+ As restated to give retroactive effective to the 1 for 15 shares reverse stock split which occurred on August 11, 2015.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
+ As restated to give retroactive effective to the 1 for 15 shares reverse stock split which occurred on August 11, 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 1 ORGANIZATION AND PRINCIPAL ACTIVITIES
Network CN Inc. was originally incorporated on September 10, 1993 in Delaware with headquarters in the Hong Kong Special Administrative Region of the People’s Republic of China (“PRC” or “China”). Since August 2006, Network CN Inc., its subsidiaries and variable interest entities for which it is the primary beneficiary (collectively “NCN” or the “Company” “we”, “our” or “us”) has been principally engaged in the provision of out-of-home advertising in China through the operation of a network of roadside light emitting diode (“LED”) digital video panels, mega-size LED digital video billboards and light boxes in major cities.
Details of the Company’s principal subsidiaries and variable interest entities as of December 31, 2015 are described in Note 3 – Subsidiaries and Variable Interest Entities.
Reverse Split
On July 30, 2015, we filed a Certificate of Amendment to its Certificate of Incorporation with the Delaware Secretary of State to effect a 1-for-15 reverse stock split of the Company’s outstanding common stock (the “Reverse Split”) together with a reduction in the authorized common stock from 400,000,000 to 26,666,667 shares.
Our common stock commenced trading on a post-split basis on August 11, 2015.
Shareholders received one new share of common stock in replacement of every fifteen shares held on April 22, 2015, the record date for the Reverse Split. The Reverse Split did not change the aggregate value of any stockholder’s shares of common stock with the par value remaining at $0.001 or any stockholder’s ownership percentage of the common stock, except for minimal changes resulting from the treatment of fractional shares. We did not issue any fractional shares as a result of the Reverse Split. The number of shares issued to each stockholder was rounded up to the nearest whole number if, as a result of the Reverse Split, the number of shares owned by any stockholder would not be a whole number.
The Reverse Split proportionately reduced all issued and outstanding shares of the Company’s common stock, as well as common stock underlying stock options, warrants and other common stock based equity grants outstanding and the respective exercise prices were proportionately increased in accordance with the terms of the agreements governing such securities. Shares of common stock reserved for issuance upon the conversion of the Company’s convertible notes were also proportionately reduced and the respective conversion prices were proportionately increased. All share and per share amounts in the consolidated financial statements and these notes thereto have been adjusted for all periods presented to give effect to the Reverse Split.
Going Concern
The Company has experienced recurring net losses of $836,776 and $2,484,932 for the years ended December 31, 2015 and 2014 respectively. Additionally, the Company has net cash used in operating activities of $409,817 and $1,318,405 for the years ended December 31, 2015 and 2014 respectively. As of December 31, 2015 and 2014, the Company has stockholders’ deficit of $9,746,050 and $9,329,190, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s plans regarding those concerns are addressed in the following paragraph. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In response to current financial conditions, the Company has undergone a drastic cost-cutting exercise, including reduction of the Company’s workforce, office rentals and other general and administrative expenses. The Company has actively explored new prominent media projects in order to provide a wider range of media and advertising services and improve our financial performance.
The existing cash and cash equivalents together with highly liquid current assets are insufficient to fund the Company’s operations for the next twelve months. The Company will need to rely upon some combination of cash generated from the Company’s operations, the proceeds from the potential exercise of the outstanding option held by Keywin Holdings Limited (“Keywin”) to purchase $2 million in shares of the Company’s common stock, or proceeds from the issuance of the Company’s equity and debt securities as well as the exercise of the conversion option by the Company’s note holders to convert the notes to the Company’s common stock, in order to maintain the Company’s operations. Based on the Company’s best estimates, the Company believes that there are sufficient financial resources to meet the cash requirements for the coming twelve months and the consolidated financial statements have been prepared on a going concern basis. However, there can be no assurance the Company will be able to continue as a going concern.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation and Preparation
These consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).
These consolidated financial statements were prepared on a going concern basis. The Company has determined that the going concern basis of preparation is appropriate based on its estimates and judgments of future performance of the Company, future events and projected cash flows. At each balance sheet date, the Company evaluates its estimates and judgments as part of its going concern assessment. Based on its assessment, the Company believes there are sufficient financial and cash resources to finance the Company as a going concern in the next twelve months. Accordingly, management has prepared the financial statements on a going concern basis.
(B) Principles of Consolidation
The consolidated financial statements include the financial statements of Network CN Inc., its subsidiaries and variable interest entities for which it is the primary beneficiary. These variable interest entities are those in which the Company, through contractual arrangements, bears the risks and enjoys the rewards normally associated with ownership of the entities. Upon making this determination, the Company is deemed to be the primary beneficiary of these entities, which are then required to be consolidated for financial reporting purpose. All significant intercompany transactions and balances have been eliminated upon consolidation.
(C) Use of Estimates
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Differences from those estimates are reported in the period they become known and are disclosed to the extent they are material to the consolidated financial statements taken as a whole.
(D) Cash and Cash Equivalents
Cash includes cash on hand, cash accounts, and interest bearing savings accounts placed with banks and financial institutions. For the purposes of the statements of cash flow, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
(E) Allowance for Doubtful Debts
Allowance for doubtful debts is made against receivables to the extent they are considered to be doubtful to collection. Receivables in the consolidated balance sheet are stated net of such allowance. The Company records its allowance for doubtful debts based upon its assessment of various factors. The Company considers historical experience, the age of the receivable balances, the credit quality of its customers, current economic conditions, and other factors that may affect customers’ ability to pay to determine the level of allowance required.
(F) Prepayments for Advertising Operating Rights, Net
Prepayments for advertising operating rights are measured at cost less accumulated amortization and impairment losses, if any. Cost includes prepaid expenses directly attributable to the acquisition of advertising operating rights. Such prepaid expenses are in general charged to the consolidated statements of operations on a straight-line basis over the operating period of the rights. All the costs expected to be amortized more than twelve months after the balance sheet date are classified as non-current assets.
An impairment loss is recognized when the carrying amount of the prepayments for advertising operating rights exceeds the sum of the undiscounted cash flows expected to be generated from the advertising operating right’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset calculated using a discounted cash flow analysis.
