UNITED STATES
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, 2012

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 incorporation
or organization)
 
(I.R.S. Employer Identification No.)

Room 2120 and 2122, Leighton Centre,
77 Leighton Road, Causeway Bay, Hong Kong
  (Address of principal executive offices, Zip Code)
 
(852) 2833-2186
(Registrant’s telephone number, including area code)
 
_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   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  ¨ (Do not check if a smaller reporting company)
 Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨   No x

The number of shares outstanding of each of the issuer’s classes of common stock, as of November 14, 2012 is as follows:
 
 
Class of Securities
 
Shares Outstanding
 
 
Common Stock, $0.001 par value
 
96,904,467
 
 


 
 

 

TABLE OF CONTENTS


PART I
FINANCIAL INFORMATION
 
2
20
26
26
     
PART II
OTHER INFORMATION
     
27
27
27
27
27
27
27
 
 
 
 
 
 
 
 

 
PART I
FINANCIAL INFORMATION
 
FINANCIAL STATEMENTS.

NETWORK CN INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
Page
3
   
4
   
5
   
6 – 19
 
 
 
 

 
 
NETWORK CN INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 
Note
 
As of September
30, 2012
   
As of December
31, 2011
 
ASSETS
             
Current Assets
             
Cash
   
$
49,743
   
$
65,623
 
Accounts receivable, net
5
   
56,202
     
146,140
 
Prepayments for advertising operating rights, net 
6
   
47,030
     
182,969
 
Prepaid expenses and other current assets, net
7
   
160,350
     
193,424
 
Deferred charges, net
     
-
     
31,692
 
Total Current Assets 
     
313,325
     
619,848
 
                   
Equipment, Net
     
320,770
     
363,596
 
                   
TOTAL ASSETS
   
$
634,095
   
$
983,444
 
                   
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                 
Current Liabilities 
                 
Accounts payable, accrued expenses and other payables
8
 
$
2,092,460
   
$
1,227,782
 
1% convertible promissory notes due 2012, net
9
   
-
     
4,812,080
 
Capital lease obligation
10
   
10,101
     
-
 
 Total Current Liabilities 
     
2,102,561
     
6,039,862
 
                   
1% convertible promissory notes due 2014, net
9
   
1,893,025
     
-
 
Capital lease obligation, net of current portion
10
   
43,650
     
-
 
Total Non-Current Liabilities 
     
1,936,675
     
-
 
                   
                   
TOTAL LIABILITIES
     
4,039,236
     
6,039,862
 
                   
COMMITMENTS AND CONTINGENCIES
11
               
                   
STOCKHOLDERS’ DEFICIT
                 
Preferred stock, $0.001 par value, 5,000,000 shares authorized
None issued and outstanding 
                 
Common stock, $0.001 par value, 400,000,000 shares authorized
Shares issued and outstanding: 96,804,467 and 96,504,467 as of September 30,
2012 and December 31, 2011 respectively
     
96,804
     
96,504
 
Additional paid-in capital 
     
121,625,423
     
119,835,325
 
Accumulated deficit 
     
(126,848,864
)
   
(126,719,052
)
Accumulated other comprehensive income
     
1,721,496
     
1,730,805
 
TOTAL STOCKHOLDERS’ DEFICIT
12
   
(3,405,141
)
   
(5,056,418
)
                   
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
   
$
634,095
   
$
983,444
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
NETWORK CN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)

     
Three Months Ended
   
Nine Months Ended
 
 
Note
 
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
REVENUES
                         
Advertising services 
   
$
356,480
   
$
458,770
   
$
1,299,463
   
$
1,178,544
 
                                   
COST OF REVENUES
                                 
Cost of advertising services 
     
(347,241)
     
(256,067)
     
(978,563)
     
(824,533)
 
                                   
GROSS PROFIT
     
9,239
     
202,703
     
320,900
     
354,011
 
                                   
OPERATING EXPENSES
                                 
Selling and marketing
     
(44,600)
     
(126,434)
     
(229,906)
     
(370,359)
 
General and administrative
     
(334,952)
     
(403,669)
     
(1,314,773)
     
(1,070,910)
 
Total Operating Expenses
     
(379,552)
     
(530,103)
     
(1,544,679)
     
(1,441,269)
 
                                   
LOSS FROM OPERATIONS
     
(370,313)
     
(327,400)
     
(1,223,779)
     
(1,087,258)
 
                                   
OTHER INCOME (EXPENSES), NET
                                 
Interest income
     
38
     
85
     
140
     
174
 
Gain on extinguishment of debt
9
   
-
     
-
     
1,877,594
     
-
 
Other income (expenses), net
     
6,273
     
68,148
     
10,740
     
(137,141)
 
Total Other Income (Expenses), Net
     
6,311
     
68,233
     
1,888,474
     
(136,967)
 
                                   
INTEREST AND OTHER
DEBT-RELATED EXPENSES
                                 
Amortization of deferred charges and debt
discount 
9
   
(265,730)
     
(149,220)
     
(711,089)
     
(436,101)
 
Interest expense 
     
(35,027)
     
(12,603)
     
(83,418)
     
(37,397)
 
Total Interest and Other Debt–Related Expenses
     
(300,757)
     
(161,823)
     
(794,507)
     
(473,498)
 
                                   
NET LOSS BEFORE INCOME TAXES
     
(664,759)
     
(420,990)
     
(129,812)
     
(1,697,723)
 
Income taxes
     
-
     
-
     
-
     
-
 
NET LOSS
   
$
(664,759)
   
$
(420,990)
   
$
(129,812)
   
$
(1,697,723)
 
                                   
OTHER COMPREHENSIVE (LOSS) INCOME
                                 
Foreign currency translation (loss) gain
     
(4,912)
     
4,132
     
(9,309)
     
14,103
 
Total Other Comprehensive (Loss) Income
     
(4,912)
     
4,132
     
(9,309)
     
14,103
 
                                   
COMPREHENSIVE LOSS
   
$
(669,671)
   
$
(416,858)
   
$
(139,121)
   
$
(1,683,620)
 
                                   
NET LOSS PER COMMON SHARE – BASIC AND DILUTED
14
 
$
(0.007)
   
$
(0.005)
   
$
(0.001)
   
$
(0.020)
 
                                   
WEIGHTED AVERAGE SHARES OUTSTANDING –
BASIC AND DILUTED
14
   
97,020,771
     
84,504,467
     
96,768,572
     
84,504,467
 

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

 
NETWORK CN INC. 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
 
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(129,812)
   
$
(1,697,723)
 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization:
               
Equipment
   
192,956
     
182,080
 
Deferred charges and debt discount
   
711,089
     
436,101
 
Gain on extinguishment of debt
   
(1,877,594)
     
-
 
Stock-based compensation for service 
   
69,540
     
338,243
 
Loss on disposal of equipment
   
14,258
     
12,598
 
Gain from write-off of long-aged payables
   
-
     
(3,254)
 
Loss from sales of available-for-sale securities
   
-
     
228,285
 
Changes in operating assets and liabilities:
               
Accounts receivable, net 
   
89,938
     
295,308
 
Prepayments for advertising operating rights, net  
   
134,217
     
72,317
 
Prepaid expenses and other current assets, net 
   
33,074
     
221,581
 
Accounts payable, accrued expenses and other payables 
   
431,024
     
(229,041)
 
Net cash used in operating activities 
   
(331,310)
     
(143,505)
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of equipment
   
(170,141)
     
(25,402)
 
Proceeds from sales of equipment
   
3,194
     
-
 
Proceeds from sales of available-for-sale securities
   
-
     
48,351
 
Net cash (used in) provided by investing activities 
   
(166,947)
     
22,949
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from directors’ loans
   
128,205
     
96,154
 
Proceeds from short-term loans
   
819,487
     
-
 
Proceeds from shareholder’s loan
   
-
     
100,000
 
Proceeds from capital lease financing
   
57,692
     
-
 
Repayment of directors’ loan
   
(168,910)
     
-
 
Repayment of short-term loans
   
(345,128)
     
-
 
Repayment of shareholder’s loan
   
-
     
(100,000)
 
Repayment of capital lease obligation
   
(3,941)
     
-
 
Net cash provided by financing activities 
   
487,405
     
96,154
 
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
(5,028)
     
(10,934)
 
                 
NET DECREASE IN CASH
   
(15,880)
     
(35,336)
 
                 
CASH, BEGINNING OF PERIOD
   
65,623
     
170,621
 
                 
CASH, END OF PERIOD
 
$
49,743
   
$
135,285
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Income taxes
 
$
-
   
$
-
 
Interest paid
 
$
32,313
   
$
24,932
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
NETWORK CN INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1. 
INTERIM FINANCIAL STATEMENTS
 
The accompanying unaudited condensed consolidated financial statements of Network CN Inc., its subsidiaries and variable interest entity (collectively “NCN” or the “Company” “we”, “our” or “us”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of our financial position and results of operations.
 
The condensed consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 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 presentation of financial statements. The results for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
 
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-K for the fiscal year ended December 31, 2011, previously filed with the Securities and Exchange Commission on April 16, 2012.

NOTE 2. 
ORGANIZATION AND PRINCIPAL ACTIVITIES

Network CN Inc. was originally incorporated on September 10, 1993 in Delaware with headquarters in the Hong Kong Special Administrative Region of the People’s Republic of China (“PRC” or “China”).  Since August 2006, the Company has been principally engaged in the provision of out-of-home advertising in China through the operation of a network of roadside LED digital video panels, mega-size LED digital video billboards and light boxes in major cities.
 
Details of the Company’s principal subsidiaries and variable interest entity as of September 30, 2012 are described in Note 4 – Subsidiaries and Variable Interest Entity.

Reverse Stock Split
 
On July 5, 2011, the Board of Directors of the Company unanimously adopted a resolution approving an amendment to the Certificate of Incorporation to effect a 1-for-5 reverse stock split of all outstanding shares of common stock, which the Company effected on September 16, 2011 (the “Reverse Split”) and a reduction of its authorized shares of common stock from 2,000,000,000 to 400,000,000 shares.
 
Shareholders received one new share of common stock in replacement of every five shares held on July 5, 2011, the record date for the Reverse Split. The Reverse Split did not change the stockholder’s ownership percentage of the common stock, except for minimal changes resulting from the treatment of fractional shares. The Company did not issue any fractional shares as a result of the Reverse Split. The number of shares issued to each stockholder was rounded up to the nearest whole number if, as a result of the Reverse Split, the number of shares owned by any stockholder would not be a whole number.

The Reverse Split proportionately reduced all issued and outstanding shares of the Company’s common stock, as well as common stock underlying stock options, warrants and other common stock based equity grants outstanding and the respective exercise prices were proportionately increased in accordance with the terms of the agreements governing such securities. Shares of common stock reserved for issuance upon the conversion of the Company’s convertible notes were also proportionately reduced and the respective conversion prices were proportionately increased.
 
All references to shares in the accompanying financial statements and notes thereto including but not limited to the number of shares and per share amounts (except par value), unless otherwise noted, have been adjusted to reflect the Reverse Split retroactively. Previously awarded options and warrants to purchase shares of the Company’s common stock have also been retroactively adjusted to reflect the Reverse Split.
 
Going Concern

The Company has experienced net loss of $129,812 and $1,697,723 for the nine months ended September 30, 2012 and 2011, respectively. Additionally, the Company has net cash used in operating activities of $331,310 and $143,505 for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012 and December 31, 2011, the Company has a stockholders’ deficit of $3,405,141 and $5,056,418, respectively. Furthermore, the Company has a working capital deficit of $1,789,236 and $5,420,014 as of September 30, 2012 and December 31, 2011, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s plans regarding those concerns are addressed in the following paragraph. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
In response to current financial conditions, the Company has undergone a drastic cost-cutting exercise, including reduction of the Company’s workforce, office rentals and other general and administrative expenses. The Company has also continued to strengthen its sales force in order to increase its sales volume. In addition, in 2011, the Company identified three media projects in China for which the Company is making a bid for consideration but the Company has not yet committed to any of these projects. If the Company is successful in its bid, the Company expects that these projects will improve the Company’s future financial performance. Accordingly, in October 2011, the Company engaged three independent consultants to provide consulting services in connection with the Company’s bid for the media projects. During 2012, the company secured two new media advertising projects in Shanghai and Zhuhai respectively. The Company expects that the new projects can generate positive cashflow to the Company.

The existing cash and cash equivalents together with highly liquid current assets are insufficient to fund the Company’s operations for the next twelve months. The Company will need to rely upon some combination of cash generated from the Company’s operations, the proceeds from the potential exercise of the outstanding option held by Keywin Holdings Limited (“Keywin”) to purchase $2 million in shares of the Company’s common stock, or proceeds from the issuance of the Company’s equity and debt securities as well as the exercise of the conversion option by the Company’s note holders to convert the notes to the Company’s common stock, in order to maintain the Company’s operations. Based on the Company’s best estimates, the Company believes that there are sufficient financial resources to meet the cash requirements for the coming twelve months and the unaudited condensed consolidated financial statements have been prepared on a going concern basis. However, there can be no assurance the Company will be able to continue as a going concern.

NOTE 3 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(A)
Basis of Presentation and Preparation
 
The unaudited condensed consolidated financial statements of the Company have been prepared in conformity with GAAP.

These unaudited condensed consolidated financial statements were prepared on a going concern basis. The Company has determined that the going concern basis of preparation is appropriate based on its estimates and judgments of future performance of the Company, future events and projected cash flows. At each balance sheet date, the Company evaluates its estimates and judgments as part of its going concern assessment. Based on its assessment, the Company believes there are sufficient financial and cash resources to finance the Company as a going concern in the next twelve months. Accordingly, management has prepared the unaudited condensed consolidated financial statements on a going concern basis.

(B) Principles of Consolidation
 
The unaudited condensed consolidated financial statements include the financial statements of Network CN Inc., its subsidiaries and its variable interest entity for which it is the primary beneficiary. A variable interest entity is an entity in which the Company, through contractual arrangements, bears the risks and enjoys the rewards normally associated with ownership of the entity. Upon making this determination, the Company is deemed to be the primary beneficiary of the entity, which is then required to be consolidated for financial reporting purposes. All significant intercompany transactions and balances have been eliminated upon consolidation.
 
(C) Use of Estimates
 
In preparing unaudited 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 unaudited 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 statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of September 30, 2012 and December 31, 2011, the Company had no cash equivalents.
 
(E) Allowance for Doubtful Debts

Allowance for doubtful debts is made against receivables to the extent they are considered to be doubtful. Receivables in the unaudited condensed consolidated balance sheets are stated net of such allowance. The Company records its allowance for doubtful debts based upon its assessment of various factors. The Company considers historical experience, the age of the receivable balances, the credit quality of its customers, current economic conditions, and other factors that may affect customers’ ability to pay to determine the level of allowance required.
 
 
(F) Prepayments for Advertising Operating Rights, Net
 
Prepayments for advertising operating rights are measured at cost less accumulated amortization and impairment losses. Cost includes prepaid expenses directly attributable to the acquisition of advertising operating rights. Such prepaid expenses are, in general, charged to the unaudited condensed consolidated statements of operations on a straight-line basis over the operating period. All the costs expected to be amortized after twelve 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) Investment in available-for-sale securities

The Company’s marketable equity securities are classified as available-for-sale investments and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. Realized gains or losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are reported in other (expense) income, net. The Company evaluates the investments periodically for possible other-than-temporary impairment. When assessing other-than-temporary impairment of equity securities, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, the Company’s intent to hold the investment for a period of time which may be sufficient for an anticipated recovery in market value, and whether its cash flow needs may require the Company to sell the investment. If appropriate, the Company records impairment charges equal to the amount that the carrying value of an equity security exceeds the estimated fair value of such security as of the evaluation date. In computing realized gains and losses on available-for-sale securities, the Company determines cost based on amounts paid, including direct costs such as commissions to acquire the security, using the specific identification method.
 
The determination of current or noncurrent status for individual available-for-sale securities is made on the basis of whether or not the securities are considered working capital available for current operations under Accounting Standards Codification, or ASC, Topic 210-10-45. We determined that investments in available-for-sale securities have not been made for the purposes of control, affiliation, or other continuing business advantage. As of September 30, 2012 and December 31, 2011, the Company had no investment in available-for-sale securities.
 
(H) Equipment, Net

Equipment is stated at cost less accumulated depreciation and impairment losses, if any. Depreciation is provided on a straight-line basis over the assets’ estimated useful lives. The estimated useful lives are as follows:

Media display equipment
5 - 7 years
Office equipment
3 - 5 years
Furniture and fixtures
3 - 5 years
Motor vehicles
5 years
Leasehold improvements
Over the unexpired lease terms

Construction in progress is carried at cost less impairment losses, if any. It relates to construction of media display equipment. No provision for depreciation is made on construction in progress until the relevant assets are completed and put into use.
 
When equipment is retired or otherwise disposed of, the related cost, accumulated depreciation and provision for impairment loss, if any are removed from the respective accounts, and any gain or loss is reflected in the unaudited condensed consolidated statements of operations. Repairs and maintenance costs on equipment are expensed as incurred.

(I) Impairment of Long-Lived Assets
 
Long-lived assets, such as equipment, are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to be generated from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset calculated using a discounted cash flow analysis.
 
(J) Deferred Charges, Net
 
Deferred charges are fees and expenses directly related to the issuance of convertible promissory notes, including placement agents’ fees. Deferred charges are capitalized and amortized over the life of the convertible promissory notes using the effective interest method. Amortization of deferred charges is included in amortization of deferred charges and debt discount on the unaudited condensed consolidated statements of operations while the unamortized balance is included in deferred charges on the unaudited condensed consolidated balance sheets. All the costs expected to be amortized after twelve months of the unaudited condensed consolidated balance sheet date are classified as non-current assets.
 
 
(K) Convertible Promissory Notes
 
1) Debt Restructuring and Issuance of 1% Convertible Promissory Note

On April 2, 2009, the Company issued 1% unsecured senior convertible promissory notes to the previous 3% convertible promissory note holders who agreed to cancel these 3% convertible promissory notes in the principal amount of $5,000,000 (including all accrued and unpaid interest thereon), and all of the warrants, in exchange for the 1% unsecured senior convertible promissory notes in the principal amount of $5,000,000. The 1% convertible promissory notes bear interest at 1% per annum, payable semi-annually in arrears, mature on April 1, 2012, and are convertible at any time into shares of the Company’s common stock at a fixed conversion price of $0.1163 per share, subject to customary anti-dilution adjustments. Pursuant to ASC Topic 470-50 and ASC Topic 470-50-40, the Company determined that the original convertible notes and the 1% convertible notes were with substantially different terms and hence the exchange was recorded as an extinguishment of original notes and issuance of new notes.

The Company determined the 1% convertible promissory notes to be conventional convertible instruments under ASC Topic 815-40-25. Its embedded conversion option was qualified for equity classification pursuant to ASC Topic 815-40, and ASC Topic 815-10-15-74. The embedded beneficial conversion feature was recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The debt discount resulting from the allocation of proceeds to the beneficial conversion feature is amortized over the term of the 1% convertible promissory notes from the respective dates of issuance using the effective interest method.

