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ITEM 1.
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CONSOLIDATED FINANCIAL STATEMENTS
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NETWORK CN INC.
CONSOLIDATED FINANCIAL STATEMENTS
NETWORK CN INC.
CONSOLIDATED BALANCE SHEETS
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Note
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As of March 31,
2019
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As of December 31,
2018
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(Unaudited)
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ASSETS
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Current Assets
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Cash
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$
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24,460
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$
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22,684
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Prepaid expenses and other current assets, net
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4
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|
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100,000
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100,254
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Total Current Assets
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124,460
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122,938
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Equipment, Net
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1,096
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1,316
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TOTAL ASSETS
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$
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125,556
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$
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124,254
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current Liabilities
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Accounts payable, accrued expenses and other payables
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5
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$
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4,191,493
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$
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4,033,084
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Short term loan
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6
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2,916,600
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2,916,600
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1% convertible promissory note due 2016, net
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7
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5,000,000
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5,000,000
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Total Current Liabilities
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12,108,093
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11,949,684
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TOTAL LIABILITIES
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12,108,093
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11,949,684
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COMMITMENTS AND CONTINGENCIES
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8
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-
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-
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STOCKHOLDERS’ DEFICIT
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Preferred stock, $0.001 par value, 5,000,000 shares authorized
None issued and outstanding
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-
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-
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Common stock, $0.001 par value, 26,666,667 shares authorized
Shares issued and outstanding: 8,769,013 and 8,732,263 as of
March 31, 2019 and December 31, 2018, respectively
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8,768
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8,731
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Additional paid-in capital
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124,199,602
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124,133,095
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Accumulated deficit
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(137,894,928
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)
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(137,671,203
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)
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Accumulated other comprehensive income
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1,704,021
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1,703,947
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TOTAL STOCKHOLDERS’ DEFICIT
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9
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(11,982,537
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)
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(11,825,430
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)
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$
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125,556
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$
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124,254
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See accompanying notes to unaudited consolidated financial
statements.
NETWORK CN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS (UNAUDITED)
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Three Months Ended
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Note
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March 31, 2019
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March 31, 2018
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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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COST OF REVENUES
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-
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-
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Cost of advertising services
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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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OPERATING EXPENSES
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General and administrative
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(76,984
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)
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(98,311
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)
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Stock based compensation for services
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(3,169
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)
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(4,320
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)
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Total Operating Expenses
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(80,153
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)
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(102,631
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)
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LOSS FROM OPERATIONS
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(80,153
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)
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(102,631
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)
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OTHER INCOME
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Interest income
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3
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-
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Total Other Income
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3
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-
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INTEREST AND OTHER DEBT-RELATD EXPENSES
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Interest expense
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6 &7
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(143,575
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)
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(140,446
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)
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Total Interest and Other Debt-Related Expenses
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(143,575
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)
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(140,446
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)
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NET LOSS BEFORE INCOME TAXES
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(223,725
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)
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(243,077
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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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(223,725
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)
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$
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(243,077
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)
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OTHER COMPREHENSIVE INCOME
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Foreign currency translation gain
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74
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155
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Total Other Comprehensive Income
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74
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155
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COMPREHENSIVE LOSS
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$
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(223,651
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)
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$
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(242,922
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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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(0.03
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)
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$
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(0.03
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)
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING – BASIC AND DILUTED
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11
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8,733,896
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8,091,195
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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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Three Months Ended
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March 31, 2019
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March 31, 2018
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$
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(223,725
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)
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$
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(243,077
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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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220
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347
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Stock-based compensation for service
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3,169
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4,320
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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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254
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467
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Accounts payable, accrued expenses and other payables
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158,409
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128,557
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Net cash used in operating activities
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(61,673
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)
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(109,386
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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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63,375
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86,400
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Proceeds from short-term loan
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-
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32,806
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Net cash provided by financing activities
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63,375
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119,206
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EFFECT OF EXCHANGE RATE CHANGES ON CASH
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74
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|
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155
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NET INCREASE IN CASH
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1,776
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|
|
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9,975
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CASH, BEGINNING OF PERIOD
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22,684
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6,124
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CASH, END OF PERIOD
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$
|
24,460
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|
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$
|
16,099
|
|
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|
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the period for:
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|
|
|
|
|
|
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Income taxes
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|
$
|
-
|
|
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$
|
-
|
|
Interest paid
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$
|
44,387
|
|
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$
|
-
|
|
See accompanying notes to unaudited consolidated financial
statements.
