NETWORK CN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)
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Three Months Ended
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Six Months Ended
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Note
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June 30,
2018
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June 30,
2017
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June 30,
2018
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June 30,
2017
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REVENUES
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Advertising services
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$
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-
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$
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-
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$
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-
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$
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-
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COST OF REVENUES
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Cost of advertising services
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-
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-
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-
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-
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GROSS LOSS
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-
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-
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-
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-
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OPERATING EXPENSES
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General and administrative
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(85,875
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)
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(96,424
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)
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(184,186
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)
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(173,787
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)
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Stock based compensation for
services
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(8,538
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)
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-
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(12,858
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)
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-
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Total Operating Expenses
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(94,413
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)
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(96,424
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)
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(197,044
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)
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(173,787
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)
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LOSS FROM OPERATIONS
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(94,413
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)
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(96,424
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)
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(197,044
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)
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|
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(173,787
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)
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OTHER INCOME
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Gain from write-off of long aged
directors’ fee payable
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12
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107,500
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-
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107,500
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-
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Total Other Income
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107,500
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-
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107,500
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-
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INTEREST AND OTHER DEBT-
RELATED EXPENSES
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Interest expense
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6&7
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(141,038
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)
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(135,623
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)
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(281,484
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)
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(268,873
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)
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Total Interest and Other Debt–
Related Expenses
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(141,038
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)
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(135,623
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)
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(281,484
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)
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(268,873
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)
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NET LOSS BEFORE INCOME
TAXES
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(127,951
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)
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(232,047
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)
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(371,028
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)
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(442,660
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)
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Income taxes
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-
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-
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NET LOSS
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$
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(127,951
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)
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$
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(232,047
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)
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$
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(371,028
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)
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$
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(442,660
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)
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OTHER COMPREHENSIVE
LOSS
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Foreign currency translation loss
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(298
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)
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(1,085
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)
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(143
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)
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(1,004
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)
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Total other comprehensive loss
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(298
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)
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(1,085
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)
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(143
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)
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(1,004
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)
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COMPREHENSIVE LOSS
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$
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(128,249
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)
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$
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(233,132
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)
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$
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(371,171
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)
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$
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(443,664
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)
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NET LOSS PER COMMON
SHARE – BASIC AND DILUTED
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11
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$
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(0.0151
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)
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$
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(0.0289
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)
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$
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(0.0447
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)
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$
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(0.0550
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)
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WEIGHTED AVERAGE
SHARES OUTSTANDING –
BASIC AND DILUTED
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11
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8,495,175
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8,041,995
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8,301,561
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8,041,995
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See accompanying notes to unaudited consolidated
financial statements.
NETWORK CN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended
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June 30, 2018
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June 30, 2017
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$
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(371,028
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)
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$
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(442,660
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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|
695
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256
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Stock-based compensation for service
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12,858
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-
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Gain from write-off of long aged directors’ fee payable
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(107,500
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)
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-
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Changes in operating assets and liabilities:
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Prepaid expenses and other current assets, net
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(2,173
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)
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(2,659
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)
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Accounts payable, accrued expenses and other payables
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162,726
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347,212
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Net cash used in operating activities
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(304,422
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)
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(97,851
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)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from private placement
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257,133
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-
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Proceeds from short-term loan
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49,601
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96,923
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Net cash provided by financing activities
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306,734
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96,923
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EFFECT OF EXCHANGE RATE CHANGES ON CASH
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|
|
(143
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)
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|
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(1,004
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)
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NET INCREASE/(DECREASE) IN CASH
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2,169
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(1,932
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)
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CASH, BEGINNING OF PERIOD
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|
6,124
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|
|
8,512
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CASH, END OF PERIOD
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$
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8,293
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$
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6,580
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the period for:
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Income taxes
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$
|
-
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$
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-
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Interest paid
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$
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151,822
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$
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-
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See accompanying notes to unaudited consolidated
financial statements.
NETWORK CN INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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NOTE 1.
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ORGANIZATION AND PRINCIPAL ACTIVITIES
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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, the Company has been principally engaged in
the provision of out-of-home advertising in China through the operation of a network of roadside 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 June 30, 2018, are described in Note 3 – Subsidiaries and Variable Interest
Entities.
Private Placement
On March 15, 2018,
Network CN Inc. (the “Company”), sold an aggregate of 216,000 shares of the Company’s common stock (the “Shares”)
to 19 foreign investors (the “New Investors”) pursuant to the terms of a Common Stock Purchase Agreement between the
Company and the New Investors, dated March 15, 2018. The purchase price paid by the New Investor for the Shares was $0.40 per Share
for an aggregate sum of Eighty-Six Thousand and Four Hundred U.S. Dollars (US$86,400.00). Net proceeds from the financing will
be used for general corporate purposes.