(G) Equipment, Net
Equipment is stated at cost less accumulated depreciation and impairment losses, if any. Depreciation is provided on a straight-line basis, less estimated residual values over the assets’ estimated useful lives. The estimated useful lives are as follows:
Media display equipment
|
5 - 7 years
|
Office equipment
|
3 - 5 years
|
Furniture and fixtures
|
3 - 5 years
|
Motor vehicles
|
5 years
|
Leasehold improvements
|
Over the unexpired lease terms
|
Construction in progress is carried at cost less impairment losses, if any. It relates to construction of media display equipment. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.
When equipment is retired or otherwise disposed of, the related cost, accumulated depreciation and provision for impairment loss, if any, are removed from the respective accounts, and any gain or loss is reflected in the consolidated statements of operations. Repairs and maintenance costs on equipment are expensed as incurred.
(H) Impairment of Long-Lived Assets
Long-lived assets, such as equipment, are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to be generated from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset calculated using a discounted cash flow analysis.
(I) Deferred Charges, Net
Deferred charges are fees and expenses directly related to the issuance of convertible promissory notes, including placement agents’ fees. Deferred charges are capitalized and amortized over the life of the convertible promissory notes using the effective interest method. Amortization of deferred charges is included in amortization of deferred charges and debt discount on the consolidated statements of operations while the unamortized balance is included in deferred charges on the consolidated balance sheets. All the costs expected to be amortized more than twelve months after the consolidated balance sheet date are classified as non-current assets.
(J) Convertible Promissory Notes and Warrants
1) Debt Restructuring and Issuance of 1% Convertible Promissory Note
On April 2, 2009, the Company issued 1% unsecured senior convertible promissory notes to the previous 3% convertible promissory note holders who agreed to cancel these 3% convertible promissory notes in the principal amount of $5,000,000 (including all accrued and unpaid interest thereon), and all of the warrants, in exchange for the 1% unsecured senior convertible promissory notes in the principal amount of $5,000,000. The 1% convertible promissory notes bore interest at 1% per annum, payable semi-annually in arrears, matured on April 1, 2012, and were convertible at any time into shares of the Company’s common stock at a fixed conversion price of $1.7445 per share, subject to customary anti-dilution adjustments. Pursuant to ASC Topic 470, Debt, the Company determined that the original convertible notes and the 1% convertible notes were with substantially different terms and hence the exchange was recorded as an extinguishment of original notes and issuance of new notes.
The Company determined the 1% convertible promissory notes to be conventional convertible instruments under ASC Topic 815, Derivatives and Hedging. Its embedded conversion option qualified for equity classification. The embedded beneficial conversion feature was recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The debt discount resulting from the allocation of proceeds to the beneficial conversion feature is amortized over the term of the 1% convertible promissory notes from the respective dates of issuance using the effective interest method.
2) Extension of 1% Convertible Promissory Note
The 1% convertible promissory notes matured on April 1, 2012 and on the same date, the Company and the note holders agreed to the following: 1) extension of the maturity date of the 1% convertible promissory notes for a period of two years and 2) modification of the 1% convertible promissory notes to be convertible at any time into shares of the Company’s common stock at a conversion price of $1.3956 per share, subject to customary anti-dilution adjustments. In all other respects not specifically mentioned, the terms of the 1% convertible promissory notes remain the same and are fully enforceable in accordance with their terms. Subsequently, the Company issued to the note holders new 1% convertible promissory notes with a maturity date of April 1, 2014. Pursuant to ASC Topic 470, the Company determined that the modification is substantially different and hence the modification was recorded as an extinguishment of notes and issuance of new notes. The Company allocated the amount of the reacquisition price to the repurchased beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date and the residual amount was allocated to the convertible security. Thus, the Company recorded a gain on extinguishment of debt.
The 1% Convertible Promissory Notes were scheduled to mature on April 1, 2014 and on March 12, 2014, the Company and the respective holders agreed to extend the maturity date of the 1% Convertible Promissory Notes for a period of two years. In all other respects not specifically mentioned, the terms of the 1% Convertible Promissory Notes shall remain the same and shall be fully enforceable in accordance with its terms.
Subsequently, the Company issued to the note holders new 1% convertible promissory notes which will mature on April 1, 2016. The Company allocated the amount of the reacquisition price to the repurchased beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date and the residual amount was allocated to the convertible security. Thus, the Company recorded no gain or loss on extinguishment of debt.
The Company determined the modified new 1% convertible promissory notes to be conventional convertible instruments under ASC Topic 815. Its embedded conversion option qualified for equity classification. The embedded beneficial conversion feature was recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The debt discount resulting from the allocation of proceeds to the beneficial conversion feature is amortized over the term of the new 1% convertible promissory notes from the respective dates of issuance using the effective interest method.
On April 29, 2016, the Company received a reservation of rights letter from the note holders to reserves all of its powers, rights and privileges.
(K) Revenue Recognition
The Company recognizes revenue in the period when advertisements are either aired or published.
(L) Stock-based Compensation
The Company complies with ASC Topic 718, Compensation – Stock Compensation, using a modified prospective application transition method, which establishes accounting for stock-based awards in exchange for employee services. Under this application, the Company is required to record stock-based compensation expense for all awards granted. It requires that stock-based compensation cost is measured at grant date, based on the fair value of the award, and recognized as expense over the requisite services period.
Common stock, stock options and warrants issued to other than employees or directors in exchange for services are recorded on the basis of their fair value. In accordance with ASC Topic 505, Equity, the non-employee stock options or warrants are measured at their fair value by using the Black-Scholes option pricing model as of the earlier of the date at which a commitment for performance to earn the equity instruments is reached (“performance commitment date”) or the date at which performance is complete (“performance completion date”). The stock-based compensation expenses are recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Accounting for non-employee stock options or warrants which involve only performance conditions when no performance commitment date or performance completion date has occurred as of reporting date requires measurement at the equity instruments then-current fair value. Any subsequent changes in the market value of the underlying common stock are reflected in the expense recorded in the subsequent period in which that change occurs.
(M) Income Taxes
The Company accounts for income taxes under ASC Topic 740, Income Tax. Deferred tax assets and liabilities are provided for the future tax effects attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from items including tax loss carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or reversed. The expense or benefit related to adjusting deferred tax assets and liabilities as a result of a change in tax rates is recognized in income or loss in the period that includes the enactment date.