NETWORK CN INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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, 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 March 31, 2019, 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). 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 $223,725
and $243,077 for the three months ended March 31, 2019 and 2018, respectively. Additionally, the Company has net cash used in operating
activities of $61,673 and $109,386 for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, and
December 31, 2018, the Company has stockholders’ deficit of $11,982,537 and $11,825,430, 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 and cash equivalents together with
highly liquid current assets are insufficient to fund the Company’s operations for the next twelve months. The Company will
need to rely upon some combination of cash generated from the Company’s operations, the proceeds from the potential exercise
of the outstanding option held by Keywin Holdings Limited (“Keywin”) to purchase $2 million in shares of the Company’s
common stock, or proceeds from the issuance of the Company’s equity and debt securities as well as the exercise of the conversion
option by the Company’s note holders to convert the notes to the Company’s common stock, in order to maintain the Company’s
operations. Based on the Company’s best estimates, the Company believes that there are sufficient financial resources to
meet the cash requirements for the coming twelve months and the consolidated financial statements have been prepared on a going
concern basis. However, there can be no assurance the Company will be able to continue as a going concern.
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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(A)
|
Basis of Presentation and Preparation
|
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 months ended March 31, 2019 and 2018 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, 2018, previously filed with the Securities and Exchange Commission
on April 1, 2019. 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
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 March 31, 2019 and December 31, 2018.
(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 and comprehensive loss. 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 months ended March 31, 2019 and 2018.
(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 has yet to generate revenue from operations
for the periods ended March 31, 2019 and 2018.
(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 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 months ended March 31, 2019 and 2018, 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 and comprehensive loss’ 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 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) Recently Adapted 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 did not 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 standard did not have a material impact on the Company’s consolidated financial
position, results of operations and cash flows.
(P) Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-14 “Compensation
– Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)”. This ASU modifies the disclosure
requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for annual
periods ending after December 15, 2020, with early adoption permitted and should be applied on a retrospective basis to all periods
presented. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13 “Fair
Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”.
This ASU modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures.
This guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods.
Early adoption is permitted. Certain disclosures in this ASU are required to be applied on a retrospective basis and others on
a prospective basis. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated
financial statements.
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 March 31, 2019 and December 31, 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
March 31, 2019 and December 31, 2018 were as follows:
|
|
As of
March 31, 2019
|
|
|
As of
December 31, 2018
|
|
Prepaid expenses
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Other deposits
|
|
|
-
|
|
|
|
254
|
|
Sub-total
|
|
|
100,000
|
|
|
|
100,254
|
|
Less: allowance for doubtful debts
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
100,000
|
|
|
$
|
100,254
|
|
The Company recorded no allowance for doubtful debts
for prepaid expenses and other current assets as of March 31, 2019 and 2018.
NOTE 5. ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES
Accounts payable, accrued expenses and other payables
as of March 31, 2019 and December 31, 2018 were as follows:
|
|
As of
March 31, 2019
|
|
|
As of
December 31, 2018
|
|
Accrued staff benefit and related fees
|
|
$
|
1,777,820
|
|
|
$
|
1,737,179
|
|
Accrued professional fees
|
|
|
82,528
|
|
|
|
61,839
|
|
Accrued interest expenses
|
|
|
2,319,980
|
|
|
|
2,220,786
|
|
Other accrued expenses
|
|
|
11,165
|
|
|
|
13,280
|
|
Total
|
|
$
|
4,191,493
|
|
|
$
|
4,033,084
|
|
NOTE 6.
