s111181410q.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     
 
For the quarterly period ended September 30, 2008   
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the transition period from ____ to ____

Commission file number 000-30264

NETWORK CN INC.
(Exact name of Registrant as specified in its charter)

Delaware  
90-0370486
(State or Other Jurisdiction of 
(I.R.S. Employer
Incorporation or Organization) 
Identification Number)

21/F., Chinachem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong
(Address of principal executive offices)
(852) 2833-2186
(Registrant’s Telephone Number, Including International Code and Area Code)

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 x No¨
 
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.
 
Large accelerated filer ¨ Accelerated filer ¨ Non- accelerated filer x Smaller reporting company ¨
   
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes¨  No x
 
As of November 5, 2008, 71,641,608 shares of the Registrant’s common stock, par value $0.001 per share, were outstanding.
 


 
 

 

NETWORK CN INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
   
Page
PART I. FINANCIAL INFORMATION  
 
   
 
 
4
 
5
 
6
 
7
40
62
62
   
PART II. OTHER INFORMATION
 
   
64
64
84
84
84
85
85
86
 
All financial information in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (“Quarterly Report”) is in United States dollars, referred to as “U.S. Dollars” or “$”.

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report on Form 10-Q (“Quarterly Report”) contains forward-looking statements about our business, financial condition and prospects based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance and achievements to be materially different from or worse than our expectations. These risks, uncertainties and other factors include those listed under Part I- Item 3 “Quantitative and Qualitative Disclosure About Market Risk” and Part II - Item 1A “Risk Factors" and elsewhere in this Quarterly Report, and some of which we may not know. Forward-looking statements are all statements that concern plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact, including, but not limited to, those that are identified by the use of terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue" or the negative of these terms or other comparable terminology.
 
Unless otherwise required by law, we assume no obligation to update or otherwise revise the forward-looking statements in this Quarterly Report, whether as a result of new information, future events or otherwise. Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report might not occur in the way we expect, or at all. Accordingly, you should not place undue reliance on any forward-looking information. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report completely and with the understanding that future results could differ materially from those contemplated by the forward-looking statements.


PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements

NETWORK CN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
   
 
 
Note
   
As of
September 30,
2008
(Unaudited)
   
As of
December 31,
2007
(Audited)
(Restated)(1)
 
ASSETS
 
Current Assets
                 
     Cash
        $ 10,041,572     $ 2,233,528  
     Accounts receivable, net
          1,397,952       1,093,142  
     Prepayments for advertising operating rights, net 
    7       4,971,254       13,636,178  
     Prepaid expenses and other current assets 
            6,566,043       3,101,699  
          Total Current Assets 
            22,976,821       20,064,547  
                         
Equipment, Net
            5,702,498       257,403  
Intangible Assets, Net
    8       7,860,451       6,114,550  
Deferred Charges, Net
            1,357,494       670,843  
                         
TOTAL ASSETS
          $ 37,897,264     $ 27,107,343  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities 
                       
     Accounts payable, accrued expenses and other payables
          $ 5,630,078     $ 3,490,586  
     Current liabilities from discontinued operations
            3,655       3,655  
    12% convertible promissory note, net
    9       -       4,740,796  
           Total Current Liabilities 
            5,633,733       8,235,037  
                         
3% Convertible Promissory Notes Due 2011, Net
    9       29,463,745       7,885,496  
                         
TOTAL LIABILITIES
            35,097,478       16,120,533  
                         
COMMITMENTS AND CONTINGENCIES
    10                  
                         
MINORITY INTERESTS 
            133,388       347,874  
                         
STOCKHOLDERS’ EQUITY 
                       
 Preferred stock, $0.001 par value, 5,000,000 shares authorized
None issued and outstanding 
            -       -  
 Common stock, $0.001 par value, 800,000,000 shares authorized
Issued and outstanding: 71,611,608 and 69,151,608 as of
September 30, 2008 and December 31, 2007 respectively
            71,612       69,152  
 Additional paid-in capital 
    11       58,725,898       35,673,586  
 Accumulated deficit 
            (57,903,100 )     (25,169,099 )
 Accumulated other comprehensive income
            1,771,988       65,297  
TOTAL STOCKHOLDERS’ EQUITY 
            2,666,398       10,638,936  
                         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
          $ 37,897,264     $ 27,107,343  

(1)
See Note 4 – Restatement and Reclassification
 
The accompanying notes are an integral part of the condensed consolidated financial statements.


NETWORK CN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)
 
         
For the Three Months ended
   
For the Nine Months Ended
 
   
Note
   
September 30,
2008
   
September 30,
2007
   
September 30,
2008
   
September 30,
2007
 
REVENUES 
                             
Advertising services 
        $ 2,520,474     $ 466,071     $ 4,158,529     $ 965,995  
                                       
COST OF REVENUES
                                     
Cost of advertising services 
          5,651,467       350,325       14,258,071       706,698  
                                       
GROSS (LOSS) PROFIT
          (3,130,993 )     115,746       (10,099,542 )     259,297  
                                       
OPERATING EXPENSES
                                     
Selling and marketing
          656,114       105,847       2,120,397       225,092  
General and administrative
          4,408,534       3,215,893       9,929,559       8,500,827  
Non-cash impairment charges
    7       5,671,782       -       5,671,782       -  
       Total Operating Expenses 
            10,736,430       3,321,740       17,721,738       8,725,919  
                                         
LOSS FROM OPERATIONS 
            (13,867,423 )     (3,205,994 )     (27,821,280 )     (8,466,622 )
                                         
OTHER INCOME
                                       
Interest income 
            21,257       2,989       61,412       11,933  
Other income 
            -       -       4       74  
       Total Other Income
            21,257       2,989       61,416       12,007  
                                         
INTEREST EXPENSE
                                       
Amortization of deferred charges and debt discount 
    9       1,392,116       -       4,091,104       -  
Interest expense 
            383,334       -       1,109,125       421  
       Total Interest Expense 
            1,775,450       -       5,200,229       421  
                                         
