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

-- Q2 2011 revenue increased 88% year-over-year to $8.6 million

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

-- Membership cards up 75% from 1.2million in June 30, 2010 to 2.0 million

-- Adjusted net income increased 30% to $2.0 million with adjusted EPS of $0.10

-- Cash and equivalents of $16.4 million on June 30, representing cash per share of ~ $0.77

-- $8.9 million of operating cash flows in first six months of 2011

Aug 16, 2011, 08:00 ET from China Internet Cafe Holdings Group, Inc.

SHENZHEN, China, Aug. 16, 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 second quarter 2011.

SUMMARY FINANCIALS


Second Quarter 2011 Results


Q2 2011

Q2 2010

CHANGE

Sales

$8.6 million

$4.6 million

+88%

Gross Profit

$3.6 million

$2.1 million

+71%

GAAP Net Income

$2.3 million

$1.5 million

+51%

Adjusted Net Income

$2.0 million(1)

$1.5 million

+30%

GAAP EPS (Diluted)

$0.11

$0.08

+38%

Adjusted EPS (Diluted)

$0.10(1)

$0.08

+19%

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




Second Quarter of 2011 Financial Results

For the quarter ended June 30, 2011, net revenue increased 88% to $8.6 million, compared to $4.6 million in the second quarter of 2010, and was driven by growth at both existing and new cafes opened in the first two quarters of 2011. Revenue growth from locations opened at least one year was 7.59% and represented approximately 5.6 million in total revenues. Revenues from locations opened in the last twelve months were $3.0 million. At June 30, 2011, the Company issued over 2.0 million membership cards, a 30% increase from 1.6 million at the end of the first quarter 2011.





Q2 2011

Q2 2010

YOY % Change


Same Store Sales

(Average monthly revenue per cafe, of cafes open more than 1 year)

$47,544.50(3)

$47,159.71(4)

+0.82%


IC Cards Issued

472,955

46,313

921%


Active Customers(2)

1,017,636

582,500

75%


(2) Customers who have used a CICC IC card during the corresponding periods

(3) Exchange rate: 6.83

(4) Exchange rate: 6.48










"We are pleased to report robust growth for the first half of 2011," said Mr. Dishan Guo, Chief Executive Officer of China Internet Cafe." We have experienced balanced improvements across our 57 stores, including 13 opened year-to-date in Shenzhen. By offering customers convenient locations, high speed connectivity with quality computers, in addition to new games and movies at an affordable price, we have created unique social gathering places where our younger customers continue to visit frequently. Our user base is supported by rapid computer adoption and increasing disposable income. CICC recently received two key awards from the National Internet Cafe Development Union and Guangdong Provincial Government, further denoting our achievements as both a visionary and a leader in our industry.  With over $16 million in cash and strong cash flow, our growth strategy includes a balance of organic growth through existing cafes, complemented by targeted new cafe openings, and acquisitions."

Gross profit for the second quarter of 2011 increased by $1.5 million, or 71% to $3.5 million from the second quarter of 2010. Gross margin decreased from 45.3% to 41.1% due to the increases in salaries, depreciation and other costs as compared to the same period in 2010.

Operating expenses increased to $0.7 million in the second quarter of 2011 from $0.01 million in year ago period, due to public company expenses and $0.2 million in non-cash stock-based compensation expenses.

Operating income for the second quarter of 2011 was $2.9 million compared to $2.0 million in the comparable period of 2010, an increase of 46%. Operating margin was 33.5% in the second quarter of 2011 compared to 43.2% in the second quarter of 2010. Excluding $498,568 in relation to the US listing expense, operating income and margins for the second quarter of 2011 were $3.4 million and 39%, respectively.

Income tax expense for the second quarter of 2011 increased 86% to $0.8 million, compared to $0.4 million in the same period last year. The effective tax rate in the second quarter of 2011 was 24% as compared to 22% in 2010.

Net income attributable to common shareholders for the three months ended June 30, 2011 was $2.3 million, or $0.11 per diluted share. Excluding $0.3 million of income from the change in fair value of the derivative financial instrument, adjusted net income for the period was $2.0 million, a 30% increase from the $1.5 million for the year ago period. Adjusted earnings per share were $0.10 compared to $0.08 for the first quarter of 2011 and 2010, respectively. Diluted earnings per share were calculated using weighted average shares of 21,124,967 and 19,000,000 for the quarters ended June 30, 2011 and June 30, 2010, respectively.

First Half of 2011 Financial Results


1H 2011 Results


1H 2011

1H 2010

CHANGE

Sales

$15.1 million

$8.3 million

+82%

Gross Profit

$6.0 million

$3.6 million

+66%

GAAP Net Income

$2.6 million

$2.7 million

-4%

Adjusted Net Income

$3.2 million(1)

$2.7 million

+20%

GAAP EPS (Diluted)

$0.12

$0.14

-10%

Adjusted EPS (Diluted)

$0.16(1)

$0.14

+11%

(1) Excludes $0.3 million non-cash gain related to changes in fair value of derivative instruments (confirm as difference between GAAP and adjusted is greater than this amount)




For the six months ended June 30, 2011, net revenue increased 82% to $15.1 million, compared to $8.3 million in the first half of 2010. Revenue growth from locations opened at least one year was 19.29% and represented approximately $10.4 million in total revenues. Revenues from locations opened in the last twelve months were $4.7 million. At June 30, 2011, the Company issued over 2 million membership cards, a 61% increase from 1.3 million at the end of the first half of 2010.