SHORT-TERM LOANS
As of March 31, 2019, and December 31, 2018, the Company
recorded an aggregated amount of $2,916,600 and $2,916,600 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 March 31, 2019 and 2018 were $
131,247
and
$127,981, 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 and comprehensive
loss 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 March 31, 2019
and December 31, 2018 were as follows:
|
|
As of
March 31, 2019
|
|
|
As of
December 31, 2018
|
|
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 March 31, 2019 and 2018 were $12,328 and $12,465, 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 March 31, 2019, and December 31, 2018, the Company’s management is
of the opinion that there are no commitments and contingencies to account for.
NOTE 9. 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 1,750 and 10,800 shares for his
services rendered for the three months ended March 2019 and 2018 respectively. The Company issued 300 shares of par value of $1.5
per share and 1,450 shares of par value of $1.88 per share to the consultant for the three months ended March 2019. The Company
issued 10,800 shares of par value of $0.4 per share to the consultant for the three months ended March 2018. In connection with
this stock grants and in accordance with ASC Topic 718, the Company recognized $3,169 and $4,320 of non-cash stock-based compensation
included in general and administrative expenses on the unaudited consolidated statements of operation for the three months ended
March 31, 2019 and 2018.
On March 15, 2018, the Company
completed three private placements 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 March 28, 2019, the Company
completed private placements of 35,000 shares of restricted common stock at $1.5 or $1.88 per share. The transaction took place
with 9 investors and generated gross proceeds of $63,375 for the period ended March 31, 2019.
NOTE 10. RELATED
PARTY TRANSACTIONS
Except as set forth below, during the three months ended
March 31, 2019 and 2018, 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 months ended March 31,
2019 and 2018 was as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
2018
|
|
|
March 31,
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to NCN common stockholders
|
|
$
|
(223,725
|
)
|
|
$
|
(243,077
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic +
|
|
|
8,733,896
|
|
|
|
8,091,195
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Options and warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of shares outstanding, diluted
|
|
|
8,733,896
|
|
|
|
8,091,195
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
The diluted net loss per common share is the same as
the basic net loss per common share for the three months ended March 31, 2019 and 2018 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 for the three months ended March 31, 2019
and 2018.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
Special Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, including the following
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance and strategic
and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are
cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties
could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking
statements. The words “believe”, “expect”, “anticipate”, “project”, “targets”,
“optimistic”, “intend”, “aim”, “will” or similar expressions are intended to identify
forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking
statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related
to our potential inability to raise additional capital; changes in domestic and foreign laws, regulations and taxes; uncertainties
related to China’s legal system and economic, political and social events in China; Securities and Exchange Commission regulations
which affect trading in the securities of “penny stocks”; changes in economic conditions, including a general economic
downturn or a downturn in the securities markets; and any of the factors and risks mentioned in the “Risk Factors”
sections of our Annual Report on Form 10-K for fiscal year ended December 31, 2018 and subsequent SEC filings. The Company assumes
no obligation and does not intend to update any forward-looking statements, except as required by law.
Use of Terms
Except as otherwise indicated by the context, references
in this report to:
|
·
|
“BVI” are references to the British Virgin Islands;
|
|
·
|
“China” and “PRC” are to the People’s
Republic of China;
|
|
·
|
the “Company”, “NCN”, “we”,
“us”, or “our”, are references to Network CN Inc., a Delaware corporation and its direct and indirect
subsidiaries: NCN Group Limited, or NCN Group, a BVI limited company; NCN Media Services Limited, a BVI limited company; NCN Group
Management Limited, or NCN Group Management, a Hong Kong limited company; Crown Winner International Limited, or Crown Winner,
a Hong Kong Limited company, and its subsidiary, and its variable interest entity, Xingpin Shanghai Advertising Limited; Crown
Eagle Investments Limited, a Hong Kong limited company;; Cityhorizon Limited, or Cityhorizon Hong Kong, a Hong Kong limited company,
and its subsidiary, Huizhong Lianhe Media Technology Co., Ltd., or Lianhe, a PRC limited company; Chuanghua Shanghai advertising
Limited, a PRC limited company; NCN Huamin Management Consultancy (Beijing) Company Limited, or NCN Huamin, a PRC limited company;
and the Company’s variable interest entity, Beijing Huizhong Bona Media Advertising Co., Ltd., or Bona, a PRC limited
company;
|
|
·
|
“NCN Management Services” are references to NCN Management
Services Limited, a BVI limited company;
|
|
·
|
“RMB” are to the Renminbi, the legal currency of
China;
|
|
·
|
the “Securities Act” are to the Securities
Act of 1933, as amended; and the “Exchange Act” are to the Securities Exchange Act of 1934, as amended; and
|
|
·
|
“U.S. dollar”, “$” and “US$”
are to the legal currency of the United States.