(N) Comprehensive Income (Loss)
The Company follows ASC Topic 220, Comprehensive Income, for the reporting and display of its comprehensive income (loss) and related components in the financial statements and thereby reports a measure of all changes in equity of an enterprise that results from transactions and economic events other than transactions with the shareholders. Items of comprehensive income (loss) are reported in both the consolidated statements of operations and comprehensive loss and the consolidated statement of stockholders’ deficit.
(O) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are computed in accordance with ASC Topic 260, Earning per Share, by dividing the net income (loss) attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding.
The diluted net loss per common share is the same as the basic net loss per share for the years ended December 31, 2015, 2014 and 2013 as all potential common shares including stock options and warrants are anti-dilutive and are therefore excluded from the computation of diluted net loss per share.
(P) Operating Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease period.
(Q) Capital Leases
Leases are classified as capital leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to lessee. Assets held under capital leases are initially recognized as assets at their fair value or, if lower, the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest elements of the finance cost is charged to the consolidated statements of operations over the lease period so as to produce a constant rate of interest on the remaining balance of the liability for each period. The equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term.
(R) Foreign Currency Translation
The assets and liabilities of the Company’s subsidiaries and variable interest entities denominated in currencies other than U.S. dollars are translated into U.S. dollars using the applicable exchange rates at the balance sheet date. For consolidated statements of operations’ items, amounts denominated in currencies other than U.S. dollars were translated into U.S. dollars using the average exchange rate during the year. Equity accounts were translated at their historical exchange rates. Net gains and losses resulting from translation of foreign currency financial statements are included in the statements of stockholders’ equity/(deficit) as accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are reflected in the consolidated statements of operations.
(S) Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosure, defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
It establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It establishes three levels of inputs that may be used to measure fair value:
Level 1
- Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
- Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
- Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The carrying value of the Company’s financial instruments, which consist of cash, accounts receivable, prepayments for advertising operating rights, prepaid expenses and other current assets, accounts payable, accrued expenses and other payables, approximates fair value due to the short-term maturities.
The carrying value of the Company’s financial instruments related to warrants associated with convertible promissory notes is stated at a value being equal to the allocated proceeds of convertible promissory notes based on the relative fair value of notes and warrants. In the measurement of the fair value of these instruments, the Black-Scholes option pricing model is utilized, which is consistent with the Company’s historical valuation techniques. These derived fair value estimates are significantly affected by the assumptions used. As the allocated value of the financial instruments related to warrants associated with convertible promissory notes is recorded in additional paid-in capital, the financial instruments related to warrants were not required to mark to market as of each subsequent reporting period.
(T) Concentration of Credit Risk
The Company places its cash with various financial institutions. The Company believes that no significant credit risk exists as these cash investments are made with high-credit-quality financial institutions.
All the revenue of the Company and a significant portion of the Company’s assets are generated and located in China. The Company’s business activities and accounts receivable are mainly from advertising services. Deposits are usually collected from customers in advance and the Company performs ongoing credit evaluation of its customers. The Company believes that no significant credit risk exists as credit loss.
The Company engaged in the provision of out-of-home advertising in China. As of December 31, 2014, one customer accounted for approximately 41% of its accounts receivable balances. Due to the longstanding nature of its relationships with these customers and contractual obligations, the Company is confident that it will recover these amounts. The Company establishes an allowance for doubtful debts accounts upon its assessment of various factors. The Company considers historical experience, the age of the receivable balances, the credit quality of its customers, current economic conditions, and other factors that may affect customers’ ability to pay to determine the level of allowance required.
(U) Segmental Reporting
ASC Topic 280 establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company’s operating segments are organized internally primarily by the type of services rendered. Accordingly, it is management’s view that the services rendered by the Company are of one operating segment: Media Network.
(V) Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" in order to ensure that revenue recognition requirements are the same under both US GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 removes inconsistencies and provides a more robust framework for addressing revenue issues. ASU 2014-09 was effective for reporting periods and interim periods beginning on or after December 15, 2016. In August 2015, the FASB issued ASU 2015-14 "Deferral of the Effective Date" to delay the implementation of ASU 2014-09 by one year, in response to feedback from preparers, practitioners and users of financial statements. Accordingly, ASU 2014-09 is now effective for reporting periods and interim periods beginning on or after December 15, 2017. Early adoption is permitted for reporting and interim periods beginning on or after December 15, 2016. The Company is currently assessing the impact of ASU 2014-09 on its consolidated financial position, results of operations and cash flows.
In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 particularly relates to the fair value and impairment of equity investments, financial instruments measured at amortized cost, and the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is only permitted for certain particular amendments within ASU 2016-01, where financial statements have not yet been issued. The Company is currently assessing the impact of ASU 2016-01 on its consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new Accounting Standards Codification Topic 842 "Leases" to replace the previous Topic 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09 (see above). ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-07 "Investments - Equity Method and Joint Ventures" to simplify the transition to the equity method of accounting. ASU 2016-07 eliminates the requirement that when an investment qualifies for the use of the equity method as a result of an increase in the level of ownership, the investor must adjust the investment, results of operations and retained earnings retrospectively as if the equity method had been in effect during all previous periods in which the investment had been held. ASU 2016-07 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09 "Compensation - Stock Compensation" to introduce improvements to employee share-based payment accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-09 on its consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" to introduce new guidance for the accounting for credit losses on instruments within its scope. ASU 2016-13 requires among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-13 on its consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently assessing the impact of ASU 2016-15 on its statement of consolidated cash flows.
In October 2016, the FASB issued ASU 2016-17 "Consolidation (Topic 810): Interests held through Related Parties that are under Common Control", to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments are effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-17 on its consolidated financial position, results of operations and cash flows.