NET LOSS BEFORE INCOME TAXES AND MINORITY INTERESTS
            (15,621,616 )     (3,203,005 )     (32,960,093 )     (8,455,036 )
Income taxes
            -       -       -       -  
Minority interests 
            75,209       (4,014 )     183,452       (4,014 )
NET LOSS FROM CONTINUING OPERATIONS
            (15,546,407 )     (3,207,019 )     (32,776,641 )     (8,459,050 )
                                         
DISCONTINUED OPPERATIONS
                                       
Income (loss) from discontinued operations, net of income taxes and
minority interests
    14       5,956       3,025       (23,445 )     (121,869 )
Gain from disposal of discontinued operations
    14       66,085       -       66,085       -  
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS
            72,041       3,025       42,640       (121,869 )
                                         
NET LOSS
          $ (15,474,366 )   $ (3,203,994 )   $ (32,734,001 )   $ (8,580,919 )
                                         
OTHER COMPREHENSIVE INCOME
                                       
Foreign currency translation gain (loss)
            78,276       (10,517 )     1,706,691       1,937  
COMPREHENSIVE LOSS
          $ (15,396,090 )   $ (3,214,511 )   $ (31,027,310 )   $ (8,578,982 )
                                         
NET INOME (LOSS) PER COMMON SHARE – BASIC AND DILUTED
                                       
Loss per common share from continuing operations
    13     $ (0.22 )   $ (0.05 )   $ (0.46 )   $ (0.13 )
Income (loss) per common share from discontinued operations
    13       0.00       0.00       0.00       (0.00 )
Net loss per common share – basic and diluted
    13     $ (0.22 )   $ (0.05 )   $ (0.46 )   $ (0.13 )
WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
    13       71,597,478       68,947,906       71,563,688       68,355,391  

The accompanying notes are an integral part of the condensed consolidated financial statements.


NETWORK CN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Unaudited)
 
 
For the Nine Months Ended
 
   
September 30,
2008
   
September 30,
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES: 
  $       $    
Net loss from continuing operations
    (32,776,641 )     (8,459,050 )
Net income (loss) from discontinued operations
    42,640       (121,869 )
Net loss
    (32,734,001 )     (8,580,919 )
                 
Adjustments to reconcile net loss to net cash used in operating activities, including discontinued operations:
 
           Depreciation and amortization:  
               
           Equipment and intangible assets
    1,427,317       321,278  
           Deferred charges and debt discount
    4,091,105       -  
           Stock-based compensation for service 
    2,476,469       4,477,566  
           Loss on disposal of equipment 
    88,340       -  
           Allowance for doubtful debt for other receivables
    1,411,287       10,716  
           Non-cash impairment charges
    5,671,782       -  
           Minority interests 
    (122,723 )     3,147  
           Gain from disposal of discontinued operations
    (66,085 )     -  
Changes in operating assets and liabilities, net of effects from acquisitions:
               
           Accounts receivable 
    (1,346,591 )     (842,149 )
           Prepayments for advertising operating rights  
    2,288,156       -  
           Prepaid expenses and other current assets 
    (2,316,952 )     (2,445,651 )
           Accounts payable, accrued expenses and other payables 
    3,121,568       5,051,781  
           Net cash used in operating activities 
    (16,010,328 )     (2,004,231 )
   
CASH FLOWS FROM INVESTING ACTIVITIES: 
               
Purchase of equipment
    (3,469,003 )     (58,491 )
Proceeds from sales of equipment
    1,789       -  
Net cash used in acquisition of subsidiaries, net 
    (2,708,928 )     (318,156 )
Proceeds from disposal of discontinued operations, net of cash disposed of
    (472,827 )     -  
           Net cash used in investing activities 
    (6,648,969 )     (376,647 )
   
CASH FLOWS FROM FINANCING ACTIVITIES: 
               
Proceeds from issuance of 3% convertible promissory note, net of costs
    33,900,000       -  
Repayment of 12% convertible promissory note
    (5,000,000 )     -  
Stock issued in placement for cash, net of costs
    -       1,500,000  
Warrant issued for services
    -       22,500  
Repayment of capital lease obligation
    -       (3,120 )
           Net cash provided by financing activities 
    28,900,000       1,519,380  
   
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    1,567,341       (1,978 )
                 
NET INCREASE (DECREASE) IN CASH
    7,808,044       (863,476 )
   
CASH, BEGINNING OF PERIOD
    2,233,528       2,898,523  
                 
CASH, END OF PERIOD
  $ 10,041,572     $ 2,035,047  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 
               
Cash paid during the period for:
               
       Income taxes
  $ -     $ -  
           Interest paid for 12% convertible promissory note
  $ 69,041     $ -  
           Interest paid for capital lease arrangement
  $ -     $ 423  
Non-cash activities:
               
       Issuance of common stock for acquisition of subsidiaries (Note 6)
  $ 3,738,000     $ -  
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
 
In January 2008, the Company acquired 100% equity interest of Cityhorizon Limited (“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.
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

NETWORK CN INC. AND SUBSIDARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1.                   INTERIM FINANCIAL STATEMENT
 
The accompanying unaudited condensed consolidated financial statements of Network CN Inc., its subsidiaries and variable interest entities (collectively “NCN” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of our financial position and results of operations.
 
The condensed consolidated financial statements for the three and nine months ended September 30, 2008 and 2007 were not audited. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB, Form 10-KSB/A (Amendment No. 1) and Form 10-KSB/A (Amendment No. 2) for the fiscal year ended December 31, 2007, previously filed with the Securities and Exchange Commission on March 24, 2008, August 11, 2008 and October 22, 2008 respectively.
 
NOTE 2.                   ORGANIZATION AND PRINCIPAL ACTIVITIES
 
Network CN Inc., originally incorporated on September 10, 1993, is a Delaware corporation with headquarters in the Hong Kong Special Administrative Region, the People’s Republic of China (the “PRC” or “China”). The Company is focused on building a nationwide media network in China.
 
During the three months ended September 30, 2008, the Company disposed of its entire travel network. Accordingly, such business has been classified as discontinued operations for all periods presented. (See Note 14 – Discontinued Operations for details).
 
Details of the Company’s principal subsidiaries and variable interest entities as of September 30, 2008 are described in Note 5 – Subsidiaries and Variable Interest Entities.
 