On May 4, 2018,
Network CN Inc. (the “Company”), sold an aggregate of 292,000 shares of the Company’s common stock (the “Shares”)
to 11 foreign investors (the “New Investors”) pursuant to the terms of a Common Stock Purchase Agreement between the
Company and the New Investors, dated May 4, 2018. The purchase price paid by the New Investor for the Shares were $0.50 or $0.60
per Share for an aggregate sum of one hundred and seventy thousand, seven hundred and thirty-three U.S. dollars and thirty cents
(US$170,733.30). Net proceeds from the financing will be used for general corporate purposes.
Going Concern
The Company has experienced recurring net
losses of $371,028 and $442,660 for the six months ended June 30, 2018 and 2017, respectively. Additionally, the Company has net
cash used in operating activities of $304,422 and $97,851 for the six months ended June 30, 2018 and 2017, respectively. As of
June 30, 2018, and December 31, 2017, the Company has stockholders’ deficit of $11,535,267 and $11,434,087, 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 unaudited 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. If the project can start to operate, the
Company expects that the project will improve the Company’s future financial performance. The Company expects that the new
project can generate positive cashflow.
The existing cash 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.
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NOTE 2
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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(A)
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Basis of Presentation and Preparation
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The accompanying unaudited consolidated
financial statements of Network CN Inc., its subsidiaries and variable interest entities (collectively “NCN” or the
“Company” “we”, “our” or “us”) have been prepared in accordance with generally
accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange
Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for
a comprehensive presentation of our financial position and results of operations.
The unaudited consolidated financial statements
for the three and six months ended June 30, 2018 and 2017 were not audited. It is management’s opinion, however, that all
material adjustments (consisting of normal recurring adjustments or a description of the nature and amount of any adjustments other
than normal recurring adjustments) have been made which are necessary for a fair presentation of financial statements. The results
for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. The year-end consolidated
balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, previously filed with the Securities
and Exchange Commission on April 16, 2018. The disclosures made in the unaudited interim consolidated financial statements generally
do not repeat those in the annual statements.
(B) Principles of Consolidation
The unaudited consolidated financial statements
include the financial statements of Network CN Inc., its subsidiaries and its variable interest entities for which it is the primary
beneficiary. A variable interest entity is an entity in which the Company, through contractual arrangements, bears the risks and
enjoys the rewards normally associated with ownership of the entity. Upon making this determination, the Company is deemed to be
the primary beneficiary of the entity, which is then required to be consolidated for financial reporting purposes. All significant
intercompany transactions and balances have been eliminated upon consolidation.
(C) Use of Estimates
In preparing unaudited 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 unaudited
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
flows, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase
to be cash equivalents. There were no cash equivalents balance as of June 30, 2018 and December 31, 2017.
(E) 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:
Office equipment
|
3 - 5 years
|
Furniture and fixtures
|
3 - 5 years
|
Motor vehicles
|
5 years
|
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 unaudited consolidated statements of operations. Repairs and maintenance costs
on equipment are expensed as incurred.
(F) 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. There was no impairment
of long-lived assets for the three and six months ended June 30, 2018 and 2017.
(G) Convertible Promissory Notes
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 matured 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.
(H) Revenue Recognition
Effective January 1, 2018, the Company
adopted and implemented ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
In May 2014, the Financial Accounting Standards
Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). We adopted ASU 2014-09 and its
related amendments (collectively known as "ASC 606") effective on January 1, 2018.
Under the new standard and its related
amendments (collectively known as ASC 606), an entity recognizes revenue when its customer obtains control of promised goods or
services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To
determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following
five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue
when (or as) the entity satisfies a performance obligation. The new standard requires disclosure of the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers. The new standard also includes criteria for the
capitalization and amortization of certain contract acquisition and fulfillment costs.
In accordance with ASC 606, we recognize
when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration we expect to
be entitled to receive in exchange for such services. To achieve this core principle, we apply the following five steps:
1) Identify the contract(s) with a customer
- A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s
rights regarding the goods or services to be transferred and identifies the payment terms related to those goods or services, (ii)
the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services
that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment
in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s
historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
The contract term for contracts that provide a right to terminate a contract for convenience without significant penalty will reflect
the term that each party has enforceable rights under the contract (the period through the earliest termination date). If the termination
right is only provided to the customer, the unsatisfied performance obligations will be evaluated as customer options as discussed
below.
2) Identify the performance obligations
in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred
to the customer that are both (i) capable of being distinct, whereby the customer can benefit from the good or service either on
its own or together with other resources that are readily available from third parties or from us, and (ii) are distinct in the
context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. Certain of
our contracts (under which we deliver multiple promised services) require us to perform integration activities where we bear risk
with respect to integration activities. Therefore, we must apply judgment to determine whether as a result of those integration
activities and risks, the promised services are distinct on the context of the contract.