NOTE 3 SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
Details of the Company’s principal consolidated subsidiaries and variable interest entities as of December 31, 2015 were as follows:
Name
|
Place of
Incorporation
|
Ownership/Control
interest
attributable to
the Company
|
Principal activities
|
NCN Group Limited
|
BVI
|
100%
|
Investment holding
|
NCN Media Services Limited
|
BVI
|
100%
|
Investment holding
|
Business Boom Investments Limited
|
BVI
|
100%
|
Investment holding
|
Cityhorizon Limited
|
Hong Kong
|
100%
|
Investment holding
|
NCN Group Management Limited
|
Hong Kong
|
100%
|
Provision of administrative and
management services
|
Crown Eagle Investment Limited
|
Hong Kong
|
100%
|
Dormant
|
Crown Winner International Limited
|
Hong Kong
|
100%
|
Investment holding
|
NCN Group (HK) Limited
|
Hong Kong
|
100%
|
Dormant
|
NCN Huamin Management Consultancy (Beijing)
Company Limited
|
PRC
|
100%
|
Dormant
|
Huizhong Lianhe Media Technology Co., Ltd.
|
PRC
|
100%
|
Dormant
|
Beijing Huizhong Bona Media Advertising Co., Ltd.
|
PRC
|
100% (1)
|
Dormant
|
Xingpin Shanghai Advertising Limited
|
PRC
|
100% (1)
|
Dormant
|
Chuanghua Shanghai Advertising Limited
|
PRC
|
100%
|
Dormant
|
Jiahe Shanghai Advertising Limited
|
PRC
|
100%
|
Dormant
|
Remarks:
1)
|
Variable interest entity which the Company exerted 100% control through a set of commercial arrangements.
|
2)
|
During the year ended December 31, 2015, the Company’s subsidiary, NCN Media Services Limited, disposed of its entire 100% equity interests of Linkrich Enterprise Advertising and Investment Limited, a Hong Kong investment holding company and Yi Gao Shanghai Advertising Limited, a PRC advertising company which has maintained minimal operation since October 2014, to an individual at $1 consideration. Accordingly, the Company recorded a gain from disposal of subsidiaries of $129,726 for the year ended December 31, 2015.
|
NOTE 4 ACCOUNTS RECEIVABLE, NET
Accounts receivable, net as of December 31, 2015 and 2014 consisted of the following:
|
|
2015
|
|
|
2014
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
25,514
|
|
Less: allowance for doubtful debts
|
|
|
-
|
|
|
|
(13,588
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
11,926
|
|
For the years ended December 31, 2015 and 2014, the Company recorded no allowance for doubtful debts for accounts receivable.
NOTE 5 PREPAYMENTS FOR ADVERTISING OPERATING RIGHTS, NET
Prepayments for advertising operating rights, net as of December 31, 2015 and 2014 were as follows:
|
|
2015
|
|
|
2014
|
|
Gross carrying amount
|
|
|
|
|
|
|
Beginning
|
|
$
|
-
|
|
|
$
|
648,082
|
|
Addition
|
|
|
-
|
|
|
|
323,334
|
|
Write off
|
|
|
-
|
|
|
|
(965,861
|
)
|
Translation adjustments
|
|
|
-
|
|
|
|
(5,555
|
)
|
Total gross carrying amount
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
-
|
|
|
|
(648,082
|
)
|
Transfer from accrued advertising operating rights fee
|
|
|
-
|
|
|
|
(323,334
|
)
|
Write off
|
|
|
-
|
|
|
|
965,861
|
|
Translation adjustments
|
|
|
-
|
|
|
|
5,555
|
|
Total accumulated amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Prepayments for advertising operating rights, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Total amortization expense of prepayments for advertising operating rights of the Company for the years ended December 31, 2015 and 2014 were $nil and $nil respectively. The amortization expense of prepayments for advertising operating rights was included as cost of advertising services on the consolidated statement of operations.
Provision for impairment
As the Company has incurred a continuous net loss, the Company performed an impairment review of its prepayments for advertising operating rights. The Company compared the carrying amount of the prepayments for advertising operating rights to the sum of the undiscounted cash flows expected to be generated. The Company determined their fair values using a discounted cash flow analysis if the carrying values exceeded undiscounted cash flows.
Accordingly, the Company recorded no impairment loss for the years ended December 31, 2015 and 2014.
For the years ended December 31, 2015 and 2014, the Company recorded no write-off of provision for impairment losses against cost and accumulated amortization of certain prepayments for advertising operating rights.
NOTE 6 PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET
Prepaid expenses and other current assets, net as of December 31, 2015 and 2014 were as follows:
|
|
2015
|
|
|
2014
|
|
Payments from customers withheld by a third party
|
|
$
|
-
|
|
|
$
|
1,568,151
|
|
Prepaid expenses
|
|
|
100,955
|
|
|
|
103,748
|
|
Rental and other deposits
|
|
|
202
|
|
|
|
45,449
|
|
Other receivables
|
|
|
-
|
|
|
|
4,525
|
|
Sub-total
|
|
|
101,157
|
|
|
|
1,721,873
|
|
Less: allowance for doubtful debts
|
|
|
-
|
|
|
|
(1,570,302
|
)
|
Total
|
|
$
|
101,157
|
|
|
$
|
151,571
|
|
For the years ended December 31, 2015 and 2014, the Company recorded no allowance for doubtful debt for prepaid expenses and other current assets. The movement of allowance during the years presented were mainly due to the changes in exchange rates between US$ and Renminbi (“RMB”).
NOTE 7 EQUIPMENT, NET
Equipment, net as of December 31, 2015 and 2014 consisted of the following:
|
|
2015
|
|
|
2014
|
|
Office equipment
|
|
$
|
14,049
|
|
|
$
|
28,105
|
|
Motor vehicles
|
|
|
57,692
|
|
|
|
57,692
|
|
Leasehold improvement
|
|
|
-
|
|
|
|
12,809
|
|
Sub-Total
|
|
|
71,741
|
|
|
|
98,606
|
|
Less: accumulated depreciation
|
|
|
(55,098
|
)
|
|
|
(60,078
|
)
|
Total
|
|
$
|
16,643
|
|
|
$
|
38,528
|
|
Depreciation expenses for the years ended December 31, 2015 and 2014 amounted to $15,975 and $43,831, respectively.
Provision for impairment
As the Company has continued to record net losses, it performed an impairment review of its equipment. The Company compared the carrying value of its equipment to the sum of the undiscounted cash flows expected to be generated. For those assets with carrying values exceeding projected undiscounted cash flows, the Company determined their fair values using a discounted cash flow analysis. Accordingly, the Company recorded no impairment loss for the years ended December 31, 2015 and 2014.