Gross profit for the six months ended June 30, 2011 increased 66% to $6.0 million, from $3.6 million in the first half of 2010. Gross margin decreased from 43.8% in the first half of 2010, to 39.9% in the first half of 2011.

Operating expenses increased to $1.3 million in the first half of 2011 from $0.2 million in the first half of 2010. Operating income for the six months ended June 30, 2011 was $4.7 million compared to $3.5 million in the comparable period of 2010, an increase of 35%. Operating margin was 31.1% in the first half of 2011 compared to 41.8% in the first half of 2010. Excluding $1 million in expenses relating to the financing and being a US listed company, operating income and margins for the first six months of 2011 were $5.7 million and 38%, respectively.

Income tax expense for the first half of 2011 increased 78% to $1.4 million, compared to $0.8 million in the same period last year. The effective tax rate in the first half of 2011 was 24% as compared to 22% in 2010.

Net income attributable to common shareholders for the six months ended June 30, 2011 was $2.6 million, or $0.12 per diluted share. Excluding $0.65 million in the expense related to the derivative financial instruments, adjusted net income for the period was $3.2 million, a 20% increase from the $2.7 million for the year ago period. Adjusted earnings per share were $0.16 compared to $0.14 for the first six months of 2011 and 2010, respectively. Diluted earnings per share were calculated using weighted average shares of 20,854,258 and 19,000,000 for the six months ended June 30, 2011 and June 30, 2010, respectively.

Financial Condition

As of June 30, 2011, the Company had $16.4 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 $5.7 million equity financing completed in the first quarter of 2011. Working capital was $3.7 million and the current ratio was 1.3:1. 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 239% from December 31, 2010 to $2.0 million. As of June 30, 2011, shareholders' equity was $15.9 million compared to $13.5 million at the end of 2010.

In the first half of 2011, the Company generated $8.9 million in cash from operating activities, compared with $3.8 million for the same period last year due to improved working capital management. China Internet Cafe spent approximately $4.6 million on capital expenditures related to the opening of new cafes during the first six months of 2011.

Business Updates

During the first six months of 2011, the Company opened 13 new locations, bringing the total number of cafes to 57. Management expects to open 10 new cafes during the second half of 2011 with a budgeted cost of $3M. The average capital expenditure to open a new store varies by size and location but typically average $300,000. With average annual revenue per store of $500,000 and a 28% net margin, the average payback period is less than 2 years.

The number of users and aggregate time consumption have benefitted from several strategies implemented this year. The introduction of higher quality content, including movies, TV shows and the latest video games have been a success. Online gaming competitions involve multiple players who play against others at the same location and remotely pull in thousands of customers each week. Early in 2011, the Company introduced a credit rewards program which allows loyal customers to earn extra gaming time and encourage credit consumption, which was been well received by customers and has helped drive aggregate usuage across the base of cafes.

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 fall 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 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 Adjusted Net Income:




Three Months Ended





June 30 (USD)






2011

2010




Net Income



$2,325,816

$1,544,175




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



(318,206)

-




Adjusted Net Income



2,007,610

1,544,175




Basic and diluted adjusted earnings per common share



$0.10

$0.08























Six Months Ended





June 30 (USD)






2011

2010




Net Income



$2,590,174

$2,701,313




Expense related to Financing & Derivative Financial Instrument



650,520

-




Adjusted Net Income



3,240,694

2,701,313




Basic and diluted adjusted earnings per common share



$0.16

$0.14


















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:





Mr. Jingwei Li


Vice President of Corporate Finance


Phone: +86-755-8989-0998


Email: Jingwei@cncicc.com





Ms. Helen Huo

Secretary of the Board

Phone: +86-18601047650

Email: helen@cncicc.com


Investor Relations:


MZ-HCI


Ted Haberfield, President


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







-- FINANCIAL TABLES –

CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS


June 30, 2011

December 31, 2010


(Unaudited)


ASSETS



Current assets:



Cash

$ 16,424,142

$ 3,836,824

Restricted cash

967,043

945,280

Loan receivable

-

2,419,916

Rental deposit

68,614

55,512

Equipment deposit

-

1,300,650

Prepayment

15,782

-

Inventory

261,794

180,582

Deferred advisory fee

340,866

-

Deferred tax assets

65,241

-

Total current assets

18,143,482

8,738,764




Property, plant and equipment, net

11,692,619

6,848,342

Intangible assets, net

176,905

191,087

Rental deposit-long term portion

294,312

235,509

Total assets

$ 30,307,318

$ 16,013,702

LIABILITIES AND STOCKHOLDERS' EQUITY



Current liabilities:



