NETWORK CN INC. Special Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, including the following "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words "believe", "expect", "anticipate", "project", "targets", "optimistic", "intend", "aim", "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to our potential inability to raise additional capital; changes in domestic and foreign laws, regulations and taxes; uncertainties related toChina's legal system and economic, political and social events inChina ;Securities and Exchange Commission regulations which affect trading in the securities of "penny stocks"; changes in economic conditions, including a general economic downturn or a downturn in the securities markets; and any of the factors and risks mentioned in the "Risk Factors" sections of our Annual Report on Form 10-K for fiscal year endedDecember 31, 2019 and in Part 2, Item 1A of this Form 10-Q. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.
COVID-19 Pandemic A novel strain of coronavirus (COVID-19) was first identified inDecember 2019 , and subsequently declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . As a result of the outbreak, companies have experienced disruptions in their operations and in markets served. The Company instituted numerous precautionary measures intended to help ensure the well-being of its employees and minimize business disruption. As a result of the measures implemented, no significant adverse impact on results of operations through and financial position atSeptember 30, 2020 , has occurred as a result of the pandemic. The full extent of the future impacts of the COVID-19 pandemic on
its operations is uncertain. Use of Terms
Except as otherwise indicated by the context, references in this report to:
l "BVI" are references to theBritish Virgin Islands ; l "China" and "PRC" are tothe People's Republic of China ; l the "Company", "NCN", "we", "us", or "our", are references toNetwork CN Inc. , aDelaware corporation and its direct and
indirect
subsidiaries: NCN Group Limited , or NCN Group , a BVI limited
company; NCN Media Services Limited , a BVI limited company; NCN
Group Management Limited , or NCN Group Management, a Hong Kong
limited company; Crown Winner International Limited , or Crown
Winner, a Hong Kong Limited company, and its subsidiary, and its
variable interest entity, Xingpin Shanghai Advertising Limited ;
Crown Eagle Investments Limited , a Hong Kong limited company;;
Cityhorizon Limited , or Cityhorizon Hong Kong, a Hong Kong limited
company, and its subsidiary, Huizhong Lianhe Media Technology Co.,
Ltd., or Lianhe, a PRC limited company; Chuanghua Shanghai
advertising Limited, a PRC limited company; NCN Huamin Management
Consultancy (Beijing) Company Limited , or NCN Huamin, a PRC
limited
company; and the Company's variable interest entity, Beijing
Huizhong Bona Media Advertising Co., Ltd. , or Bona, a PRC limited
company;
l "NCN Management Services" are references to NCN Management Services
Limited, a BVI limited company;
l "RMB" are to the Renminbi, the legal currency of China ;
l the "Securities Act" are to the Securities Act of 1933, as amended;
and the "Exchange Act" are to the Securities Exchange Act of
1934, as amended; and
l "U.S. dollar", "$" and "US$" are to the legal currency of the United
States .
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Table of Contents
Overview of Our Business
Our mission is to become a nationwide leader in providing out-of-home
advertising in China , primarily serving the needs of branded corporate
customers. Our business direction to not just selling air-time for its media
panels but also started working closely with property developers in media
planning for the property at the very early stage. As a media planner we share
the advertising profits with the property developers without paying significant
rights fees, so we expect to achieve a positive return from these projects.
To address these unfavorable market conditions, we continue to implement
cost-cutting measures, including reductions in our workforce, office rentals,
selling and marketing related expenses and other general and administrative
expenses. We have also re-assessed the commercial viability of each of our
concession rights contracts and have terminated those of our concession rights
that we determined were no longer commercially viable due to high annual fees.
Management has also successfully negotiated some reductions in advertising
operating rights fees under remaining contracts.
For more information relating to our business, please refer to Part I, "Item 1 -
Business" of our Annual Report on Form 10-K for the fiscal year ended December
31, 2019 .
Recent Development Completes Additional Private Placement
OnMarch 28, 2019 , the Company sold an aggregate of 35,000 shares of the Company's common stock (the "Shares") to 9 foreign investors (the "New Investors ") pursuant to the terms of a Common Stock Purchase Agreement between the Company and theNew Investors , datedMarch 28, 2019 . The purchase price paid by the New Investor for the Shares were$1.50 or$1.88 per Share for an aggregate sum of sixty-three thousand, three hundred andseventy-five U.S. dollars andthirty cents (US$63,375 ). Net proceeds from the financing will be used for general corporate purposes. OnAugust 16, 2019 , the Company sold 5,000 shares of the Company's common stock (the "Shares") to a foreign investor (the "Investor") pursuant to the terms of a Common Stock Purchase Agreement between the Company and the Investor, datedAugust 16, 2019 . The purchase price paid by the Investors for the Shares was$1.875 per Share for an aggregate sum of nine thousand three hundred andseventy-five U.S. dollars (US$9,375 ). Net proceeds from the financing have been used for general corporate purposes. The offering was made pursuant to an exemption from registration with theSEC pursuant to Regulation S. The securities have not been registered under the Securities Act of 1933 or any state securities laws and unless so registered may not be offered or sold inthe United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933 and applicable state securities laws. The Company did not grant any registration rights to the new shareholders with respect to the Shares in the offering.
