NETWORK CN INC - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from ____ to ____
Commission
file number 000-30264
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NETWORK
CN INC.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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90-0370486
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
Number)
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Suite
3908, Shell Tower, Times Square, 1 Matheson Street, Causeway Bay, Hong
Kong
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(Address
of principal executive
offices)
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(852)
2833-2186
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Exchange
Act: NONE
Securities
registered pursuant to Section 12(g) of the Exchange Act:
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Common
Stock, $0.001 Par Value
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(Title
of Each Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes o No þ
As of
June 30, 2009, the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold was approximately $7.9 million.
The
number of shares outstanding of each of the issuer’s classes of common stock, as
of March 15, 2010 is as follows:
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Class of
Securities
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Shares
Outstanding
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Common
Stock, $0.001 par value
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422,522,071
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TABLE OF CONTENTS
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PART
I
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5
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13
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28
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28
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29
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29
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PART
II
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29
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31
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32
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44
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45
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45
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46
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47
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PART
III
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47
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50
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56
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58
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59
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PART
IV
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60
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64
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements
contained in this annual report include “forward-looking statements” within the
meaning of such term in Section 27A of the Securities Act and Section 21E of the
Exchange Act. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which could cause actual financial or operating
results, performances or achievements expressed or implied by such
forward-looking statements not to occur or be realized. Forward-looking
statements made in this Report generally are based on our best estimates of
future results, performances or achievements, predicated upon current conditions
and the most recent results of the companies involved and their respective
industries. Forward-looking statements may be identified by the use of
forward-looking terminology such as “may”, “will”, “could”, “should”, “project”,
“expect”, “believe”, “estimate”, “anticipate”, “intend”, “continue”,
“potential”, “opportunity” or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:
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our
potential inability to raise additional
capital;
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changes
in domestic and foreign laws, regulations and
taxes;
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uncertainties
related to China's legal system and economic, political and social events
in China;
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Securities
and Exchange Commission regulations which affect trading in the securities
of “penny stocks;” and
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·
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changes
in economic conditions, including a general economic downturn or a
downturn in the securities markets.
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Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this annual report are
discussed in Item 1A. “Risk Factors”. Readers are urged to carefully review and
consider the various disclosures made by us in this annual report and our other
filings with the Security and Exchange Commission (the “SEC”). These reports
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition and results of operations and prospects. The
forward-looking statements made in this annual report speak only as of the date
hereof and we disclaim any obligation to provide updates, revisions or
amendments to any forward-looking statements to reflect changes in our
expectations or future events.
USE
OF TERMS
Except as
otherwise indicated by the context, references in this report to:
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“BVI”
are references to the British Virgin
Islands;
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“China”
and “PRC” are to the People’s Republic of
China;
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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 Huamin Management
Consultancy (Beijing) Company Limited, or NCN Huamin, a PRC limited company;
Cityhorizon Limited, or Cityhorizon Hong Kong, a Hong Kong limited
company, and its wholly owned subsidiaries, Cityhorizon Limited, or
Cityhorizon BVI, a BVI limited company; Huizhong Lianhe
Media Technology Co., Ltd., or Lianhe, a PRC
limited company; Linkrich Enterprise Advertising and Investment Limited,
or Linkrich Enterprise, a HK limited company, and its subsidiary, Yi Gao
Shanghai Advertising Limited, or Yi Gao, a PRC limited company and the
Company’s variable interest entities: Beijing Huizhong Bona Media
Advertising Co., Ltd., or Bona, a PRC
limited company; and Huizhi Botong Media Advertising Beijing Co., Ltd., or
Botong, a PRC limited company.
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·
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“NCN
Landmark” are references to NCN Landmark International Hotel Group
Limited, a BVI limited company,
and its wholly-owned subsidiary, Beijing NCN Landmark Hotel Management
Limited, a PRC limited company;
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·
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“NCN
Management Services” are references to NCN Management Services Limited,
a BVI limited
company;
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“Quo
Advertising ” are references to Shanghai Quo Advertising Co. Ltd, a PRC
limited company
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“RMB”
are to the Renminbi, the legal currency of
China;
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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;
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“Tianma”,
are references to Guangdong Tianma International Travel Service Co., Ltd,
a PRC limited company;
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“U.S.
dollar”, “$” and “US$” are to the legal currency of the United States;
and
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“Xuancaiyi”
are references to Xuancaiyi (Beijing) Advertising Company Limited, a PRC
limited company
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PART
I
ITEM
1. BUSINESS
Overview
Our
mission is to become a nationwide leader in providing out-of-home advertising in
China, primarily serving the needs of branded corporate customers. We seek to
acquire rights to install and operate roadside advertising panels and mega-size
advertising panels in the major cities in China. In most cases, we are
responsible for installing advertising panels, although in some cases,
advertising panels might have already been installed, and we will be responsible
for operating and maintaining the panels. Once the advertising panels are put
into operation, we sell advertising airtime to our customers directly. Since
late 2006, we have been operating a growing advertising network of roadside LED
digital video panels, mega-size LED digital video billboards and light boxes in
major Chinese cities. LED (known as “Light Emitting Diode”) technology has
evolved to become a new and popular form of advertising in China, capable of
delivering crisp, super-bright images both indoors and outdoors.
Our total
advertising revenues were $1,266,927, $4,622,270 and $1,442,552 for the years
ended December 31, 2009, 2008 and 2007 respectively. Our net loss attributable
to NCN common stockholders was $37,359,188, $59,484,833 and $14,646,619 for the
years ended December 31, 2009, 2008 and 2007 respectively. Our results of
operations were negatively affected by a variety of factors, which led to less
than expected revenues and cash inflows during the fiscal year 2009, including
the following:
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the
rising costs to acquire advertising rights due to competition among
bidders for those rights;
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slower
than expected consumer acceptance of the digital form of advertising
media;
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strong
competition from other media companies;
and
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slowing
demand due to the worldwide financial crisis and deteriorating economic
conditions in China, leading many customers to cut their advertising
budget. The impact of the reduction in the pace of our advertising
spending is expected to be more significant on our new digital form of
media than traditional advertising
platforms.
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To
address these unfavorable market conditions, in the latter half of 2008, we
undertook drastic cost-cutting measures including reduction of our workforce,
office rentals, and reductions to our selling and marketing expenses and other
general and administrative expenses. We also re-assessed the commercial
viability of each of our concession right contracts and determined that many of
our concession rights are no longer commercially viable due to high annual fees
and therefore such commercially non-viable concession right contracts were
terminated. Management has also successfully negotiated some reductions in
advertising operating rights fees under existing contracts. The outcome of these
cost reduction measures has been reflected in our financial
results.
Since
early 2010, we have begun to restructure our organization by consolidating our
PRC operations into one directly owned PRC entity, Yi Gao. We expect that this
consolidation will enhance our operational efficiency and effectiveness and
should reduce our operating expenses for the foreseeable future. For details,
please refer to Item7. – Management’s Discussion and Analysis of Financial
Condition and Results of Operations, “Recent Developments – Corporate
Restructuring” below.
To
strengthen our ability to generate revenues from advertising sales which depends
largely upon our ability to provide large networks of advertising locations
throughout major areas in China, we also started our advertising agency business
in 2009. We seek the advertising airtime from third party vendors in major
cities in China and sell such advertising airtime to our customers. As an
advertising agent, we are not responsible for acquiring advertising operating
rights, installing, operating and maintaining advertising panels. We expect that
this product line will enable us to generate revenue without having capital
commitment and hence enhance our current capital position and
liquidity.
We also
completed a debt restructuring exercise in April 2009 which has directly
lessened our cash constraints. For details, please refer to Item 7. –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, “Liquidity and
Capital Resources - Restructuring of Convertible Debt” below. In July
2009, our board appointed Dr. Earnest Leung, the nominee of our controlling
shareholder, Keywin Holdings Limited (“Keywin”), as our chief executive officer.
Dr. Leung, a Keywin director, has over 20 years experience in the investment
banking industry and is actively formulating a series of business development
strategies and exploring more prominent advertising related projects, aiming to
expand the Company and improve its financial performance. Management has
identified and is currently studying the feasibility of several potential
projects, however, we have not yet committed to any of them.
History
We were
incorporated under the laws of the State of Delaware on September 10, 1993 under
the name EC Capital Limited. Our predecessor companies were involved in a
variety of business and were operated by various management teams under
different operating names. Between 2004 and 2006 we operated under the name Teda
Travel Group Inc., which was primarily engaged in the provision of management
services to hotels and resorts in China. On August 1, 2006, we
changed our name to “Network CN Inc.” in order to better reflect our new vision
to build a nationwide information and entertainment network in
China.
From
early 2006 until 2008, we had two business divisions: our Media Business
Division and a Non-Media Business Division. We initially focused on the
Non-Media Business Division, which was mainly comprised of a travel network
through which we provided agency tour services and hotel management services. In
2006, we acquired 55% of the equity interest in Tianma, a PRC company engaged in
the provision of tour services to customers both inside and outside of the PRC.
In 2006 and 2007, we earned substantially all of our revenues from these tour
services. We also provided day-to-day management services to hotels and resorts
in the PRC. During the latter half of 2006, we adjusted our primary focus away
from the tourism and hotel management business to the building of a media
network with the goal of becoming a nationwide leader in out-of-home, digital
display advertising, roadside LED digital video panels and mega-size video
billboards. In November 2006 we secured a media-related contract for installing
and managing out-of-home LED advertising video panels. In 2007, we secured
further rights to operate mega-size LED and roadside LED panels in prominent
cities in the PRC through either entering business agreements with authority
parties or business combination exercise, and began generating revenues from our
Media Business.
Disposal
of Non-Media Business Division
On June
16, 2006, to take advantage of China’s booming travel market, we acquired,
through NCN Management Services, 55% of the equity interests of Tianma, a travel
agency headquartered in Guangdong Province in the PRC, for an aggregate purchase
price of $936,283, $833,333 of which was in cash and $102,950 of which was in
362,500 shares of our common stock. The results of operations of Tianma have
been included in the Company's consolidated statement of operations since the
completion of the acquisition on June 16, 2006. Tianma is an authorized inbound
and outbound travel operator and provides travel agency services to customers
for both inbound and outbound travel. It organizes independent inbound and
outbound tour and travel packages for a variety of destinations within China and
internationally. Tour packages may include air and land transportation, hotels,
restaurants and tickets to tourist destinations and other excursions. Tianma
books all elements of such packages with third-party service providers, such as
airlines, car rental companies and hotels, or through other tour package
providers and then resells such packages to its clients.
In 2008,
as the Company did not foresee any major contribution from Tianma in the near
future, the Board of Directors of the Company resolved that it was in the best
interests of the Company to focus on developing its media business and to
explore ways of divesting its travel business. The Company entered into stock
purchase agreements disclosed below, to dispose of its entire Non-Media Business
Division.
On
September 1, 2008, the Company completed the sale of all its interests in NCN
Management Services to an independent third party for a consideration
of HK$1,350,000, or approximately $173,000, in cash. The acquirer acquired NCN
Management Services along with its subsidiaries, which include 100% interest in
NCN Hotels Investment Limited, 100% interest in NCN Pacific Hotels Limited and a
55% interest (through trust) in Tianma. The Company reported a gain on the sale,
net of income taxes of $61,570.
On
September 30, 2008, the Company completed the sale of its 99.9% interest in NCN
Landmark to an independent third party for a cash consideration of $20,000. The
acquirer acquired NCN Landmark along with its subsidiary, 100% interest in
Beijing NCN Landmark Hotel Management Limited, a PRC corporation. The Company
reported a gain on the sale, net of income taxes of $4,515.
The
Company treated the sales of NCN Management Services along with its subsidiaries
and variable interest entity and NCN Landmark along with its subsidiary as a
discontinuation of operations.
Acquisition
of Quo Advertising
On
January 31, 2007, we acquired 100% of the equity interests of Quo Advertising,
an advertising agency headquartered in Shanghai, China, pursuant to a purchase
and sale agreement and a trust agreement, dated January 24, 2007, between the
Company and two independent PRC individuals. The Company acquired Quo
Advertising for a purchase price of $907,600, $64,000 of which was in cash and
the balance of which was in 300,000 shares of our common stock, valued at
$843,600. The results of operations of Quo Advertising have been included in the
Company's consolidated statement of operations since the completion of the
acquisition on January 31, 2007.
Quo
Advertising was founded in 1996 in Shanghai, China and provided advertising
design, production, public relations and event management services for domestic
and international clients before our acquisition. The acquisition strengthens
our media network in the PRC. Our media business was mainly run through Quo
Advertising in 2007 and 2008.
Acquisition
of Xuancaiyi
Effective
September 1, 2007, we acquired, through Quo Advertising, a 51% majority of the
equity interests of Xuancaiyi, an advertising agency located in Beijing, China,
for a consideration of up to RMB12,245,000 (approximately $1,667,000) in cash,
payable over time based on Xuancaiyi’s achievement of certain net profit
targets. An initial payment of RMB2,500,000 (approximately $330,000) was made in
September 2007 and the balance of the payment was due as follows: (1) up to RMB
2,454,300 (approximately $336,700) based on Xuancaiyi’s net profit for the four
months ended December 31, 2007; (2) up to RMB 1,834,500 (approximately $251,700)
based on Xuancaiyi’s net profit for the first quarter of fiscal year 2008; (3)
up to RMB 1,827,400 (approximately $250,700) based on Xuancaiyi’s net profit for
the second quarter of fiscal year 2008; (4) up to RMB1,819,100 (approximately
$249,500) based on Xuancaiyi’s net profit for the third quarter of fiscal year
2008; and (5) up to RMB1,809,700 (approximately $248,300) based on Xuancaiyi’s
net profit for the fourth quarter of fiscal year 2008. As Xuancaiyi failed to
achieve the net profit targets in each of the above periods, no further cash
payment was made with respect to the above earn-out consideration. The results
of operations of Xuancaiyi have been included in the Company's consolidated
statement of operations since the acquisition date on September 1,
2007.
Xuancaiyi
was founded in 2007 and obtained the right to manage and operate a mega-size
high resolution LED advertising billboard in a prominent location in China’s
capital city, Beijing. The billboard, covering more than 758 square meters, is
located on the East Third Ring Road near the exit of the Airport Highway. As of
December 31, 2008, a business agreement entered into between Xuancaiyi and its
media partner has expired and so Xuancaiya has maintained minimal operations
thereafter. In the second quarter of fiscal 2009, we disposed of the entire 51%
equity interests of Xuancaiyi to its minority shareholders at $nil
consideration.
Acquisition
of Cityhorizon BVI
On
January 1, 2008, we entered into a share purchase agreement with our wholly
owned subsidiary Cityhorizon Hong Kong, to acquire 100% of the equity interest
in Cityhorizon BVI and its wholly owned subsidiaries, Lianhe and Bona, from
Cityhorizon BVI’s sole shareholder, for an aggregate purchase price of
$8,738,000, $5,000,000 of which was in cash and the balance of which was in
1,500,000 shares of restricted common stock of par value of $0.001 each, valued
at $3,738,000. The results of operations of Cityhorizon BVI, Lianhe and Bona
have been included in the Company's consolidated statement of operations since
the completion of the acquisition on January 1, 2008.
Cityhorizon
BVI is an investment holding company and its subsidiaries Lianhe and Bona were
both founded in 2006. Lianhe is principally engaged in the provision of
technology and management consulting services and Bona is principally engaged in
the provision of advertising services. The purpose of the acquisition was to
further strengthen our Media Network in China. There has been no change in
Lianhe’s and Bona’s business since the date of acquisition.
Consolidation
of Variable Interest Entity - Botong
On
January 1, 2008, the Company caused its subsidiary, Lianhe, to enter into a
series of commercial agreements with Botong and its registered shareholders,
pursuant to which Lianhe is obligated to provide exclusive technology and
management consulting services to Botong in exchange for service fees amounting
to substantially all of the net income of Botong. Each of the registered PRC
shareholders of Botong also entered into equity pledge agreements and option
agreements with Lianhe which cannot be amended or terminated except by written
consent of all parties. Pursuant to these equity pledge agreements and option
agreements, each shareholder pledged its equity interest in Botong for the
performance of Botong’s payment obligations under the exclusive technology and
management consulting services agreements. In addition, the shareholders of
Botong assigned to Lianhe all their voting rights as shareholders of Botong and
Lianhe has the option to acquire the equity interests of Botong at a mutually
agreed on purchase price that will first be used to repay any loans payable to
Lianhe or any affiliate of Lianhe by the registered Botong
shareholders.
On
January 1, 2008, Lianhe committed to extend loans totaling $137,179 to the
registered shareholders of Botong for the purpose of financing such
shareholders’ investment in Botong. Through the above contractual arrangements,
Lianhe became the primary beneficiary of Botong which becomes a variable
interest entity. The results of operations of Botong have been included in the
Company's consolidated statement of operations since January 1,
2008.
Botong
was founded in 2007 and obtained the right to manage and operate for a 6-year
period, a mega-size high resolution LED advertising billboard located at Haoyou
Emporium Wangujing in Beijing. There has been no change of its business since
the date of acquisition.
Other
Contractual Arrangements with the PRC Operating Companies
PRC
regulations limit foreign ownership of companies that provide advertising
services. Our advertising business was initially run through our trust
arrangements with Quo Advertising directly operated our advertising network
projects.
In
January 2008, after our acquisition of Cityhorizon BVI and its PRC
subsidiaries Lianhe and Bona, we restructured our advertising business in order
to strengthen our compliance with existing PRC regulation. Through Lianhe, we
entered into an exclusive management consulting services agreement and an
exclusive technology consulting services agreement with each of Quo Advertising
and Bona. In addition, we entered into an equity pledge agreement and an option
agreement with each of the registered PRC shareholders of Quo Advertising and
Bona, pursuant to which these shareholders pledged 100% of their shares to
Lianhe and granted Lianhe the option to acquire their shares at a mutually
agreed purchase price which shall first be used to repay any loans payable to
Lianhe or any affiliate of Lianhe by the registered PRC shareholders. These
commercial arrangements enable us to exert effective control on these entities
and their subsidiaries, and transfer their economic benefits to the Company for
financial results consolidation pursuant to FIN 46(R).
Corporate
Structure
The
following chart reflects our organization structure as of the date of this
annual report:
Available
Information
We file
with the SEC our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to reports to be filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC
Our
corporate headquarters are located at Suite 3908, Shell Tower, Times Square, 1
Matheson Street, Causeway Bay, Hong Kong, Special Administrative
Region of the People’s Republic of China. Our telephone number is (852)
2833-2186. We maintain a website at www.ncnmedia.com that
links to our electronic SEC filings and contains information about our
subsidiaries which is not a part of this report. All the above
documents are available free of charge on our website as soon as reasonably
practicable after filing such material electronically or otherwise furnishing it
to the SEC.
Industry
Overview
The
recent worldwide financial crisis and the deteriorating economic conditions in
China created a number of challenges to China’s advertising industry during the
2009 period, as budget conservatism prevailed among advertisers throughout the
period. Although there were signs of recovery in China in late 2009, most
advertisers continued to be cost-conscious and preferred to commit to short-term
contracts rather than long-term contracts. Competition in the domestic
out-of-home advertising sector is very intense and many local operators offered
significant sales discounts to compete for market share.
In 2009,
The State Administration for Industry and Commerce of the PRC, estimated that
Television will remain the dominant advertising medium in the PRC in the coming
future, followed by print media, outdoor, internet and radio advertising. It was
believed that the media and advertising industry will remain as one of the
fastest growing markets in China. According to a market research report issued
by a reputable international investment bank in late of 2008, total advertising
spending in China is expected to show sustained growth above 8% over the next 10
years. For out-of-home advertising, overall out-of-home advertising spending is
expected to slow to 10% and 14% year-over-year in 2009 and 2010, respectively,
from 20% in 2008.
In the
past, we have expended our resources to build an out-of-home media throughout
different PRC cities. In preparation for the upcoming 2010 Shanghai World Expo
which we believe could bring us new business and revenues, we have allocated
substantial resources in Shanghai while minimizing our Beijing operations. We
believe that, in order to increase our market share in out-of-home advertising
in China, in the long-run, we will have to increase our advertising locations,
obtain more exclusive arrangements in desirable locations and to provide a wider
range of media and advertising services through entering business agreements or
business combination exercises with third parties.
Our
Services
We
install and operate roadside advertising panels in major cities throughout
China. The following table summarizes by location the number of roadside
advertising panels that the Company has the right to install and operate and the
installation status:
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Location
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No.
of Advertising
Panels
(1)
|
Panels
Installed
As
of March 1, 2010
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Panels
Owned
As
of March 1,
2010
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Expiration
(2)
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|
Nanjing
Road Pedestrian Street, Shanghai
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52
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52
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52
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2010
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Total
as of March 1, 2010
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52
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52
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52
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The
following table summarizes by location the number of mega-size advertising
panels that the Company has the right to install and operate and the
installation status:
|
Location
|
No.
of Advertising
Panels
(1)
|
Panels
Installed
As
of March 1, 2010
|
Panels
Owned
As
of March 1,
2010
|
Expiration
(2)
|
|
Wuhan
|
1
|
1
|
1
|
2012
|
|
Beijing
|
1
|
1
|
1
|
2013
|
|
Total
as of March 1, 2010
|
2
|
2
|
2
|
|
1)
|
The
size of the Company’s typical roadside advertising panels ranges from 1.5
square meters to 4 square meters, while the mega-size advertising panels
are typically from 80 square meters to over 120 square
meters.
|
|
2)
|
Although
the Company has a contractual right to operate the panels for certain
period of time, governmental authorities in the PRC could limit the period
during which we can operate the panels if the government interprets the
current rules and regulations differently or if it were to implement new
rules and regulations.
|
Our
Suppliers
In some
of our media projects, we are responsible for installing advertising panels and
billboards. We design the shape of our advertising panels and billboards
according to the terms approved by the relevant PRC governmental documents. We
identify suppliers of component parts used in our advertising panels and
contract assembly of our advertising panels to third-party contract assemblers
who will assemble our advertising panels according to our specification. We
select component suppliers based on price and quality.
We did
not install any advertising panels in 2009 and 2007. During 2008, only 2
suppliers accounted for 20% or more of our panel installation costs. Xian
Qingsong Technology Co., Ltd and Shenzhen LAMP Technology Co., Ltd, accounted
for 31% and 26% to our panel installation costs respectively.
Our
Customers
The media
and advertising industry is one of the fastest growing markets in China.
Out-of-home advertising is attractive because of relatively modest content
production costs, less regulatory exposure, low maintenance costs and
centralized operations made efficient by computers and other technology
solutions. Industry analysts look for out-of-home advertising spending in China
to grow at a 20% compounded annual growth rate through 2010. We are upbeat on
the long-term prospect for the China sector although a temporary pause occurred
in 2009 as the economy was hit by the global economic downturn.
Our
customers include large international and domestic brand name customers. The
following tables set forth those customers accounted for 10% or more of our
advertising sales in each fiscal year:
|
Name
of Customer
|
Advertising
Sales %
|
|
For the year ended December 31,
2009
|
|
|
Shanghai
Wenchang Advertising Co., Ltd
|
16%
|
|
Shanghai
Chuangtian Advertising Co., Ltd
|
15%
|
|
Kinetic
|
15%
|
|
Beijing
Dentsu Advertising Co., Ltd.
|
11%
|
|
For the year ended December 31,
2008
|
|
|
OMD
|
38%
|
|
Beijing
Dentsu Advertising Co., Ltd.
|
16%
|
|
For the year ended December 31,
2007
|
|
|
MGI
Luxury Asia Pacific Ltd
|
26%
|
|
Shanghai
Gaorui Advertising Company Limited
|
16%
|
|
Binli
(Shanghai) Commercial Company Limited
|
14%
|
|
SMH
International Trading (Shanghai) Co., Ltd
|
14%
|
Our
customers usually place their advertising orders on a project basis instead of a
recurring basis. Our management does not believe that our advertising business
depends upon a few customers, or that the loss of any one customer would have a
material adverse effect on our business.
Sales
and Marketing
We sell
our services through our direct sales force as well as through our advertising
agencies. We employ sales professionals in the PRC and provide them in-house
training to ensure we operate closely with and provide a high level of support
to our customers. Selling through our advertising agencies enables us to
leverage our direct sales resources and reach additional customers
segment.
Competition
We
compete with other advertising companies in China, including companies that
operate out-of-home advertising media networks, such as Focus Media, JCDecaux
and Clear Media. The Company competes with these companies for advertising
clients on the basis of the size of our advertising network, advertising
coverage, panel locations, pricing, and range of advertising services that we
offer. The Company also competes with these companies for rights to locate LED
panels and/or billboards in desirable locations in Chinese cities. In addition,
commercial buildings, hotels, restaurants and other commercial locations may
decide to install and operate their own billboards or LED panels. The Company
also competes for overall advertising spending with other more traditional media
such as newspapers, TV, magazines and radio, and more advanced media like
internet advertising, frame and public transport.
The
Company may also face competition from new entrants into the out-of-home LED
advertising sector. Our sector is characterized by low initial fixed costs for
entrance in term of LED panel requirements and it is uncommon for advertising
clients to enter into exclusive arrangements. In addition, as of
December 10, 2005, wholly foreign-owned advertising companies are allowed
to operate in China, which may expose us to increasing competition from
international advertising media companies attracted by the opportunities in
China.
Increased
competition could reduce our operating margins, profitability and result in a
loss of market share. Some of our existing and potential competitors may have
competitive advantages, such as more advertising locations and broader coverage
and exclusive arrangements in desirable locations. These competitors could
provide advertising clients with a wider range of media and advertising
services, which could cause us to lose advertising clients or to reduce prices
in order to compete, which could decrease our revenues, gross margins and
profits. We cannot guarantee that we will be able to compete against these
existing and new competitors.
In
addition, we believe our business will be adversely affected by the recent
global financial turmoil. In order to enhance our competitive power, we will
strictly control our operating costs, actively explore ways to terminate
commercially non-viable concession right contracts and continue to search for
other prominent advertising projects in order to expand our advertising network.
We believe that expanding our advertising network will enable us to offer more
competitive pricing to our advertising clients, thereby increasing our
profitability.
Our
Intellectual Property
We do not
have any registered trademarks, copyrights or licenses. However, we have
obtained the following patent rights from the PRC State Intellectual Property
Office:
|
·
|
The
technology of a display module and settings method for colored LED panels,
which expires on November 22,
2017;
|
|
·
|
The
technology of the display system with blind spot checking function, which
expires on November 27, 2017;
and
|
|
·
|
The
invention of methodology in light intensity tuning for out-of-home LED
panels, which expires on November 8,
2027;
|
We have
also applied for the following patent rights from the PRC State Intellectual
Property Office:
|
·
|
The
invention of methodology and monitoring system for staff in their
out-of-home LED panel maintenance;
|
|
·
|
The
invention of blind spot checking methodology for multi-LED panels;
and
|
|
·
|
The
invention of centralized remote management methodology for out-of-home LED
panels.
|
Our
Research and Development
No
material costs have been incurred on research and development activities for the
fiscal years 2009, 2008 and 2007. We do not expect to incur significant
research and development costs in the coming future.
Employees
As of
December 31, 2009, the Company and its subsidiaries and variable interest
entities had approximately 33 employees at our offices located at our Hong Kong
and PRC offices, all of which are full-time employees.
Our
employees are not represented by a labor organization or covered by a collective
bargaining agreement. We believe that we maintain a satisfactory working
relationship with our employees and we have not experienced any significant
labor disputes or work stoppage or any difficulty in recruiting staff for our
operations.
We are
required under PRC law to make contributions to the employee benefit plans at
specified percentages of the after-tax profit. In addition, we are required by
the PRC law to cover employees in China with various type of social insurance.
We believe that we are in material compliance with the relevant PRC
laws.
Government
Regulation
Limitations
on Foreign Ownership in the Advertising Industry
The principal regulations governing foreign ownership in the
advertising industry in China include:
|
·
|
The Catalogue for Guiding Foreign Investment in Industry (2007); |
|
·
|
Advertising Law (1994); |
|
·
|
Regulations on Control of Advertisement (1987); |
|
·
|
Implementation Rules for Regulations on Control of Advertisement (2004); and |
|
·
|
The Administrative Regulations on Foreign-invested Advertising Enterprises (2004). |
Since
December 2005, the PRC government has allowed foreign investors to directly own
100% of an advertising business if the foreign investor has at least three years
of direct operations in the advertising business outside of China or to set up
an advertising joint venture if the foreign investor has at least two years of
direct operations in the advertising industry outside of China.
As we do
not have the necessary advertising business outside of China, we are not
entitled to own directly 100% of an advertising business in China. Our
advertising business was provided through our contractual arrangements with our
PRC operating entity, Quo Advertising in the year 2007. Quo Advertising was
owned by two PRC citizens, who are designated by us and hold 100% of the equity
interests in Quo Advertising in trust for the benefit of us, and operates our
advertising network projects. In January 2008, we restructured our advertising
business after acquiring the media entities namely Lianhe and Bona. We, through
our newly acquired subsidiary, Lianhe, entered into an exclusive
management consulting services agreement and an exclusive technology consulting
services agreement with each of Quo Advertising, Bona and Botong. In addition,
Lianhe entered into an equity pledge agreement and an option agreement with each
of the registered PRC shareholders of Quo Advertising, Bona and Botong
designated by us and pursuant to which these shareholders had pledged 100% of
their shares to Lianhe and granted Lianhe the option to acquire their shares at
a mutually agreed purchase price which shall first be used to repay any loans
payable to Lianhe or any affiliate of Lianhe by the registered PRC shareholders.
These commercial arrangements enable us to exert effective control on these
entities, and transfer their economic benefits to us for financial results
consolidation.
Although
these contractual arrangements, in the opinion of our PRC legal counsel, are in
compliance with all existing PRC laws, rules and regulations and are enforceable
in accordance with their terms and conditions, there are substantial
uncertainties regarding the interpretation and implementation of current PRC
laws and regulation. Accordingly, we cannot assure you that PRC regulatory
authorities will not determine that our contractual arrangements and the
business operations of our PRC operating companies as described herein violate
PRC laws or regulations. If we or any of our PRC operating companies were found
to be in violation of any existing or future PRC laws or regulations, the
relevant regulatory authorities would have broad discretion in dealing with such
violation. Any actions taken may cause disruption to our business operations and
may adversely affect our business, financial condition and results of operation.
See Item A1. “Risk
Factor" for details.
Advertising
Services
Business
Licenses for Advertising Companies
The
principal regulations governing advertising businesses in China
include:
|
·
|
The
Advertising Law (1994)
|
|
·
|
Regulations
on Control of Advertisement (1987);
and
|
|
·
|
The
Implementing Rules for the Advertising Administrative Regulations
(2004).
|
These
regulations stipulate that companies that engage in advertising activities must
obtain from the SAIC or its local branches a business license which specifically
includes operating an advertising business within its business scope. Companies
conducting advertising activities without such a license may be subject to
penalties, including fines, confiscation of advertising income and orders to
cease advertising operations. The business license of an advertising company is
valid for the duration of its existence, unless the license is suspended or
revoked due to a violation of any relevant law or regulation.
We do not
expect to encounter any difficulties in maintaining our business licenses. Our
PRC advertising operating companies hold business license from the local
branches of the SAIC as required by the existing PRC regulations.
Advertising
Content
PRC
advertising laws and regulations set forth certain content requirements for
advertisements in China, which include prohibitions on, among other things,
misleading content, superlative wording, socially destabilizing content or
content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic,
psychotropic, toxic or radioactive drugs are prohibited. It is prohibited to
disseminate tobacco advertisements via broadcast or print media. It is also
prohibited to display tobacco advertisements in any waiting lounge, theater,
cinema, conference hall, stadium or other public area. There are also specific
restrictions and requirements regarding advertisements that relate to matters
such as patented products or processes, pharmaceuticals, medical instruments,
veterinary pharmaceuticals, agrochemicals, foodstuff, alcohol and cosmetics. In
addition, all advertisements relating to pharmaceuticals, medical instruments,
agrochemicals and veterinary pharmaceuticals advertised through radio, film,
television, newspaper, magazine and other forms of media, together with any
other advertisements which are subject to censorship by administrative
authorities according to relevant laws and administrative regulations, must be
submitted to the relevant administrative authorities for content approval prior
to dissemination.
Advertisers,
advertising operators and advertising distributors are required by PRC
advertising laws and regulations to ensure that the content of the
advertisements they prepare or distribute are true and in full compliance with
applicable laws. In providing advertising services, advertising operators and
advertising distributors must review the prescribed supporting documents
provided by advertisers for advertisements and verify that the content of the
advertisements comply with applicable PRC laws and regulations. In addition,
prior to distributing advertisements for certain commodities, which are subject
to government censorship and approval, advertising distributors and advertisers
are obligated to ensure that such censorship has been performed and approval has
been obtained. Violation of these regulations may result in penalties, including
fines, confiscation of advertising income, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading
information. In circumstances involving serious violations, the SAIC or its
local branches may revoke violators’ licenses or permits for advertising
business operations. Furthermore, advertisers, advertising operators or
advertising distributors may be subject to civil liability if they infringe on
the legal rights and interests of third parties in the course of their
advertising business. We will employ qualified advertising inspectors who are
trained to review advertising content for compliance with relevant laws and
regulations.
Out-of-home
Advertising
The
Advertising Law stipulates that the exhibition and display of out-of-home
advertisements must not:
|
·
|
utilize traffic safety facilities and traffic signs; |
|
·
|
impede the use of public facilities, traffic safety facilities and traffic signs; |
|
·
|
obstruct commercial and public activities or create an eyesore in urban areas; |
|
·
|
be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; and |
|
·
|
be placed in areas prohibited by the local governments from having out-of-home advertisements. |
In
additional to the Advertising Law, the SAIC promulgated the Out-of-home
Advertising Registration Administrative Regulations on December 8, 1995, as
amended on December 3, 1998, and May 22, 2006, which governs the out-of-home
advertising industry in China.
Out-of-home
advertisements in China must be registered with the local SAIC before
dissemination. The advertising distributors are required to submit a
registration application form and other supporting documents for registration.
After review and examination, if an application complies with the requirements,
the local SAIC will issue an Out-of-home Advertising Registration Certificate
for such advertisement. Many municipal cities of China have respectively
promulgated their own local regulations on the administration of out-of-home
advertisements. Those municipal regulations set forth specific requirements on
the out-of-home advertisements, such as the allowed places of dissemination and
size requirements of the out-of-home advertisement facilities.
In
addition to the regulations on out-of-home advertisements, the placement and
installation of LED billboards are also subject to municipal local zoning
requirements and relevant governmental approvals of the city where the LED
billboards located. In Shanghai, the placement and installation of LED
billboards are required to obtain application for an out-of-home advertising
registration certificate for each LED billboard subject to a term of use
approved by local government agency for each LED billboard. If the existing LED
billboards placed by our LED location provider or us are required to be removed,
the attractiveness of this portion of our advertising network will be
diminished.
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Rules
on Foreign Exchange Control (1996), as amended. Under the Rules, Renminbi is
freely convertible for trade and service-related foreign exchange transactions,
but not for direct investment, loan or investment outside China unless the prior
approval of the State Administration for Foreign Exchange of the PRC or other
relevant authorities is obtained.
Pursuant
to the Rules on Foreign Exchange Control, foreign investment enterprises in
China may purchase foreign currency without the approval of the State
Administration for Foreign Exchange of the PRC for trade and service-related
foreign exchange transactions by providing commercial documents evidencing these
transactions. They may also retain foreign exchange (subject to a cap approved
by the State Administration for Foreign Exchange of the PRC) to satisfy foreign
exchange liabilities or to pay dividends. However, the relevant PRC government
authorities may limit or eliminate the ability of foreign investment enterprises
to purchase and retain foreign currencies in the future. In addition, foreign
exchange transactions for direct investment, loan and investment outside China
are still subject to limitations and require approvals from the State
Administration for Foreign Exchange of the PRC.
Dividend
Distributions
The
principal regulations governing distribution of dividends of wholly
foreign-owned companies include:
|
·
|
The Foreign Investment Enterprise Law (1986), as amended; and |
|
·
|
Administrative Rules under the Foreign Investment Enterprise Law (2001). |
Under
these regulations, foreign investment enterprises in China may pay dividends
only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, wholly foreign-owned
enterprises in China are required to set aside at least 10% of their after-tax
profits each year, if any, to fund certain reserve funds, unless such reserve
funds as accumulated have reached 50% of their respective registered capital.
These reserves are not distributable as cash dividends.
Enterprise Income Tax
Law
The
Enterprise Income Tax Law, or EIT Law, was promulgated by the PRC’s National
People’s Congress on March 16, 2007 to introduce a new uniform taxation regime
in the PRC. Both resident and non-resident enterprises deriving income from the
PRC will be subject to this EIT Law from January 1, 2008. It replaces the
previous two different tax rates applied to foreign-invested enterprises and
domestic enterprises by only one single income tax rate applied for all
enterprises in the PRC. Under this EIT Law, except for some hi-tech enterprises
which are subject to EIT rates of 15% and other very limited situation that
allows EIT rates at 20%, the general applicable EIT rate in the PRC is 25%. We
may not enjoy tax incentives for our further established companies in the PRC
and therefore our tax advantages over domestic enterprises may be
diminished.
Environmental
Matters
The
Company's operations are subject to various environmental regulations. We
believe that we are in substantial compliance with applicable laws, rules and
regulations relating to the protection of the environment and that our
compliance will have no material effect on our capital expenditures, earnings or
competitive position.
ITEM
1A. RISK FACTORS
Risks
relating to our business include the factors set forth below. If an
adverse outcome of any of the following risks actually occurs, our business,
financial condition or operating results could be materially and adversely
affected. In evaluating our business, shareholders should consider carefully the
following factors in addition to the other information presented
herein.
RISKS
RELATED TO OUR BUSINESS
The
recent global economic and financial market crisis may continue to have a
negative effect on our business, financial condition, results of operations and
cash flow.
The
recent global economic and financial market crisis has caused, among other
things, a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, lower consumer and business
spending, and lower consumer net worth, in the United States, China and other
parts of the world. This global economic and financial market crisis has had,
and may continue to have, a negative effect on our ability to borrow funds or
enter into other financial arrangements if and when additional funds become
necessary for our operations. We believe many of our advertisers have also been
affected by the current economic turmoil. Current or potential advertisers may
no longer be in business, may be unable to fund advertising purchases or
determine to reduce purchases, all of which would lead to reduced demand for our
advertising services, reduced gross margins, and increased delays of payments of
accounts receivable or defaults of payments. We are also limited in our ability
to reduce costs to offset the results of a prolonged or severe economic downturn
given our fixed media costs associated with our operations. Therefore, the
global economic and financial market crisis could continue to have a material
adverse effect on our business, financial condition, results of operations and
cash flow. In addition, the timing and nature of any recovery in the credit and
financial markets remains uncertain, and there can be no assurance that market
conditions will improve in the near future or that our results will not continue
to be materially and adversely affected.
We
have a limited operating history, which may make it difficult for you to
evaluate our business and prospects.
We began
to operate our advertising business in late 2006. Accordingly, we have a very
limited operating history upon which you can evaluate the viability and
sustainability of our business and its acceptance by advertisers and consumers.
In addition, due to our short operating history and recent additions to our
management team, some of our senior management and employees have only worked
together at our company for a relatively short period of time. As a result, it
may be difficult for you to evaluate the effectiveness of our senior management
and other key employees and their ability to address future challenges to our
business.
We
may not be able to recruit and retain key personnel, particularly sales and
marketing personnel, which could have material and adverse effects on our
business, financial condition and results of operations.
Our
future success depends in part on the contributions of our management team and
key technical and sales personnel and our ability to attract and retain
qualified new personnel. In particular, our success depends on the continuing
employment of our CEO Dr. Earnest Leung and our Deputy CEO, Mr. Godfrey Hui, as
well as our sales, marketing and other key personnel. Because of significant
competition in our industry for qualified managerial, technical and sales
personnel, we cannot assure you that we will be able to retain our key senior
managerial, technical and sales personnel or that we will be able to attract,
integrate and retain other such personnel that we may require in the future. If
we are unable to retain our existing personnel, or attract, train, integrate or
motivate additional qualified personnel, our growth may be restricted. The loss
of any of these key employees could slow our programming, distribution and sales
efforts or have an adverse effect on how our business is perceived by
advertisers, venue providers and investors, and our management may have to
divert their attention from our business to recruiting replacements for such key
personnel.
There
may be unknown risks inherent in our acquisitions of Lianhe and
Bona.
Although
we conducted due diligence with respect to the acquisition of Lianhe and Bona,
there is no assurance that all risks associated with these companies have been
revealed. To protect us from associated liabilities, we have received guarantees
of indemnification from the original owners. However we have no assurance that
such guarantees will be honored and legal action to enforce such guarantees
could be very costly and time consuming. The possibility of unknown risks in
those acquisitions could affect our business, financial condition and results of
operations.
All
of our directors and officers are outside the United States. It may be difficult
for investors to enforce judgments obtained against officers or directors of the
Company.
All of
our directors and officers are nationals and/or residents of countries other
than the United States, and all their assets are located outside the United
States. As a result, it may be difficult for investors to effect service of
process on our directors or officers, or enforce within the United States or
Canada any judgments obtained against us or our officers or directors, including
judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. Consequently, you may be prevented
from pursuing remedies under U.S. federal securities laws against them. In
addition, investors may not be able to commence an action in a Canadian court
predicated upon the civil liability provisions of the securities laws of the
United States. The foregoing risks also apply to those experts identified in
this Annual Report that are not residents of the United States.
Our
substantial indebtedness and related interest payments could adversely affect
our operations.
We have
issued convertible promissory notes to certain investors and our related
interest payments on such notes could impose financial burdens on us. If further
new debt is added to our consolidated debt level, the related risks that we now
face could intensify. Covenants in the convertible notes and related agreements,
and debt we may incur in the future, may materially restrict our operations,
including our ability to incur debt, pay dividends, make certain investments and
payments, and encumber or dispose of assets. In addition, financial covenants
contained in agreements relating to our existing and future debt could lead to a
default in the event our results of operations do not meet our plans and we are
unable to amend such financial covenants prior to default. An event of default
under any debt instrument, if not cured or waived, could have a material adverse
effect on us, our financial condition and our capital structure.
In
order to grow at the pace expected by management, we will require additional
capital to support our long-term business plan. If we are unable to obtain
additional capital in future years, we may be unable to proceed with our
long-term business plan and we may be forced to curtail or cease our operation
or further business expansion.
We will
require additional working capital to support our long-term business plan, which
includes identifying suitable targets for horizontal or vertical mergers or
acquisitions, so as to enhance the overall productivity and benefit from
economies of scale. Our working capital requirements and the cash flow provided
by future operating activities, if any, will vary greatly from quarter to
quarter, depending on the volume of business during the period and payment terms
with our customers. U.S. and global credit and equity markets have recently
undergone significant disruption, making it difficult for many businesses to
obtain financing on acceptable terms. In addition, equity markets are continuing
to experience wide fluctuations in value. If these conditions continue or
worsen, we may not be able to obtain adequate levels of additional financing,
whether through equity financing, debt financing or other sources. To raise
funds, we may need to issue new equities or bonds which could result in
additional dilution to our shareholders and in. Additional financings could
result in significant dilution to our earnings per share or the issuance of
securities with rights superior to our current outstanding securities or contain
covenants that would restrict our operations and strategy. In addition, we may
grant registration rights to investors purchasing our equity or debt securities
in the future. If we are unable to raise additional financing, we may be unable
to implement our long-term business plan, develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures on a timely basis, if at all. In addition, a lack of additional
financing could force us to substantially curtail or cease
operations.
Our
acquisitions of Lianhe, Bona and any future acquisitions may expose us to
potential risks and have an effect on our ability to manage our
business.
It is our
strategy to expand our business through acquisitions like that of Lianhe and
Bona. We would keep on searching for appropriate opportunities to acquire more
businesses or to form joint ventures, etc. that are complementary to our core
business. For each acquisition, our management encounters whatever difficulties
during the integration of new operations, services and personnel with our
existing operations. We may also expose ourselves to other potential risks like
unforeseen or hidden liabilities of the acquired companies, the allocation of
resources from our existing business to the new operations, uncertainties in
generating expected revenue, employee relationships and governing by new
regulations after integration. The occurrence of any of these unfavorable events
in our recent acquisitions or possible future acquisitions could have an effect
on our business, financial condition and results of operations.