2) Extension of 1% Convertible Promissory Note

The 1% convertible promissory notes matured on April 1, 2012 and on the same date, the Company and the note holders agreed to the following: 1) extension of the maturity date of the 1% convertible promissory notes for a period of two years and 2) modification of the 1% convertible promissory notes to be convertible at any time into shares of the Company’s common stock at a conversion price of $0.09304 per share, subject to customary anti-dilution adjustments. In all other respects not specifically mentioned, the terms of the 1% convertible promissory notes remain the same and are fully enforceable in accordance with their terms. Subsequently, the Company issued new 1% convertible promissory notes matured on April 1, 2014 to the note holders. Pursuant to ASC Topic 470-50-40-10, the Company determined that the modification is substantially different and hence the modification was recorded as an extinguishment of notes and issuance of new notes. Pursuant to ASC Topic 470-20-40-3, the Company allocated the amount of the reacquisition price to the repurchased beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date and the residual amount would be allocated to the convertible security. Thus, the Company recorded a gain on extinguishment of debt.

The Company determined the modified new 1% convertible promissory notes to be conventional convertible instruments under ASC Topic 815-40-25. Its embedded conversion option was qualified for equity classification pursuant to ASC Topic 815-40, and ASC Topic 815-10-15-74. The embedded beneficial conversion feature was recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The debt discount resulting from the allocation of proceeds to the beneficial conversion feature is amortized over the term of the new 1% convertible promissory notes from the respective dates of issuance using the effective interest method.

(L) Revenue Recognition
 
The Company recognizes revenue in the period when advertisements are either aired or published.
 
(M) Stock-based Compensation
 
The Company follows ASC Topic 718, using a modified prospective application transition method, which establishes accounting for stock-based awards in exchange for employee services. Under this application, the Company is required to record stock-based compensation expense for all awards granted after the date of adoption and unvested awards that were outstanding as of the date of adoption. ASC Topic 718 requires that stock-based compensation cost is measured at grant date, based on the fair value of the award, and recognized as expense over the requisite services period.
   
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 ASC Topic 718. In accordance with ASC Topic 505-50, the non-employee stock options or warrants are measured at their fair value by using the Black-Scholes option pricing model as of the earlier of the date at which a commitment for performance to earn the equity instruments is reached (“performance commitment date”) or the date at which performance is complete (“performance completion date”). The stock-based compensation expenses are recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Accounting for non-employee stock options or warrants which involve only performance conditions when no performance commitment date or performance completion date has occurred as of reporting date requires measurement at the equity instruments then-current fair value. Any subsequent changes in the market value of the underlying common stock are reflected in the expense recorded in the subsequent period in which that change occurs.
  
 
(N) Income Taxes
 
The Company accounts for income taxes under ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are provided for the future tax effects attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from items including tax loss carry forwards.
 
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or reversed. Under ASC Topic 740, the expense or benefit related to adjusting deferred tax assets and liabilities as a result of a change in tax rates is recognized in income or loss in the period that includes the enactment date.
 
(O) Comprehensive Income (Loss)
 
The Company follows ASC Topic 220 for the reporting and display of its comprehensive income (loss) and related components in the financial statements and thereby reports a measure of all changes in equity of an enterprise that results from transactions and economic events other than transactions with the shareholders. Items of comprehensive income (loss) are reported in the unaudited condensed consolidated statements of operations and comprehensive loss.
  
Accumulated other comprehensive income as presented on the condensed consolidated balance sheets consisted of the accumulative foreign currency translation adjustment at period end.

(P) Earnings (Loss) Per Common Share
 
Basic earnings (loss) per common share are computed in accordance with ASC Topic 260 by dividing the net income (loss) attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding.
 
The diluted net income (loss) per share is the same as the basic net income (loss) per share for the three and nine months ended September 30, 2012 and 2011, 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.

(Q) 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 unaudited condensed consolidated statements of operations on a straight-line basis over the lease period.

(R) Capital Leases

Leases are classified as capital leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to lessee. Assets held under capital leases are initially recognized as assets at their fair value or, if lower, the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest elements of the finance cost is charged to the unaudited condensed consolidated statements of operations over the lease period so as to produce a constant rate of interest on the remaining balance of the liability for each period. The equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term.

(S) Foreign Currency Translation
 
The assets and liabilities of the Company’s subsidiaries and variable interest entity denominated in currencies other than U.S. dollars are translated into U.S. dollars using the applicable exchange rates at the balance sheet date. For unaudited condensed consolidated statements of operations’ items, amounts denominated in currencies other than U.S. dollars were translated into U.S. dollars using the average exchange rate during the period. Equity accounts were translated at their historical exchange rates. Net gains and losses resulting from translation of foreign currency financial statements are included in the statements of stockholders’ equity as accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are reflected in the unaudited condensed consolidated statements of operations.
 
 
(T) Fair Value of Financial Instruments
 
ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
The carrying value of the Company’s financial instruments, which consist of cash, accounts receivable, prepayments for advertising operating rights, prepaid expenses and other current assets, accounts payable, accrued expenses and other payables, and convertible promissory notes approximates fair value due to the short-term maturities.
 
(U) Concentration of Credit Risk
 
The Company places its cash with various financial institutions. The Company believes that no significant credit risk exists as these cash investments are made with high-credit-quality financial institutions.
 
All the revenue of the Company and a significant portion of the Company’s assets are generated and located in China. The Company’s business activities and accounts receivable are mainly from advertising services. Deposits are usually collected from customers in advance and the Company performs ongoing credit evaluation of its customers. The Company believes that no significant credit risk exists as credit loss.
 
(V) Segmental Reporting
 
ASC Topic 280 establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company’s operating segments are organized internally primarily by the type of services rendered. Accordingly, it is management’s view that the services rendered by the Company are of one operating segment: Media Network.

(W) Recent Accounting Pronouncements

 In December 2011, FASB issued ASU No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force).   The objective of this update is to resolve the diversity in practice about whether the guidance in Subtopic 360-20 applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. The amendments in this update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. The adoption of ASU No. 2011-10 did not have a material impact on our financial statements.

In December 2011, FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Management is currently evaluating the potential impact of ASU No. 2011-11 on our financial statements.
 
 
In July 2012, FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment T he objective of the amendments in this update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013. Management is currently evaluating the potential impact of ASU No. 2012-02 on our financial statements.

In October 2012, FASB issued ASU No. 2012-04, Technical Corrections and Improvements: The amendments in this Update cover a wide range of Topics in the Codification. These amendments are presented in two sections—Technical Corrections and Improvements (Section A) and Conforming Amendments Related to Fair Value Measurements (Section B).   For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013. Management is currently evaluating the potential impact of ASU No. 2012-04 on our financial statements.

(X) Reclassifications

Certain amounts reported for prior year have been reclassified to conform to the current year’s presentation. 

NOTE 4.  SUBSIDIARIES AND VARIABLE INTEREST ENTITY
                  
Details of the Company’s principal subsidiaries and variable interest entity as of September 30, 2012 were as follows:

Name
Place of
Incorporation
Ownership/Control
interest
attributable to
the Company
Principal activities
NCN Group Limited
British Virgin
Islands (“BVI”)
100%
Investment holding
NCN Media Services Limited
BVI
100%
Investment holding
Linkrich Enterprise Advertising and Investment Limited
Hong Kong
100%
Investment holding
Cityhorizon Limited
Hong Kong
100%
Investment holding
NCN Group Management Limited
Hong Kong
100%
Provision of administrative and management services
Crown Eagle Investments Limited
Hong Kong
100%
Dormant
Crown Winner International Limited
Hong Kong
100%
Dormant
NCN Huamin Management Consultancy (Beijing) Company Limited
PRC
100%
Dormant
Huizhong Lianhe Media Technology Co., Ltd.
PRC
100%
Provision of high-tech services
Beijing Huizhong Bona Media Advertising Co., Ltd.
PRC
100%(1)
Provision of advertising services
Yi Gao Shanghai Advertising Limited (“Yi Gao”)
PRC
100%
Provision of advertising services
Remarks:

1) Variable interest entity which the Company exerted 100% control through a set of commercial arrangements.

NOTE 5. 
ACCOUNTS RECEIVABLE, NET
 
Accounts receivable, net as of September 30, 2012 and December 31, 2011 were as follows:

   
As of
September 30,
2012
   
As of
December 31,
2011
 
Accounts receivable
 
$
69,310
   
$
159,362
 
Less: allowance for doubtful debts
   
(13,108)
     
(13,222
)
Total
 
$
56,202
   
$
146,140
 

The Company recorded no allowance for doubtful debts for accounts receivables for the three and nine months ended September 30, 2012 and 2011.
 
NOTE 6. 
PREPAYMENTS FOR ADVERTISING OPERATING RIGHTS, NET

Prepayments for advertising operating rights, net as of September 30, 2012 and December 31, 2011 were as follows:
 
   
  As of
September 30,
2012
   
  As of
December 31,
2011
 
Gross carrying amount
 
$
1,545,326
   
$
914,846
 
Less: accumulated amortization
   
(1,498,296
)
   
(731,877
)
Total
 
$
47,030
   
$
182,969
 
 
Total amortization expense of prepayments for advertising operating rights of the Company for the three months ended September 30, 2012 and 2011 were $279,722 and $180,136, respectively, while for the nine months ended September 30, 2012 and 2011 amounted to $776,236 and $533,040, respectively. The amortization expense of prepayments for advertising operating rights was included as cost of advertising services in the unaudited condensed consolidated statements of operations.

As the Company recorded a continuous net loss from operations, the Company performed an impairment review of its prepayments for advertising operating rights. The Company recorded no impairment loss for the three and nine months ended September 30, 2012 and 2011.

NOTE 7. 
PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET
 
Prepaid expenses and other current assets, net as of September 30, 2012 and December 31, 2011 were as follows:

   
As of
September 30, 
2012
   
As of
December 31,
2011
 
Payments from customers withheld by a third party
 
$
1,512,729
   
$
1,525,966
 
Other receivables
   
333
     
274
 
Prepaid expenses
   
107,211
     
155,075
 
Rental deposits
   
54,881
     
40,168
 
Sub-total
   
1,675,154
     
1,721,483
 
Less: allowance for doubtful debts
   
(1,514,804)
     
(1,528,059
)
Total
 
$
160,350
   
$
193,424
 

The Company recorded no allowance for doubtful debts for prepaid expenses and other current assets for the three and nine months ended September 30, 2012 and 2011.

NOTE 8. 
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES

Accounts payable, accrued expenses and other payables as of September 30, 2012 and December 31, 2011 were as follows:

   
As of
September 30,
2012
   
As of
December 31,
2011
 
Accrued advertising operating rights fees
 
$
32,660
   
$
-
 
Accrued staff benefit and related fees
   
747,322
     
410,254
 
Accrued professional fees
   
78,254
     
115,615
 
Directors’ loans (Note 13)
   
189,039
     
229,744
 
Short-term loans (1,2,3&4)
   
474,359
     
-
 
Accrued interest expenses
   
63,702
     
12,603
 
Other accrued expenses
   
401,142
     
328,040
 
Other payables
   
105,982
     
131,526
 
Total
 
$
2,092,460
   
$
1,227,782
 

1) On April 13, 2012, we received a loan of HKD3,000,000 (equivalent to $384,615) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before May 12, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.
 
 
2) On April 17, 2012, we received a loan of HKD200,000 (equivalent to $25,641) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before May 16, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.

3) On May 2, 2012, we received a loan of HKD200,000 (equivalent to $25,641) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before June 1, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.

4) On May 17, 2012, we received a loan of HKD300,000 (equivalent to $38,462) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before June 16, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.
 
The interest expenses of the short-term loans for the three months ended September 30, 2012 and 2011 were $21,346 and $nil respectively, while for the nine months ended September 30, 2012 and 2011 amounted to $44,192 and $nil, respectively.

NOTE 9. 
CONVERTIBLE PROMISSORY NOTES AND WARRANTS

(1) Debt Restructuring and Issuance of 1% Convertible Promissory Notes

On November 19, 2007, the Company entered into a Note and Warrant Purchase Agreement, as amended (the “Purchase Agreement”) with Shanghai Quo Advertising Co. Ltd and affiliated investment funds of Och-Ziff Capital Management Group (the “Investors”) pursuant to which it agreed to issue in three tranches, 3% Senior Secured Convertible Promissory Notes due June 30, 2011, in the aggregate principal amount of up to $50,000,000 (the “3% Convertible Promissory Notes”) and warrants to acquire an aggregate amount of 6,857,143 shares of the Company’s Common Stock (the “Warrants”). Between November 19 - 28, 2007, the Company issued 3% Convertible Promissory Notes in the aggregate principal amount of $15,000,000, Warrants to purchase shares of the Company’s common stock at $12.50 per share and Warrants to purchase shares of the Company’s common stock at $17.50 per share.  On January 31, 2008, the Company amended and restated the previously issued 3% Convertible Promissory Notes and issued to the Investors 3% Convertible Promissory Notes in the aggregate principal amount of $50,000,000 (the “Amended and Restated Notes”), Warrants to purchase shares of the Company’s common stock at $12.50 per share and Warrants to purchase shares of the Company’s common stock at $17.50 per share.  In connection with the Amended and Restated Notes, the Company entered into a Security Agreement, dated as of January 31, 2008 (the “Security Agreement”), pursuant to which the Company granted to the collateral agent for the benefit of the Investors, a first-priority security interest in certain of the Company’s assets, and 66% of the equity interest in the Company.

On April 2, 2009, the Company entered into a new financing arrangement with the previous holders of the Amended and Restated Notes (the “Note Holders”), including Keywin.

Pursuant to a note exchange and option agreement, dated April 2, 2009 (the “Note Exchange and Option Agreement”), between the Company and Keywin, Keywin exchanged its Amended and Restated Note in the principal amount of $45,000,000, and all accrued and unpaid interest thereon, for 61,407,093 shares of the Company’s common stock and an option to purchase an aggregate of 24,562,837 shares of the Company’s common stock, for an aggregate purchase price of $2,000,000 (the “Keywin Option”). The Keywin Option was originally exercisable for a three-month period which commenced on April 2, 2009, but pursuant to several subsequent amendments, the exercise period has been extended to a forty-five-month period ending on January 1, 2013, subject to the Company’s right to unilaterally terminate the exercise period upon 30 days’ written notice. As of September 30, 2012, the Keywin Option has not been exercised.

Pursuant to a note exchange agreement, dated April 2, 2009, among the Company and the Note Holders, the parties agreed to cancel their Amended and Restated Notes in the principal amount of $5,000,000 (including all accrued and unpaid interest thereon), and all of the warrants, in exchange for the Company’s issuance of the 1% unsecured senior convertible promissory notes due 2012 in the principal amount of $5,000,000 (the “1% Convertible Promissory Notes”). The 1% Convertible Promissory Notes bear interest at 1% per annum, are payable semi-annually in arrears, mature on April 1, 2012, and are convertible at any time by the holder into shares of the Company’s common stock at an initial conversion price of $0.1163 per share, subject to customary anti-dilution adjustments. In addition, in the event of a default, the holders will have the right to redeem the 1% Convertible Promissory Notes at 110% of the principal amount, plus any accrued and unpaid interest. The parties also agreed to terminate the Security Agreement and release all security interests arising out of the Purchase Agreement and the Amended and Restated Notes.
 
 
2) Extension of 1% Convertible Promissory Notes and Issuance of New 1% Convertible Promissory Notes

The 1% Convertible Promissory Notes matured on April 1, 2012 and on the same date, the Company and the Note Holders agreed to the following: (1) extension of the maturity date of the 1% Convertible Promissory Notes for a period of two years and (2) modification of the 1% Convertible Promissory Notes to be convertible at any time into shares of the Company’s common stock at a conversion price of $0.09304 per share, subject to customary anti-dilution adjustments. In all other respects not specifically mentioned, the terms of the 1% Convertible Promissory Notes shall remain the same and shall be fully enforceable in accordance with its terms. Subsequently, the Company issued new 1% convertible promissory notes (the “New 1% Convertible Promissory Notes”) to the Note Holders. The New 1% Convertible Promissory Notes bear interest at 1% per annum, are payable semi-annually in arrears, mature on April 1, 2014, and are convertible at any time by the holders into shares of the Company’s common stock at an initial conversion price of $0.09304 per share, subject to customary anti-dilution adjustments. In addition, in the event of a default, the holders will have the right to redeem the 1% Convertible Promissory Notes at 110% of the principal amount, plus any accrued and unpaid interest.
 
Gain on extinguishment of debt

Pursuant to ASC Topic 470-20-40-3, the Company allocated the amount of the reacquisition price to the repurchased beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date and the residual amount was allocated to the convertible security. Thus, the Company recognized a gain on extinguishment of debt of $1,877,594 at the date of extinguishment and included in the unaudited condensed consolidated statements of operations.

Convertible promissory notes, net as of September 30, 2012 and December 31, 2011 were as follows:
 
   
As of
September 30, 
2012
   
As of
December 31,
2011
 
Gross carrying value
 
$
5,000,000
   
$
5,000,000
 
Less: Allocated intrinsic value of beneficial conversion feature
   
(3,598,452)
     
(1,447,745
)
Add: Accumulated amortization of debt discount
   
491,477
     
1,259,825
 
     
1,893,025
     
4,812,080
 
Less: Current portion
   
-
     
(4,812,080
)
Non-current portion
 
$
1,893,025
   
$
-
 

The embedded beneficial conversion feature are recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value of beneficial conversion feature is calculated according to ASC Topic 470-20. The 1% Convertible Promissory Notes before and after modification are considered to have a beneficial conversion feature as the effective conversion price was less than the Company’s market price of common stock at commitment date. The value of beneficial conversion features of 1% Convertible Promissory Notes before and after modification amounted to $1,447,745 and $3,598,452, respectively, is recorded as a reduction in the carrying value of the convertible promissory notes against additional paid-in capital. As the 1% Convertible Promissory Notes have stated redemption dates, the respective debt discount is amortized over the term of the notes from the respective date of issuance using the effective interest method.

The amortization of deferred charges and debt discount for the three and nine months ended September 30, 2012 and 2011 were as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
Conversion Features
 
$
265,730
   
$
128,910
   
$
679,397
   
$
375,248
 
Deferred Charges
   
-
     
20,310
     
31,692
     
60,853
 
Total
 
$
265,730
   
$
149,220
   
$
711,089
   
$
436,101
 

Interest Expense

The interest expenses of the 1% Convertible Promissory Notes for the three months ended September 30, 2012 and 2011 were $12,603, while for the nine months ended September 30, 2012 and 2011 amounted to $37,397.
 
 
NOTE 10. 
CAPITAL LEASE OBLIGATION

As of September 30, 2012, the gross amount of the motor vehicle under capital leases was $53,751. The following is a schedule by years of future minimum lease payment under capital leases together with the present value of the net minimum lease payment as of September 30, 2012.