Issuance of Convertible Promissory Note
OnJanuary 14, 2020 , the Company entered into a Subscription Agreement withTsang Wai Yee Terri ("the Subscriber") under which the Subscriber agreed to purchase the 1% Senior Unsecured Convertible Note Agreement from the Company for an agreement purchase price of six hundred andforty-five thousand US Dollars ($645,000 ). On the same date, the Company signed the 1% Senior Unsecured Convertible Note Agreement under which the Company may sell and issue to the Subscriber up to an aggregate maximum amount of$645,000 in principal amount of Convertible Notes prior toJanuary 13, 2025 . The Convertible Promissory Notes issued to the Investor are convertible at the holder's option into shares of Company common stock at$1.00 per share. 22 Table of Contents
Identification of New projects
OnJanuary 14, 2020 , the Company entered into a Letter of Intent withEarthasia Worldwide Holdings Limited ("EWHL") that the Company will acquire 100% of the EWHL's issued and outstanding stock owned by the shareholders of the EWHL and the EWHL will become a wholly owned subsidiary of the Company. OnJuly 23, 2020 , the Company entered into Share Exchange Agreement withEase Global Limited ("Ease Global"), the shareholder ofTrade More Global Limited ('Trade More") that the Company will purchase, One Thousand and One Hundred (1,100) currently issued shares of common stock of Trade More from Ease Global and in exchange for Forty-nine Million (49,000,000) shares of newly-issued shares of common stock of the Company. The closing of the Exchange shall occur onSeptember 2, 2020 or such other date as agreed by the parties of the Share Exchange Agreement. Upon completion of the Exchange, 78% of issued shares of common stock of the Company shall be held by the Ease Global while all of the shares of capital stock of Trade More shall be held by the Company. EWHL is a wholly owned subsidiary of Trade More.
Increase of authorized capital
OnApril 28, 2020 , the Board of Directors and Majority of stockholders of the Company approved to increase the total number of authorized shares of Common Stock from 26,666,667 to 100,000,000,000. Results of Operations The following results of operations is based upon and should be read in conjunction with the Company's unaudited consolidated financial statements and the notes thereto included in Part I - Financial Information, "Item 1. Financial Statement." All amounts are expressed inU.S. dollars. Comparison of Three Months EndedSeptember 30, 2020 andSeptember 30, 2019 General and Administrative Expenses - General and administrative expenses primarily consist of compensation related expenses (including salaries paid to executive and employees, employee bonuses and other staff welfare and benefits, rental expenses, depreciation expenses, fees for professional services, travel expenses and miscellaneous office expenses). General and administrative expenses for the three months endedSeptember 30, 2020 increased by 12% to$88,309 , as compared to$78,856 for the corresponding prior year period. The increase in general and administrative expenses was mainly due to the increase in salaries. Stock based compensation for services- Stock-based compensation for services is stock granted to directors, executive officers and employees for services rendered calculated in accordance with Accounting Standards Codification, or ASC, Topic 718, Stock-based Compensation, for services was$469 for the three months endedSeptember 30, 2019 . The increase in the stock-based compensation was mainly due stock granted for services rendered during the three months
endedSeptember 30, 2019 . Interest and Other Debt-Related Expenses - Interest expense and other debt-related expenses for the three months endedSeptember 30, 2020 decreased to$129,971 , or by -10%, as compared to$144,644 for the corresponding prior year period. The decrease was mainly due to the decreased in interest to 1% convertible promissory note due 2016. Income Taxes - The Company derives all of its income in the PRC and is subject to income tax in the PRC. No income tax was recorded during the three months endedSeptember 30, 2020 and 2019, because the Company and all of its subsidiaries and variable interest entities operated at a taxable loss during the respective periods.
Net Loss - The Company incurred a net loss of
Comparison of Nine Months Ended
General and Administrative Expenses - General and administrative expenses for the nine months endedSeptember 30, 2020 decreased by 7% to$221,257 , compared to$237,428 for the corresponding prior year period. The decrease in general and administrative expenses was mainly due to decrease of salaries on wage subsidy granted by Hong Kong Government inJune 2020 . 23 Table of Contents Gain from write-off of long aged payables - Gain from write-off of long-aged payables for the nine months endedSeptember 30, 2020 was$394,522 , compared to $nil for the nine months endedSeptember 30, 2019 . We believe the obligation for future settlement for such long-aged payables is remote and therefore wrote
them off. Stock based compensation for services- Stock-based compensation for services is stock granted to directors, executive officers and employees for services rendered calculated in accordance with Accounting Standards Codification, or ASC, Topic 718, Stock-based Compensation, for services was $nil and$3,638 for the nine months endedSeptember 30, 2020 and 2019. The decrease in the stock-based compensation was mainly due to no stock had been granted for services rendered during the nine months endedSeptember 30, 2020 . Interest and Other Debt-Related Expenses- Interest expense and other debt-related expenses for the nine months endedSeptember 30, 2020 decreased to$402,632 , or by -7%, compared to$432,206 for the corresponding prior year period. The decrease was mainly due to decrease in short-term loan interests from 1.5% per month to 1% per annum with the amount of$128,205 fromJanuary 2020 . Income Taxes - The Company derives all of its income in the PRC and is subject to income tax in the PRC. No income tax was recorded during the nine months endedSeptember 30, 2020 and 2019 as the Company and all of its subsidiaries and its variable interest entities operated at a taxable loss during the respective periods.