We may be exposed
to potential risks relating to our internal controls over financial reporting
and our ability to have the operating
effectiveness of our internal controls attested to by our independent
auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. We are subject to this requirement commencing with
our fiscal year ending December 31, 2007 and a report of our management is
included under Item 9A of this Annual Report on Form 10-K. In addition, SOX 404
requires the independent registered public accounting firm auditing a company’s
financial statements to attest to and report on the operating effectiveness of
such company’s internal controls. While we believe that the Company has adequate
internal control procedures in place, we can provide no assurance that we will
be viewed by our independent auditors as complying with all of the requirements
imposed thereby or that we will receive a positive attestation from them. In the
event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent auditors with respect to
our internal controls, investors and others may lose confidence in the
reliability of our financial statements which could negatively impact our stock
market price.
Our
quarterly operating results are difficult to predict and may fluctuate
significantly from period to period in the future.
Our
quarterly operating results are difficult to predict and may fluctuate
significantly from period to period based on the seasonality of consumer
spending and corresponding advertising trends in China. As a result, you may not
be able to rely on period to period comparisons of our operating results as an
indication of our future performance. Factors that are likely to cause our
operating results to fluctuate, such as the seasonality of advertising spending
in China, the effect of the global economic downturn on spending in China, a
further deterioration of economic conditions in China and potential changes to
the regulation of the advertising industry in China, are discussed elsewhere in
this annual report. If our revenues for a particular quarter are lower than we
expect, we may be unable to reduce our operating expenses for that quarter by a
corresponding amount, which would harm our operating results for that quarter
relative to our operating results from other quarters.
We
have incurred losses and substantial doubt exists about our ability to continue
as a going concern.
We have a
history of operating losses. We have incurred a net loss attributable to NCN
common stockholders of $37,359,188 for fiscal year ended December 31, 2009. As
of December 31, 2009, our shareholders’ deficit was $1,491,206. These raise
substantial doubt about our ability to continue as a going concern. We have been
dependent on sales of our equity securities and debt financing to meet our cash
requirements. If adequate capital is not available to us, we may need to sell
assets or seek to undertake a restructuring of our obligations with our
creditors. We cannot give assurances that we would be able to accomplish either
of these measures on commercially reasonable terms, if at all. In any such case,
we may not be able to continue as a going concern.
If
our subcontractors fail to perform their contractual obligations, our ability to
provide services and products to our customers, as well as our ability to obtain
future business, may be harmed.
Many of
our contracts involve subcontracts with other companies upon which we rely to
perform a portion of the services that we must provide to our customers. There
is a risk that we may have disputes with our subcontractors, including disputes
regarding the quality and timeliness of work performed by those subcontractors.
A failure by one or more of our subcontractors to satisfactorily perform the
agreed-upon services may materially and adversely impact our ability to perform
our obligations to our customers, could expose us to liability and could have a
material adverse effect on our ability to compete for future contracts and
orders.
We
have limited business insurance coverage for our PRC subsidiaries. In the event
that adequate insurance is not available or our insurance is not deemed to cover
a claim, we could face liability.
We carry
insurance of various types, including general liability and professional
liability insurance in amounts management considers adequate and customary for
the jurisdiction in which we operate. Insurance companies in China offer limited
business insurance products because the insurance industry in China is still at
an early stage of development, and some of our insurance policies may limit or
prohibit insurance coverage for punitive or certain other types of damages, or
liability arising from gross negligence. If we incur increased losses related to
employee acts or omissions, or system failure, or if we are unable to obtain
adequate insurance coverage at reasonable rates, or if we are unable to receive
reimbursements from insurance carriers, our financial condition and results of
operations could be materially and adversely affected.
RISKS
RELATED TO OPERATING OUR BUSINESS IN CHINA
All of
our assets and revenues are derived from our operations located in China.
Accordingly, our business, financial condition, results of operations and
prospects are subject, to a significant extent, to economic, political and legal
developments in China.
The
PRC’s economic, political and social conditions, as well as governmental
policies, could impede the overall economic growth of China and adversely affect
our liquidity and our ability to access to capital and to operate our
business.
We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:
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the
higher level of government
involvement;
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the
early stage of development of the market-oriented sector of the
economy;
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the
rapid growth rate;
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the
higher level of control over foreign exchange;
and
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the
allocation of resources.
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As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us. While the PRC economy has experienced significant growth over the
past several years, the rate of growth has been irregular, both geographically
and among various sectors of the economy, and has recently slowed across all
sectors.
A number
of factors have contributed to this slow-down, including appreciation of
Renminbi, which adversely affected China’s exports, and tightening macroeconomic
measures and monetary policies adopted by the Chinese government aimed at
preventing overheating of the Chinese economy and controlling China’s high level
of inflation. The slow-down has been exacerbated by the recent global crisis in
the financial services and credit markets, which has caused significant
volatility and dislocation of the global capital markets as well as increased
rates of default and bankruptcy. It is uncertain how long the global crises in
the financial services and credit markets will continue and how much adverse
impact it will have on the global economy in general or the Chinese economy in
particular. These macroeconomic developments could negatively affect our
business, operating results, or financial condition in a number of ways. For
instance, current or potential customers may delay or decrease spending with us
or may not pay us or may delay paying us for previously purchased
services.
Recently,
the Chinese economy has experienced periods of rapid expansion. During this
period, there have been high rates of inflation. As a result, the PRC government
adopted various corrective and cool-down measures designed to restrict the
availability of credit or regulate growth and contain inflation. While inflation
has moderated since 1995, high inflation would cause the PRC government to
impose controls on credit and/or prices, which could inhibit economic activity
in China, and thereby affecting the Company’s business operations and prospects
in the PRC.
If
the PRC government finds that the agreements that establish the structure for
operating our China business do not comply with PRC governmental restrictions on
foreign investment in the advertising industry, we could be subject to severe
penalties.
Our media
operations were mainly conducted by Lianhe, Botong, Bona and Quo Advertising
(deconsolidated on January 1, 2010) through commercial agreements arrangement.
PRC regulations require any foreign entities that invest in the advertising
services industry to have at least two years of direct operations in the
advertising industry outside of China. Beginning December 10, 2005, foreign
investors have been allowed to own directly 100% of PRC companies operating an
advertising business if the foreign entity has at least three years of direct
operations in the advertising business outside of China or less than 100% if the
foreign investor has at least two years of direct operations in the advertising
industry. We did not have any PRC operating subsidiaries able to apply for the
required licenses for providing advertising services in China until Yi Gao, an
equity joint venture was formed in late 2009. Before 2008, all of our
advertising business is run through Quo Advertising, which is owned by two PRC
citizens designated by us. Quo Advertising holds the requisite licenses to
provide advertising services in China. We have entered into contractual
agreements with the shareholders of Quo Advertising, which provide us with the
substantial ability to control Quo Advertising and its subsidiaries. In January
2008, we restructured our advertising business after further acquiring the media
companies namely Lianhe and Bona. We, through our newly acquired company,
Lianhe, entered into an exclusive management consulting services agreement and
an exclusive technology consulting services agreement with each of Quo
Advertising, Bona and Botong. In addition, we entered into an equity pledge
agreement and an option agreement with each of the registered PRC shareholders
of Quo Advertising, Bona and Botong designated by us and pursuant to which these
shareholders had pledged 100% of their shares to Lianhe and granted Lianhe the
option to acquire their shares at a mutually agreed purchase price which shall
first be used to repay any loans payable to Lianhe or any affiliate of Lianhe by
the registered PRC shareholders These commercial arrangements enable us to exert
effective control on these entities, and transfer their economic benefits to us
for financial results consolidation.
In early
2010, we start to restructure our organization structure by eliminating variable
interest entities structure and substituting with direct ownership. On January
1, 2010, we consolidate all the business operations of Quo into Yi Gao. We also
plan to transition the operations of Bona and Botong to Yi Gao.
However,
before completing the restructuring, we cannot assure you that our existing PRC
operating subsidiaries and affiliates will not be found to be in violation of
any PRC laws or regulations or fail to obtain or maintain any of the required
permits or approvals, the relevant PRC regulatory authorities, including the
State Administration for Industry and Commerce (SAIC), would have broad
discretion in dealing with such violations, including:
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revoking
the business and operating licenses of our PRC subsidiaries and
affiliates;
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discontinuing
or restricting our PRC subsidiaries’ and affiliates’
operations;
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imposing
conditions or requirements with which we or our PRC subsidiaries and
affiliates may not be able to
comply;
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requiring
us or our PRC subsidiaries and affiliates to restructure the relevant
ownership structure or operation;
or
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restricting
or prohibiting our use of the proceeds of this offering to finance our
business and operations in China.
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The
imposition of any of these penalties would result in a material and adverse
effect on our ability to conduct our business.
We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006.
On August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, which became effective on September 8, 2006. This new regulation,
among other things, governs the approval process by which a PRC company may
participate in an acquisition of assets or equity interests. Depending on the
structure of the transaction, the new regulation will require the PRC parties to
make a series of applications and supplemental applications to the government
agencies. In some instances, the application process may require the
presentation of economic data concerning a transaction, including appraisals of
the target business and evaluations of the acquirer, which are designed to allow
the government to assess the transaction. Government approvals will have
expiration dates by which a transaction must be completed and reported to the
government agencies. Compliance with the new regulations is likely to be more
time consuming and expensive than in the past and the government can now exert
more control over the combination of two businesses. Accordingly, due to the new
regulation, our ability to engage in business combination transactions has
become significantly more complicated, time consuming and expensive, and we may
not be able to negotiate a transaction that is acceptable to our stockholders or
sufficiently protect their interests in a transaction.
The new
regulation allows PRC government agencies to assess the economic terms of a
business combination transaction. Parties to a business combination transaction
may have to submit to the Ministry of Commerce and other relevant government
agencies an appraisal report, an evaluation report and the acquisition
agreement, all of which form part of the application for approval, depending on
the structure of the transaction. The regulations also prohibit a transaction at
an acquisition price obviously lower than the appraised value of the PRC
business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate and complete a
business combination transaction on financial terms that satisfy our investors
and protect our stockholders’ economic interests.
In
addition to the above risks, in many instances, we will seek to structure
transactions in a manner that avoids the need to make applications or a series
of applications with Chinese regulatory authorities under these new M&A
regulations. If we fail to effectively structure an acquisition in a manner that
avoids the need for such applications or if the Chinese government interprets
the requirements of the new M&A regulations in a manner different from our
understanding of such regulations, then acquisitions that we have effected may
be unwound or subject to rescission. Also, if the Chinese government determines
that our structure of any of our acquisitions does not comply with these new
regulations, then we may also be subject to fines and penalties.
We
rely on contractual arrangements and commercial agreement arrangement with our
PRC operating companies and their shareholders for our China operations, which
may not be as effective in providing operational control as direct
ownership.
Our
advertising business was initially run through our contractual arrangements with
our PRC operating companies, Quo Advertising. Quo Advertising was owned by two
PRC citizens designated by us and directly operated our advertising network
projects. In January 2008, we restructured our advertising business after
further acquiring the media companies namely Lianhe and Bona. We, through our
newly acquired company, Lianhe, entered into a series of commercial agreements
with each of Quo Advertising, Bona and Botong and their respective registered
shareholders. It enables us to exert effective control on these entities, and
transfer their economic benefits to us for financial results
consolidation.
These
contractual arrangements and commercial agreement arrangements may not be as
effective in providing us with control over media subsidiaries as direct
ownership. Before we complete the restructuring as aforementioned, under the
current contractual arrangements, as a legal matter, if our PRC operating
companies, Bona and Botong and their registered PRC shareholders fails to
perform its or his/her respective obligations under these contractual
arrangements, we may have to incur substantial costs to enforce such
arrangements, and take legal action to compel him/her to fulfill his/her
contractual obligations. In the event we are unable to enforce these contractual
arrangements, we may not be able to exert effective control over our PRC
operating companies, and our ability to conduct our business may be negatively
affected.
We
rely on trust agreement arrangement with Quo Advertising to control 30% equity
of Yi Gao, which may not be as effective in providing operational control as
direct ownership.
Currently
we are restructuring our operations in China by eliminating variable interest
entities structure and substituting with direct ownership. We aim to consolidate
all our advertising business into Yi Gao. a newly formed advertising joint
venture in China. Yi Gao currently is 70% equity owned by Linkrich Enterprise
Advertising and 30% equity owned by Quo Advertising.
On
January 1, 2010, all the business operations of Quo were transferred to Yi Gao
and the commercial arrangements with Quo were terminated. The stockholders of
Quo were no longer designated by us. In order to enable us to exert 100% control
over the advertisement business of Yi Gao, we have Quo Advertising signed a
trust declaration, which enable Quo Advertising to hold the 30% equity interest
of Yi Gao on behalf and for the benefit of Linkrich Enterprise
Advertising.
Although
the trust arrangement, in the opinion of our PRC legal counsel, are in
compliance with all existing PRC laws, rules and regulations and are enforceable
in accordance with their terms and conditions, there are substantial
uncertainties regarding the interpretation and implementation of current PRC
laws and regulation. Accordingly, we cannot assure you that PRC regulatory
authorities will not determine that our trust arrangements with Quo Advertising
are void. In the event Quo Advertising does not return the equity
interest in Yi Gao to Linkrich Enterprise, or another designated entity, we may
have to incur substantial costs to take legal action to compel Quo Advertising
return the trust property to us. In the event we are unable to get back the
equity interest in Yi Gao, we may not be able to exert 100% control over our PRC
advertisement business, and our ability to conduct our business may be
negatively affected.
The
discontinuation of preferential tax treatments or other incentives for foreign
invested enterprises under the new Enterprise Income Tax Law could materially
impact our business development efforts in China and adversely affect our
business, financial condition and results of
operations.
The
Enterprise Income Tax Law of the People's Republic of China, or New EIT Law, was
promulgated by the PRC’s National People’s Congress on March 16, 2007 to create
a “level playing field” by establishing, effective as of January 1, 2008, a
unified corporate income tax rate, cost deduction and tax incentive policies for
both domestic and foreign-invested enterprises deriving income from the PRC.
Under the prior regulatory scheme, foreign enterprises and foreign invested
enterprises, or FIEs, were generally only required to pay income tax at an
effective rate of approximately 15% to 20%, while domestic Chinese companies
usually have to pay income tax at an effective rate of about 25% or even higher.
The New EIT Law and its implementing rules apply one single income tax rate of
25% to all both domestic and foreign-invested enterprises, except for some
hi-tech enterprises which are subject to EIT rates of 15%. We may not enjoy tax
incentives for our further established companies in the PRC and therefore our
tax advantages over domestic enterprises may be diminished and our business
development in China may be adversely affected.
Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC stockholders.
Under the
New EIT Law, an enterprise established outside of China with “de facto
management bodies” within China is considered a “resident enterprise”, meaning
that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes. The implementing rules of the New EIT Law define
de facto management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. Because the New EIT Law and its implementing rules are new, no
official interpretation or application of this new “resident enterprise”
classification is available. Therefore, it is unclear how tax authorities will
determine tax residency based on the facts of each case.
If the
PRC tax authorities determine that the Company is a “resident enterprise” for
PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as
non-China source income would be subject to PRC enterprise income tax at a rate
of 25%. Second, although under the New EIT Law and its implementing rules
dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt
income”, we cannot guarantee that such dividends will not be subject to a 10%
withholding tax, as the PRC foreign exchange control authorities, which enforce
the withholding tax, have not yet issued guidance with respect to the processing
of outbound remittances to entities that are treated as resident enterprises for
PRC enterprise income tax purposes. Finally, it is possible that future guidance
issued with respect to the new “resident enterprise” classification could result
in a situation in which a 10% withholding tax is imposed on dividends we pay to
our non-PRC stockholders and with respect to gains derived by our non-PRC
stockholders from transferring our shares. We are actively monitoring the
possibility of “resident enterprise” treatment for the 2008 tax year and are
evaluating appropriate organizational changes to avoid this treatment, to the
extent possible. If we were treated as a “resident enterprise” by PRC tax
authorities, we would be subject to taxation in both the U.S. and China, and our
PRC tax may not be creditable against our U.S. tax.
In
addition, our operations and transactions are subject to review by the PRC tax
authorities pursuant to relevant PRC laws and regulations which change
frequently, and their interpretation and enforcement involve uncertainties. For
instance, in the case of some of our acquisitions of offshore entities that
conducted their PRC operations through their affiliates in China, we cannot
assure our investors that the PRC tax authorities will not require us to pay
additional taxes in relation to such acquisitions, in particular where the PRC
tax authorities take the view that the previous taxable income of the PRC
affiliates of the acquired offshore entities needs to be adjusted and additional
taxes be paid. In the event that the sellers failed to pay any taxes required
under PRC laws in connection with these transactions, the PRC tax authorities
might require us to pay the tax together with late-payment interest and
penalties.
The
PRC government exerts substantial influence over the manner in which we conduct
our business activities.
The PRC
economy differs from the economies of most developed countries in many respects,
including the extent of government involvement, level of development, growth
rate, and control of foreign exchange and allocation of resources. The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has implemented measures since the late
1970’s emphasizing the utilization of market forces for economic reform, the
reduction of state ownership of productive assets and the establishment of
improved corporate governance in business enterprises, a substantial portion of
productive assets in China are still owned by the PRC government. In addition,
the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises
significant control over China’s economic growth through allocating resources,
controlling payment of foreign currency-denominated obligations, establishing
monetary policy and providing preferential treatment to particular industries or
companies. These actions, as well as future actions and policies of the PRC
government, could materially affect our liquidity and our ability to access to
capital and to operate our business.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint
ventures.
Restrictions
on currency exchange, including regulation of loans and direct investment by
offshore holding companies to PRC, entities may limit our ability to receive and
use our sales revenue effectively.
Most of
the Company’s sales revenue and expenses are denominated in Renminbi which may
need to be exchanged into other currencies, primarily U.S. dollars, and remitted
outside of the PRC. Effective from July 1, 1996, foreign currency “current
account” transactions by foreign investment enterprises, including Sino-foreign
joint ventures, are no longer subject to the approval of State Administration of
Foreign Exchange, or SAFE, but need only a ministerial review, according to the
Administration of the Settlement, Sale and Payment of Foreign Exchange
Provisions promulgated in 1996, or the FX Regulations. “Current account” items
include international commercial transactions, which occur on a regular basis,
such as those relating to trade and provision of services. Distributions to
joint venture parties also are considered a “current account transaction”. Other
non-current account items, known as “capital account” items, remain subject to
SAFE approval. The Company can obtain foreign currency in exchange for Renminbi
from swap centers authorized by the PRC government. In addition, our PRC
operating subsidiaries may purchase foreign currencies for settlement of current
account transactions, including payments of dividends to us, without SAFE
approval, by complying with certain procedural requirements. The Company does
not anticipate problems in obtaining foreign currency to satisfy its
requirements, but there is no assurance that future foreign currency shortages
or changes in currency exchange laws and regulations by the PRC government will
not restrict the Company from exchanging Renminbi in a timely manner. Since a
significant amount of our future revenue will be denominated in Renminbi, any
existing and future restrictions on currency exchange may limit our ability to
utilize revenue generated in Renminbi to fund our business activities outside
China that are denominated in foreign currencies.
As an
offshore holding company of our PRC operating subsidiaries and affiliates, we
may make loans or contribute additional capital to them or they may seek to
borrow from other foreign lenders. Such loans must be registered with SAFE, and
if we finance the subsidiaries by means of additional capital contributions,
these capital contributions must be approved by certain government authorities,
including the PRC Ministry of Commerce, or their respective local counterparts.
We cannot guarantee that we can obtain these government registrations or
approvals on a timely basis, if at all, with respect to future loans or capital
contributions by us to our operating subsidiaries. If we fail to receive such
registrations or approvals, these would adversely affect the liquidity of our
PRC operating subsidiaries and our ability to expand the business.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and the Renminbi and between those currencies and other
currencies in which our sales may be denominated. Because substantially all of
our earnings and cash assets are denominated in Renminbi and the net proceeds
from this offering will be denominated in U.S. dollars, fluctuations in the
exchange rate between the U.S. dollar and the Renminbi will affect the relative
purchasing power of these proceeds, our balance sheet and our earnings per share
in U.S. dollars following this offering. In addition, appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will also affect the relative value of any dividend we
issue after this offering that will be exchanged into U.S. dollars and earnings
from, and the value of, any U.S. dollar-denominated investments we make in the
future.
Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
the People’s Bank of China regularly intervenes in the foreign exchange market
to prevent significant short-term fluctuations in the exchange rate, the
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the medium to long term. Moreover, it is possible that in the future
the PRC authorities may lift restrictions on fluctuations in the Renminbi
exchange rate and lessen intervention in the foreign exchange
market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.
If
any of our PRC companies becomes the subject of a bankruptcy or liquidation
proceeding, we may lose the ability to use and enjoy those assets, which could
materially affect our business and our ability to generate revenue and the
market price of our common stock, and since our assets are located in the PRC,
stockholders may not receive distributions that they would otherwise be entitled
to.
The
Company’s assets are located in PRC and as such, may be outside of the
jurisdiction of U.S. courts to administer if the Company was the subject of an
insolvency or bankruptcy proceeding. As a result, if the Company were declared
bankrupt or insolvent, the Company’s stockholders may not be able to receive the
distributions on liquidation that they are otherwise entitled to under U.S.
bankruptcy law.
PRC
laws and regulations impose certain restriction on foreign investment in China’s
advertising service industry, and substantial uncertainties exist with respect
to our contractual arrangements with our PRC operating companies.
Since
2005, the PRC government has allowed foreign investors to directly own 100% of
an advertising business if the foreign investor has at least three years of
direct operations in the advertising business outside of China or to own less
than 100% if the foreign investor has at least two years of direct operations in
the advertising industry outside of China. As we do not currently directly
operate an advertising business outside of China, we are not entitled to own
directly 100% of an advertising business in China.
Our
advertising business was initially run through our contractual arrangements with
our PRC operating companies, Quo Advertising. Quo Advertising was owned by two
PRC citizens designated by us and directly operated our advertising network
projects. In January 2008, we restructured our advertising business after
further acquiring the media subsidiaries namely Lianhe and Bona. We, through our
newly acquired company, Lianhe, entered into an exclusive management consulting
services agreement and an exclusive technology consulting services agreement
with each of Quo Advertising, Bona and Botong. In addition, Lianhe also entered
into an equity pledge agreement and an option purchase agreement with each of
the registered PRC shareholders of Quo Advertising, Bona and Botong designated
by us pursuant to which these shareholders had pledged 100% of their shares to
Lianhe and granted Lianhe the option to acquire their shares at a mutually
agreed purchase price which shall first be used to repay any loans payable to
Lianhe or any affiliate of Lianhe by the registered PRC shareholders. These
commercial arrangements enable us to exert effective control on these entities,
and transfer their economic benefits to us for financial results
consolidation.
Although
these contractual arrangements, in the opinion of our PRC legal counsel, are in
compliance with all existing PRC laws, rules and regulations and are enforceable
in accordance with their terms and conditions, there are substantial
uncertainties regarding the interpretation and implementation of current PRC
laws and regulation. We cannot assure you that PRC regulatory authorities will
not determine that our contractual arrangements and the business operations of
our PRC operating companies as described herein violate PRC laws or regulations.
If we or any of our PRC operating companies were found to be in violation of any
existing or future PRC laws or regulations, the relevant regulatory authorities
would have broad discretion in dealing with such violation. Before our
completion of restructuring as aforementioned, any actions taken may cause
disruption to our business operations and may adversely affect our business,
financial condition and results of operation.
The
PRC government regulates the advertising industry. If we fail to obtain or
maintain all pertinent permits and approvals or if the PRC government imposes
more restrictions on this industry, our business may be affected.
The PRC
government regulates the advertising industry. We are required to obtain
applicable permits or approvals from different regulatory authorities to conduct
our business, including separate licenses for advertising activities. If we fail
to obtain or maintain any of the required permits or approvals, we may be
subject to various penalties, such as fines or suspension of operations in these
regulated businesses, which could severely disrupt our business operations. As a
result, our financial condition and results of operations may be negatively
affected.
While
there are no formal PRC laws or regulations that define or regulate out-of-home
advertising, we believe that the relevant PRC government authorities are
currently considering adopting new regulations governing out-of-home
advertising. We cannot predict the timing of establishing such regulations and
their impacts on our Company. Changes in laws and regulations or the enactment
of new laws and regulations governing placement or content of out-of-home
advertising, may affect our business prospects and results of operations. We
cannot predict the ultimate cost for complying with these new requirements. For
instance, the PRC government has promulgated regulations allowing foreign
companies to hold a 100% equity interest in PRC advertising companies starting
from December 10, 2005. We are not certain how the PRC government will
implement this regulation or how it would affect our ability to compete in the
advertising industry in the PRC.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries in
China. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference, but have limited
precedential value. In 1979, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past 28 years has
significantly enhanced the protections afforded to various forms of foreign
investment in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. For
instance, we may have to resort to administrative and court proceedings to
enforce the legal protection that we are entitled to by law or contract. Any
litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention .Since PRC administrative and
court authorities have significant discretion in interpreting statutory and
contractual terms, it may be difficult to evaluate the outcome of administrative
court proceedings and the level of law enforcement that we would receive in more
developed legal systems. Such uncertainties, including the inability to enforce
our contracts, especially our contractual arrangements among Lianhe, Quo
Advertising, Bona and Botong are governed by the PRC law, could adversely affect
our business and operation. We cannot predict the effect of future developments
in the PRC legal system, particularly with regard to the industries in which we
operate, imposed on our business.
In
addition, all of our executive officers and all but one of our directors are
residents of China and not of the United States, and substantially all the
assets of these persons are located outside the United States. As a result, it
could be difficult for investors to effect service of process in the United
States or to enforce a judgment obtained in the United States against our
Chinese officers, directors and subsidiaries.
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.
The PRC
National Development and Reform Commission, or the NDRC, and SAFE recently
promulgated regulations that require PRC residents and PRC corporate entities to
register with and obtain approvals from relevant PRC government authorities in
connection with their direct or indirect offshore investment activities. These
regulations apply to our shareholders who are PRC residents and may apply to any
offshore acquisitions that we make in the future.
In
October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the
Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China, or the SAFE Notice, which requires
PRC residents to register with the competent local SAFE branch before using
onshore assets or equity interests held by them to establish offshore special
purpose companies, or SPVs, for the purpose of overseas equity financing. Under
the SAFE Notice, such PRC residents must also file amendments to their
registration in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations.
Moreover, if the SPVs were established and owned the onshore assets or equity
interests before the implementation date of the SAFE Notice, a retroactive SAFE
registration is required to have been completed before March 31, 2006. If any
PRC resident stockholder of any SPV fails to make the required SAFE registration
and amended registration, the PRC subsidiaries of that SPV may be prohibited
from distributing their profits and the proceeds from any reduction in capital,
share transfer or liquidation to the SPV. Failure to comply with the SAFE
registration and amendment requirements described above could also result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions.
Because
of uncertainty over how the SAFE Notice will be interpreted and implemented, and
how or whether SAFE will apply it to us, we cannot predict how it will affect
our business operations or future strategies. For example, our present and
prospective PRC subsidiaries’ ability to conduct foreign exchange activities,
such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with the SAFE Notice by our PRC resident beneficial
holders. In addition, such PRC residents may not always be able to complete the
necessary registration procedures required by the SAFE Notice. We also have
little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with the SAFE Notice, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiaries’ ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
Our
subsidiaries and affiliated Chinese entities in China are subject to
restrictions on paying dividends or making other payments to us, which may
restrict our ability to satisfy our liquidity requirements.
We rely
on dividends from our subsidiaries in China and consulting and other fees paid
to us by our affiliated Chinese entities. Current PRC regulations permit our
subsidiaries to pay dividends to us only out of their accumulated profits, if
any, determined in accordance with Chinese accounting standards and regulations.
In addition, our subsidiaries in China are required to set aside at least 10% of
their respective accumulated profits each year, if any, to fund certain reserve
funds. These reserves are not distributable as cash dividends. Further, if our
subsidiaries and affiliated Chinese entities in China incur debt on their own
behalf, the instruments governing the debt may restrict their ability to pay
dividends or make other payments to us, which may restrict our ability to
satisfy our liquidity requirements.
The
implementation of the PRC Labor Contract Law may significantly increase our
operating expenses and adversely affect our business and results of
operations.
On June
29, 2007, the PRC National People’s Congress enacted the Labor Contract Law,
which became effective on January 1, 2008. The Labor Contract Law formalizes
worker’s rights concerning overtime hours, pensions, layoffs, employment
contracts and the role of trade unions and provides for specific standards and
procedure for the termination of an employment contract. In addition, the Labor
Contract Law requires the payment of a statutory severance pay upon the
termination of an employment contract in most cases, including in cases of the
expiration of a fixed-term employment contract. As there has been little
guidance as to how the Labor Contract Law will be interpreted and enforced by
the relevant PRC authorities, there remains substantial uncertainty as to its
potential impact on our business and results of operations. The implementation
of the Labor Contract Law may significantly increase our operating expenses, in
particular our personnel expenses, as the continued success of our business
depends significantly on our ability to attract and retain qualified personnel.
In the event that we decide to terminate some of our employees or otherwise
change our employment or labor practices, the Labor Contract Law may also limit
our ability to effect these changes in manner that we believe to be
cost-effective or desirable, which could adversely affect our business and
results of operations.
Any
future outbreak of severe acute respiratory syndrome or avian flu in China, or
similar adverse public health developments, may severely disrupt our business
and operations.
From
December 2002 to June 2003, China and certain other countries experienced an
outbreak of a new and highly contagious form of atypical pneumonia now known as
severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health
Organization declared that the SARS outbreak had been contained. However,
following this declaration, a number of isolated new cases of SARS have been
reported, mostly recently in central China in April 2004. During May and June of
2003, many businesses in China were closed by the PRC government to prevent
transmission of SARS. In addition, during 2005 and 2006 China reported cases of
humans becoming infected with a strain of avian influenza or bird flu known as
H5N1, which is often fatal to humans. This disease, which is spread through
poultry populations, is capable in some circumstances of being transmitted to
humans and is often fatal. A new outbreak of SARS or an outbreak of avian flu
may reduce the level of economic activity in affected areas and deter people
from congregating in public places, which may lead to a reduction in our
advertising revenue as our clients may cancel existing contracts or defer future
advertising expenditures. In addition, health or other government authorities
may require temporary closure of our offices, or the offices, where we provide
our advertising services. All these will severely disrupt our business
operations and have a material adverse effect on our financial condition and
results of operations.
RISKS
RELATED TO OUR INDUSTRY
The
media and advertising industry is sensitive to changes in economic conditions
and advertising trends.
The media
and advertising industry is particularly sensitive to changes in general
economic conditions and advertising trends. A deterioration of economic
conditions would usually lead to a decrease in demand for advertising,
Advertisers may reduce the money they spend on purchasing advertising airtime
for a number of reasons, including but not limited to the
followings:
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a
general decline in economic
conditions
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a
decline in economic conditions in the particular cities where we conduct
business
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a
decision to shift advertising expenditures to other available advertising
media
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a
decline in advertising expenditure in
general
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A
decrease in demand for advertising airtime in general and for our advertising
services in particular would impair our ability to generate advertising revenues
and our business, results of operations and financial condition could be
materially and adversely affected.
The
media and advertising industry is highly competitive and our inability to
compete with companies that are larger and better capitalized than we are may
adversely affect our business and results of operations.
We have
to compete with other advertising companies in the out-of-home advertising
market. We compete for advertising clients primarily in terms of network size
and coverage, locations of our LED panels and billboards, pricing, and range of
services that we can offer. We also face competition from advertisers in other
forms of media such as out-of-home television advertising network in commercial
buildings, hotels, restaurants, supermarkets and convenience chain stores. We
expect that the competition will be more severe in the near future. The
relatively low fixed costs and the practice of non-exclusive arrangement with
advertising clients would provide a very low barrier for new entrants in this
market segment. Moreover, international advertising media companies have been
allowed to operate in China since 2005, exposing us to even greater
competition.
It
becomes more difficult to increase the number of desirable locations in major
cities because most of the locations have already been occupied by our
competitors and limitation by municipal zoning and planning policies. In other
cities, although we could increase the locations, they would only generate less
economic return to the Company. Anyway, we anticipate the economic return would
increase with the pace of economic development of these cities. If we are unable
to increase the placement of our out-of-home advertising market, we may be
unable to expand our client base to sell advertising time slots on our network
or increase the rates we charge for time slots. As a consequence of this, our
operating margins and profitability may be reduced, and may result in a loss of
market share. Since we are a new entrant to this market segment, we have less
competitive advantages than the existing competitors in terms of experience,
expertise, and marketing force. The Company is tackling these problems by
further acquisition of well-established advertising company like Lianhe and
Bona. We cannot assure that we will be able to compete against new or existing
competitors to generate satisfactory profit.
Furthermore,
due to the less desirable locations currently the Company has, we can only
charge the advertisers at a lower rates. If the Company is unable to
continuously secure more desirable locations for deployment of our advertising
poster frames, we may be unable or need to lower our rates to attract
advertisers to purchase time slots from us to generate satisfactory
profit.
If
we cannot enter into further agreements for roadside LED video panels and
mega-size digital video billboards in other major cities in China, we may be
unable to grow our revenue base and generate higher levels of
revenue.
We needs
to continue geographic expansion in the media network market by entering into
business cooperation agreements with local advertising companies to operate and
manage our roadside LED video panels and mega-size digital video billboards in
China. We are currently searching for more opportunities. However, many of the
most desirable locations in the major cities have been occupied by our
competitors. If we are unable to or need to pay extra considerations in order to
enter into any new agreements, it may highly increase our costs of sales and may
be unable to convince our advertisers to purchase more advertising time and
generate our satisfactory profits.
If
we are unable to attract advertisers to advertise on our networks, we will be
unable to grow our revenue base to generate revenues.
We charge
our advertisers based on the time that is used on our roadside LED video panels
and mega-size digital video billboards. The desire of advertisers to advertise
on our out-of-home media networks depends on the size and coverage of the
networks, the desirability of the locations of the LED panels and billboards,
our brand name and charging rate. If we fail to increase the number of
locations, displays and billboards in our networks to provide the advertising
services to suit the needs of our advertisers, we may be unable to attract them
to purchase our advertising time to generate revenues.
We
generally do not have exclusive or long-term agreements with our advertising
clients and we may lose their engagement if they are not satisfied with our
services or for other reasons.
As is
customary in the advertising industry in China, we generally do not have
exclusive or long-term agreements with our advertising clients. A majority of
our agreements with our advertising clients have a term of less than a year. As
a result, we must rely on high-quality services, industry reputation, our
network size and coverage and favorable pricing to attract and retain
advertising clients. There is no assurance, however, that we will be able to
maintain our relationships with current and/or future clients. Our other
advertising clients may elect to terminate their relationships with us if they
are not satisfied with our services. We lost client accounts in the past and may
lose client accounts in the future. If a substantial number of our advertising
clients choose not to continue to purchase advertising time from us, we would be
unable to generate sufficient revenues and cash flows to operate our business,
and our results of operations and financial condition would be materially and
adversely affected.
If
the public does not accept our out-of-home advertising media, we will be unable
to generate revenue.
The
out-of-home advertising network that we are developing is a rather new concept
in China. It is too early to conclude whether the public accept this advertising
means or not. If the public is receptive toward our new media network, our
advertisers will continue to purchase the advertising air-time from us. However,
in case the public finds any element such as the audio or video features in our
media network to be disruptive or intrusive, advertisers may withdraw their
requests for purchasing time slots from us and to advertise on other networks.
Such uncertainty could adversely affect our revenue.
We
may be subject to government regulations in installing our out-of-home roadside
LED video panels and mega-size digital video billboards advertising
network.
The
placement and installation of LED panels and billboards are subject to municipal
zoning requirements and governmental approvals. We are required to obtain
approvals for construction permits from the relevant supervisory departments of
the PRC government for each installation of roadside LED video panel and
mega-size digital video billboard. We cannot assure you that we can obtain all
the relevant government approvals for all of our installations in China. If such
approvals are delayed or are not granted, we will be unable to install LED
panels or billboards on schedule, if at all, and we may incur additional
installation costs or loss of advertising revenue.
If
we are unable to adapt to changing advertising trends and the technology needs
of advertisers and consumers, we will not be able to compete effectively and we
will be unable to increase or maintain our revenues, which may affect our
business prospects and revenues.
The
market for out-of-home advertising requires us to research new advertising
trends and the technology needs of advertisers and consumers, which may require
us to develop new features and enhancements for our advertising network. The
majority of our displays use medium-size roadside LED video panels and mega-size
LED digital video billboards. We are currently researching ways that we may be
able to utilize other technology such as cable or broadband networking, advanced
audio technologies and high-definition panel technology. Development and
acquisition costs may have to be incurred in order to keep pace with new
technology needs but we may not have the financial resources necessary to fund
and implement future technological innovations or to replace obsolete
technology. Furthermore, we may fail to respond to these changing technology
needs. For instance, if the use of wireless or broadband networking capabilities
on our advertising network becomes a commercially viable alternative and meets
all applicable PRC legal and regulatory requirements, and we fail to implement
such changes on our out-of-home network and in-store network or fail to do so in
a timely manner, our competitors or future entrants into the market who do take
advantage of such initiatives could gain a competitive advantage over us. If we
cannot succeed in developing and introducing new features on a timely and
cost-effective basis, advertiser demand for our advertising networks may
decrease and we may not be able to compete effectively or attract advertising
clients, which would have an effect on our business prospects and
revenues.
We
may be subject to, and may expend significant resources in defending against,
government actions and civil suits based on the content and services we provide
through our digital out-of-home advertising networks.
PRC
advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the
content of the advertisements they prepare or distribute is fair and accurate
and is in full compliance with applicable law. Violation of these laws or
regulations may result in penalties, including fines, confiscation of
advertising fees, orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the PRC government may revoke a
violator’s license for advertising business operations.
As an
out-of-home advertising, we are obligated under PRC laws, rules and regulations
to monitor the advertising content aired on our network or stationary
advertising platform for compliance with applicable laws. Although the
advertisements shown on our network generally have previously been broadcast
over public television networks and have been subjected to internal review and
verification by these broadcasters, we are required to separately and
independently review and verify these advertisements for content compliance
before displaying these advertisements. In addition, for advertising content
related to special types of products and services, such as alcohol, cosmetics,
pharmaceuticals and medical procedures, we are required to confirm that the
advertisers have obtained requisite government approvals including the
advertisers’ operating qualifications, proof of quality inspection of the
advertised products, government pre-approval of the contents of the
advertisement and filing with the local authorities. We employ, qualified
advertising inspectors who are trained to review advertising content for
compliance with applicable PRC laws, rules and regulations. We endeavor to
comply with such requirements, including by requesting relevant documents from
the advertisers. Further, out-of-home advertisements must be registered with the
local branch of the State Administration for Industry and Commerce, or SAIC,
before dissemination, and advertising distributors are required to submit a
registration application form and the content of the advertisement to the local
SAIC and receive an advertising registration certificate from the local SAIC.
Our reputation will be tarnished and our results of operations may be adversely
affected if advertisements shown on our digital out-of-home advertising network
are provided to us by our advertising clients in violation of relevant PRC
content laws and regulations, or if the supporting documentation and government
approvals provided to us by our advertising clients in connection with such
advertising content are not complete, or if the advertisements are not content
compliant.
Moreover,
civil claims may be filed against us for fraud, defamation, subversion,
negligence, copyright or trademark infringement or other violations due to the
nature and content of the information displayed on our advertising network. If
consumers find the content displayed on our advertising network to be offensive
the authority parties may seek to hold us responsible for any consumer claims or
may terminate their relationships with us.
In
addition, if the security of our content management system is breached and
unauthorized images, text or audio sounds are displayed on our advertising
network, viewers or the PRC government may find these images, text or audio
sounds to be offensive, which may subject us to civil liability or government
censure despite our efforts to ensure the security of our content management
system. Any such event may also damage our reputation. If our advertising
viewers do not believe our content is reliable or accurate, our business model
may become less appealing to viewers in China and our advertising clients may be
less willing to place advertisements on our advertising network.
We
may be subject to intellectual property infringement claims, which may force us
to incur substantial legal expenses and could potentially result in judgments
against us, which may materially disrupt our business.
We cannot
be certain that our advertising content, entertainment content or other aspects
of our media business do not or will not infringe upon patents, copyrights or
other intellectual property rights held by third parties. Although we are not
aware of any such claims, we may become subject to legal proceedings and claims
from time to time relating to the intellectual property of others in the
ordinary course of our business. If we are found to have violated the
intellectual property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be forced to develop
alternatives. In addition, we may incur substantial expenses in defending
against these third party infringement claims, regardless of their merit.
Successful infringement or licensing claims against us may result in substantial
monetary liabilities, which may materially and adversely disrupt our
business.
We
may be, or may be joined as, a defendant in litigation brought against our
clients or our local operating partners by third parties, governmental or
regulatory authorities, consumers or competitors, which could result in
judgments against us and materially disrupt our business.
From time
to time, we may be, or may be joined as, a defendant in litigation brought
against our clients or our local operating partners by third parties,
governmental or regulatory authorities, consumers or competitors. These actions
could involve claims alleging, among other things, that:
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advertising
claims made with respect to our client’s products or services are false,
deceptive or misleading;
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our
clients’ products are defective or injurious and may be harmful to others;
marketing, communications or advertising materials created for our clients
infringe on the proprietary rights of third parties;
or
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our
relationships with our local operating partners violate or interfere with
the contractual relationships or rights of third
parties;
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The
damages, costs, expenses and attorneys’ fees arising from any of these claims
could have an adverse effect on our business, results of operations, financial
condition and prospects. In any case, our reputation may be negatively affected
by these allegations.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could have a
material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or the FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute, for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and we make sales in China. Our
activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents or distributors of our
Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be
less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA may result in severe criminal or civil
sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition. In addition, the
U.S. government may seek to hold our Company liable for successor liability FCPA
violations committed by companies in which we invest or that we
acquire.
RISKS
RELATED TO OUR COMMON STOCK
Although
publicly traded, the trading market in our common stock has been substantially
less liquid than the average trading market for a stock quoted on the OTCBB and
this low trading volume may adversely affect the price of our common
stock.
Our
common stock started trading on the Over-the-Counter Bulletin Board, or OTCBB,
under the symbol “NWCN”. The trading market in our common stock has been
substantially less liquid than the average trading market for companies quoted
on the OTCBB. Reported average daily trading volume in our common stock for the
year ended December 31, 2009, was approximately 22,086 shares. Limited trading
volume will subject our shares of common stock to greater price volatility and
may make it difficult for you to sell your shares of common stock at a price
that is attractive to you.
The
market price of our common stock is volatile, leading to the possibility of its
value being depressed at a time when you want to sell your
holdings.
The
market price of our common stock is volatile, and this volatility may continue.
For instance, between January 1, 2009 and December 31, 2009, the closing bid
price of our common stock, as reported on the markets on which our securities
have traded, ranged between $0.15 and $0.03. Numerous factors, many of which are
beyond our control, may cause the market price of our common stock to fluctuate
significantly. These factors include:
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our
actual or anticipated changes in our earnings, fluctuations in our
operating results or our failure to meet the expectations of financial
market analysts and investors;
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changes
in financial estimates by us or by any securities analysts who might cover
our stock;
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speculation
about our business in the press or the investment
community;
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significant
developments relating to our relationships with our customers or
suppliers;
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stock
market price and volume fluctuations of other publicly traded companies
and, in particular, those that are in the advertising
industry;
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customer
demand for our products;
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investor
perceptions of our industry in general and our company in
particular;
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the
operating and stock performance of comparable
companies;
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general
economic conditions and trends;
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major
catastrophic events;
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announcements
by us or our competitors of new products, significant acquisitions,
strategic partnerships or
divestitures;
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changes
in accounting standards, policies, guidance, interpretation or principles;
and
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loss
of external funding sources.
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Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could result in
substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price
and volume fluctuations for reasons unrelated to operating performance of
particular companies. For example, in October 2008, the securities markets in
the United States, China and other jurisdictions experienced the largest decline
in share prices since the “Black Monday” crash on October 19, 1987. These market
fluctuations may adversely affect the price of our common stock and other
interests in our company at a time when you want to sell your interest in
us.
A
decline in the price of our shares of common stock could affect our ability to
raise further working capital and adversely impact our operations.