Fiscal years ending December 31,
       
2012
 
$
3,462
 
2013
   
13,846
 
2014
   
13,846
 
2015
   
13,846
 
2016
   
13,846
 
2017
   
4,615
 
Total minimum lease payments
   
63,461
 
Less: Amount representing interest
   
(9,710)
 
Present value of net minimum lease payment
   
53,751
 
Less: Current portion
   
(10,101)
 
Non-current portion
 
$
43,650
 

NOTE 11. 
COMMITMENTS AND CONTINGENCIES
 
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, 2012:

Three months ending December 31, 2012
 
$
48,632
 
Fiscal years ending December 31,
       
2012
   
48,632
 
2013
   
146,696
 
2014
   
131,476
 
Thereafter
   
-
 
Total
 
$
326,804
 

  2. Annual Advertising Operating Rights Fee Commitment

The Company, through its PRC operating companies, has acquired advertising rights from third parties to operate different types of advertising panels for certain periods.
 
The following table sets forth the estimated future annual commitment of the Company with respect to the advertising operating rights of panels that the Company held as of September 30, 2012:

Three months ending December 31, 2012
 
$
479,035
 
Fiscal years ending December 31,
       
2012
   
479,035
 
2013
   
544,146
 
Thereafter
   
-
 
Total
 
$
1,023,181
 
 
3. Capital commitments
 
As of September 30, 2012, the Company had commitments for capital expenditures in connection with construction of roadside advertising panels and mega-size advertising panels of approximately $19,000.
 
 
NOTE 12. 
STOCKHOLDERS’ DEFICIT
 
 Stock, Options and Warrants Issued for Services
 
1. In August 2006, the Company issued a warrant to purchase up to 20,000 shares of restricted common stock to a consultant at an exercise price $3.50 per share. One-fourth of the shares underlying the warrant became exercisable every 45 days beginning from the date of issuance. The warrant remains exercisable until August 25, 2016. The fair market value of the warrant was estimated on the grant date using the Black-Scholes option pricing model as required by SFAS 123R with the following assumptions and estimates: expected dividend 0%, volatility 192%, a risk-free rate of 4.5% and an expected life of one (1) year. The value of the warrant recognized for the three and nine months ended September 30, 2012 and 2011 were $nil. As of September 30, 2012, none of the warrant was exercised.

2. In July 2009, the Company granted an aggregate of 400,000 shares of common stock to Jennifer Fu, our Former Chief Financial Officer and one employee of the Company individually for their services to the Company covering the period from July 15, 2009 to July 14, 2011. Such shares with par value of $0.001 were issued on July 28, 2009 but will not vest until July 14, 2010 after which the relevant share certificate will be handed to the employees. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $nil of non-cash stock-based compensation included in general and administrative expenses on the unaudited condensed consolidated statements of operations for the three months ended September 30, 2012 and 2011, while during the nine months ended September 30, 2012 and 2011 such amounts were $nil and $7,500, respectively.

3. In July 2009, NCN Group Management Limited entered into Executive Employment Agreements with Earnest Leung, Chief Executive Officer and Godfrey Hui, Deputy Chief Executive Officer. Pursuant to the agreements, Dr. Earnest Leung and Mr. Godfrey Hui were granted 6,000,000 and 2,000,000 shares, respectively, for their services rendered during the period from July 1, 2009 to June 30, 2011. Such shares with par value of $0.001 each were issued to the concerned executives on July 28, 2009. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $1,200,000 of deferred stock compensation amortized over requisite service period. The amortization of deferred stock compensation of $nil recorded as non-cash stock-based compensation and included in general and administrative expenses on the unaudited condensed consolidated statements of operations for the three months ended September 30, 2012 and 2011, while during the nine months ended September 30, 2012 and 2011 such amounts were $nil and $300,000, respectively.
 
4. In August 2010, the Company granted an aggregate of 360,000 shares of common stock to the independent directors of the Company for their services to the Company covering the period from July 2, 2010 to July 1, 2011. Each independent director was granted shares of the Company’s common stock subject to a vesting period of twelve months in the following amounts: Ronald Lee: 120,000 shares; Gerald Godfrey: 120,000 shares; and Serge Choukroun: 120,000 shares. In connection with these stock grants and in accordance with ASC Topic 718 , the Company recognized $nil of non-cash stock-based compensation included in general and administrative expenses on the unaudited condensed consolidated statement of operation for the three months ended September 30, 2012 and 2011, while during the nine months ended September 30, 2012 and 2011 such amounts were $nil and $27,818, respectively.

5. In July 2011, the Board of Director granted an aggregate of 360,000 shares of common stock to the independent directors of the Company for their services rendered during the year from July 1, 2011 to June 30, 2012. Each independent director was granted shares of the Company’s common stock subject to a vesting period of twelve months in the following amounts: Ronald Lee, 120,000 shares; Gerald Godfrey, 120,000 shares; and Serge Choukroun, 120,000 shares. On November 8, 2011, the Board of Directors granted 75,000 shares of the common stock to the independent director, Charles Liu, for his service rendered during the period from November 16, 2011 to June 30, 2012. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $nil and $2,925 of non-cash stock-based compensation included in general and administrative expenses on the unaudited condensed consolidated statements of operation for the three months ended September 30, 2012 and 2011, respectively, while during the nine months ended September 30, 2012 and 2011 such amounts were $13,890 and $2,925, respectively.

6. In April 2012, the Company entered into a service agreement with a financial advisory company. Pursuant to the agreement, the financial advisory company was granted 540,541 shares for services rendered. Such shares with par value of $0.001 were issued to the financial advisory company in May 2012. In August 2012, the Company entered into a mutual termination agreement with the financial advisory company to terminate the service agreement and the Company cancelled the shares issued. In connection with these stock grants and cancellations, the Company reversed $100,000 of non-cash stock-based compensation included in general and administrative expenses on the unaudited condensed consolidated statements of operations for the three months ended September 30, 2012, while during the nine months ended September 30, 2012 such amount was $nil.

7. In July 2012, the Board of Director granted an aggregate of 360,000 shares of common stock to the independent directors of the Company for their services rendered during the year from [July 1, 2012 to June 30, 2013]. Each independent director was granted shares of the Company’s common stock subject to a vesting period of twelve months in the following amounts: Ronald Lee, 120,000 shares; Gerald Godfrey, 120,000 shares; and Charles Liu, 120,000 shares. In connection with these stock grants and in accordance with ASC Topic 718, the Company recognized $16,650 and $nil of non-cash stock-based compensation included in general and administrative expenses on the unaudited condensed consolidated statements of operation for the three months ended September 30, 2012 and 2011, respectively, while during the nine months ended September 30, 2012 and 2011 such amounts were $16,650 and $nil, respectively.

8. In September 2012, the Company entered into a financial public relations agreement with a Consultant. Pursuant to the agreement, the Consultant was granted 700,000 shares of common stock for the service rendered during the year from September 10, 2012 to September 9, 2013. In September 2012, the Company issued 300,000 shares of par value of $0.001 each to the Consultant. In connection with this stock grant, the Company recognized $39,000 and $nil of non-cash stock-based compensation included in general and administrative expenses on the unaudited condensed consolidated statements of operations for the three months ended September 30, 2012 and 2011, respectively, while during the nine months ended September 30, 2012 and 2011, such amounts were $39,000 and $nil, respectively.
 
 
NOTE 13. 
RELATED PARTY TRANSACTIONS
 
Except as set forth below, during the nine months ended September 30, 2012 and 2011, the Company did not enter into any material transactions or series of transactions that would be considered material in which any officer, director or beneficial owner of 5% or more of any class of the Company’s capital stock, or any immediate family member of any of the preceding persons, had a direct or indirect material interest.

On July 1, 2009, the Company and Keywin, of which the Company’s chief executive officer and director is the director and his spouse is the sole shareholder, entered into an Amendment, pursuant to which the Company agreed to extend the exercise period for the Keywin Option under the Note Exchange and Option Agreement between the Company and Keywin, to purchase an aggregate of 24,562,837 shares of our common stock for an aggregate purchase price of $2,000,000, from a three-month period ended on July 1, 2009, to a six-month period ended October 1, 2009. The exercise period for the Keywin option was subsequently further extended to a nine-month period ended January 1, 2010, pursuant to the Second Amendment. On January 1, 2010, the Company and Keywin entered into the third Amendment, pursuant to which the Company agreed to further extend the exercise period to an eighteen-month period ended on October 1, 2010, and provide the Company with the right to unilaterally terminate the exercise period upon 30 days’ written notice. On September 30, 2010, the exercise period for the Keywin Option was further extended to a twenty-seven-month period ended on June 30, 2011. On June 1, 2011, the exercise period for the Keywin Option was further extended to a thirty-three-month period ended on January 1, 2012. On December 30, 2011, the exercise period for the Keywin Option was further extended to a thirty-nine-month period ended on July 1, 2012. On June 28, 2012, the exercise period for the Keywin Option was further extended to a forty-five-month period ending on January 1, 2013.

During the nine months ended September 30, 2012 and 2011, the Company recorded a fee of $nil and $87,357, respectively for sharing an office with its facilities, of which the related company is the tenant.

During the nine months ended September 30, 2012, the Company received loans of $128,205 from its director and repaid loans of $168,910 to its director. As of September 30, 2012 and December 31, 2011, the Company recorded an amount of $189,039 and $229,744 payable to directors. Such payable was included in accounts payable, accrued expenses and other payables on the unaudited condensed consolidated balance sheets. The amount is unsecured, bears no interest and is repayable on demand.

During the nine months ended September 30, 2012, the Company purchased a motor vehicle from its director for HK$450,000 (equivalent to $57,692).
 

NOTE 14. 
NET LOSS PER COMMON SHARE
 
Net loss per common share information for the three and nine months ended September 30, 2012 and 2011 was as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
Numerator:
                       
Net loss
 
$
(664,759)
   
$
(420,990
)
 
$
(129,812)
   
$
(1,697,723
)
Denominator :
                               
Weighted average number of shares outstanding, basic
   
97,020,771
     
84,504,467
     
96,768,572
     
84,504,467
 
Effect of dilutive securities
   
-
     
-
     
-
     
-
 
Options and warrants
   
-
     
-
     
-
     
-
 
Weighted average number of shares outstanding,
diluted
   
97,020,771
     
84,504,467
     
96,768,572
     
84,504,467
 
                                 
Net loss per common share – basic and diluted
 
(0.007)
   
(0.005
)
 
(0.001)
   
(0.020
)
 
 
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, 2012 and 2011 as all potential common shares including stock options and warrants are anti-dilutive and are therefore excluded from the computation of diluted net loss per common share. 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 loss per common share because of anti-dilutive effect as of September 30, 2012 and 2011 were summarized as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
Potential common equivalent shares:
                       
Stock warrants for services*
   
-
     
-
     
-
     
-
 
Conversion feature associated with convertible promissory notes to common stock
   
53,740,327
     
-
     
53,740,327
     
42,992,261
 
Common stock to be granted to consultants for services (including non-vested shares)
   
20,000
     
20,000
     
20,000
     
20,000
 
Stock options granted to Keywin
   
12,129,946
     
-
     
12,517,332
     
10,448,078
 
Total
   
65,890,273
     
20,000
     
66,277,659
     
53,460,339
 
R emarks: * As of September 30, 2012, the number of potential common equivalent shares associated with warrants issued for services was nil, which was related to a warrant to purchase 20,000 shares of common stock issued by the Company to a consultant in 2006 for service rendered at an exercise price of $3.50, which will expire in August 2016.

NOTE 15.                 BUSINESS SEGMENTS

The Company operates in one single business segment: Media Network, providing out-of home advertising services.

NOTE 16.                SUBSEQUENT EVENTS

Management evaluated all activity of the Company and concluded that no subsequent events have occurred that would require recognition in the unaudited condensed consolidated financial statements.
 
 
 
 
 
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview of Our Business

Our mission is to become a nationwide leader in providing out-of-home advertising in China, primarily serving the needs of branded corporate customers. We seek to acquire rights to install and operate roadside advertising panels and mega-size advertising panels in the major cities in China. In most cases, we are responsible for installing advertising panels, although in some cases, advertising panels might have already been installed, and we will be responsible for operating and maintaining the panels. Once the advertising panels are put into operation, we sell advertising airtime to our customers directly. Since late 2006, we have been operating an advertising network of roadside LED digital video panels, mega-size LED digital video billboards and light boxes in major Chinese cities. Light Emitting Diode, or LED, technology has evolved to become a new and popular form of advertising in China, capable of delivering crisp, super-bright images both indoors and outdoors.
 
Total advertising revenues were $1,299,463 and $1,178,544 for the nine months ended September 30, 2012 and 2011, respectively, and we had a net loss of $129,812 and $1,697,723 for the nine months ended September 30, 2012 and 2011, respectively. Our results of operations were negatively affected by a variety of factors, which led to less than expected revenues and cash inflows during the fiscal year 2012, including the following:
 
·
the rising costs to acquire advertising rights due to competition among bidders for those rights;
   
·
slower than expected consumer acceptance of the digital form of advertising media;
   
·
strong competition from other media companies; and
   
·
many customers continued to be cost-conscious in their advertising budget especially on our new digital form of media.
 
To address these unfavorable market conditions, we continue to implement cost-cutting measures, including reductions in our workforce, office rentals, selling and marketing related expenses and other general and administrative expenses. We have also re-assessed the commercial viability of each of our concession rights contracts and have terminated those of our concession rights that we determined were no longer commercially viable due to high annual fees. Management has also successfully negotiated some reductions in advertising operating rights fees under remaining contracts. Since the latter half of 2011, we have expanded our focus from LED media and have actively explored new prominent media projects in order to provide a wider range of media and advertising services and improve our financial performance.
 
During the period from May 2010 to January 2012, we have only kept one concession right contract to operate 52 roadside advertising panels along the Nanjing Road in Shanghai, China. In February 2012, we secured a new media advertising project in Shanghai, China. Pursuant to a cooperative agreement entered into with Shanghai Shenpu Advertising & Decoration Co., Limited, we were granted the right to operate a mega-sized traditional advertising billboard located at Raffles City, Shanghai, and two mega-sized traditional advertising billboards located at different sections along Nanjing Road and Henan Road in Shanghai. The terms of the cooperative arrangement is one year with a renewal option. In the past, these three mega-sized advertising panels were mainly used by branded corporate customers such as Citibank, Nikon and Nintendo and we expect that this trend will continue. In October 2012, we secured a new media advertising project in Zhuhai, China. Pursuant to the agreement, we were granted the right to operate the 276 square meter advertising area located on the first floor of the Union Building at the entrance of Zhuhai sub-zone of Zhuhai-Macau Cross Border Industrial Zone for a period of a 34-month ending July 31, 2015. The Company will continually explore new media projects in order to provide a wider range of media and advertising services, rather than focusing primarily on LED media. The Company has identified several such potential projects which it intends to aggressively pursue in the coming year.
 
For more information relating to our business, please refer to Part I, “Item 1 - Business” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Recent Development
 
Extension of Convertible Promissory Notes

On November 19, 2007, the Company entered into a Note and Warrant Purchase Agreement, as amended (the “Purchase Agreement”) with Shanghai Quo Advertising Co. Ltd and affiliated investment funds of Och-Ziff Capital Management Group (the “Investors”) pursuant to which it agreed to issue in three tranches, 3% Senior Secured Convertible Promissory Notes due June 30, 2011, in the aggregate principal amount of up to $50,000,000 (the “3% Convertible Promissory Notes”) and warrants to acquire an aggregate amount of 6,857,143 shares of the Company’s Common Stock (the “Warrants”). Between November 19 - 28, 2007, the Company issued 3% Convertible Promissory Notes in the aggregate principal amount of $15,000,000, Warrants to purchase shares of the Company’s common stock at $12.50 per share and Warrants to purchase shares of the Company’s common stock at $17.50 per share.  On January 31, 2008, the Company amended and restated the previously issued 3% Convertible Promissory Notes and issued to the Investors 3% Convertible Promissory Notes in the aggregate principal amount of $50,000,000 (the “Amended and Restated Notes”), Warrants to purchase shares of the Company’s common stock at $12.50 per share and Warrants to purchase shares of the Company’s common stock at $17.50 per share.  In connection with the Amended and Restated Notes, the Company entered into a Security Agreement, dated as of January 31, 2008 (the “Security Agreement”), pursuant to which the Company granted to the collateral agent for the benefit of the Investors, a first-priority security interest in certain of the Company’s assets, and 66% of the equity interest in the Company.
 
 
On April 2, 2009, we entered into the Note Exchange Agreement with certain Investors, pursuant to which the parties agreed to cancel the Amended and Restated Notes in the principal amount of $5 million held by such Investors (including accrued and unpaid interest thereon), and all the Warrants, in exchange for our issuance of 1% Unsecured Senior Convertible Notes due 2012 in the principal amount of $5 million, or the 1% Convertible Promissory Notes. The 1% Convertible Promissory Notes bear interest at 1% per annum, are payable semi-annually in arrears, and matured on April 1, 2012. They are convertible at any time into shares of our common stock at an initial conversion price of $0.1163 per share, subject to customary anti-dilution adjustments. In the event of a default, the Note Holders have the right to redeem the 1% Convertible Promissory Notes at 110% of the principal amount, plus any accrued and unpaid interest. The parties also agreed to terminate the Security Agreement and release all security interests arising out of the Purchase Agreement and the Amended and Restated Notes.

The 1% Convertible Promissory Notes matured on April 1, 2012 and on the same date, the Company and the Note Holders agreed to the following: (1) extension of the maturity date of the 1% Convertible Promissory Notes for a period of two years and (2) modification of the 1% Convertible Promissory Notes to be convertible at any time into shares of the Company’s common stock at a conversion price of $0.09304 per share, subject to customary anti-dilution adjustments. In all other respects not specifically mentioned, the terms of the 1% Convertible Promissory Notes shall remain the same and shall be fully enforceable in accordance with its terms. Subsequently, the Company issued new 1% unsecured senior convertible promissory notes matured on April 1, 2014 to the Note Holders.

Results of Operations
 
The following results of operations is based upon and should be read in conjunction with the Company’s unaudited 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.
 
Comparison of Three Months Ended September 30, 2012 and September 30, 2011
 
Revenues – Our revenues consist primarily of income from out-of-home advertising panels. We recognize revenue in the period when advertisements are displayed. Revenues from advertising services for the three months ended September 30, 2012 were $356,480, as compared to $458,770 for the corresponding prior year period, a decrease of 22%. Approximately 27% of the decline in revenue was attributed to reduced advertising services revenue from the Nanjing Road Project. The decrease was offset by a 5% increase in revenue generated from the new media advertising project in Shanghai during the three months ended September 30, 2012.
   
Cost of Revenues – Cost of revenues primarily consists of fees to obtain rights to operate advertising panels, advertising agency service fees, media display equipment depreciation expenses and other miscellaneous expenses. Cost of revenues for the three months ended September 30, 2012 was $347,241, an increase of 36% as compared to $256,067 for the three months ended September 30, 2011. Approximately 39% of this increase was due to an amortization of advertising operating rights fee of $279,722 for the three months ended September 30, 2012, as compared to $180,136 for the corresponding prior year period. The increase was partially offset by lower business tax.
 
Gross Profit – Our gross profit for the three months ended September 30, 2012 was $9,239 as compared to $202,703 for the corresponding prior year period. The reduction in gross profit was due to the decrease in revenues and the increase in cost of revenues during the three months ended September 30, 2012.