Pledge of Equipment
No equipment has been pledged by the Company.
NOTE 8 ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES
Accounts payable, accrued expenses and other payables as of December 31, 2015 and 2014 consisted of the following:
|
|
2015
|
|
|
2014
|
|
Accrued advertising operating rights
|
|
$
|
-
|
|
|
$
|
525,790
|
|
Accrued staff benefits and related fees
|
|
|
1,241,765
|
|
|
|
1,237,128
|
|
Accrued professional fees
|
|
|
149,508
|
|
|
|
139,276
|
|
Accrued interest expenses
|
|
|
878,275
|
|
|
|
408,474
|
|
Other accrued expenses
|
|
|
74,117
|
|
|
|
79,077
|
|
Short-term loans 1)
|
|
|
2,501,389
|
|
|
|
2,093,953
|
|
Receipts in advance
|
|
|
-
|
|
|
|
10,834
|
|
Other payables
|
|
|
7,982
|
|
|
|
29,580
|
|
Total
|
|
$
|
4,853,036
|
|
|
$
|
4,524,112
|
|
1) As of December 31, 2015, the Company recorded an aggregated amount of $2,501,389 of short-term loans. Those loans were borrowed from an unrelated individual. Those loans are unsecured, bear a monthly interest of 1.5% and shall be repayable in one month. However, according to the agreement, the Company shall have the option to shorten or extend the life of those short-term loans if the need arises and the Company has agreed with the lender to extend the short-term loans on due date. As of the date of this report, those loans have not yet been repaid.
The interest expenses of the short-term loans for the years ended December 31, 2015 and 2014 amounted to $419,801 and $306,958, respectively.
NOTE 9 CONVERTIBLE PROMISSORY NOTES AND WARRANTS
(1) Debt Restructuring and Issuance of 1% Convertible Promissory Notes
On November 19, 2007, the Company entered into a Note and Warrant Purchase Agreement, as amended (the “Purchase Agreement”) with Shanghai Quo Advertising Co. Ltd and affiliated investment funds of Och-Ziff Capital Management Group (the “Investors”) pursuant to which it agreed to issue in three tranches, 3% Senior Secured Convertible Promissory Notes due June 30, 2011, in the aggregate principal amount of up to $50,000,000 (the “3% Convertible Promissory Notes”) and warrants to acquire an aggregate amount of 457,143 shares of the Company’s Common Stock (the “Warrants”). Between November 19 - 28, 2007, the Company issued 3% Convertible Promissory Notes in the aggregate principal amount of $15,000,000, Warrants to purchase shares of the Company’s common stock at $187.5 per share and Warrants to purchase shares of the Company’s common stock at $262.5 per share. On January 31, 2008, the Company amended and restated the previously issued 3% Convertible Promissory Notes and issued to the Investors 3% Convertible Promissory Notes in the aggregate principal amount of $50,000,000 (the “Amended and Restated Notes”), Warrants to purchase shares of the Company’s common stock at $187.5 per share and Warrants to purchase shares of the Company’s common stock at $262.5 per share. In connection with the Amended and Restated Notes, the Company entered into a Security Agreement, dated as of January 31, 2008 (the “Security Agreement”), pursuant to which the Company granted to the collateral agent for the benefit of the Investors, a first-priority security interest in certain of the Company’s assets, and 66% of the equity interest in the Company.
On April 2, 2009, the Company entered into a new financing arrangement with the previous holders of the Amended and Restated Notes (the “Note Holders”), and Keywin.
Pursuant to a note exchange and option agreement, dated April 2, 2009 (the “Note Exchange and Option Agreement”), between the Company and Keywin, Keywin exchanged its Amended and Restated Note in the principal amount of $45,000,000, and all accrued and unpaid interest thereon, for 4,093,806 shares of the Company’s common stock and an option to purchase an aggregate of 2,020,202 shares of the Company’s common stock, for an aggregate purchase price of $2,000,000 (the “Keywin Option”). The Keywin Option was originally exercisable for a three-month period which commenced on April 2, 2009, but pursuant to several subsequent amendments, the exercise period has been extended to an one hundred and five-month period ending on January 1, 2018, subject to the Company’s right to unilaterally terminate the exercise period upon 30 days’ written notice. As of December 31, 2015, the Keywin Option has not been exercised.
Pursuant to a note exchange agreement, dated April 2, 2009, among the Company and the Note Holders, the parties agreed to cancel their Amended and Restated Notes in the principal amount of $5,000,000 (including all accrued and unpaid interest thereon), and all of the warrants, in exchange for the Company’s issuance of the 1% unsecured senior convertible promissory notes due 2012 in the principal amount of $5,000,000 (the “1% Convertible Promissory Notes”). The 1% Convertible Promissory Notes bear interest at 1% per annum, are payable semi-annually in arrears, mature on April 1, 2012, and are convertible at any time by the holder into shares of the Company’s common stock at an initial conversion price of $1.7445 per share, subject to customary anti-dilution adjustments. In addition, in the event of a default, the holders will have the right to redeem the 1% Convertible Promissory Notes at 110% of the principal amount, plus any accrued and unpaid interest. The parties also agreed to terminate the Security Agreement and release all security interests arising out of the Purchase Agreement and the Amended and Restated Notes.
2) Extension of 1% Convertible Promissory Notes and Issuance of New 1% Convertible Promissory Notes in 2012
The 1% Convertible Promissory Notes matured on April 1, 2012 and on the same date, the Company and the Note Holders agreed to the following: (1) extension of the maturity date of the 1% Convertible Promissory Notes for a period of two years and (2) modification of the 1% Convertible Promissory Notes to be convertible at any time into shares of the Company’s common stock at a conversion price of $1.3956 per share, subject to customary anti-dilution adjustments. In all other respects not specifically mentioned, the terms of the 1% Convertible Promissory Notes shall remain the same and shall be fully enforceable in accordance with its terms. Subsequently, the Company issued new 1% convertible promissory notes (the “New 1% Convertible Promissory Notes”) to the Note Holders. The New 1% Convertible Promissory Notes bear interest at 1% per annum, are payable semi-annually in arrears, mature on April 1, 2014, and are convertible at any time by the Note Holders into shares of the Company’s common stock at an initial conversion price of $1.3956 per share, subject to customary anti-dilution adjustments. In addition, in the event of a default, the Note Holders will have the right to redeem the New 1% Convertible Promissory Notes at 110% of the principal amount, plus any accrued and unpaid interest.
