The accompanying notes are an integral part of the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
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, 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). Net proceeds from the financing will be
used for general corporate purposes.
On May 4, 2018, 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). Net proceeds from
the financing will be used for general corporate purposes.
On December 28, 2018, the Company
sold an aggregate of 149,398 shares of the Company’s common stock (the “Shares”) to 16 foreign investors (the
“New Investors”) pursuant to the terms of a Common Stock Purchase Agreement between the Company and the New Investors,
dated December 28, 2018. The purchase price paid by the New Investor for the Shares were $0.77 or $2.00 per Share for an aggregate
sum of one hundred and forty-nine thousand, five hundred and seventy-three U.S. dollars and thirty cents (US$149,573). Net proceeds
from the financing will be used for general corporate purposes.
On March 28, 2019, the Company
sold an aggregate of 35,000 shares of the Company’s common stock (the “Shares”) to 9 foreign investors (the “New
Investors”) pursuant to the terms of a Common Stock Purchase Agreement between the Company and the New Investors, dated March
28, 2019. The purchase price paid by the New Investor for the Shares were $1.50 or $1.88 per Share for an aggregate sum of sixty-three
thousand, three hundred and seventy-five U.S. dollars and thirty cents (US$63,375). Net proceeds from the financing will be used
for general corporate purposes.
Going Concern
The Company has experienced recurring net losses of $818,202
and $769,960 for the years ended December 31, 2018 and 2017 respectively. Additionally, the Company has net cash used in operating
activities of $484,127 and $165,629 for the years ended December 31, 2018 and 2017 respectively. As of December 31, 2018 and 2017,
the Company has stockholders’ deficit of $11,825,430 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 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 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 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. These uncertainties
may result in adverse effects on continuation of the Company as a going concern. The accompany consolidated financial statements
do not reflect any adjustments that might result from the outcome of these uncertainties.
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”).
(B) Use of Estimates
The Company's consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenue and expense during the reporting period. Estimates are used when accounting
for certain items such as accounting for income tax valuation allowances. Estimates are based on historical experience, where applicable,
and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with
estimates, actual results may differ.
(C) 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.
(D) Cash
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.
There were no cash equivalents balance as of December 31, 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 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 undiscounted cash flow analysis. There was no impairment
of long-lived assets for the years ended December 31, 2018 and 2017.
(G) 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 was 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 has yet to generate revenue from operations
for the years ended December 31, 2018 and 2017.
(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 recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis
of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The
Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability
by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more
likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss
carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible
carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation
allowance on such assets would be reduced.
The Company recognizes tax benefits from uncertain tax
positions only if 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. Once this threshold has been met, the Company's measurement of its expected tax
benefits is recognized in its consolidated financial statements. The Company accrues interest on unrecognized tax benefits as a
component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
(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 consolidated 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, 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, 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 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
on consolidated 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
and comprehensive loss.
(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
In February 2016, the FASB issued ASU No. 2016-02, “Leases”
(“ASU 2016-02”), to make leasing activities more transparent and comparable, requiring most leases to be recognized
by lessees on their balance sheets as right-of-use assets, along with corresponding lease liabilities. ASU 2016-02 is effective
for annual periods beginning after December 31, 2018 and interim periods within that year, with early adoption permitted. The adoption
of this guidance is not expected to have a material impact on the Company’s consolidated financial statements as the Company
does not have any lease commitments at the reporting date.
In July 2017, the FASB issued ASU 2017-11 “Earnings
Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting
for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”,
to simplify the accounting for certain financial instruments with down round features. The amendments require companies to disregard
the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability
or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the
effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted
downward because of the down round feature) and will also recognize the effect of the trigger within equity. The amendments also
address navigational concerns within the FASB Accounting Standards Codification® related to an indefinite deferral available
to private companies with mandatorily redeemable financial instruments and certain noncontrolling interests, one that created significant
“pending content” in the Codification. The FASB decided to reclassify the indefinite deferral as a scope exception,
which does not have an accounting effect. The amendments are 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 2017-11 on its consolidated financial
position, results of operations and cash flows.