Selling and Marketing Expenses – Selling and marketing expenses primarily consist of advertising and other marketing related expenses, compensation and related expenses for personnel engaged in sales and sales support functions. Selling and marketing expenses for the three months ended September 30, 2012 decreased by 65% to $44,600, as compared to $126,434 for the corresponding prior period. Approximately 52% of the decrease was due to a restructuring of our sales team and the remaining 13% was attributable to other cost cutting measures.
 
General and Administrative Expenses – General and administrative expenses primarily consist of compensation related expenses (including salaries paid to executive officers and employees, stock-based compensation expense for stock granted to directors, executive officers and employees for services rendered calculated in accordance with Accounting Standards Codification, or ASC Topic 718, employee bonuses and other staff welfare and benefits, rental expenses, depreciation expenses, fees for professional services, travel expenses and miscellaneous office expenses).  General and administrative expenses for the three months ended September 30, 2012 decreased by 17% to $334,952, as compared to $403,669 for the corresponding prior year period. Approximately 12% of the decrease was due to lower stock compensation expense amounting to $47,275, as a result of the termination of a service agreement with a financial advisor. This decline was partially offset by an increase in stock compensation amounting to $39,000 as a result of shares granted to a consulting company during the three months ended September 30, 2012. The remaining 5% of the decrease was mainly due to further reduction of the Company’s rental and other general administrative expenses as well as a loss on disposal of fixed assets amounting to $12,598 was recorded during the three months ended September 30, 2011.
 
 
Interest and Other Debt-Related Expenses – Interest expense and other debt-related expenses for the three months ended September 30, 2012 increased to $300,757 by 86%, as compared to $161,823 for the corresponding prior year period. Approximately 72% of the increase was due to the amortization of debt discount from the extension of convertible promissory notes in April 2012 and the remaining 14% was attributable to the increase in interest expense for the short-term loans.

Other Income (Expenses), Net – Other income, net for the three months ended September 30, 2012 was $6,311, compared to $68,233 for the corresponding prior year period. The decrease in other income, net was mainly attributed to the receipt of refund from Chengtian litigation net of respective legal fee amounting to $88,013, partially offset by the loss from sales of available-for-sale securities amounting to $22,996 in 2011 period.

Income Taxes – The Company derives all of its income in the PRC and is subject to income tax in the PRC. No income tax was recorded during the three months ended September 30, 2012 and 2011, because the Company and all of its subsidiaries and variable interest entity operated at a taxable loss during the respective periods.

Net Loss – The Company incurred a net loss of $664,759 for the three months ended September 30, 2012, an increase of 58% compared to $420,990 for the corresponding prior year period. The increase in net loss was mainly driven by decrease in gross profit and other income and increase in interest and other debt-related expenses offset by decrease in operating expenses.

Comparison of Nine Months Ended September 30, 2012 and September 30, 2011

Revenues – Revenues from advertising services for the nine months ended September 30, 2012 were $1,299,463 an increase of 10% compared to $1,178,544 for the corresponding prior year period. Approximately 17% of the increase was attributed to the increase in revenue generated from a new media advertising project in Shanghai during the nine months ended September 30, 2012. The increase was offset by 7% decrease of revenue from the Nanjing Road Project during the nine months ended September 30, 2012.

Cost of Revenues – Cost of revenues for the nine months ended September 30, 2012 were $978,563, an increase of 19% as compared to $824,533 for the nine months ended September 30, 2011. Approximately 29% of the increase was attributable to an increase in the amortization of advertising operating rights fee, which was $776,236 for the nine months ended September 30, 2012, as compared to $533,040 for the corresponding prior year period. The increase was as the result of obtaining one more media advertising project in Shanghai during the current year period. The increase was offset by the decrease in business tax and advertising production fee.

Gross Profit – Our gross profit for the nine months ended September 30, 2012 was $320,900 compared to gross profit of $354,011 for the corresponding prior year period. The decrease in gross profit was primarily driven by the increase in cost of revenues, which was partially offset by the increase in revenues during the nine months ended September 30, 2012.

Selling and Marketing Expenses – Selling and marketing expenses for the nine months ended September 30, 2012 decreased by 38% to $229,906, compared to $370,359 for the corresponding prior period. Approximately 24% of the decrease was due to the restructuring of our sales team so as to enhance our operational effectiveness and efficiency and the remaining 14% was attributable to further cost cutting measures.

General and Administrative Expenses General and administrative expenses for the nine months ended September 30, 2012 increased by 23% to $1,314,773 compared to $1,070,910 for the corresponding prior year period. Approximately 20% of the increase in general and administrative expenses was mainly due to a reversal of over-provision of rental related expenses in connection with the Chengtian litigation amounting to $215,639 recorded during the nine months ended September 30, 2011; An additional 28% of the increase was due to a reversal of over-provision of tax allowance for shares granted to executives amounting to $297,415 during the nine months ended September 30, 2011 as a result of the decline in our stock price when the vesting period expires. The increase was partially offset by a decrease in stock compensation expense amounting to $262,295 due to the completion of requisite service period in 2011 for certain previously granted stock.

Interest and Other Debt-Related Expenses Interest expense and other debt-related expenses for the nine months ended September 30, 2012 increased to $794,507, or by 68%, compared to $473,498 for the corresponding prior year period. Approximately 58% of the increase was due to the increase in amortization of debt discount as a result of the extension of convertible promissory notes in April 2012 and the remaining 10% was attributable to the increase in interest expense for the short-term loans.

Other Income (Expenses), Net Other income, net for the nine months ended September 30, 2012 was $1,888,474, compared to other expenses, net of $136,967 for the corresponding prior year period. The increase in other income, net was primarily attributed to the extension of convertible promissory notes in April 2012, from which the Company recorded a one-time gain on extinguishment of debt amounting to $1,877,594 during the nine months ended September 30, 2012. Other expenses, net for the prior year period were mainly attributed to the loss from sales of available-for-sale securities amounting to $228,285 were recorded offset by the receipt of refund related to the Chengtian litigation, net of respective legal fees amounting to $88,013 was recorded during the nine months ended September 30, 2011.
 
 
Income Taxes The Company derives all of its income in the PRC and is subject to income tax in the PRC. No income tax was recorded during the nine months ended September 30, 2012 and 2011 as the Company and all of its subsidiaries and its variable interest entities operated at a taxable loss during the respective periods.

Net Loss – The Company incurred a net loss of $129,812 for the nine months ended September 30, 2012, compared to $1,697,723 for the corresponding prior year period. The decrease in net loss was primarily due to a one-time gain on extinguishment of debt amounting to $1,877,594 recorded during the nine months ended September 30, 2012.

  Liquidity and Capital Resources

As of September 30, 2012, we had cash of $49,743, as compared to $65,623 as of December 31, 2011, an decrease of $15,880.  The increase was mainly attributable to the cash provided by directors’ loans and other short-term loans, which was partially offset by an increase in cash used in operating activities and financing activities.

The following table sets forth a summary of our cash flows for the periods indicated:

   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
 
Net cash used in operating activities
 
$
(331,310
)
 
$
(143,505)
 
Net cash (used in) provided by investing activities
   
(166,947
)
   
22,949
 
Net cash provided by financing activities
   
487,405
     
96,154
 
Effect of exchange rate changes on cash
   
(5,028
)
   
(10,934)
 
Net decrease in cash
   
(15,880
)
   
(35,336)
 
Cash, beginning of period
   
65,623
     
170,621
 
Cash, end of period
 
$
49,743
   
$
135,285
 
 
Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2012 was $331,310 as compared to $143,505 for the corresponding prior year period. The increase was mainly due to the decrease in gross profit and was partially offset by better management of our working capital.
 
Our cash flow projections indicate that our current assets and projected revenues from our existing project will not be sufficient to fund operations over the next twelve months. This raises substantial doubt about our ability to continue as a going concern. We intend to rely on Keywin’s exercise of its outstanding option to purchase $2 million in shares of our common stock or on the issuance of additional equity and debt securities as well as on our note holders’ exercise of their conversion option to convert our notes to our common stock, in order to fund our operations. However, it may be difficult for us to raise funds in the current economic environment. We cannot give assurance that we will be able to generate sufficient revenue or raise new funds, or that Keywin will exercise its option before its expiration and our note holders will exercise their conversion option before the note is due. In any such case, we may not be able to continue as a going concern.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2012 was $166,947, as compared to net cash provided by investing activities of $22,949 for the corresponding prior year period. The increase in net cash used in investing activities was mainly attributable to leasehold improvements paid for the relocation of our Hong Kong and Shanghai offices as well as a motor vehicle purchased during the nine months ended September 30, 2012.

Financing Activities

Net cash provided by financing activities was $487,405 for the nine months ended September 30, 2012, as compared to $96,154 for the corresponding prior year period. The increase was mainly due to the receipts of short-term loans for financing our operations during the nine months ended September 30, 2012. Net cash provided by financing activities for the nine months ended September 30, 2011 was mainly due to a receipt of directors’ loans of $96,154.
 
 
Short-term Loans

On February 24, 2012, we received a loan of HKD1,000,000 (equivalent to $128,205) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and is repayable by one month. The borrower and the Company agreed to extend the life of the short-term loan and the loan with interest was repaid on April 15, 2012.

On March 20, 2012, we received a loan of $140,000 from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and is repayable on demand. Such loan with interest was repaid on April 13, 2012.

On March 30, 2012, we received a loan of HKD600,000 (equivalent to $76,923) from an unrelated individual. The amount is unsecured, bears an annual interest of 12% and is repayable on April 13, 2012. Such loan with interest was repaid on April 13, 2012.

On April 13, 2012, we received a loan of HKD3,000,000 (equivalent to $384,615) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before May 12, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.

On April 17, 2012, we received a loan of HKD200,000 (equivalent to $25,641) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before May 16, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.

On May 2, 2012, we received a loan of HKD200,000 (equivalent to $25,641) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before June 1, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.

On May 17, 2012, we received a loan of HKD300,000 (equivalent to $38,462) from an unrelated individual. The amount is unsecured, bears a monthly interest of 1.5% and shall be repayable before June 16, 2012.  However, according to the agreement, the Company shall have the option to shorten or extend the life of the short-term loan if the need arises and the Company has agreed with the lender to extend the short-term loan on due date.  Up to the date of this quarterly report, such loan has not yet been repaid.

Advertising Operating Rights Fees
 
Advertising operating rights fees are the major cost of our advertising revenue. To maintain the advertising operating rights, we are required to pay advertising operating rights fees in accordance with payment terms set forth in contracts we entered into with various parties. These parties generally require us to prepay advertising operating rights fees for a period of time. The details of our advertising operating rights fees were as follows:
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
Payment for prepayments for advertising operating rights
 
$
47,031
   
$
242,747
   
$
609,359
   
$
460,723
 
                                 
Amortization of prepayments for advertising operating rights
   
279,722
   
$
180,136
   
$
776,236
   
$
533,040
 

   
As of
September 30,
2012
   
As of
December 31,
2011
 
Prepayments for advertising operating rights, net
 
47,030
   
182,969
 
                 
Accrued advertising operating rights fees
 
$
32,660
   
-
 

For future advertising operating rights commitments under non-cancellable advertising operating right contracts, please refer to the table under the following sub-section – “Contractual Obligations and Commercial Commitments.”

We financed the above payments through the issuance of our equity and debt securities. As we currently only generate limited revenue from our media operation, we intend to continue to raise funds through the issuance of equity and debt securities to satisfy future payment requirements. There can be no assurance that we will be able to enter into such agreements.
 
 
In the event that advertising operating rights fees cannot be paid in accordance with the payment terms set forth in our contracts, we may not be able to continue to operate our advertising panels and our ability to generate revenue will be adversely affected. As such, failure to raise additional funds would have significant negative impact on our financial condition.
 
Capital Expenditures

During the nine months ended September 30, 2012 and 2011, we acquired equipment of $170,141 and $25,402 which were primarily financed by short-term loans and capital lease financing, and the cash flows generated from our operations, respectively..

Contractual Obligations and Commercial Commitments
 
The following table presents certain payments due under contractual obligations with minimum firm commitments as of September 30, 2012:

   
Payments due by period
 
   
Total
   
Due in 2012
   
Due in 2013-
2014
   
Due in 2015-
2016
   
Thereafter
 
Debt Obligations (a)
 
$
5,000,000
   
$
-
   
$
5,000,000
   
$
-
   
$
-
 
Operating Lease Obligations (b)
   
326,804
     
48,632
     
278,172
     
-
     
-
 
Advertising Operating Rights Fee Obligations (c)
   
1,023,181
     
479,035
     
544,146
     
-
     
-
 
Purchase Obligations (d)
 
$
19,000
   
$
19,000
   
$
-
   
$
-
   
$
-
 

(a) Debt Obligations . We issued an aggregate of $5,000,000 in 1% Convertible Promissory Notes in April 2009 to our investors and such 1% Convertible Promissory Notes matured on April 1, 2012. On the same date, the Company and the Note Holders agreed to extend the maturity date of the 1% Convertible Promissory Notes for a period of two years. For details, please refer to the Note 9 of the unaudited condensed consolidated financial statements.
 
(b) Operating Lease Obligations . We have entered into various non-cancelable operating lease agreements for our offices. Such operating leases do not contain significant restrictive provisions.
 
(c) Advertising Operating Rights Fee Obligations . The Company, through its PRC operating companies, has acquired rights from third parties to operate 1) roadside advertising panels along Nanjing Road in Shanghai whose lease terms expired in 2013 and 2) a mega-sized advertising billboard located at Raffles City, Shanghai, China together with two mega-sized advertising billboards located at different section along Nanjing Road and Henan Road in Shanghai, China, whose lease terms expired in 2013.
 
(d) Purchase Obligations . We are obligated to make payments under non-cancellable contractual arrangements with our vendors, principally for constructing our advertising panels and leasehold improvement.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Recent Accounting Pronouncements

 In December 2011, FASB issued ASU No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force).   The objective of this update is to resolve the diversity in practice about whether the guidance in Subtopic 360-20 applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. The amendments in this update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. The adoption of ASU No. 2011-10 did not have a material impact on our financial statements.
 
 
In December 2011, FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Management is currently evaluating the potential impact of ASU No. 2011-11 on our financial statements.

In July 2012, FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment T he objective of the amendments in this update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013. Management is currently evaluating the potential impact of ASU No. 2012-02 on our financial statements.

In October 2012, FASB issued ASU No. 2012-04, Technical Corrections and Improvements: The amendments in this Update cover a wide range of Topics in the Codification. These amendments are presented in two sections—Technical Corrections and Improvements (Section A) and Conforming Amendments Related to Fair Value Measurements (Section B).   For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013. Management is currently evaluating the potential impact of ASU No. 2012-04 on our financial statements.

Off Balance Sheet Arrangements
  
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
As required by Rule 13a-15 under the Exchange Act, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that as of September 30, 2012, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.

Changes in Internal Control Over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
 
There has been no change to our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II
OTHER INFORMATION

LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business.

We are not aware of any material, active or pending legal proceedings against the Company or its subsidiaries or variable interest entity, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no material proceedings to which any of our directors, officers or affiliates of the Company, any owner of record or beneficiary of more than 5% of any class of voting securities of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries and variable interest entity or has a material interest adverse to the Company or any of its subsidiaries and variable interest entity.

ITEM 1A. RISK FACTORS.
    
Not applicable.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
We have not sold any equity securities during the quarter ended September 30, 2012 which sale was not previously disclosed in a current report on Form 8-K filed during that period.
 
DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
MINE SAFETY DISCLOSURES .
      
Not applicable.
 
OTHER INFORMATION.
 
We have no information to include that was required to be but was not disclosed in a report on Form 8-K during the period covered by this Form 10-Q. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
 
EXHIBITS.
 
The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No.
 
Description
10.1
 
1% Senior Unsecured Convertible Notes
     
31.1
 
Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101 *
 
Financial statements and footnotes of Network CN Inc. for the fiscal quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T (furnished herewith)
 
* Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: November 14, 2012
NETWORK CN INC.
     
     
 
By: 
/s/ Earnest Leung
 
Earnest Leung, Chief Executive Officer
 
( Principal Executive Officer )
 

 
By: 
/s/  Shirley Cheng
 
Shirley Cheng , Interim Chief Financial Officer
 
( Principal Financial Officer and Principal
Accounting Officer )
 
 
28

Exhibit 10.1
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE “ACT”) OR UNDER THE SECURITIES LAWS OF ANY STATE.  THIS SECURITY MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (B) AN EXEMPTION OR QUALIFICATION UNDER APPLICABLE SECURITIES LAWS OR (C) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.  ANY ATTEMPT TO TRANSFER, SELL, PLEDGE OR HYPOTHECATE THIS SECURITY IN VIOLATION OF THESE RESTRICTIONS SHALL BE VOID.

1% SENIOR UNSECURED CONVERTIBLE NOTE

$2,111,000 April 2, 2012

FOR VALUE RECEIVED , NETWORK CN INC. , a Delaware corporation (the “ Company ”), hereby promises to pay to the order of SCULPTOR FINANCE (AS) IRELAND LIMITED, a company organized under the laws of the Republic of Ireland whose registered office is at 5 Harbourmaster Place, IFSC, Dublin 1, Ireland (the “ Holder ”), or its registered assigns or successors in interest or order, without demand, the sum of TWO MILLION ONE HUNDRED ELEVEN THOUSAND US DOLLARS ($2,111,000) (the “ Principal ”), plus accrued and unpaid interest thereon on April 1, 2014 (the “ Maturity Date ”).

This 1% Senior Unsecured Convertible Note due 2014 of the Company (this “ Note ,” and together with the other 1% Senior Unsecured Convertible Note due 2014 of the Company, as they may hereafter be further amended, restated, supplemented or otherwise modified from time to time, the “ Notes ”) amends and restates in its entirety that certain 1% Senior Unsecured Convertible Note due 2012 of the Company issued April 2, 2009 and is subject to the Note Exchange Agreement, dated as of April 2, 2009, by and among the Company, the Holder and the other parties named therein (the “ Exchange Agreement ”).  The securities represented by this Note are also subject to a Registration Rights Agreement (the “ Registration Rights Agreement ”) and a Letter Agreement and Termination of Investor Rights Agreement (the “ Letter Agreement ,” and together with the Notes, the Exchange Agreement, the Registration Rights Agreement and the Letter Agreement, the “ Transaction Documents ”), each dated as of April 2, 2009, among the Company, the Holder and the other parties named therein.  The following terms shall apply to this Note:
 
ARTICLE I
 
INTEREST
 
1.1            Interest Rate .  The Company hereby agrees to pay interest to the Holder in respect of the outstanding Principal, at a per annum rate equal to one percent (1%) in cash.  Such interest shall accrue on the outstanding Principal from and after the date hereof, and shall be payable semi-annually in arrears with the first interest payment due on September 30, 2012 and succeeding interest payments due on the last Business Day of each  March and September thereafter (each, an “ Interest Payment Date ”).   All computations of interest hereunder shall be made on the basis of a year of 365 days for the actual number of days (including the first but excluding the last day) occurring in the period for which such interest is payable. As used in this Note, “ Business Day ” means a day, excluding a Saturday, Sunday, legal holiday or other days on which banks are required to be closed in the People’s Republic of China, Hong Kong or New York.
 