We typically do not include options that
would result in a material right. If options to purchase additional services or options to renew are included in customer contracts,
we evaluate the option in order to determine if our arrangement include promises that may represent a material right and needs
to be accounted for as a performance obligation in the contract with the customer.
3) Determine the transaction price - The
transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services
to the customer. Our contract prices may include fixed amounts, variable amounts or a combination of both fixed and variable amounts.
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should
be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the
nature of the variable consideration. When determining if variable consideration should be constrained, management considers whether
there are factors outside our control that could result in a significant reversal of revenue. In making these assessments, we consider
the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
4) Allocate the transaction price to the
performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price
is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation
of the transaction price to each performance obligation based on a relative standalone selling price (SSP) basis unless the transaction
price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service
that forms part of a single performance obligation. For most performance obligations, we determine standalone selling price based
on the price at which the performance obligation is sold separately. Although uncommon, if the standalone selling price is not
observable through past transactions, we estimate the standalone selling price taking into account available information such as
market conditions and internally approved pricing guidelines related to the performance obligations.
5) Recognize revenue when (or as) we satisfy
a performance obligation: we satisfy performance obligations either over time or at a point-in-time as discussed in further detail
below. Revenue is recognized when the related performance obligation is satisfied by transferring control of a promised good or
service to a customer.
The Company does not expect to generated
any revenue for the period.
(I) 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.
The Company follows ASC topic 505-50, “Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,”
for stock issued to consultants and other non-employees. In accordance with ACS Topic 505-50, the stock issued as compensation
for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair
market value of the stock, whichever can be more clearly determined. The fair value of the equity instrument is charged directly
to expense over the period during which services are rendered.
(J) 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.
The Company recognizes and measures uncertain
tax positions and records tax benefits when it is more likely than not that the tax position will be sustained on examination by
the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from
such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. The company recognizes interest and penalties as a component of income tax expense if applicable.
(K) 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.
Accumulated other comprehensive income
as presented on the consolidated balance sheets consisted of the accumulative foreign currency translation adjustment at period
end.
(L) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share
are computed in accordance with ASC Topic 260 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 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 share is the same
as the basic net loss per share for the three and six months ended June 30, 2018 and 2017, as all potential ordinary shares including
stock options and warrants are anti-dilutive and are therefore excluded from the computation of diluted net loss per share.
(M) Foreign Currency Translation
The assets and liabilities of the Company’s
subsidiaries and variable interest entity 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 unaudited 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
period. 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 as accumulated other comprehensive
income (loss). Foreign currency transaction gains and losses are reflected in the unaudited consolidated statements of operations.
(N) 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, prepaid expenses and other current assets, accounts payable, accrued expenses and
other payables, and convertible promissory notes 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.
(O) Recent Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements
unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued
that might have a material impact on our financial position or results of operations.
|
NOTE 3.
|
SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
|
Details of the Company’s principal
subsidiaries and variable interest entities as of June 30, 2018 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
|
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 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
|
* The subsidiary’s registration license has been revoked.
Remarks:
1) Variable interest entity which the
Company exerted 100% control through a set of commercial arrangements.
|
NOTE 4.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET
|
Prepaid expenses and other current assets,
net as of June 30, 2018 and December 31, 2017 were as follows:
|
|
As of
June 30, 2018
|
|
|
As of
December 31, 2017
|
|
Prepaid expenses
|
|
$
|
102,967
|
|
|
$
|
100,794
|
|
Other deposits
|
|
|
253
|
|
|
|
253
|
|
Sub-total
|
|
|
103,220
|
|
|
|
101,047
|
|
Less: allowance for doubtful debts
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
103,220
|
|
|
$
|
101,047
|
|
The Company recorded no allowance for doubtful
debts for prepaid expenses and other current assets for the three and six months ended June 30, 2018 and 2017.
|
NOTE 5.
|
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES
|
Accounts payable, accrued expenses and
other payables as of June 30, 2018 and December 31, 2017 were as follows:
|
|
As of
June 30, 2018
|
|
|
As of
December 31, 2017
|
|
Accrued staff benefit and related fees
|
|
$
|
1,641,920
|
|
|
$
|
1,650,355
|
|
Accrued professional fees
|
|
|
60,166
|
|
|
|
44,394
|
|
Accrued interest expenses
|
|
|
2,066,536
|
|
|
|
1,937,010
|
|
Other accrued expenses
|
|
|
8,004
|
|
|
|
89,641
|
|
Total
|
|
$
|
3,776,626
|
|
|
$
|
3,721,400
|
|
As of June 30, 2018, and December 31, 2017,
the Company recorded an aggregated amount of $2,872,036 and $2,822,435 of short-term loans, respectively. Those loans were borrowed
from an unrelated individual. Those loans are unsecured, bear a monthly interest of 1.5% and repayable on demand. 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 three months ended June 30, 2018 and 2017 were $128,846 and $123,158, while for the six months ended June 30, 2018
and 2017 amounted to $256,827 and $244,080, respectively.
|
NOTE 7.
|
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 1,637,522 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 a one hundred and five-months period ending on January 1, 2018 and the exercise price changed to $0.99, subject
to the Company’s right to unilaterally terminate the exercise period upon 30 days’ written notice. As of March 31,2016,
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.