Gain on extinguishment of debt
Pursuant to ASC Topic 470-20-40-3, the Company allocated the amount of the reacquisition price to the repurchased beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date and the residual amount was allocated to the convertible security. Thus, the Company recognized a gain on extinguishment of debt of $1,877,594 at the date of extinguishment and included in the statements of operations for the year ended December 31, 2012.
3) Extension of 1% Convertible Promissory Notes and Issuance of New 1% Convertible Promissory Notes in 2014
The 1% Convertible Promissory Notes matured on April 1, 2014 and on March 12, 2014, the Company and the respective holders agreed to extend the maturity date of the 1% Convertible Promissory Notes for a period of two years until April 1, 2016. In all other respects not specifically mentioned, the terms of the 1% Convertible Promissory Notes shall remain the same and shall be fully enforceable in accordance with its terms.
On April 29, 2016, the Company received a reservation of rights letter from the note holders to reserves all of its powers, rights and privileges.
Pursuant to ASC Topic 470-50 and ASC Topic 470-50-40, the Company determined that the original convertible notes and the modified convertible notes had substantially different terms and hence the fair value of the embedded beneficial conversion feature of the modified convertible notes, which would be recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital and any debt discount will be amortized over the term of the modified convertible notes from the effective date of the new agreement using the effective interest method. As of April 1, 2014, the Company determined the fair value of the embedded beneficial conversion feature of the modified convertible notes is $nil.
4)No extension of 1% Convertible Promissory Notes at the maturity date on April 1, 2016
On April 29, 2016, the Company received a reservation of rights letter from the note holders to reserves all of its powers, rights and privileges.
The following table details the accounting treatment of the convertible promissory notes:
|
|
New 1%
Convertible
Promissory
Notes, due in
2014
|
|
|
New 1%
Convertible
Promissory
Notes, due in 2016
|
|
|
Total
|
|
Proceeds of new 1% convertible promissory notes
|
|
$
|
5,000,000
|
|
|
$
|
-
|
|
|
$
|
5,000,000
|
|
Allocated intrinsic value of beneficial conversion feature
|
|
|
(3,598,452
|
)
|
|
|
-
|
|
|
|
(3,598,452
|
)
|
Amortization of debt discount for the year ended December 31, 2012
|
|
|
800,249
|
|
|
|
-
|
|
|
|
800,249
|
|
Net carrying value of convertible promissory notes as of December
31, 2012
|
|
|
2,201,797
|
|
|
|
|
|
|
|
2,201,797
|
|
Amortization of debt discount for the year ended December 31, 2013
|
|
|
1,862,615
|
|
|
|
|
|
|
|
1,862,615
|
|
Net carrying value of convertible promissory notes as of December
31, 2013
|
|
|
4,064,412
|
|
|
|
-
|
|
|
|
4,064,412
|
|
Amortization of debt discount for the year ended December 31, 2014
|
|
|
935,588
|
|
|
|
-
|
|
|
|
935,588
|
|
Repayment of 1% convertible promissory note
|
|
|
(5,000,000
|
)
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
Proceeds of new 1% convertible promissory notes
|
|
|
-
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Allocated intrinsic value of beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net carrying value of convertible promissory notes as of December
31, 2014 and 2015
|
|
$
|
-
|
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Amortization of Deferred Charges and Debt Discount
The amortization of deferred charges and debt discount for the year ended December 31, 2015 was as follows:
|
|
Warrants
|
|
|
Conversion
Features
|
|
|
Deferred
Charges
|
|
|
Total
|
|
New 1% convertible promissory notes, due in 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
New 1% convertible promissory notes, due in 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The amortization of deferred charges and debt discount for the year ended December 31, 2014 was as follows:
|
|
Warrants
|
|
|
Conversion
Features
|
|
|
Deferred
Charges
|
|
|
Total
|
|
New 1% convertible promissory notes, due in 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
New 1% convertible promissory notes, due in 2014
|
|
|
-
|
|
|
|
935,588
|
|
|
|
-
|
|
|
|
935,588
|
|
Total
|
|
$
|
-
|
|
|
$
|
935,588
|
|
|
$
|
-
|
|
|
$
|
935,588
|
|
Interest Expense
The following table details the interest expenses:
|
|
|
Years Ended December 31,
|
|
|
|
|
2015
|
|
|
|
2014
|
|
New 1% convertible promissory notes, due in 2016
|
|
$
|
50,000
|
|
|
$
|
37,397
|
|
New 1% convertible promissory notes, due in 2014
|
|
|
|
|
|
|
12,603
|
|
Total
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
NOTE 10 CAPITAL LEASE OBLIGATION
As of December
31, 2015, the gross amount of the motor vehicle under capital leases was $57,692. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payment as of December
31, 2015.
Fiscal years ending December 31,
|
|
|
|
2016
|
|
$
|
13,846
|
|
2017
|
|
|
4,615
|
|
Total minimum lease payments
|
|
|
18,461
|
|
Less: Amount representing interest
|
|
|
(857
|
)
|
Present value of net minimum lease payment
|
|
|
17,604
|
|
Less: Current portion
|
|
|
(13,052
|
)
|
Non-current portion
|
|
$
|
4,552
|
|
NOTE 11 COMMITMENTS AND CONTINGENCIES
Contingencies
The Company accounts for loss contingencies in accordance with ASC Topic 450 and other related guidelines. Set forth below is a description of certain loss contingencies as of December 31, 2015 and management’s opinion as to the likelihood of loss in respect of loss contingency.