 
 

 
 
1.2            Default Redemption .  Notwithstanding anything to the contrary herein, upon the occurrence and during the continuation of any Event of Default (as defined in Article 4 hereof), the Holder shall have the right, at its option, to require the Company to repurchase this Note (or any part thereof), in accordance with the terms set forth in Article 5 hereof.
 
1.3            No Prepayment .  The Company may not prepay all or any part of the amounts outstanding under this Note at any time without the express written consent of the Holder. For the avoidance of doubt, any redemption pursuant to Article 5 hereof shall not be deemed a prepayment.

1.4            Taxes .  Any and all payments by the Company to or for the account of the Holder under this Note shall be made free and clear of and without deduction for any taxes, except as required by applicable law.  If the Company shall be required by any applicable law to deduct any taxes from or in respect of any sum payable under this Note to the Holder, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to addi tional sums payable under this ‎ Section 1.4 ), the Holder receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) as promptly as practicable after the date of such payment, the Company shall furnish to the Holder the original or a certified copy of a receipt evidencing payment thereof.

ARTICLE II
 
CONVERSION
 
2.1            Note Conversion .  The Holder shall have the right, but not the obligation, to convert all or any part of the outstanding Principal of this Note, together with any accrued and unpaid interest thereon to the date of such conversion, into such number of fully paid and non-assessable shares of the Company’s common stock, par value US$0.001 per share (the “ Common Stock ”) or other securities of the Company as and if required pursuant to Section 2.3 (b), at any time and from time to time prior to the later of the Maturity Date or the date on which this Note is paid in full, subject to the terms and conditions set forth in this Article 2 , at a conversion price per share of Common Stock equal to US$0.09304 (the “ Conversion Price ”), as the same may be adjusted from time to time in accordance with this Note and as proportionally adjusted for any subdivision, consolidation, reclassification or similar event of the Common Stock) calculated in accordance with Section 2.3 .

2.2            Conversion Procedures
 
(a)           In the event that the Holder elects to convert this Note, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (a “ Notice of Conversion ”) to the Company, which Notice of Conversion shall provide a breakdown in reasonable detail of the Principal, accrued and unpaid interest amounts being converted and the name of the entity to be issued the Shares of Common Stock upon conversion.  The date specified in the Notice of Conversion, or if no date is specified, then the date of the delivery of the Notice of Conversion, shall be referred to as the “ Conversion Date .”  A form of Notice of Conversion to be employed by the Holder is annexed hereto as Exhibit A .
 
(b)           Pursuant to the terms of the Notice of Conversion, the Company shall deliver, or cause to be delivered, such number of Shares of Common Stock (or other securities of the Company as and if required pursuant to Section 2.3(b)) as determined pursuant to this Note (the “ Conversion Shares ”) via physical certificates to the Holder or its assignee (if and as designated in the Notice of Conversion and to the extent permitted by applicable securities laws). In the case of the exercise of the conversion rights set forth herein, the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the Conversion Date.  The Holder or its assignee (if and as designated in the Notice of Conversion) shall be treated for all purposes as the beneficial holder of such Conversion Shares, unless the Holder provides the Company written instructions to the contrary.  
 
 
-2-

 
 
(c)           The number of Conversion Shares to be issued upon each conversion of this Note pursuant to this Article 2 shall be the quotient obtained by dividing the Principal and accrued interest by the then applicable Conversion Price.  No fractional shares of Common Stock shall be issued upon any conversion of this Note.  In lieu of the Company issuing any fractional shares to the Holder upon any conversion of this Note, the Company shall make an adjustment and payment in cash to the Holder.

(d)           The Company shall deliver or cause to be delivered certificates representing the Conversion Shares within seven (7) business days of the Conversion Date (the “ Certificate Delivery Date ”).  If the Holder has made a sale or transfer of any such Conversion Shares either pursuant to Rule 144 or pursuant to a registration statement and (1) the Company shall fail to deliver or cause to be delivered to the Holder by the Certificate Delivery Date, a certificate representing such Conversion Shares and (2) following the Certificate Delivery Date the Holder, or any third party on behalf of the Holder, purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of such Conversion Shares (a “Buy-In” ), then, the Company shall pay in cash to the Holder (for costs incurred either directly by such Holder or on behalf of a third party) the amount by which the total purchase price paid for Common Stock as a result of the Buy-In (including brokerage commissions, if any) exceed the proceeds received by such Holder as a result of the sale to which such Buy-In relates. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

2.3            Adjustment Events .  The Conversion Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:
 
(a)            Merger, Sale of Assets, etc .  If (i) the Company effects any merger or consolidation of the Company with or into another entity, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another entity) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (iv) the Company consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more persons or entities whereby such other persons or entities (such other persons or entities, the “ Purchasers ”) acquire more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the Purchasers or such other persons or entities associated or affiliated with the Purchasers), or (v) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common Stock of the Company (in any such case, a “ Fundamental Transaction ”), this Note, as to the Principal and accrued and unpaid interest thereon, shall thereafter, at the Holder’s election, be deemed to evidence the right to convert into such number and kind of shares or other securities and property as would have been issuable or distributable on account of such Fundamental Transaction, upon or with respect to the securities subject to the conversion right immediately prior to such Fundamental Transaction.  The foregoing provision shall similarly apply to successive Fundamental Transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the provisions of this Section 2.3 shall apply to such securities of such successor or purchaser after any such Fundamental Transaction.
 
 
-3-

 
 
(b)            Reclassification, etc .  If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the Principal hereof and accrued and unpaid interest hereon, shall thereafter be deemed to evidence the right to convert into an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.
 
(c)            Stock Splits, Combinations and Dividends .  If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock (whether by a stock split or otherwise), or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.

(d)            Share Issuance .  So long as any amount of this Note is outstanding, if the Company shall issue any Equity-Linked Securities (as defined below), except for securities issued or issuable pursuant to an Exempt Issuance (as defined below), prior to the full conversion or payment of this Note, for a consideration that is less than the Conversion Price, then, and thereafter successively upon each such issuance, the Conversion Price shall be reduced to such other lower issue price.  For purposes of this Note, “ Equity-Linked Securities ” means any equity securities of the Company (including any Common Stock) and any equity-linked securities of the Company (including any instruments, warrants, options or rights to acquire any equity securities of the Company).  For purposes of this adjustment, the issuance of any Equity-Linked Securities shall result in an adjustment to the Conversion Price upon the issuance of such Equity-Linked Security, and again upon the issuance of shares of Common Stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than the then applicable Conversion Price.  For purposes of this Article 2 , “ Exempt Issuance ” shall mean (a) the issuance of shares of Common Stock to employees, consultants, service providers, officers or directors of the Company, pursuant to any other stock or option plan duly adopted for such purpose by the Company, up to an aggregate number of shares not to exceed twenty percent (20%) of the total outstanding Common Stock of the Company as determined as of the date hereof, (b) the issuance of securities upon the exercise or exchange of or conversion of any securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Note, provided that such securities have not been amended since the date of this Note to increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities, and (c) the issuance of securities to bona fide third party purchasers on an arm’s length basis.

(e)            Replacement Note .  In the event of any partial conversion of the outstanding Principal and any accrued and unpaid interest under this Note, the Holder agrees to surrender this Note to the Company and the Company shall issue to the Holder a replacement Note in the amount of the remaining Principal (and accrued and unpaid interest, if applicable) after giving effect to such partial conversion.

2.4            Notice as to Adjustments . Whenever the Conversion Price is adjusted pursuant to this Article 2 , the Company shall promptly mail to the Holder a notice setting forth the Conversion Price after such adjustment and setting forth a statement of the facts requiring such adjustment.
 
 
-4-

 
 
2.5            Reservation and Registration .  The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note, free from all mortgages, charges, pledges, liens, hypothecations or other security interests (“ Liens ”), preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than the aggregate number of shares of the Common Stock as shall be issuable (taking into account the adjustments and restrictions of this Article 2 ) upon the conversion of this Note.  The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable and, pursuant to the Registration Rights Agreement, shall be registered for public sale in accordance therewith.  The Company agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note.
 
2.6            Transfer Taxes .  The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary, stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates.
 
ARTICLE III
 
COVENANTS
 
3.1            Affirmative Covenants of the Company .  The Company covenants and agrees that, so long as all or any of the Principal of this Note remains outstanding, it shall:
 
(a)           pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any properties belonging to it before the same shall be in default; provided, however, that the Company shall not be required to pay any such tax, assessment, charge or levy which is being contested in good faith by proper proceedings and adequate reserves for the accrual of same are maintained if required by generally accepted accounting principles;
 
(b)           preserve its corporate existence and continue to engage in business of the same general type as conducted as of the date hereof; and
 
(c)           comply in all respects with all statutes, laws, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements (the “ Requirement(s) ”) of all governmental bodies, departments, commissions, boards, companies or associates insuring the premises, courts, authorities, officials, or officers, which are applicable to the Company or its property; except wherein the failure to comply would not have a materially adverse on (i)   the business, property, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or (ii) the ability of the Company to perform its obligations under this Note, the Exchange Agreement, the Registration Rights Agreement or the Letter Agreement (collectively, the “ Transaction Documents ”); provided that nothing contained herein shall prevent the Company from contesting the validity or the application of any Requirements. As used in this Note, “ Subsidiary ” means, with respect to a person, any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity of which at least a majority of the total voting power of the voting stock is at the time owned or controlled, directly or indirectly, by such person, and, in respect of the Company, shall also include any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity from time to time organized and existing under the laws of the People’s Republic of China whose financial reporting is consolidated with the Company in any audited financial statements filed by the Company with the Commission in accordance with the Securities and Exchange of 1934 as amended, together with the rules and regulations promulgated thereunder from time to time in effect.
 
 
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3.2            Negative Covenants of the Company .  The Company covenants that so long as all or any of the Principal of this Note remains outstanding, it shall not, and shall ensure that none of its Subsidiaries shall, without the prior written consent of the holders of a majority of the principal amount of the Notes:
 
(a)            Charter Documents .  Except with respect to any amendment of the Company’s certificate of incorporation to implement a reverse stock split and increase or decrease the authorized shares of the Company; modify, alter, repeal or amend the Company’s certificate of incorporation, by-laws or other organizational documents or effect any change of legal form of the Company; provided, however, that the number of Conversion Shares issuable hereunder shall be adjusted to prevent the dilution of such shares in the event of a reverse stock split as contemplated under Section 2.3(c) hereof;
 
(b)            Dividends .  Declare or pay dividends or other distributions by the Company or any of its Subsidiaries in respect of the equity securities of such entity other than dividends or distributions of cash which amounts during any 12-month period that do not exceed ten percent (10%) of the consolidated net income of the Company based on the Company’s most recent audited financial statements disclosed in the Company’s annual report on Form 10-K (or equivalent form) filed with the U.S. Securities and Exchange Commission.
 
(c)            Redemptions or Repurchases .  Except for any redemption pursuant to Article V hereof, redeem or repurchase shares of Common Stock or any other securities of the Company unless the Holders shall have first received, in respect of the Notes or the Conversion Shares, an amount in cash equal to the greater of (i) the Redemption Price and (ii) the amounts the Holders would be entitled to receive assuming the Conversion Shares are subject the redemption or repurchase.
 
ARTICLE IV

EVENTS OF DEFAULT

The occurrence of any of the following events shall constitute an event of default (“ Event of Default “):

4.1            Failure to Pay Principal or Interest .  The Company shall fail to pay the Principal, when due, or any interest or other sum when due under this Note.
 
4.2            Breach of Covenant or Representations and Warranties .  The Company breaches any covenant or other term or condition of the Transaction Documents (including but not limited to the conversion obligations in Article 2 ) in any material respect, which failure is not cured, if possible to cure, within five Business Days after the Company has become or should have become aware of such failure, or any representation or warranty of the Company made in Transaction Documents shall be false or misleading in any material respect as of the date hereof.
 
4.3            Failure to Close Note Exchange .  The Company and Keywin Holdings Limited (“ Keywin ”) fail to effect the exchange of the 3% Senior Secured Convertible Notes Due June 30, 2011 of the Company held by Keywin for shares of Common Stock in accordance with the terms of and pursuant to the Note Exchange and Option Agreement, dated April 2, 2009, by and between the Company and Keywin, by the date of this Note.

4.4            General Assignment .  The Company or any Subsidiary makes an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed.
 
 
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4.5            Bankruptcy .  Bankruptcy, insolvency, reorganization, or liquidation proceedings or other such proceedings or relief under any bankruptcy, insolvency or restructuring law or any law, or the issuance of any notice in relation to such event, shall be instituted by or against the Company or any Subsidiary.

4.6            Judgments .  Any judgment against the Company or any Subsidiary or any of their property or other assets with actual damages, net of insurance proceeds, in excess of $1,000,000 and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of thirty (30) calender days.

4.7            Delisting .  The Common Stock shall not be eligible for listing or quotation for trading on a Trading Market for a period of ten (10) consecutive trading days, and shall not be eligible to resume listing or quotation for trading thereon within thirty (30) trading days. As used in this Note, “ Trading Market ” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the OTC Bulletin Board, the New York Stock Exchange, NYSE Alternext U.S. (formerly known as the American Stock Exchange), the Nasdaq Global Market or the Nasdaq Capital Market.

4.8            Stop Trade .  Stop trade order imposed judicially or by the U.S. Securities and Exchange Commission or by the OTC Bulletin Board or other exchange trading suspension with respect to Company’s Common Stock and such stop order not being rectified and resumed within thirty (30) trading days.

4.9            Non-Registration .  The failure to timely file the registration statements covering the Conversion Shares in accordance with the Registration Rights Agreement.

4.10            Reservation Default .  Failure by the Company to have reserved for issuance upon conversion of this Note the amount of Common Stock as set forth in this Note and the Transaction Documents.

4.11            Cross Default .  A default by the Company or any of its Subsidiaries under any loan, mortgage, indenture, notes, debentures or any other instrument evidencing any indebtedness of the Company or any of its Subsidiaries in excess of $1,000,000, that results in acceleration of the maturity of such debt or liability, or failure to pay any such debt when due.

 
ARTICLE V
 
REDEMPTION
 
5.1            Optional Redemption Rights .  If there is an occurrence of any Event of Default hereunder, the Holder shall have the right, at its option, to require the Company to repurchase this Note (the “ Redemption Rights”) from the Holder for an aggregate purchase price in cash equal to 110% of the aggregate Principal and any accrued and unpaid interest (the “ Redemption Price ”).  
 
5.2            Redemption Procedures .  The Holder may exercise the Redemption Rights under Section 5.1 by delivering written notice to the Company (the “ Redemption Notice ”).  The Company shall pay the Holder the Redemption Price not later than thirty (30) Business Days after delivery of such Redemption Notice by the Holder (the “ Redemption Date ”), and this Note shall be immediately cancelled and retired.   If the Redemption Notice shall have been duly given, and if on the Redemption Date the Redemption Price payable upon repurchase of this Note is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor, then notwithstanding that this Note shall not have been surrendered by the Holder, interest with respect to this Note shall cease to accrue after the Redemption Date and all rights with respect to this Note (other than the right to receive the Redemption Price) shall forthwith after the Redemption Date terminate.
 
 
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5.3            Failure to Pay .  In the event that the Holder exercises the Redemption Rights and the Company does not have sufficient funds to pay the Redemption Price in full, this Note and the then outstanding Principal plus all accrued and unpaid interest thereon shall, notwithstanding the Holder’s surrender of this Note to the Company pursuant to Section 5.2 , remain outstanding until the date the Holder receives the Redemption Price in full and the Holder shall maintain all of its rights and remedies under this Note.  For the avoidance of doubt, interest on the Principal shall continue to accrue to the extent provided in Section 1.1 until the date the Holder receives the Redemption Price in full.
 
ARTICLE VI
 
STATUS OF NOTE
 
6.1            Status of Note .  Except for obligations arising from Permitted Liens, and subject to Section 6.2 below, the obligations of the Company under this Note shall rank senior to all indebtedness of the Company, whether now or hereinafter existing. “ Permitted Liens ” means the individual and collective reference to any: (a) Liens for taxes, assessments and other governmental charges or levies not yet due, or Liens for taxes, assessments and other governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Company) have been established in accordance with U.S. generally accepted accounting principals, consistently applied, and duly reflected in the Company’s financial statements; (b) Liens imposed by law which were incurred in the ordinary course of the Company’s business, such as carriers,’ warehousemen’s and mechanics’ liens, statutory landlords’ liens, and other similar liens arising in the ordinary course of the Company’s business, and which (i) do not individually or in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company and its consolidated Subsidiaries or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens incurred in connection with lease obligations, purchase money indebtedness of up to two million dollars ($2,000,000), in the aggregate, incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased assets, provided that such liens are not secured by assets of the Company or its Subsidiaries other than the assets so acquired or leased.

6.2            Unsecured Debt and Bank Loan Facilities .  Notwithstanding anything to the contrary in Section 6.1 above: (a) the Company may issue unsecured debt ranking pari passu with this Note so long as the maturity date (and any other repayment or prepayment date) for such new indebtedness or any other provision allowing for such indebtedness to be redeemed or put to the Company is later than the Maturity Date; and (b) the Company may enter into bank loan facilities that are senior to this Note.

6.3            Liquidation .  Upon any Liquidation Event, the Holder will be entitled to receive, before any distribution or payment is made upon, or set apart with respect to, any other indebtedness of the Company or any class of capital stock of the Company, an amount equal to the Principal plus all accrued and unpaid interest thereon.  For purposes of this Note, “ Liquidation Event ” means a liquidation pursuant to a filing of a petition for bankruptcy under applicable law or any other insolvency or debtor’s relief, an assignment for the benefit of creditors, or a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
 
 
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ARTICLE VII
 
MISCELLANEOUS
 
7.1            Non-Waiver and Other Remedies .  No course of dealing, failure or delay on the part of the Holder of this Note in exercising any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
 
7.2            Notices .  Any notice required or permitted pursuant to this Note shall be given in writing and shall be given either personally or by sending it by next-day or second-day courier service, fax, electronic mail or similar means to the address as shown below (or at such other address as such party may designate by fifteen (15) days’ advance written notice to the other parties to this Note given in accordance with this section):
 

If to the Holder:  
5 Harbourmaster Place, IFSC
Dublin 1, Ireland
Fax: +353-1-6806050
Attention: The Directors

with a copy to:

c/o Och-Ziff Capital Management HK Ltd
Suite 2003A Cheung Kong Center
2 Queen's Road Central
Hong Kong S.A.R.
Fax: +852-2297-0818
Attention: Zoltan Varga and David C. Zeiden

If to the Company:  
Network CN Inc.
Room 2120 & 2122, Leighton Center,
77 Leighton Road,
Causeway Bay, Hong Kong
Attention: Earnest Leung
Fax:  (852) 2833-8186

with a copy to (which shall not constitute notice):

Blank Rome LLP
Watergate 600 New Hampshire Avenue NW ,
Washington, DC 20037
Attention:  Scott C. Kline, Esq.
Fax: 202.572.8441

Where a notice is sent by next-day or second-day courier service, service of the notice shall be deemed to be effected by properly addressing, pre-paying and sending by next-day or second-day service through an internationally-recognized courier a letter containing the notice, with a confirmation of delivery, and to have been effected at the expiration of two (2) days after the letter containing the same is sent as aforesaid.  Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organization, with a written confirmation of delivery, and to have been effected on the day the same is sent as aforesaid.
 