Net Loss - The Company incurred a net loss of$229,367 for the nine months endedSeptember 30, 2020 , compared to of$673,269 for the corresponding prior year period. The decrease in net loss was mainly driven by the increase in gain from write-off of long aged payables.
Liquidity and Capital Resources
As of
The following table sets forth a summary of our cash flows for the periods
indicated:
Nine Months Ended
September 30, 2020 September 30, 2019 Net cash used in operating activities $ (666,309 ) $ (105,758 ) Net cash provided by financing activities 666,446
88,904
Effect of exchange rate changes on cash 63 (52 ) Net increase/(decrease) in cash 200
(16,906 )
Cash, beginning of period 5,510 22,684
Cash, end of period $ 5,710 $ 5,778
Operating Activities
Net cash used in operating activities for the nine months ended September 30,
2020 was $666,309 , as compared to net cash used in operating activities
amounting to $105,758 for the corresponding prior year period. This was mainly
attributable to increase in payments to short term loan interest during the nine
months ended September 30, 2020 .
Our cash flow projections indicate that our current assets and projected
revenues from our existing project will not be sufficient to fund operations
over the next twelve months. This raises substantial doubt about our ability to
continue as a going concern. We intend to rely on Keywin's exercise of its
outstanding option to purchase $2 million in shares of our common stock or on
the issuance of additional equity and debt securities as well as on our note
holders' exercise of their conversion option to convert our notes to our common
stock, in order to fund our operations. However, it may be difficult for us to
raise funds in the current economic environment. We cannot give assurance that
we will be able to generate sufficient revenue or raise new funds, or that
Keywin will exercise its option before its expiration and our note holders will
exercise their conversion option before the note is due. In any such case, we
may not be able to continue as a going concern.
Investing Activities
Net cash used in investing activities for the nine months ended
24 Table of Contents Financing Activities
Net cash provided by financing activities was$666,446 for the nine months endedSeptember 30, 2020 , as compared to$88,904 for the corresponding prior year period. The increase was mainly due to increase in proceeds from convertible promissory note and proceeds from short-term loans for financing our operations during the nine months endedSeptember 30, 2020 . Short-term Loan As ofSeptember 30, 2020 , the Company recorded an aggregated amount of$2,973,211 short-term loans. Those loans were borrowed from unrelated individuals. Those loans with an aggregate amount of$2,845,006 are unsecured, bear a monthly interest of 1.5% and shall be repayable in one month and loan with an aggregate amount of$128,205 is unsecured, bear a yearly interest of 1% and shall be repayable in one month. However, according to the agreement, the Company shall have the option to shorten or extend the life of those short-term loans if the need arises and the Company has agreed with the lender to extend the short-term loans on the due date. Up to the date of this report, those
loans have not yet been repaid. Capital Expenditures
During the three and nine months ended
Contractual Obligations and Commercial Commitments
The following table presents certain payments due under contractual obligations
with minimum firm commitments as of
Payments due by period
Due in Due in Due in
Total 2020 2021 - 2022 2022-2023 ThereafterDebt Obligations (a)$ 5,645,000 $ 5,000,000 $ - $ -$ 645,000 Short Term Loan (b) 2,973,211 2,973,211 - - - (a) Debt Obligations. We issued an aggregate of$5,000,000 in 1% Convertible Promissory Notes inApril 2009 to our investors and such 1% Convertible Promissory Notes matured onApril 1, 2016 . In 2020, we issued a new % Senior Unsecured Convertible Note which matured onJanuary 13, 2025 . For details, please refer to the Note 7 of the consolidated financial statements. (b) Short Term Loan. We have entered into short-term loan agreements with unrelated individuals. Those loans with an aggregate amount of$2,845,006 are unsecured, bear a monthly interest of 1.5% and shall be repayable in one month and loan with an aggregate amount of$128,205 is unsecured, bear a yearly interest of 1% and shall be repayable in one month. However, according to the agreement, the Company shall have the option to shorten or extend the life of those short-term loans if the need arises and the Company has agreed with the lender to extend the short-term loans on the due date. Up to the date of this report, those loans have not yet been repaid.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations. 25 Table of Contents
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.
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