 
NOTE 3.                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(A) Basis of Preparation
 
These 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 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 ("FIN 46R"), 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.
 
(C) Use of Estimates
 
In preparing condensed 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 condensed 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 September 30, 2008 and 2007, the Company had no cash equivalents.
 
 
(E) Allowance for Doubtful Accounts
 
Allowance for doubtful accounts is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such allowance. The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts 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
 
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. 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 and accumulated depreciation are removed from the respective accounts, and any gain or loss is reflected in the statement 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 provision for impairment loss. 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’ fee. 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 interest expense on the consolidated statement of operations while the unamortized balance is included in deferred charges on the consolidated balance sheet.
 
(K) Convertible Promissory Notes and Warrants
 
In 2007, the Company issued 12% convertible promissory note and warrants and 3% convertible promissory notes and warrants. In 2008, the Company issued additional 3% convertible promissory notes and warrants. As of September 30, 2008 and December 31, 2007, the warrants and embedded conversion feature were classified as equity under Emerging Issues Task Force (“EITF”) Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” 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”. Such classification will be reassessed at each balance sheet date. 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” and EITF Issue No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”.
 
 
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 to interest expense 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 to interest expense over the term of the 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 statement 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”.
 
Pursuant to the provisions of agreements in connection with the 3% convertible promissory notes, in the event of a default, or if the Company’s actual EPS in any fiscal year is less than 80% of the respective EPS target, certain investors may 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 Company accounts for such potential liability of 20% internal rate of return on the then outstanding principal amount in accordance with SFAS No. 5 “Accounting for Contingencies”.
 
 
(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”, 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 $41,000 and $nil for the three and nine months ended September 30, 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. Guangdong Tianma International Travel Service Co., Ltd. (“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 Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R “Share-Based Payment”, a revision to SFAS No. 123 “Accounting for Stock-Based Compensation”, and superseding APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. Effective January 1, 2006, the Company adopted SFAS No. 123R, 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 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, 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”. In accordance with EITF 96-18, 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”. Under SFAS No. 109, 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, 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” 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 statement 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” by dividing the net income (loss) attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding.
 
 
The diluted net loss per share is the same as the basic net loss per share for the three and nine months ended September 30, 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 denominated in currencies other than United States (“U.S.”) dollars are translated into U.S. dollars using the applicable exchange rates at the balance sheet date. For statement 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
 
The carrying value of the Company’s financial instruments, which consist of cash, accounts receivables, 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 issued in 2007 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-qualify 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 receivables are mainly from tour services and 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” 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. It is the management’s view that the services rendered by the Company are of three operating segments: Media Network, Travel Network and Investment Holding. During the three months ended September 30, 2008, the Company disposed of one of the operating segments, Travel Network which was included in discontinued operation accordingly.
 
(W) Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS No. 157 defined fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. In February 2008, the FASB released FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157”, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, expect those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement did not have a material effect on the Company's future reported financial position or results of operations.
 
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157 “Fair Value Measurements”. The adoption of this statement did not have a material effect on the Company's financial statements.
 
 
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (Revised),Business Combinations” (“SFAS No. 141 (R)”), replacing SFAS No. 141,Business Combinations” (“SFAS No. 141”), and SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”. SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141, broadens its scope by applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things, that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, that liabilities related to contingent consideration be recognized at the acquisition date and re-measured at fair value in each subsequent reporting period, that acquisition-related costs be expensed as incurred, and that income be recognized if the fair value of the net assets acquired exceeds the fair value of the consideration transferred. SFAS No. 160 improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 141(R) and SFAS No. 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently assessing the impact of adopting SFAS No. 141 (R) and SFAS No. 160 on its financial statements and related disclosures.
 
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS No. 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivative instruments within the scope of SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS No.133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS No. 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS No. 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company is currently assessing the impact of adopting SFAS No. 161 on its financial statements and related disclosures.
 
 
In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the accounting principles to be used. Any effect of applying the provisions of this statement will be reported as a change in accounting principle in accordance with SFAS No. 154 “Accounting Changes and Error Corrections”. SFAS No. 162 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.
 
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This Statement will not have any impact on the Company’s consolidated financial statements.
 
In May 2008, the FASB issued Staff Position No. APB 14-1 “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion”. APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. The Company is currently evaluating the impact of the adoption of this position could have on its financial condition, results of operations and cash flows.
 
 
In June 2008, the FASB issued Emerging Issues Task Force Issue No. 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS No.133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No.133 paragraph 11(a) scope exception. The Company is currently evaluating the impact of adoption of EITF No. 07-5 on its financial statements and related disclosures.
 
In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. The Company is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the convertible notes and related warrants transactions.
 
NOTE 4.                   RESTATEMENT AND RECLASSIFICATION
 
(a)
Restatement of Financial Results
 
On October 10, 2008, we filed a Current Report on Form 8-K to announce that our Board of Directors, based upon the consideration of issues addressed in the SEC review and the recommendation of the Audit Committee, determined that we should restate our previously issued condensed consolidated financial statements for quarterly periods ended March 31, 2008 and June 30, 2008 and consolidated financial statements for the year ended December 31, 2007.
 
The restatement adjustments corrected 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. 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”, which stated that discount resulting from allocation of proceeds to the beneficial conversion feature should be recognized as interest expense 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 expense 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”, EITF Issues No. 98-5 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.
 
 
The aggregate net effect of the restatement was to (1) increase stockholders’ equity by approximately $14.3 million, $15.1 million and $4.7 million as of June 30, 2008, March 31, 2008 and December 31, 2007 respectively; (2) increase both non-cash interest expense and net loss for the three months ended June 30, 2008 by approximately $0.8 million and decrease both non-cash interest expense and net loss for the three months ended March 31, 2008 and for the year ended December 31, 2008 by approximately $10.4 million and $4.7 million respectively. Accordingly, the net loss per common share (basic and diluted) for the three months ended June 30, 2008 and March 31, 2008 increased from $0.11 to $0.12 and decreased from $0.26 to $0.12 respectively while for the year ended December 31, 2008 decreased from $0.28 to $0.21.
 