 
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7.3            Assignability .  This Note shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns. Subject to applicable laws and regulations, this Note and all rights hereunder may be transferred or assigned in whole or in part by the Holder, and the Company shall assist the Holder in consummating any such transfer or assignment. The Company may not assign this Note without the consent of the Holder. A transfer of this Note may be effected only by a surrender hereof to the Company and the issuance by the Company of a new note or notes in replacement thereof, which shall be registered by the Company in accordance with Section 7.4 hereof once an executed copy of the replacement note has been executed by the transferee.

7.4            Transfer Register .  In the event of a transfer, the Company shall maintain a register (the “ Register ”) for the registration or transfer of this Note, and shall enter the names and addresses of the registered holders of this Note, the transfers of this Note and the names and addresses of the transferees of this Note.  The Company shall treat any registered holder as the absolute owner of this Note held by such holder, as indicated in the Register, for the purpose of receiving payment of all amounts payable with respect to this Note and for all other purposes.  The Note and the right, title, and interest of any person in and to such Note shall be transferable only upon notation of such transfer in the Register.  Solely for purposes of this Section 7.4 and for tax purposes only, the keeper of the Register, if it is not the Company, shall be the Company’s agent for purposes of maintaining the Register.  This Section 7.4 shall be construed so that this Note is at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the United States Internal Revenue Code (the “ Code ”) and any related regulations (and any other relevant or successor provisions of the Code or such regulations).

7.5            Collection Costs; Attorneys’ Fees .  If default is made in the payment of this Note, the Company shall be obligated to pay the Holder hereof reasonable costs of collection, including attorneys’ fees and, in addition, the Company and of any amendment or modification of any of the foregoing requested by the Company or arising following an Event of Default.
 
7.6            Governing Law; Rules of Construction .  THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE COMPANY HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
 
7.7            Consent to Jurisdiction and Service of Process .  ALL JUDICIAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK
 
7.8            Waiver of Jury Trial .  EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
 
 
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7.9            Usury Savings Clause .  This Note is subject to the express condition that at no time shall the Company be obligated or required to pay interest at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which Company is permitted by law to agree to pay.  If, by the terms of this Note, the Company is at any time required or obligated to pay interest on the outstanding balance at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and interest pay able hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall he deemed to have been payments in reduction of the outstanding balance.
 
7.10            United States Dollars .  All references to “$” or dollars in this Note shall refer to the currency of the United States.

7.11            Section Headings .  Section headings herein have been inserted for reference only and shall not be deemed to limit or otherwise affect, in any matter, or be deemed to interpret in whole or in part any of the terms or provisions of this Note.

*    *    *

[Remainder of Page Left Blank Intentionally]
 
 
 
 
 
 
 
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IN WITNESS WHEREOF, this Note has been executed and delivered on the date specified above by the duly authorized representative of the Company.
 


 
NETWORK CN INC.
 
       
       
 
By:
 
 
 
Name:
Earnest Leung
 
 
Title:
Chief Executive Officer
 
 
 
 
 
 
 
 
 

 
 
Exhibit A
 
NOTICE OF CONVERSION
 
The undersigned hereby elects to convert the following amount of the outstanding principal [and accrued and unpaid interest thereon] under that certain 1% Senior Unsecured Convertible Promissory Note, due April 1, 2014 of NETWORK CN INC., a Delaware corporation (the “ Company ”), into shares of Common Stock according to the conditions therein, as of the date written below.  No fee will be charged to the holder for any conversion.
 
Conversion calculation:
   
     
     
     
Date to Effect Conversion:  
   
     
     
     
Number of shares of Common Stock to be issued:
 
     
     
Shares of Common Stock to be issued in the name of:
[Insert name of Holder or its assignee]



HOLDER:          
 
   
   
 (Print Name of Holder)
 
     
By: 
   
Name:
   
Title:
   
 
 
 

 
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE “ACT”) OR UNDER THE SECURITIES LAWS OF ANY STATE.  THIS SECURITY MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (B) AN EXEMPTION OR QUALIFICATION UNDER APPLICABLE SECURITIES LAWS OR (C) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.  ANY ATTEMPT TO TRANSFER, SELL, PLEDGE OR HYPOTHECATE THIS SECURITY IN VIOLATION OF THESE RESTRICTIONS SHALL BE VOID.

1% SENIOR UNSECURED CONVERTIBLE NOTE

$2,243,000 April 2, 2012

FOR VALUE RECEIVED , NETWORK CN INC. , a Delaware corporation (the “ Company ”), hereby promises to pay to the order of SCULPTOR FINANCE (MD) IRELAND LIMITED, a company organized under the laws of the Republic of Ireland whose registered office is at 5 Harbourmaster Place, IFSC, Dublin 1, Ireland (the “ Holder ”), or its registered assigns or successors in interest or order, without demand, the sum of TWO MILLION TWO HUNDRED FORTY THREE THOUSAND US DOLLARS ($2,243,000) (the “ Principal ”), plus accrued and unpaid interest thereon on April 1, 2014 (the “ Maturity Date ”).

This 1% Senior Unsecured Convertible Note due 2014 of the Company (this “ Note ,” and together with the other 1% Senior Unsecured Convertible Note due 2014 of the Company, as they may hereafter be further amended, restated, supplemented or otherwise modified from time to time, the “ Notes ”) amends and restates in its entirety that certain 1% Senior Unsecured Convertible Note due 2012 of the Company issued April 2, 2009 and is subject to the Note Exchange Agreement, dated as of April 2, 2009, by and among the Company, the Holder and the other parties named therein (the “ Exchange Agreement ”).  The securities represented by this Note are also subject to a Registration Rights Agreement (the “ Registration Rights Agreement ”) and a Letter Agreement and Termination of Investor Rights Agreement (the “ Letter Agreement ,” and together with the Notes, the Exchange Agreement, the Registration Rights Agreement and the Letter Agreement, the “ Transaction Documents ”), each dated as of April 2, 2009, among the Company, the Holder and the other parties named therein.  The following terms shall apply to this Note:
 
ARTICLE I
 
INTEREST
 
1.1            Interest Rate .  The Company hereby agrees to pay interest to the Holder in respect of the outstanding Principal, at a per annum rate equal to one percent (1%) in cash.  Such interest shall accrue on the outstanding Principal from and after the date hereof, and shall be payable semi-annually in arrears with the first interest payment due on September 30, 2012 and succeeding interest payments due on the last Business Day of each  March and September thereafter (each, an “ Interest Payment Date ”). All computations of interest hereunder shall be made on the basis of a year of 365 days for the actual number of days (including the first but excluding the last day) occurring in the period for which such interest is payable. As used in this Note, “ Business Day ” means a day, excluding a Saturday, Sunday, legal holiday or other days on which banks are required to be closed in the People’s Republic of China, Hong Kong or New York.
 
 
 

 
 
1.2            Default Redemption .  Notwithstanding anything to the contrary herein, upon the occurrence and during the continuation of any Event of Default (as defined in Article 4 hereof), the Holder shall have the right, at its option, to require the Company to repurchase this Note (or any part thereof), in accordance with the terms set forth in Article 5 hereof.
 
1.3            No Prepayment .  The Company may not prepay all or any part of the amounts outstanding under this Note at any time without the express written consent of the Holder. For the avoidance of doubt, any redemption pursuant to Article 5 hereof shall not be deemed a prepayment.

1.4            Taxes .  Any and all payments by the Company to or for the account of the Holder under this Note shall be made free and clear of and without deduction for any taxes, except as required by applicable law.  If the Company shall be required by any applicable law to deduct any taxes from or in respect of any sum payable under this Note to the Holder, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to addi tional sums payable under this ‎ Section 1.4 ), the Holder receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) as promptly as practicable after the date of such payment, the Company shall furnish to the Holder the original or a certified copy of a receipt evidencing payment thereof.

ARTICLE II
 
CONVERSION
 
2.1            Note Conversion .  The Holder shall have the right, but not the obligation, to convert all or any part of the outstanding Principal of this Note, together with any accrued and unpaid interest thereon to the date of such conversion, into such number of fully paid and non-assessable shares of the Company’s common stock, par value US$0.001 per share (the “ Common Stock ”) or other securities of the Company as and if required pursuant to Section 2.3 (b), at any time and from time to time prior to the later of the Maturity Date or the date on which this Note is paid in full, subject to the terms and conditions set forth in this Article 2 , at a conversion price per share of Common Stock equal to US$0.09304 (the “ Conversion Price ”), as the same may be adjusted from time to time in accordance with this Note and as proportionally adjusted for any subdivision, consolidation, reclassification or similar event of the Common Stock) calculated in accordance with Section 2.3 .

2.2            Conversion Procedures
 
(a)           In the event that the Holder elects to convert this Note, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (a “ Notice of Conversion ”) to the Company, which Notice of Conversion shall provide a breakdown in reasonable detail of the Principal, accrued and unpaid interest amounts being converted and the name of the entity to be issued the Shares of Common Stock upon conversion.  The date specified in the Notice of Conversion, or if no date is specified, then the date of the delivery of the Notice of Conversion, shall be referred to as the “ Conversion Date .”  A form of Notice of Conversion to be employed by the Holder is annexed hereto as Exhibit A .
 
(b)           Pursuant to the terms of the Notice of Conversion, the Company shall deliver, or cause to be delivered, such number of Shares of Common Stock (or other securities of the Company as and if required pursuant to Section 2.3(b)) as determined pursuant to this Note (the “ Conversion Shares ”) via physical certificates to the Holder or its assignee (if and as designated in the Notice of Conversion and to the extent permitted by applicable securities laws). In the case of the exercise of the conversion rights set forth herein, the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the Conversion Date.  The Holder or its assignee (if and as designated in the Notice of Conversion) shall be treated for all purposes as the beneficial holder of such Conversion Shares, unless the Holder provides the Company written instructions to the contrary.  
 
 
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(c)           The number of Conversion Shares to be issued upon each conversion of this Note pursuant to this Article 2 shall be the quotient obtained by dividing the Principal and accrued interest by the then applicable Conversion Price.  No fractional shares of Common Stock shall be issued upon any conversion of this Note.  In lieu of the Company issuing any fractional shares to the Holder upon any conversion of this Note, the Company shall make an adjustment and payment in cash to the Holder.

(d)           The Company shall deliver or cause to be delivered certificates representing the Conversion Shares within seven (7) business days of the Conversion Date (the “ Certificate Delivery Date ”).  If the Holder has made a sale or transfer of any such Conversion Shares either pursuant to Rule 144 or pursuant to a registration statement and (1) the Company shall fail to deliver or cause to be delivered to the Holder by the Certificate Delivery Date, a certificate representing such Conversion Shares and (2) following the Certificate Delivery Date the Holder, or any third party on behalf of the Holder, purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of such Conversion Shares (a “Buy-In” ), then, the Company shall pay in cash to the Holder (for costs incurred either directly by such Holder or on behalf of a third party) the amount by which the total purchase price paid for Common Stock as a result of the Buy-In (including brokerage commissions, if any) exceed the proceeds received by such Holder as a result of the sale to which such Buy-In relates. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

2.3            Adjustment Events .  The Conversion Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:
 
(a)            Merger, Sale of Assets, etc .  If (i) the Company effects any merger or consolidation of the Company with or into another entity, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another entity) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (iv) the Company consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more persons or entities whereby such other persons or entities (such other persons or entities, the “ Purchasers ”) acquire more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the Purchasers or such other persons or entities associated or affiliated with the Purchasers), or (v) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common Stock of the Company (in any such case, a “ Fundamental Transaction ”), this Note, as to the Principal and accrued and unpaid interest thereon, shall thereafter, at the Holder’s election, be deemed to evidence the right to convert into such number and kind of shares or other securities and property as would have been issuable or distributable on account of such Fundamental Transaction, upon or with respect to the securities subject to the conversion right immediately prior to such Fundamental Transaction.  The foregoing provision shall similarly apply to successive Fundamental Transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the provisions of this Section 2.3 shall apply to such securities of such successor or purchaser after any such Fundamental Transaction.
 
 
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(b)            Reclassification, etc .  If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the Principal hereof and accrued and unpaid interest hereon, shall thereafter be deemed to evidence the right to convert into an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.
 
(c)            Stock Splits, Combinations and Dividends .  If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock (whether by a stock split or otherwise), or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.

(d)            Share Issuance .  So long as any amount of this Note is outstanding, if the Company shall issue any Equity-Linked Securities (as defined below), except for securities issued or issuable pursuant to an Exempt Issuance (as defined below), prior to the full conversion or payment of this Note, for a consideration that is less than the Conversion Price, then, and thereafter successively upon each such issuance, the Conversion Price shall be reduced to such other lower issue price.  For purposes of this Note, “ Equity-Linked Securities ” means any equity securities of the Company (including any Common Stock) and any equity-linked securities of the Company (including any instruments, warrants, options or rights to acquire any equity securities of the Company).  For purposes of this adjustment, the issuance of any Equity-Linked Securities shall result in an adjustment to the Conversion Price upon the issuance of such Equity-Linked Security, and again upon the issuance of shares of Common Stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than the then applicable Conversion Price.  For purposes of this Article 2 , “ Exempt Issuance ” shall mean (a) the issuance of shares of Common Stock to employees, consultants, service providers, officers or directors of the Company, pursuant to any other stock or option plan duly adopted for such purpose by the Company, up to an aggregate number of shares not to exceed twenty percent (20%) of the total outstanding Common Stock of the Company as determined as of the date hereof, (b) the issuance of securities upon the exercise or exchange of or conversion of any securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Note, provided that such securities have not been amended since the date of this Note to increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities, and (c) the issuance of securities to bona fide third party purchasers on an arm’s length basis.

(e)            Replacement Note .  In the event of any partial conversion of the outstanding Principal and any accrued and unpaid interest under this Note, the Holder agrees to surrender this Note to the Company and the Company shall issue to the Holder a replacement Note in the amount of the remaining Principal (and accrued and unpaid interest, if applicable) after giving effect to such partial conversion.

2.4            Notice as to Adjustments . Whenever the Conversion Price is adjusted pursuant to this Article 2 , the Company shall promptly mail to the Holder a notice setting forth the Conversion Price after such adjustment and setting forth a statement of the facts requiring such adjustment.
 
 
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2.5            Reservation and Registration .  The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note, free from all mortgages, charges, pledges, liens, hypothecations or other security interests (“ Liens ”), preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than the aggregate number of shares of the Common Stock as shall be issuable (taking into account the adjustments and restrictions of this Article 2 ) upon the conversion of this Note.  The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable and, pursuant to the Registration Rights Agreement, shall be registered for public sale in accordance therewith.  The Company agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note.
 
2.6            Transfer Taxes .  The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary, stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates.
 
ARTICLE III
 
COVENANTS
 
3.1            Affirmative Covenants of the Company .  The Company covenants and agrees that, so long as all or any of the Principal of this Note remains outstanding, it shall:
 
(a)           pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any properties belonging to it before the same shall be in default; provided, however, that the Company shall not be required to pay any such tax, assessment, charge or levy which is being contested in good faith by proper proceedings and adequate reserves for the accrual of same are maintained if required by generally accepted accounting principles;
 
(b)           preserve its corporate existence and continue to engage in business of the same general type as conducted as of the date hereof; and
 
(c)           comply in all respects with all statutes, laws, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements (the “ Requirement(s) ”) of all governmental bodies, departments, commissions, boards, companies or associates insuring the premises, courts, authorities, officials, or officers, which are applicable to the Company or its property; except wherein the failure to comply would not have a materially adverse on (i)   the business, property, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or (ii) the ability of the Company to perform its obligations under this Note, the Exchange Agreement, the Registration Rights Agreement or the Letter Agreement (collectively, the “ Transaction Documents ”); provided that nothing contained herein shall prevent the Company from contesting the validity or the application of any Requirements. As used in this Note, “ Subsidiary ” means, with respect to a person, any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity of which at least a majority of the total voting power of the voting stock is at the time owned or controlled, directly or indirectly, by such person, and, in respect of the Company, shall also include any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity from time to time organized and existing under the laws of the People’s Republic of China whose financial reporting is consolidated with the Company in any audited financial statements filed by the Company with the Commission in accordance with the Securities and Exchange of 1934 as amended, together with the rules and regulations promulgated thereunder from time to time in effect.
 
 
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3.2            Negative Covenants of the Company .  The Company covenants that so long as all or any of the Principal of this Note remains outstanding, it shall not, and shall ensure that none of its Subsidiaries shall, without the prior written consent of the holders of a majority of the principal amount of the Notes:
 
(a)            Charter Documents .  Except with respect to any amendment of the Company’s certificate of incorporation to implement a reverse stock split and increase or decrease the authorized shares of the Company; modify, alter, repeal or amend the Company’s certificate of incorporation, by-laws or other organizational documents or effect any change of legal form of the Company; provided, however, that the number of Conversion Shares issuable hereunder shall be adjusted to prevent the dilution of such shares in the event of a reverse stock split as contemplated under Section 2.3(c) hereof;
 
(b)            Dividends .  Declare or pay dividends or other distributions by the Company or any of its Subsidiaries in respect of the equity securities of such entity other than dividends or distributions of cash which amounts during any 12-month period that do not exceed ten percent (10%) of the consolidated net income of the Company based on the Company’s most recent audited financial statements disclosed in the Company’s annual report on Form 10-K (or equivalent form) filed with the U.S. Securities and Exchange Commission.
 
(c)            Redemptions or Repurchases .  Except for any redemption pursuant to Article V hereof, redeem or repurchase shares of Common Stock or any other securities of the Company unless the Holders shall have first received, in respect of the Notes or the Conversion Shares, an amount in cash equal to the greater of (i) the Redemption Price and (ii) the amounts the Holders would be entitled to receive assuming the Conversion Shares are subject the redemption or repurchase.
 
ARTICLE IV

EVENTS OF DEFAULT

The occurrence of any of the following events shall constitute an event of default (“ Event of Default “):

4.1            Failure to Pay Principal or Interest .  The Company shall fail to pay the Principal, when due, or any interest or other sum when due under this Note.
 
4.2            Breach of Covenant or Representations and Warranties .  The Company breaches any covenant or other term or condition of the Transaction Documents (including but not limited to the conversion obligations in Article 2 ) in any material respect, which failure is not cured, if possible to cure, within five Business Days after the Company has become or should have become aware of such failure, or any representation or warranty of the Company made in Transaction Documents shall be false or misleading in any material respect as of the date hereof.
 
4.3            Failure to Close Note Exchange .  The Company and Keywin Holdings Limited (“ Keywin ”) fail to effect the exchange of the 3% Senior Secured Convertible Notes Due June 30, 2011 of the Company held by Keywin for shares of Common Stock in accordance with the terms of and pursuant to the Note Exchange and Option Agreement, dated April 2, 2009, by and between the Company and Keywin, by the date of this Note.

4.4            General Assignment .  The Company or any Subsidiary makes an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed.
 
