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

SHENZHEN, China, August 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 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.

"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

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:

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.

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