(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 three months ended September 30, 2008. As a result of the disposal, the condensed 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 condensed consolidated statements of operations. The net operating results of the discontinued operations have been reported, net of applicable income taxes and minority interests, as “Income (Loss) from Discontinued Operations, Net of Income Taxes and Minority Interests”. For details, please refer to Note 14 – Discontinued Operations.
 
The above reclassification does not have an effect on net loss and net loss per share.
 
 
NOTE 5.                   SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
 
Details of the Company’s principal consolidated subsidiaries and variable interest entities as of September 30, 2008 were as follows:
 
Name
 
Place of
incorporation
Ownership
interest
attributable to
the Company
Principal activities
NCN Group Limited
British Virgin Islands
100%
Investment holding
NCN Media Services Limited
British Virgin Islands
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
NCN Huamin Management
Consultancy (Beijing)
Company Limited
The PRC
100%
Provision of administrative and
management services
Shanghai Quo Advertising
Company Limited
The PRC
100%
Provision of advertising services
Xuancaiyi (Beijing) Advertising
Company Limited
The PRC
51%
Provision of advertising services
Teda (Beijing) Hotels
Management Limited
The PRC
100%
Dormant; undergoing liquidation
process
NCN Asset Management
Services Limited
British Virgin Islands
100%
Dormant
NCN Travel Services Limited
British Virgin Islands
100%
Dormant
NCN Financial Services Limited
British Virgin Islands
100%
Dormant
Linkrich Enterprise Advertising
and Investment Limited
Hong Kong
100%
Dormant
Cityhorizon Limited (Note 6)
British Virgin Islands
100%
Investment holding
Huizhong Lianhe Media
Technology Co., Ltd (Note 6)
The PRC
100%
Provision of high-tech services
Beijing Huizhong Bona Media
Advertising Co., Ltd. (Note 6)
The PRC
100%
Provision of advertising services
Huizhi Botong Media
Advertising Beijing Co., Ltd (Note 6)
The PRC
100%
Provision of advertising services
Crown Eagle Investment Limited
Hong Kong
100%
Dormant
Profit Wave Investment Limited
Hong Kong
100%
Dormant
Qingdao Zhongan Boyang
Advertising Co., Ltd.
The PRC
60%
Provision of advertising services
 
 
Remarks :
 
1)
The Company established its wholly-owned subsidiaries, namely, Crown Eagle Investment Limited and Profit Wave Investment Limited in January 2008.
 
2)
The Company established its subsidiary Qingdao Zhongan Boyang Advertising Co., Ltd. in March 2008.
 
3)
The Company disposed of all its travel network related subsidiaries and variable interest entity, namely, NCN Management Services Limited, NCN Hotels Investment Limited, NCN Pacific Hotels Limited, Tianma, NCN Landmark International Hotel Group Limited and Beijing NCN Landmark Hotel Management Limited in September 2008. See Note 14 – Discontinued Operations for details.
 
 
NOTE 6.                   BUSINESS COMBINATIONS
 
(a) 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, Huizhong Lianhe Media Technology Co., Ltd. (“Lianhe”), a wholly owned subsidiary of Cityhorizon BVI, Beijing Huizhong Bona Media Advertising Co., Ltd. (“Bona”), a wholly owned subsidiary of Cityhorizon BVI, and Liu Man Ling, an individual and 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 Liu Man Ling. Pursuant to the Share Purchase Agreement, the Company in January 2008 paid the Liu Man Ling US$5,000,000 in cash and issued Liu Man Ling 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
    170,347  
Equipment, net
    1,995,702  
Intangible assets, net
    1,973,865  
Liabilities assumed
    (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.
 
(b)           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 Huizhi Botong Media Advertising Beijing Co., Ltd (“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 US$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 is a variable interest entity as defined under FIN 46 (Revised) “Consolidation of Variable Interest Entities”. 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
    102,154  
Equipment, net
    599,348  
Intangible asset
    551,031  
Liabilities assumed
    (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 right.
 
NOTE 7.                   PREPAYMENTS FOR ADVERTISING OPERATING RIGHTS
 
Prepayments for advertising operating rights as of September 30, 2008 and December 31, 2007 were as follows:
 
   
As of
September 30, 2008
(Unaudited)
   
As of
December 31, 2007
(Audited)
 
Gross carrying amount
  $ 25,139,969       14,676,513  
Less: accumulated amortization
    (14,496,933 )     (1,040,335 )
Less: provision for impairment
    (5,671,782 )     --  
Prepayments for advertising operating rights, net
  $ 4,971,254       13,636,178  
 
Total amortization expense of prepayments for advertising operating rights of the Company for the three months ended September 30, 2008 and 2007 were $4,992,495 and $nil respectively while for the nine months ended September 30, 2008 and 2007 amounted to $12,977,200 and $nil respectively.
 
Provision for impairment
 
As the Company recorded a continuous net loss, the Company performed an impairment review of its prepayments for advertising operating rights during the quarter ended September 30, 2008. 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 $5,671,782 for the three and nine months ended September 30, 2008 in relation to the prepayments for certain advertising operating rights projects. The impairment loss was included as non-cash impairment charges in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2008.
 
 
NOTE 8.                   INTANGIBLE ASSETS, NET
 
Intangible assets as of September 30, 2008 and December 31, 2007 were as follows:
 
 
 
As of
September 30, 2008
(Unaudited)
   
As of
December 31, 2007
(Audited)
 
Amortized intangible rights
           
Gross carrying amount
  $ 7,137,097       7,825,267  
Less: accumulated amortization
    (1,102,470 )     (999,106 )
Less: provision for impairment loss
    -       (711,611 )
Amortized intangible rights, net
    6,034,627       6,114,550  
                 
Unamortized intangible rights
               
Gross carrying amount
    -       815,902  
Less: provision for impairment
    -       (815,902 )
Unamortized intangible rights, net
    -       -  
                 
Amortized acquired application systems
               
Gross carrying amount
  $ 1,973,865       -  
Less: accumulated amortization
    (148,041 )     -  
Amortized acquired application systems, net
    1,825,824       -  
                 
Intangible assets, net
  $ 7,860,451       6,114,550  
 
During the three months ended June 30, 2008, the Company wrote-off all the intangible rights to which provision for impairment were fully provided in fiscal 2007. Total amortization expense of intangible assets of the Company for the three months ended September 30, 2008 and 2007 were $259,665 and $118,336 respectively while for the nine months ended September 30, 2008 and 2007 amounted to $778,995 and $279,514 respectively.
 