A
prolonged decline in the price of our shares of common stock could result in a
reduction in the liquidity of our shares of common stock and a reduction in our
ability to raise capital. Any reduction in our ability to raise equity capital
in the future would force us to reallocate funds from other planned uses and
would have a significant negative effect on our business plans and operations,
including our ability to develop our business and continue our current
operations. If the stock price declines, there can be no assurance that we can
raise additional capital or generate funds from operations sufficient to meet
our obligations.
If
we issue additional shares, this may result in dilution to our existing
stockholders.
Our
Certificate of Incorporation authorizes the issuance of 2,000,000,000 shares of
common stock and 5,000,000 shares of preferred stock. Our board of directors has
the authority to issue additional shares up to the authorized capital stated in
the Certificate of Incorporation. Our board of directors may choose to issue
shares to acquire one or more businesses or to provide additional financing in
the future. The issuance of shares may result in a reduction of the book value
or market price of the outstanding shares of our common stock. If we issue
additional shares, there may be a reduction in the proportionate ownership and
voting power of all other stockholders. Further, any issuance may result in a
change of control of the Company.
Our
authorized preferred stock constitutes what is commonly referred to as “blank
check” preferred stock. This type of preferred stock allows the board of
directors to designate the preferred stock into a series, and determine
separately for each series any one or more relative rights and preferences. The
board of directors may issue shares of any series without further stockholder
approval. Preferred stock authorized in series allows our board of directors to
hinder or discourage an attempt to gain control by a merger, tender offer at a
control premium price, or proxy contest. Consequently, the preferred stock could
entrench our management. In addition, the market price of our common stock could
be affected by the existence of the preferred stock.
We
may be subject to penny stock regulations and restrictions which may limit a
stockholder’s ability to buy and sell our stock on the secondary
market.
The SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. As of March
16, 2010, the closing bid and asked price for our common stock was $0.02 per
share, which designates it as a “penny stock”. As a “penny stock”, our common
stock may become subject to Rule 15g-9 under the Exchange Act, or the “Penny
Stock Rule”. This rule imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction prior to sale. As a
result, this rule may affect the ability of broker-dealers to sell our
securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market. Disclosure is also required to be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stock.
There can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule. In any event, even if our common stock were exempt from the Penny
Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a
distribution of penny stock, if the SEC finds that such a restriction would be
in the public interest. The penny stock rules could discourage investors from
purchasing our common stock and thereby limit its marketability.
FINRA
sales practice requirements may also limit a stockholder’s ability to buy and
sell our stock.
In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority, or FINRA, promulgates rules that require a broker-dealer,
when providing investment recommendations, must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending low priced securities to their non-institutional customers,
broker-dealers must make reasonable efforts to obtain information about the
customer’s financial status, tax status and investment objectives. Under
interpretations of these rules, FINRA believes that there is a high probability
that low priced securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to recommend their
customers buying our common stock, which may limit ability of our investors to
buy and sell our stock and hence have an effect on the market for our
shares.
Stockholders
should have no expectation of any dividends.
The
holders of our common stock are entitled to receive dividends, when, as and if
declared by the board of directors out of funds of the Company legally available
for the payment of dividends. To date, we have not declared nor paid any cash
dividends. The board of directors does not intend to declare any dividends in
the near future, but instead intends to retain all earnings, if any, to finance
the development and expansion of our business and operations. Accordingly,
investors must be prepared to rely on sales of their common stock after price
appreciation to earn an investment return, which may never occur. Investors
seeking cash dividends should not purchase our common stock. Any determination
to pay dividends in the future will be made at the discretion of our board of
directors and will depend on our results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law and other
factors our board deems relevant.
A
significant percentage of our outstanding ordinary shares is beneficially owned
by a company, Keywin Holdings Limited of which Dr. Earnest Leung, our chief
executive officer is the director, and as a result, he may have significantly
greater influence on us and our corporate actions by nature of the size of
Keywin’s shareholdings relative to our public shareholders.
Keywin
Holdings Limited beneficially owns approximately 27.8% of our outstanding
ordinary shares. Accordingly, Earnest Leung, as a director of Keywin Holdings
limited, has significant influence in determining the outcome of any corporate
transaction or other matter submitted to the shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
our assets, election of directors and other significant corporate actions.
Without Earnest Leung’s consent, we could be prevented from entering into
transactions or conducting business that could be beneficial to us. Accordingly,
Dr. Earnest Leung’s control of the Company could hinder any change in
control of our business, particularly where such change of control would benefit
shareholders other than Dr. Earnest Leung. It would be difficult for us to
change our corporate structure if any disputes arise between us and
Dr. Earnest Leung or if he fails to carry out his contractual and fiduciary
obligations to us. Thus, Earnest Leung’s interests as an officer and employee
may differ from his interests as a shareholder or from the interests of our
other shareholders, including you.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We occupy
871 square feet of executive office space at Suite 3908, Shell Tower, Times
Square, 1 Matheson Street, Causeway Bay, Hong Kong, for $8,846 per month
(including office facilities), pursuant to a half-year agreement commencing
November 1, 2009 between the Company’s wholly owned subsidiary NCN Group
Management Limited and our related company, Vision Tech International Holdings
Limited .
We also
maintain office space in Beijing and Shanghai for certain of our PRC
operating companies. Our Beijing office occupies 150 square meters of space at
Room 1611, Full Link Plaza No. 18, Chaoyangmenwai Ave, Beijing, China, for
$2,206 per month, pursuant to a 2-year lease agreement commencing November
18, 2009 between the Company’s wholly owned subsidiary, Lianhe and Beijing Full
Link Plaza Mansion Co., Ltd; and our Shanghai office currently occupies 359.7
square meters of space at Flat A, 21/F, No. 580 Nanjing West
Road, Shanghai, China, for $8,823 per month, pursuant to a 2 year
lease agreement commencing January 1, 2010 to December 31, 2011 between the
Company’s subsidiary, Yi Gao and Quo Advertising, our former PRC operating
company which was deconsolidated in 2010.
We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business.
ITEM
3. LEGAL PROCEEDINGS
On March
20, 2008, our wholly-owned subsidiary, NCN Huamin, entered into a rental
agreement with Beijing Chengtian Zhihong TV & Film Production Co., Ltd., or
Chengtian, pursuant to which a certain office premises located in Beijing was
leased from Chengtian to NCN Huamin for a term of three years, commencing April
1, 2008. On December 30, 2008, NCN Huamin issued a notice to Chengtian to
terminate the rental agreement effective on December 31, 2008 due to the fact
that Chengtian had breached several provisions of the rental agreement and
refused to take any remedial actions. On January 14, 2009, NCN Huamin received a
notice from Beijing Arbitration Commission that Chengtian, as plaintiff, had
initiated a lawsuit against NCN Huamin seeking an aggregate of approximately
$505,000 for unpaid rental-related expenses, plus accrued interest, as well as
compensation for unilateral termination of the rental contract. On February 25,
2009, NCN Huamin counter-claimed for breach of rental contract against
Chengtian, seeking an aggregate of approximately $155,000 from Chengtian for
overpayment of rental expenses and compensation for Chengtian’s breach of
contract. In July 2009, the Beijing Arbitration Commission made a judgment that
Huamin is liable to pay Chengtian of $280,000. In October, 2009, the Company
appealed to Beijing Second Intermediate People's Court against the arbitration
decision. On December 18, 2009, Beijing Second Intermediate People’s Court made
a final judgment to rescind the original judgment made by the Beijing
Arbitration Commission. At present, no further legal actions have been taken or
lawsuit was filed by Chengtian against Huamin. We do not believe that the
outcome of this litigation will have a material impact on our consolidated
financial statements, or our results of operations.
Other
than as described above, we are not aware of any material, active or pending
legal proceedings against the Company or its subsidiaries or variable interest
entities, nor are we involved as a plaintiff in any material proceeding or
pending litigation. There are no proceedings adverse to the Company in which any
of our directors, officers or affiliates of the Company, any owner of record or
beneficiary of more than 5% of any class of voting securities of the Company, or
security holder is a party or has a material interest.
ITEM 4. REMOVED AND
RESERVED.
PART
II
|
ITEM
5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for Our Common Stock
Since
August 1, 2006, our common stock has been listed on the Over-the-Counter
Bulletin Board, or OTCBB, maintained by the Financial Industry Regulatory
Authority, under the symbol “NWCN.OB”. Prior to that date, our common stock had
been quoted on the OTCBB under the symbol “TTVL.OB”. On March 16, 2010, the last
reported sales price of our common stock on the OTCBB was $0.02 per share. The
CUSIP number is 64125G100.
The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
|
Closing Prices (1)
|
|||||
|
High
|
Low
|
||||
|
FISCAL
YEAR ENDED DECEMBER 31, 2009:
|
|||||
|
Fourth Quarter
|
$0.12
|
$0.05
|
|||
|
Third Quarter
|
$0.12
|
$0.03
|
|||
|
Second Quarter
|
$0.12
|
$0.03
|
|||
|
First Quarter
|
$0.15
|
$0.03
|
|||
|
FISCAL
YEAR ENDED DECEMBER 31, 2008:
|
|||||
|
Fourth Quarter
|
$0.90
|
$0.15
|
|||
|
Third Quarter
|
$2.00
|
$0.90
|
|||
|
Second Quarter
|
$2.08
|
$1.50
|
|||
|
First Quarter
|
$2.51
|
$1.85
|
|||
|
(1)
|
The
above tables set forth the range of high and low closing prices per share
of our common stock as reported by www.bloomberg.com
for the periods indicated.
|
||||
Approximate
Number of Holders of Our Common Stock
As of
March 15, 2010, the Company had approximately 140 stockholders of record and
422,522,071 shares of common stock were issued and outstanding. Because some of
our common stock is held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.
Holladay
Stock Transfer is the registrar and transfer agent for our common stock. Their
address is 2939 North 67th Place, Suite C, Scottsdale, Arizona 85251, USA and
their telephone number and facsimile are (480) 481-3940 and (480) 481-3941,
respectively.
Dividend
Policy
The
Company has not declared any dividends since incorporation and does not
anticipate doing so in the foreseeable future. We currently intend to retain
most, if not all, of our available funds and any future earnings to operate and
expand our business.
As we are
a holding company, we rely on dividends paid to us by our subsidiaries in the
PRC through our Hong Kong subsidiaries, Cityhorizon Hong Kong and Linkrich
Enterprise. In accordance with its articles of association, each of our
subsidiaries in the PRC is required to allocate to its enterprise development
reserve at least 10% of its respective after-tax profits determined in
accordance with the PRC accounting standards and regulations. Each of our
subsidiaries in the PRC may stop allocations to its general reserve if such
reserve has reached 50% of its registered capital. Allocations to the reserve
can only be used for making up losses and other specified purposes and may not
be paid to us in forms of loans, advances, or cash dividends. Dividends paid by
our PRC subsidiaries to Cityhorizon Hong Kong and Linkrich Enterprise, our Hong
Kong subsidiaries, will not be subject to Hong Kong capital gains or other
income tax under current Hong Kong laws and regulations because they will not be
deemed to be assessable income derived from or arising in Hong
Kong.
Our board
of directors has discretion on whether to pay dividends unless the distribution
would render us unable to repay our debts as they become due. Even if our board
of directors decides to pay dividends, the form, frequency and amount will
depend upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and other factors
that the board of directors may deem relevant. For instance, the terms of the
outstanding promissory notes issued to affiliated funds of Och-Ziff on April 2,
2009 contain restrictions on the payment of dividends. The dividend restrictions
provide that the Company or any of its subsidiaries shall not declare or pay
dividends or other distributions in respect of the equity securities of such
entity other than dividends or distributions of cash which amounts during any
12-month period that exceed ten percent (10%) of the consolidated net income of
the Company based on the Company’s most recent audited financial statements
disclosed in the Company’s annual report on Form 10-K (or equivalent form) filed
with the U.S. Securities and Exchange Commission.
Performance
Graph
The
following performance graph* compares, for the five year period ended December
31, 2009, the cumulative total stockholder return for the Company’s common stock
quoted on the OTCBB,
the
Standard & Poor’s 500 Stock Index, or the S&P 500 Index, and the
NASDAQ Stock Market (U.S. Companies) Index, or the NASDAQ Stock Market
Index.
The graph assumes that $100 was invested on December 31, 2004 in the
common stock of the Company, the OTCBB, the NASDAQ Stock
Market and the S&P 500 Index, assumes reinvestment of
any dividends. Measurement points are the last trading day of each of the
Company’s years ended December 31, 2005, 2006, 2007, 2008 and 2009. The stock
price performance on the following graph is not necessarily indicative of future
stock price performance.
* This
performance graph shall not be deemed “filed” for purposes of Section 18 of the
Exchange Act or otherwise, subject to the liabilities under that Section and
shall not be deemed to be incorporated by reference into any filing of the
Company under the Securities Act of 1933, as amended or the Exchange
Act.
Securities
Authorized for Issuance Under Equity Compensation Plans
See Item
12. “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters — Securities Authorized for Issuance Under Equity
Compensation Plans”.
Recent
Sales of Unregistered Securities
During
the fiscal year ended December 31, 2009 we did not offer or sell any
unregistered securities that were not previously disclosed in a quarterly report
on Form 10-Q or in a current report on Form 8-K.
Purchases
of Our Equity Securities
No
repurchases of our common stock were made during the fourth quarter of our
fiscal year ended December 31, 2009.
ITEM
6. SELECTED FINANCIAL DATA
The
following selected consolidated financial data should be read in conjunction
with Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
and the Consolidated Financial Statements and Notes to Financial
Statements.
Consolidated
Statements of Operations Data
|
Years
ended December 31
|
||||||||||||||||||||
|
2009
|
2008
|
2007(1)
|
2006
|
2005
|
||||||||||||||||
|
Revenues
|
$ | 1,266,927 | $ | 4,622,270 | $ | 1,442,552 | $ | - | $ | - | ||||||||||
|
Cost
of revenues
|
(2,067,881 | ) | (17,374,713 | ) | (2,795,188 | ) | - | - | ||||||||||||
|
Operating
expenses
|
(5,423,074 | ) | (40,099,318 | ) | (12,088,954 | ) | (4,892,856 | ) | (421,439 | ) | ||||||||||
|
Other
income
|
36,572 | 91,348 | 23,414 | 35,569 | - | |||||||||||||||
|
Interest
and other debt-related expenses
|
(31,195,905 | ) | (7,082,378 | ) | (329,194 | ) | (358 | ) | - | |||||||||||
|
Net
loss from continuing operations
|
(37,383,361 | ) | (59,842,791 | ) | (13,755,038 | ) | (4,889,277 | ) | (381,804 | ) | ||||||||||
|
Net
income (loss) from discontinued operations
|
- | 45,041 | (953,629 | ) | 395,923 | (1,670,016 | ) | |||||||||||||
|
Net
loss attributable to NCN common stockholders
|
(37,359,188 | ) | (59,484,833 | ) | (14,646,619 | ) | (4,468,706 | ) | (2,051,455 | ) | ||||||||||
|
Net
loss per share from continuing operations attributable to NCN common
stockholders – basic and diluted
|
$ | (0.12 | ) | $ | (0.83 | ) | $ | (0.20 | ) | $ | (0.10 | ) | $ | (0.02 | ) | |||||
Consolidated
Balance Sheets Data
|
Years
ended December 31
|
|||||||||||||||||||||
|
2009
|
2008
|
2007(1)
|
2006
|
2005
|
|||||||||||||||||
|
Cash
|
$ | 1,969,549 | $ | 7,717,131 | $ | 2,233,528 | $ | 2,898,523 | $ | 85,919 | |||||||||||
|
Prepayments
for advertising operating rights, net
|
348,239 | 418,112 | 13,636,178 | - | - | ||||||||||||||||
|
Total
assets
|
4,655,442 | 13,072,666 | 27,107,343 | 10,527,134 | 3,289,603 | ||||||||||||||||
|
Convertible
promissory notes
|
3,854,934 | 30,848,024 | 12,626,292 | - | - | ||||||||||||||||
|
Total
liabilities
|
6,146,648 | 36,428,883 | 16,120,533 | 1,011,780 | 1,301,123 | ||||||||||||||||
|
Stockholders’
(deficit) equity
|
$ | (1,491,206 | ) | $ | (23,356,217 | ) | $ | 10,638,936 | $ | 9,425,252 | $ | 1,988,796 | |||||||||
(1)
Restated to correct the accounting errors arising from our misapplication
of accounting policies to the discount associated with the beneficial conversion
feature attributed to the issuance of the 3% convertible promissory notes in
2007 and 2008. Please refer to Notes 3 to the consolidated financial statements
for details.
|
ITEM
7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this Report. In addition to
historical information, the following discussion contains certain
forward-looking information. See “Forward Looking Statements” above for certain
information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S. GAAP.
References in this Report to a particular “fiscal” year are to our fiscal year
ended on December 31, 2009.
Overview
Our
mission is to become a nationwide leader in providing out-of-home advertising in
China, primarily serving the needs of branded corporate customers. We seek to
acquire rights to install and operate roadside advertising panels and mega-size
advertising panels in the major cities in China. In most cases, we are
responsible for installing advertising panels, although in some cases,
advertising panels might have already been installed, and we will be responsible
for operating and maintaining the panels. Once the advertising panels are put
into operation, we sell advertising airtime to our customers directly. Since
late 2006, we have been operating a growing advertising network of roadside LED
digital video panels, mega-size LED digital video billboards and light boxes in
major Chinese cities. LED (known as “Light Emitting Diode”) technology has
evolved to become a new and popular form of advertising in China, capable of
delivering crisp, super-bright images both indoors and outdoors.
Our total
advertising revenues were $1,266,927, $4,622,270 and $1,442,552 for the years
ended December 31, 2009, 2008 and 2007 respectively. Our net loss attributable
to NCN common stockholders was $37,359,188, $59,484,833 and $14,646,619 for the
years ended December 31, 2009, 2008 and 2007 respectively. Our results of
operations were negatively affected by a variety of factors, which led to less
than expected revenues and cash inflows during the fiscal year 2009, including
the following:
|
·
|
the
rising costs to acquire advertising rights due to competition among
bidders for those rights;
|
|
·
|
slower
than expected consumer acceptance of the digital form of advertising
media;
|
|
·
|
strong
competition from other media companies;
and
|
|
·
|
slowing
demand due to the worldwide financial crisis and deteriorating economic
conditions in China, leading many customers to cut their advertising
budget. The impact of the reduction in the pace of our advertising
spending is expected to be more significant on our new digital form of
media than traditional advertising
platforms.
|
To
address these unfavorable market conditions, in the latter half of 2008, we
undertook drastic cost-cutting measures including reduction of our workforce,
office rentals, and reductions to our selling and marketing expenses and other
general and administrative expenses. We also re-assessed the
commercial viability of each of our concession right contracts and determined
that many of our concession rights are no longer commercially viable due to high
annual fees and therefore such commercially non-viable concession right
contracts were terminated. Management has also successfully negotiated some
reductions in advertising operating rights fees under existing contracts. The
outcome of these cost reduction measures has been reflected in our financial
results.
Since
early 2010, we have begun to restructure our organization by consolidating our
PRC operations into one directly owned PRC entity, Yi Gao. We expect that this
consolidation will enhance our operational efficiency and effectiveness and
should reduce our operating expenses for the foreseeable future. For details,
please refer to below sub-section “Recent Developments”
below.
To
strengthen our ability to generate revenues from advertising sales which depends
largely upon our ability to provide large networks of advertising locations
throughout major areas in China, we also started our advertising agency business
in 2009. We seek the advertising airtime from third party vendors in major
cities in China and sell such advertising airtime to our customers. As an
advertising agent, we are not responsible for acquiring advertising operating
rights, installing, operating and maintaining advertising panels. We expect that
this product line will enable us to generate revenue without having capital
commitment and hence enhance our current capital position and
liquidity.
We also
completed a debt restructuring exercise in April 2009 which has directly
lessened our cash constraints. For details, please refer to below sub-section
“Liquidity and Capital
Resources - Restructuring of Convertible Debt” below. In July 2009, our
board appointed Dr. Earnest Leung, the nominee of our controlling shareholder,
Keywin, as our chief executive officer. Dr. Leung, a Keywin director, has over
20 years experience in the investment banking industry and is actively
formulating a series of business development strategies and exploring more
prominent advertising related projects, aiming to expand the Company and improve
its financial performance. Management has identified and is currently studying
the feasibility of several potential projects, however, we have not yet
committed to any of them.
Recent
Developments
Corporate
Restructuring
Since
2008, all our advertising business has been run through commercial arrangements
with our PRC operating companies, namely Quo Advertising, Bona and Botong. In
early 2010, our management decided that we would operate with more efficiency if
we eliminated our structure of variable interest entities and substituted them
with direct ownership. On January 1, 2010, we consolidated all the
business operations of Quo into one directly owned PRC entity, Yi Gao, a newly
formed advertising joint venture in China with 70% shareholding owned by
Linkrich Enterprise, our wholly owned Hong Kong subsidiary and 30% shareholding
owned by Quo, and terminated all Quo commercial arrangements. While
the Quo stockholders are no longer designated by us, we are able to exert 100%
control over the Yi Gao advertising business, pursuant to a trust declaration
executed by Quo Advertising, whereby Quo Advertising holds Yi Gao’s 30% equity
interest on behalf and for the benefit of Linkrich Enterprise.
We plan
to transition the operations of Bona and Botong to Yi Gao in order to simplify
our operating structure. We believe that these arrangements will improve our
operational efficiency and effectiveness.
Results
of Operations
Results
of operations for the year ended December 31, 2009 as compared to the year ended
December 31, 2008.
Revenues. Our revenues
primarily consists of (1) LED panels and billboards advertising income, we
recognize revenue in the period when advertisements are either aired or
published and (2) advertising design, productions, public relations and event
management services income. We recognize revenues when
the services are performed. Revenues from advertising services for the
year ended December 31, 2009 were $1,266,927, as compared to $4,622,270 for the
year ended December 31, 2008, a decrease of 73%. The decrease was mainly
attributed to a decrease in advertising sales orders as a result of the
worldwide financial crisis and deteriorating economic conditions in
China.
Cost of Revenues. Cost of
revenues primarily consists of fees to obtain rights to operate advertising
panels, advertising agency service fees, media display equipment depreciation
expenses and other miscellaneous expenses. Cost of revenues for the year ended
December 31, 2009 were $2,067,881, a decrease of 88% compared to $17,374,713 for
the year ended December 31, 2008. The significant decrease was mainly
attributable to the decrease in amortization of advertising operating rights
fees. The amortization of advertising operating rights fee for the year ended
December 31, 2009 was $1,493,664, a decrease of 91% compared to $15,900,456 for
the year ended December 31, 2008. The decrease in the amortization of
advertising operating rights fees resulted from the termination of commercially
non-viable concession right contracts in late 2008 and early 2009 as well as the
renegotiation of certain concession advertising operating rights fees to lower
prices.
Gross Loss. Our gross loss
for the year ended December 31, 2009 was $800,954, a decrease of 94% compared to
gross loss of $12,752,443 for the same period in 2008. The decrease in gross
loss was primarily driven by a significant decrease in our cost of revenues
resulted from the termination of commercially non-viable concession right
contracts in late 2008 and early 2009 as well as the renegotiation of certain
concession advertising operating rights fees to a lower prices.
Selling and Marketing
Expenses. Selling and marketing expenses primarily consists of advertising and other
marketing related expenses, compensation and related expenses for personnel
engaged in sales and sales support functions. Selling and marketing
expenses decreased by 79% from $2,996,142 for the year ended December 31, 2008
to $630,730 for the year ended December 31, 2009, primarily due to a decrease in
advertising services provided by the Company.
General and Administrative Expenses.
General and administrative expenses primarily consists of compensation related
expenses (including salaries paid to executive and employees, stock-based
compensation expense for stock granted to directors, executive officers and
employees for services rendered calculated in accordance with SFAS
123R (ASC
Topic 718), employee
bonuses and other staff welfare and benefits, rental expenses, amortization
expenses of intangible rights, depreciation expenses, fees for professional
services, travel expenses and miscellaneous office expenses. General and
administrative expenses for the year ended December 31, 2009 decrease by
60% to $4,532,628 compared to $11,254,933 for the year ended December 31, 2008.
The decrease in general and administrative expenses was mainly due to drastic
cost cutting measures, including reduction of the Company’s workforce, rental,
and other general and administrative expenses during 2009.
Net Write-back of (Allowance for)
Doubtful Debts. Net write-back of allowance for doubtful debts was
$542,771 for the year ended December 31, 2009 compared to allowance for doubtful
debts of $7,739,043 for the year ended December 31, 2008. The write-back of
allowance of doubtful debts in 2009 includes
certain doubtful debts were subsequently collected in 2009. The allowance
for doubtful debts for 2008 includes a one-time allowance for doubtful debt of
$7,140,983 for prepaid expenses and other current assets for the year ended
December 31, 2008. Such prepaid expenses and other current assets mainly
represented the balance of payment from our customers being withheld by the
authority party of certain media project and our initial deposits placed for
soliciting other potential media projects which were abandoned by our management
in late fiscal 2008.
Non-cash Impairment Charges.
Non-cash impairment charges decreased by 96% to $802,487 for the year ended
December 31, 2009, as compared to $18,109,200 for the year ended December 31,
2008. As the Company recorded a continuous net loss, ongoing impairment review
was performed. For the year ended December 31, 2009, a non-cash impairment loss
of $454,904 and $347,583 were recorded for media display equipment and
intangible assets respectively. For the year ended December 31, 2008, a non-cash
impairment loss of $7,979,808, $2,977,915 and $7,151,477 was recorded for
prepayments for advertising operating rights, media display equipment and
intangible assets respectively.
Interest and Other Debt-Related
Expenses. Interest and other debt-related expenses for the year ended
December 31, 2009 increased to $31,195,905, or by 340%, compared to $7,082,378
for the year ended December 31, 2008. The significant increase was primarily due
to the debt restructuring completed in April 2009, from which the Company
recorded a one-time non-cash debt conversion charges, a one-time loss on early
extinguishment of debt and a one-time write-off on unamortized deferred changes
and debt discount of $10,204,627, $1,696,684 and $16,935,828, respectively
during the year ended December 31, 2009.
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 for the year ended December 31, 2009 and 2008 as the
Company and all of its subsidiaries and variable interest entities operated at a
taxable loss in fiscal 2009 and 2008.
Net Loss from Continuing
Operations. The Company incurred a net loss from continuing operations of
$37,383,361 for the year ended December 31, 2009, a decrease of 38% compared to
a net loss of $59,842,791 for the year ended December 31, 2008. Generally, the
decrease in the loss from continuing operations was due to 1) decrease in the
cost of advertising services, selling and marketing expense, general and
administrative expenses as a result of our cost cutting measures; 2) decrease in
non-cash impairment charges; 3) the write-back of allowance for doubtful debt,
offset by an increase in interest and other debt-related expenses arisen from
one-time effect of debt restructuring, amounted to $28,837,139.
Results
of operations for the year ended December 31, 2008 as compared to the year ended
December 31, 2007.
Revenues. Revenues from
advertising services for the year ended December 31, 2008 were $4,622,270, as
compared to $1,442,552 for the year ended December 31, 2007, an increase of
220%. The significant increase was attributable to the Company beginning to
generate LED advertising revenue in late 2007.
Cost of Revenues. Cost of
revenues for the year ended December 31, 2008 was $17,374,713, an increase of
522% compared to $2,795,188 for year ended December 31, 2007. The significant
increase was attributable to an increase in both amortization of advertising
rights which were acquired in late 2007 and early 2008 and depreciation of media
display equipment which were placed into operation in early
2008.
Gross Loss. Our gross loss
for the year ended December 31, 2008 was $12,752,443, an increase of 843%, as
compared to gross loss of $1,352,636 for the same period in 2007. The increase
in gross loss was primarily driven by a significant increase in our cost of
revenues as most of our media projects were placed into operation in late 2007
and early 2008. As our advertising revenue in 2008 was adversely affected by
unexpected unfavorable market condition, increase in revenue was not in line
with increase in cost of revenues. Accordingly, a significant increase in gross
loss was recorded.
Selling and Marketing
Expenses. Selling and marketing expenses for the year ended December 31,
2008 increased by 494% to $2,996,142 compared to $504,758 for the year
ended December 31, 2007, primarily due to an increase in advertising
services provided by the Company.
General and Administrative
Expenses. General and administrative expenses for the year ended December
31, 2008 increased by 2% to $11,254,933 compared to $11,067,777 for the
year ended December 31, 2007. The increase was driven by the increase in
amortization charges of intangible assets as a result of the addition of
identifiable intangible assets arising from the consolidation of Botong and
Lianhe in January 2008 and the increase in staff costs, office rental expense
and other miscellaneous administrative expense as a result of the Company’s
continuous expansion in fiscal 2008, while offset by the decrease in the
stock-based compensation expense. The decrease in the stock-based compensation
was mainly due to less stock having been granted for services rendered during
the year ended December 31, 2008.
Net Write-back of (Allowance for)
Doubtful Debts. Allowance for doubtful debts for the year ended December
31, 2008 increased by 100% to $7,739,043 compared to $nil for the year ended
December 31, 2007. The increase was mainly due to the occurrence of a
one-time allowance for doubtful debts of $7,140,983 for prepaid expenses and
other current assets for the year ended December 31, 2008. Such prepaid expenses
and other current assets mainly represented the balance of payment from our
customers being withheld by the authority party of certain media project and our
initial deposits placed for soliciting other potential media projects which were
abandoned by our management in late fiscal 2008.
Non-cash impairment charges.
Non-cash impairment charges increased by 3,407% to $18,109,200 for the
year ended December 31, 2008 as compared to $516,419 for the year ended December
31, 2007. As the Company recorded a continuous net loss in fiscal 2008, it
performed an impairment review on its prepayments for advertising operating
rights, media display equipment and intangible assets during the latter half of
fiscal 2008. Accordingly, a non-cash impairment loss of $$7,979,808, $2,977,915
and $7,151,477 was recorded for prepayments for advertising operating rights,
media display equipment and intangible assets respectively. For the year ended
December 31, 2007, a non-cash impairment loss of $516,419 was recorded for
intangible assets only. Such intangible assets were related to non-LED business
and tour business on which we recorded a continuous operating loss in
2007.
Interest and Other Debt-Related
Expenses. Interest and other debt-related expenses for the year ended
December 31, 2008 increased by 2,051% to $7,082,378 compared to $329,194 for the
year ended December 31, 2007. The significant increase was primarily due to the
issuance of convertible promissory notes in late 2007 and early 2008. Of the
$7,082,378 recorded in the year ended December 31, 2008, $5,589,920 was
attributed to amortization of deferred charges and debt discount associated with
these convertible promissory notes and $1,492,458 was attributed to their
respective interest expense.
Income Taxes. The Company
derives all of its income in the PRC and is subject to income tax in the PRC.
Income tax incurred for the year ended December 31, 2008 was $nil as compared to
$7,668 for the year ended December 31, 2007. No income tax was recorded in 2008
as the Company and all of its subsidiaries and variable interest entities
operated at a loss in fiscal 2008.
Net Loss from Continuing Operations.
The Company incurred a net loss from continuing operations of $59,842,791
for the year ended December 31, 2008, an increase of 335% compared to a net loss
of $13,755,038 for the year ended December 31, 2007. The increase in net loss
was driven by several factors: (1) increase in cost of advertising services
related to our media business as mention above, (2) increase in non-cash
impairment charges recorded for prepayments for advertising operating rights,
media display equipments and intangible assets, (3) increase in amortization of
deferred charges and debt discount associated with the issuance of convertible
promissory notes in late 2007 and early 2008, (4) increase in amortization
charges of intangible assets as a result of the addition of identifiable
intangible assets arising from the consolidation of Botong and Lianhe in January
2008 (5) occurrence of a one-time allowance for doubtful debt of $7,140,983 for
prepaid expenses and other current assets as mentioned above and (6) increase in
professional fees, payroll and other administrative expenses as a result of our
rapid expansion.
Results of Discontinued
Operations
In
Fiscal 2009
No
material disposal transaction happened.
In
Fiscal 2008
The
Company disposed of its entire travel network business during the year ended
December 31, 2008, pursuant to stock purchase agreements with various purchasers
as follows:
|
·
|
On
September 1, 2008, the Company completed the sale of all its interests in
NCN Management Services to an independent third party for a consideration
of HK$1,350,000, or approximately $173,000, in cash. The acquirer acquired
NCN Management Services along with its subsidiaries, which include 100%
interest in NCN Hotels Investment Limited, 100% interest in NCN Pacific
Hotels Limited and a 55% interest (through trust) in Tianma. The Company
reported a gain on the sale, net of income taxes of
$61,570.
|
|
·
|
On
September 30, 2008, the Company completed the sale of its 99.9% interest
in NCN Landmark to an independent third party for a cash consideration of
$20,000. The acquirer acquired NCN Landmark along with its subsidiary,
100% interest in Beijing NCN Landmark Hotel Management Limited, a PRC
corporation. The Company reported a gain on the sale, net of income taxes
of $4,515.
|
The
Company treated the sales of NCN Management Services along with its subsidiaries
and variable interest entity and NCN Landmark along with its subsidiary as a
discontinued operation. Accordingly, revenues, costs and expenses of the
discontinued operations have been excluded from the respective captions in the
condensed consolidated statements of operations. The net operating results of
the discontinued operations have been reported, net of applicable income taxes,
as “Net Loss from Discontinued Operations, Net of Income Taxes”.
In
Fiscal 2007
No
material disposal transaction happened.
Summary
Operating Results of the Discontinued Operations
Summary
operating results for the discontinued operations for the years ended 2009, 2008
and 2007 were as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | - | $ | 24,528,096 | $ | 26,140,355 | ||||||
|
Cost
of revenues
|
- | (24,172,537 | ) | (25,830,401 | ) | |||||||
|
Gross
profit
|
- | 355,559 | 309,954 | |||||||||
|
Non-cash
impairment charges
|
- | - | (815,902 | ) | ||||||||
|
Operating
expenses
|
- | (477,481 | ) | (460,362 | ) | |||||||
|
Other
income
|
- | 98,838 | 9,210 | |||||||||
|
Interest
income
|
- | 2,040 | 3,471 | |||||||||
|
Interest
expenses
|
- | - | - | |||||||||
|
Net
loss from discontinued operations, net of income taxes
|
- | (21,044 | ) | (953,629 | ) | |||||||
|
Gain
from disposal of discontinued operations
|
- | 66,085 | - | |||||||||
|
Net
income (loss) from discontinued operations
|
$ | - | $ | 45,041 | $ | (953,629 | ) | |||||
Liquidity
and Capital Resources
Cash
Flows
As of
December 31, 2009, current assets were $3,073,760, current liabilities were
$2,291,714 and we had net working capital of $782,046. Cash as of December 31,
2009 was $1,969,549 compared to $7,717,131 as of December 31, 2008,
a decrease of $5,747,582. The decrease was mainly attributable to the cash
utilized by operating activities.
As of
December 31, 2008, current assets were $8,982,777, current liabilities were
$5,580,859 and we had net working capital of $3,401,918. Cash as of December 31,
2008 was $7,717,131 compared to $2,233,528 as of December 31, 2007,
an increase of $5,483,603. The increase was attributable to the issuance of
convertible promissory notes in late 2007 and early 2008.
The following table sets forth a summary of our cash flows for the periods indicated:
|
Years
ended December 31,
|
|||||||||||||
|
2009
|
2008
|
2007
|
|
||||||||||
|
Net
cash used in operating activities
|
$ | (5,428,273 | ) | $ | (17,944,568 | ) | $ | (21,320,216 | ) | ||||
|
Net
cash used in investing activities
|
(54,364 | ) | (6,689,257 | ) | (523,319 | ) | |||||||
|
Net
cash provided by (used in) financing activities
|
(250,000 | ) | 28,900,000 | 21,119,380 | |||||||||
|
Effect
of exchange rate changes on cash
|
(14,945 | ) | 1,217,428 | 59,160 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(5,747,582 | ) | 5,483,603 | (664,995 | ) | ||||||||
|
Cash
and cash equivalents at the beginning of year
|
7,717,131 | 2,233,528 | 2,898,523 | ||||||||||
|
Cash
and cash equivalents at the end of year
|
$ | 1,969,549 | $ | 7,717,131 | $ | 2,233,528 | |||||||
Operating
Activities
Net cash
used by operating activities for the year ended December 31, 2009 was $5,428,273
compared to $17,944,568 for the year ended December 31, 2008, a decrease of
$12,516,295. The decrease in net cash used in operating activities was mainly
attributable to our drastic cost-cutting measures and the decrease in the
payment for advertising operating rights fees as a result of the termination of
commercially non-viable concession right contracts in 2009.
Net cash
utilized by operating activities for the year ended December 31, 2008 was
$17,944,568, as compared with $21,320,216 for the year ended December 31, 2007,
a decrease of $3,375,648. The decrease in net cash used in operating activities
was mainly attributable to a decrease in the payments for acquiring
advertising operating right in fiscal 2008.
Investing
Activities
Net cash
used in investing activities for the year ended December 31, 2009 was $54,364
compared to net cash used in investing activities of $6,689,257 for the year
ended December 31, 2008, a decrease of $6,634,893. The decrease was mainly
attributable to less equipment being purchased and no acquisitions being
completed during 2009. For the year ended December 31, 2008, the investing
activities consisted primarily of purchase of equipment related to our
media business and costs associated with the acquisition of Cityhorizon
BVI.
Net cash
used in investing activities for the year ended December 31, 2008 was
$6,689,257, compared with net cash used in investing activities of $523,319 for
the year ended December 31, 2007, an increase of $6,165,938 . The increase was
mainly due to more equipment being purchased and larger acquisitions were being
completed during 2008.
Financing
Activities
Net cash
used in financing activities was $250,000 in fiscal 2009 compared to net cash
provided by financing activities of $28,900,000 in fiscal 2008. For fiscal 2009,
the cash used in financing activities consisted primarily of issuance costs
related to 1% convertible promissory notes. For fiscal 2008, the cash provided
by financing activities primarily consisted of the issuance of $35,000,000 in 3%
convertible promissory notes, offset by $5,000,000 paid to redeem the
outstanding 12% convertible promissory note due May 2008.
Net cash
provided by financing activities was $28,900,000 for the year ended December 31,
2008, compared with net cash provided by financing activities
of $21,119,380 for the year ended December 31, 2007, an increase of
$7,780,620. The increase was primarily attributable to the issuance of
$35,000,000 in 3% Convertible Promissory Notes, offset by $5,000,000 paid to
redeem outstanding 12% convertible promissory note due May 2008 discussed as
above. For the year ended December 31, 2007, the financing activities were
attributable to a private placement that raised proceeds of $1,500,000 and the
issuance of Convertible Promissory Notes in fiscal 2007, which included
$5,000,000 in 12% convertible promissory notes and $15,000,000 in 3% convertible
promissory notes.
Restructuring
of Convertible Debt
On
November 19, 2007, we entered into a Note and Warrant Purchase Agreement, as
amended (the “Purchase Agreement”) with our subsidiary Quo Advertising and
affiliated investment funds of Och-Ziff Capital Management Group (the
“Investors”) pursuant to which we 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 34,285,715 shares of our Common
Stock (the “Warrants”). On November 19, 2007, we issued 3% Convertible
Promissory Notes in the aggregate principal amount of $6,000,000, Warrants to
purchase shares of our common stock at $2.50 per share and Warrants to purchase
shares of our common stock at $3.50 per share. On November 28, 2007, we
issued 3% Convertible Promissory Notes in the aggregate principal amount of
$9,000,000, Warrants to purchase shares of our common stock at $2.50 per share
and Warrants to purchase shares of our common stock at $3.50 per
share.
On
January 31, 2008, we 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 our common stock at $2.50 per share and
Warrants to purchase shares of our common stock at $3.50 per share (the “Third
Closing”). In connection with the Third Closing, the parties entered into
the First Amendment to the Purchase Agreement, dated as of January 31, 2008, to,
among other things, establish additional funding channels between the Company
and its subsidiaries in China and provide for certain other modifications in
connections with the Third Closing. Concurrently with the Third Closing, we
loaned substantially all the proceeds from the Amended and Restated Notes to our
wholly-owned direct subsidiary, NCN Group, and such loan was evidenced by an
intercompany note issued by NCN Group in favor of the Company (the “NCN Group
Note”). In connection with the Amended and Restated Notes, we entered into
a Security Agreement, dated as of January 31, 2008 (the “Security Agreement”),
pursuant to which we granted to the collateral agent for the benefit of the
Investors, a first-priority security interest in certain of our assets,
including the NCN Group Note and 66% of the equity interest of NCN Group. In
addition, NCN Group and certain of our indirect wholly owned subsidiaries each
granted the Company a security interest in certain of the assets of such
subsidiaries to, among other things, secure the NCN Group Note and certain
related obligations.
On April
2, 2009, we entered into a Note Exchange Agreement with certain of the Investors
(the “Note Exchange Agreement”), pursuant to which the parties agreed to cancel
Amended and Restated Notes in the principal amount of $5 million held by such
Investors (including accrued and unpaid interest thereon), and all the Warrants,
in exchange for our issuance of new 1% Unsecured Senior Convertible Promissory
Notes due 2012 in the principal amount of $5 million (the “1% Convertible
Promissory Notes”). The 1% Convertible Promissory Notes bear interest at 1% per
annum, payable semi-annually in arrears, and mature on April 1, 2012. They
are convertible at any time into shares of our common stock at an initial
conversion price of $0.02326 per share, subject to customary anti-dilution
adjustments. 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.
On April
2, 2009, we also entered into a Note Exchange and Option Agreement (the “Note
Exchange and Option Agreement”) with Keywin Holdings Limited (“Keywin”), a
transferee of the Investors, pursuant to which we agreed to exchange the
remaining Amended and Restated Notes in the principal amount of $45 million
(including all accrued and unpaid interest thereon) for (i) 307,035,463 shares
of our common stock and (ii) an option to purchase an aggregate of 122,814,185
shares of our common stock for an aggregate purchase price of $2,000,000,
originally exercisable for a three-month period commencing on April 2, 2009 (the
“Keywin Option”). Pursuant to the latest amendment dated January 1, 2010, we
agreed to extend the exercise period to an eighteen-month period ending on
October 1, 2010, and provide the Company with the right to unilaterally
terminate the exercise period upon 30 days’ written notice.
Advertising
Operating Rights Fee
Advertising
operating rights fee is the major cost of our advertising revenue. To maintain
the advertising operating rights, the Company has to pay the advertising
operating rights fee according to payment terms set forth in the contracts
entered into with various contracting parties. These contracting parties
generally require the Company to prepay advertising operating rights fee for a
period of time. The details of our advertising operating rights fee were as
follows:
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Payment
for prepayments for advertising operating rights
|
$ | 1,336,739 | $ | 7,405,975 | $ | 14,627,129 | ||||||
|
Settlement
of accrued advertising operating rights
|
733,000 | 49,385 | - | |||||||||
|
Total
payment
|
$ | 2,069,739 | $ | 7,455,360 | $ | 14,627,129 | ||||||
|
Amortization
of prepayments for advertising operating rights
|
$ | 1,388,980 | $ | 15,167,456 | $ | 990,951 | ||||||
|
Accrued
advertising operating rights fee recognized
|
104,684 | 733,000 | 49,385 | |||||||||
|
Total
advertising operating rights fee recognized
|
$ | 1,493,664 | $ | 15,900,456 | $ | 1,040,336 | ||||||
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Prepayments
for advertising operating rights, net
|
$ | 348,239 | $ | 418,112 | ||||
|
Accrued
advertising operating rights fees
|
$ | 104,684 | $ | 733,000 | ||||
For
future advertising operating rights commitments under non-cancellable
advertising operating right contracts, please refer to the table under the
following sub-section – “Contractual Obligations and
Commercial Commitments”.
We
financed the above payments through the issuance of our equity and debt
securities. As we currently generate limited revenue from our media operation,
in addition to the proceeds from the issuance of convertible promissory notes,
we intend to continue to raise funds through the issuance of equity and debt
securities to satisfy future payment requirements. There can be no assurance
that we will be able to enter into such agreements.
In the
event that advertising operating rights fees cannot be paid in accordance with
the payment terms set forth in our contracts, we may not be able to continue to
operate our advertising panels and our ability to generate revenue will be
adversely affected. As such, failure to raise additional funds would have
significant negative impact on our financial condition.
Capital
Expenditures
During
the years ended December 31, 2009 and 2008, we acquired assets of $128,489 and
$3,518,408 respectively which were financed through proceeds from the issuance
of convertible promissory notes. During the year ended December 31, 2007,
we acquired assets of $207,371 financed through working capital.