Short term loan

$ 154,727

$    151,245

Accounts payable

93,611

69,373

Deferred revenue

1,964,584

579,822

Payroll and payroll related liabilities

297,906

199,548

Income and other taxes payable

1,687,455

987,194

Accrued expenses

348,307

102,018

Amount due to a shareholder

1,896,569

465,741

Dividend payable on preferred stock

101,978

-

Derivative financial instrument - preferred stock

5,109,335

-

Derivative financial instrument - warrants

2,748,158

-

Total current liabilities

14,402,630

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 June 30, 2011 and December 31, 2010,



respectively)

212

202

Additional paid in capital

1,069,049

1,628,417

Statutory surplus reserves

718,744

718,744

Retained earnings

13,089,628

10,499,454

Accumulated other comprehensive income

1,027,055

611,944

Total stockholders' equity

15,904,688

13,458,761

Total liabilities and stockholders' equity

$ 30,307,318

$ 16,013,702



CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES






UNAUDITED CONDENSED CONSOLIDATED

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME







For The Six Months Ended

For The three Months Ended


June 30,

June 30,


2011

2010

2011

2010






Revenue

$ 15,114,661

$ 8,302,413

$ 8,625,080

$ 4,581,308

Cost of revenue

9,067,523

4,667,565

5,072,181

2,507,426

Gross profit

6,047,138

3,634,848

3,552,900

2,073,882






Operating Expenses





General and administrative expenses

1,331,546

162,728

663,820

93,934

Total operating expenses

1,331,546

162,728

663,820

93,934






Income from operations

4,715,592

3,472,120

2,889,080

1,979,948






Non-operating income (expenses)





Derivative financial instruments -





day-one loss

(1,120,072)

-

-

-

Change in fair value of derivative





financial instrument - preferred stock

289,148

-

194,841

-

Change in fair value of derivative





financial instrument - warrants

180,404

-

123,365

-

Interest income

5,102

2,460

5,102

2,460

Interest expenses

(5,164)

(4,713)

(2,633)

(3,572)

Other expenses

(472)

(33)

(2,466)

(4)

Total non-operating income (expenses)

(651,054)

(2,286)

318,210

(1,116)






Net income before income taxes

4,064,538

3,469,834

3,207,289

1,978,832

Income taxes

1,372,386

768,521

812,697

434,657

Net income

2,692,152

$ 2,701,313

$ 2,394,592

$ 1,544,175






Dividend on preferred stock

(101,978)

-

(68,776)

-

Net income available to Common





stockholders

2,590,174

2,701,313

2,325,816

1,544,175






Other comprehensive income





Net income

$ 2,692,152

2,701,313

2,394,592

1,544,175

Foreign currency translation

415,111

40,049

359,738

38,927

Net Comprehensive income

$ 3,107,263

$ 2,741,362

$ 2,754,330

$ 1,583,102






Earnings per share





- Basic

0.12

0.14

0.11

0.08

- Diluted

0.13

0.14

0.11

0.08

Weighted average common stock





outstanding





- Basic

20,854,258

19,000,000

21,124,967

19,000,000

- Diluted

20,854,258

19,000,000

21,124,967

19,000,000



CHINA INTERNET CAFE HOLDINGS GROUP, INC. AND SUBSIDIARIES




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





For The Six Months Ended


June 30,


2011

2010

Cash flows from operating activities



Net income

$ 2,692,152

$ 2,701,313

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

(289,148)

-

Change in fair value of derivative financial instrument-



warrants

(180,404)

-

Advisory fee

631,134

-

Depreciation

1,305,607

704,376

Amortization

18,386

5,799

Deferred tax assets

(64,556)

-

Changes in operating assets and liabilities:



Prepayment

(15,616)

5,001

Rental deposit

(64,595)

(21,334)

Inventory

(76,246)

(11,109)

Accounts payable

24,275

22,165

Deferred revenue

1,357,008

(51,503)

Payroll and payroll related liabilities

92,779

(7,293)

Income and other taxes payable

670,417

249,699

Accrued expenses

241,006

17,200

Amount due to a shareholder

1,414,776

195,037

Net cash provided by operating activities

8,877,045

3,809,351




Cash flows from investing activities



Acquisition of property, plant and equipment

(4,626,368)

(1,292,087)

Receipt of loan receivable due to termination of an



investment agreement

2,449,629

-

Acquisition of cafes

-

(348,839)

Net cash used in investing activities

(2,176,739)

(1,640,926)




Cash flows from financing activities



Net proceeds from issuance of preferred stock and warrants

5,675,614

10,000

Issuance of shares for reverse merger

-

251,612

Compensation for reorganization

-

(129,032)

Net cash flows provided by financing activities:

5,675,614

132,580




Effect of foreign currency translation on cash

211,398

20,635




Net increase in cash

12,587,318

2,321,640

Cash - beginning of period

3,836,824

3,063,298

Cash - end of period

$ 16,424,142

$ 5,384,938




Cash paid during the period for:



Interest paid

$    5,164

$    2,383

Income taxes paid

$ 942,480

$ 333,927



SOURCE China Internet Cafe Holdings Group, Inc.