NOTE 9.                   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 account of $5,000,000 at interest rate of 12% per annum (the “12% Convertible Promissory Note”). The 12% Convertible Promissory Note is convertible into the Company’s common stock at the conversion price of $2.40 per share. Pursuant to the agreement, the Company is 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 is six months and the Company has 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 note. However, the Company has the right to prepay all or any portion of the amounts due under the 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 12% Convertible Promissory Note due May 2008 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. The Company recognized the unamortized portion of the associated deferred charges and debt discount as expenses included in amortization of deferred charges and debt discount on the consolidated statements of operation during the period of extinguishment.
 
(b)  3% Convertible Promissory Notes and warrants
 
On November 19, 2007, the Company, Quo Advertising and certain Designated Holders, 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 the Purchase Agreement, 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 are issued in three tranches:
 
1) On November 19, 2007, Convertible 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, Convertible 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, Convertible 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, maturing on June 30, 2011, bear interest at 3% per annum payable semi-annually in arrears. The 3% Convertible Promissory Notes are 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 will be adjusted downward on an annual basis if the Company should fail to meet certain annual earnings per share (“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 may 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 grant 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 will also be adjusted downward whenever the conversion price of the 3% Convertible Promissory Notes is adjusted downward in accordance with the provisions of the Purchase Agreement. The warrants shall expire on June 30, 2011, pursuant to the Purchase Agreement.
 
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 (“NCN Group”), and such loan was evidenced by an intercompany note issued by NCN Group in favor of the Company (the “NCN Group Note”). The Company entered into a Security Agreement, dated January 31, 2008, pursuant to which the Company granted to the collateral agent for the benefit of the Investors a first-priority security interest in certain of its assets, including the NCN Group Note and 66% of the shares of NCN Group. In addition, 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 September 30, 2008, none of the conversion options and warrants associated with the above convertible promissory notes was exercised.
 
 
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)
   
Total
 
Proceeds of convertible promissory notes
  $ 5,000,000     $ 15,000,000     $ 35,000,000     $ 55,000,000  
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 )     (15,757,575 )
Total net proceeds of the convertible promissory notes
    4,666,330         7,782,728         18,159,697         30,608,755  
Repayment of convertible promissory note
    (5,000,000 )     -       -       (5,000,000 )
Amortization of debt discount
    333,670       1,196,551       2,324,769       3,854,990  
Net carrying value of convertible promissory notes as of September 30, 2008
  $ -     $ 8,979,279     $ 20,484,466     $ 29,463,745  
 
Warrants and Beneficial Conversion Features
 
The fair values of the financial instruments associated with warrants of both 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.
 
 
Both the warrants and embedded conversion features issued in connection with 12% convertible promissory note and 3% convertible promissory notes meet the criteria of EITF 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” for equity classification and also met the other criteria in paragraph 11(a) of SFAS 133Accounting for Derivative Instruments and Hedging Activities” . Accordingly, the conversion features do not require derivative accounting. The intrinsic value of beneficial conversion feature is calculated according to EITF Issue No. 98-5Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio” and EITF Issue No. 00-27Application of Issue No. 98-5 to Certain Convertible Instruments” . For 3% convertible promissory note, 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 while for the 12% convertible promissory note, no beneficial conversion feature existed. The value of beneficial conversion feature 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 has stated redemption date, the respective debt discount being equal to the value of beneficial conversion feature of $15,757,575 is amortized over the term of the notes from the respective date of issuance using the effective yield method.
 
Amortization of Deferred Charges and Debt Discount
 
The amortization of deferred charges and debt discount for the three months ended September 30, 2008 was as follows:
 
   
Warrants
   
Conversion
Features
   
Deferred
Charges
   
Total
 
12% convertible promissory note
  $ -     $ -     $ -     $ -  
3% convertible promissory notes
    443,478       841,944       106,694       1,392,116  
Total
  $ 443,478     $ 841,944     $ 106,694     $ 1,392,116  
 
The amortization of deferred charges and debt discount for the nine months ended September 30, 2008 was as follows:
 
   
Warrants
   
Conversion
Features
   
Deferred
Charges
   
Total
 
12% convertible promissory note
  $ 259,204     $ -     $ 80,700     $ 339,904  
3% convertible promissory notes
    1,179,420       2,239,132       332,648       3,751,200  
Total
  $ 1,438,624     $ 2,239,132     $ 413,348     $ 4,091,104  
 
 
NOTE 10.                      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 September 30, 2008:
 
Three months ending December 31,2008
  $ 256,530  
Fiscal years ending December 31,
       
2008
  $ 256,530  
2009
    971,561  
2010
    843,241  
2011
    197,474  
Total
  $ 2,268,806  

2. Annual Advertising Operating Rights Fee Commitment
 
Since November 2006, the Company, through its subsidiaries NCN Media Services Limited, Quo Advertising , Xuancaiyi, Bona and Botong has acquired advertising rights from third parties to operate different types of advertising panels for periods ranging from 1 year to 20 years.
 
The following table sets forth the estimated future annual commitment of the Company with respect to the advertising operating rights of 1,864 roadside advertising panels, 11,000 in-building LCD and 11 mega-size advertising panels that the Company held as of September 30, 2008:
 
   
(In millions)
 
Three months ending December 31,2008
  $ 13.06  
Fiscal years ending December 31,
       
2008
  $ 13.06  
2009
    14.61  
2010
    4.04  
2011
    4.06  
2012
    3.97  
Thereafter
    25.42  
Total
  $ 65.16  
 
 
3. Capital commitments
 
As of September 30, 2008, the Company had commitments for capital expenditures in connection with construction of roadside advertising panels and mega-size advertising panels of approximately $97,000.
 
(b)           Contingencies
 
The Company accounts for loss contingencies in accordance with SFAS No. 5, “Accounting for Loss Contingencies” and other related guidelines. Set forth below is a description of certain loss contingencies as of September 30, 2008 and management’s opinion as to the likelihood of loss in respect of loss contingency.
 