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 consolidated
subsidiaries and variable interest entities as of December 31, 2018 were as follows:
Name8j
|
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
December 31, 2018 and 2017 were as follows:
|
|
2018
|
|
|
2017
|
|
Prepaid expenses
|
|
$
|
100,000
|
|
|
$
|
100,794
|
|
Rental and other deposits
|
|
|
254
|
|
|
|
253
|
|
Sub-total
|
|
|
100,254
|
|
|
|
101,047
|
|
Less: allowance for doubtful debts
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
100,254
|
|
|
$
|
101,047
|
|
For the years ended December 31, 2018 and 2017, the Company
recorded no allowance for doubtful debt for prepaid expenses and other current assets.
NOTE 5 EQUIPMENT,
NET
Equipment, net as of December 31, 2018 and 2017 consisted
of the following:
|
|
2018
|
|
|
2017
|
|
Office equipment
|
|
$
|
6,873
|
|
|
$
|
6,873
|
|
Less: accumulated depreciation
|
|
|
(5,557
|
)
|
|
|
(4,296
|
)
|
Total
|
|
$
|
1,316
|
|
|
$
|
2,577
|
|
Depreciation expenses for the years ended December 31,
2018 and 2017 amounted to $1,261 and $951 respectively. During the year ended December 31, 2017, the Company wrote off office equipment
with cost at $9,808 with no gain or loss on the written off.
Pledge of Equipment
No equipment has been pledged by the Company.
NOTE 6 ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES
Accounts payable, accrued expenses and other payables
as of December 31, 2018 and 2017 consisted of the following:
|
|
2018
|
|
|
2017
|
|
Accrued staff benefits and related fees
|
|
$
|
1,737,179
|
|
|
$
|
1,650,355
|
|
Accrued professional fees
|
|
|
61,839
|
|
|
|
44,394
|
|
Accrued interest expenses
|
|
|
2,220,786
|
|
|
|
1,937,010
|
|
Other accrued expenses
|
|
|
13,280
|
|
|
|
89,641
|
|
Total
|
|
$
|
4,033,084
|
|
|
$
|
3,721,400
|
|
NOTE 7 SHORT-TERM LOANS
As of December 31, 2018, the Company recorded an aggregated
amount of $2,916,600 of short-term loans. 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
years ended December 31, 2018 and 2017 amounted to $517,022 and $494,898, respectively.
NOTE 8 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 one hundred and twenty-nine-month period ending on January 1, 2020, subject to the Company’s right to unilaterally
terminate the exercise period upon 30 days’ written notice. As of December 31, 2017, 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.
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, 2015, 2016, 2017 and 2018
|
|
$
|
-
|
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Interest Expense
The following table details the interest expenses:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
New 1% convertible promissory notes, due in 2016
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
New 1% convertible promissory notes, due in 2014
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
NOTE 9 COMMITMENTS
AND CONTINGENCIES
Contingencies
The Company accounts for loss contingencies in accordance
with ASC Topic 450 and other related guidelines. As of December 31, 2018 and 2017, the Company’s management is of the opinion
that there are no commitments and contingencies to account for.
NOTE 10 STOCKHOLDERS’
DEFICIT
(A)
|
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 32,870 shares for his services
rendered and the Company issued 32,870 shares of par value of $0.4 to $2.00 per share to the consultant. In connection with this
stock grants and in accordance with ASC Topic 718, the Company recognized $20,337 of non-cash stock-based compensation included
in general and administrative expenses on the consolidated statements of operation for the year ended December 31, 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 year ended December 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 for the year ended December 31, 2018.