Contractual
Obligations and Commercial Commitments
The
following table presents certain payments due under contractual obligations with
minimum firm commitments as of December 31, 2009:
|
Payments
due by period
|
||||||||||||||||||||
|
Total
|
Due
in
2010
|
Due
in
2011
- 2012
|
Due
in 2013-2014
|
Thereafter
|
||||||||||||||||
|
Long
Term Debt Obligations (a)
|
$ | 5,000,000 | $ | - | $ | 5,000,000 | $ | - | $ | - | ||||||||||
|
Operating
Lease Obligations (b)
|
465,352 | 395,317 | 70,035 | - | - | |||||||||||||||
|
Advertising
Operating Rights Fee obligations (c)
|
2,811,339 | 1,569,640 | 1,101,687 | 140,012 | - | |||||||||||||||
|
Purchase
Obligations (d)
|
$ | 18,000 | $ | 18,000 | $ | - | $ | - | $ | - | ||||||||||
Long-term Debt
Obligations. We issued an aggregate of $5,000,000 in 1% Convertible
Promissory Notes in April 2009 to our investors. Such 1% Convertible Promissory
Notes mature on April 1, 2012. For details, please refer to the notes to
financial statements.
Operating Lease
Obligations. We have entered into various non-cancelable operating lease
agreements for our offices and staff quarter. Such operating leases do not
contain significant restrictive provisions.
Annual
Advertising Operating Rights Fee Obligations. The Company, through its
PRC operating companies has acquired rights from third parties to operate
roadside advertising panels and mega-size advertising panels whose lease terms
expire between 2010 and 2013.
Purchase
Obligations. We are obligated to make payments under non-cancellable
contractual arrangements with our vendors, principally for constructing our
advertising panels.
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.
Critical
Accounting Policies
The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including but not limited to those
related to income taxes and impairment of long-lived assets. We base our
estimates on historical experience and on various other assumptions and factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Based on our
ongoing review, we plan to adjust to our judgments and estimates where facts and
circumstances dictate. Actual results could differ from our
estimates.
We
believe the following critical accounting policies are important to the
portrayal of our financial condition and results and require our management's
most difficult, subjective or complex judgments, often because of the need to
make estimates about the effect of matters that are inherently
uncertain.
Principles of
Consolidation – The condensed consolidated financial statements include
the financial statements of Network CN Inc., its subsidiaries and variable
interest entities. Variable interest entities are those entities in which the
Company, through contractual arrangements, bears the risks of, and enjoys the
rewards normally associated with ownership of the entities, and therefore the
Company is the primary beneficiary of these entities. In accordance
with FASB Interpretation No. 46R “Consolidation of Variable Interest
Entities—an
interpretation of ARB No. 5” (“FIN 46R”) (ASC Topic
810), the primary beneficiary is required to consolidate the variable interest
entities for financial reporting purposes. All significant intercompany
transactions and balances have been eliminated upon consolidation.
Prepayments for
Advertising Operating Rights, Net –Prepayments for advertising operating
rights are measured at cost less accumulated amortization and impairment losses.
Cost includes prepaid expenses directly attributable to the acquisition of
advertising operating rights. Such prepaid expenses are in
general charged to the condensed consolidated statements of operations on a
straight-line basis over the operating period. All the costs expected to be
amortized after 12 months of the balance sheet date are classified as
non-current assets.
An
impairment loss is recognized when the carrying amount of the prepayments for
advertising operating rights exceeds the sum of the undiscounted cash flows
expected to be generated from the advertising operating right’s use and eventual
disposition. An impairment loss is measured as the amount by which the carrying
amount exceeds the fair value of the asset calculated using a discounted cash
flow analysis.
Equipment, Net –
Equipment is stated at cost less accumulated depreciation and
impairment losses. Depreciation is provided using the straight-line method over
the estimated useful life as follows:
|
Media
display equipment
|
5 -
7 years
|
|
|
Office
equipment
|
3 -
5 years
|
|
|
Furniture
and fixtures
|
3 -
5 years
|
|
|
Leasehold
improvements
|
Over
the unexpired lease terms
|
Construction
in progress is carried at cost less impairment losses, if any. It relates to
construction of media display equipment. No provision for depreciation is made
on construction in progress until the relevant assets are completed and put into
use.
When
equipment is retired or otherwise disposed of, the related cost, accumulated
depreciation and provision for impairment loss are removed from the respective
accounts, and any gain or loss is reflected in the condensed consolidated
statements of operations. Repairs and maintenance costs on equipment are
expensed as incurred.
Intangible
Assets, Net – Intangible assets are stated at cost less accumulated
amortization and impairment losses. Intangible assets that have indefinite
useful lives are not amortized. Other intangible assets with finite useful lives
are amortized on a straight-line basis over their estimated useful lives of 16
months to 20 years. The amortization methods and estimated useful lives of
intangible assets are reviewed regularly.
Impairment of
Long-Lived Assets –Long-lived assets, including intangible assets with
definite lives, are reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of the assets may not be
recoverable. An intangible asset that is not subject to amortization is reviewed
for impairment annually or more frequently whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset and intangible 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.
Convertible
Promissory Notes and Warrants –
|
1)
|
Issuance
of 12% Convertible Promissory Note and Warrants and 3% Convertible
Promissory Notes and Warrants
|
During
2007 and 2008, the Company issued a 12% convertible promissory note in the
principal amount of $5,000,000 and warrants and 3% convertible promissory notes
in the principal amount of $50,000,000 and warrants. The warrants and embedded
conversion feature were classified as equity under EITF Issue No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” (ASC Topic 815-40) and met the other criteria in paragraph 11(a)
of Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (ASC Topic 815-10-15-74). The Company
allocated the proceeds of the convertible promissory notes between convertible
promissory notes and the financial instruments related to warrants associated
with convertible promissory notes based on their relative fair values at the
commitment date. The fair value of the financial instruments related to warrants
associated with convertible promissory notes was determined utilizing the
Black-Scholes option pricing model and the respective allocated proceeds to the
warrants is recorded in additional paid-in capital. The embedded beneficial
conversion feature associated with convertible promissory notes was recognized
and measured by allocating a portion of the proceeds equal to the intrinsic
value of that feature to additional paid-in capital in accordance with EITF
Issue No. 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio” (ASC Topic 470-20) and EITF Issue No. 00-27
“Application of Issue No. 98-5
to Certain Convertible Instruments” (ASC Topic 470-20).
The
portion of debt discount resulting from the allocation of proceeds to the
financial instruments related to warrants associated with convertible promissory
notes is being amortized over the life of the convertible promissory notes,
using the effective yield method. For the portion of debt discount resulting
from the allocation of proceeds to the beneficial conversion feature, it is
amortized over the term of the notes from the respective dates of issuance using
the effective yield method.
|
2)
|
Debt
Restructuring and Issuance of 1% Convertible Promissory
Note
|
On April
2, 2009, the Company entered into a new financing arrangement with the holders
of the 3% convertible promissory notes and warrants and a new investor. The
Company provided an inducement conversion offer to a new investor who exchanged
3% convertible promissory notes in the principal amount of $45,000,000, and all
accrued and unpaid interest thereon, for 307,035,463 shares of the Company’s
common stock (the original conversion price is $1.65 per share convertible into
28,282,227 shares). Pursuant to paragraph 21 of EITF Issue No. 00-27 “Application of Issue No. 98-5 to
Certain Convertible Instruments” (ASC Topic 470-20), all the unamortized
debt discount (including the discount from an allocation of proceeds to the
warrants and the discount originated by the beneficial conversion feature) of
the relevant 3% convertible promissory notes remaining at the date of conversion
were immediately recognized as expenses and is included in amortization of
deferred charges and debt discount in the condensed consolidated statement of
operations. The Company also accounted for the inducement conversion offer
according to SFAS No. 84
“Induced Conversions of Convertible Debt” (ASC Topic 470-20). To induce
conversion, the Company has reduced the conversion price and also granted an
option to purchase an aggregate of 122,814,185 shares of the Company’s common
stock, for an aggregate purchase price of $2,000,000, exercisable for a
three-month period. The Company recognized non-cash debt conversion charges
equal to the fair value of the incremental consideration (including both
reduction in the conversion price and grant of purchase option) given as of the
date the inducement offer is accepted by a new investor. The fair value of the
purchase option was determined utilizing Black-Scholes option pricing
model.
For the
remaining 3% convertible promissory notes in the principal amount of $5,000,000,
the Company and the holders of the 3% convertible promissory notes agreed to
cancel the 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 Company’s issuance of new 1% unsecured senior convertible
promissory notes due 2012 in the principal amount of $5,000,000. The 1%
convertible promissory notes bear interest at 1% per annum, payable
semi-annually in arrears, mature on April 1, 2012, and are convertible at any
time into shares of our common stock at an fixed conversion price of $0.02326
per share, subject to customary anti-dilution adjustments. Pursuant to EITF
Issue No. 96-19 “Debtor’s
Accounting For a Modification or Exchange of Debt Instruments” (ASC Topic
470-50) and EITF Issue No. 06-6 “Debtor’s Accounting for a
Modification (or Exchange) of Convertible Debt Instruments” (ASC Topic
470-50-40), the Company determined that the original convertible notes and new
convertible notes were with substantially different terms and hence reported in
the same manner as an extinguishment of original notes and issuance of new
notes.
The
Company determined the new 1% convertible promissory notes to be conventional
convertible instruments under EITF Issue No. 05-2 “The Meaning of “Conventional
Convertible Debt Instrument” in Issue No. 00-19” (ASC Topic
815-40-25). Its
embedded conversion option was qualify for equity classification pursuant to
EITF Issue No. 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” (ASC Topic 815-40), and met
the other criteria in paragraph 11(a) of SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (ASC Topic 815-10-15-74). 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 yield method.
Early Redemption
of Convertible Promissory Notes –Should early redemption of convertible
promissory notes occur, the unamortized portion of the associated deferred
charges and debt discount would be fully written off and any early redemption
premium will be recognized as expense upon its occurrence. All related charges,
if material, would be aggregated and included in a separate line “charges on
early redemption of convertible promissory notes”. Such an expense would be
included in ordinary activities on the condensed consolidated statements of
operations as required by SFAS No. 145 “Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”
(ASC Topic 470-50).
Revenue
Recognition –For advertising services, the Company recognizes revenue in
the period when advertisements are either aired or published. Revenues from
advertising barter transactions are recognized in the period during which the
advertisements are either aired or published. Expenses from barter transactions
are recognized in the period as incurred. Barter transactions are accounted in
accordance with EITF Issue No. 99-17 “Accounting for Advertising Barter
Transactions” (ASC Topic 605-20-25), which are recorded at the fair value
of the advertising provided based on the Company’s own historical practice of
receiving cash for similar advertising from buyers unrelated to the counterparty
in the barter transactions.
For hotel
management services, the Company recognizes revenue in the period when the
services are rendered and collection is reasonably assured.
For tour
services, the Company recognizes services-based revenue when the services have
been performed. Tianma offers independent leisure travelers bundled
packaged-tour products which include both air-ticketing and hotel reservations.
Tianma’s packaged-tour products cover a variety of domestic and international
destinations.
Tianma
organizes inbound and outbound tour and travel packages which can incorporate,
among other things, air and land transportation, hotels, restaurants and tickets
to tourist destinations and other excursions. Tianma books all elements of such
packages with third-party service providers such as airlines, car rental
companies and hotels, or through other tour package providers and then resells
such packages to its clients. A typical sale of tour services is as
follows:
|
1.
|
Tianma,
in consultation with sub-agents, organizes a tour or travel package,
including making reservations for blocks of tickets, rooms, etc. with
third-party service providers. Tianma may be required to make deposits,
pay all or part of the ultimate fees charged by such service providers or
make legally binding commitments to pay such fees. For air-tickets, Tianma
normally books a block of air tickets with airlines in advance and pays
the full amount of the tickets to reserve seats before any tours are
formed. The air tickets are usually valid for a certain period of time. If
the pre-packaged tours do not materialize and are eventually not formed,
Tianma will resell the air tickets to other travel agents or customers.
For hotels, meals and transportation, Tianma usually pays an upfront
deposit of 50-60% of the total cost. The remaining balance is then settled
after completion of the tours.
|
|
2.
|
Tianma,
through its sub-agents, advertises tour and travel packages at prices set
by Tianma and sub-agents.
|
|
3.
|
Customers
approach Tianma or its appointed sub-agents to book an advertised packaged
tour.
|
|
4.
|
The
customers pay a deposit to Tianma directly or through its appointed
sub-agents.
|
|
5.
|
When
the minimum required number of customers (which number is different for
each tour based on the elements and costs of the tour) for a particular
tour is reached, Tianma will contact the customers for tour confirmation
and request full payment. All payments received by the appointed
sub-agents are paid to Tianma prior to the commencement of the
tours.
|
|
6.
|
Tianma
will then make or finalize corresponding bookings with outside service
providers such as airlines, bus operators, hotels, restaurants, etc. and
pay any unpaid fees or deposits to such
providers.
|
Tianma is
the principal in such transactions and the primary obligor to the third-party
providers regardless of whether it has received full payment from its customers.
In addition, Tianma is also liable to the customers for any claims relating to
the tours such as accidents or tour services. Tianma has adequate insurance
coverage for accidental loss arising during the tours. The Company utilizes
a network of sub-agents who operate strictly in Tianma’s name and can only
advertise and promote the business of Tianma with the prior approval of
Tianma.
Stock-based
Compensation –In December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (ASC
Topic 718). Effective January 1, 2006, the Company adopted SFAS No. 123R (ASC
Topic 718), 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 after the date of adoption and
unvested awards that were outstanding as of the date of adoption. SFAS No. 123R
(ASC Topic 718) requires that stock-based compensation cost is measured at grant
date, based on the fair value of the award, and recognized in expense over the
requisite services period.
Common
stock, stock options and warrants issued to other than employees or directors in
exchange for services are recorded on the basis of their fair value, as required
by SFAS No. 123R (ASC Topic 718), which is measured as of the date required by
EITF Issue 96-18
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” (ASC Topic
505-50). In accordance with EITF 96-18 (ASC Topic 505-50), the non-employee
stock options or warrants are measured at their fair value by using the
Black-Scholes option pricing model as of the earlier of the date at which a
commitment for performance to earn the equity instruments is reached
(“performance commitment date”) or the date at which performance is complete
(“performance completion date”). The stock-based compensation expenses are
recognized on a straight-line basis over the shorter of the period over which
services are to be received or the vesting period. Accounting for non-employee
stock options or warrants which involve only performance conditions when no
performance commitment date or performance completion date has occurred as of
reporting date requires measurement at the equity instruments then-current fair
value. Any subsequent changes in the market value of the underlying common stock
are reflected in the expense recorded in the subsequent period in which that
change occurs.
Income Taxes –
The Company accounts for income taxes under SFAS No. 109 “Accounting for Income Taxes”
(ASC Topic 740). Under SFAS No. 109 (ASC Topic 740),
deferred tax assets and liabilities are provided for the future tax effects
attributable to temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases, and for the
expected future tax benefits from items including tax loss carry
forwards.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or reversed. Under SFAS No. 109 (ASC Topic 740), the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Foreign Currency
Translation –The assets and liabilities of the Company’s subsidiaries and
variable interest entities denominated in currencies other than U.S. dollars are
translated into U.S. dollars using the applicable exchange rates at the balance
sheet date. For condensed consolidated statements of operations’ items, amounts
denominated in currencies other than U.S. dollars were translated into U.S.
dollars using the average exchange rate during the period. Equity accounts were
translated at their historical exchange rates. Net gains and losses resulting
from translation of foreign currency financial statements are included in
the statements of stockholders’ equity as accumulated other comprehensive income
(loss). Foreign currency transaction gains and losses are reflected in the
condensed consolidated statements of operations.
Recent
Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140” (“SFAS
166”) (not part of the Codification yet). SFAS 166 (not part of the Codification
yet) removes the concept of a qualifying special-purpose entity and removes the
exception from applying FIN 46R (ASC Topic 810) to variable interest entities
that are qualifying special-purpose entities; limits the circumstances in which
a transferor derecognizes a portion or component of a financial asset; defines a
participating interest; requires a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced disclosure; among
others. SFAS 166 (not part of the Codification yet) will be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Management is
currently evaluating the potential impact of SFAS 166 (not part of the
Codification yet) on our financial statements.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”) (not part of the Codification yet). This
updated guidance requires an enterprise to perform an analysis to determine
whether the enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity; to eliminate the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity; to add an
additional reconsideration event for determining whether an entity is a variable
interest entity when any changes in facts and circumstances occur such that
holders of the equity investment at risk, as a group, lose the power from voting
rights or similar rights of those investments to direct the activities of the
entity that most significantly impact the entity’s economic performance; and to
require enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprise’s involvement in a
variable interest entity. SFAS 167 (not part of the Codification yet) will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Management is currently evaluating the potential impact of SFAS 167
(not part of the Codification yet) on our financial statements.
In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic
740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities (formerly proposed as FASB
Staff Position No. 48-d, Application Guidance for
Pass-Through Entities and Tax-Exempt Not-for-Profit Entities and Disclosure
Modifications for Nonpublic Entities), which amended Accounting
Standards Codification Subtopic 740-10, Income Taxes – Overall. ASU
2009-06 clarifies that an entity’s assertion that it is a pass-through entity is
a tax position and should be assessed in accordance with Subtopic 740-10.
Additionally, the ASU provides implementation guidance on the attribution of
income taxes to entities and owners. The revised guidance is effective for
periods ending after September 15, 2009. Management is currently evaluating
the potential impact of ASU2010-6 on our financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. ASU 2009-13 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. Management is currently
evaluating the potential impact of ASU2009-13 on our financial
statements.
In
October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include
Software Elements, (amendments to ASC Topic 985, Software)” (“ASU
2009-14”). ASU 2009-14 removes tangible products from the scope of software
revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Management is currently evaluating the potential impact of ASU
2009-14 on our financial statements.
In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”(
amendments to ASC Topic 470, Debt)” (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of
issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with Topic 820 and recognized as
an issuance cost, with an offset to additional paid-in
capital. Loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs. The
amendments also require several disclosures including a description and the
terms of the arrangement and the reason for entering into the
arrangement. The effective dates of the amendments are dependent upon
the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15,
2009. Management is currently evaluating the potential impact
of ASU 2009-15 on our financial statements.
In
December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860)
Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16
amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The
amendments in ASU 2009-16 improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. ASU 2009-16 is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009. Management is currently
evaluating the potential impact of ASU2009-16 on our financial
statements.
In
December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity's economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
ASU 2009-17 also requires additional disclosures about an enterprise's
involvement in variable interest entities. ASU 2009-17 is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009. Management is currently
evaluating the potential impact of ASU209-17 on our financial
statements.
In
January 2010, FASB issued ASU 2010-2 Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU
2010-2"). ASU 2010-2 addresses implementation issues related to the changes in
ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards
Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary. An entity is required to deconsolidate a
subsidiary when the entity ceases to have a controlling financial interest in
the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a
gain or loss on the transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or loss associated
with the difference between the fair value of the retained investment in the
subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. ASU 2010-2 is effective for the
Company starting January 3, 2010. Management is currently
evaluating the potential impact of ASU2010-2 on our financial
statements.
In
February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements ("ASU
2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is an SEC filer is not required to disclose the date through which
subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is
effective for interim and annual periods ending after June 15, 2010. Management is currently
evaluating the potential impact of ASU2010-9 on our financial
statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
follow discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.
Interest
Rate Sensitivity
We have
no significant interest-bearing assets and our convertible promissory notes are
fixed rate securities. Our exposure to market risk for changes in interest rates
relates primarily to the interest income generated by our cash deposits in
banks. We have not been exposed, nor do we anticipate being exposed, to material
risks due to changes in interest rates. However, our future interest income may
be different from our expectations due to changes in interest
rates.
Foreign
Currency Exchange Risk
While our
reporting currency is the U.S. dollar, our consolidated revenues and
consolidated costs and expenses are substantially denominated in RMB. As a
result, we are exposed to foreign exchange risk as our revenues and results of
operations may be affected by fluctuations in the exchange rate between U.S.
dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of
our RMB revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. If the RMB appreciates against U.S. dollars, any new
RMB-denominated investments or expenditures will be more costly to us. Assets
and liabilities are translated at exchange rates at the balance sheet dates and
revenue and expenses are translated at the average exchange rates and
stockholders’ equity is translated at historical exchange rates. Any resulting
translation adjustments are not included in determining net income but are
included in determining other comprehensive income, a component of stockholders’
equity. To date, we have not entered into any hedging transactions in an effort
to reduce our exposure to foreign currency exchange risk.
The value
of the RMB against the U.S. dollar and other currencies is affected by, among
other things, changes in China’s political and economic conditions. Since July
2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank
of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate
or depreciate significantly in value against the U.S. dollar in the medium to
long term. Moreover, it is possible that in the future, PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Inflation
Risk
Inflationary
factors such as increases in the costs to acquire advertising rights and
overhead costs may adversely affect our operating results. Although we do not
believe that inflation has had a material impact on our financial position or
results of operations to date, a high rate of inflation in the future may have
an adverse effect on our ability to maintain current levels of gross margin and
selling, general and administrative expenses as a percentage of revenues if the
selling prices of our services do not increase with these increased
costs.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated
Financial Statements
The
financial statements required by this item begin on page F-1
hereof.
Quarterly
Financial Results
The
following table reflects our unaudited quarterly consolidated statement of
operations data for the quarters presented. We believe that the historical
quarterly information has been prepared substantially on the same basis as the
audited consolidated financial statements, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts below to state fairly the unaudited quarterly results of operations
data.
|
For
the Three Months ended
|
||||||||||||||||||||||||||||||||
|
December
31,
2009
|
September
30,
2009
|
June
30,
2009
|
March
31,
2009
|
December
31,
2008
|
September
30,
2008
|
June
30,
2008
|
March
31,
2008
|
|||||||||||||||||||||||||
|
Revenues,
net
|
$ | 454,094 | $ | 293,706 | $ | 333,978 | $ | 185,149 | $ | 463,741 | $ | 2,520,474 | $ | 1,053,888 | $ | 584,167 | ||||||||||||||||
|
Gross
loss
|
(100,564 | ) | (266,200 | ) | (167,080 | ) | (267,110 | ) | (2,652,901 | ) | (3,130,993 | ) | (3,591,376 | ) | (3,377,173 | ) | ||||||||||||||||
|
Net
loss from continuing operations
|
(2,134,801 | ) | (1,100,369 | ) | (30,300,722 | ) | (3,847,469 | ) | (26,882,698 | ) | (15,621,634 | ) | (8,859,055 | ) | (8,479,404 | ) | ||||||||||||||||
|
Net
income (loss) from discontinued operations
|
- | - | - | - | - | 67,352 | (56,865 | ) | 34,554 | |||||||||||||||||||||||
|
Net
loss attributable to NCN common stockholders
|
$ | (2,134,801 | ) | $ | (1,099,364 | ) | $ | (30,299,321 | ) | $ | (3,825,702 | ) | $ | (26,750,832 | ) | $ | (15,474,366 | ) | $ | (8,888,121 | ) | $ | (8,371,514 | ) | ||||||||
|
Net
income (loss) per common share – basic and diluted
|
||||||||||||||||||||||||||||||||
|
Loss
per common share from continuing operations
|
$ | - | $ | - | $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.37 | ) | $ | (0.22 | ) | $ | (0.12 | ) | $ | (0.12 | ) | ||||||||||
|
Income
(loss) per common share from discontinued operations
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Net
loss per common share – basic and diluted
|
$ | - | $ | - | $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.37 | ) | $ | (0.22 | ) | $ | (0.12 | ) | $ | (0.12 | ) | ||||||||||
|
ITEM
9.
|
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|
On
February 4, 2010, the Company was notified of the resignation, effective
immediately, of the US Audit Practice of Jimmy CH Cheung & Co (“JCHC”), as
the Company’s independent registered public accounting firm in connection with
JCHC’s merger on January 29, 2010, with Baker Tilly Hong Kong Limited (“BTHK”).
On February 5, 2010, the Company’s Board of Directors approved the appointment
of BTHK as the Company’s independent registered public accounting
firm.
The audit
reports of JCHC on the financial statements of the Company as of and for the
years ended December 31, 2008 and December 31, 2007 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
In
connection with the audits of the Company’s financial statements for the fiscal
years ended December 31, 2008 and 2007 and through the date of this Current
Report, there were: (i) no disagreements between the Company and JCHC on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of JCHC, would have caused JCHC to make reference to the subject
matter of the disagreement in their reports on the Company’s financial
statements for such years, and (ii) no reportable events within the meaning set
forth in Item 304(a)(1)(v) of Regulation S-K.
During
the Company’s two most recent fiscal years ended December 31, 2008 and 2007 and
through February 5, 2010, the Company did not consult with BTHK on (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that may be rendered on the
Company’s financial statements, and BTHK did not provide either a written report
or oral advice to the Company that was an important factor considered by the
Company in reaching a decision as to any accounting, auditing, or financial
reporting issue; or (ii) the subject of any disagreement, as defined in Item 304
(a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event
within the meaning set forth in Item 304(a)(1)(v) of Regulation
S-K.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports that we file or submit
under the Exchange Act, is recorded, processed, summarized, and reported during
the year and that such information is accumulated and communicated to our
management, including our Chief Executive Officer, Earnest Leung, and our Chief
Financial Officer, Jennifer Fu, as appropriate to allow timely decisions
regarding required disclosure. Our internal control over financial reporting is
designed to provide reasonable assurance to our management and Board of
Directors regarding the reliability of financial reporting and published
financial statements.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures, as of
December 31, 2009, in accordance with Rules 13a-15(f) and 15d-15(f) of the
Exchange Act. Based on and as a result of this evaluation, our Chief Executive
Officer and our Chief Financial Officer have determined that as of the end of
the period covered by this Report, our disclosure controls and procedures were
effective.
Management’s
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may vary over
time.
A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company’s annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. An internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
Our
management, with the participation and under the supervision of our Chief
Executive Officer, Earnest Leung and our Chief Financial Officer, Jennifer Fu,
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework and criteria established in Internal Control- Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this evaluation, Mr Leung and Ms Fu
determined that our internal control over financial reporting was effective as
of December 31, 2009.
The
Company’s independent registered public accounting firm has issued an
attestation report regarding its assessment of the Company’s internal control
over financial reporting as of December 31, 2009, which appears on page
F-2.
Changes In Internal Control Over
Financial Reporting.
We regularly
review our system of internal control over financial reporting and make changes
to our processes and systems to improve controls and increase efficiency, while
ensuring that we maintain an effective internal control environment. Changes may
include such activities as implementing new, more efficient systems,
consolidating activities, and migrating processes.
There has
been no change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
Not
applicable
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors
and Executive Officers
The
following table sets forth the names, ages and positions held with respect to
each Director and Executive Officer of the Company as of the date of this Annual
Report.
|
Name
|
Age
|
Position
|
Director
Since
|
|
Earnest
Leung
|
53
|
Chief
Executive Officer and Chairperson of the Board
|
2009
|
|
Godfrey
Hui
|
50
|
Deputy
Chief Executive Officer and Director
|
2002
|
|
Jennifer
Fu
|
32
|
Chief
Financial Officer and Corporate Secretary
|
N/A
|
|
Ronald
Lee
|
63
|
Director
|
2009
|
|
Gerald
Godfrey
|
81
|
Director
|
2009
|
Each
Director serves until our 2010 annual stockholders meeting and until their
respective successors are duly elected and qualified or earlier
resignation or removal.
Earnest Leung has served as
the Company’s director since May 11, 2009, and as Chief Executive Officer and
Chairperson of the Board of the Company since July 15, 2009. Dr. Leung has over
20 years’ experience in the investment banking industry. Since
November 2004, he has worked as a financial advisor and consultant in Hong Kong
and currently serves as a director of Southern Territories Group, Ltd., an
investment company, Keywin Holdings Limited, an investment company, and of
Statezone Ltd, a financial consulting company owned and controlled by Dr.
Leung. He also currently serves as a director and chief executive officer
of Vision Tech International Holdings Limited, which is listed on Hong Kong Main
Board engaging in the distribution of consumer electronic products and home
appliances in Hong Kong. Prior to that, Dr. Leung served, from
September 1994 to October 2004, as Senior Director and Head of Investment, Asia
for American Express Bank. Dr. Leung also held various senior
investment positions with BNP Paribas Bank, New Zealand Insurance and Bank of
America Trust. Dr. Leung holds an honorary doctor degree from International
American University.
Godfrey Hui has served as
Company’s director since April 2002, and as Deputy Chief Executive Officer since
July 15, 2009. Mr. Hui also served from April 2002 to July 2009 as the Company’s
Chief Executive Officer. Mr. Hui had over twenty years’ experience in the
hotel industry prior to founding our Company. He has worked for several
international and regional hotel groups, including Hopewell Holdings Limited, a
Hong Kong based real estate developer, where Mr. Hui worked in various
capacities including Director of Operations, Finance and Development of the
Hotel Division, Executive Assistant to the Chairman, Chairman of the Executive
Committee, and Group Financial Controller and was responsible for management and
financial issues, and Mega Hotels Management Limited (now a subsidiary of
Hopewell), where he served as Director of Finance, Development and Operations.
Mr. Hui holds a Bachelor of Science in Business Management from the Chinese
University of Hong Kong and a Master’s Degree in Finance and Investment from the
University of Hull. Mr. Hui also serves as an independent non-executive director
of Vinda International Holdings Limited, which is listed on Hong Kong Main Board
engaging in manufacturing and sale of household consumable paper.
Jennifer Fu was appointed as
the Company’s Chief Financial Officer on February 5, 2010. Prior to her
appointment, she served since July 15, 2009 as the Company’s Interim Chief
Financial Officer, and since January 2008 as the Vice President, Finance of NCN
Group Management Limited, the Company’s subsidiary. Prior to that, Ms. Fu
served in various periods, from December 2003 to August 2007, as the Financial
Controller, Accounting Head and Internal Audit Manager of Coils Electronic Co.,
Limited, a principal subsidiary of CEC International Holdings Limited, a Hong
Kong listed company engaged in the assembly and sale of coils, capacitors and
other electronic components. Ms Fu began her career as an auditor in an
international
firm of certified public accountants and is a fellow member of The
Association of Chartered Certified Accountants and member of Hong Kong Institute
of Certified Public Accountants. Ms. Fu holds a Bachelor’s Degree in
Accounting and Finance from the University of Hong Kong.
Ronald Lee has served as the
Company’s director since July 2, 2009. Mr. Lee is the founder and has served as
the Sole Proprietor of Ronald H. T. Lee & Co., Certified Public Accountants
since 1973. He also has served as senior consultant of UHY Vacation HK CPA
Limited, Chartered Accountants, Certified Public Accountants since 2007. Mr. Lee
has over 40 years’ experience in accounting industry. Mr. Lee graduated from the
Hong Kong Technical College in 1967 (now the Hong Kong Polytechnic University)
and is a fellow member of the Australian Society of Certified Practising
Accountants and the Hong Kong Institute of Certified Public Accountants. He is
also an associate member of the Institute of Chartered Accountants in England
& Wales, The Taxation Institute of Hong Kong and the Society of Chinese
Accountants and Auditors.
Gerald Godfrey has served as
the Company’s director since July 2, 2009. Mr. Godfrey is now retired, was a
partner with Charlotte Horstmann & Gerald Godfrey Ltd., a Hong Kong-based
company that dealt in Asian antiques and art, from 1955 to 2005. From 1997 to
2003, Mr. Godfrey served as an independent non-executive director of the
Millennium Group, a Hong-Kong based company that assists corporations,
developers and investors with selling, leasing or investing in office,
industrial, distribution, retail, land and resort properties in Asia. Mr.
Godfrey served as Honorary Consul General to the Kingdom of Morocco from 1984 to
2004, and voting member of the Hong Kong Jockey Club. Mr. Godfrey received an
M.A. from the Oxford University in 1951.
Family
Relationships
There are
no family relationships between any directors or officers of the
Company.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement. Except as set forth in our discussion below in
“Transactions with Related Persons, Promoters and Certain Control Persons;
Corporate Governance”, none of our directors, director nominees or executive
officers has been involved in any transactions with us or any of our directors,
executive officers, affiliates or associates which are required to be disclosed
pursuant to the rules and regulations of the SEC.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers, directors and beneficial owner of more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
statements of ownership and changes in ownership. The same persons are required
to furnish us with copies of all Section 16(a) forms they file. We believe that,
during fiscal 2009, all of our executive officers, directors and beneficial
owner of more than 10% of a registered class of our equity securities complied
with the applicable filing requirements, with the following
exceptions:
1) a late
Form 3 report was filed for Keywin Holdings Limited on May 20, 2009 to report
310,388,463 shares of common stock owned and stock option to purchase
122,814,185 shares of common stock following the completion of debt
restructuring on April 2, 2009;
(2) a
late Form 3 report was filed for Jennifer Fu on August 11, 2009, to report
her stock owned following her appointment as Interim Financial Officer on
July 15, 2009;
(3) a
late Form 3 report was filed for Gerald Godfrey on August 20, 2009, to
report his stock owned following his appointment as director on July
2, 2009;
(4) a
late Form 4 report was filed for Ronald Lee on August 11, 2009, to report the
stock award of 600,000 shares of common stock vested on July 1, 2010, effective
July 15, 2009;
(5) a
late Form 4 report was filed for Peter Mak on August 11, 2009, to report the
stock award of 600,000 shares of common stock vested on July 1, 2010, effective
July 15 ,2009;
(6) a
late Form 4 report was filed for Gerald Godfrey on August 20, 2009, to report
the stock award of 600,000 shares of common stock vested on July 1, 2010 ,
effective July 15, 2009;
(7) a
late Form 4 report was filed for Jennifer Fu on August 11, 2009, to report the
stock award of 1,000,000 shares of common stock on July 14, 2010, effective
July 15, 2009;
(8) a
late Form 4 report was filed for Earnest Leung on August 11, 2009, to report the
stock award of 30,000,000 shares of common stock vested, effective July 15,
2009; and
(9) a
late Form 4 report was filed for Godfrey Hui on August 11, 2009, to report
(a) disposal of 1,500,000 shares of common stock granted in July 2007 as a
result of his executive employment agreement dated July 23, 2007 was terminated
on July 15, 2009; and (b) stock award of 10,000,000 shares of common stock ,
effective July 15, 2009.
In making
these statements, we have relied upon examination of the copies of all Section
16(a) forms provided to us and the written representations of our executive
officers, directors and beneficial owner of more than 10% of a registered class
of our equity securities.
Code
of Business Conduct and Ethics
A Code of
Business Conduct and Ethics is a written standard designed to deter wrongdoing
and to promote (a) honest and ethical conduct, (b) full, fair, accurate, timely
and understandable disclosure in regulatory filings and public statements, (c)
compliance with applicable laws, rules and regulations, (d) prompt
reporting of
violations of the code to an appropriate person and (e) accountability for
adherence to the Code. We are not currently subject to any law, rule or
regulation requiring that we adopt a Code of Business Conduct and Ethics.
However, we have adopted a code of business conduct and ethics that applies to
our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Such
code of business conduct and ethics is available on our corporate website at
www.ncnmedia.com.
Corporate
Governance
Our board
of directors is currently comprised of Ronald Lee and Gerald Godfrey who each
serves on our board of directors as an “independent director” as defined by Rule
4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market, Inc., or the
“Nasdaq Marketplace Rules”. The board of directors has determined that
Messr. Lee possesses the accounting or related financial management
experience that qualifies him as financially sophisticated within the meaning of
Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and that he is an “audit
committee financial expert” as defined by the rules and regulations of the
SEC.
Our board
of directors currently has three standing committees which perform various
duties on behalf of and report to the board of directors: (i) audit committee,
(ii) remuneration committee and (iii) nominating committee. From time to time,
the board of directors may establish other committees. Each of the three
standing committees is comprised entirely of independent directors as
follows:
|
Name
of Director
|
Audit
|
Nominating
|
Remuneration
|
|
Ronald
Lee
|
M
|
C
|
M
|
|
Gerald
Godfrey
|
C
|
||
|
Peter
Mak**
|
C
|
M
|
C =
Chairperson
M =
Member
** On December 31, 2009, Mr.
Peter Mak resigned from the board of directors of the Company, effective
immediately. Mr. Peter Mak’s resignation was not because of any disagreement
with the Company on any matter relating to the Company’s operations, policies or
practices. The board of directors of the Company is currently reviewing
candidates to fill the vacancy caused by Mr. Mak’s departure.
The Board
of Directors has adopted a written charter for each of these committees, copies
of which can be found on our website at www.ncnmedia.com.
Audit
Committee
Our board
of directors established an Audit Committee in September 2007. Our Audit
Committee currently consists of one member only: Ronald Lee, who is
“independent” as that term is defined under the Nasdaq Marketplace Rules, as
currently in effect. In addition, the Board of Directors has determined that
Messrs. Lee is an “audit committee financial expert” as defined by SEC
rules. Mr. Lee is a qualified accountant with many years of finance and audit
experience.
The Audit
Committee oversees our accounting, financial reporting and audit processes;
appoints, determines the compensation of, and oversees, the independent
auditors; pre-approves audit and non-audit services provided by the independent
auditors; reviews the results and scope of audit and other services
provided by the independent auditors; reviews the accounting principles and
practices and procedures used in preparing our financial statements; and reviews
our internal controls.
The Audit
Committee works closely with management and our independent auditors. The Audit
Committee also meets with our independent auditors without members of management
present, on a quarterly basis, following completion of our auditors’ quarterly
reviews and annual audit, to review the results of their work. The Audit
Committee also meets with our independent auditors to approve the annual scope
and fees for the audit services to be performed.
Remuneration
Committee
Our board
of directors established a Remuneration Committee in September 2007. Our
Remuneration Committee consists of two members: Ronald Lee and Gerald Godfrey,
each of whom is “independent” as that term is defined under the Nasdaq
Marketplace Rules, as currently in effect. Mr. Godfrey serves as the chairperson
of the Remuneration Committee.
The
Remuneration Committee (i) oversees and makes general recommendations to
the Board of Directors regarding our compensation and benefits policies;
(ii) oversees, evaluates and approves cash and stock compensation plans,
policies and programs for our executive officers; and (iii) oversees and
sets compensation for the Board of Directors. Our Chief Executive Officer may
not be present at any meeting of our compensation committee during which his
compensation is deliberated.
Nominating
Committee
Our board
of directors established a Nominating Committee in September 2007. Our
Nominating Committee currently consists of one member only: Ronald Lee who is
“independent” as that term is defined under the Nasdaq Marketplace Rules, as
currently in effect. Mr. Ronald serves as the chairperson of the Nominating
Committee.
The
Nominating Committee (i) considers and periodically reports on matters
relating to the identification, selection and qualification of the Board of
Directors and candidates nominated to the Board of Directors and its committees;
(ii) develops and recommends governance principles applicable to the
Company; and (iii) oversees the evaluation of the Board of Directors and
management from a corporate governance perspective.
Although
our bylaws do not contain provisions which specifically address the process by
which a stockholder may nominate an individual to stand for election to the
Board of Directors at our annual meeting of stockholders, the Nominating
Committee will consider director candidates recommended by stockholders. In
evaluating candidates submitted by stockholders, the Nominating Committee will
consider (in addition to the criteria applicable to all director candidates
described below) the needs of the Board and the qualifications of the candidate,
and may also take into consideration the number of shares held by the
recommending stockholder and the length of time that such shares have been
held.
The
Nominating Committee does not have any formal criteria for director nominees;
however, it believes that director nominees should have certain minimum
qualifications, including the highest personal and professional integrity and
values, an inquiring and independent mind, practical wisdom and mature judgment.
In evaluating director nominees, the Nominating Committee also considers an
individual’s skills, character, leadership experience, business experience and
acumen, familiarity with relevant industry issues, national and international
experience, and other relevant criteria that may contribute to our success. This
evaluation is performed in light of the skill set and other characteristics
that would most complement those of the current directors, including the
diversity, maturity, skills and experience of the board as a whole, with the
objective of recommending a group of persons that can best implement our
business plan, develop our business and represent shareholder
interests.
ITEM
11 EXECUTIVE COMPENSATION
Persons
Covered
As of
December 31, 2009, there were only three Executive Officers including Chief
Executive Officer, Deputy Chief Executive Officer and Chief Financial Officer in
the Company. The Company’s Chief Executive Officer and Chief Financial Officer
during fiscal year 2009 and the Company’s executive officer as of December 31,
2009, or the Named Executive Officers are set forth below:
|
Name
|
Position
|
|
Earnest
Leung
|
Chief
Executive Officer and Chairperson of the Board
|
|
Godfrey
Hui
|
Deputy
Chief Executive Officer and Director (Former Chief Executive
Officer)
|
|
Jennifer
Fu
|
Chief
Financial Officer and Corporate Secretary
|
|
Daley
Mok
|
Former
Chief Financial Officer, Former Corporate Secretary and Former
Director
|
On June
15, 2009, the Directors of the Company removed Daley Mok as the Company’s Chief
Financial Officer and from all other offices of the Company held by him and
terminated his appointment as such. On the same day, the
Directors of the Company appointed Mr. Godfrey Hui, the Company’s Former Chief
Executive Officer, to serve as interim Chief Financial Officer.
On July
15, 2009, Godfrey Hui resigned from his position as the Chief Executive Officer
and Interim Chief Financial Officer. The Board of Directors of the Company
appointed Earnest Leung, a director of the Company, to serve as the Company’s
Chief Executive Officer, Godfrey Hui to serve as the Company’s Deputy Chief
Executive Officer, and Jennifer Fu, to serve as the Company’s Interim Chief
Financial Officer, effective immediately.
On
February 5, 2010, the Company’s board of directors appointed Jennifer Fu to
serve as the Company’s Chief Financial Officer.
Compensation
Discussion and Analysis
Overview
Our Board
of Directors determines executive compensation. The Company’s executive
compensation program is generally designed to align the interests of executives
with the interests of shareholders and to reward executives for achieving the
Company’s objectives. The executive compensation program is also designed to
attract and retain the services of qualified executives.
In
determining executive compensation, our Board considers the recommendations of
its Remuneration Committee which bases its recommendations on input from
the Chief Executive Officer, the officers’ current compensation, changes in cost
of living, our financial condition, our operating results and individual
performance.
Executive
compensation generally consists of base salary, bonuses and long-term incentive
equity compensation such as stock grants or additional options to purchase
shares of the Company’s common stock as well as various health and welfare
benefits. The Board has determined that both the base salary and long-term
incentive equity compensation should be the principal component of executive
compensation. The Board has not adopted a formal bonus plan, and all bonuses are
discretionary.
Elements
of Compensation
The
executive compensation for (i) the Company’s Chief Executive Officer and Chief
Financial Officer and (ii) the Company’s compensated executive officer who were
serving as executive officers (collectively “Named Executive Officers”) for
fiscal 2009 primarily consisted of base salary, long term incentive equity
compensation, income tax reimbursement, and other compensation and benefit
programs generally available to other employees.
Base Salary. The
Board establishes base salaries for the Company’s Named Executive Officers based
on the scope of their responsibilities, taking into account competitive market
compensation paid by other companies in the Company’s peer group for similar
positions. Generally, the Board believes that executive base salaries should be
targeted near the median of the range of salaries for executives in similar
positions and with similar responsibilities at comparable companies in line with
our compensation philosophy.
Base
salaries are reviewed annually, and may be adjusted to realign salaries with
market levels after taking into account individual responsibilities, performance
and experience.
Bonuses. Bonuses are
intended to compensate the Named Executive Officers for achieving the Company’s
financial performance and other objectives established by the Board each year.
The Board currently does not adopt a formal bonus plan and all bonuses are
discretionary.
Long-Term Incentive Equity
Compensation. The Board believes that stock-based awards promote the
long-term growth and profitability of the Company by providing executive
officers with incentives to improve shareholder value and contribute to the
success of the Company and by enabling the Company to attract, retain and reward
the best available persons for executive officer positions. The Named Executive
Officers were eligible to receive certain number of shares of common stock of
the Company. On July 15, 2009, the Company agreed to grant certain number of
shares of common stock of the Company to each of Earnest Leung, Godfrey Hui and
Jennifer Fu in the following amounts: Dr. Leung : 30,000,000 shares; Mr. Hui:
10,000,000 shares and Ms Fu: 1,000,000 shares for their first two years service
to the Company. The Company cannot currently determine the number or type of
additional awards that may be granted to eligible participants under the
long-term incentive equity compensation plan in the future. Such determination
will be made from time to time by the Remuneration Committee (or
Board).
