China Internet Cafe Holdings Group Announces Record First Quarter 2011 Financial Results

SHENZHEN, China, May 24, 2011 /PRNewswire-Asia-FirstCall/ -- China Internet Cafe Holdings Group, Inc. ("CICC" or the "Company") (OTC Bulletin Board: CICC), one of the largest owners and chain operators of internet cafes in Southern China, today announced its financial results for its first quarter 2011.

SUMMARY FINANCIALS

First Quarter of 2011 Financial Results

For the quarter ended March 31, 2011, net revenue increased 74% to $6.5 million, compared to $3.7 million in the first quarter of 2011. Revenue growth from locations opened at least one year was 3% and represented approximately $3.9 million in total revenues. Revenues from locations opened in the last twelve months were $2.5 million. At March 31, 2011, the Company issued over 1.56 million membership cards, a 24% increase from 1.26 million at the end of 2010. Approximately 50% of all registered users were active in the past year while half have used their IC card at least once in the past week.

"We delivered solid growth in the first quarter," said Mr. Dishan Guo, Chief Executive Officer of China Internet Cafe. "Customers continue to visit our cafes because of our convenient locations, high speed connectivity and new computers which offer a wide variety of games and movies, creating an excellent experience. We will continue to balance our growth between existing cafes, new cafe openings, and acquisitions. With over $15 million of cash and strong cash flows, we are evaluating several attractive options to deploy our capital organically and through acquisitions."

Gross profit for the first quarter of 2011 increased by $0.9 million, to $2.5 million, up 60% from the first quarter of 2010. Gross margin decreased from 41.9 to 38.4% due to the higher employee compensation.

Operating expenses increased to $0.67 million in the first quarter of 2011 from $0.06 million in the first quarter of 2010. The increase was primarily due to higher expenses related to being a public company and $0.4 million in non-cash stock-based compensation expenses.

Operating income for the first quarter of 2011 was $1.8 million compared to $1.5 million in the comparable period of 2010. Operating margin was 28.2% in the quarter compared to 40.1% in the first quarter of 2010. Excluding the stock-based compensation expense, operating margin was 34.6% in the first quarter of 2011.

Income tax expense for the first quarter of 2011 increased 68% to $0.6 million, compared to $0.3 million in the same period last year. The effective tax rate in 2011 was 24% as compared to 22% in 2010.

Net income for the three months ended March 31, 2011 was $0.3 million, or $0.01 per diluted share. Adjusted net income for the period was $1.7 million, a 45% increase from the $1.2 million for the year ago period. Adjusted earnings per share were $0.08 compared to $0.06 for the first quarter of 2011 and 2010, respectively. Diluted earnings per share were calculated using weighted average shares of 20,580,542 and 19,000,000 for the quarters ended March 31, 2011 and March 31, 2010, respectively.

Financial Condition

As of March 31, 2011, the Company had $15.2 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 $4.6 million and the current ratio was 1.4:1. 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 61% from December 31, 2010 to $0.9 million. As of March 31, 2011, shareholders' equity was $13.2 million compared to $13.5 million at the end of 2010.

In the first quarter of 2011, the Company generated $6.3 million in cash from operating activities, compared with $1.6 million for the same period last year due to the loan receivable from Yunnan Subsidiary and director's advance for the payment of public company expenses. Net cash used in investing activities was $0.6 million for the quarter ended March 31, 2011, which included of the build out of new cafes, acquisitions, and leasehold improvements to existing cafes.

Business Updates

During the first quarter of 2011, the Company opened 4 new locations, bringing the total number of cafes to 48. Management expects to open seven new cafes during the second quarter of 2011. 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.

The Company plans to drive same store sales by offering new loyalty programs such as online gaming competitions, while increasing the availability of high quality, value-added content such as movies, TV shows and video games. In 2011, a credit rewards program will allow loyal customers to earn extra gaming time and encourage credit consumption. For example, customers recharging 100 RMB into the IC card will receive a 20% credit back the following month. New cafes will be outfitted with private rooms that are equipped with surround sound and movie screening areas. It will also include team gaming and tournament play areas with LCD screens for spectator viewing to drive incremental player utilization and the average revenue per user.

Management is actively evaluating potential acquisitions outside Shenzhen in order to expand its geographic footprint and to eventually secure a national internet cafe license. The Company will follow a strict set of criteria for all acquisition candidates in order to maximize returns to shareholders. The Company believes it will consummate a transaction by September 2011.

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 46 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 Adjusted Net Income:

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.

-- FINANCIAL TABLES –

SOURCE China Internet Cafe Holdings Group, Inc.