1. Tianma litigation
 
Guangdong Tianma International Travel Service Co., Ltd, (“Tianma) of which the Company owned 55% interest through trust was involved in a legal litigation associated with a car accident in 2005. The Company was indemnified for any future liability by the previous owners when it acquired Tianma in June 2006. As of September 1, 2008, the Company entered into a stock purchase agreement to dispose of its 55% interest in Tianma. For details, please refer to Note 14 – Discontinued Operations. There were no provisions in the stock purchase agreement requiring the Company to indemnify the buyer for any future liability arising from transactions incurred prior to September 1, 2008. Accordingly, the Company considers that it has no loss contingencies in relation to Tianma as of September 30, 2008.
 
2. Early Redemption of 3% Convertible Promissory Notes
 
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 may 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. As the Company recorded a continuous net loss as of September 30, 2008, management anticipates that the Company is unlikely to achieve the EPS target or 80% of the EPS target in fiscal year 2008. The Company is in the process of re-negotiating with the investors in the hope of revising certain terms of the Purchase Agreement.
 
In the event of early redemption of 3 % convertible promissory notes, the Company has to redeem its outstanding principal amount of $50 million as of September 30, 2008, plus accrued and unpaid interest of $1,084,083 as of September 30, 2008 and penalties of approximately $7 million which represented 20% internal rate of return on the outstanding principal balance of $50 million.
 
The Company considers that the likelihood of the investors calling for early redemption is between remote and reasonably possible. Accordingly, the Company is only disclosing the loss contingencies and made no accrual for any penalties arising from early redemption.
 
 
NOTE 11.                  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 three months ended September 30, 2008 and 2007 were $nil while during the nine months ended September 30, 2008 and 2007 were $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 recognized for the three months ended September 30, 2008 and 2007 were approximately $nil and $6,201 respectively while during the nine months ended September 30, 2008 and 2007 were $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, Chief Executive Officer, Daniel So, Managing Director, Daley Mok, Chief Financial Officer, Benedict Fung, the President, and Stanley Chu, 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. In connection with these stock grants and in accordance with SFAS 123R, the Company recognized non-cash stock-based compensation of $699,300 and $854,700 included in general and administrative expenses on the consolidated statement of operations for the three months ended September 30, 2008 and 2007 respectively while during the nine months ended September 30, 2008 and 2007 were $2,097,900 and $854,700 respectively. Out of the total shares granted under the Agreements, on January 2, 2008, an aggregate of 660,000 S-8 shares with par value of $0.001 each were vested and issued to the 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 during the six months ended December 31, 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, Gerd Jakob, Edward Lu, Ronglie Xu and Joachim Burger. 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, the Company recognized $nil and $14,495 of non-cash stock-based compensation included in Payroll on the consolidated statement of operation for the three months ended September 30, 2008 and 2007 respectively while during the nine months ended September 30, 2008 and 2007 were $86,970 and $14,495 respectively. On July 21, 2008, an aggregate of 65,000 S-8 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 was obligated to issue 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 3% convertible promissory notes as mentioned in Note 9 – Convertible Promissory Notes and Warrants 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 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 value of the warrant recognized for the three months ended September 30, 2008 and 2007 were $31,959 and $nil respectively while during the nine months ended September 30, 2008 and 2007 were $95,875 and $nil respectively.
 
 
10. In December 2007, the Company committed to grant 235,000 S-8 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, the Company recognized non-cash stock-based compensation of $611,000 in Payroll on the consolidated statement of operation for the year ended December 31, 2007. Such 235,000 S-8 shares of par value of $0.001 each were issued on January 2, 2008. In addition, the Company committed to grant certain shares of common stock to an employee pursuant to his employment contract for service rendered. Accordingly, the Company recognized the non-cash stock-based compensation of $6,375 and $nil for the three months ended September 30, 2008 and 2007 while $76,500 and $nil for the nine months ended September 30, 2008 and 2007. In October 2008, an aggregate of 30,000 S-8 shares of common stock of par value of $0.001 each were vested and issued to an employee.
 
11. In June 2008, the Board of Directors resolved to grant 110,000 shares of common stock to the board of directors, Peter Mak, Gerd Jakob, Edward Lu, Ronglie Xu, Joachim Burger, Godfrey Hui, Daniel So, Daley Mok and Stanley Chu, as part of their directors’ fee. 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. In connection with these stock grants and in accordance with SFAS 123R, the Company recognized $54,999 and $nil of non-cash stock-based compensation included in general and administrative expenses on the consolidated statement of operations for the three months and nine months ended September 30, 2008 and 2007 respectively.
 
12. In July 2008, the Company committed to grant 170,000 S-8 shares of common stock to certain employees of the Company for their services rendered. Accordingly, the Company recognized the non-cash stock-based compensation of $43,283 and $nil for the three months ended September 30, 2008 and 2007 while $43,283 and $nil for the nine months ended September 30, 2008 and 2007.
 
13. In August 2008, the Company committed to grant 100,000 S-8 shares of common stock to a consultant for services rendered. The value of stock grant recognized for the three months and nine months ended September 30, 2008 and 2007 were $20,941 and $nil 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.
 
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 9 – 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 9 – 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. Concurrently with the Third Closing, the Company loaned substantially all the proceeds from 3% Convertible Promissory Notes to its direct wholly owned subsidiary, NCN Group Limited (“NCN Group”), and such loan was evidenced by an intercompany note issued by NCN Group in favor of the Company (the “NCN Group Note”). The Company entered into a Security Agreement, dated as of January 31, 2008 pursuant to which the Company granted to the collateral agent for the benefit of the Investors a first-priority security interest in certain of its assets, including the NCN Group Note and 66% of the shares of NCN Group. In addition, NCN Group and certain of the Company’s 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. 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 9 – Convertible Promissory Note and Warrant for details.
 
 
NOTE 12.                  RELATED PARTY TRANSACTIONS
 
During the nine months ended September 30, 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.
 