Income Tax
Reimbursement. Dr. Earnest Leung and Mr. Godfrey Hui were fully
reimbursed by the Company for their Hong Kong personal income taxes resulting
from their employment under the employment agreement dated July 15, 2009 while
Ms Jennifer Fu was reimbursed by the Company for her Hong Kong personal income
taxes resulting from 1,000,000 shares of common stock of the Company granted to
her.
Change-In-Control and
Termination Arrangements. The employment agreements with current Named
Executives may be terminated by giving the other party three-month advanced
notice, except Ms. Jennifer Fu may be terminated with one-month advance notice.
Other than as disclosed above, the Company does not have change-in-control
arrangements with any of its current Named Executives, and the Company is not
obligated to pay severance or other enhanced benefits to executive officers upon
termination of their employment.
Summary
Compensation Table
The
following table sets forth information concerning all compensation awarded to,
earned by or paid during fiscal years 2009, 2008 and 2007, to the Named
Executive Officers:
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
(1)
Bonus
($)
|
(2)
Stock Awards
($)
|
Options
Awards
($)
|
Non-Equity
Incentive
Plan Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
(3)
All Other Compensation
($)
|
Total
($)
|
|
Earnest
Leung,
Chief
Executive
Officer
and
Director
|
2009
|
46,154
|
-
|
225,000
|
-
|
-
|
-
|
289,175
|
560,329
|
|
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Godfrey
Hui,
Deputy
Chief
Executive
Officer
and
Director
|
2009
|
161,538
|
-
|
75,000
|
-
|
-
|
-
|
179,981
|
416,519
|
|
2008
|
216,923
|
-
|
777,000
|
-
|
-
|
85,237
|
1,079,160
|
||
|
2007
|
152,308
|
-
|
529,250
|
-
|
-
|
203,755
|
885,313
|
||
|
Jennifer
Fu, Chief
Financial
Officer
and
Corporate
Secretary
|
2009
|
72,495
|
-
|
7,500
|
-
|
-
|
-
|
1,538
|
81,533
|
|
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Daley
Mok, Former
Chief
Financial
Officer,
Corporate
Secretary
and
Director
|
2009
|
93,718
|
-
|
-
|
-
|
-
|
-
|
37,578
|
131,296
|
|
2008
|
151,538
|
-
|
518,000
|
-
|
-
|
-
|
49,686
|
719,224
|
|
|
2007
|
97,179
|
-
|
262,750
|
-
|
-
|
-
|
46,910
|
406,839
|
| (1) | No bonus was paid to the Named Executive Officers in fiscal 2009, 2008 and 2007. |
| (2) | The aggregate number of stock awards vested to each of the Named Executive Officers for his service rendered in each fiscal period was summarized as follows: |
|
Named
Executive Officer
|
2009
|
2008
|
2007
|
|
Earnest
Leung
|
30,000,000
|
-
|
-
|
|
Godfrey
Hui
|
10,000,000
|
300,000
|
275,000
|
|
Jennifer
Fu
|
-
|
-
|
-
|
|
Daley
Mok
|
-
|
200,000
|
125,000
|
As of
December 31, 2009, all the above stocks were issued to each of Named Executive
Officers. The dollar amounts reflect the value determined by the Company for
accounting purposes for these awards and do not reflect whether the recipient
has actually realized a financial benefit from the award. This column represents
the dollar amount recognized for financial statement reporting purposes for each
of the above specified fiscal years for stock awards granted to each of the
Named Executive Officers in accordance with SFAS 123R. Pursuant to SEC rules,
the amounts shown exclude the impact of estimated forfeitures related to
service-based vesting conditions. No stock awards were forfeited by any of the
Named Executive Officers. For additional information, see Note 15 of our
financial statements. For information on the valuation assumptions for stock
grants made prior to 2009, see the notes in our financial statements in the Form
10-K for the respective year.
|
(3)
|
All
other compensation represents (a) contribution paid by the Company into a
mandatory provident fund for the benefit of the Named Executive Officers
(b) monthly cash allowance of HK$40,000 (approximately $5,161) paid to Dr.
Earnest Leung and Mr. Godfrey Hui commencing from July 2009and (c) income
tax reimbursement to be paid to Dr. Earnest Leung and Mr. Godfrey Hui in
order to sufficiently cover their Hong Kong salary taxes resulting from
their employment during each fiscal year and to Mr. Daley Mok for his
employment commencing from July 1, 2007 till June 15, 2009. As the
aggregate of all other perquisites and other personal benefits received by
each Named Executive Officer was less than $10,000, they are not included
in the above.
|
Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements
On July
23, 2007, our subsidiary, NCN Group Management Limited, or the NCN Group,
entered into executive employment agreements with Mr. Godfrey Hui and Mr. Daley
Mok. Pursuant to these employment agreements, effective as of July 1, 2007, each
Named Executive Officer was obligated to receive a monthly base salary and was
entitled to receive shares of the Company’s common stock as
follows:
|
Named
Executive Officer
|
Base
Salary (1)
($)
|
Common
Stock Grant
|
|
|
Godfrey
Hui
|
15,384
|
2,000,000(2)
|
|
|
Daley
Mok
|
8,974
|
1,500,000(3)
|
|
(1) The
Named Executive Officers’ base salary is paid in Hong Kong dollars. The amounts
set forth in this table are in U.S. dollars based on an exchange rate of HK$:US$
= 7.8:1. The base salary has been adjusted during fiscal year 2008 which was
summarized as follows:
|
Named
Executive Officer
|
Adjusted
Base Salary
On
January 1, 2008 ($)
|
Adjusted
Base Salary
on
July 1, 2008 ($)
|
|
Godfrey
Hui
|
16,923
|
19,231
|
|
Daley
Mok
|
9,872
|
15,385
|
(2)
Pursuant to Mr. Hui’s employment contract, he is entitled to a stock grant of
2,000,000 shares of the Company’s common stock subject to annual vesting over
five years if he remains employed by the Company as the Chief Executive Officer
through the vesting date. The details of the vesting date and number of shares
to be vested are as follows: December 31, 2007: 200,000 shares; December 31,
2008: 300,000 shares; December 31, 2009: 400,000 shares; December 31, 2010:
500,000 shares and December 31, 2011: 600,000 shares. The grant shall be subject
to all terms of the Company’s 2007 stock option/stock issuance plan or any
future stock option/stock issuance plan under which it is issued. As of July
2009, his employment contract dated July 23, 2008 was terminated as a result of
change of the board. Accordingly, Mr. Hui was no longer entitled to shares to be
vested in 2009 and 2010.
(3)
Pursuant to Mr. Mok’s employment contract, he is entitled to a stock grant of
1,500,000 shares of the Company’s common stock subject to annual vesting over
five years if he remains employed by the Company as Chief Financial Officer
through the vesting date. The details of the vesting date and number of shares
to be vested are as follows: December 31, 2007: 100,000 shares; December 31,
2008: 200,000 shares; December 31, 2009: 300,000 shares; December 31, 2010:
400,000 shares and December 31, 2011: 500,000 shares. The grant shall be subject
to all terms of the Company’s 2007 stock option/stock issuance plan or any
future stock option/stock issuance plan under which it is issued. As of June 15,
2009, the Company removed Mr. Mok as the Company’s Chief Financial Officer.
Accordingly, Mr. Mok was no longer entitled to shares to be vested in 2009 and
2010.
In
addition to base salaries and stock grants disclosed above, the employment
agreements dated July 23, 2007 for Mr. Hui and Mr. Mok include the following
material provisions:
|
·
|
Each
employment agreement shall continue until termination by either party with
three-month advance notice or for cause or
disability.
|
|
·
|
Discretionary
bonus is determined by the board of directors of the NCN Group based on
the realization of financial and performance goals of the Company and the
NCN Group.
|
|
·
|
Restrictive
covenants regarding confidentiality, other employment after termination
for a period of six months without the approval of the NCN Group’s Board
of Directors, and solicitation of customers, suppliers or employees of the
NCN Group.
|
|
·
|
Income
tax reimbursement which will be sufficient to cover their Hong Kong
personal income taxes resulting from their employment under the respective
employment agreements.
|
|
·
|
In
the event employment is terminated other than for cause, disability, or in
the event of their resignation for good reason, each officer is entitled
to severance payments consisting of his then base salary for 48 months
provided there has been no change in control of either the NCN Group or
the Company, or for 60 months if there has been a change in control of
either the NCN Group or the Company in the preceding one year. In
addition, he shall be entitled to accelerated vesting of all stock grants,
as of the date of such termination other than for cause, remain
unexercised and unvested, to the extent permissible by law. The employment
agreements also provide that, in the event employment is terminated for
disability, each officer shall be potentially eligible for disability
benefits under any Company-provided disability plan in which he then
participate, and shall be entitled to accelerated vesting of all stock
grants, as of the date of such disability, remain unexercised and
unvested, to the extent permissible by
law.
|
On July
15, 2009, the Company restructured the board composition and entered into
separate executive employment agreements with each of Earnest Leung and Godfrey
Hui, in connection with their services to the Company as our Chief Executive
Officer and Deputy Chief Executive Officer, respectively. Accordingly, the
employment agreement dated July 23, 2007 for Mr. Hui was terminated.. Under the
terms of the agreements, each of Dr. Leung and Mr. Hui will receive a monthly
salary of HK$60,000 (approximately $7,741) and a monthly allowance of HK$40,000
(approximately $5,161) and we have agreed to grant each of Dr. Leung and Mr.
Hui, of 30 million shares and 10 million shares of our common stock,
respectively, for their first two years of service to the Company. We will fully
reimburse them for their Hong Kong personal income taxes resulting from their
employment under the agreements. Each of the executives has also agreed to
customary non-competition and confidentiality provisions and the agreements may
be terminated by the Company at any time without notice or payment, in the event
that any of the executives engage in misconduct or dereliction of
duty.
On
February 5, 2010, Jennifer Fu was appointed as the Company’s Chief Financial
Officer. Ms Fu is entitled to a monthly salary of HK$49,000 (approximately
$6,282) and a monthly allowance of HKD6,000 (approximately $769). We have agreed
to grant Ms. Fu 1 million shares of our common stock for her first two years of
service to the Company and will fully reimburse her for her Hong Kong personal
income taxes resulting from 1 million shares granted to her. The employment may
be terminated by the Company at any time without notice or payment, in the event
that any of the executives engage in misconduct or dereliction of
duty.
Retirement
Benefits
Currently,
we do not provide any employees, including our named executive officers any
company sponsored retirement benefits other than a state pension scheme in which
all of our employees in China participate.
Grants
of Plan-Based Awards
The
following table sets forth information regarding grants of awards to the Named
Executive Officers during the year ended December 31, 2009:
|
Name
|
Grant
Date
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units (#)
|
All
Other
Option Awards:
Number of
Securities
Underlying
Options
(#)
(1)
|
Exercise
or
Base
Price
of
Option
Awards
($/share)
|
Grant
Date
Fair
Value
of
Stock
and
Options
Awards
|
Closing
Price
on
Grant
Date
($/share)
|
||||||||||||||||
|
Earnest
Leung
|
July
15, 2009
|
30,000,000
|
-
|
-
|
-
|
900,000
|
||||||||||||||||
|
Godfrey
Hui
|
July
15, 2009
|
10,000,000
|
-
|
-
|
-
|
300,000
|
||||||||||||||||
|
Jennifer
Fu
|
July
15, 2009
|
1,000,000
|
-
|
-
|
-
|
30,000
|
||||||||||||||||
|
Daley
Mok
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
As
described elsewhere herein, in July 2009, three Named Executive Officers were
granted certain shares of the Company’s common stock for their first two years
of service to the Company. Other than the foregoing, no other stock awards were
granted to the Company’s Named Executive Officers during fiscal year
2009.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth the equity awards outstanding at December 31, 2009
for each of the named executive officers.
|
Option Awards
|
Stock Awards
|
||||||||||||||||
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option Exercise
Price ($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
|
Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)
|
|||||||||||
|
Earnest
Leung
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Godfrey
Hui
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Jennifer
Fu(1)
|
-
|
-
|
-
|
-
|
1,000,000
|
$49,810
|
|||||||||||
|
Daley
Mok
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
(1)
|
As
disclosed elsewhere herein, Ms. Fu is entitled to a stock grant of
1,000,000 shares of the Company’s common stock, subject to annual vesting
over two years if she remains employed by the Company through the vesting
date. Such shares with par value of $0.001 were issued on July 28, 2009
but will not vest until July 14, 2010 after which the relevant share
certificate will be handed to her.
|
Potential
Payments Upon Termination or Change-in Control
The
employment agreements with current Named Executives may be terminated by giving
the other party three-month advanced notice, except Ms. Jennifer Fu may be
terminated with one-month advance notice. Other than as disclosed above, the
Company does not have change-in-control arrangements with any of its current
Named Executives, and the Company is not obligated to pay severance or other
enhanced benefits to executive officers upon termination of their employment.
Accordingly, there is no potential payments payable to our current Named
Executive Officers upon termination or change-in control.
Director
Compensation
The
following table provides information about the compensation earned by directors
who served during fiscal year 2009 (including Mr.Gerd Jakob and Mr. Peter Mak
who resigned as director on May 5, 2009 and December 31, 2009 respectively;
Messrs. Daley Mok, Daniel So, Stanley Chu, Edward Lu, Ronglie Xu who hold office
until July 2, 2009):
|
Name
of director
|
Fees
Earned
or
Paid(1)
in
Cash
($)
|
Stock
Awards(2)
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings($) |
All
Other
Compensation
($)
|
Total
($)
|
|
Earnest
Leung
|
52,147
|
-
|
-
|
-
|
-
|
-
|
52,147
|
|
Godfrey
Hui
|
28,000
|
15,000
|
-
|
-
|
-
|
-
|
43,000
|
|
Ronald
Lee*
|
12,000
|
9,000
|
-
|
-
|
-
|
-
|
21,000
|
|
Gerald
Godfrey*
|
12,000
|
9,000
|
-
|
-
|
-
|
-
|
21,000
|
|
Peter
Mak*
|
27,000
|
24,000
|
-
|
-
|
-
|
-
|
51,000
|
|
Daley
Mok
|
7,500
|
10,000
|
-
|
-
|
-
|
-
|
17,500
|
|
Daniel
So
|
7,500
|
10,000
|
-
|
-
|
-
|
-
|
17,500
|
|
Stanley
Chu
|
7,500
|
10,000
|
-
|
-
|
-
|
-
|
17,500
|
|
Edward
Lu*
|
10,000
|
10,000
|
-
|
-
|
-
|
-
|
20,000
|
|
Gerd
Jakob*
|
6,667
|
-
|
-
|
-
|
-
|
-
|
6,667
|
|
Ronglie
Xu*
|
15,000
|
15,000
|
-
|
-
|
-
|
-
|
30,000
|
*Non-employee
directors
(1) For
the service period from July 2008 to June 2009, non-employee directors were
entitled to an annual fee of $20,000 and an additional annual fee of $10,000 was
paid to the chairperson of each board committee while for employee directors,
all were entitled to an annual fee of $15,000 except for (1) Mr. Hui, former
board chairperson, who entitled to an annual fee of $20,000; (2) Dr. Leung, who
was appointed in May 2009 and was entitled to a fee of $32,051 for his service
period from May 2009 to June 2009. For the Service period from July 2009 to June
2010, non-employee directors were entitled to annual fee of $24,000 and the
employee directors were entitled to an annual fee of $36,000.
(2)
In July 2008, directors were granted an award of 10,000 shares with vesting date
on June 30, 2009, for services rendered as a director between July 1, 2008 and
June 30, 2009, and an additional 5,000 shares was granted to the chairperson of
the board and to the chairperson of each board committee. In July 2009, only
non-employee directors were granted an award of 600,000 shares with vesting date
on July 1, 2010. These amounts do not reflect whether the recipient has actually
realized a financial benefit from the awards. The amounts represent the dollar
amount recognized for financial statement reporting purposes for fiscal year
2009 for stock awards granted to each of the directors, in accordance with FAS
123R, and reflect the value determined by the Company for accounting purposes
for these awards. Pursuant to SEC rules, the amounts shown exclude the impact of
estimated forfeitures related to service-based vesting conditions. No stock
awards were forfeited by any of our non-employee directors in fiscal year 2009.
For additional information, see Note 15 of our financial statements included
herein.
Remuneration
Committee Interlocks and Insider Participation
All
current members of the Remuneration Committee are independent directors, and all
past members were independent directors at all times during their service on
such Committee. None of the past or present members of our Remuneration
Committee are present or past employees or officers of ours or any of our
subsidiaries. No member of the Remuneration Committee has had any relationship
with us requiring disclosure under Item 404 of Regulation S-K under the
Securities Exchange Act of 1934, as amended. None of our executive officers has
served on the Board or Remuneration Committee (or other committee serving an
equivalent function) of any other entity, one of whose executive officers served
on our Board or Remuneration Committee.
Limitation
of Liability and Indemnification of Officers and Directors
Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934, as amended, may be permitted to our directors, officers and
controlling persons pursuant to provisions of the Articles of Incorporation and
Bylaws, or otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information as of December 31, 2009 with respect
to compensation plans, under which securities are authorized for issuance,
aggregated as to (i) compensation plans previously approved by security
holders, and (ii) compensation plans not previously approved by security
holders.
Equity
Compensation Plan Information
|
Plan
Category
|
Number
Of Securities To
Be
Issued Upon Exercise Of
Outstanding
Options,
Warrants And Rights
(a)
|
Weighted
Average
Exercise
Price Of
Outstanding
Options,
Warrants And Rights
(b)
|
Number
Of Securities Remaining
Available
For Future Issuance
Under
Equity Compensation
Plans
(Excluding Securities
Reflected In Column
(A))
(c)
|
|
|
Equity
compensation
plans
approved by
security
holders
|
-
|
-
|
1,000,000
(1)
|
|
|
Equity
compensation
plans
not approved by
security
holders
|
100,000
(2)
|
$0.7
|
-
|
|
|
Total
|
100,000
(2)
|
$0.7
|
1,000,000
|
|
|
(1)
|
We
reserved 3,000,000 shares for issuance under our 2004 Stock Incentive
Plan, of which 1,000,000 shares are still available for issuance as of
December 31, 2009. We reserved 7,500,000 shares for issuance under our
2007 Stock Option/Stock Issuance Plan. All 7,500,000 shares were issued as
of December 31, 2009 and 36,997,260 shares were currently issued in
excessive of the number of shares of common stock available for issuance
under 2007 Stock Option/Stock Issuance Plan. Such excessive shares are
held in escrow by the Company, in accordance with the plan, pending
shareholders’ approval. See below subsection - " Equity Incentive
Plans" for more information about the
plan.
|
|||
|
(2)
|
A
warrant to purchase 100,000 shares of restricted common stock was granted
to a consultant on August 25, 2006 with an exercise price of $0.70 per
share. One-fourth of the shares underlying the warrant become exercisable
every 45 days beginning from the date of issuance. The warrant shall
remain exercisable until August 25, 2016. The warrant remained unexercised
as of December 31, 2009.
|
|||
Option
Grants In the Last Fiscal Year
None.
Equity
Incentive Plan
In April
2004, our Board of Directors and holders of a majority of our then outstanding
common stock authorized and approved the 2004 Stock Incentive Plan, or the 2004
Plan. Under the 2004 Plan, we reserved 3,000,000 shares of our common stock for
issuance upon exercise of incentive and non-qualified stock options, stock
bonuses and rights to purchase awarded from time-to-time, to our officers,
directors, employees and consultants. As of December 31, 2009, 2,000,000 shares
have been issued under the plan and 1,000,000 shares remain available for
issuance. No options, warrants or other rights to acquire shares of our common
stock have been granted or are outstanding under the plan. A registration
statement on Form S-8 was filed with the SEC with respect to 2,000,000 shares of
common stock issuable under the plan on April 22, 2004 (SEC File No.
333-114644).
In March
2007, our Board of Directors authorized and approved the 2007 Stock Option/Stock
Issuance Plan, or the 2007 Plan. The purpose of the plan is to promote the best
interests of the Company and its stockholders by providing a means of non-cash
remuneration to selected participants who contribute to the operating progress
and earning power of the Company. The plan also provides incentives to employees
and directors by offering them an opportunity to acquire a proprietary interest
in the Company. Under the 2007 Plan, we reserved 7,500,000 shares of our common
stock for issuance upon exercise of incentive and non-qualified stock options,
stock bonuses and rights to purchase awarded from time to time, to our officers,
directors, employees and consultants. A registration statement on Form S-8 was
filed with the SEC on April 6, 2007 (SEC File No. 333-141943) with respect to
7,500,000 shares of common stock issuable under the 2007 Plan as well as options
to purchase 225,000 shares of common stock issued to the Company’s legal counsel
in February 2006. Such options were not issued under the 2004 Plan or the 2007
Plan. The Company’s stockholders approved the 2007 Plan in November
2007.
Both of
the Plans are currently administered by our Board of Directors. Under each plan,
the Board determines which of our employees, officers, directors and consultants
are granted awards, as well as the material terms of each award, including
whether options are to be incentive stock options or non-qualified stock
options.
Subject
to the provisions of the Plans, and the Internal Revenue Code with respect to
incentive stock options, the Board determines who shall receive awards, the
number of shares of common stock that may be purchased, the time and manner of
exercise of options and exercise prices. At its discretion, the Board also
determines the form of consideration to be received upon exercise and may permit
the exercise price of options granted under the plans to be paid in whole or in
part with previously acquired shares and/or the surrender of options. The term
of options granted under the plans may not exceed ten years, or five years for
an incentive stock option granted to an optionee owning more than 10% of our
voting stock. The exercise price for incentive stock options may not be less
than 100% of the fair market value of our common stock at the time the option is
granted. However, incentive stock options granted to a 10% holder of our voting
stock may not be exercisable at less than 110% of the fair market value of our
common stock at the date of the grant. The exercise price for non-qualified
options will be determined by the board.
Security
Ownership of Certain Beneficial Owners and Management
The
following tables set forth information as of March 15, 2010, regarding the
beneficial ownership of our common stock (a) by each stockholder who is known by
the Company to own beneficially in excess of 5% of our outstanding common stock;
(b) by each of the Company’s officers and directors; (c) and by the Company’s
officers and directors as a group. Except as otherwise indicated, all persons
listed below have (i) sole voting power and investment power with respect to
their shares of common stock, except to the extent that authority is shared by
spouses under applicable law, and (ii) record and beneficial ownership with
respect to their shares of stock. Unless otherwise identified, the address of
the directors and officers of the Company listed above is Suite 3908, Shell
Tower, Times Square, 1 Matheson Street Causeway Bay, Hong Kong. .
|
Title of Class
|
Name and Address of
Beneficial Owner
|
Office, If Any
|
Amount & Nature of
Beneficial
Ownership
(1)
|
Percent of
Class
(3)
|
||||
|
Common Stock
|
Earnest
Leung
|
CEO
and Director
|
31,463,000
|
7.4
|
||||
|
Common
Stock
|
Godfrey
Hui
|
Deputy
CEO and Director
|
11,135,000
|
2.6
|
||||
|
Common
Stock
|
Jennifer
Fu
|
CFO
|
10,000
|
*
|
||||
|
Common
Stock
|
Ronald
Lee
|
Director
|
-
|
-
|
||||
|
Common
Stock
|
Gerald
Godfrey
|
Director
|
-
|
-
|
||||
|
All
Officers and Directors as a
group (5 persons named above) |
42,608,000
|
|||||||
|
Common
Stock
|
Keywin
Holdings Limited
Room
902, 9/F1., Universal Trade Centre, 3 Arbuthnot Road, Central, Hong
Kong
|
5%
Security Holder
|
243,523,668 (2)
|
44.7
|
||||
|
Sino
Portfolio International Ltd
3104
-7, 31/F, Central Plaza, 18 Harbour Road, Hong Kong
|
5%
Security Holder
|
137,681,437
|
32.6
|
|||||
|
Total
Shares Owned by Persons Named above
|
423,813,105
|
* Less than 1%
(1) Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.
(2)
Includes an option to purchase an aggregate of 122,814,185 shares of the
Company’s common stock, exercisable for an aggregate purchase price of
$2,000,000 until October 1, 2010.
(3) A
total of 422,522,071 shares of our common stock outstanding are considered to be
outstanding pursuant to SEC Rule 13d-3(d)(1) as of March 15, 2010. For each
beneficial owner above, any options exercisable within 60 days have been
included in the denominator.
Changes
in Control
There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Related
Transactions
Except as
set forth below, during our last two fiscal years, we have not entered into any
material transactions or series of transactions that would be considered
material in which any director or executive officer or beneficial owner of 5% or
more of any class of our 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 Director (being appointed on
July 15, 2009 and May 11, 2009 respectively) is 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 is recorded as
issuance costs for 1% Convertible Promissory Notes and $100,000 is recorded as
prepaid expenses and other current assets, net during the year ended December
31, 2009.
On July
1, 2009, the Company and Keywin, of which Dr. Earnest Leung 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 122,814,185 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. On September 30, 2009, the exercise
period for the Keywin Option was further extended to a nine-month period ended
January 1, 2010. On January 1, 2010, the Company and Keywin entered into the
third Amendment, pursuant to which the Company agreed to extend the exercise
period to an eighteen-month period ending on October 1, 2010, and provide the
Company with the right to unilaterally terminate the exercise period upon 30
days’ written notice.
During
the year ended December 31, 2009, the Company paid expenses in an aggregate
amount of $413,309 on behalf of Vision Tech International Holdings Limited, of
which Dr. Earnest Leung is the chief executive officer and director. The balance
is unsecured, bears no interest and repayable on demand. Such amount was fully
repaid as of the date of this Annual Report.
Related
Party Transaction Policy
Our
Company has adopted a written Related Party Transaction Policy, or the Policy,
for the purpose of describing the procedures used to identify, review, approve
and disclose, if necessary, any transaction in which (i) the Company is a
participant and (ii) a related person has or will have a direct or indirect
material interest.
Once a
related party transaction in which the aggregate amount involved will or may be
expected to exceed $120,000 in any calendar year has been identified, the Audit
Committee must review the transaction for approval or ratification. In
determining whether to approve or ratify a related party transaction, the Audit
Committee shall consider all relevant facts and circumstances, including the
following factors:
|
·
|
the
benefits to the Company of the
transaction;
|
|
·
|
the
nature of the related party’s interest in the
transaction;
|
|
·
|
whether
the transaction would impair the judgment of a director or executive
officer to act in the best interest of the Company and its stockholders;
|
|
·
|
the
potential impact of the transaction on a director’s independence;
and
|
|
·
|
any
other matters the Audit Committee deems
appropriate.
|
No
director may participate in any discussion, approval or ratification of a
transaction in which he or she is a related person.
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal
years.
Director
Independence
Mr.
Ronald Lee and Mr. Gerald Godfrey each serves on our board of directors as an
“independent director” as defined by the Nasdaq Marketplace Rules. Our board of
directors currently has three standing committees which perform various duties
on behalf of and report to the board of directors: (i) audit committee, (ii)
remuneration committee and (iii) nominating committee. Each of the three
standing committees is comprised entirely of these independent
directors.
There are
no family relationships among any of our directors or executive officers. There
are no arrangements or understandings among any of the directors, executive
officers or other persons pursuant to which any officer or director was selected
to serve as a director or officer.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Baker
Tilly Hong Kong Limited and Jimmy C.H. Cheung & Co are our Principal
Independent Registered Public Accountants engaged to examine our financial
statements for the fiscal years ended December 31, 2009 and 2008 respectively.
The following table shows the fees that we paid or accrued for the audit and
other services provided by Baker Tilly Hong Kong Limited and Jimmy C.H. Cheung
& Co., for the fiscal years ended December 31, 2009 and 2008.
|
Fee
Category
|
2009
|
2008
|
||||||
|
Audit
Fees
|
$ | 102,423 | $ | 139,526 | ||||
|
Audit-Related
Fees
|
$ | -- | $ | -- | ||||
|
Tax
Fees
|
$ | -- | $ | -- | ||||
|
All
Other Fees
|
$ | -- | $ | -- | ||||
Audit
Fees
This
category includes the audit of our annual financial statements, review of
financial statements included in our annual and quarterly reports and services
that are normally provided by the independent registered public accounting firms
in connection with engagements for those fiscal years. They also include fees
billed for those services that are normally provided by the independent
registered public accounting firms in connection with statutory and regulatory
filings.
Audit-Related
Fees
This
category consists of assurance and related services by the independent
registered public accounting firms that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under “Audit Fees”. The services for the fees disclosed under
this category include consultations concerning financial accounting and
reporting standards.
Tax
Fees
This
category consists of professional services rendered for tax compliance and tax
advice.
All
Other Fees
This
category consists of fees for other miscellaneous items.
Policy on Pre-Approval of Audit
Services
The Audit
Committee pre-approves all services, including both audit and non-audit
services, provided by our independent registered public accounting firm. All
audit services (including statutory audit engagements as required under local
country laws) must be accepted by the Audit Committee before the audit
commences.
Each
year, management and the independent registered public accounting firm will
jointly submit a pre-approval request, which will list each known and/or
anticipated audit and non-audit service for the upcoming calendar year and which
will include associated budgeted fees. The Audit Committee will review the
requests and approve a list of annual pre-approved non-audit
services.
All
services provided by Baker Tilly Hong Kong Limited and Jimmy C.H. Cheung &
Co during the fiscal years ended December 31, 2009, 2008 and 2007 were
pre-approved by the Audit Committee.
PART
IV
|
ITEM
15
|
EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
|
(a) The
following consolidated financial statements are filed as a part of this Form
10-K :
|
(i)
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
|
|
(ii)
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-6
|
|
(iii)
|
Consolidated
Statements of Operations and Comprehensive Loss for the years ended
December 31, 2009, 2008 and 2007 (Restated)
|
F-7
|
|
(iv)
|
Consolidated
Statement of Stockholders’ Equity for the years ended December 31, 2009,
2008 and 2007 (Restated)
|
F-9
|
|
(v)
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007 (Restated)
|
F-13
|
|
(vi)
|
Notes
to Consolidated Financial Statements
|
F-15
|
(b) The
following Exhibits are filed as part of this Annual Report on Form
10-K:
|
Exhibit
No.
|
Description
|
|
3.1
|
Amended
And Restated Certificate Of Incorporation incorporated herein by reference
from Exhibit A to Registrant’s Definitive Information Statement on
Schedule 14C filed with the SEC on January 10, 2007.
|
|
3.2
|
Amended
and Restated By-Laws, adopted on January 10, 2006, is incorporated herein
by reference from Exhibit 3-(II) to Registrant’s Current Report on Form
8-K filed with the SEC on January 18, 2006.
|
|
3.3
|
Amended
and Restated Certificate of Incorporation filed with the Delaware
Secretary of State on July 27, 2009 (incorporated herein by reference from
Registrant's Current Report on Form 8-Kfiled with the SEC on July 29,
2009).
|
|
4.1
|
Form
of Registrant’s Common Stock Certificate.
|
|
4.2
|
Form
of Amended and Restated Secured Convertible Promissory Note (incorporated
herein by reference from Registrant's Current Report on Form 8-Kfiled with
the SEC on February 6, 2008).
|
|
4.3
|
Form
of Warrant (incorporated herein by reference from Registrant's Current
Report on Form 8-K filed with the SEC on February 6,
2008).
|
|
4.4
|
Form
of 3% Senior Secured Convertible Promissory Note (incorporated herein by
reference from Registrant's Current Report on Form 8-K filed with the SEC
on November 14, 2007).
|
|
4.5
|
Form
of Warrant (incorporated herein by reference from Registrant's Current
Report on Form 8-K filed with the SEC on November 14,
2007).
|
|
4.6
|
TEDA
Travel Group, Inc. 2004 Stock Incentive Plan (incorporated herein by
reference from Registrant's Registration Statement on Form S-8 filed with
the SEC on April 22, 2004).
|
|
4.7
|
2007
Stock Option/Stock Issuance Plan (incorporated herein by reference from
Registrant's Registration Statement on Form S-8 filed with the SEC on
April 6, 2007).
|
|
4.8
|
Form
of Note 1% Senior Unsecured Convertible Promissory Note, dated April 2,
2009 (incorporated herein by reference from Registrant's Current Report on
Form 8-K filed with the SEC on April 6, 2009).
|
|
4.9
|
Registration
Rights Agreement, dated April 2, 2009, by and among the Company, Sculptor
Finance (MD) Ireland Limited, Sculptor Finance (AS) Ireland Limited,
Sculptor Finance (SI) Ireland Limited and Keywin Holdings Limited
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on April 6, 2009)
|
|
10.1
|
Purchase
Agreement, dated November 19, 2007 (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on November 26,
2007).
|
|
10.2
|
First
Amendment to Note and Warrant Purchase Agreement, dated January 31, 2008
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on February 6, 2008).
|
|
10.3
|
Security
Agreement, dated January 31, 2008 (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on February 6,
2008).
|
|
10.4
|
Registration
Rights Agreement, dated November 19, 2007 (incorporated herein by
reference from Registrant's Current Report on Form 8-K filed with the SEC
on November 26, 2007).
|
|
10.5
|
Share
Purchase Agreement dated January 1, 2008 (incorporated herein by reference
from Registrant's Current Report on Form 8-K filed with the SEC on January
7, 2008).
|
|
10.6
|
Agreement
for Co-operation in Business between Shanghai Quo Advertising Company
Limited and Wuhan Weiao Advertising Company Limited dated as of August 16,
2007 (incorporated herein by reference from Registrant's Current Report on
Form 8-K filed with the SEC on August 21, 2007).
|
|
10.7
|
Note
and Warrant Purchase Agreement dated November 12, 2007 by and between the
Company and Wei An Developments Limited (incorporated herein by reference
from Registrant's Current Report on Form 8-K filed with the SEC on
November 14, 2007).
|
|
10.8
|
Contract
for the Rebuilding and Leasing of Advertisement Light Boxes on Nanjing
Road Pedestrian Street (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on June 26,
2007) .
|
|
10.9
|
Agreement
for Advertising Business dated April 26, 2007, by and among Shanghai Quo
Advertising Company Limited, a subsidiary of Network CN Inc., and Shanghai
Yukang Advertising Company Limited (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on May 2,
2007).
|
|
10.10
|
Agreement
for Co-operation and Agency in the Publication of Advertisements dated
April 14, 2007, by and among Shanghai Quo Advertising Company Limited, a
subsidiary of Network CN Inc., and Shanghai Qian Ming Advertising Company
Limited (incorporated herein by reference from Registrant's Current Report
on Form 8-K filed with the SEC on April 20, 2007).
|
|
10.11
|
Stock
Transfer Agreement between Youwei Zheng and NCN Management Services
Limited for acquisition of 55% equity interest in Guangdong Tianma
International Travel Service Co., Ltd., dated June 16, 2006 (incorporated
herein by reference from Registrant’s Current Report on Form 8-K filed
with the SEC on March 30, 2007).
|
|
10.12
|
Business
Joint Venture Agreement, between Shanghai Zhong Ying Communication
Engineering Company Limited and Shanghai Quo Advertising Company Limited
to manage LED outdoor project in Huangpu district of Shanghai, China
(incorporated herein by reference from Registrant’s Current Report on Form
8-K filed with the SEC on February 7, 2007).
|
|
10.13
|
Business
Joint Venture Agreement, between Nanjing Yiyi Culture Advertising Company
Limited and Shanghai Quo Advertising Company Limited to manage LED outdoor
project in Nanjing (incorporated herein by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on February 15,
2007).
|
|
10.14
|
Business
Joint Venture Agreement, between Wuhan Xin An Technology Development
Company Limited and Shanghai Quo Advertising Company Limited to manage LED
outdoor project in Wuhan (incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on March 1,
2007).
|
|
10.15
|
Stock
Purchase Agreement dated as of September 1, 2008, between Zhanpeng Wang,
an individual, and NCN Group Limited, a British Virgin Islands
corporation.
|
|
10.16
|
Note
Exchange Agreement, dated April 2, 2009, by and among the Company,
Sculptor Finance (MD) Ireland Limited, Sculptor Finance (AS) Ireland
Limited, Sculptor Finance (SI) Ireland Limited, OZ Master Fund, Ltd., OZ
Asia Master Fund, Ltd. and OZ Global Special Investments Master Fund, L.P.
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on April 6, 2009)
|
|
10.17
|
Note
Exchange and Option Agreement, dated April 2, 2009, between the Company
and Keywin Holdings Limited. (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on April 6,
2009)
|
|
10.18
|
Letter
Agreement and Termination of Investor Rights Agreement, dated April 2,
2009, by and among the Company, Company, Sculptor Finance (MD) Ireland
Limited, Sculptor Finance (AS) Ireland Limited, Sculptor Finance (SI)
Ireland Limited, OZ Master Fund, Ltd., OZ Asia Master Fund, Ltd., OZ
Global Special Investments Master Fund, L.P. and Keywin Holdings Limited.
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on April 6, 2009)
|
|
10.19
|
Employment
Agreement, dated July 15, 2009, between the Company and Earnest Leung.
(incorporated herein by reference from Registrant's Quarterly Report on
Form 10-Q filed with the SEC on August 10, 2009)
|
|
10.20
|
Employment
Agreement, dated July 15, 2009, between the Company and Godfrey Hui.
(incorporated herein by reference from Registrant's Quarterly Report on
Form 10-Q filed with the SEC on August 10, 2009)
|
|
10.21
|
Amendment
No. 1 to Note Exchange and Option Agreement, dated July 1, 2009, between
Keywin Holdings Limited and the Company. (incorporated herein by reference
from Registrant's Quarterly Report on Form 10-Q filed with the SEC on
August 10, 2009)
|
|
10.22
|
Amendment
No. 2 to Note Exchange and Option Agreement dated September 30, 2009,
between Keywin Holding Limited and the Company. (incorporated herein by
reference from Registrant's Quarterly Report on Form 10-Q filed with the
SEC on November 6, 2009)
|
|
10.23
|
Amendment
No. 3 to Note Exchange and Option Agreement dated January 1, 2010,
between Keywin Holding Limited and the Company
|
|
10.24
|
Lease
Agreement with Vision Tech International Holdings
Limited
|
|
14.1
|
Code
of Business Conduct and Ethics for Network CN Inc. as approved by the
Board of Directors as of December 31, 2003, is incorporated herein by
reference from Registrant’s Annual Report on Form 10-KSB filed with the
SEC on April 13, 2005.
|
|
16.1
|
Letter
of US Audit Practice of Jimmy CH Cheung & Co, dated February 9, 2010.
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on February 9, 2010).
|
|
21.1
|
Subsidiaries
of the registrant.*
|
|
23.1
|
Consent
of independent auditors Jimmy C.H. Cheung & Co.*
|
| 23.2 | Consent of independent auditors Baker Tilly Hong Kong Limited.* |
|
24.1
|
Power
of Attorney (included in the Signatures section of this
report).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
*
Filed herewith.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| NETWORK CN INC | |||
|
|
By:
|
/s/ Earnest Leung | |
| Earnest Leung | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: March 31, 2010 | |||
|
|
By:
|
/s/ Jennifer Fu | |
| Jennifer Fu | |||
| Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) | |||
| Date: March 31, 2010 | |||
Power
of Attorney
Each
person whose signature appears below appoints Earnest Leung his or her
attorney-in-fact, with full power of substitution and re-substitution, to sign
any and all amendments to this report on Form 10-K of Network CN Inc., and to
file them, with all their exhibits and other related documents, with the
Securities and Exchange Commission, ratifying and confirming all that their
attorney-in-fact and agent or his or her substitute or substitutes may lawfully
do or cause to be done by virtue of this appointment.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
Name
|
Title
|
Date
|
|
|
/s/
Earnest Leung
|
Chief
Executive Officer and Director
|
March 31,
2010
|
|
|
Earnest
Leung
|
(Principal
Executive Officer)
|
||
|
/s/
Jennifer Fu
|
Chief
Financial Officer
|
March
31, 2010
|
|
|
Jennifer
Fu
|
(Principal
Financial and Accounting Officer)
|
||
|
/s/
Godfrey Hui
|
Deputy
Chief Executive Officer and Director
|
March
31, 2010
|
|
|
Godfrey
Hui
|
|||
|
/s/
Ronald Lee
|
Director
|
March
31, 2010
|
|
|
Ronald
Lee
|
NETWORK
CN INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Contents
|
Page
|
|
|
F-2
|
||
|
F-6
|
||
|
F-7
|
||
|
F-9
|
||
|
F-13
|
||
|
F-15
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of:
Network
CN Inc.
We have
audited the accompanying consolidated balance sheet of Network CN Inc. and all
of its subsidiaries and variable interest entities as of December 3 1, 2009 and
the related consolidated statement of operations and comprehensive loss,
stockholders' equity and cash flows for the year ended December 31, 2009. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits of the financial statements provide a reasonable basis for our
opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Network CN Inc. and all of
its subsidiaries and variable interest entities as of December 31, 2009, and the
results of its operations and its cash flows for the year ended December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Page
Two
The
accompanying consolidated financial statements have been prepared assuming that
the Company will
continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company
has incurred net losses of $37,359,188 for the year ended December 31, 2009.
Additionally, during
the year ended December 31, 2009, the Company has used cash flow in operations
of $5,428,273. As of December 31, 2009, the Company recorded a stockholders'
deficit of $1,491,206. These factors raise substantial doubt about its ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Baker Tilly Hong Kong Limited
BAKER
TILLY HONG KONG LIMITED
Certified
Public Accountants
Hong
Kong
Date:
March 31, 2010
 |
Jimmy
C.H. Cheung & Co
Certified
Public Accountants
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of:
Network
CN Inc.
We have
audited the accompanying consolidated balance sheet of Network CN Inc. and all
of its subsidiaries and variable interest entities as of December 31,
2008 and the related consolidated statements of operations and comprehensive
loss, stockholders' equity and cash flows for the years ended December 31, 2008
and 2007 (restated). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits of the financial statements provide a reasonable basis for our
opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Network CN Inc. and all of
its subsidiaries and variable interest entities as of December 31, 2008, and the
results of its operations and its cash flows for the years ended December 31,
2008 and 2007 (restated), in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Page
Two
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred net losses of
$59,484,833 and $14,646,619 for the years ended December 31, 2008 and 2007
(restated), respectively. Additionally, during the years ended December 31, 2008
and 2007 (restated), the Company has used cash flow in operations of $17,944,568
and $21,320,216, respectively. As of December 31, 2008, the Company recorded a
stockholders' deficit of $23,356,217. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Jimmy C.H. Cheung & Co.