|
Overview of Our Business
Our mission is to become a nationwide leader in providing
out-of-home advertising in China, primarily serving the needs of branded corporate customers. Our business direction to not just
selling air-time for its media panels but also started working closely with property developers in media planning for the property
at the very early stage. As a media planner we share the advertising profits with the property developers without paying significant
rights fees, so we expect to achieve a positive return from these projects.
To address these unfavorable market conditions, we continue
to implement cost-cutting measures, including reductions in our workforce, office rentals, selling and marketing related expenses
and other general and administrative expenses. We have also re-assessed the commercial viability of each of our concession rights
contracts and have terminated those of our concession rights that we determined were no longer commercially viable due to high
annual fees. Management has also successfully negotiated some reductions in advertising operating rights fees under remaining contracts.
For more information relating to our business, please
refer to Part I,
“Item 1 - Business”
of our Annual Report on Form 10-K for the fiscal year ended December 31,
2018.
Recent Development
Completes Additional 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.
The offering was made pursuant
to an exemption from registration with the SEC pursuant to Regulation S. The securities have not been registered under the Securities
Act of 1933 or any state securities laws and unless so registered may not be offered or sold in the United States except pursuant
to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933 and applicable
state securities laws. The Company did not grant any registration rights to the new shareholders with respect to the Shares in
the offering.
Identification of Potential Projects
The Company will continually explore new media projects
in order to provide a wider range of media and advertising services, rather than focusing primarily on LED media. The Company has
identified several such potential projects which it intends to aggressively pursue in the coming year.
Results of Operations
The following results of operations is based upon
and should be read in conjunction with the Company’s unaudited consolidated financial statements and the notes thereto included
in Part I – Financial Information, “Item 1. Financial Statement.” All amounts are expressed in U.S. dollars.
Comparison of Three Months Ended March 31, 2019
and March 31, 2018
General and Administrative Expenses
–
General
and administrative expenses primarily consist of compensation related expenses (including salaries paid to executive and employees,
employee bonuses and other staff welfare and benefits, rental expenses, depreciation expenses, fees for professional services,
travel expenses and miscellaneous office expenses). General and administrative expenses for the three months ended March 31, 2019
decreased by 22% to $76,984, as compared to $98,311 for the corresponding prior year period. The decrease in general and administrative
expenses was mainly due to the decrease in legal fee of the Company.
Stock based compensation for services
– Stock-based
compensation for services is stock granted to directors, executive officers and employees for services rendered calculated in accordance
with Accounting Standards Codification, or ASC, Topic 718, Stock-based compensation for services was $3,169 and $4,320 for the
three months ended March 31, 2019 and 2018, the stock-based compensation was mainly due stock had been granted for services rendered
for private placement during the three months ended March 31, 2019 and 2018.
Interest and Other Debt-Related Expenses
–
Interest expense and other debt-related expenses for the three months ended March 31, 2019 increased to $143,575, or by
2%, as compared to $140,446 for the corresponding prior year period. The increase was mainly due to the increased in short term
loans balance.
Income Taxes
–
The Company derives
all of its income in the PRC and is subject to income tax in the PRC. No income tax was recorded during the three months ended
March 31, 2019 and 2018, because the Company and all of its subsidiaries and variable interest entities operated at a taxable loss
during the respective periods.
Net Loss –
The Company incurred a net loss
of $223,725 for the three months ended March 31, 2019, a decrease of 8%, as compared to a net loss of $243,077 for the corresponding
prior year period. The decrease in net loss was driven by several factors, including the decrease in general and administrative
expenses.