 
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4.5            Bankruptcy .  Bankruptcy, insolvency, reorganization, or liquidation proceedings or other such proceedings or relief under any bankruptcy, insolvency or restructuring law or any law, or the issuance of any notice in relation to such event, shall be instituted by or against the Company or any Subsidiary.

4.6            Judgments .  Any judgment against the Company or any Subsidiary or any of their property or other assets with actual damages, net of insurance proceeds, in excess of $1,000,000 and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of thirty (30) calender days.

4.7            Delisting .  The Common Stock shall not be eligible for listing or quotation for trading on a Trading Market for a period of ten (10) consecutive trading days, and shall not be eligible to resume listing or quotation for trading thereon within thirty (30) trading days. As used in this Note, “ Trading Market ” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the OTC Bulletin Board, the New York Stock Exchange, NYSE Alternext U.S. (formerly known as the American Stock Exchange), the Nasdaq Global Market or the Nasdaq Capital Market.

4.8            Stop Trade .  Stop trade order imposed judicially or by the U.S. Securities and Exchange Commission or by the OTC Bulletin Board or other exchange trading suspension with respect to Company’s Common Stock and such stop order not being rectified and resumed within thirty (30) trading days.

4.9            Non-Registration .  The failure to timely file the registration statements covering the Conversion Shares in accordance with the Registration Rights Agreement.

4.10           Reservation Default .  Failure by the Company to have reserved for issuance upon conversion of this Note the amount of Common Stock as set forth in this Note and the Transaction Documents.

4.11           Cross Default .  A default by the Company or any of its Subsidiaries under any loan, mortgage, indenture, notes, debentures or any other instrument evidencing any indebtedness of the Company or any of its Subsidiaries in excess of $1,000,000, that results in acceleration of the maturity of such debt or liability, or failure to pay any such debt when due.
 
ARTICLE V
 
REDEMPTION
 
5.1            Optional Redemption Rights .  If there is an occurrence of any Event of Default hereunder, the Holder shall have the right, at its option, to require the Company to repurchase this Note (the “ Redemption Rights”) from the Holder for an aggregate purchase price in cash equal to 110% of the aggregate Principal and any accrued and unpaid interest (the “ Redemption Price ”).  
 
5.2            Redemption Procedures .  The Holder may exercise the Redemption Rights under Section 5.1 by delivering written notice to the Company (the “ Redemption Notice ”).  The Company shall pay the Holder the Redemption Price not later than thirty (30) Business Days after delivery of such Redemption Notice by the Holder (the “ Redemption Date ”), and this Note shall be immediately cancelled and retired.   If the Redemption Notice shall have been duly given, and if on the Redemption Date the Redemption Price payable upon repurchase of this Note is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor, then notwithstanding that this Note shall not have been surrendered by the Holder, interest with respect to this Note shall cease to accrue after the Redemption Date and all rights with respect to this Note (other than the right to receive the Redemption Price) shall forthwith after the Redemption Date terminate.
 
 
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5.3            Failure to Pay .  In the event that the Holder exercises the Redemption Rights and the Company does not have sufficient funds to pay the Redemption Price in full, this Note and the then outstanding Principal plus all accrued and unpaid interest thereon shall, notwithstanding the Holder’s surrender of this Note to the Company pursuant to Section 5.2 , remain outstanding until the date the Holder receives the Redemption Price in full and the Holder shall maintain all of its rights and remedies under this Note.  For the avoidance of doubt, interest on the Principal shall continue to accrue to the extent provided in Section 1.1 until the date the Holder receives the Redemption Price in full.
 
ARTICLE VI
 
STATUS OF NOTE
 
6.1            Status of Note .  Except for obligations arising from Permitted Liens, and subject to Section 6.2 below, the obligations of the Company under this Note shall rank senior to all indebtedness of the Company, whether now or hereinafter existing. “ Permitted Liens ” means the individual and collective reference to any: (a) Liens for taxes, assessments and other governmental charges or levies not yet due, or Liens for taxes, assessments and other governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Company) have been established in accordance with U.S. generally accepted accounting principals, consistently applied, and duly reflected in the Company’s financial statements; (b) Liens imposed by law which were incurred in the ordinary course of the Company’s business, such as carriers,’ warehousemen’s and mechanics’ liens, statutory landlords’ liens, and other similar liens arising in the ordinary course of the Company’s business, and which (i) do not individually or in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company and its consolidated Subsidiaries or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens incurred in connection with lease obligations, purchase money indebtedness of up to two million dollars ($2,000,000), in the aggregate, incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased assets, provided that such liens are not secured by assets of the Company or its Subsidiaries other than the assets so acquired or leased.

6.2            Unsecured Debt and Bank Loan Facilities .  Notwithstanding anything to the contrary in Section 6.1 above: (a) the Company may issue unsecured debt ranking pari passu with this Note so long as the maturity date (and any other repayment or prepayment date) for such new indebtedness or any other provision allowing for such indebtedness to be redeemed or put to the Company is later than the Maturity Date; and (b) the Company may enter into bank loan facilities that are senior to this Note.

6.3            Liquidation .  Upon any Liquidation Event, the Holder will be entitled to receive, before any distribution or payment is made upon, or set apart with respect to, any other indebtedness of the Company or any class of capital stock of the Company, an amount equal to the Principal plus all accrued and unpaid interest thereon.  For purposes of this Note, “ Liquidation Event ” means a liquidation pursuant to a filing of a petition for bankruptcy under applicable law or any other insolvency or debtor’s relief, an assignment for the benefit of creditors, or a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
 
 
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ARTICLE VII
 
MISCELLANEOUS
 
7.1            Non-Waiver and Other Remedies .  No course of dealing, failure or delay on the part of the Holder of this Note in exercising any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
 
7.2            Notices .  Any notice required or permitted pursuant to this Note shall be given in writing and shall be given either personally or by sending it by next-day or second-day courier service, fax, electronic mail or similar means to the address as shown below (or at such other address as such party may designate by fifteen (15) days’ advance written notice to the other parties to this Note given in accordance with this section):
 
If to the Holder:  
5 Harbourmaster Place, IFSC
Dublin 1, Ireland
Fax: +353-1-6806050
Attention: The Directors

with a copy to:

c/o Och-Ziff Capital Management HK Ltd
Suite 2003A Cheung Kong Center
2 Queen's Road Central
Hong Kong S.A.R.
Fax: +852-2297-0818
Attention: Zoltan Varga and David C. Zeiden

If to the Company: 
Network CN Inc.
Room 2120 & 2122, Leighton Center,
77 Leighton Road,
Causeway Bay, Hong Kong
Attention: Earnest Leung
Fax:  (852) 2833-8186

with a copy to (which shall not constitute notice):

Blank Rome LLP
Watergate 600 New Hampshire Avenue NW ,
Washington, DC 20037
Attention:  Scott C. Kline, Esq.
Fax: 202.572.8441

Where a notice is sent by next-day or second-day courier service, service of the notice shall be deemed to be effected by properly addressing, pre-paying and sending by next-day or second-day service through an internationally-recognized courier a letter containing the notice, with a confirmation of delivery, and to have been effected at the expiration of two (2) days after the letter containing the same is sent as aforesaid.  Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organization, with a written confirmation of delivery, and to have been effected on the day the same is sent as aforesaid.
 
 
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7.3            Assignability .  This Note shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns. Subject to applicable laws and regulations, this Note and all rights hereunder may be transferred or assigned in whole or in part by the Holder, and the Company shall assist the Holder in consummating any such transfer or assignment. The Company may not assign this Note without the consent of the Holder. A transfer of this Note may be effected only by a surrender hereof to the Company and the issuance by the Company of a new note or notes in replacement thereof, which shall be registered by the Company in accordance with Section 7.4 hereof once an executed copy of the replacement note has been executed by the transferee.

7.4            Transfer Register .  In the event of a transfer, the Company shall maintain a register (the “ Register ”) for the registration or transfer of this Note, and shall enter the names and addresses of the registered holders of this Note, the transfers of this Note and the names and addresses of the transferees of this Note.  The Company shall treat any registered holder as the absolute owner of this Note held by such holder, as indicated in the Register, for the purpose of receiving payment of all amounts payable with respect to this Note and for all other purposes.  The Note and the right, title, and interest of any person in and to such Note shall be transferable only upon notation of such transfer in the Register.  Solely for purposes of this Section 7.4 and for tax purposes only, the keeper of the Register, if it is not the Company, shall be the Company’s agent for purposes of maintaining the Register.  This Section 7.4 shall be construed so that this Note is at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the United States Internal Revenue Code (the “ Code ”) and any related regulations (and any other relevant or successor provisions of the Code or such regulations).

7.5            Collection Costs; Attorneys’ Fees .  If default is made in the payment of this Note, the Company shall be obligated to pay the Holder hereof reasonable costs of collection, including attorneys’ fees and, in addition, the Company and of any amendment or modification of any of the foregoing requested by the Company or arising following an Event of Default.
 
7.6            Governing Law; Rules of Construction .  THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE COMPANY HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
 
7.7            Consent to Jurisdiction and Service of Process .  ALL JUDICIAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK
 
7.8            Waiver of Jury Trial .  EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
 
 
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7.9            Usury Savings Clause .  This Note is subject to the express condition that at no time shall the Company be obligated or required to pay interest at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which Company is permitted by law to agree to pay.  If, by the terms of this Note, the Company is at any time required or obligated to pay interest on the outstanding balance at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and interest pay able hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall he deemed to have been payments in reduction of the outstanding balance.
 
7.10            United States Dollars .  All references to “$” or dollars in this Note shall refer to the currency of the United States.

7.11            Section Headings .  Section headings herein have been inserted for reference only and shall not be deemed to limit or otherwise affect, in any matter, or be deemed to interpret in whole or in part any of the terms or provisions of this Note.

*    *    *

[Remainder of Page Left Blank Intentionally]
 
 
 
 
 
 
 
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IN WITNESS WHEREOF, this Note has been executed and delivered on the date specified above by the duly authorized representative of the Company.
 


 
NETWORK CN INC.
 
       
       
 
By:
 
 
 
Name:
Earnest Leung
 
 
Title:
Chief Executive Officer
 
 
 
 
 
 
 
 
 

 
 
Exhibit A
 
NOTICE OF CONVERSION
 
The undersigned hereby elects to convert the following amount of the outstanding principal [and accrued and unpaid interest thereon] under that certain 1% Senior Unsecured Convertible Promissory Note, due April 1, 2014 of NETWORK CN INC., a Delaware corporation (the “ Company ”), into shares of Common Stock according to the conditions therein, as of the date written below.  No fee will be charged to the holder for any conversion.
 
Conversion calculation:
   
     
     
     
Date to Effect Conversion:  
   
     
     
     
Number of shares of Common Stock to be issued:
 
     
     
Shares of Common Stock to be issued in the name of:
[Insert name of Holder or its assignee]



HOLDER:          
 
   
   
 (Print Name of Holder)
 
     
By: 
   
Name:
   
Title:
   
 
 
 

 
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (AS AMENDED, THE “ACT”) OR UNDER THE SECURITIES LAWS OF ANY STATE.  THIS SECURITY MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (B) AN EXEMPTION OR QUALIFICATION UNDER APPLICABLE SECURITIES LAWS OR (C) AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.  ANY ATTEMPT TO TRANSFER, SELL, PLEDGE OR HYPOTHECATE THIS SECURITY IN VIOLATION OF THESE RESTRICTIONS SHALL BE VOID.

1% SENIOR UNSECURED CONVERTIBLE NOTE

$646,000
April 2, 2012

FOR VALUE RECEIVED , NETWORK CN INC. , a Delaware corporation (the “ Company ”), hereby promises to pay to the order of SCULPTOR FINANCE (SI) IRELAND LIMITED, a company organized under the laws of the Republic of Ireland whose registered office is at 5 Harbourmaster Place, IFSC, Dublin 1, Ireland (the “ Holder ”), or its registered assigns or successors in interest or order, without demand, the sum of SIX HUNDRED FORTY SIX THOUSAND US DOLLARS ($646,000) (the “ Principal ”), plus accrued and unpaid interest thereon on April 1, 2014 (the “ Maturity Date ”).

This 1% Senior Unsecured Convertible Note due 2014 of the Company (this “ Note ,” and together with the other 1% Senior Unsecured Convertible Note due 2014 of the Company, as they may hereafter be further amended, restated, supplemented or otherwise modified from time to time, the “ Notes ”) amends and restates in its entirety that certain 1% Senior Unsecured Convertible Note due 2012 of the Company issued April 2, 2009 and is subject to the Note Exchange Agreement, dated as of April 2, 2009, by and among the Company, the Holder and the other parties named therein (the “ Exchange Agreement ”).  The securities represented by this Note are also subject to a Registration Rights Agreement (the “ Registration Rights Agreement ”) and a Letter Agreement and Termination of Investor Rights Agreement (the “ Letter Agreement ,” and together with the Notes, the Exchange Agreement, the Registration Rights Agreement and the Letter Agreement, the “ Transaction Documents ”), each dated as of April 2, 2009, among the Company, the Holder and the other parties named therein.  The following terms shall apply to this Note:
 
ARTICLE I
 
INTEREST
 
1.1            Interest Rate .  The Company hereby agrees to pay interest to the Holder in respect of the outstanding Principal, at a per annum rate equal to one percent (1%) in cash.  Such interest shall accrue on the outstanding Principal from and after the date hereof, and shall be payable semi-annually in arrears with the first interest payment due on September 30, 2012 and succeeding interest payments due on the last Business Day of each  March and September thereafter (each, an “ Interest Payment Date ”). All computations of interest hereunder shall be made on the basis of a year of 365 days for the actual number of days (including the first but excluding the last day) occurring in the period for which such interest is payable. As used in this Note, “ Business Day ” means a day, excluding a Saturday, Sunday, legal holiday or other days on which banks are required to be closed in the People’s Republic of China, Hong Kong or New York.
 
 
 

 
 
1.2            Default Redemption .  Notwithstanding anything to the contrary herein, upon the occurrence and during the continuation of any Event of Default (as defined in Article 4 hereof), the Holder shall have the right, at its option, to require the Company to repurchase this Note (or any part thereof), in accordance with the terms set forth in Article 5 hereof.
 
1.3            No Prepayment .  The Company may not prepay all or any part of the amounts outstanding under this Note at any time without the express written consent of the Holder. For the avoidance of doubt, any redemption pursuant to Article 5 hereof shall not be deemed a prepayment.

1.4            Taxes .  Any and all payments by the Company to or for the account of the Holder under this Note shall be made free and clear of and without deduction for any taxes, except as required by applicable law.  If the Company shall be required by any applicable law to deduct any taxes from or in respect of any sum payable under this Note to the Holder, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payab le under this ‎ Section 1.4 ), the Holder receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) as promptly as practicable after the date of such payment, the Company shall furnish to the Holder the original or a certified copy of a receipt evidencing payment thereof.

ARTICLE II
 
CONVERSION
 
2.1            Note Conversion .  The Holder shall have the right, but not the obligation, to convert all or any part of the outstanding Principal of this Note, together with any accrued and unpaid interest thereon to the date of such conversion, into such number of fully paid and non-assessable shares of the Company’s common stock, par value US$0.001 per share (the “ Common Stock ”) or other securities of the Company as and if required pursuant to Section 2.3 (b), at any time and from time to time prior to the later of the Maturity Date or the date on which this Note is paid in full, subject to the terms and conditions set forth in this Article 2 , at a conversion price per share of Common Stock equal to US$0.09304 (the “ Conversion Price ”), as the same may be adjusted from time to time in accordance with this Note and as proportionally adjusted for any subdivision, consolidation, reclassification or similar event of the Common Stock) calculated in accordance with Section 2.3 .

2.2            Conversion Procedures
 
(a)           In the event that the Holder elects to convert this Note, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (a “ Notice of Conversion ”) to the Company, which Notice of Conversion shall provide a breakdown in reasonable detail of the Principal, accrued and unpaid interest amounts being converted and the name of the entity to be issued the Shares of Common Stock upon conversion.  The date specified in the Notice of Conversion, or if no date is specified, then the date of the delivery of the Notice of Conversion, shall be referred to as the “ Conversion Date .”  A form of Notice of Conversion to be employed by the Holder is annexed hereto as Exhibit A .
 
(b)           Pursuant to the terms of the Notice of Conversion, the Company shall deliver, or cause to be delivered, such number of Shares of Common Stock (or other securities of the Company as and if required pursuant to Section 2.3(b)) as determined pursuant to this Note (the “ Conversion Shares ”) via physical certificates to the Holder or its assignee (if and as designated in the Notice of Conversion and to the extent permitted by applicable securities laws). In the case of the exercise of the conversion rights set forth herein, the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the Conversion Date.  The Holder or its assignee (if and as designated in the Notice of Conversion) shall be treated for all purposes as the beneficial holder of such Conversion Shares, unless the Holder provides the Company written instructions to the contrary.  
 
 
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(c)           The number of Conversion Shares to be issued upon each conversion of this Note pursuant to this Article 2 shall be the quotient obtained by dividing the Principal and accrued interest by the then applicable Conversion Price.  No fractional shares of Common Stock shall be issued upon any conversion of this Note.  In lieu of the Company issuing any fractional shares to the Holder upon any conversion of this Note, the Company shall make an adjustment and payment in cash to the Holder.

(d)           The Company shall deliver or cause to be delivered certificates representing the Conversion Shares within seven (7) business days of the Conversion Date (the “ Certificate Delivery Date ”).  If the Holder has made a sale or transfer of any such Conversion Shares either pursuant to Rule 144 or pursuant to a registration statement and (1) the Company shall fail to deliver or cause to be delivered to the Holder by the Certificate Delivery Date, a certificate representing such Conversion Shares and (2) following the Certificate Delivery Date the Holder, or any third party on behalf of the Holder, purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of such Conversion Shares (a “Buy-In” ), then, the Company shall pay in cash to the Holder (for costs incurred either directly by such Holder or on behalf of a third party) the amount by which the total purchase price paid for Common Stock as a result of the Buy-In (including brokerage commissions, if any) exceed the proceeds received by such Holder as a result of the sale to which such Buy-In relates. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

2.3            Adjustment Events .  The Conversion Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:
 
(a)            Merger, Sale of Assets, etc .  If (i) the Company effects any merger or consolidation of the Company with or into another entity, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another entity) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (iv) the Company consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more persons or entities whereby such other persons or entities (such other persons or entities, the “ Purchasers ”) acquire more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the Purchasers or such other persons or entities associated or affiliated with the Purchasers), or (v) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common Stock of the Company (in any such case, a “ Fundamental Transaction ”), this Note, as to the Principal and accrued and unpaid interest thereon, shall thereafter, at the Holder’s election, be deemed to evidence the right to convert into such number and kind of shares or other securities and property as would have been issuable or distributable on account of such Fundamental Transaction, upon or with respect to the securities subject to the conversion right immediately prior to such Fundamental Transaction.  The foregoing provision shall similarly apply to successive Fundamental Transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the provisions of this Section 2.3 shall apply to such securities of such successor or purchaser after any such Fundamental Transaction.
 
 
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(b)            Reclassification, etc .  If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the Principal hereof and accrued and unpaid interest hereon, shall thereafter be deemed to evidence the right to convert into an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.
 
(c)            Stock Splits, Combinations and Dividends .  If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock (whether by a stock split or otherwise), or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.