JIMMY
C.H. CHEUNG & CO
Certified
Public Accountants
Hong
Kong
Date: March 26, 2009
|
1607
Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong
Tel: (852)
25295500 Fax: (852) 21277660
Email:
jimmy.cheung@jchcheungco.hk
Website: http://www.jchcheungco.hk
|
NETWORK
CN INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
|
As
of December 31,
|
||||||||||||
|
Note
|
2009
|
2008
|
||||||||||
|
ASSETS
|
||||||||||||
|
Current
Assets
|
||||||||||||
|
Cash
|
$ | 1,969,549 | $ | 7,717,131 | ||||||||
|
Accounts
receivable, net
|
6 | 90,065 | 217,402 | |||||||||
|
Prepayments
for advertising operating rights, net
|
7 | 348,239 | 418,112 | |||||||||
|
Prepaid
expenses and other current assets, net
|
8 | 665,907 | 630,132 | |||||||||
|
Total
Current Assets
|
3,073,760 | 8,982,777 | ||||||||||
|
Equipment,
Net
|
9 | 1,389,691 | 2,397,624 | |||||||||
|
Intangible
Assets, Net
|
10 | - | 449,307 | |||||||||
|
Deferred
Charges, Net
|
11 | 191,991 | 1,242,958 | |||||||||
|
TOTAL
ASSETS
|
$ | 4,655,442 | $ | 13,072,666 | ||||||||
|
LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
||||||||||||
|
Current
Liabilities
|
||||||||||||
|
Accounts
payable, accrued expenses and other payables
|
12 | $ | 2,288,059 | $ | 5,577,204 | |||||||
|
Current
liabilities from discontinued operations
|
3,655 | 3,655 | ||||||||||
|
Total
Current Liabilities
|
2,291,714 | 5,580,859 | ||||||||||
|
3%
Convertible Promissory Notes Due 2011, Net
|
13 | - | 30,848,024 | |||||||||
|
1%
Convertible Promissory Note Due 2012, Net
|
13 | 3,854,934 | - | |||||||||
|
TOTAL
LIABILITIES
|
6,146,648 | 36,428,883 | ||||||||||
|
COMMITMENTS
AND CONTINGENCIES
|
14 | |||||||||||
|
STOCKHOLDERS’
DEFICIT
|
15 | |||||||||||
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized
None
issued and outstanding
|
- | - | ||||||||||
|
Common
stock, $0.001 par value, 2,000,000,000 shares authorized
Shares
issued and outstanding: 423,122,071 and 71,641,608 as of December 31, 2009
and 2008 respectively
|
423,122 | 71,642 | ||||||||||
|
Additional
paid-in capital
|
119,323,848 | 59,578,612 | ||||||||||
|
Deferred
stock-based compensation
|
(900,000 | ) | - | |||||||||
|
Accumulated
deficit
|
(122,013,120 | ) | (84,653,932 | ) | ||||||||
|
Accumulated
other comprehensive income
|
1,674,944 | 1,647,461 | ||||||||||
|
TOTAL
STOCKHOLDERS’ DEFICIT
|
(1,491,206 | ) | (23,356,217 | ) | ||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$ | 4,655,442 | $ | 13,072,666 | ||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
NETWORK
CN INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 (RESTATED)
|
Years
Ended December 31,
|
||||||||||||||||
|
Note(s)
|
2009
|
2008
|
2007
Restated(1)
|
|||||||||||||
|
REVENUES
|
|
|||||||||||||||
|
Advertising
services
|
$ | 1,266,927 | $ | 4,622,270 | $ | 1,442,552 | ||||||||||
|
COST
OF REVENUES
|
||||||||||||||||
|
Cost
of advertising services
|
(2,067,881 | ) | (17,374,713 | ) | (2,795,188 | ) | ||||||||||
|
GROSS
LOSS
|
(800,954 | ) | (12,752,443 | ) | (1,352,636 | ) | ||||||||||
|
OPERATING
EXPENSES
|
||||||||||||||||
|
Selling
and marketing
|
(630,730 | ) | (2,996,142 | ) | (504,758 | ) | ||||||||||
|
General
and administrative
|
(4,532,628 | ) | (11,254,933 | ) | (11,067,777 | ) | ||||||||||
|
Net
write-back of /(allowance for) doubtful debts
|
6,8 | 542,771 | (7,739,043 | ) | - | |||||||||||
|
Non-cash
impairment charges
|
7,9,10 | (802,487 | ) | (18,109,200 | ) | (516,419 | ) | |||||||||
|
Total
Operating Expenses
|
(5,423,074 | ) | (40,099,318 | ) | (12,088,954 | ) | ||||||||||
|
LOSS
FROM OPERATIONS
|
(6,224,028 | ) | (52,851,761 | ) | (13,441,590 | ) | ||||||||||
|
OTHER
INCOME
|
||||||||||||||||
|
Interest
income
|
22,486 | 90,703 | 23,340 | |||||||||||||
|
Other
income
|
14,086 | 645 | 74 | |||||||||||||
|
Total
Other Income
|
36,572 | 91,348 | 23,414 | |||||||||||||
|
INTEREST
AND OTHER DEBT-RELATED EXPENSES
|
||||||||||||||||
|
Amortization
of deferred charges and debt discount
|
13 | (18,873,863 | ) | (5,589,920 | ) | (206,391 | ) | |||||||||
|
Non-cash
debt conversion charges
|
13 | (10,204,627 | ) | - | - | |||||||||||
|
Loss
on early extinguishment of debt
|
13 | (1,696,684 | ) | - | - | |||||||||||
|
Interest
expense
|
13 | (420,731 | ) | (1,492,458 | ) | (122,803 | ) | |||||||||
|
Total
Interest and Other Debt-Related Expenses
|
(31,195,905 | ) | (7,082,378 | ) | (329,194 | ) | ||||||||||
|
NET
LOSS BEFORE INCOME TAXES
|
(37,383,361 | ) | (59,842,791 | ) | (13,747,370 | ) | ||||||||||
|
Income
taxes
|
20 | - | - | (7,668 | ) | |||||||||||
|
NET
LOSS FROM CONTINUING OPERATIONS
|
(37,383,361 | ) | (59,842,791 | ) | (13,755,038 | ) | ||||||||||
|
DISCONTINUED
OPERATIONS
|
||||||||||||||||
|
Net
loss from discontinued operations, net of income taxes
|
18 | - | (21,044 | ) | (953,629 | ) | ||||||||||
|
Gain
from disposal of discontinued operations
|
18 | - | 66,085 | - | ||||||||||||
|
NET
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
|
- | 45,041 | (953,629 | ) | ||||||||||||
|
NET
LOSS
|
$ | (37,383,361 | ) | $ | (59,797,750 | ) | $ | (14,708,667 | ) | |||||||
|
LESS:
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS, NET OF INCOME
TAXES
|
24,173 | 312,917 | 62,048 | |||||||||||||
|
NET
LOSS ATTRIBUTABLE TO NCN COMMON STOCKHOLDERS
|
$ | (37,359,188 | ) | $ | (59,484,833 | ) | $ | (14,646,619 | ) | |||||||
|
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
|
Total
other comprehensive income
|
26,655 | 1,589,247 | 65,712 | |||||||||||||
|
Less:
foreign currency translation (gain) loss attributable to noncontrolling
interests
|
828 | (7,083 | ) | (3,895 | ) | |||||||||||
|
Foreign
currency translation gain attributable To NCN common
stockholders
|
27,483 | 1,582,164 | 61,817 | |||||||||||||
|
COMPREHENSIVE
LOSS ATTRIBUTABLE TO NCN COMMON STOCKHOLDERS
|
$ | (37,331,705 | ) | $ | (57,902,669 | ) | $ | (14,584,802 | ) | |||||||
|
NET
LOSS PER COMMON SHARE – BASIC AND DILUTED
|
||||||||||||||||
|
Loss
per common share from continuing operations attributable to NCN common
stockholders
|
17 | $ | (0.12 | ) | $ | (0.83 | ) | $ | (0.20 | ) | ||||||
|
Loss
per common shares from discontinued operations attributable to NCN common
stockholders
|
17 | - | - | (0.01 | ) | |||||||||||
|
Net
loss per common share – basic and diluted
|
17 | $ | (0.12 | ) | $ | (0.83 | ) | $ | (0.21 | ) | ||||||
|
WEIGHTED
AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
|
17 | 317,882,046 | 71,569,242 | 68,556,081 | ||||||||||||
|
AMOUNTS
ATTRIBUTABLE TO NCN COMMON STOCKHOLERS
|
||||||||||||||||
|
Loss
from continuing operations, net of tax
|
$ | (37,359,188 | ) | $ | (59,527,473 | ) | $ | (13,692,714 | ) | |||||||
|
Gain
(loss) from discontinued operations, net of tax
|
- | 42,640 | (953,905 | ) | ||||||||||||
|
NET
LOSS ATTRIBUTABLE TO NCN COMMON STOCKHOLDERS
|
$ | (37,359,188 | ) | $ | (59,484,833 | ) | $ | (14,646,619 | ) |
(1) See
Note 3 – Restatement and Reclassification
The
accompanying notes are an integral part of the consolidated financial
statements.
NETWORK
CN INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007(RESTATED)
|
Common
Stock
|
||||||||||||||||||||||||||||
|
Share
|
Amount
|
Additional
Paid-In
Capital
|
Deferred
Stock-Based
Compensation
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Income
|
Total
|
||||||||||||||||||||||
|
Balance
as of December
31,
2006
|
67,300,718 | $ | 67,301 | $ | 22,721,951 | $ | (2,845,000 | ) | $ | (10,522,480 | ) | $ | 3,480 | $ | 9,425,252 | |||||||||||||
|
Issuance
of stock for
private
placement
|
500,000 | 500 | 1,499,500 | - | - | - | 1,500,000 | |||||||||||||||||||||
|
Issuance
of stock for
acquisition
of a
subsidiary
|
300,000 | 300 | 843,300 | - | - | - | 843,600 | |||||||||||||||||||||
|
Issuance
of stock for
services
rendered by
directors
and officers
|
607,260 | 607 | 166,227 | - | - | - | 166,834 | |||||||||||||||||||||
|
Issuance
of stock for
services
rendered by
consultants
|
218,630 | 219 | 441,785 | - | - | - | 442,004 | |||||||||||||||||||||
|
Exercise
of warrants by a consultant
|
225,000 | 225 | 22,275 | - | - | - | 22,500 | |||||||||||||||||||||
|
Stock-based
compensation
for stock
granted
to directors,
officers
and employees
for
services
|
- | - | 2,378,380 | - | - | - | 2,378,380 | |||||||||||||||||||||
|
Stock-based
compensation
for stock option/warrants issued
to
consultants for
services
|
- | - | 27,921 | - | - | - | 27,921 | |||||||||||||||||||||
|
Stock-based
compensation
for stock
warrants
issued to a
placement
agent for
services
|
- | - | 21,305 | - | - | - | 21,305 | |||||||||||||||||||||
|
Amortization
of deferred
stock-based
compensation
|
- | - | - | 2,845,000 | - | - | 2,845,000 | |||||||||||||||||||||
|
Value
of warrants
associated
with
convertible
notes
|
- | - | 2,823,670 | - | - | - | 2,823,670 | |||||||||||||||||||||
|
Value
of beneficial
conversion
feature of
convertible
notes to
common
stock
|
- | - | 4,727,272 | - | - | 4,727,272 | ||||||||||||||||||||||
|
Translation
adjustment
|
- | - | - | - | - | 61,817 | 61,817 | |||||||||||||||||||||
|
Net
loss for the year -
Restated(1)
|
- | - | - | - | (14,646,619 | ) | - | (14,646,619 | ) | |||||||||||||||||||
|
Balance
as of December
31,
2007- Restated(1)
|
69,151,608 | $ | 69,152 | $ | 35,673,586 | $ | - | $ | (25,169,099 | ) | $ | 65,297 | $ | 10,638,936 | ||||||||||||||
|
Value
of warrants
associated
with
convertible
notes
|
- | - | 5,810,000 | - | - | - | 5,810,000 | |||||||||||||||||||||
|
Value
of beneficial
conversion
feature of
convertible
notes to
common
stock
|
- | - | 11,030,303 | - | - | - | 11,030,303 | |||||||||||||||||||||
|
Issuance
of stock for
acquisition
of
subsidiaries
|
1,500,000 | 1,500 | 3,736,500 | - | - | - | 3,738,000 | |||||||||||||||||||||
|
Issuance
of stock for services rendered by directors and officers
|
330,000 | 330 | (330 | ) | - | - | - | - | ||||||||||||||||||||
|
Issuance
of stock for
services
rendered by
employees
|
660,000 | 660 | (660 | ) | - | - | - | - | ||||||||||||||||||||
|
Stock-based
compensation
for stock
granted
to directors,
officers
and employees
for
services
|
- | - | 3,149,028 | - | - | - | 3,149,028 |
|
Stock-based
compensation
for
stock
granted to a
consultant
for services
|
- | - | 52,354 | - | - | - | 52,354 | |||||||||||||||||||||
|
Stock-based
compensation
for stock
warrants
issued to a
placement
agent for
service
|
- | - | 127,831 | - | - | - | 127,831 | |||||||||||||||||||||
|
Translation
adjustment
|
- | - | - | - | - | 1,582,164 | 1,582,164 | |||||||||||||||||||||
|
Net
loss for the year
|
- | - | - | - | (59,484,833 | ) | - | (59,484,833 | ) | |||||||||||||||||||
|
Balance
as of December
31,
2008
|
71,641,608 | $ | 71,642 | $ | 59,578,612 | $ | - | $ | (84,653,932 | ) | $ | 1,647,461 | $ | (23,356,217 | ) | |||||||||||||
|
Issuance
of stock for
services
rendered by
directors
and officers
|
43,385,000 | 43,385 | (43,385 | ) | (1,200,000 | ) | - | - | (1,200,000 | ) | ||||||||||||||||||
|
Issuance
of stock for
services
rendered by
employees
|
1,060,000 | 1,060 | (1,060 | ) | - | - | - | - | ||||||||||||||||||||
|
Stock-based
compensation
for stock
granted
to directors,
officers
and employees
for
services
|
- | - | 1,333,441 | - | - | - | 1,333,441 | |||||||||||||||||||||
|
Stock-based
compensation
for
stock
granted to a
consultant
for services
|
- | - | 125,647 | - | - | - | 125,647 | |||||||||||||||||||||
|
Stock-based
compensation
for stock
warrants
issued to a
placement
agent for
service
|
- | - | 319,581 | - | - | - | 319,581 | |||||||||||||||||||||
|
Issuance
of stock to
Keywin
|
307,035,463 | 307,035 | (307,035 | ) | - | - | - | - | ||||||||||||||||||||
|
Exchange
of 3%
Convertible
Promissory
Notes
to Common Stock
|
45,000,000 | 45,000,000 |
|
Exchange
of accrued
and
unpaid interests of
3%
Convertible
Promissory
Notes to
Common
Stock
|
1,665,675 | 1,665,675 | ||||||||||||||||||||||||||
|
Non-Cash
Debt
Conversion
Charges
|
- | - | 10,204,627 | - | - | - | 10,204,627 | |||||||||||||||||||||
|
Value
of beneficial
conversion
feature of
convertible
note to
common
stock
|
1,447,745 | 1,447,745 | ||||||||||||||||||||||||||
|
Amortization
of deferred
stock-based
compensation
|
- | - | - | 300,000 | - | - | 300,000 | |||||||||||||||||||||
|
Translation
adjustment
|
- | - | - | - | - | 27,483 | 27,483 | |||||||||||||||||||||
|
Net
loss for the year
|
- | - | - | - | (37,359,188 | ) | - | (37,359,188 | ) | |||||||||||||||||||
|
Balance
as of December
31,
2009
|
423,122,071 | $ | 423,122 | $ | 119,323,848 | $ | (900,000 | ) | $ | (122,013,120 | ) | $ | 1,674,944 | $ | (1,491,206 | ) |
(1) See
Note 3 – Restatement and Reclassification
The
accompanying notes are an integral part of the consolidated financial
statements.
NETWORK
CN INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007(RESTATED)
|
Years
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
Restated(1)
|
|||||||||
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|||||||||||
|
Net
loss from continuing operations
|
$ | (37,359,188 | ) | $ | (59,527,473 | ) | $ | (13,692,714 | ) | ||
|
Net
income (loss) from discontinued operations
|
- | 42,640 | (953,905 | ) | |||||||
|
Net
loss
|
(37,359,188 | ) | (59,484,833 | ) | (14,646,619 | ) | |||||
|
Adjustments
to reconcile net loss to net cash used in operating activities, including
discontinued operations:
|
|||||||||||
|
Depreciation
and amortization:
|
|||||||||||
|
Equipment
and intangible assets
|
576,938 | 1,956,090 | 528,635 | ||||||||
|
Deferred
charges and debt discount
|
18,873,863 | 5,589,920 | 206,391 | ||||||||
|
Non-cash
debt conversion charges
|
10,204,627 | - | - | ||||||||
|
Loss
on early extinguishment of debt
|
1,696,684 | - | - | ||||||||
|
Stock-based
compensation for service
|
878,669 | 3,329,213 | 5,755,693 | ||||||||
|
Loss
on disposal of equipment
|
127,441 | 176,535 | 5,350 | ||||||||
|
(Net
write-back of) allowance for doubtful debt
|
(542,771 | ) | 7,739,043 | 10,716 | |||||||
|
Non-cash
impairment charges
|
|||||||||||
|
Equipment
and intangible assets
|
802,487 | 10,129,392 | 1,332,321 | ||||||||
|
Prepayments
for advertising operating rights
|
- | 7,979,808 | - | ||||||||
|
Noncontrolling
interests
|
(24,173 | ) | (256,111 | ) | (62,048 | ) | |||||
|
Gain
from disposal of discontinued operations
|
- | (66,085 | ) | - | |||||||
|
Gain
from disposal of subsidiaries / an affiliate
|
- | - | (10,096 | ) | |||||||
|
Net
gain on deconsolidation of variable interest entities
|
(14,338 | ) | - | - | |||||||
|
Changes
in operating assets and liabilities, net of effects from acquisitions and
disposition:
|
|||||||||||
|
Accounts
receivable, net
|
548,509 | (766,282 | ) | (614,589 | ) | ||||||
|
Prepayments
for advertising operating rights, net
|
69,873 | 5,634,833 | (13,636,178 | ) | |||||||
|
Prepaid
expenses and other current assets, net
|
83,019 | (2,974,785 | ) | (2,375,340 | ) | ||||||
|
Accounts
payable, accrued expenses and other payables
|
(1,349,913 | ) | 3,068,694 | 2,185,548 | |||||||
|
Net
cash used in operating activities
|
(5,428,273 | ) | (17,944,568 | ) | (21,320,216 | ) | |||||
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|||||||||||
|
Purchase
of equipment
|
(128,489 | ) | (3,518,408 | ) | (207,371 | ) | |||||
|
Proceeds
from sales of equipment
|
74,449 | 10,906 | 2,668 | ||||||||
|
Net
cash used in acquisition of subsidiaries, net
|
- | (2,708,928 | ) | (319,167 | ) | ||||||
|
Proceeds
from disposal of subsidiaries
|
- | - | 551 | ||||||||
|
Proceeds
from disposal of discontinued operations, net of cash disposed
of
|
(324 | ) | (472,827 | ) | - | ||||||
|
Net cash used in investing
activities
|
(54,364 | ) | (6,689,257 | ) | (523,319 | ) | |||||
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|||||||||||
|
Proceeds
from issuance of 12% convertible promissory note, net of
costs
|
- | - | 4,900,000 | ||||||||
|
Proceeds
from issuance of 3% convertible promissory note, net of
costs
|
- | 33,900,000 | 14,700,000 | ||||||||
|
Repayment
of 12% convertible promissory note
|
- | (5,000,000 | ) | - | |||||||
|
Proceeds
from issuance of common stock for private placement, net of
costs
|
- | - | 1,500,000 | ||||||||
|
Proceeds
from exercise of warrants issued for service
|
- | - | 22,500 | ||||||||
|
Repayment
of capital lease obligation
|
- | - | (3,120 | ) | |||||||
|
Issuance
costs paid for 1% convertible promissory note
|
(250,000 | ) | - | - | |||||||
|
Net cash provided by (used in) financing
activities
|
(250,000 | ) | 28,900,000 | 21,119,380 | |||||||
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(14,945 | ) | 1,217,428 | 59,160 | |||||||
|
NET
INCREASE (DECREASE) IN CASH
|
(5,747,582 | ) | 5,483,603 | (664,995 | ) | ||||||
|
CASH,
BEGINNING OF YEAR
|
7,717,131 | 2,233,528 | 2,898,523 | ||||||||
|
CASH,
END OF YEAR
|
$ | 1,969,549 | $ | 7,717,131 | $ | 2,233,528 | |||||
|
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
|
|||||||||||
|
Cash
paid during the year for:
|
|||||||||||
|
Income
taxes
|
$ | - | $ | - | $ | - | |||||
|
Interest
paid for 12% convertible promissory note
|
$ | - | $ | 69,041 | $ | 78,934 | |||||
|
Interest
paid for 1% convertible promissory note
|
$ | 24,795 | $ | - | $ | - | |||||
|
Interest
paid for capital lease arrangement
|
$ | - | $ | - | $ | 421 |
(1) See
Note 3 – Restatement and Reclassification
SUPPLEMENTAL
DISCLOSURE FOR NON-CASH ACTIVITIES:
1) NON-CASH
INVESTING ACTIVITIES
On
January 31, 2007, the Company acquired 100% of the equity interests of Quo
Advertising, an advertising agency headquartered in Shanghai, China, The Company
issued 300,000 shares of the Company’s common stock of par value of $0.001 each,
totaling $843,600 as part of the consideration. For more details, please refer
to Note 5- Business Combinations.
In
January 2008, the Company acquired 100% equity interest of Cityhorizon BVI,
a British Virgin Islands company. The Company issued 1,500,000 shares of
restricted common stock of par value of $0.001 each, totaling $3,738,000 as part
of the consideration. For more details, please refer to Note 5 – Business
Combinations.
2) NON-CASH
FINANCING ACTIVITIES
In April
2009, the Company issued an aggregate of 307,035,463 shares of the Company’s
restricted common stock with par value of $0.001 each and an option to purchase
an aggregate of 122,814,185 shares of the Company’s common stock, for an
aggregate purchase price of $2,000,000, exercisable for a three-month period to
a new investor in exchange for 3% Convertible Promissory Notes in the principal
amount of $45,000,000, and all accrued and unpaid interest thereon ($1,665,675).
Pursuant to a note exchange agreement dated April 2, 2009, the Company and the
investors canceled the 3% Convertible Promissory Notes in the principal amount
of $5,000,000 held by the investors including all accrued and unpaid interest
thereon ($185,075), and all of the Warrants, in exchange for the Company’s
issuance of new 1% Unsecured Senior Convertible Promissory Note due 2012 in the
principal amount of $5,000,000. For more details, please refer to Note 13 –
Convertible Promissory Notes and Warrants.
The
accompanying notes are an integral part of the consolidated financial
statements.
NETWORK
CN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
NOTE
1 ORGANIZATION
AND PRINCIPAL ACTIVITIES
Network
CN Inc. and all of its subsidiaries and variable interest entities (collectively
“NCN” or the “Company”) are principally engaged in the provision of out-of-home
advertising in China. Since late of 2006, the Company has been operating a
growing advertising network of roadside LED digital video panels, mega-size LED
digital video billboards and light boxes in major Chinese cities.
Network
CN Inc., originally incorporated on September 10, 1993 under the name EC Capital
Limited, is a Delaware company with headquarters in the Hong Kong Special
Administrative Region, the People’s Republic of China (“the PRC” or “China”).
The Company was operated by different management teams in the past, under
different operating names, pursuing a variety of business ventures. Between 2004
and 2006, the Company operated under the name Teda Travel Group Inc., which was
primarily engaged in the provision of management services to hotels and resorts
in China. On August
1, 2006, the Company changed its name to “Network CN Inc.” in order to better
reflect its new vision to build a nationwide information and entertainment
network in China through its business in Travel Network and Media Network. In
2008, the Company disposed of its entire Travel Network in order to focus on
Media Network. Accordingly, such business has been classified as discontinued
operations for all periods presented. (See Note 18 – Discontinued Operations for
details).
Details
of the Company’s principal subsidiaries and variable interest entities as of
December 31, 2009 are described in Note 4 – Subsidiaries and Variable Interest
Entities.
Going
Concern
The
Company has experienced recurring net losses attributable to NCN common
stockholders of $ 37.4 million, $59.5 million and $14.6 million for the years
ended December 31, 2009, 2008 and 2007 respectively. Additionally, the
Company has net cash used in operating activities of $5.4 million, $17.9 million
and $21.3 million for the years ended December 31, 2009, 2008 and 2007
respectively. As of December 31, 2009, the Company recorded a stockholders’
deficit of $1.5 million. These factors raise substantial doubt about its ability
to continue as a going concern. The Company’s plans regarding those concerns are
addressed in the following paragraph. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
In
response to current financial conditions, the Company has undergone drastic
cost-cutting exercise including reduction of the Company’s workforce, office
rentals, as well as selling and marketing expenses and other general and
administrative expenses. Certain commercially non-viable concession right
contracts were terminated and management has successfully negotiated with
certain authority parties of concession rights to reduce advertising operating
right fees. Besides, the Company has explored various means of obtaining
additional financing. Accordingly, management believes that there are sufficient
financial resources to meet the cash requirements for the next 12 months and the
consolidated financial statements have been prepared on a going concern
basis.
NOTE
2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(A)
Basis of Presentation and Preparation
These
consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles in the United States of
America (“GAAP”).
These
consolidated financial statements were prepared on a going concern basis. The
Company has determined that the going concern basis of preparation is
appropriate based on its estimates and judgments of future performance of the
Company, future events and projected cash flows. At each balance sheet date, the
Company evaluates its estimates and judgments as part of its going concern
assessment. Based on its assessment, the Company believes there are sufficient
financial and cash resources to finance the Company as a going concern in the
next twelve months. Accordingly, management has prepared the financial
statements on a going concern basis.
(B)
Principles of Consolidation
The
consolidated financial statements include the financial statements of Network CN
Inc., its subsidiaries and variable interest entities. Variable interest
entities are those entities in which the Company, through contractual
arrangements, bears the risks of, and enjoys the rewards normally associated
with ownership of the entities, and therefore the Company is the primary
beneficiary of these entities, which are required to be consolidated for
financial reporting purpose. All significant intercompany transactions and
balances have been eliminated upon consolidation.
(C)
Use of Estimates
In
preparing consolidated financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could differ
from those estimates. Differences from those estimates are reported in the
period they become known and are disclosed to the extent they are material to
the consolidated financial statements taken as a whole.
(D)
Cash and Cash Equivalents
Cash
includes cash on hand, cash accounts, and interest bearing savings accounts
placed with banks and financial institutions. For the purposes of the cash flow
statements, the Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. As of December 31, 2009 and 2008, the Company had no cash
equivalents.
(E)
Allowance for Doubtful Debts
Allowance
for doubtful debts is made against receivable to the extent they are considered
to be doubtful. Receivables in the consolidated balance sheet are stated net of
such allowance. The Company records its allowance for doubtful debts based upon
its assessment of various factors. The Company considers historical experience,
the age of the receivable balances, the credit quality of its customers, current
economic conditions, and other factors that may affect customers’ ability to pay
to determine the level of allowance required.
(F)
Prepayments for Advertising Operating Rights, Net
Prepayments
for advertising operating rights are measured at cost less accumulated
amortization and impairment losses. Cost includes prepaid expenses directly
attributable to the acquisition of advertising operating rights. Such prepaid
expenses are in general charged to the consolidated statements of
operations on a straight-line basis over the operating period. All the costs
expected to be amortized after 12 months of the balance sheet date are
classified as non-current assets.
An
impairment loss is recognized when the carrying amount of the prepayments for
advertising operating rights exceeds the sum of the undiscounted cash flows
expected to be generated from the advertising operating right’s use and eventual
disposition. An impairment loss is measured as the amount by which the carrying
amount exceeds the fair value of the asset calculated using a discounted cash
flow analysis.
(G)
Equipment, Net
Equipment
is stated at cost less accumulated depreciation and impairment losses.
Depreciation is provided using the straight-line method over the estimated
useful life as follows:
|
Media
display equipment
|
5 -
7 years
|
|
Office
equipment
|
3 -
5 years
|
|
Furniture
and fixtures
|
3 -
5 years
|
|
Leasehold
improvements
|
Over
the unexpired lease terms
|
Construction
in progress is carried at cost less impairment losses, if any. It relates to
construction of media display equipment. No provision for depreciation is made
on construction in progress until the relevant assets are completed and put into
use.
When
equipment is retired or otherwise disposed of, the related cost, accumulated
depreciation and provision for impairment loss are removed from the respective
accounts, and any gain or loss is reflected in the consolidated statements of
operations. Repairs and maintenance costs on equipment are expensed as
incurred.
(H)
Intangible Assets, Net
Intangible
assets are stated at cost less accumulated amortization and impairment losses.
Intangible assets that have indefinite useful lives are not amortized. Other
intangible assets with finite useful lives are amortized on a straight-line
basis over their estimated useful lives of 16 months to 20 years. The
amortization methods and estimated useful lives of intangible assets are
reviewed regularly.
(I)
Impairment of Long-Lived Assets
Long-lived
assets, including intangible assets with definite lives, are reviewed for
impairment whenever events or changes in circumstance indicate that the carrying
amount of the assets may not be recoverable. An intangible asset that is not
subject to amortization is reviewed for impairment annually or more frequently
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. An impairment loss is recognized when the
carrying amount of a long-lived asset and intangible 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.
(J)
Deferred Charges, Net
Deferred
charges are fees and expenses directly related to the issuance of convertible
promissory notes, including placement agents’ fees. Deferred charges are
capitalized and amortized over the life of the convertible promissory notes
using the effective yield method. Amortization of deferred charges is included
in amortization of deferred charges and debt discount on the consolidated
statements of operations while the unamortized balance is included in deferred
charges in the consolidated balance sheets.
(K)
Convertible Promissory Notes and Warrants
1)
Issuance
of 12% Convertible Promissory Note and Warrants and 3% Convertible Promissory
Notes and Warrants
During
2007 and 2008, the Company issued a 12% convertible promissory note in the
principal amount of $5,000,000 and warrants and 3% convertible promissory notes
in the principal amount of $50,000,000 and warrants. The warrants and embedded
conversion feature were classified as equity under EITF Issue No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” (ASC Topic 815-40) and met the other criteria in paragraph 11(a)
of Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (ASC Topic 815-10-15-74). The Company
allocated the proceeds of the convertible promissory notes between convertible
promissory notes and the financial instruments related to warrants associated
with convertible promissory notes based on their relative fair values at the
commitment date. The fair value of the financial instruments related to warrants
associated with convertible promissory notes was determined utilizing the
Black-Scholes option pricing model and the respective allocated proceeds to the
warrants is recorded in additional paid-in capital. The embedded beneficial
conversion feature associated with convertible promissory notes was recognized
and measured by allocating a portion of the proceeds equal to the intrinsic
value of that feature to additional paid-in capital in accordance with EITF
Issue No. 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio” (ASC Topic 470-20) and EITF Issue No. 00-27
“Application of Issue No. 98-5
to Certain Convertible Instruments” (ASC Topic 470-20).
The
portion of debt discount resulting from the allocation of proceeds to the
financial instruments related to warrants associated with convertible promissory
notes is being amortized over the life of the convertible promissory notes,
using the effective yield method. For the portion of debt discount resulting
from the allocation of proceeds to the beneficial conversion feature, it is
amortized over the term of the notes from the respective dates of issuance using
the effective yield method.
2) Debt
Restructuring and Issuance of 1% Convertible Promissory Notes
On April
2, 2009, the Company entered into a new financing arrangement with the holders
of the 3% convertible promissory notes and warrants and a new investor. The
Company provided an inducement conversion offer to a new investor who exchanged
3% convertible promissory notes in the principal amount of $45,000,000, and all
accrued and unpaid interest thereon, for 307,035,463 shares of the Company’s
common stock (the original conversion price is $1.65 per share convertible into
28,282,227 shares). Pursuant to paragraph 21 of EITF Issue No. 00-27 “Application of Issue No. 98-5 to
Certain Convertible Instruments” (ASC Topic 470-20), all the unamortized
debt discount (including the discount from an allocation of proceeds to the
warrants and the discount originated by the beneficial conversion feature) of
the relevant 3% convertible promissory notes remaining at the date of conversion
were immediately recognized as expenses and is included in amortization of
deferred charges and debt discount in the consolidated statement of operations.
The Company also accounted for the inducement conversion offer according to SFAS
No. 84 “Induced Conversions of
Convertible Debt” (ASC Topic 470-20). To induce conversion, the Company
has reduced the conversion price and also granted an option to purchase an
aggregate of 122,814,185 shares of the Company’s common stock, for an aggregate
purchase price of $2,000,000, exercisable for a three-month period. The Company
recognized non-cash debt conversion charges equal to the fair value of the
incremental consideration (including both reduction in the conversion price and
grant of purchase option) given as of the date the inducement offer is accepted
by a new investor. The fair value of the purchase option was determined
utilizing Black-Scholes option pricing model.
For the
remaining 3% convertible promissory notes in the principal amount of $5,000,000,
the Company and the holders of the 3% convertible promissory notes agreed to
cancel the 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 Company’s issuance of new 1% unsecured senior convertible
promissory notes due 2012 in the principal amount of $5,000,000. The 1%
convertible promissory notes bear interest at 1% per annum, payable
semi-annually in arrears, mature on April 1, 2012, and are convertible at any
time into shares of our common stock at an fixed conversion price of $0.02326
per share, subject to customary anti-dilution adjustments. Pursuant to EITF
Issue No. 96-19 “Debtor’s
Accounting For a Modification or Exchange of Debt Instruments” (ASC Topic
470-50) and EITF Issue No. 06-6 “Debtor’s Accounting for a
Modification (or Exchange) of Convertible Debt Instruments” (ASC Topic
470-50-40), the Company determined that the original convertible notes and new
convertible notes were with substantially different terms and hence reported in
the same manner as an extinguishment of original notes and issuance of new
notes.
The
Company determined the new 1% convertible promissory notes to be conventional
convertible instruments under EITF Issue No. 05-2 “The Meaning of “Conventional
Convertible Debt Instrument” in Issue No. 00-19” (ASC Topic
815-40-25). Its
embedded conversion option was qualify for equity classification pursuant to
EITF Issue No. 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” (ASC Topic 815-40), and met
the other criteria in paragraph 11(a) of SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (ASC Topic 815-10-15-74). 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 yield method.
(L)
Early Redemption of Convertible Promissory Notes
Should
early redemption of convertible promissory notes occur, the unamortized portion
of the associated deferred charges and debt discount would be fully written off
and any early redemption premium will be recognized as expense upon its
occurrence. All related charges, if material, would be aggregated and included
in a separate line “charges on early redemption of convertible promissory
notes”. Such an expense would be included in ordinary activities on the
consolidated statements of operations as required by SFAS No. 145 “Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”
(ASC Topic 470-50).
(M)
Revenue Recognition
For
advertising services, the Company recognizes revenue in the period when
advertisements are either aired or published. Revenues from advertising barter
transactions are recognized in the period during which the advertisements are
either aired or published. Expenses from barter transactions are recognized in
the period as incurred. Barter transactions are accounted in accordance with
EITF Issue No. 99-17 “Accounting for Advertising Barter
Transactions” (ASC Topic 605-20-25), which are recorded at the fair value
of the advertising provided based on the Company’s own historical practice of
receiving cash for similar advertising from buyers unrelated to the counterparty
in the barter transactions. The amounts included in advertising services revenue
and general and administrative for barter transactions were approximately $nil,
$41,000 and $nil for the years ended December 31, 2009, 2008 and 2007
respectively.
For
hotel management services, the Company recognizes revenue in the period when the
services are rendered and collection is reasonably assured.
For tour
services, the Company recognizes services-based revenue when the services have
been performed. Tianma offers independent leisure travelers bundled
packaged-tour products which include both air-ticketing and hotel reservations.
Tianma’s packaged-tour products cover a variety of domestic and international
destinations.
Tianma
organizes inbound and outbound tour and travel packages which
can incorporate, among other things, air and land transportation, hotels,
restaurants and tickets to tourist destinations and other excursions. Tianma
books all elements of such packages with third-party service providers such as
airlines, car rental companies and hotels, or through other tour package
providers and then resells such packages to its clients. A typical sale of tour
services is as follows:
|
1.
|
Tianma,
in consultation with sub-agents, organizes a tour or travel package,
including making reservations for blocks of tickets, rooms, etc. with
third-party service providers. Tianma may be required to make deposits,
pay all or part of the ultimate fees charged by such service providers or
make legally binding commitments to pay such fees. For air-tickets, Tianma
normally books a block of air tickets with airlines in advance and pays
the full amount of the tickets to reserve seats before any tours are
formed. The air tickets are usually valid for a certain period of time. If
the pre-packaged tours do not materialize and are eventually not formed,
Tianma will resell the air tickets to other travel agents or customers.
For
hotels, meals and transportation, Tianma usually pays an upfront
deposit of 50-60% of the total cost. The remaining balance is then settled
after completion of the tours.
|
|
2.
|
Tianma,
through its sub-agents, advertises tour and travel packages at prices set
by Tianma and sub-agents.
|
|
3.
|
Customers
approach Tianma or its appointed sub-agents to book an advertised packaged
tour.
|
|
4.
|
The
customers pay a deposit to Tianma directly or through its appointed
sub-agents.
|
|
5.
|
When
the minimum required number of customers (which number is different for
each tour based on the elements and costs of the tour) for a particular
tour is reached, Tianma will contact the customers for tour confirmation
and request full payment. All payments received by the appointed
sub-agents are paid to Tianma prior to the commencement of the
tours.
|
|
6.
|
Tianma
will then make or finalize corresponding bookings with outside service
providers such as airlines, bus operators, hotels, restaurants, etc. and
pay any unpaid fees or deposits to such
providers.
|
Tianma is
the principal in such transactions and the primary obligor to the third-party
providers regardless of whether it has received full payment from its customers.
In addition, Tianma is also liable to the customers for any claims relating to
the tours such as accidents or tour services. Tianma has adequate insurance
coverage for accidental loss arising during the tours. The Company utilizes
a network of sub-agents who operate strictly in Tianma’s name and can only
advertise and promote the business of Tianma with the prior approval of
Tianma.
(N)
Stock-based Compensation
In
December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (ASC
Topic 718). Effective January 1, 2006, the Company adopted SFAS No. 123R (ASC
Topic 718), 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 after the date of adoption and
unvested awards that were outstanding as of the date of adoption. SFAS No. 123R
(ASC Topic 718) requires that stock-based compensation cost is measured at grant
date, based on the fair value of the award, and recognized in expense over the
requisite services period.
Common
stock, stock options and warrants issued to other than employees or directors in
exchange for services are recorded on the basis of their fair value, as required
by SFAS No. 123R (ASC Topic 718), which is measured as of the date required by
EITF Issue 96-18
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” (ASC Topic
505-50). In accordance with EITF 96-18 (ASC Topic 505-50), the non-employee
stock options or warrants are measured at their fair value by using the
Black-Scholes option pricing model as of the earlier of the date at which a
commitment for performance to earn the equity instruments is reached
(“performance commitment date”) or the date at which performance is complete
(“performance completion date”). The stock-based compensation expenses are
recognized on a straight-line basis over the shorter of the period over which
services are to be received or the vesting period. Accounting for non-employee
stock options or warrants which involve only performance conditions when no
performance commitment date or performance completion date has occurred as of
reporting date requires measurement at the equity instruments then-current fair
value. Any subsequent changes in the market value of the underlying common stock
are reflected in the expense recorded in the subsequent period in which that
change occurs.
(O)
Income Taxes
The
Company accounts for income taxes under SFAS No. 109 “Accounting for Income Taxes”
(ASC Topic 740). Under SFAS No. 109 (ASC Topic 740),
deferred tax assets and liabilities are provided for the future tax effects
attributable to temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases, and for the
expected future tax benefits from items including tax loss carry
forwards.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or reversed. Under SFAS No. 109 (ASC Topic 740), the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(P)
Comprehensive Income (Loss)
The
Company follows SFAS No. 130
“Reporting Comprehensive Income” (ASC Topic 220) for the reporting and
display of its comprehensive income (loss) and related components in the
financial statements and thereby reports a measure of all changes in equity of
an enterprise that results from transactions and economic events other than
transactions with the shareholders. Items of comprehensive income (loss) are
reported in both the consolidated statements of operations and comprehensive
loss and the consolidated statement of stockholders’ equity.
(Q)
Earnings (Loss) Per Common Share
Basic
earnings (loss) per common share are computed in accordance with SFAS
No. 128 “Earnings Per
Share” (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
years ended December 31, 2009, 2008 and 2007 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.
(R)
Operating Leases
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company are accounted for as operating leases. Payments made under
operating leases are charged to the consolidated statements of operations on a
straight-line basis over the lease period.
(S)
Foreign Currency Translation
The
assets and liabilities of the Company’s subsidiaries and variable interest
entities denominated in currencies other than U.S. dollars are translated into
U.S. dollars using the applicable exchange rates at the balance sheet date. For
consolidated statements of operations’ items, amounts denominated in currencies
other than U.S. dollars were translated into U.S. dollars using the average
exchange rate during the 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 consolidated
statements of operations.
(T)
Fair Value of Financial Instruments
SFAS
No. 157 “Fair Value
Measurements” (ASC Topic 820) 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.
SFAS
No. 157 (ASC Topic 820) 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. SFAS No. 157 (ASC Topic
820) establishes three levels of inputs that may be used to measure fair
value:
Level 1 - Level 1 applies to
assets or liabilities for which there are quoted prices in active markets for
identical assets or liabilities.
Level 2 - Level 2 applies to
assets or liabilities for which there are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability such as
quoted prices for similar assets or liabilities in active markets; quoted prices
for identical assets or liabilities in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived principally from,
or corroborated by, observable market data.
Level 3 - Level 3 applies to
assets or liabilities for which there are unobservable inputs to the valuation
methodology that are significant to the measurement of the fair value of the
assets or liabilities.
The
carrying value of the Company’s financial instruments, which consist of cash,
accounts receivable, prepayments for advertising operating rights, prepaid
expenses and other current assets, accounts payable, accrued expenses and other
payables, approximates fair value due to the short-term maturities.
The
carrying value of the Company’s financial instruments related to warrants
associated with convertible promissory notes is stated at a value being
equal to the allocated proceeds of convertible promissory notes based on the
relative fair value of notes and warrants. In the measurement of the fair value
of these instruments, the Black-Scholes option pricing model is utilized, which
is consistent with the Company’s historical valuation techniques. These derived
fair value estimates are significantly affected by the assumptions used. The
allocated value of the financial instruments related to warrants associated with
convertible promissory notes is recorded as an equity, which does not
require to mark-to-market as of each subsequent reporting period.
(U)
Concentration of Credit Risk
The
Company places its cash with various financial institutions. The Company
believes that no significant credit risk exists as these cash investments are
made with high-credit-quality financial institutions.
All the
revenue of the Company and a significant portion of the Company’s assets are
generated and located in China. The Company’s business activities and accounts
receivable are mainly from advertising services. Deposits are usually collected
from customers in advance and the Company performs ongoing credit evaluation of
its customers. The Company believes that no significant credit risk exists as
credit loss.
(V)
Segmental Reporting
SFAS No.
131 “Disclosures about
Segments of an Enterprise and Related Information” (ASC Topic 280)
establishes standards for reporting information about operating segments on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers in
financial statements. The Company’s operating segments are organized internally
primarily by the type of services rendered. In September 2008, the Company
disposed of its entire travel business and focus on developing its media
business in the PRC. Accordingly, it is management’s view that the services
rendered by the Company are of one operating segment: Media
Network.
(W)
Recent Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140” (“SFAS
166”) (not part of the Codification yet). SFAS 166 (not part of the Codification
yet) removes the concept of a qualifying special-purpose entity and removes the
exception from applying FIN 46R (ASC Topic 810) to variable interest entities
that are qualifying special-purpose entities; limits the circumstances in which
a transferor derecognizes a portion or component of a financial asset; defines a
participating interest; requires a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced disclosure; among
others. SFAS 166 (not part of the Codification yet) will be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Management is
currently evaluating the potential impact of SFAS 166 (not part of the
Codification yet) on our financial statements.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”) (not part of the Codification yet). This
updated guidance requires an enterprise to perform an analysis to determine
whether the enterprise’s variable interest or interests give it a controlling
financial interest in a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity; to eliminate the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity; to add an
additional reconsideration event for determining whether an entity is a variable
interest entity when any changes in facts and circumstances occur such that
holders of the equity investment at risk, as a group, lose the power from voting
rights or similar rights of those investments to direct the activities of the
entity that most significantly impact the entity’s economic performance; and to
require enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprise’s involvement in a
variable interest entity. SFAS 167 (not part of the Codification yet) will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Management is currently evaluating the potential impact of SFAS 167
(not part of the Codification yet) on our financial statements.
In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic
740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities (formerly proposed as FASB
Staff Position No. 48-d, Application Guidance for
Pass-Through Entities and Tax-Exempt Not-for-Profit Entities and Disclosure
Modifications for Nonpublic Entities), which amended Accounting
Standards Codification Subtopic 740-10, Income Taxes – Overall. ASU
2009-06 clarifies that an entity’s assertion that it is a pass-through entity is
a tax position and should be assessed in accordance with Subtopic 740-10.
Additionally, the ASU provides implementation guidance on the attribution of
income taxes to entities and owners. The revised guidance is effective for
periods ending after September 15, 2009. Management is currently evaluating
the potential impact of ASU2010-6 on our financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. ASU 2009-13 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. Management is currently
evaluating the potential impact of ASU2009-13 on our financial
statements.
In
October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include
Software Elements, (amendments to ASC Topic 985, Software)” (“ASU
2009-14”). ASU 2009-14 removes tangible products from the scope of software
revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Management is currently evaluating the potential impact of ASU
2009-14 on our financial statements.
In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”(
amendments to ASC Topic 470, Debt)” (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of
issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with Topic 820 and recognized as
an issuance cost, with an offset to additional paid-in
capital. Loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs. The
amendments also require several disclosures including a description and the
terms of the arrangement and the reason for entering into the
arrangement. The effective dates of the amendments are dependent upon
the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15,
2009. Management is currently evaluating the potential impact
of ASU 2009-15 on our financial statements.