Liquidity and Capital Resources
As of March 31, 2019, we had cash of $24,460, as compared
to $22,684 as of December 31, 2018, an increase of $1,776 with the increase of proceeds from private placement.
The following table sets forth a summary of our cash flows for the periods
indicated:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Net cash used in operating activities
|
|
$
|
(61,673
|
)
|
|
$
|
(109,386
|
)
|
Net cash provided by financing activities
|
|
|
63,375
|
|
|
|
119,206
|
|
Effect of exchange rate changes on cash
|
|
|
74
|
|
|
|
155
|
|
Net increase in cash
|
|
|
1,776
|
|
|
|
9,975
|
|
Cash, beginning of period
|
|
|
22,684
|
|
|
|
6,124
|
|
Cash, end of period
|
|
$
|
24,460
|
|
|
$
|
16,099
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash used in operating activities for the three months
ended March 31, 2019 was $61,673, as compared to net cash used in operating activities amounting to $109,386 for the corresponding
prior year period. This was mainly attributable to decrease in payment to suppliers during the three months ended March 31,
2019.
Our cash flow projections indicate that our current assets
and projected revenues from our existing project will not be sufficient to fund operations over the next twelve months. This raises
substantial doubt about our ability to continue as a going concern. We intend to rely on Keywin’s exercise of its outstanding
option to purchase $2 million in shares of our common stock or on the issuance of additional equity and debt securities as well
as on our note holders’ exercise of their conversion option to convert our notes to our common stock, in order to fund our
operations. However, it may be difficult for us to raise funds in the current economic environment. We cannot give assurance that
we will be able to generate sufficient revenue or raise new funds, or that Keywin will exercise its option before its expiration
and our note holders will exercise their conversion option before the note is due. In any such case, we may not be able to continue
as a going concern.
Investing Activities
Net cash used in investing activities for the three months
ended March 31, 2019 and 2018 was $nil.
Financing Activities
Net cash provided by financing activities was $63,375
for the three months ended March 31, 2019, as compared to $119,206 for the corresponding prior year period. The decrease was
mainly due to decrease in proceeds from private placement and no proceeds from short-term loans for financing our operations during
the three months ended March 31, 2019.
Short-term Loan
As of March 31, 2019, the Company recorded an aggregated
amount of $2,916,600 short-term loans. Those loans were borrowed from an unrelated individual. Those loans are unsecured, bear
a monthly interest of 1.5% and shall be repayable in one month. However, according to the agreement, the Company shall have the
option to shorten or extend the life of those short-term loans if the need arises and the Company has agreed with the lender to
extend the short-term loans on the due date. Up to the date of this report, those loans have not yet been repaid.
Capital Expenditures
During the three months ended March 31, 2019 and 2018,
we did not acquire equipment.
Contractual Obligations and Commercial Commitments
The following table presents certain payments due under
contractual obligations with minimum firm commitments as of March 31, 2019:
|
|
Payments due by period
|
|
|
|
Total
|
|
|
Due in
2018
|
|
|
Due in
2019 – 2020
|
|
|
Due in
2020-2021
|
|
|
Thereafter
|
|
Debt Obligations (a)
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short Term Loan (b)
|
|
|
2,916,600
|
|
|
|
2,916,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(a) Debt Obligations
. We issued an aggregate
of $5,000,000 in 1% Convertible Promissory Notes in April 2009 to our investors and such 1% Convertible Promissory Notes matured
on April 1, 2016. For details, please refer to the Note 7 of the consolidated financial statements.
(b) Short Term Loan.
We have entered into
short-term loan agreement with an unrelated individual. Those loans are unsecured, bear a monthly interest of 1.5% and repayable
on demand or have due date in a month. However, according to the agreement, the Company shall have the option to shorten or extend
the life of those short-term loans if the need arises and the Company has agreed with the lender to extend the short-term loans
on the due date. Up to the date of this report, those loans have not yet been repaid.
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.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources that are material to our investors.