On December 28, 2018, the Company
completed private placement of 149,398 shares of restricted common stock at $0.77 or $2.00 per share. The transaction took place
with 16 investors and generated gross proceeds of $149,573 for the year ended December 31, 2018.
(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 consolidated 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 11 RELATED
PARTY TRANSACTIONS
Except as set forth below, during the years ended December
31, 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 the Keywin Option is exercised and completed. As of December 31, 2018, $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, 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 12 NET
LOSS PER COMMON SHARE
Net loss per share information for the years ended December
31, 2018 and 2017 was as follows:
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to NCN common stockholders
|
|
$
|
(818,202
|
)
|
|
$
|
(769,960
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic
|
|
|
8,442,113
|
|
|
|
8,041,995
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Options and warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of shares outstanding, diluted
|
|
|
8,442,113
|
|
|
|
8,041,995
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.097
|
)
|
|
$
|
(0.095
|
)
|
The diluted net loss per common share is the same as
the basic net loss per common share for the years ended December 31, 2018 and 2017 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.
NOTE 13 GAIN FROM DISPOSAL OF SUBSIDIARIES
As a part of the cost-cutting measures implemented,
the Company disposed its dormant company. The Company’s subsidiary, Crown Winner International Limited, disposed of its entire
100% equity interests of Business Boom Investments Limited, a Hong Kong investment holding company and NCN Group (HK) Limited,
a Hong Kong company which has dormant, to an unrelated individual at $1 consideration. Accordingly, the Company recorded a gain
from disposal of subsidiaries of $25 arising from disposal of subsidiaries with negative equity for the year ended December 31,
2017.
NOTE 14 GAIN FROM WRITE-OFF OF LONG-AGED DIRECTORS’
FEE PAYABLE
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 have 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.
NOTE 15 INCOME TAXES
Income is subject to taxation in various countries in
which the Company and its subsidiaries operate or are incorporated. The loss before income taxes by geographical locations for
the years ended December 31, 2018 and 2017 were summarized as follows:
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
89,465
|
|
|
$
|
55,111
|
|
Foreign
|
|
|
728,737
|
|
|
|
714,849
|
|
|
|
$
|
818,202
|
|
|
$
|
769,960
|
|
Other than the United States, the Company is subject
to taxation in Hong Kong and PRC. Under Hong Kong tax laws, deferred tax assets are recognized for tax loss carried forward to
the extent that the realization of the related tax benefit through future taxable profits is probable. These tax losses do not
expire under current Hong Kong tax legislation. Under PRC tax laws, tax losses may be carried forward for 5 years and no carry-back
is allowed. At December 31, 2018, the Company does not have available tax losses in the Hong Kong and PRC to utilize for future
taxable profits.
At December 31, 2018, the Company had an unused net operating
loss carryforward of approximately $21,458,262 for income tax purposes, which expires between 2024 and 2038. This net operating
loss carryforward may result in future income tax benefits of approximately $4,506,235 however, because realization is uncertain
at this time, a valuation allowance in the same amount has been established. Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Significant components of the Company’s deferred
tax liabilities and assets of December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Effect of net operating loss carried forward
|
|
|
4,506,235
|
|
|
|
4,495,007
|
|
Less: valuation allowance
|
|
|
(4,506,235
|
)
|
|
|
(4,495,007
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Movement of valuation allowance:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
At the beginning of the year
|
|
$
|
4,495,007
|
|
|
$
|
8,577,316
|
|
Current year addition/(deduction)
|
|
|
11,228
|
|
|
|
(4,082,309
|
)
|
At the end of the year
|
|
$
|
4,506,235
|
|
|
$
|
4,495,007
|
|
As a result of the reduction
of the corporate income tax rate from 35% to 21% due to the Tax Cuts and Jobs Act which was enacted on December 22, 2017, U.S.
GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax
effects accounted for in the period of enactment. (the change in deferred tax balances would have a corresponding change to valuation
allowance thereby resulting in no income tax expense for the year).
F-18