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.
No gain or loss 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 no gain or loss on extinguishment of debt at the date of extinguishment for the year ended December 31,
2014.
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.
Convertible promissory notes, net as of
June 30, 2018 and December 31, 2017 were as follows:
|
|
As of
June 30, 2018
|
|
|
As of
December 31, 2017
|
|
Gross carrying value
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Less: Allocated intrinsic value of beneficial conversion
feature
|
|
|
-
|
|
|
|
-
|
|
Add: Accumulated amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Less: Current portion
|
|
|
-
|
|
|
|
-
|
|
Non-current portion
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Interest Expense
The interest expenses of the 1% Convertible
Promissory Notes for the three months ended June 30, 2018 and 2017 were $12,192 and $12,465, respectively, while for the six months
ended June 30, 2018 and 2017 amounted to $24,657 and $24,793, respectively.
|
NOTE 8.
|
COMMITMENTS AND CONTINGENCIES
|
Contingencies
The Company accounts for loss contingencies
in accordance with ASC Topic 450 and other related guidelines. As of June 30, 2018, the Company’s management is of the opinion
that there are no commitments and contingencies to account for.
|
NOTE 9.
|
STOCKHOLDERS’ DEFICIT
|
Stock, Options and Warrants Issued
for Services
In March 2018, the Company entered into
an escrow agent services agreement with an escrow agent. Pursuant to the agreement, the escrow agent was granted 25,400 shares
for his services rendered and the Company issued 25,400 shares of par value of $0.4 to $0.6 per share to the consultant. In connection
with this stock grants and in accordance with ASC Topic 718, the Company recognized $8,536 and $12,858 of non-cash stock-based
compensation included in general and administrative expenses on the unaudited consolidated statements of operation for the three
months and six months ended June 30, 2018.
On March 15, 2018,
the Company completed private placement of 216,000 shares of restricted common stock at $0.4 per share. The transaction took place
with 19 investors and generated gross proceeds of $86,400 for the period ended March 31, 2018.
On May 4, 2018,
the Company completed private placement of 292,000 shares of restricted common stock at $0.5 or $0.6 per share. The transaction
took place with 11 investors and generated gross proceeds of $170,733.3 for the three months ended June 30, 2018.
|
NOTE 10.
|
RELATED PARTY TRANSACTIONS
|
Except as set forth below, during the three
and six months ended June 30, 2018 and 2017, 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 Keywin Option is exercised and completed.
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, 2017, the latest exercise period for the Keywin Option
was further extended to a hundred and twenty-nine-month period ending on January 1, 2020 and the exercise price changed to $0.99.
|
NOTE 11.
|
NET LOSS PER COMMON SHARE
|
Net loss per common share information for the three and six
months ended June 30, 2018 and 2017 was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to NCN
common stockholders
|
|
$
|
(127,951
|
)
|
|
$
|
(232,047
|
)
|
|
$
|
(371,028
|
)
|
|
$
|
(442,660
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares outstanding, basic
|
|
|
8,495,175
|
|
|
|
8,041,995
|
|
|
|
8,301,561
|
|
|
|
8,041,995
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of
shares outstanding, diluted
|
|
|
8,495,175
|
|
|
|
8,041,995
|
|
|
|
8,301,561
|
|
|
|
8,041,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share –
basic and diluted
|
|
$
|
(0.0151
|
)
|
|
$
|
(0.0289
|
)
|
|
$
|
(0.0447
|
)
|
|
$
|
(0.0550
|
)
|
The diluted net loss per common share is
the same as the basic net loss per common share for the three and six months ended June 30, 2018 and 2017 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 common share. There were no 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 June 30, 2018 and 2017.
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NOTE 12
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GAIN FROM WRITE-OFF OF LONG-AGED DIRECTORS’ FEE PAYABLE
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The Company’s directors considered
the payment of the outstanding long-aged directors’ fees have not been claimed due to loss of contact and it is in the best
interests of Company to write off the directors’ fee of the resigned directors. The Company’s directors has resolved
that they are of the opinion that the obligation for future settlement of accrued long-aged directors’ fee payable are remote,
therefore the related accruals have been written off.