NOTE 13.                  NET INCOME (LOSS) PER COMMON SHARE
 
 
Net loss per share information for the three and nine months ended September 30, 2008 and 2007 was as follows:
 
   
For the three
months ended
September 30,
2008
   
For the three
months ended
 September 30,
2007
   
For the nine
months ended
September 30,
2008
   
For the nine
months ended
September 30,
2007
 
Numerator:
                       
Net loss from continuing operations
    (15,546,407 )     (3,207,019 )     (32,776,641 )     (8,459,050 )
Net income (loss) from discontinued operations
    72,041       3,025       42,640       (121,869 )
Net loss attributable to stockholders
  $ (15,474,366 )   $ (3,203,994 )   $ (32,734,001 )   $ (8,580,919 )
Denominator:
                               
        Weighted average number of shares outstanding, basic
    71,597,478       68,947,906       71,563,688       68,355,391  
        Effect of dilutive securities
                               
Options and warrants
    -       -       -       -    
        Weighted average number of shares outstanding, diluted
    71,597,478       68,947,906       71,563,688       68,355,391  
                                 
Net income (loss) per common share – basic and diluted
                               
Continuing operations
    (0.22 )     (0.05 )     (0.46 )     (0.12 )
Discontinued operations
    0.00       0.00       0.00       (0.00 )
Net loss per common share – basic and diluted
  $ (0.22 )   $ (0.05 )   $ (0.46 )   $ (0.13 )
 
The diluted net loss per common share is the same as the basic net loss per common share for the three and nine months ended September 30, 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 common share. The securities that could potentially dilute basic net income (loss) per common share in the future that were not included in the computation of diluted net income (loss) per common share because of anti-dilutive effect as of September 30, 2008 and 2007 were summarized as follows:
 
   
For the three
months ended September 30,
2008
   
For the three
months ended September 30,
2007
   
For the nine
months ended September 30,
2008
   
For the nine
months ended September 30,
2007
 
Potential common equivalent shares:
                       
Stock options for services
    -       -       -       -  
Stock warrants for services (1)
    61,430       141,308       61,430       141,308  
Conversion feature associated with convertible promissory notes to common stock
    30,303,030       -       30,303,030       -  
Common stock to be granted to directors executives and employees for services (including non-vested shares)
    7,070,000       -       7,135,000       -  
Total
    37,434,460       141,308       37,499,460       141,308  
 
Remarks:
 
(1)
As of September 30, 2008, the number of potential common equivalent shares associated with warrants issued for services was 61,430 which was related to a warrant to purchase 100,000 common stock issued by the Company to a consultant in 2006 for service rendered at an exercise price of $0.70, which expired in August 2016.
 
 
NOTE 14.                  DISCONTINUED OPERATIONS
 
During the three months ended September 30, 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.

On September 1, 2008, the Company completed the sale of all its interests in NCN Management Services Limited (“NCN Management Services”) to Zhanpeng Wang (“Zhanpeng”), an individual for a consideration of HK$1,350,000, or approximately US$173,000, in cash. Zhanpeng 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 and minority interests 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
    1,041,781  
Prepaid expenses and other current assets
    860,036  
Equipment, net
    17,464  
Minority interest
    (99,423 )
Liabilities assumed
    (2,370,866 )
Net assets
  $ 111,507  
 
On September 30, 2008, the Company completed the sale of its 99.9% interests in NCN Landmark International Hotel Group Limited (“NCN Landmark”) to Ngar Yee Tsang (“Ngar”), an individual for a cash consideration of $20,000. Ngar 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 and minority interests 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
    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 condensed consolidated statements of operations. The net operating results of the discontinued operations have been reported, net of applicable income taxes and minority interests, as “Income (Loss) from Discontinued Operations, Net of Income Taxes and Minority Interests”.
 
Summary operating results for the discontinued operations for travel network were as follows:
 
   
For the Three Months ended
   
For the Nine Months Ended
 
   
September 30,
 2008
   
September 30,
2007
   
September 30,
2008
   
September 30,
2007
 
Revenues
    6,342,479       8,018,734       24,528,096       15,432,761  
Cost of revenues
    (6,242,465 )     (7,926,043 )     (24,172,537 )     (15,221,181 )
Gross profit
    100,014       92,691       355,599       211,580  
Operating expenses
    (156,864 )     (91,597 )     (477,481 )     (345,600 )
Other income
    58,027       5,322       98,838       9,209  
Interest income
    72       871       2,040       2,075  
Minority interest
    4,707       (4,262 )     (2,401 )     867  
Income (loss) from discontinued operations, net of income taxes and minority interests
    5,956       3,025       (23,445 )     (121,869 )
 
NOTE 15.                                BUSINESS SEGMENTS FROM CONTINUING OPERATIONS
 
The Company has changed their operating segments in 2007 as a result of change of internal organization structure by management. As the Company disposed of its entire Travel Network in September 2008, the Company’s continuing operations are classified into two primary business segments accordingly, which operate exclusively: 1) Media Network segment provides marketing communications consultancy services to customers in China and 2) Investment Holding segment represents the companies which provide administrative and management services to its subsidiaries or fellow subsidiaries. The accounting policies of the segments are the same as described in the summary of significant accounting policies. There were no inter-segment sales.
 
 
For the Three Months Ended
September 30, 2008
 
Media Network
   
Investment
Holding
   
Total
 
Revenues  
  $ 2,520,474     $ -     $ 2,520,474  
Net loss from continuing operations
    11,956,600       3,589,807       15,546,407  
Depreciation and amortization  
                       
- Equipment and intangible assets
    448,865       92,666       541,531  
    - Deferred charges and debt discount
    -       1,392,116       1,392,116  
Interest expense
    -       383,334       383,334  
Allownace for doubtful debt for other receivables (1)
    1,411,287       -       1,411,287  
Non-cash impairment charges
    5,671,782       -       5,671,782  
Assets  
    36,278,980       8,245,851       44,524,831  
Capital Expenditures  
    205,712       -       205,712  
                         
For the Three Months Ended
September 30, 2007
 
Media Network
   
Investment
Holding
   
Total
 
Revenues  
  $ 466,071     $ -     $ 466,071  
Net loss from continuing operations
    118,248       3,088,771       3,207,019  
Depreciation and amortization
- Equipment and intangible assets  
    55,309       74,897       130,206  
Assets  
    3,211,071       8,526,429       11,737,500  
Capital Expenditures  
    -       41,532       41,532  
 