On July 5, 2013, Yi Gao received a notice from the People's Court of Huangpu District, Shanghai that Shanghai Shenpu Advertising Co. Ltd (“Shenpu”), as plaintiff, had initiated a contract dispute against Yi Gao seeking an aggregate of RMB1,807,215 (equivalent to approximately US$291,000 at the then-prevailing exchange rate) for unpaid rights fee, penalty and production cost. On August 7, 2013, Yi Gao received a court verdict from the People's Court of Huangpu District, Shanghai that Yi Gao is liable to repay the unpaid fee of RMB650,000, penalty and production cost. On August 26, 2013, Yi Gao submitted an appeal to People's Court of Huangpu District, Shanghai that the penalty calculated is not reasonable. On November 13, 2013, Yi Gao withdrew the appeal. As a result, Yi Gao is liable to pay an aggregate of RMB765,463 (equivalent to approximately US$124,870 at the then-prevailing exchange rate) to Shenpu. On February 19, 2014, Yi Gao paid RMB45,221 to Shenpu. In June 2015, the Company’s subsidiary, NCN Media Services Limited, disposed of its entire 100% equity interests of Linkrich Enterprise Advertising and Investment Limited and Yi Gao Shanghai Advertising Limited to an individual.
NOTE 12 STOCKHOLDERS’ DEFICIT
(A)
|
Stock, Options and Warrants Issued for Services
|
1. In August 2006, the Company issued a warrant to purchase up to 1,333 shares of restricted common stock to a consultant at an exercise price $52.5 per share. One-fourth of the shares underlying the warrant became exercisable every 45 days beginning from the date of issuance. The warrant remains exercisable until August 25, 2016. The fair market value of the warrant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions and estimates: expected dividend 0%, volatility 192%, a risk-free rate of 4.5% and an expected life of one (1) year. The value of the warrant recognized for the years ended December 31, 2015, and 2014 was $nil. As of December 31, 2015, none of the warrant was exercised.
2. In December 2012, the Company entered into two consultancy agreements with two consultants. Pursuant to the agreements, these two consultants were granted 400,000 shares and 166,667 shares respectively for their services rendered. In December 2012, the Company issued 266,667 and 166,667 shares of par value of $0.001 each to these two consultants respectively. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $390,000 of non-cash stock-based compensation included in general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2012. In January 2014, the Company issued the remaining 133,333 shares of par value of $0.001 to one of the consultant. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $55,600 of non-cash stock-based compensation included in general and administrative expenses
on the consolidated statements of operation for the year ended December 31, 2014.
3. In March 2013, the Company agreed to issue an aggregate of 9,000 shares of common stock to the independent director, Charles Liu as director’s fee from November 16, 2011 to December 31, 2012. In November 2014, the shares were cancelled.
4. In August 2013, the Board of Directors granted an aggregate of 24,000 shares of common stock to the directors of the Company for their services rendered during the year from July 1, 2013 to June 30, 2014. Each director was granted shares of the Company’s common stock subject to a vesting period of twelve months in the following amounts: Earnest Leung, 8,000 shares; Gerald Godfrey, 8,000 shares; and Charles Liu, 8,000 shares. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $nil and $12,582 of non-cash stock-based compensation included in general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2015 and 2014 respectively.
5. On February 24, 2014, the Company completed three private placements of 500,000 shares of restricted common stock at $1.5 per share. The transaction took place with three investors and generated gross proceeds of $750,000 for the year ended December 31, 2014.
6. In February 2015, the Company agreed to issue an aggregate of 56,250 shares of common stock to the independent director, Charles Liu as director’s fee from November 16, 2011 to June 30, 2014.
7. In February 2015, the Board of Director granted an aggregate of 39,999 shares of common stock to the directors of the Company for their services rendered during the year from July 1, 2014 to June 30, 2015. Each director was granted shares of the Company’s common stock subject to a vesting period of twelve months in the following amounts: Earnest Leung, 13,333 shares; Wong Wing Kong, 13,333 shares; and Shirley Cheng, 13,333 shares. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $27,309 and $12,582 of non-cash stock-based compensation included in general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2015 and 2014 respectively.
8. In April 2015, the Company entered into a consultancy agreement with a consultant. Pursuant to the agreement, the consultant was granted 266,667 shares for his services rendered. In April 2015, the Company issued 266,667 shares of par value of $0.001 each to the consultant. In connection with this stock grants and in accordance with ASC Topic 718, the Company recognized $324,000 and $nil of non-cash stock-based compensation included in general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2015 and 2014 respectively.
9. In August 2015, the Board of Directors granted an aggregate of 53,332 shares of common stock to the directors of the Company for their services rendered during the year from July 1, 2015 to June 30, 2016. Each director was granted shares of the Company’s common stock subject to a vesting period of twelve months in the following amounts: Earnest Leung, 13,333 shares; Wong Wing Kong, 13,333 shares; Frederick Wong, 13,333 shares and Shirley Cheng, 13,333 shares. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $20,000 and $nil of non-cash stock-based compensation included in general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2015 and 2014 respectively.
(B) Restriction on payment of dividends
The Company has not declared any dividends since incorporation. For instance, the terms of the outstanding promissory notes issued to affiliated funds of Och-Ziff on April 2, 2014 contain restrictions on the payment of dividends. The dividend restrictions provide that the Company or any of its subsidiaries shall not declare or pay dividends or other distributions in respect of the equity securities of such entity other than dividends or distributions of cash which amounts during any 12-month period that exceed ten percent (10%) of the consolidated net income of the Company based on the Company’s most recent audited financial statements disclosed in the Company’s annual report on Form 10-K (or equivalent form) filed with the U.S. Securities and Exchange Commission.
NOTE 13 RELATED PARTY TRANSACTIONS
Except as set forth below, during the years ended December 31, 2015 and 2014, the Company did not enter into any material transactions or series of transactions that would be considered material in which any officer, director or beneficial owner of 5% or more of any class of the Company’s capital stock, or any immediate family member of any of the preceding persons, had a direct or indirect material interest.
In April 2009, in connection with debt restructuring, Statezone Ltd. of which Dr. Earnest Leung, the Company’s Chief Executive Officer and a Director (being appointed on July 15, 2009 and May 11, 2009, respectively) was the sole director, provided agency and financial advisory services to the Company. Accordingly, the Company paid an aggregate service fee of $350,000, of which $250,000 has been recorded as issuance costs for 1% Convertible Promissory Notes and $100,000 has been recorded as prepaid expenses and other current assets, net since April 2009. Such $100,000 is refundable unless the Keywin Option is exercised and completed. As of December 31, 2015, $100,000 was recorded as prepaid expenses and other current assets.