In
December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860)
Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16
amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The
amendments in ASU 2009-16 improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. ASU 2009-16 is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009. Management is currently
evaluating the potential impact of ASU2009-16 on our financial
statements.
In
December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity that most significantly
impact the entity's economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
ASU 2009-17 also requires additional disclosures about an enterprise's
involvement in variable interest entities. ASU 2009-17 is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009. Management is currently
evaluating the potential impact of ASU209-17 on our financial
statements.
In
January 2010, FASB issued ASU 2010-2 Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU
2010-2"). ASU 2010-2 addresses implementation issues related to the changes in
ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards
Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary. An entity is required to deconsolidate a
subsidiary when the entity ceases to have a controlling financial interest in
the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a
gain or loss on the transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or loss associated
with the difference between the fair value of the retained investment in the
subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. ASU 2010-2 is effective for the
Company starting January 3, 2010. Management is currently
evaluating the potential impact of ASU2010-2 on our financial
statements.
In
February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements ("ASU
2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is an SEC filer is not required to disclose the date through which
subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is
effective for interim and annual periods ending after June 15, 2010. Management is currently
evaluating the potential impact of ASU2010-9 on our financial
statements.
NOTE
3 RESTATEMENT
AND RECLASSIFICATION
(A)
Restatement of Financial Results
On
October 10, 2008, the Company filed a Current Report on Form 8-K to
announce that the Company’s Board of Directors, based upon the consideration of
issues addressed in the SEC review and the recommendation of the Audit
Committee, determined that the Company should restate its previously issued
consolidated financial statements for the year ended December 31, 2007 and
unaudited consolidated financial statements for the interim periods ended March
31, 2008 and June 30, 2008.
The
restatement adjustments corrected the accounting errors arising from its
misapplication of accounting policies to the discount associated with the
beneficial conversion feature attributed to the issuance of the 3% convertible
promissory notes in 2007. The Company initially amortized the discount according
to EITF Issue No. 98-5
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratio” (ASC Topic 470-20), which
stated that discount resulting from allocation of proceeds to the beneficial
conversion feature should be recognized as interest and other debt–related
expenses over the minimum period from the date of issuance to the date of
earliest conversion. As the notes are convertible at the date of issuance, the
Company fully amortized such discount through interest and other debt–related
expenses at the date of issuance accordingly. However, according to Issue 6 of
EITF Issue No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments” (ASC
Topic 470-20), EITF Issues No. 98-5 (ASC Topic 470-20) should be modified to
require the discount related to the beneficial conversion feature to be accreted
from the date of issuance to the stated redemption date regardless of when the
earliest conversion date occurs using the effective interest method. The
restatement adjustments were to reflect the retrospective application of the
Issue 6 of EITF Issue No. 00-27 (ASC Topic 470-20).
The
restatement affected the Company’s previously reported non-cash interest
expense, net loss, long-term debt and stockholders’ equity but had no effects on
its cash flow. There was no change to each subtotal (operating, investing and
financing activities) in the Company’s consolidated statements of cash flows as
a result of the restatement. Certain balances related to line items within
certain cash flows were corrected as part of the restatement. The
restatement in the consolidated financial statements as of December 31,
2007 and for the year ended December 31, 2007 is as
follows:
|
For the year ended December 31,
2007
|
As
Previously
Reported
|
Restatement
Adjustments
|
As
Restated
|
|||||||||
|
Interest
and Other Debt-Related Expenses
|
||||||||||||
|
Amortization
of deferred charges and debt discount
|
$ | 4,866,351 | $ | (4,659,960 | ) | $ | 206,391 | |||||
|
Net
loss attributable to NCN common stockholders
|
(19,306,579 | ) | 4,659,960 | (14,646,619 | ) | |||||||
|
Comprehensive
loss
|
(19,244,762 | ) | 4,659,960 | (14,584,802 | ) | |||||||
|
Net
loss per common share – basic and diluted
|
$ | (0.28 | ) | $ | 0.07 | $ | (0.21 | ) | ||||
|
As of December 31, 2007
|
As
Previously
Reported
|
Restatement
Adjustments
|
As
Restated
|
|||||||||
|
Liabilities
|
||||||||||||
|
3%
convertible promissory notes due 2011, net
|
$ | 12,545,456 | $ | (4,659,960 | ) | $ | 7,885,496 | |||||
|
Total
liabilities
|
20,780,493 | (4,659,960 | ) | 16,120,533 | ||||||||
|
Stockholders’
Equity
|
||||||||||||
|
Accumulated
deficit
|
(29,829,059 | ) | 4,659,960 | (25,169,099 | ) | |||||||
|
Total
stockholder’s equity
|
$ | 5,978,976 | $ | 4,659,960 | $ | 10,638,936 | ||||||
(B)
Reclassification
To better
present the results of the Company, the “by function of expense” method for the
presentation of the statements of operations and comprehensive loss has been
adopted. Comparative amounts for prior periods have been reclassified in order
to achieve a consistent presentation.
In
addition, the Company completed the disposal of travel network during the year
ended December 31, 2008. As a result of the disposal, the consolidated financial
statements of the Company reflect travel network operation as discontinued
operations for all presented periods. Accordingly, revenues and costs and
expenses of travel network have been excluded from the respective accounts in
the consolidated statements of operations. The net operating results of the
discontinued operations have been reported, net of applicable income taxes, as
“Net Loss from Discontinued Operations, Net of Income Taxes. For details, please
refer to Note 18 – Discontinued Operations.
The above
reclassification does not have an effect on net loss and net loss per
share.
NOTE
4 SUBSIDIARIES
AND VARIABLE INTEREST ENTITIES
Details
of the Company’s principal consolidated subsidiaries and variable interest
entities as of December 31, 2009 were as follows:
|
Name
|
Place
of
Incorporation
|
Ownership
interest
attributable to
the Company
|
Principal activities
|
|
NCN
Group Limited
|
BVI
|
100%
|
Investment
holding
|
|
NCN
Media Services Limited
|
BVI
|
100%
|
Investment
holding
|
|
NCN
Travel Services Limited
|
BVI
|
100%
|
Dormant
|
|
Linkrich
Enterprise Advertising and Investment Limited
|
Hong
Kong
|
100%
|
Investment
holding
|
|
Crown
Winner International Limited
|
Hong
Kong
|
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
|
|
Profit
Wave Investment Limited
|
Hong
Kong
|
100%
|
Dormant
|
|
NCN
Huamin Management Consultancy (Beijing) Company Limited
|
PRC
|
100%
|
Provision
of administrative and management services
|
|
Shanghai
Quo Advertising Company Limited
|
PRC
|
100%
|
Provision
of advertising services
|
|
Teda
(Beijing) Hotels Management Limited
|
PRC
|
100%
|
Dormant;
undergoing liquidation process
|
|
Huizhong
Lianhe Media Technology Co., Ltd.
|
PRC
|
100%
|
Provision
of high-tech services
|
|
Beijing
Huizhong Bona Media Advertising Co., Ltd.
|
PRC
|
100%
|
Provision
of advertising services
|
|
Huizhi
Botong Media Advertising Beijing Co., Ltd.
|
PRC
|
100%
|
Provision
of advertising services
|
|
Yi
Gao Shanghai Advertising Limited
|
PRC
|
100%
|
Provision
of advertising services
|
Remarks:
1)
During the year ended December 31, 2009, the Company’s variable interest entity,
Quo Advertising, disposed of its entire 51% equity interests of Xuancaiyi, a PRC
advertising company which has maintained minimal operation since the beginning
of 2009, to the minority shareholders of Xuancaiyi at $nil consideration.
Accordingly, the Company recorded a loss on deconsolidation of variable interest
entity of $8,178 included in general and administrative expenses on the
consolidated statements of operations during the year ended December 31,
2009.
2)
During the year ended December 31, 2009, the Company’s variable interest entity,
Quo Advertising, disposed of its entire 60% equity interests of Qingdao Zhongan
Boyang, a PRC advertising company at $nil consideration. Accordingly, the
Company recorded a gain on deconsolidation of variable interest entity of
$22,516 included in general and administrative expenses on the consolidated
statements of operations during the year ended December 31, 2009.
3) The Company winded up
its wholly
owned subsidiary,
namely, Cityhorizon Limited, a BVI company engaging in investment holding during
the year ended December 31, 2009.
4)
In late 2009, the Company established its wholly-owned subsidiary, namely, Yi
Gao Shanghai Advertising Limited.
NOTE
5 BUSINESS
COMBINATIONS
|
(A)
|
Transactions
Completed in 2007
|
|
1.
|
Acquisition
of Quo Advertising
|
On
January 31, 2007, the Company acquired 100% of the equity interests of Quo
Advertising, an advertising agency headquartered in Shanghai, China, pursuant to
a Purchase and Sales Agreement and Trust Agreements entered with independent
third parties dated January 24, 2007. The acquisition helped the Company to grow
its advertising business in China. The Company paid $64,000 in cash and issued
300,000 shares of the Company’s common stock of par value of $0.001 each,
totaling $843,600 in exchange for 100% of the equity interest of Quo
Advertising. The total consideration was $907,600.
The
acquisition has been accounted for using the purchase method of accounting and
the results of operations of Quo Advertising have been included in the Company's
consolidated statement of operations since the completion of the acquisition on
January 31, 2007.
The
allocation of the purchase price is as follows:
|
Cash
|
|
$
|
18,001
|
|
|
Accounts
receivable, net
|
|
|
83,791
|
|
|
Prepaid
expenses and other current assets, net
|
|
|
298,559
|
|
|
Equipment,
net
|
|
|
15,114
|
|
|
Intangible
right
|
|
|
536,540
|
|
|
Accounts
payable, accrued expenses and other payables
|
|
|
(44,405
|
)
|
|
Total
purchase price
|
|
$
|
907,600
|
|
Identifiable
intangible right of $536,540 is measured at fair value as of the date of the
acquisition and amortized over 20 years. The intangible right of Quo Advertising
was fully provided with impairment loss in 2007. For details, please refer to
Note 10 – Intangible Assets, Nets for details.
|
2.
|
Acquisition
of Xuancaiyi
|
Effective
September 1, 2007, the Company, through Quo Advertising, acquired 51% of the
equity interests of Xuancaiyi (Beijing) Advertising Company Limited
(“Xuancaiyi”), an advertising agency in Beijing, China, for a consideration of
up to RMB 12,245,000 (equivalent to $1,666,943) in cash. Xuancaiyi secured the
rights to operate a 758 square-meter mega-size high resolution LED advertising
billboard in a prominent location in Beijing, China. The investment in Xuancaiyi
will strengthen the Company’s Media Network in China. The acquisition has been
accounted for using the purchase method of accounting and the results of
operations of Xuancaiyi have been included in the Company's consolidated
statement of operations since the acquisition date on September 1,
2007.
The
purchase consideration, to be paid fully in cash, is payable as
follows:
|
1.
|
An
initial payment of RMB2,500,000 (approximately
$330,000);
|
|
2.
|
Up
to RMB 2,454,300 (approximately $337,000) based on Xuancaiyi’s net profit
for the four months ended December 31,
2007;
|
|
3.
|
Up
to RMB 1,834,500 (approximately $252,000) based on Xuancaiyi’s net profit
for the first quarter of fiscal year
2008;
|
|
4.
|
Up
to RMB 1,827,400 (approximately $251,000) based on Xuancaiyi’s net profit
for the second quarter of fiscal year
2008;
|
|
5.
|
Up
to RMB1,819,100 (approximately $250,000) based on Xuancaiyi’s net profit
for the third quarter of fiscal year 2008;
and
|
|
6.
|
Up
to RMB1,809,700 (approximately $248,000) based on Xuancaiyi’s net profit
for the fourth quarter of fiscal year
2008.
|
The
initial payment of RMB2,500,000 (equivalent to $330,000) was made in September
2007. The allocation of the initial payment is as follows:
|
Cash
|
$ | 57,971 | ||
|
Prepaid
expenses and other current assets, net
|
82,150 | |||
|
Equipment,
net
|
6,955 | |||
|
Intangible
right
|
586,066 | |||
|
Accounts
payable, accrued expenses and other payables
|
(85,833 | ) | ||
|
Noncontrolling
interests
|
(317,181 | ) | ||
|
Total
purchase price
|
$ | 330,128 |
Identifiable
intangible right of $586,066 is measured at fair value as of the date of the
acquisition and is amortized over 16 months based on initial contract period
with Xuancaiyi’s media partner.
As
Xuancaiyi failed to achieve the net profit targets in each of the above periods,
no further cash payment has been made with respect to the above earn-out
consideration.
|
(B)
|
Transactions
Completed in 2008
|
1. Acquisition
of Cityhorizon BVI
On
January 1, 2008, the Company and its wholly owned subsidiary Cityhorizon Limited
(“Cityhorizon Hong Kong”), a Hong Kong company, entered into a Share Purchase
Agreement with Cityhorizon BVI, Lianhe, a wholly owned subsidiary of Cityhorizon
BVI, Bona, a wholly owned subsidiary of Cityhorizon BVI, and a third party who
is the sole shareholder of Cityhorizon BVI pursuant to which the Company,
through its subsidiary Cityhorizon Hong Kong, acquired 100% of the issued and
outstanding shares of Cityhorizon BVI from the third party . Pursuant to the
Share Purchase Agreement, the Company in January 2008 paid the third party
$5,000,000 in cash and issued the third party 1,500,000 shares of restricted
common stock of par value of $0.001 each, totaling $3,738,000. The total
purchase consideration was $8,738,000. The purpose of the acquisition was to
strengthen the Company’s media network in China.
The
acquisition has been accounted for using the purchase method of accounting and
the results of operations of Cityhorizon BVI, Lianhe and Bona have been included
in the Company's consolidated statement of operations since the completion of
the acquisition on January 1, 2008.
The
allocation of the purchase price is as follows:
|
Cash
|
$
|
2,427,598
|
||
|
Prepayments
for advertising operating rights
|
2,450,794
|
|||
|
Prepayments
and other current assets, net
|
170,347
|
|||
|
Equipment,
net
|
1,995,702
|
|||
|
Intangible
assets, net
|
1,973,865
|
|||
|
Accounts
payable, accrued expenses and other payables
|
(280,306
|
)
|
||
|
Total
purchase price
|
$
|
8,738,000
|
Intangible
assets represent the acquired application systems developed internally by Lianhe
for controlling LED activities. Based on a valuation performed by an independent
valuer, the fair value of the acquired application systems as of the date of
acquisition amounted to RMB31,000,000 (equivalent to US$4,252,564). This fair
value, after deducting negative goodwill of $2,278,699 arising from business
combination with Cityhorizon BVI, Lianhe and Bona, equaled to $1,973,865. Such net amount was
amortized over the useful lives of the application systems. The acquired
application systems were fully provided with impairment loss in 2008. For
details, please refer to Note 10 – Intangible Assets, Nets for
details.
2. Consolidation
of variable interest entity - Botong
On
January 1, 2008, the Company caused its subsidiary, Lianhe, to enter into a
series of commercial agreements with Botong, a company organized under the laws
of the PRC, and their respective registered shareholders, pursuant to which
Lianhe provides exclusive technology and management consulting services to
Botong in exchange for service fees amounting to substantially all of the net
income of Botong. Each of the registered PRC shareholders of Botong also entered
into equity pledge agreements and option agreements with Lianhe which cannot be
amended or terminated except by written consent of all parties. Pursuant to
these equity pledge agreements and option agreements, each shareholder pledged
such shareholder’s interest in Botong for the performance of such Botong’s
payment obligations under its respective exclusive technology and management
consulting services agreements. In addition, Lianhe has been assigned all voting
rights by the shareholders of Botong and has the option to acquire the equity
interests of Botong at a mutually agreed purchase price which shall first be
used to repay any loans payable to Lianhe or any affiliate of Lianhe by the
registered PRC shareholders.
In
addition, as of January 1, 2008, Lianhe committed to extend loan totaling
$137,179 to the registered shareholders of Botong for the purpose of financing
such shareholders’ investment in Botong. Through the above contractual
arrangements, Lianhe becomes the primary beneficiary of Botong which becomes a
variable interest entity. The results of operations of Botong have been included
in the Company's consolidated statement of operations since January 1,
2008.
On
January 1, 2008, the net assets of Botong were as follows:
|
Cash
|
$
|
653
|
||
|
Prepaid
expenses and other current assets, net
|
102,154
|
|||
|
Equipment,
net
|
599,348
|
|||
|
Intangible
asset
|
551,031
|
|||
|
Accounts
payable, accrued expenses and other payables
|
(1,116,007
|
)
|
||
|
Net
assets
|
$
|
137,179
|
Identifiable
intangible asset with a fair value of $551,031 as of the effective date of
Lianhe and Botong entering into the above contractual arrangements is amortized
over the remaining contract period of Botong’s advertising operating
right.
|
(C)
|
Unaudited
Pro Forma Consolidated Financial
Information
|
1. Disclosure
for the year ended December 31, 2007
The table
below summarizes the unaudited pro forma results of operations assuming the
acquisitions of Quo Advertising and Xuancaiyi were completed on January 1, 2007.
These unaudited pro forma results have been prepared for information purposes
only and do not purport to be indicative of what the operating results would
have been had the acquisitions actually taken place on January 1, 2007, and may
not be indicative of future operating results.
|
|
Year
ended December 31,2007
|
|||
|
|
(Unaudited)
(Restated)
|
|||
|
Revenues
|
$ | 27,619,599 | ||
|
Net
loss before income taxes and noncontrolling interests
|
$ | (14,807,565 | ) | |
|
Net
loss attributable to NCN common stockholders
|
$ | (14,753,561 | ) | |
|
Net
loss per share
-
Basic and diluted
|
$ | (0.22 | ) | |
2. Disclosure
for the year ended December 31, 2008
As the
acquisition of Cityhorizon BVI and consolidation of Botong was on January 1,
2008, no pro-forma consolidated financial information was required to be
prepared according to FASB Statements No.141, “Business Combinations"(ASC
Topic805).
NOTE
6 ACCOUNTS
RECEIVABLE, NET
Accounts
receivable, net as of December 31, 2009 and 2008 consisted of the
following:
|
2009
|
2008
|
|||||||
|
Accounts
receivable
|
$ | 93,909 | $ | 817,643 | ||||
|
Less:
allowance for doubtful debts
|
(3,844 | ) | (600,241 | ) | ||||
|
Total
|
$ | 90,065 | $ | 217,402 | ||||
For the
year ended December 31, 2009, the Company recorded a net write-back of allowance
for doubtful debts for accounts receivable of $421,172. For the years ended
December 31, 2008 and 2007, the Company recorded an allowance for doubtful debts
for accounts receivable of $598,060 and $nil respectively. Such allowance for
doubtful debt and net write-back of allowance for doubtful debts were included
as net write-back of / (allowance for) doubtful debts on the consolidated
statements of operations.
The
Company recorded a write-off of certain allowance for doubtful debts for
accounts receivable of $175,593, $nil and $nil for the years ended December 31,
2009, 2008 and 2007 respectively.
NOTE
7 PREPAYMENTS
FOR ADVERTISING OPERATING RIGHTS, NET
Prepayments
for advertising operating rights, net as of December 31, 2009 and 2008 were
as follows:
|
2009
|
2008
|
|||||||
|
Gross
carrying amount
|
||||||||
|
Beginning
|
$ | 24,606,150 | $ | 14,627,129 | ||||
|
Addition
|
2,069,739 | 7,455,360 | ||||||
|
Transfer
from prepaid expenses and other current assets
|
- | 2,283,791 | ||||||
|
Write
off
|
(23,907,912 | ) | - | |||||
|
Translation
adjustments
|
39,061 | 239,870 | ||||||
|
Total
gross carrying amount
|
2,807,038 | 24,606,150 | ||||||
|
Accumulated
amortization
|
||||||||
|
Beginning
|
(16,275,735 | ) | (990,951 | ) | ||||
|
Transfer
from accrued advertising operating rights fee
|
(733,000 | ) | - | |||||
|
Amortization
for the year
|
(1,388,980 | ) | (15,167,456 | ) | ||||
|
Write
off
|
16,031,388 | - | ||||||
|
Translation
adjustments
|
16,625 | (117,328 | ) | |||||
|
Total
accumulated amortization
|
(2,349,702 | ) | (16,275,735 | ) | ||||
|
Provision
for impairment
|
||||||||
|
Beginning
|
(7,912,303 | ) | - | |||||
|
Addition
|
- | (7,979,808 | ) | |||||
|
Write
off
|
7,876,523 | - | ||||||
|
Translation
adjustments
|
(73,317 | ) | 67,505 | |||||
|
Total
Provision for impairment
|
(109,097 | ) | (7,912,303 | ) | ||||
|
Prepayments
for advertising operating rights, net
|
$ | 348,239 | $ | 418,112 | ||||
Total
amortization expense of prepayments for advertising operating rights of the
Company for the years ended December 31, 2009, 2008 and 2007 were $1,388,980,
$15,167,456 and $990,951 respectively. The amortization expense of prepayments
for advertising operating rights was included as cost of advertising services on
the consolidated statement of operations.
Provision
for impairment
As the
Company recorded a continuous net loss, the Company performed an impairment
review of its prepayments for advertising operating rights. The Company compared
the carrying amount of the prepayments for advertising operating rights of each
project to the sum of the undiscounted cash flows expected to be generated. For
those projects with carrying values exceeding undiscounted cash flows, the
Company determined their fair values using a discounted cash flow analysis.
Accordingly, the Company recorded an impairment loss of $nil, $7,979,808 and
$nil for the years ended December 31, 2009, 2008 and 2007 in relation to the
prepayments for certain advertising operating rights projects. The impairment
loss was included as non-cash impairment charges on the consolidated
statement of operations.
For the
years ended December 31, 2009, 2008 and 2007, the Company recorded a write-off
of provision for impairment losses against cost and accumulated amortization of
certain prepayments for advertising operating rights amounted to $7,876,523,
$nil and $nil respectively.
NOTE
8 PREPAID
EXPENSES AND OTHER CURRENT ASSETS, NET
Prepaid
expenses and other current assets, net as of December 31, 2009 and
2008 were as follows:
|
2009
|
2008
|
|||||||
|
Rental
deposits
|
$ | 91,548 | $ | 93,294 | ||||
|
Deposits
paid for soliciting potential media projects
|
- | 3,109,609 | ||||||
|
Payments
from customers withheld by a third party
|
1,404,977 | 1,402,751 | ||||||
|
Receivable
from a related party (Note 16)
|
413,309 | - | ||||||
|
Other
receivables
|
10,914 | 2,937,228 | ||||||
|
Prepaid
expenses
|
158,722 | 222,679 | ||||||
|
Sub-total
|
2,079,470 | 7,765,561 | ||||||
|
Less:
allowance for doubtful debts
|
(1,413,563 | ) | (7,135,429 | ) | ||||
|
Total
|
$ | 665,907 | $ | 630,132 | ||||
For the
year ended December 31, 2009, the Company recorded a net write-back of allowance
for doubtful debts for prepaid expenses and other current assets of $121,599,
while for the years ended December 31, 2008 and 2007, the Company recorded an
allowance for doubtful debts for prepaid expenses and other current assets of
$7,140,983 and $10,716 respectively. The allowance for doubtful debts for other
receivables was included in net write-back of / (allowance for) doubtful
debts and net loss from discontinued operations, net of income taxes on the
consolidated statements of operations.
The
Company wrote off certain allowance for doubtful debts for prepaid expenses and
other current assets of $5,601,974, $nil and $nil for the years ended December
31, 2009, 2008 and 2007 respectively.
NOTE
9 EQUIPMENT,
NET
Equipment,
net as of December 31, 2009 and 2008 consisted of the following:
|
2009
|
2008
|
|||||||
|
Media
display equipment
|
$ | 5,230,837 | $ | 5,389,316 | ||||
|
Office
equipment
|
321,257 | 484,827 | ||||||
|
Furniture
and fixtures
|
15,566 | 54,520 | ||||||
|
Construction
in progress
|
- | 378,106 | ||||||
|
Sub-Total
|
5,567,660 | 6,306,769 | ||||||
|
Less:
accumulated depreciation
|
(1,232,235 | ) | (928,466 | ) | ||||
|
Less:
provision for impairment
|
(2,945,734 | ) | (2,980,679 | ) | ||||
|
Total
|
$ | 1,389,691 | $ | 2,397,624 | ||||
Depreciation
expenses for the years ended December 31, 2009, 2008 and 2007 amounted to
$475,214, $917,428 and $56,603 respectively.
Provision for
impairment
As the
Company recorded a continuous net loss, the Company performed an impairment
review of its equipment. The Company compared the carrying value of its
equipment to the sum of the undiscounted cash flows expected to be generated.
For those assets with carrying values exceeding undiscounted cash flows,
the Company determined their fair values using a discounted cash flow analysis.
Accordingly, the Company recorded an impairment loss of $454,904, $2,977,915 and
$nil for certain media display equipment for the years ended December 31, 2009,
2008 and 2007. The impairment loss was included as non-cash impairment
charges in the consolidated statements of operations.
For the
years ended December 31, 2009, 2008 and 2007, the Company recorded a write-off
of provision for impairment losses against cost and accumulated amortization of
equipment amounted to $494,953, $nil and $nil respectively.
Pledge
of Equipment
Upon the
completion of debt restructuring in April 2009, no equipment has been pledged by
the Company.
NOTE
10 INTANGIBLE
ASSETS, NET
Intangible
assets, net as of December 31, 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||||
|
Amortized
intangible rights
|
||||||||
|
Gross
carrying amount
|
$ | 551,031 | $ | 7,137,097 | ||||
|
Less:
accumulated amortization
|
(203,448 | ) | (1,312,790 | ) | ||||
|
Less:
provision for impairment loss
|
(347,583 | ) | (5,375,000 | ) | ||||
|
Amortized
intangible rights, net
|
- | 449,307 | ||||||
|
Amortized
acquired application systems
|
||||||||
|
Gross
carrying amount
|
1,973,865 | 1,973,865 | ||||||
|
Less:
accumulated amortization
|
(197,388 | ) | (197,388 | ) | ||||
|
Less:
provision for impairment loss
|
(1,776,477 | ) | (1,776,477 | ) | ||||
|
Amortized
acquired application systems, net
|
- | - | ||||||
|
Intangible
assets, net
|
$ | - | $ | 449,307 | ||||
Total
amortization expense of intangible assets of the Company for the years ended
December 31, 2009, 2008 and 2007 amounted to $101,724, $1,038,662 and $472,032
respectively.
Provision for
impairment
Total
non-cash impairment charges recorded for intangible assets of the Company for
the years ended December 31, 2009, 2008 and 2007 amounted to $347,583,
$7,151,477 and $1,332,321 respectively. They were included in non-cash
impairment charges and net loss from discontinued operations, net of income
taxes in the consolidated statements of operations.
a) In
Fiscal 2007
In 2007,
the Company compared the undiscounted cash flows expected to be generated to the
carrying value of Quo Advertising’s intangible right as a result of the non-LED
business of Quo Advertising is shrinking and recording a continuous operating
loss. The Company determined that the intangible right of Quo Advertising which
associated with non-LED advertising business should be fully provided with
impairment loss. An impairment loss of $516,419 for intangible right of Quo
Advertising was recorded for the year ended December 31, 2007. In fiscal 2008,
the Company wrote-off the intangible right of Quo Advertising.
For the
intangible right of Tianma, which associated with operating right to conduct
tour business, the Company compared the undiscounted cash flows to the carrying
values of Tianma’s intangible right as a result of continuous operating loss
recorded by Tianma in 2007. The Company has determined the intangible right
should be fully provided with impairment loss based on discounted cash flow
model. Accordingly, the Company recorded an impairment loss of $815,902 for
intangible right of Tianma for the year ended December 31, 2007. In fiscal 2008,
the Company wrote-off the intangible right of Tianma.
b) In
Fiscal 2008
In 2008,
the Company performed impairment review on its intangible right acquired in 2006
for managing and operating 120 LED outdoor advertising video panels in the
Changning district of Shanghai, China as a result of limited revenue being
generated from such media project. The Company determined that the intangible
right of such media project should be fully provided with impairment loss based
on discounted cash flow analysis. Accordingly, the Company recorded an
impairment loss of $5,375,000 for such intangible right for the year ended
December 31, 2008. In fiscal 2009, the Company wrote-off the intangible right of
such media project.
The
Company also performed an impairment review on its acquired application systems
from Lianhe for controlling LED activities as the Company recorded a continuous
net loss on LED business. The Company determined that the acquired application
systems should be fully provided with impairment loss based on discounted cash
flow analysis. Accordingly, the Company recorded an impairment loss of
$1,776,477 for the acquired application system for the year ended December 31,
2008.
c) In
Fiscal 2009
In 2009,
the Company performed impairment review on the intangible rights arisen from the
consolidation of Botong. Such intangible right was related to the acquired
advertising operating right for operating 1 mega-size LED billboard at Haoyou
Emporium in Beijing. The Company determined that such intangible right should be
fully provided with impairment loss based on discounted cash flow analysis.
Accordingly, the Company recorded an impairment loss of $347,583 for such
intangible right for the year ended December 31, 2009.
NOTE
11 DEFERRED
CHARGES, NET
Deferred
charges, net as of December 31, 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||||
|
Deferred
charges
|
$ | 250,000 | $ | 1,700,000 | ||||
|
Less:
accumulated amortization
|
(58,009 | ) | (457,042 | ) | ||||
|
Total
|
$ | 191,991 | $ | 1,242,958 | ||||
Total
amortization of deferred charges for the years ended December 31, 2009, 2008 and
2007 amounted to $1,189,214, $527,885 and $29,157 respectively. They were
included as amortization of deferred charges and debt discount in the
consolidated statements of operations.
Pursuant
to the debt restructuring in April, 2009, all the associated unamortized
deferred charges of the 3% Convertible Promissory Notes at the date of
transaction were immediately recognized as expenses and included as interest and
other debt-related expenses. For details, please refer to Note 13 – Convertible
Promissory Notes and Warrants.
|
NOTE
12
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER
PAYABLES
|
Accounts
payable, accrued expenses and other payables as of December 31, 2009 and 2008
consisted of the following:
|
2009
|
2008
|
|||||||
|
Accounts
payable
|
$ | 105,957 | $ | 801,627 | ||||
|
Accrued
professional fee
|
468,942 | 461,953 | ||||||
|
Accrued
staff benefit and related fees
|
908,832 | 1,028,049 | ||||||
|
Accrued
interest expenses
|
12,603 | 1,467,417 | ||||||
|
Other
accrued expenses
|
558,369 | 839,519 | ||||||
|
Payable
to a related party (Note 16)
|
17,692 | - | ||||||
|
Other
payables
|
215,664 | 978,639 | ||||||
|
Total
|
$ | 2,288,059 | $ | 5,577,204 | ||||
NOTE
13 CONVERTIBLE
PROMISSORY NOTES AND WARRANTS
(A) 12%
Convertible Promissory Note and Warrants
On
November 12, 2007, the Company entered into a 12% Note and Warrant Purchase
Agreement with Wei An Developments Limited (“Wei An”) with respect to the
purchase by Wei An a convertible promissory note in the principal amount of
$5,000,000 at interest rate of 12% per annum (the “12% Convertible Promissory
Note”). The 12% Convertible Promissory Note was convertible into the
Company’s common stock at the conversion price of $2.40 per share. Pursuant
to the agreement, the Company was subject to a commitment fee of 2% of the
principal amount of the 12% Convertible Promissory Note. The term of the 12%
Convertible Promissory Note was six months and the Company had the option to
extend the 12% Convertible Promissory Note by an additional six-month period at
an interest rate of 14% per annum and be subject to an additional commitment fee
of 2% of the principal amount of the 12% Convertible Promissory Note. However,
the Company had the right to prepay all or any portion of the amounts due under
the 12% Convertible Promissory Note at any time without penalty or premium. In
addition, pursuant to the Warrant Purchase Agreement, the Company issued
warrants to purchase up to 250,000 shares of the Company’s common stock at the
exercise price of $2.30 per share, which are exercisable for a period of two
years.
On
February 13, 2008, the Company fully redeemed the 12% Convertible Promissory
Note at a redemption price equal to 100% of the principal amount of $5,000,000
plus accrued and unpaid interest. No penalty or premium was charged for such
early redemption.
As of
December 31, 2009, none of the warrants associated with 12% Convertible
Promissory Note was exercised.
(B) 3%
Convertible Promissory Notes and Warrants
On
November 19, 2007, the Company and Quo Advertising entered into a 3% Note and
Warrant Purchase Agreement (the “Purchase Agreement”) with affiliated investment
funds of Och-Ziff Capital Management Group (the “Investors”), pursuant to which
the Company agreed to issue 3% Senior Secured Convertible 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 34,285,715
shares of common stock of the Company (the “Warrants”).
The 3%
Convertible Promissory Notes and Warrants were issued in three
tranches:
|
1)
|
On
November 19, 2007, 3% Convertible Promissory Notes in the aggregate
principal amount of $6,000,000, Warrants exercisable for 2,400,000 shares
at $2.50 per share and Warrants exercisable for 1,714,285 shares at $3.50
per share were issued;
|
|
2)
|
On
November 28, 2007, 3% Convertible Promissory Notes in the aggregate
principal amount of $9,000,000, Warrants exercisable for 3,600,000 shares
at $2.50 per share and Warrants exercisable for 2,571,430 shares at $3.50
per share were issued; and
|
|
3)
|
On
January 31, 2008 (the “Third Closing”), 3% Convertible Promissory Notes in
the aggregate principal amount of $35,000,000, Warrants exercisable for
14,000,000 shares at $2.50 per share and Warrants exercisable for
10,000,000 shares at $3.50 per share were
issued.
|
The 3%
Convertible Promissory Notes bore interest at 3% per annum payable semi-annually
in arrears and were convertible into shares of common stock at an initial
conversion price of $1.65 per share, subject to customary anti-dilution
adjustments. In addition, the conversion price was subject to adjusted
downward on an annual basis if the Company should fail to meet certain annual
EPS targets described in the Purchase Agreement. The EPS targets for fiscal
2008, 2009 and 2010 are $0.081, $0.453, and $0.699 respectively. In the event of
a default, or if the Company’s actual EPS as defined in the Purchase Agreement
for any fiscal year is less than 80% of the respective EPS target, certain
Investors could require the Company to redeem the 3% Convertible Promissory
Notes at 100% of the principal amount, plus any accrued and unpaid interest,
plus an amount representing a 20% internal rate of return on the then
outstanding principal amount. The Warrants were to expire on June 30, 2011 and
granted the holders the right to acquire shares of common stock at $2.50 and
$3.50 per share, subject to customary anti-dilution adjustments. The exercise
price of the Warrants would also be adjusted downward whenever the conversion
price of the 3% Convertible Promissory Notes is adjusted downward. In connection
with the issuance of the 3% Senior Secured Convertible Notes, the Company also
entered into registration rights agreement with the Investors, pursuant to
which, as amended, the Company agreed to file at their request, a registration
statement registering for resale any shares issued to the Investor upon
conversion of the 3% Convertible Promissory Notes or exercise of the
Warrants.
On
January 31, 2008, the Company issued $35,000,000 in 3% Convertible Promissory
Notes and amended and restated $15,000,000 in 3% Convertible Promissory Notes
issued in late 2007. Concurrent with the Third Closing, the Company loaned
substantially all the proceeds from 3% Convertible Promissory Notes to its
directly wholly owned subsidiary, NCN Group Limited (the “NCN Group”), and such
loan was evidenced by an intercompany note issued by NCN Group in favor of the
Company (the “NCN Group Note”). At the same time, the Company entered into a
Security Agreement, pursuant to which the Company granted to the collateral
agent for the benefit of the convertible note holders a first-priority security
interest in certain of its assets, including the NCN Group Note and 66% of the
shares of the NCN Group. In addition, the NCN Group and certain of the Company’s
indirectly wholly owned subsidiaries each granted the Company a security
interest in certain of the assets of such subsidiaries to, among other things,
secure the NCN Group Note and certain related obligations.
As of
December 31, 2008, the Company failed to meet EPS target for fiscal 2008. The
Investors agreed the conversion price of the 3% Convertible Promissory Notes
remained unchanged at $1.65 and have not proposed any adjustment to the
conversion price. None of warrants associated with the above convertible
promissory notes has been exercised.
(C) Debt
Restructuring and 1% Convertible Promissory Notes
On April
2, 2009, the Company entered into a new financing arrangement with the holders
of the 3% Convertible Promissory Notes and Warrants and a new
investor.
Pursuant
to a note exchange and option agreement, dated April 2, 2009 (the “Note Exchange
and Option Agreement”), between the Company and Keywin Holdings Limited
(“Keywin”), Keywin exchanged the 3% Convertible Promissory Notes in the
principal amount of $45,000,000, and all accrued and unpaid interest thereon,
for 307,035,463 shares of the Company’s common stock and an option to purchase
an aggregate of 122,814,185 shares of the Company’s common stock, for an
aggregate purchase price of $2,000,000, exercisable for a three-month period
commencing on April 2, 2009 (the “Keywin Option”). Pursuant to the first and
second amendments, the exercise period of such option was subsequently extended
to a six-month period ended October 1, 2009 and nine-month period ended January
1, 2010 respectively. As of December 31, 2009, such option to purchase the
Company’s common stock has not been exercised.
On
January 1, 2010, the Company and Keywin entered into the third Amendment,
pursuant to which the Company agreed to extend the exercise period to an
eighteen-month period ending on October 1, 2010, and provide the Company with
the right to unilaterally terminate the exercise period upon 30 days’ written
notice,
Pursuant
to a note exchange agreement, dated April 2, 2009, among the Company and the
Investors, the parties agreed to cancel the 3% Convertible Promissory Notes in
the principal amount of $5,000,000 held by the Investors (including all accrued
and unpaid interest thereon), and all of the Warrants, in exchange for the
Company’s issuance of new 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,
payable semi-annually in arrears, mature on April 1, 2012, and are convertible
at any time into shares of our common stock at an initial conversion price of
$0.02326 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
3% Convertible Promissory Notes.
The
following table details the accounting treatment of the convertible promissory
notes:
|
12%
Convertible
Promissory
Note
|
3%
Convertible
Promissory
Notes
(first
and
second
tranches)
|
3%
Convertible
Promissory
Notes
(third
tranche)
|
1%
Convertible
Promissory
Notes
|
Total
|
||||||||||||||||
|
Proceeds
of convertible
promissory notes |
$ | 5,000,000 | $ | 15,000,000 | $ | 35,000,000 | $ | 5,000,000 | $ | 60,000,000 | ||||||||||
|
Allocation
of proceeds:
|
||||||||||||||||||||
|
Allocated
relative fair value
of warrants |
(333,670 | ) | (2,490,000 | ) | (5,810,000 | ) | - | (8,633,670 | ) | |||||||||||
|
Allocated
intrinsic value of
beneficial conversion feature |
- | (4,727,272 | ) | (11,030,303 | ) | (1,447,745 | ) | (17,205,320 | ) | |||||||||||
|
Total
net proceeds of the
convertible promissory notes |
4,666,330 | 7,782,728 | 18,159,697 | 3,552,255 | 34,161,010 | |||||||||||||||
|
Repayment
of 12% convertible
promissory note |
(5,000,000 | ) | - | - | - | (5,000,000 | ) | |||||||||||||
|
Conversion
of 3% convertible
promissory notes of $45 million |
- | (15,000,000 | ) | (30,000,000 | ) | - | (45,000,000 | ) | ||||||||||||
|
Cancellation
of 3% convertible
promissory notes of $5 million |
- | - | (5,000,000 | ) | - | (5,000,000 | ) | |||||||||||||
|
Amortization
of debt discount
|
333,670 | 7,217,272 | 16,840,303 | 302,679 | 24,693,924 | |||||||||||||||
|
Net
carrying value of
convertible promissory notes as of December 31, 2009 |
$ | - | $ | - | $ | - | $ | 3,854,934 | $ | 3,854,934 | ||||||||||
Amortization
of Deferred Charges and Debt Discount
The
amortization of deferred charges and debt discount for the year ended December
31, 2009 was as follows:
|
Warrants
|
Conversion
Features
|
Deferred
Charges
|
Total
|
|||||||||||||
|
12%
convertible promissory note
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
3%
convertible promissory notes
|
5,996,879 | 11,385,091 | 1,131,205 | 18,513,175 | ||||||||||||
|
1%
convertible promissory notes
|
- | 302,679 | 58,009 | 360,688 | ||||||||||||
|
Total
|
$ | 5,996,879 | $ | 11,687,770 | $ | 1,189,214 | $ | 18,873,863 | ||||||||
The
amortization of deferred charges and debt discount for the year ended December
31, 2008 was as follows:
|
Warrants
|
Conversion
Features
|
Deferred
Charges
|
Total
|
|||||||||||||
|
12%
convertible promissory note
|
$ | 259,204 | $ | - | $ | 80,700 | $ | 339,904 | ||||||||
|
3%
convertible promissory notes
|
1,657,004 | 3,145,827 | 447,185 | 5,250,016 | ||||||||||||
|
1%
convertible promissory notes
|
- | - | - | - | ||||||||||||
|
Total
|
$ | 1,916,208 | $ | 3,145,827 | $ | 527,885 | $ | 5,589,920 | ||||||||
The
amortization of deferred charges and debt discount for the year ended December
31, 2007 was as follows:
|
Warrants
|
Conversion
Features
|
Deferred
Charges
|
Total
|
|||||||||||||
|
12%
convertible promissory note
|
$ | 74,466 | $ | - | $ | 19,301 | $ | 93,767 | ||||||||
|
3%
convertible promissory notes
|
35,456 | 67,312 | 9,856 | 112,624 | ||||||||||||
|
1%
convertible promissory notes
|
- | - | - | - | ||||||||||||
|
Total
|
$ | 109,922 | $ | 67,312 | $ | 29,157 | $ | 206,391 | ||||||||
The fair
values of the financial instruments associated with warrants of both the 12%
Convertible Promissory Note and 3% Convertible Promissory Notes were determined
utilizing Black-Scholes option pricing model, which is consistent with the
Company’s historical valuation methods. The following assumptions and estimates
were used in the Black-Scholes option pricing model: (1) 12% Convertible
Promissory Note: volatility of 182%; an average risk-free interest rate of
3.52%; dividend yield of 0%; and an expected life of 2 years, (2) 3% Convertible
Promissory Notes: volatility of 47%; an average risk-free interest rate of
3.30%; dividend yield of 0%; and an expected life of 3.5 years. The respective
allocated proceeds to the warrants of 12% Convertible Promissory Note and 3%
Convertible Promissory Notes amounted to $333,670 and $8,300,000, respectively,
is recorded in additional paid-in capital and the respective debt discount is
amortized over the life of convertible promissory notes, using the effective
yield method.
The
embedded beneficial conversion feature are recognized and measured by allocating
a portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The intrinsic value of beneficial conversion feature
is calculated according to EITF Issue No. 98-5 “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio” (ASC Topic 470-20) and EITF Issue No. 00-27 “Application of Issue No. 98-5 to
Certain Convertible Instruments” (ASC Topic 470-20). Only the 3%
Convertible Promissory Notes and 1% Convertible Promissory Notes are considered
to have a beneficial conversion feature as the their effective conversion price
was less than the Company’s market price of common stock at commitment date. For
the 12% Convertible Promissory Note, no beneficial conversion feature existed.
The value of beneficial conversion feature of 3% Convertible Promissory Notes
and 1% Convertible Promissory Notes amounted to $15,757,575 and $1,447,745,
respectively, is recorded as a reduction in the carrying value of the
convertible promissory notes against additional paid-in capital. As the 3%
Convertible Promissory Notes and 1% Convertible Promissory Notes have stated
redemption dates, the respective debt discount is amortized over the term of the
notes from the respective date of issuance using the effective yield
method.
On
February 13, 2008, the Company fully redeemed 12% Convertible Promissory Note at
a redemption price equal to 100% of the principal amount of $5,000,000 plus
accrued and unpaid interest. Accordingly, all the associated unamortized
deferred charges and unamortized debt discount of $48,261 and $149,885,
respectively, at the date of redemption were immediately recognized as expenses
and included in amortization of deferred charges and debt discount on the
consolidated statements of operations for the year ended December 31,
2008.