 
For the Nine Months Ended
September 30, 2008
 
Media Network
   
Investment
Holding
   
Total
 
Revenues  
  $ 4,158,529     $ -     $ 4,158,529  
Net loss from continuing operations
    21,937,422       10,839,219       32,776,641  
Depreciation and amortization  
                       
- Equipment and intangible assets
    1,297,961       121,839       1,419,800  
- Deferred charges and debt discount
    -       4,091,104       4,091,104  
Allowance for doubtful debt for other receivables (1)
    1,411,287       -       1,411,287  
Non-cash impairment charges
    5,918,467       -       5,918,467  
Interest expense
    -       1,109,125       1,109,125  
Assets  
    36,278,980       8,245,851       44,524,831  
Capital Expenditures  
    3,338,300       119,051       3,457,351  
                         
For the Nine Months Ended
September 30, 2007
 
Media Network
   
Investment
Holding
   
Total
 
Revenues  
  $ 965,995     $ -     $ 965,995  
Net loss from continuing operations
    144,714       8,314,336       8,459,050  
Depreciation and amortization
-Equipment and intangible assets  
    64,834       250,919       315,753  
Assets  
    3,211,071       8,566,429       11,777,500  
Capital Expenditures  
    3,330       54,119       57,449  
 
Remarks :
(1) The Company recorded a one-time doubtful debt provision of $1,411,287 for other receivables during the three months ended September 30, 2008. Such provision was included in general and administrative expenses on the consolidated statements of operations for the three and nine months ended September 30, 2008.
 

 

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
CAUTIONARY STATEMENTS
 
The following management’s discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the Company’s condensed consolidated financial statements and the notes thereto included in Part I Financial Information, Item 1. Financial Statement. All amounts are expressed in U.S. dollars.
 
OVERVIEW
 
Network CN Inc. (“we” or “the Company”), originally incorporated on September 10, 1993, is a Delaware company with headquarters in the Hong Kong Special Administrative Region, the People’s Republic of China (“the PRC” or “China”). It was operated by different management teams in the past, under different operating names, pursuing a variety of business ventures. The most recent former name was Teda Travel Group, Inc. On August 1, 2006, the Company changed its name to “Network CN Inc.” in order to better reflect the Company’s vision under its new and expanded management team.
 
Our business plan in early 2006 was to build a nationwide information and entertainment network in the PRC. To achieve this goal, we established two business divisions: the Media Business division and the Non-Media Business division. During the latter half of 2006, we adjusted our primary focus away from the Non-Media Business to our Media Business and began building 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.
 
With the completion of $50 million financing in three tranches from November 2007 to January 2008, the Company’s original plan was to secure advertising rights and install a nationwide digital network up to 20 mega-size panels and 2,000 roadside panels. With the support of the investors in the financing, however, substantial amount of funds in the aggregate amount of approximately US$15 million were re-allocated to two major projects, namely, Terminal 3 Beijing Airport Project (the “T3 Project”) and the Co-operation Project with Beijing All Media Culture Group (the “BAMC Project”) from which the Company expected to generate substantial revenues with the 2008 Beijing Olympics. The T3 Project covers an exclusive right to operate 98 freestanding multimedia advertisement light boxes in designated locations within the newly-built Terminal 3 of the Beijing International Airport, while the BAMC Project covers an exclusive right to operate 11,000 in-building LCD screens in governmental and office buildings, banks, hotels, hospitals, Olympic venues and other locations in Beijing.
 
 
Disposal of Non-Media Business
 
The Board of Directors of the Company resolved in June 2008 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. During the quarter, the Company successfully sold its entire travel network.
 
The Company believed that it was in the best interests of the Company to dispose of its non-core business in order to focus on developing its media business.
 
Market Conditions
 
The Company’s results of operations during the nine months ended September 30, 2008 were negatively affected by a variety of factors including:
 
 
·
The rising costs to acquire advertising rights due to competition among bidders for those rights;
 
 
·
Delays in obtaining government approvals for panel installation due to the government’s focus on fighting snow storms in different provinces in the early months of the year;
 
 
·
Slower than expected consumer acceptance of the digital form of advertising media;
 
 
·
Strong competition from other media companies;
 
 
·
The provision of free advertising time to air earthquake information, government recovery efforts and donation-related information for the 8.0 magnitude earthquake in the Sichuan Province;
 
 
·
Various administrative delays and restrictions of the Beijing Olympic Committee limiting advertisements during the Olympic period in Olympic-related panels to official Olympic sponsors only. Non-Olympic sponsors with which the Company had negotiated were forced to pull out; 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 advertising spending is expected to be more significant on our new digital form of media than traditional advertising platforms.
 
In addition to the above market factors, one of our key projects, the T3 Project, also encounters the following issues:
 
 
T3 Project
 
In November 2007, the Company obtained an exclusive right to operate 98 freestanding multimedia advertisement light boxes to be situated in designated locations within Beijing International Airport in China for a 3-year period. Terminal 3 is the new international terminal which was scheduled to open in January 2008 but the opening date was delayed to late March 2008. The commencement date to operate our advertisement light boxes, originally planned to operate in January 2008, was therefore delayed to late March 2008.
 
During the 2008 Olympics, as required by the Olympic Organizing Committee, all the advertising contracts had to be signed among three parties, namely, the Beijing International Airport Authority, the authority party with advertising rights directly granted by the Beijing International Airport Authority (the “Authority Party”), and the customer. The authority party had the right to receive the relevant payment from customers on behalf of the Company. In July 2008, in view of the market situation, the Company started re-negotiating certain terms of the concession right contract with the Authority Party. Subsequently in August 2008, the Company received a unilateral termination letter regarding the exclusive right from the authority party. During September 2008, the Authority Party received a total of $1,411,287 from customers on behalf of the Company without paying back to the Company. Currently, the Company is evaluating its ability to take legal action against the authority party for the withheld payment and all other associated losses. No assurance can be given that the Company will be able to recover the fees due to it and has conservatively treated the withheld payment as uncollectible in the financial statements. Accordingly, allowance for doubtful debt of $1,411,287 was provided for such receivable during the three months ended September 30, 2008.
 
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