive Officer


Phone: +86-755-8989-1398




Mr. Jingwei Li


Vice President of Corporate Finance


Phone: +86-755-8989-0998


Email: Jingwei@cncicc.com




Investor Relations:


MZ North America


Ted Haberfield, President


Phone: +1-760-755-2716
Email: thaberfield@hcinternational.net
Web: www.mz-ir.com







- FINANCIAL TABLES -


CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS




September 30, 2011


December 31, 2010



(Unaudited)



ASSETS





Current assets:





Cash


$

20,628,454


$

3,836,824

Restricted cash



-



945,280

Loan receivable



-



2,419,916

Rental deposit



96,752



55,512

Equipment deposit



-



1,300,650

Prepayment



15,653



-

Inventory



201,724



180,582

Deferred advisory fee



123,091



-

Deferred tax assets



67,422



-

Total current assets



21,133,096



8,738,764

Property, plant and equipment, net



11,123,057



6,848,342

Intangible assets, net



169,569



191,087

Rental deposit-long term portion



270,376



235,509

Total assets


$

32,696,098


$

16,013,702

LIABILITIES AND STOCKHOLDERS' EQUITY







Current liabilities:







Short term loan


$

156,531


$

151,245

Accounts payable



112,139



69,373

Deferred revenue



1,958,396



579,822

Payroll and payroll related liabilities



316,185



199,548

Income and other taxes payable



1,541,846



987,194

Accrued expenses



421,364



102,018

Amount due to a shareholder



1,995,338



465,741

Dividend payable on preferred stock



72,729



-

Derivative financial instrument - preferred stock



4,905,728



-

Derivative financial instrument - warrants



2,619,033



-

Total current liabilities



14,035,289



2,554,941








Commitments and contingencies (Note 17)







Preferred stock ($0.00001 par value, 100,000,000 shares authorized,  4,274,703 and 0 shares issued and outstanding; preference in liquidation - $5,770,849 and $0)



-



-

Stockholders' Equity:







Common stock ($0.00001 par value, 100,000,000 shares authorized,  21,124,967 and 20,200,000 shares issued and outstanding  as of September 30, 2011 and December 31, 2010, respectively)



212



202

Additional paid in capital



1,171,027



1,628,417

Statutory surplus reserves



718,744



718,744

Retained earnings



15,398,528



10,499,454

Accumulated other comprehensive income



1,308,298



611,944

Total stockholders' equity



18,660,809



13,458,761

Total liabilities and stockholders' equity


$

32,696,098


$

16,013,702





CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME




For The Nine Months Ended


For The three Months Ended



September 30,


September 30,



2011


2010


2011


2010










Revenue


$

23,722,727


$

14,142,866


$

8,608,066


$

5,840,453

Cost of revenue



14,180,296



7,797,869



5,112,773



3,130,304

Gross profit



9,542,431



6,344,997



3,495,293



2,710,149














Operating Expenses













General and administrative expenses



1,986,821



351,888



655,275



75,906

Reorganizational expenses



-



435,086






435,086

Total operating expenses



1,986,821



786,974



655,275



510,992














Income from operations



7,555,610



5,558,023



2,840,018



2,199,157














Non-operating income (expenses)













Derivative financial instruments - day-one loss



(1,120,072)



-



-



-

Change in fair value of derivative financial instrument - preferred stock



492,755



-



203,607



-

Change in fair value of derivative financial instrument - warrants



309,529



-



129,125



-

Interest income



12,055



4,287



6,953



1,827

Interest expenses



(7,826)



(7,115)



(2,662)



(2,402)

Other expenses



(552)



(43)



(80)



(10)

Total non-operating income (expenses)



(314,111)



(2,871)



336,943



(585)














Income before income taxes



7,241,499



5,555,152



3,176,961



2,198,572

Income taxes



2,167,718



1,340,823



795,332



572,302

Net income attributable to China Internet Cafe Holdings Group, Inc.



5,073,781


$

4,214,329


$

2,381,629


$

1,626,270














Dividend on preferred stock



(174,707)



-



(72,729)



-

Net income attributable to China Internet Cafe Holdings Group, Inc. common stockholders



4,899,074



4,214,329



2,308,900



1,626,270














Other comprehensive income













Net income


$

5,073,781



4,214,329



2,381,629



1,626,270

Foreign currency translation



696,354



229,549



281,243



209,872

Total comprehensive income


$

5,770,135


$

4,443,878


$

2,662,872


$

1,836,142














Earnings per share













- Basic



0.23



0.22



0.11



0.08

- Diluted



0.24



0.22



0.11



0.08

Weighted average common stock outstanding













- Basic



20,944,826



19,400,000



21,124,967



20,186,957

- Diluted



20,944,826



19,400,000



21,124,967



20,186,957





CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




For The Nine Months Ended



September 30,



2011


2010

Cash flows from operating activities





Net income


$

5,073,781


$

4,214,329

Adjustments to reconcile net income (loss) to net cash used in operating activities:







Derivative financial instruments - day-one loss



1,120,072



-

Change in fair value of derivative financial instrument - preferred stock



(492,755)



-

Change in fair value of derivative financial instrument- warrants



(309,529)



-

Advisory fee



848,909



-

Depreciation



2,111,933



1,161,497

Amortization



27,763



14,601

Deferred tax assets



(66,384)



-

Changes in operating assets and liabilities:







Restricted cash



963,258



-

Prepayment



(15,412)



-

Rental deposit



(65,035)



(81,776)

Inventory



(14,602)



1,156

Accounts payable



41,601



45,374

Deferred revenue



1,337,394



(130,200)

Payroll and payroll related liabilities



107,974



27,431

Income and other taxes payable



512,138



442,125

Accrued expenses



312,290



82,094

Amount due to a shareholder



1,505,459



231,668

Net cash provided by operating activities



12,998,855



6,008,299








Cash flows from investing activities







Acquisition of property, plant and equipment



(4,759,757)



(2,696,834)

Receipt of loan receivable due to termination of an investment agreement



2,465,939



-

Acquisition of cafes



-



(635,233)

Net cash used in investing activities



(2,293,818)



(3,332,067)








Cash flows from financing activities







Net proceeds from issuance of preferred stock and warrants



5,675,614



-

Issuance of shares for reverse merger



-



251,612

Net proceeds from short term loan



-



300,000

Compensation for reorganization



-



1,442

Net cash flows provided by financing activities:



5,675,614



553,054








Effect of foreign currency translation on cash



410,979



117,906








Net increase in cash



16,791,630



3,347,192

Cash - beginning of period



3,836,824



3,061,856

Cash - end of period


$

20,628,454


$

6,409,048








Cash paid during the period for:







Interest paid


$

7,826


$

7,115

Income taxes paid


$

1,935,931


$

1,051,472








SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVTIES:







Summary of Assets Acquired from Acquisitions:







Net property and equipment



-



499,776

Other current assets



-



15,678

Intangible assets



-



207,964

Net assets acquired



-



723,418








Transfer of equipment / deposits paid in property and equipment


$

1,243,723


$

83,811

Dividend payable on preferred stock


$

72,729


$

-

Advisory fee


$

848,909


$

-




SOURCE China Internet Cafe Holdings Group, Inc.