On April
2, 2009, Keywin exchanged 3% Convertible Promissory Notes in the principal
amount of $45,000,000 and all accrued and unpaid interest thereon, for
307,035,463 shares of the Company’s common stock. All the associated unamortized
deferred charges and unamortized debt discount of the 3% Convertible Promissory
Notes in the principal amount of $45,000,000 amounting to $1,005,774 and
$15,930,054, respectively, at the date of conversion were immediately recognized
as expenses and included in amortization of deferred charges and debt discount
on the consolidated statements of operations for the year ended December 31,
2009.
Non-cash
debt conversion charges
Pursuant
to the debt restructuring in April 2009, the Company provided an inducement
conversion offer to Keywin who exchanged 3% Convertible Promissory Notes in the
principal amount of $45,000,000 and all accrued and unpaid interest thereon, for
307,035,463 shares of the Company’s common stock. To induce conversion, the
Company has reduced the conversion price and additionally granted an option to
Keywin to purchase an aggregate of 122,814,185 shares of the Company’s common
stock, for an aggregate purchase price of $2,000,000, exercisable for a
three-month period. Accordingly, for the year ended December 31, 2009, the
Company recognized a non-cash debt conversion charge of $10,204,627 equal to the
fair value of the incremental consideration (including both reduction in the
conversion price and grant of the purchase option). The fair value of the
purchase option was determined utilizing Black-Scholes option pricing model. The
following assumptions and estimates were used: volatility of 129%; an average
risk-free interest rate of 0.22%; dividend yield of 0%; and an expected life of
3 months.
Loss
on early extinguishment of debt
As
aforementioned, on April 2, 2009, the Company, the Investors agreed to cancel
the 3% Convertible Promissory Notes in the principal amount of $5,000,000 held
by the Investors (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 in the principal amount of $5,000,000. The Company
determined that the 3% Convertible Promissory Notes and the 1% Convertible
Promissory Notes were with substantially different terms and hence reported in
the same manner as an extinguishment of the 3% Convertible Promissory Notes and
issuance of the 1% Convertible Promissory Notes. Accordingly, all the associated
unamortized deferred charges and unamortized debt discount of the 3% Convertible
Promissory Notes in the principal amount of $5,000,000 amounted to $111,753 and
$1,770,006 respectively at the date of extinguishment were immediately
recognized as expenses and all the accrued and unpaid interest of $185,075 at
the date of extinguishment were recognized as income. Such expenses, net of
income amounted to $1,696,684 were included in the loss on early extinguishment
of debt on the consolidated statements of operations for the year ended December
31, 2009.
Interest
Expense
The
following table details the interest expenses:
|
For
the years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
12%
convertible promissory note
|
$ | - | $ | 69,041 | $ | 122,803 | ||||||
|
3%
convertible promissory notes
|
383,334 | 1,423,417 | - | |||||||||
|
1%
convertible promissory notes
|
37,397 | - | - | |||||||||
|
Total
|
$ | 420,731 | $ | 1,492,458 | $ | 122,803 | ||||||
NOTE
14 COMMITMENTS
AND CONTINGENCIES
(A) Commitments
1.
Rental Lease Commitment
The
Company’s existing rental leases do not contain significant restrictive
provisions. The following is a schedule by year of future minimum lease
obligations under non-cancelable rental operating leases as of December 31,
2009:
|
Fiscal
years ending December 31,
|
||||
|
2010
|
$
|
395,317
|
||
|
2011
|
70,035
|
|||
|
Total
|
$
|
465,352
|
Rent
expense for the years ended December 31, 2009, 2008 and 2007 was $ 381,093,
$1,390,070 and $593,441 respectively.
2.
Annual Advertising Operating Rights Fee Commitment
The
Company, through its through its PRC operating companies has acquired
advertising rights from third parties to operate different types of advertising
panels for certain periods.
The
following table sets forth the estimated future annual commitment of the Company
with respect to the advertising operating rights of panels that the Company held
as of December 31, 2009:
|
Fiscal
years ending December 31,
|
||||
|
2010
|
$
|
1,569,640
|
||
|
2011
|
513,248
|
|||
|
2012
|
588,439
|
|||
|
2013
|
94,642
|
|||
|
Thereafter
|
45,370
|
|||
|
Total
|
$
|
2,811,339
|
3.
Capital commitments
As
of December 31, 2009, the Company had commitments for capital expenditures
in connection with construction of roadside advertising panels and mega-size
advertising panels of approximately $18,000.
(B)
Contingencies
The
Company accounts for loss contingencies in accordance with SFAS No. 5 “Accounting for Loss
Contingencies” (ASC Topic 450) and other related guidelines. Set forth
below is a description of certain loss contingencies as of December 31, 2009 and
management’s opinion as to the likelihood of loss in respect of loss
contingency.
On March
20, 2008, the Company’s wholly-owned subsidiary NCN Huamin entered into a rental
agreement with Beijing Chengtian Zhihong TV & Film Production Co., Ltd.
(“Chengtian”), pursuant to which, a certain office premises located in Beijing
was leased from Chengtian to NCN Huamin for a term of three years, commencing
April 1, 2008. On December 30, 2008, NCN Huamin issued a notice to Chengtian to
terminate the rental agreement effective on December 31, 2008, as Chengtian had
breached several provisions as stated in the rental agreement and refused to
take any remedial actions. On January 14, 2009, NCN Huamin received a notice
from Beijing Arbitration Commission that Chengtian, as plaintiff, had initiated
a lawsuit against NCN Huamin seeking an aggregate of approximately $505,000 for
unpaid rental-related expense plus accrued interest as well as compensation for
unilateral termination of the rental contract. On February 25, 2009, NCN Huamin
counter-claimed for breach of rental contract against Chengtian and asserted to
claim an aggregate of approximately $155,000 from Chengtian for overpayment of
rental expenses and compensation for Chengtian’s breach of
contract.
In July
2009, the Beijing Arbitration Commission made a judgment that Huamin is liable
to pay Chengtian of $280,000. In October, 2009, the Company appealed to Beijing
Second Intermediate People's Court against the arbitration decision. On December
18, 2009, Beijing Second Intermediate People’s Court made a final judgment to
rescind the original judgment made by the Beijing Arbitration Commission. At
present, no further legal actions have been taken or lawsuit was filed by
Chengtian against Huamin. The Company do not believe that the outcome of this
litigation will have a material impact on its consolidated financial statements,
or its results of operations.
NOTE
15 STOCKHOLDERS’
EQUITY
|
(A)
|
Stock,
Options and Warrants Issued for
Services
|
1. In
February 2006, the Company issued an option to purchase up to 225,000 shares of
common stock to its legal counsel at an exercise price of $0.10 per share. So
long as the counsel’s relationship with the Company continues, one-twelfth of
the shares underlying the option vested and became exercisable each month from
the date of issuance. The option was exercisable for 120 days after termination
of the relationship. The fair market value of the option was estimated on the
grant date using the Black-Scholes option pricing model as required by SFAS 123R
with the following assumptions and estimates: expected dividend 0%, volatility
147%, a risk-free rate of 4.5% and an expected life of one (1) year. The value
of an option recognized for the years ended December 31, 2009, 2008 and 2007
were $nil, $nil and $1,317 respectively. The option was exercised in April
2007.
2.
In August 2006, the Company issued a warrant to purchase up to 100,000 shares of
restricted common stock to a consultant at an exercise price $0.70 per share.
One-fourth of the shares underlying the warrant became exercisable every 45 days
beginning from the date of issuance. The warrant remains exercisable until
August 25, 2016. The fair market value of the warrant was estimated on the grant
date using the Black-Scholes option pricing model as required by SFAS 123R with
the following assumptions and estimates: expected dividend 0%, volatility 192%,
a risk-free rate of 4.5% and an expected life of one (1) year. The value of the
warrant recognized for the years ended December 31, 2009, 2008 and 2007 were
$nil, $nil and $26,604 respectively.
3. In
April 2007, the Company issued 45,000 S-8 shares of common stock of par value of
$0.001 each, totaling $18,000 to its legal counsel for services
rendered.
4. In
April 2007, the Company issued 377,260 S-8 shares of common stock of par value
of $0.001 each, totaling $85,353 to its directors and officers for services
rendered.
5. In
July 2007, NCN Group Management Limited entered into Executive Employment
Agreements (the “Agreements”) with Godfrey Hui, Deputy Chief Executive Officer
(former Chief Executive Officer), Daniel So, former Managing Director, Daley
Mok, former Chief Financial Officer, Benedict Fung, former President, and
Stanley Chu, former General Manager. Pursuant to the Agreements, each executive
was granted shares of the Company’s common stock subject to annual vesting over
five years in the following amounts: Mr. Hui, 2,000,000 shares; Mr. So,
2,000,000 shares; Dr. Mok, 1,500,000 shares; Mr. Fung, 1,200,000 shares and Mr.
Chu, 1,000,000 shares. However, Mr. So, Mr. Fung and Mr. Chu resigned from their
respective positions in January 2009 and Mr. Mok was removed as the Company’s
Chief Financial Officer in June 2009. Further, on July 15, 2009, NCN Group
Management Limited entered into a new executive employment agreement with
Godfrey Hui, in connection with his services to the Company as the Deputy Chief
Executive Officer. Accordingly, they are no longer entitled to those shares that
will be vested on December 31, 2009, 2010 and 2011 in the following amounts: Mr.
So, 1,500,000 shares; Mr. Fung, 970,000 shares, Mr. Chu, 790,000 shares; Mr.
Mok, 1,200,000 shares; and Mr. Hui, 1,500,000 shares. In connection with these
stock grants and in accordance with SFAS 123R (ASC Topic 718), the Company
recognized non-cash stock-based compensation of $nil, $2,797,200 and $1,709,400
included in general and administrative expenses on the consolidated statement of
operations for the years ended December 31, 2009, 2008 and 2007 respectively.
Out of the total shares granted under the Agreements, on January 2, 2008, an
aggregate of 660,000 shares with par value of $0.001 each were vested and issued
to the concerned executives. On July 28, 2009, an aggregate of 500,000 shares
with par value of $0.001 each were vested and issued to certain concerned
executives.
6. In
August 2007, the Company issued 173,630 shares of restricted common stock of par
value of $0.001 each, totaling $424,004 to a consultant for services rendered.
The value of stock grant is fully amortized and recognized in 2007.
7. In
August 2007, the Company issued 230,000 S-8 shares of common stock of par value
of $0.001 each, totaling $69,500 to its directors and officers for services
rendered.
8. In
September 2007, the Company entered into a service agreement with independent
directors Peter Mak, Ronglie Xu (who hold office until July 2, 2009), Joachim
Burger (who resigned as a director of the Company on September 30,
2008), Gerd Jakob (who resigned as a director of the Company on May 5,
2009) and Edward Lu (who hold office until July 2, 2009). Pursuant to the
service agreements, each independent director was granted shares of the
Company’s common stock subject to a vesting period of ten months in the
following amounts: Peter Mak: 15,000 shares; Ronglie Xu: 15,000 shares; Joachim
Burger: 15,000 shares, Gerd Jakob: 10,000 shares and Edward Lu: 10,000 shares.
In connection with these stock grants and in accordance with SFAS 123R (ASC
Topic 718), the Company recognized $nil, $86,970 and $57,980 of non-cash
stock-based compensation included in general and administrative expenses on the
consolidated statement of operation for the years ended December 31, 2009, 2008
and 2007 respectively. On July 21, 2008, an aggregate of 65,000 shares of common
stock of par value of $0.001 each were vested and issued to the independent
directors.
9. In
November 2007, the Company issued a warrant to purchase up to 300,000 shares of
restricted common stock to a placement agent for provision of agency services in
connection with the issuance of the 3% Convertible Promissory Notes at an
exercise price $3.0 per share which are exercisable for a period of two years.
The fair value of the warrant was estimated on the grant date using the
Black-Scholes option pricing model as required by SFAS 123R (ASC Topic 718) with
the following weighted average assumptions: expected dividend 0%, volatility
182%, a risk-free rate of 4.05 % and an expected life of two (2) year. The
warrant is expired in November 2009. The value of the warrant recognized for the
years ended December 31, 2009, 2008 and 2007 were $319,581, $127,831 and $21,305
respectively.
10. In
December 2007, the Company committed to grant 235,000 shares of common stock to
certain employees of the Company for their services rendered during the year
ended December 31, 2007. In connection with these stock grants and in accordance
with SFAS 123R (ASC Topic 718), the Company recognized non-cash stock-based
compensation of $nil, $nil and $611,000 in general and administrative expenses
on the consolidated statement of operation for the years ended December 31,
2009, 2008 and 2007. Such 235,000 shares of par value of $0.001 each were issued
on January 2, 2008. In addition, the Company committed to grant another 30,000
shares of common stock to an employee pursuant to his employment contract for
service rendered. The Company recognized the non-cash stock-based compensation
of $nil, $76,500 and $nil for the years ended December 31, 2009, 2008 and 2007
for such 30,000 S-8 shares granted. In October 2008, such 30,000 shares of
common stock of par value of $0.001 each were vested and issued to the
employees.
11. In
June 2008, the Board of Directors granted 110,000 shares of common stock to the
board of directors, Peter Mak, Ronglie Xu, Joachim Burger, Gerd Jakob, Edward
Lu, Godfrey Hui, Daniel So, Daley Mok and Stanley Chu, as part of their
directors’ fee for their service rendered during the period from July 1, 2008 to
June 30, 2009. Each director was granted shares of the Company’s common stock
subject to a vesting period of twelve months in the following amounts: Peter
Mak: 15,000 shares; Ronglie Xu: 15,000 shares; Joachim Burger: 15,000 shares;
Gerd Jakob: 10,000 shares; Edward Lu: 10,000 shares; Godfrey Hui: 15,000 shares;
Daniel So: 10,000 shares; Daley Mok: 10,000 shares and Stanley Chu: 10,000
shares. However, Mr. Joachim Burger and Mr. Gerd Jakob resigned as directors on
September 30 2008 and May 5, 2009, respectively. Therefore, they are no longer
entitled to those shares. In connection with these stock grants and in
accordance with SFAS 123R (ASC Topic 718), the Company recognized $74,999,
$95,001 and $nil of non-cash stock-based compensation included in general and
administrative expenses on the consolidated statement of operations for the
years ended December 31, 2009, 2008 and 2007 respectively. On July 28, 2009,
85,000 shares of common stock of par value of $0.001 each were vested and issued
to those directors.
12. In
July 2008, the Company granted 170,000 shares of common stock to certain
employees of the Company for their services rendered. One of the employees
effectively resigned in January 2009 and his entitlement to 70,000 shares was
canceled. One of the employees agreed to forfeit his original entitled shares of
40,000. Accordingly, in connection with these stock grants, he Company
recognized the non-cash stock-based compensation of $25,442, $93,358 and $nil
for the years ended December 31, 2009, 2008 and 2007 respectively. On July 28,
2009, 60,000 shares of common stock with par value of $0.001 were vested and
issued to the employees.
13. In
August 2008, the Company granted 100,000 shares of common stock to a consultant
for services rendered. The value of stock grant recognized for the years ended
December 31, 2009, 2008 and 2007 were $125,647, $52,353 and $nil
respectively.
14. In
July 2009, the Board of Directors granted an aggregate of 1,800,000 shares of
common stock to the independent directors of the Company for their services to
the Company covering the period from July 2, 2009 to July 1, 2010. Each
independent director was granted shares of the Company’s common stock subject to
a vesting period of twelve months in the following amounts: Peter Mak: 600,000
shares; Ronald Lee: 600,000 shares; and Gerald Godfrey: 600,000 shares. Such
shares with par value of $0.001were issued on July 28, 2009 but will not be
vested until July 1, 2010 after which the relevant share certificate will be
handed to the independent directors. However, Mr. Peter Mak resigned as
directors on December 31, 2009. Therefore, he is no longer entitled to those
shares. In connection with these stock grants and in accordance with SFAS 123R
(ASC Topic 718), the Company recognized $18,000, $nil and $nil of non-cash
stock-based compensation included in general and administrative expenses on the
consolidated statements of operations for the years ended December 31, 2009,
2008 and 2007 respectively.
15. In
July 2009, the Board of Directors granted an aggregate of 2,000,000 shares of
common stock to Jennifer Fu, Chief Financial Officer and one employee of the
Company individually for their services to the Company covering the period from
July 15, 2009 to July 14, 2011. Such shares with par value of $0.001 were issued
on July 28, 2009 but will not vest until July 14, 2010 after which the relevant
share certificate will be handed to the employees. In connection with these
stock grants and in accordance with SFAS 123R (ASC Topic 718), the Company
recognized $15,000, $nil and $nil of non-cash stock-based compensation included
in general and administrative expenses on the consolidated statements of
operations for the years ended December 31, 2009, 2008 and 2007
respectively.
16. In
July 2009, NCN Group Management Limited entered into Executive Employment
Agreements with Earnest Leung, Chief Executive Officer and Godfrey Hui, Deputy
Chief Executive Officer. Pursuant to the agreements, Dr. Earnest Leung and Mr.
Godfrey Hui were granted 30,000,000 and 10,000,000 shares, respectively, for
their services rendered during the period from July 1, 2009 to June 30, 2011.
Such shares with par value of $0.001 each were issued to the concerned
executives on July 28, 2009. In connection with these stock grants and in
accordance with SFAS 123R (ASC Topic 718), the Company recognized $1,200,000 of
deferred stock compensation amortized over vesting period. The amortization of
deferred stock compensation of $300,000, $nil and $nil were recorded as non-cash
stock-based compensation and included in general and administrative expenses on
the consolidated statement of operation for the years ended December 31, 2009,
2008 and 2007 respectively.
(B) Stock
Issued for Acquisition
1. In
January 2007, in connection with the acquisition of Quo Advertising, the Company
issued 300,000 shares of restricted common stock of par value of $0.001 each,
totaling $843,600 as part of consideration.
2. In
January 2008, in connection with the acquisition of Cityhorizon BVI, the Company
issued 1,500,000 shares of restricted common stock of par value of $0.001 each,
totaling $3,738,000 as part of consideration.
(C)
Stock Issued for Private Placement
In April
2007, the Company issued and sold 500,000 shares of restricted common stock of
par value of $0.001 each, totaling $1,500,000 in a private placement. No
investment banking fees were incurred as a result of this
transaction.
(D)
Conversion Option and Stock Warrants Issued in Notes Activities
On
November 12, 2007, pursuant to the 12% Note and Warrant Purchase Agreement of
$5,000,000, the Company issued warrants to purchase up to 250,000 shares of the
Company’s common stock at the exercise price of $2.30 per share, which are
exercisable for a period of two years to Wei An. The allocated proceeds to the
warrants of $333,670 based on the relative fair value of 12% Convertible
Promissory Notes and warrants were recorded as reduction in the carrying value
of the note against additional-paid in capital. As the effective conversion
price is higher than the Company’s market price of common stock at commitment
date, no beneficial conversion existed. Please refer to Note 13 – Convertible
Promissory Note and Warrant for details.
On
November 19, 2007, pursuant to the 3% Note and Warrant purchase Agreement, the
Company issued warrants to purchase up to 2,400,000 shares of the Company’s
common stock at the exercise price of $2.5 per share and 1,714,285 shares of the
Company’s common stock at the exercise price of $3.5 per share associated with
the convertible notes of $6,000,000 in the first closing. On November 28, 2007,
the Company also issued warrants to purchase up to 3,600,000 shares of the
Company’s common stock at the exercise price of $2.5 per share and 2,571,430
shares of the Company’s common stock at the exercise price of $3.5 per share.
The allocated proceeds to these warrants were $2,490,000 in aggregate which were
recorded as reduction in the carrying value of the notes against additional
paid-in capital. As the effective conversion price after allocating a portion of
the proceeds to the warrants was less than the Company’s market price of common
stock at commitment date, it was considered to have a beneficial conversion
feature with value of $4,727,272 recorded as a reduction in the carrying value
of the notes against additional paid-in capital. Please refer to Note 13 –
Convertible Promissory Note and Warrant for details.
On
January 31, 2008, the Company issued $35,000,000 in 3% Convertible Promissory
Notes and amended and restated $15,000,000 in 3% Convertible Promissory Notes
issued in late 2007. In addition, the Company issued additional warrants to
purchase 14,000,000 shares of the Company’s common stock at $2.50 per share and
warrants to purchase 10,000,000 shares of the Company’s common stock at $3.50
per share. The allocated proceeds to these warrants were $5,810,000 in aggregate
which were recorded as reduction in the carrying value of the notes against
additional paid-in capital. As the effective conversion price after allocating a
portion of the proceeds to the warrants was less than the Company’s market price
of common stock at commitment date, it was considered to have a beneficial
conversion feature with value of $11,030,303 recorded as a reduction in the
carrying value of the notes against additional paid-in capital. Please refer to
Note 13 – Convertible Promissory Note and Warrant for details.
(E)Debt
Restructuring
On April
2, 2009, the Company entered into a new financing arrangement. Note 13 –
Convertible Promissory Note and Warrant for details. Keywin exchanged 3%
Convertible Promissory Notes in the principal amount of $45,000,000 and all
accrued and unpaid interest thereon, for 307,035,463 shares of the Company’s
common stock and an option to Keywin to purchase an aggregate of 122,814,185
shares of the Company’s common stock, for an aggregate purchase price of
$2,000,000, exercisable for a three-month period commencing on April 2, 2009.
Accordingly, the Company reversed such 3% Convertible Promissory Notes of
principal amount of $45,000,000 and all accrued and unpaid interest of
$1,665,675 against additional paid-in capital. The Company also recognized a
non-cash debt conversion charges of $10,204,627 against additional paid-in
capital.
As part
of new financing arrangement, the Company also issued $5,000,000 in the 1%
Convertible Promissory Notes on April 2, 2009. As the conversion price was less
than the Company’s market price of common stock at commitment date, it was
considered to have a beneficial conversion feature with value of $1,447,745
recorded as a reduction in the carrying values of the notes against additional
paid-in capital. For details, please refer to Note 13 – Convertible Promissory
Note and Warrant.
On April
6, 2009, the Company issued an aggregate of 307,035,463 shares of the Company’s
restricted common stock with par value of $0.001 each to Keywin
accordingly.
(F)
Changes in Deficit
The
following table summarizes the changes in deficit for the year ended December
31, 2009:
|
Noncontrolling
Interests
|
NCN
Common
Stockholders
|
Total
|
||||||||||
|
Total
deficit as of January 1, 2009
|
$ | - | $ | (23,356,217 | ) | $ | (23,356,217 | ) | ||||
|
Net
loss
|
(24,173 | ) | (37,359,188 | ) | (37,383,361 | ) | ||||||
|
Other
comprehensive income (loss)
|
(828 | ) | 27,483 | 26,655 | ||||||||
|
Preferred
stock
|
- | - | - | |||||||||
|
Common
stock
|
- | 351,480 | 351,480 | |||||||||
|
Additional
paid-in capital
|
- | 59,745,236 | 59,745,236 | |||||||||
|
Disposal
of investment
|
25,001 | - | 25,001 | |||||||||
|
Deferred
stock compensation
|
- | (900,000 | ) | (900,000 | ) | |||||||
|
Total
deficit as of December 31, 2009
|
$ | - | $ | (1,491,206 | ) | $ | (1,491,206 | ) | ||||
(G)
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, 2009 contain restrictions on the payment of dividends. The dividend
restrictions provide that the Company or any of its subsidiaries shall not
declare or pay dividends or other distributions in respect of the equity
securities of such entity other than dividends or distributions of cash which
amounts during any 12-month period that exceed ten percent (10%) of the
consolidated net income of the Company based on the Company’s most recent
audited financial statements disclosed in the Company’s annual report on Form
10-K (or equivalent form) filed with the U.S. Securities and Exchange
Commission.
NOTE
16 RELATED
PARTY TRANSACTIONS
Except as
set forth below, during the years ended December 31, 2009, 2008 and 2007, 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.
On
December 21, 2007, the Company acquired 100% of voting shares of Linkrich
Enterprise Advertising and Investment Limited, a dormant corporation
incorporated in the Hong Kong Special Administrative Region, the PRC on March
16, 2001 from a director at a consideration of $1,282 which is the par value of
the voting shares.
In
connection with debt restructuring in April 2009, a company of which the
Company’s chief Executive officer and director (being appointed on July 15, 2009
and May 11, 2009 respectively) is 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 is recorded as issuance
costs for 1% Convertible Promissory Notes and $100,000 is recorded as prepaid
expenses and other current assets, net during the year ended December 31,
2009.
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 122,814,185 shares
of our common stock for an aggregate purchase price of $2,000,000, from a
three-month period ending 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 ending on October 1, 2010, and provide the
Company with the right to unilaterally terminate the exercise period upon 30
days’ written notice,
During
the year ended December 31, 2009, the Company paid expenses in the aggregate
amount of $413,309 expenses on behalf of a related company which is controlled
by a director and chief executive officer of the Company. This amount is
unsecured, bears no interest and repayable on demand. For details, please refer
to Note 8 – Prepaid Expenses and Other Current Assets, Net.
During
the year ended December 31, 2009, the Company entered into an agreement with a
related company which is controlled by a director and chief executive officer of
the Company. Pursuant to the agreement, the Company entered into an arrangement
with the related company such that the Company shared an office with its
facilities, of which the related company is the tenant, at a monthly fee of
$8,846 commencing from November 1, 2009 to April 30, 2010. As of December 31,
2009, the Company recorded an amount of $17,692 payable to the related company.
The amount is unsecured, bears no interest and repayable on demand.
NOTE
17 NET
LOSS PER COMMON SHARE
Net
loss per share information for the years ended December 31, 2009, 2008 and 2007
was as follows:
|
2009
|
2008
|
2007
(Restated)
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
loss from continuing operations attributable to NCN common
stockholders
|
$ | (37,359,188 | ) | $ | (59,527,473 | ) | $ | (13,692,714 | ) | |||
|
Net
loss from discontinued operations attributable to NCN common
stockholders
|
- | 42,640 | (953,905 | ) | ||||||||
|
Net
loss attributable to NCN common stockholders
|
(37,359,188 | ) | (59,484,833 | ) | (14,646,619 | ) | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average number of shares outstanding, basic
|
317,882,046 | 71,569,242 | 68,556,081 | |||||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Options
and warrants
|
- | - | - | |||||||||
|
Weighted
average number of shares outstanding, diluted
|
317,882,046 | 71,569,242 | 68,556,081 | |||||||||
|
Net
loss per common share – basic and diluted
|
||||||||||||
|
Continuing
operations
|
(0.12 | ) | (0.83 | ) | (0.20 | ) | ||||||
|
Discontinued
operations
|
- | - | (0.01 | ) | ||||||||
|
Net
loss per common share – basic and diluted
|
$ | (0.12 | ) | $ | (0.83 | ) | $ | (0.21 | ) | |||
The
diluted net loss per common share is the same as the basic net loss per common
share for the years ended December 31, 2009, 2008 and 2007 as the ordinary
shares to be issued under stock options and warrants outstanding are
anti-dilutive and are therefore excluded from the computation of diluted net
loss per common share. The securities that could potentially dilute basic net
loss per common share in the future that were not included in the computation of
diluted net loss per common share because of anti-dilutive effect as of December
31, 2009, 2008 and 2007 were summarized as follows:
|
2009
|
2008
|
2007
|
||||||
|
Potential
common equivalent shares:
|
||||||||
|
Stock
warrants for services (1)
|
-
|
55,488
|
122,394
|
|||||
|
Warrant
associated with convertible promissory notes
|
-
|
-
|
364,436
|
|||||
|
Conversion
feature associated with convertible promissory notes to common
stock
|
214,961,307
|
-
|
11,174,242
|
|||||
|
Common
stock to be granted to directors executives and employees for services
(including non-vested shares)
|
-
|
7,305,000
|
8,000,000
|
|||||
|
Common
stock to be granted to consultants for services (including non-vested
shares)
|
100,000
|
100,000
|
-
|
|||||
|
Stock
options granted to Keywin
|
94,457,750
|
-
|
-
|
|||||
|
Total
|
309,519,057
|
7,460,488
|
19,661,072
|
Remarks:
|
(1)
|
As
of December 31, 2009, the number of potential common equivalent shares
associated with warrants issued for services was nil, which was related to
a warrant to purchase 100,000 shares of common stock issued by the Company
to a consultant in 2006 for service rendered at an exercise price of
$0.70, which will expire in August
2016.
|
NOTE
18 DISCONTINUED
OPERATIONS
(A)
In Fiscal 2007
No
material disposal transaction happened.
(B)
In Fiscal 2008
In
September 2008, the Company disposed of its entire travel network which was
classified as one of the Company’s business segments in order to focus on its
media business. Accordingly, the Company entered into stock purchase agreements
to dispose of its entire travel network.
1. Sale
of NCN Management Services
On
September 1, 2008, the Company completed the sale of all its interests in NCN
Management Services Limited (“NCN Management Services”) to an independent third
party for a consideration of $173,077 in cash. The acquirer acquired NCN
Management Services along with its subsidiaries, which include 100% interest in
NCN Hotels Investment Limited, 100% interest in NCN Pacific Hotels Limited and
55% interest (through trust) in Tianma. The Company reported a gain on the sale,
net of income taxes of $61,570. The carrying amount of the assets and
liabilities included in the relevant disposal group as of the disposal date of
September 1, 2008 were as follows:
|
Cash
|
$
|
662,515
|
||
|
Accounts
receivable, net
|
1,041,781
|
|||
|
Prepaid
expenses and other current assets, net
|
860,036
|
|||
|
Equipment,
net
|
17,464
|
|||
|
Noncontrolling
interests
|
(99,423
|
)
|
||
|
Liabilities
assumed
|
(2,370,866
|
)
|
||
|
Net
assets
|
$
|
111,507
|
2. Sale
of NCN Landmark
On
September 30, 2008, the Company completed the sale of its 99.9% interests in NCN
Landmark International Hotel Group Limited (“NCN Landmark”) to an independent
third party for a cash consideration of $20,000. The acquirer acquired NCN
Landmark along with its subsidiary, Beijing NCN Landmark Hotel Management
Limited, a PRC corporation. The Company reported a gain on the sale, net of
income taxes of $4,515. The carrying amount of the assets and liabilities
included in the relevant disposal group as of the disposal date of September 30,
2008 were as follows:
|
Cash
|
$
|
3,389
|
||
|
Prepaid
expenses and other current assets, net
|
9,566
|
|||
|
Equipment,
net
|
10,053
|
|||
|
Liabilities
assumed
|
(7,523
|
)
|
||
|
Net
assets
|
$
|
15,485
|
The
Company treated the sale of NCN Management Services along with its subsidiaries
and variable interest entity and NCN Landmark along with its subsidiary as
discontinued operations. Accordingly, revenues, costs and expenses of the
discontinued operations have been excluded from the respective captions in the
consolidated statements of operations. The net operating results of the
discontinued operations have been reported, net of applicable income taxes, as
“Net Loss from Discontinued Operations, Net of Income Taxes”.
(C)
In Fiscal 2009
No
material disposal transaction happened.
(D)
Summary Operating Results of the Discontinued Operations
Summary
operating results for the discontinued operations for the years ended 2009, 2008
and 2007 were as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | - | $ | 24,528,096 | $ | 26,140,355 | ||||||
|
Cost
of revenues
|
- | (24,172,537 | ) | (25,830,401 | ) | |||||||
|
Gross
profit
|
- | 355,559 | 309,954 | |||||||||
|
Non-cash
impairment charges
|
- | - | (815,902 | ) | ||||||||
|
Operating
expenses
|
- | (477,481 | ) | (460,362 | ) | |||||||
|
Other
income
|
- | 98,838 | 9,210 | |||||||||
|
Interest
income
|
- | 2,040 | 3,471 | |||||||||
|
Interest
expenses
|
- | - | - | |||||||||
|
Net
loss from discontinued operations, net of income taxes
|
- | (21,044 | ) | (953,629 | ) | |||||||
|
Gain
from disposal of discontinued operations
|
- | 66,085 | - | |||||||||
|
Net
income (loss) from discontinued operations
|
$ | $ | 45,041 | $ | (953,629 | ) | ||||||
NOTE
19 BUSINESS
SEGMENTS FROM CONTINUING OPERATIONS
In
September 2008, the Company disposed of its entire travel business. Accordingly,
it is management’s view that the Company operate in one single business segment:
Media Network, providing out-of home advertising services.
Geographic
Information
The Group
operates in the PRC and all of the Company’s long lived assets are located in
the PRC.
Major
Customers
An
analysis of percentage of advertising sales to major customers is as
follows:
|
2009
|
2008
|
2007
|
|||||
|
Customer
A
|
16%
|
||||||
|
Customer
B
|
15%
|
||||||
|
Customer
C
|
15%
|
||||||
|
Customer
D
|
11%
|
||||||
|
Customer
E
|
38%
|
-
|
|||||
|
Customer
F
|
-
|
16%
|
-
|
||||
|
Customer
G
|
-
|
-
|
26%
|
||||
|
Customer
H
|
-
|
-
|
16%
|
||||
|
Customer
I
|
-
|
-
|
14%
|
||||
|
Customer J
|
-
|
-
|
14%
|
NOTE
20
INCOME TAXES
Income is
subject to taxation in various countries in which the Company operate. The loss
before income taxes and noncontrolling interests by geographical locations for
the years ended December 31, 2009, 2008 and 2007 was summarized as
follows:
|
2009
|
2008
|
2007
(Restated)
|
||||||||||
|
United
States
|
$ | 32,127,551 | $ | 8,280,492 | $ | 4,275,859 | ||||||
|
Foreign
|
5,255,810 | 51,562,299 | 9,471,511 | |||||||||
| $ | 37,383,361 | $ | 59,842,791 | $ | 13,747,370 | |||||||
Income
tax expenses by geographical locations for the years ended December 31, 2009,
2008 and 2007 were summarized as follows:
|
2009
|
2008
|
2007
(Restated)
|
||||||||||
|
Current
|
$ | $ | $ | |||||||||
|
United
States
|
- | - | - | |||||||||
|
Foreign
|
- | - | 7,668 | |||||||||
| $ | - | $ | - | $ | 7,668 | |||||||
|
Deferred
|
||||||||||||
|
United
States
|
- | - | - | |||||||||
|
Foreign
|
- | - | - | |||||||||
| $ | - | $ | - | $ | - | |||||||
The
reconciliation of the effective income tax of the Company to the U.S. federal
statutory rate (the principal tax jurisdiction of the Company) was as
follows:
|
2009
|
2008
|
2007
(Restated)
|
||||||||||
|
Expected
income tax benefit
|
$ | 12,710,342 | $ | 20,346,549 | $ | 4,674,106 | ||||||
|
Operating
loss carried forward
|
(864,141 | ) | (2,815,367 | ) | (1,453,792 | ) | ||||||
| Nondeductible expenses | (10,059,226 | ) | - | - | ||||||||
|
Tax
effect on foreign income which is not subject U.S. federal corporate
income tax rate of 34%
|
(1,786,975 | ) | (17,531,182 | ) | (3,212,646 | ) | ||||||
| $ | - | $ | - | $ | 7,668 | |||||||
An
analysis of the Company’s deferred tax liabilities and deferred tax assets as of
December 31, 2009, 2008 and 2007 was as follows:
|
2009
|
2008
|
2007
(Restated)
|
||||||||||
|
Deferred
tax assets:
|
$ | $ | $ | |||||||||
|
Net
operating loss carried forward
|
7,486,656 | 6,622,515 | 3,807,148 | |||||||||
|
Less:
valuation allowance
|
(7,486,656 | ) | (6,622,515 | ) | (3,807,148 | ) | ||||||
|
Net
deferred tax assets
|
$ | - | $ | - | $ | - | ||||||
The
Company provided a full valuation allowance against the deferred tax assets as
of December 31, 2009, 2008 and 2007 due to the uncertainty surrounding the
realizability of these benefits in future tax returns.
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
3.1
|
Amended
And Restated Certificate Of Incorporation incorporated herein by reference
from Exhibit A to Registrant’s Definitive Information Statement on
Schedule 14C filed with the SEC on January 10, 2007.
|
|
3.2
|
Amended
and Restated By-Laws, adopted on January 10, 2006, is incorporated herein
by reference from Exhibit 3-(II) to Registrant’s Current Report on Form
8-K filed with the SEC on January 18, 2006.
|
|
3.3
|
Amended
and Restated Certificate of Incorporation filed with the Delaware
Secretary of State on July 27, 2009 (incorporated herein by reference from
Registrant's Current Report on Form 8-Kfiled with the SEC on July 29,
2009).
|
|
4.1
|
Form
of Registrant’s Common Stock Certificate.
|
|
4.2
|
Form
of Amended and Restated Secured Convertible Promissory Note (incorporated
herein by reference from Registrant's Current Report on Form 8-Kfiled with
the SEC on February 6, 2008).
|
|
4.3
|
Form
of Warrant (incorporated herein by reference from Registrant's Current
Report on Form 8-K filed with the SEC on February 6,
2008).
|
|
4.4
|
Form
of 3% Senior Secured Convertible Promissory Note (incorporated herein by
reference from Registrant's Current Report on Form 8-K filed with the SEC
on November 14, 2007).
|
|
4.5
|
Form
of Warrant (incorporated herein by reference from Registrant's Current
Report on Form 8-K filed with the SEC on November 14,
2007).
|
|
4.6
|
TEDA
Travel Group, Inc. 2004 Stock Incentive Plan (incorporated herein by
reference from Registrant's Registration Statement on Form S-8 filed with
the SEC on April 22, 2004).
|
|
4.7
|
2007
Stock Option/Stock Issuance Plan (incorporated herein by reference from
Registrant's Registration Statement on Form S-8 filed with the SEC on
April 6, 2007).
|
|
4.8
|
Form
of Note 1% Senior Unsecured Convertible Promissory Note, dated April 2,
2009 (incorporated herein by reference from Registrant's Current Report on
Form 8-K filed with the SEC on April 6, 2009).
|
|
4.9
|
Registration
Rights Agreement, dated April 2, 2009, by and among the Company, Sculptor
Finance (MD) Ireland Limited, Sculptor Finance (AS) Ireland Limited,
Sculptor Finance (SI) Ireland Limited and Keywin Holdings Limited
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on April 6, 2009)
|
|
10.1
|
Purchase
Agreement, dated November 19, 2007 (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on November 26,
2007).
|
|
10.2
|
First
Amendment to Note and Warrant Purchase Agreement, dated January 31, 2008
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on February 6, 2008).
|
|
10.3
|
Security
Agreement, dated January 31, 2008 (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on February 6,
2008).
|
|
10.4
|
Registration
Rights Agreement, dated November 19, 2007 (incorporated herein by
reference from Registrant's Current Report on Form 8-K filed with the SEC
on November 26, 2007).
|
|
10.5
|
Share
Purchase Agreement dated January 1, 2008 (incorporated herein by reference
from Registrant's Current Report on Form 8-K filed with the SEC on January
7, 2008).
|
|
10.6
|
Agreement
for Co-operation in Business between Shanghai Quo Advertising Company
Limited and Wuhan Weiao Advertising Company Limited dated as of August 16,
2007 (incorporated herein by reference from Registrant's Current Report on
Form 8-K filed with the SEC on August 21,
2007).
|
|
10.7
|
Note
and Warrant Purchase Agreement dated November 12, 2007 by and between the
Company and Wei An Developments Limited (incorporated herein by reference
from Registrant's Current Report on Form 8-K filed with the SEC on
November 14, 2007).
|
|
10.8
|
Contract
for the Rebuilding and Leasing of Advertisement Light Boxes on Nanjing
Road Pedestrian Street (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on June 26,
2007) .
|
|
10.9
|
Agreement
for Advertising Business dated April 26, 2007, by and among Shanghai Quo
Advertising Company Limited, a subsidiary of Network CN Inc., and Shanghai
Yukang Advertising Company Limited (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on May 2,
2007).
|
|
10.10
|
Agreement
for Co-operation and Agency in the Publication of Advertisements dated
April 14, 2007, by and among Shanghai Quo Advertising Company Limited, a
subsidiary of Network CN Inc., and Shanghai Qian Ming Advertising Company
Limited (incorporated herein by reference from Registrant's Current Report
on Form 8-K filed with the SEC on April 20, 2007).
|
|
10.11
|
Stock
Transfer Agreement between Youwei Zheng and NCN Management Services
Limited for acquisition of 55% equity interest in Guangdong Tianma
International Travel Service Co., Ltd., dated June 16, 2006 (incorporated
herein by reference from Registrant’s Current Report on Form 8-K filed
with the SEC on March 30, 2007).
|
|
10.12
|
Business
Joint Venture Agreement, between Shanghai Zhong Ying Communication
Engineering Company Limited and Shanghai Quo Advertising Company Limited
to manage LED outdoor project in Huangpu district of Shanghai, China
(incorporated herein by reference from Registrant’s Current Report on Form
8-K filed with the SEC on February 7, 2007).
|
|
10.13
|
Business
Joint Venture Agreement, between Nanjing Yiyi Culture Advertising Company
Limited and Shanghai Quo Advertising Company Limited to manage LED outdoor
project in Nanjing (incorporated herein by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on February 15,
2007).
|
|
10.14
|
Business
Joint Venture Agreement, between Wuhan Xin An Technology Development
Company Limited and Shanghai Quo Advertising Company Limited to manage LED
outdoor project in Wuhan (incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on March 1,
2007).
|
|
10.15
|
Stock
Purchase Agreement dated as of September 1, 2008, between Zhanpeng Wang,
an individual, and NCN Group Limited, a British Virgin Islands
corporation.
|
|
10.16
|
Note
Exchange Agreement, dated April 2, 2009, by and among the Company,
Sculptor Finance (MD) Ireland Limited, Sculptor Finance (AS) Ireland
Limited, Sculptor Finance (SI) Ireland Limited, OZ Master Fund, Ltd., OZ
Asia Master Fund, Ltd. and OZ Global Special Investments Master Fund, L.P.
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on April 6, 2009)
|
|
10.17
|
Note
Exchange and Option Agreement, dated April 2, 2009, between the Company
and Keywin Holdings Limited. (incorporated herein by reference from
Registrant's Current Report on Form 8-K filed with the SEC on April 6,
2009)
|
|
10.18
|
Letter
Agreement and Termination of Investor Rights Agreement, dated April 2,
2009, by and among the Company, Company, Sculptor Finance (MD) Ireland
Limited, Sculptor Finance (AS) Ireland Limited, Sculptor Finance (SI)
Ireland Limited, OZ Master Fund, Ltd., OZ Asia Master Fund, Ltd., OZ
Global Special Investments Master Fund, L.P. and Keywin Holdings Limited.
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on April 6, 2009)
|
|
10.19
|
Employment
Agreement, dated July 15, 2009, between the Company and Earnest Leung.
(incorporated herein by reference from Registrant's Quarterly Report on
Form 10-Q filed with the SEC on August 10, 2009)
|
|
10.20
|
Employment
Agreement, dated July 15, 2009, between the Company and Godfrey Hui.
(incorporated herein by reference from Registrant's Quarterly Report on
Form 10-Q filed with the SEC on August 10,
2009)
|
|
10.21
|
Amendment
No. 1 to Note Exchange and Option Agreement, dated July 1, 2009, between
Keywin Holdings Limited and the Company. (incorporated herein by reference
from Registrant's Quarterly Report on Form 10-Q filed with the SEC on
August 10, 2009)
|
|
10.22
|
Amendment
No. 2 to Note Exchange and Option Agreement dated September 30, 2009,
between Keywin Holding Limited and the Company. (incorporated herein by
reference from Registrant's Quarterly Report on Form 10-Q filed with the
SEC on November 6, 2009)
|
|
10.23
|
Amendment
No. 3 to Note Exchange and Option Agreement dated January 1, 2010,
between Keywin Holding Limited and the Company
|
|
10.24
|
Lease
Agreement with Vision Tech International Holdings
Limited
|
|
14.1
|
Code
of Business Conduct and Ethics for Network CN Inc. as approved by the
Board of Directors as of December 31, 2003, is incorporated herein by
reference from Registrant’s Annual Report on Form 10-KSB filed with the
SEC on April 13, 2005.
|
|
16.1
|
Letter
of US Audit Practice of Jimmy CH Cheung & Co, dated February 9, 2010.
(incorporated herein by reference from Registrant's Current Report on Form
8-K filed with the SEC on February 9, 2010).
|
|
21.1
|
Subsidiaries
of the registrant.*
|
| 23.1 | Consent of independent auditors Jimmy C.H. Cheung & Co.* |
| 23.2 | Consent of independent auditors Baker Tilly Hong Kong Limited.* |
|
24.1
|
Power
of Attorney (included in the Signatures section of this
report).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
F-45