On July 1, 2009, the Company and Keywin, of which the Company’s chief executive officer and director is the director and his spouse is the sole shareholder, entered into an Amendment, pursuant to which the Company agreed to extend the exercise period for the Keywin Option under the Note Exchange and Option Agreement between the Company and Keywin, to purchase an aggregate of 1,637,522 shares of our common stock for an aggregate purchase price of $2,000,000, from a three-month period ended on July 1, 2009, to a six-month period ended October 1, 2009. The exercise period for the Keywin option was subsequently further extended to a nine-month period ended January 1, 2010, pursuant to the Second Amendment. On January 1, 2010, the Company and Keywin entered into the third Amendment, pursuant to which the Company agreed to further extend the exercise period to an eighteen-month period ended on October 1, 2010, and provide the Company with the right to unilaterally terminate the exercise period upon 30 days’ written notice. On September 30, 2010, the exercise price was extended at various times from September 1, 2010 to December 31, 2015, the latest exercise period for the Keywin Option was further extended to a one hundred and five-month period ending on January 1, 2018 and the exercise price changed to $0.99.
During the years ended December 31, 2015 and 2014, the Company received loans of $nil and $nil from its directors and repaid $nil and $85,244 to its directors respectively. As of December 31, 2015 and 2014, the Company recorded an amount of $nil payable to directors. Such payable was included in accounts payable, accrued expenses and other payables on the consolidated balance sheets. The amount is unsecured, bears no interest and repayable on demand.
NOTE 14 NET LOSS PER COMMON SHARE
Net loss per share information for the years ended December 31, 2015 and 2014 was as follows:
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to NCN common stockholders
|
|
$
|
(836,776
|
)
|
|
$
|
(2,484,932
|
)
|
Denominator
:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic
|
|
|
8,003,289
|
|
|
|
7,669,855
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
-
|
|
Options and warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of shares outstanding, diluted
|
|
|
8,003,289
|
|
|
|
7,669,855
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.32
|
)
|
The diluted net loss per common share is the same as the basic net loss per common share for the years ended December 31, 2015 and 2014 as the ordinary shares issuable under stock options and warrants outstanding are anti-dilutive and are therefore excluded from the computation of diluted net loss per common share. The securities that could potentially dilute basic net loss per common share in the future that were not included in the computation of diluted net loss per common share because of anti-dilutive effect as of December 31, 2015 and 2014 were summarized as follows:
|
|
2015
|
|
|
2014
|
|
Potential common equivalent shares:
|
|
|
|
|
|
|
Stock warrants for services (1)
|
|
|
-
|
|
|
|
-
|
|
Conversion feature associated with convertible promissory notes to
common stock
|
|
|
-
|
|
|
|
-
|
|
Common stock to be granted to directors executives and employees
for services (including non-vested shares)
|
|
|
-
|
|
|
|
-
|
|
Common stock to be granted to consultants for services (including
non-vested shares)*
|
|
|
1,333
|
|
|
|
1,333
|
|
Stock options granted to Keywin
|
|
|
-
|
|
|
|
79,715
|
|
Total
|
|
|
1,333
|
|
|
|
81,048
|
|
Remarks:
*As of December 31, 2015, the number of potential common equivalent shares associated with warrants issued for services was nil, which was related to a warrant to purchase 1,333 shares of common stock issued by the Company to a consultant in 2006 for service rendered at an exercise price of $52.50, which will expire in August 2016.
+ The per share computation reflect the changes in number of shares as restated to give retroactive effective to the 1 for 15 shares reverse stock split which occurred on August 11, 2015
NOTE 15 BUSINESS SEGMENTS FROM CONTINUING OPERATIONS
The Company operates in one single business segment: Media Network, providing out-of-home advertising services.
Geographic Information
The Group operates in the PRC and all of the Company’s long lived assets are located in the PRC.
Major Customers
An analysis of percentage of advertising sales to major customers is as follows:
|
|
2015
|
|
2014
|
|
Customer A
|
|
-
|
|
67%
|
|
Customer B
|
|
-
|
|
16%
|
|
NOTE 16 GAIN FROM DISPOSAL OF SUBSIDIARIES
As a part of the cost-cutting measures implemented, the Company re-assessed the commercial viability of each of the concession rights contracts and have terminated those determined as no longer commercially viable due to high annual fees. The Company’s subsidiary, NCN Media Services Limited, disposed of its entire 100% equity interests of Linkrich Enterprise Advertising and Investment Limited, a Hong Kong investment holding company and Yi Gao Shanghai Advertising Limited, a PRC advertising company which has maintained minimal operation since October 2014, to an unrelated individual at $1 consideration. Accordingly, the Company recorded a gain from disposal of subsidiaries of $129,726 arising from disposal of subsidiaries with negative equity.
NOTE 17 INCOME TAXES
Income is subject to taxation in various countries in which the Company and its subsidiaries operate or are incorporated. The (income) loss before income taxes by geographical locations for the years ended December 31, 2015 and 2014 were summarized as follows:
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
539,586
|
|
|
$
|
1,241,366
|
|
Foreign
|
|
|
297,190
|
|
|
|
1,243,566
|
|
|
|
$
|
836,776
|
|
|
$
|
2,484,932
|
|
Income tax expenses by geographical locations for the years ended December 31, 2015 and 2014 were summarized as follows:
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
United States
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The reconciliation of the effective income tax of the Company to the U.S. federal statutory rate was as follows:
|
|
2015
|
|
|
2014
|
|
Expected income tax benefit
|
|
$
|
284,504
|
|
|
$
|
844,877
|
|
Operating loss carried forward
|
|
|
(183,459
|
)
|
|
|
(103,965
|
)
|
Nondeductible income (expenses)
|
|
|
-
|
|
|
|
(318,100
|
)
|
Tax effect on foreign income which is not subject to U.S. federal
corporate income tax rate of 34%
|
|
|
(101,045
|
)
|
|
|
(422,812
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
An analysis of the Company’s deferred tax liabilities and deferred tax assets as of December 31, 2015 and 2014 was as follows:
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Effect of net operating loss carried forward
|
|
$
|
8,517,120
|
|
|
$
|
8,333,661
|
|
Less: valuation allowance
|
|
|
(8,517,120
|
)
|
|
|
(8,333,661
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company provided a full valuation allowance against the deferred tax assets as of December 31, 2015 and 2014 due to the uncertainty surrounding the realizability of these benefits in future tax returns.