(d)            Share Issuance .  So long as any amount of this Note is outstanding, if the Company shall issue any Equity-Linked Securities (as defined below), except for securities issued or issuable pursuant to an Exempt Issuance (as defined below), prior to the full conversion or payment of this Note, for a consideration that is less than the Conversion Price, then, and thereafter successively upon each such issuance, the Conversion Price shall be reduced to such other lower issue price.  For purposes of this Note, “ Equity-Linked Securities ” means any equity securities of the Company (including any Common Stock) and any equity-linked securities of the Company (including any instruments, warrants, options or rights to acquire any equity securities of the Company).  For purposes of this adjustment, the issuance of any Equity-Linked Securities shall result in an adjustment to the Conversion Price upon the issuance of such Equity-Linked Security, and again upon the issuance of shares of Common Stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than the then applicable Conversion Price.  For purposes of this Article 2 , “ Exempt Issuance ” shall mean (a) the issuance of shares of Common Stock to employees, consultants, service providers, officers or directors of the Company, pursuant to any other stock or option plan duly adopted for such purpose by the Company, up to an aggregate number of shares not to exceed twenty percent (20%) of the total outstanding Common Stock of the Company as determined as of the date hereof, (b) the issuance of securities upon the exercise or exchange of or conversion of any securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Note, provided that such securities have not been amended since the date of this Note to increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities, and (c) the issuance of securities to bona fide third party purchasers on an arm’s length basis.

(e)            Replacement Note .  In the event of any partial conversion of the outstanding Principal and any accrued and unpaid interest under this Note, the Holder agrees to surrender this Note to the Company and the Company shall issue to the Holder a replacement Note in the amount of the remaining Principal (and accrued and unpaid interest, if applicable) after giving effect to such partial conversion.

2.4            Notice as to Adjustments . Whenever the Conversion Price is adjusted pursuant to this Article 2 , the Company shall promptly mail to the Holder a notice setting forth the Conversion Price after such adjustment and setting forth a statement of the facts requiring such adjustment.
 
 
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2.5            Reservation and Registration .  The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note, free from all mortgages, charges, pledges, liens, hypothecations or other security interests (“ Liens ”), preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than the aggregate number of shares of the Common Stock as shall be issuable (taking into account the adjustments and restrictions of this Article 2 ) upon the conversion of this Note.  The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable and, pursuant to the Registration Rights Agreement, shall be registered for public sale in accordance therewith.  The Company agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note.
 
2.6            Transfer Taxes .  The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary, stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates.
 
ARTICLE III
 
COVENANTS
 
3.1            Affirmative Covenants of the Company .  The Company covenants and agrees that, so long as all or any of the Principal of this Note remains outstanding, it shall:
 
(a)           pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any properties belonging to it before the same shall be in default; provided, however, that the Company shall not be required to pay any such tax, assessment, charge or levy which is being contested in good faith by proper proceedings and adequate reserves for the accrual of same are maintained if required by generally accepted accounting principles;
 
(b)           preserve its corporate existence and continue to engage in business of the same general type as conducted as of the date hereof; and
 
(c)           comply in all respects with all statutes, laws, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements (the “ Requirement(s) ”) of all governmental bodies, departments, commissions, boards, companies or associates insuring the premises, courts, authorities, officials, or officers, which are applicable to the Company or its property; except wherein the failure to comply would not have a materially adverse on (i)   the business, property, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or (ii) the ability of the Company to perform its obligations under this Note, the Exchange Agreement, the Registration Rights Agreement or the Letter Agreement (collectively, the “ Transaction Documents ”); provided that nothing contained herein shall prevent the Company from contesting the validity or the application of any Requirements. As used in this Note, “ Subsidiary ” means, with respect to a person, any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity of which at least a majority of the total voting power of the voting stock is at the time owned or controlled, directly or indirectly, by such person, and, in respect of the Company, shall also include any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity from time to time organized and existing under the laws of the People’s Republic of China whose financial reporting is consolidated with the Company in any audited financial statements filed by the Company with the Commission in accordance with the Securities and Exchange of 1934 as amended, together with the rules and regulations promulgated thereunder from time to time in effect.
 
3.2            Negative Covenants of the Company .  The Company covenants that so long as all or any of the Principal of this Note remains outstanding, it shall not, and shall ensure that none of its Subsidiaries shall, without the prior written consent of the holders of a majority of the principal amount of the Notes:
 
 
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(a)            Charter Documents .  Except with respect to any amendment of the Company’s certificate of incorporation to implement a reverse stock split and increase or decrease the authorized shares of the Company; modify, alter, repeal or amend the Company’s certificate of incorporation, by-laws or other organizational documents or effect any change of legal form of the Company; provided, however, that the number of Conversion Shares issuable hereunder shall be adjusted to prevent the dilution of such shares in the event of a reverse stock split as contemplated under Section 2.3(c) hereof;
 
(b)            Dividends .  Declare or pay dividends or other distributions by the Company or any of its Subsidiaries in respect of the equity securities of such entity other than dividends or distributions of cash which amounts during any 12-month period that do not exceed ten percent (10%) of the consolidated net income of the Company based on the Company’s most recent audited financial statements disclosed in the Company’s annual report on Form 10-K (or equivalent form) filed with the U.S. Securities and Exchange Commission.
 
(c)            Redemptions or Repurchases .  Except for any redemption pursuant to Article V hereof, redeem or repurchase shares of Common Stock or any other securities of the Company unless the Holders shall have first received, in respect of the Notes or the Conversion Shares, an amount in cash equal to the greater of (i) the Redemption Price and (ii) the amounts the Holders would be entitled to receive assuming the Conversion Shares are subject the redemption or repurchase.
 
ARTICLE IV

EVENTS OF DEFAULT

The occurrence of any of the following events shall constitute an event of default (“ Event of Default “):

4.1            Failure to Pay Principal or Interest .  The Company shall fail to pay the Principal, when due, or any interest or other sum when due under this Note.
 
4.2            Breach of Covenant or Representations and Warranties .  The Company breaches any covenant or other term or condition of the Transaction Documents (including but not limited to the conversion obligations in Article 2 ) in any material respect, which failure is not cured, if possible to cure, within five Business Days after the Company has become or should have become aware of such failure, or any representation or warranty of the Company made in Transaction Documents shall be false or misleading in any material respect as of the date hereof.
 
4.3            Failure to Close Note Exchange .  The Company and Keywin Holdings Limited (“ Keywin ”) fail to effect the exchange of the 3% Senior Secured Convertible Notes Due June 30, 2011 of the Company held by Keywin for shares of Common Stock in accordance with the terms of and pursuant to the Note Exchange and Option Agreement, dated April 2, 2009, by and between the Company and Keywin, by the date of this Note .

4.4             General Assignment .  The Company or any Subsidiary makes an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for them or for a substantial part of their property or business; or such a receiver or trustee shall otherwise be appointed.
 
 
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4.5            Bankruptcy .  Bankruptcy, insolvency, reorganization, or liquidation proceedings or other such proceedings or relief under any bankruptcy, insolvency or restructuring law or any law, or the issuance of any notice in relation to such event, shall be instituted by or against the Company or any Subsidiary.

4.6            Judgments .  Any judgment against the Company or any Subsidiary or any of their property or other assets with actual damages, net of insurance proceeds, in excess of $1,000,000 and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of thirty (30) calender days.

4.7           Delisting.  The Common Stock shall not be eligible for listing or quotation for trading on a Trading Market for a period of ten (10) consecutive trading days, and shall not be eligible to resume listing or quotation for trading thereon within thirty (30) trading days. As used in this Note, “Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the OTC Bulletin Board, the New York Stock Exchange, NYSE Alternext U.S. (formerly known as the American Stock Exchange), the Nasdaq Global Market or the Nasdaq Capital Market.

4.8            Stop Trade .  Stop trade order imposed judicially or by the U.S. Securities and Exchange Commission or by the OTC Bulletin Board or other exchange trading suspension with respect to Company’s Common Stock and such stop order not being rectified and resumed within thirty (30) trading days.

4.9            Non-Registration .  The failure to timely file the registration statements covering the Conversion Shares in accordance with the Registration Rights Agreement.

4.10           Reservation Default .  Failure by the Company to have reserved for issuance upon conversion of this Note the amount of Common Stock as set forth in this Note and the Transaction Documents.

4.11           Cross Default .  A default by the Company or any of its Subsidiaries under any loan, mortgage, indenture, notes, debentures or any other instrument evidencing any indebtedness of the Company or any of its Subsidiaries in excess of $1,000,000, that results in acceleration of the maturity of such debt or liability, or failure to pay any such debt when due.

 
ARTICLE V
 
REDEMPTION
 
5.1            Optional Redemption Rights .  If there is an occurrence of any Event of Default hereunder, the Holder shall have the right, at its option, to require the Company to repurchase this Note (the “ Redemption Rights”) from the Holder for an aggregate purchase price in cash equal to 110% of the aggregate Principal and any accrued and unpaid interest (the “ Redemption Price ”).  
 
5.2            Redemption Procedures .  The Holder may exercise the Redemption Rights under Section 5.1 by delivering written notice to the Company (the “ Redemption Notice ”).  The Company shall pay the Holder the Redemption Price not later than thirty (30) Business Days after delivery of such Redemption Notice by the Holder (the “ Redemption Date ”), and this Note shall be immediately cancelled and retired.   If the Redemption Notice shall have been duly given, and if on the Redemption Date the Redemption Price payable upon repurchase of this Note is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor, then notwithstanding that this Note shall not have been surrendered by the Holder, interest with respect to this Note shall cease to accrue after the Redemption Date and all rights with respect to this Note (other than the right to receive the Redemption Price) shall forthwith after the Redemption Date terminate.
 
 
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5.3            Failure to Pay .  In the event that the Holder exercises the Redemption Rights and the Company does not have sufficient funds to pay the Redemption Price in full, this Note and the then outstanding Principal plus all accrued and unpaid interest thereon shall, notwithstanding the Holder’s surrender of this Note to the Company pursuant to Section 5.2 , remain outstanding until the date the Holder receives the Redemption Price in full and the Holder shall maintain all of its rights and remedies under this Note.  For the avoidance of doubt, interest on the Principal shall continue to accrue to the extent provided in Section 1.1 until the date the Holder receives the Redemption Price in full.
 
ARTICLE VI
 
STATUS OF NOTE
 
6.1            Status of Note .  Except for obligations arising from Permitted Liens, and subject to Section 6.2 below, the obligations of the Company under this Note shall rank senior to all indebtedness of the Company, whether now or hereinafter existing. “ Permitted Liens ” means the individual and collective reference to any: (a) Liens for taxes, assessments and other governmental charges or levies not yet due, or Liens for taxes, assessments and other governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Company) have been established in accordance with U.S. generally accepted accounting principals, consistently applied, and duly reflected in the Company’s financial statements; (b) Liens imposed by law which were incurred in the ordinary course of the Company’s business, such as carriers,’ warehousemen’s and mechanics’ liens, statutory landlords’ liens, and other similar liens arising in the ordinary course of the Company’s business, and which (i) do not individually or in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company and its consolidated Subsidiaries or (ii) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens incurred in connection with lease obligations, purchase money indebtedness of up to two million dollars ($2,000,000), in the aggregate, incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased assets, provided that such liens are not secured by assets of the Company or its Subsidiaries other than the assets so acquired or leased.

6.2            Unsecured Debt and Bank Loan Facilities .  Notwithstanding anything to the contrary in Section 6.1 above: (a) the Company may issue unsecured debt ranking pari passu with this Note so long as the maturity date (and any other repayment or prepayment date) for such new indebtedness or any other provision allowing for such indebtedness to be redeemed or put to the Company is later than the Maturity Date; and (b) the Company may enter into bank loan facilities that are senior to this Note.

6.3            Liquidation .  Upon any Liquidation Event, the Holder will be entitled to receive, before any distribution or payment is made upon, or set apart with respect to, any other indebtedness of the Company or any class of capital stock of the Company, an amount equal to the Principal plus all accrued and unpaid interest thereon.  For purposes of this Note, “ Liquidation Event ” means a liquidation pursuant to a filing of a petition for bankruptcy under applicable law or any other insolvency or debtor’s relief, an assignment for the benefit of creditors, or a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
 
 
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ARTICLE VII
 
MISCELLANEOUS
 
7.1            Non-Waiver and Other Remedies .  No course of dealing, failure or delay on the part of the Holder of this Note in exercising any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
 
7.2            Notices .  Any notice required or permitted pursuant to this Note shall be given in writing and shall be given either personally or by sending it by next-day or second-day courier service, fax, electronic mail or similar means to the address as shown below (or at such other address as such party may designate by fifteen (15) days’ advance written notice to the other parties to this Note given in accordance with this section):
 
If to the Holder:  
5 Harbourmaster Place, IFSC
Dublin 1, Ireland
Fax: +353-1-6806050
Attention: The Directors

with a copy to:

c/o Och-Ziff Capital Management HK Ltd
Suite 2003A Cheung Kong Center
2 Queen's Road Central
Hong Kong S.A.R.
Fax: +852-2297-0818
Attention: Zoltan Varga and David C. Zeiden

If to the Company: 
Network CN Inc.
Room 2120 & 2122, Leighton Center,
77 Leighton Road,
Causeway Bay, Hong Kong
Attention: Earnest Leung
Fax:  (852) 2833-8186

with a copy to (which shall not constitute notice):

Blank Rome LLP
Watergate 600 New Hampshire Avenue NW | Washington, DC 20037
Attention:  Scott C. Kline, Esq.
Fax: 202.572.8441

Where a notice is sent by next-day or second-day courier service, service of the notice shall be deemed to be effected by properly addressing, pre-paying and sending by next-day or second-day service through an internationally-recognized courier a letter containing the notice, with a confirmation of delivery, and to have been effected at the expiration of two (2) days after the letter containing the same is sent as aforesaid.  Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organization, with a written confirmation of delivery, and to have been effected on the day the same is sent as aforesaid.
 
 
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7.3            Assignability .  This Note shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns. Subject to applicable laws and regulations, this Note and all rights hereunder may be transferred or assigned in whole or in part by the Holder, and the Company shall assist the Holder in consummating any such transfer or assignment. The Company may not assign this Note without the consent of the Holder. A transfer of this Note may be effected only by a surrender hereof to the Company and the issuance by the Company of a new note or notes in replacement thereof, which shall be registered by the Company in accordance with Section 7.4 hereof once an executed copy of the replacement note has been executed by the transferee.

7.4            Transfer Register .  In the event of a transfer, the Company shall maintain a register (the “ Register ”) for the registration or transfer of this Note, and shall enter the names and addresses of the registered holders of this Note, the transfers of this Note and the names and addresses of the transferees of this Note.  The Company shall treat any registered holder as the absolute owner of this Note held by such holder, as indicated in the Register, for the purpose of receiving payment of all amounts payable with respect to this Note and for all other purposes.  The Note and the right, title, and interest of any person in and to such Note shall be transferable only upon notation of such transfer in the Register.  Solely for purposes of this Section 7.4 and for tax purposes only, the keeper of the Register, if it is not the Company, shall be the Company’s agent for purposes of maintaining the Register.  This Section 7.4 shall be construed so that this Note is at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the United States Internal Revenue Code (the “ Code ”) and any related regulations (and any other relevant or successor provisions of the Code or such regulations).

7.5            Collection Costs; Attorneys’ Fees .  If default is made in the payment of this Note, the Company shall be obligated to pay the Holder hereof reasonable costs of collection, including attorneys’ fees and, in addition, the Company and of any amendment or modification of any of the foregoing requested by the Company or arising following an Event of Default.
 
7.6            Governing Law; Rules of Construction .  THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE COMPANY HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
 
7.7            Consent to Jurisdiction and Service of Process .  ALL JUDICIAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK
 
7.8            Waiver of Jury Trial .  EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
 
 
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7.9            Usury Savings Clause .  This Note is subject to the express condition that at no time shall the Company be obligated or required to pay interest at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which Company is permitted by law to agree to pay.  If, by the terms of this Note, the Company is at any time required or obligated to pay interest on the outstanding balance at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and interest pay able hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall he deemed to have been payments in reduction of the outstanding balance.
 

7.10            United States Dollars .  All references to “$” or dollars in this Note shall refer to the currency of the United States.

7.11            Section Headings .  Section headings herein have been inserted for reference only and shall not be deemed to limit or otherwise affect, in any matter, or be deemed to interpret in whole or in part any of the terms or provisions of this Note.

*    *    *

[Remainder of Page Left Blank Intentionally]

 
 
 
 
 
 
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IN WITNESS WHEREOF, this Note has been executed and delivered on the date specified above by the duly authorized representative of the Company.
 

 
NETWORK CN INC.
 
       
       
 
By:
 
 
 
Name:
Earnest Leung
 
 
Title:
Chief Executive Officer
 
 
 
 
 
 
 
 
 

 

Exhibit A
 
NOTICE OF CONVERSION
 
The undersigned hereby elects to convert the following amount of the outstanding principal [and accrued and unpaid interest thereon] under that certain 1% Senior Unsecured Convertible Promissory Note, due April 1, 2014 of NETWORK CN INC., a Delaware corporation (the “ Company ”), into shares of Common Stock according to the conditions therein, as of the date written below.  No fee will be charged to the holder for any conversion.
 
Conversion calculation:
   
     
     
     
Date to Effect Conversion:  
   
     
     
     
Number of shares of Common Stock to be issued:
 
     
     
Shares of Common Stock to be issued in the name of:
[Insert name of Holder or its assignee]



HOLDER:          
 
   
   
 (Print Name of Holder)
 
     
By: 
   
Name:
   
Title:
   
 



Exhibit 31.1
CERTIFICATIONS
 
I, Earnest Leung , certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Network CN Inc.;
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14, 2012

/s/ Earnest Leung
 
Earnest Leung
 
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 

Exhibit 31.2
CERTIFICATIONS
 
I, Shirley Cheng , certify that:

 
1.
 
I have reviewed this quarterly report on Form 10-Q of Network CN Inc.;
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012

/s/ Shirley Cheng
 
Shirley Cheng
 
Interim Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
 
 
 
 

Exhibit 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002


 The undersigned, Earnest Leung , the Chief Executive Officer of NETWORK CN INC. (the “Company”), DOES HEREBY CERTIFY that:

 1.      The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 2.      Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 IN WITNESS WHEREOF, each of the undersigned has executed this statement this 14th day of November 2012.
 

 
/s/ Earnest Leung
 
Earnest Leung
 
Chief Executive Officer
 
(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to Network CN Inc. and will be retained by Network CN Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
 
 
 

Exhibit 32.2

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

 The undersigned, Shirley Cheng , the Interim Chief Financial Officer of NETWORK CN INC. (the “Company”), DOES HEREBY CERTIFY that:

 1.      The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 2.      Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

IN WITNESS WHEREOF, each of the undersigned has executed this statement this 14th day of November 2012.


/s/ Shirley Cheng                                                                 
 Shirley Cheng
 Interim Chief Financial Officer
( Principal Financial Officer and Principal   Accounting Officer )

A signed original of this written statement required by Section 906 has been provided to Network CN Inc. and will be retained by Network CN Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.