UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of
The
Securities Exchange Act of 1934
Date of
report (Date of earliest event reported)
October
10, 2008
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NETWORK
CN INC.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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000-30264
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90-0370486
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(State
or Other Jurisdiction
of Incorporation)
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(Commission
File Number)
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(I.R.S.
Employer
Identification
No.)
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21/F.,
Chinachem Century Tower, 178 Gloucester Road, Wanchai,
Hong
Kong
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code
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(Former
name or former address, if changed since last
report)
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Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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o
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Item
4.02. Non-Reliance on Previously Issued Financial Statements or a
Related Audit Report or Completed Interim Review.
Special
Note — This Current Report on Form 8-K contains forward-looking statements that
are based on our current expectations. Actual results may differ
materially from those expressed or implied by those forward-looking statements
because of a number of risks and uncertainties. See “Disclosures About
Forward-Looking Statements” below.
Background
and Overview
Upon
consideration of certain issues identified in a comment letter from the Staff of
the Securities and Exchange Commission (“SEC”) dated September 18, 2008, the
Audit Committee of the Board (the “Audit Committee”), after
discussions with management and our independent registered public accounting
firms, recommended to the Board that our previously issued consolidated
financial statements for the year ended December 31, 2007 and unaudited
condensed consolidated financial statements for the interim periods ended March
31, 2008 and June 30, 2008 be restated. In this Current Report on
Form 8-K, the year ended December 31, 2007, and the three months ended March 31,
2008 and June 30, 2008, are referred to collectively as the “Restatement
Period”.
The
Company concluded on October 10, 2008 that our previously issued consolidated
financial statements for the Restatement Period need to be
restated. Accordingly, our previously issued consolidated financial
statements for the Restatement Period and the corresponding reports of our
independent registered public accounting firms included in our previously filed
2007 Annual Report on Form 10-KSB, as subsequently amended by Amendment
No. 1 to Form 10-KSB filed on August 11, 2008, should no longer be
relied upon.
Management’s
Reassessment and Re-evaluation of Consolidated Financial Statements
On the
basis of management’s review of the matters addressed in the SEC review, we have
determined that restatements are required in our previously issued consolidated
financial statements for the Restatement Period. The restatements will
correct the accounting errors arising from our misapplication of accounting
policies to the discount associated with the beneficial conversion feature
attributed to the issuance of the 3% convertible promissory notes in 2007 and
2008. We amortized the entire discount at the date of issuance instead of
amortizing the discount over the term of the notes from the respective dates of
issuance.
Expected
Impact of the Restatement
The
accounting policies used by the Company resulted in an overstatement of non-cash
interest expense of approximately $4.7 million and $9.6 million for fiscal year
2007 and for the six months ended June 30, 2008 respectively. The
restatement has no effect on our cash flow or liquidity.
Set forth
below is the anticipated impact of the restatement on our previously issued
consolidated financial statements:
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Consolidated
Statements
of
Operations
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Amortization of
Deferred
Charges and Debt
Discounts
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Net
Loss
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As
reported
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As
restated
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As
reported
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As
restated
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For
the year ended
December
31, 2007
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$ |
4,866,351 |
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$ |
206,391 |
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$ |
(19,306,579 |
) |
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$ |
(14,646,619 |
) |
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For
the three months
ended
March 31, 2008
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11,790,530 |
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1,348,284 |
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(18,813,760 |
) |
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(8,371,514 |
) |
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For
the three months
ended
June 30, 2008
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$ |
541,573 |
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$ |
1,350,704 |
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$ |
(8,078,990 |
) |
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$ |
(8,888,121 |
) |
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Consolidated Balance
Sheets
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3% Convertible
Promissory
Notes,
Net
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Stockholders’
Equity
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As
reported
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As
restated
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As
reported
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As
restated
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As
of December 31, 2007
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$ |
12,545,456 |
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$ |
7,885,496 |
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$ |
5,978,976 |
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$ |
10,638,936 |
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As
of March 31, 2008
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42,045,203 |
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26,942,997 |
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9,127,580 |
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24,229,786 |
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As
of June 30, 2008
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$ |
42,471,397 |
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$ |
28,178,322 |
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$ |
2,912,555 |
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$ |
17,205,630 |
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The
anticipated impact and amounts of the restatement are based on our current
expectations and we cannot provide assurance that the final impact and the
amounts of the restatement will not differ materially from estimates that are
described in this Current Report on Form 8-K.
Anticipated
Presentation of Restated Consolidated Financial Statements
We
currently intend to present the restated consolidated financial statements and
related financial information in our Annual Report on Form 10-KSB for the year
ended December 31, 2007 and our Quarterly Reports on Form 10-Q for the first and
second quarters of 2008. We estimate the above mentioned reports will be filed
before the end of October 2008.
The Audit
Committee and our management have discussed the foregoing matters disclosed in
this Current Report on Form 8-K with our independent registered public
accounting firms.
The above statements regarding the
expected impact and amounts of the restatement and the anticipated timing of our
SEC filings constitute forward-looking statements that are based on our current
expectations. The actual impact and amounts and the detailed presentation of the
restatement will be included in our upcoming filings after we have completed our
work on the restatement.
There can be no assurance that the
final impact and the amounts of the restatement will not differ materially from
estimates that are described in this Current Report on Form 8-K or that any
other information set forth herein will not change materially before we file our
restated consolidated financial statements. See “Disclosures About
Forward-Looking Statements” below.
Assessment
of Internal Control Over Financial Reporting
Management
is aware that the occurrence of a restatement of previously issued consolidated
financial statements to reflect the correction of a misstatement indicated
material weaknesses in internal control over financial
reporting. Specifically, as of the Restatement Period, the Company did not
maintain effective controls to ensure the correct application of accounting
policies to the discount associated with the beneficial conversion feature
attributed to issuance of 3% convertible promissory notes. Therefore,
management’s reports on internal control over financial reporting included in
2007 Annual Report on Form 10-KSB and Form 10-Q for the first and second
quarters of 2008, which stated that the Company’s internal control over
financial reporting was effective as of Restatement Period, can no longer be
relied upon and will be restated in the upcoming filings.
In
response to the material weakness in internal control over financial reporting
described above, management is developing and implementing new processes and
procedures governing our internal control over financial reporting. Certain
remedial measures have already been implemented or are currently contemplated,
which include adding more technical accounting and financial reporting personnel
in order to increase expertise in these areas; and providing additional
technical training to current accounting staff, etc. Management will continue to
monitor their implementation to ensure our correct application of accounting
policies in relation to note discounts.
Disclosures
About Forward-Looking Statements
This
Current Report on Form 8-K contains forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Report Act of 1995. All
statements other than those that are purely historical are forward-looking
statements. Words such as “expect”, “anticipate”, “believe”, “estimate”,
“intend”, “plan”, “potential” and similar expressions also identify
forward-looking statements. Forward-looking
statements include statements regarding expected materiality or significance,
the quantitative effects of the restatement, and any anticipated conclusions of
the Company, the Audit Committee or management.
Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results, as well as our
expectations regarding materiality or significance, the restatement’s
quantitative effects, the effectiveness of our disclosure controls and
procedures, and material weaknesses in internal control over financial
reporting, to differ materially from those in the forward-looking statements.
These factors include, among other things, the risk that additional information
may arise from the preparation of our restated consolidated financial statements
and that our internal control over financial reporting may be inadequate or have
weaknesses of which we are not currently aware or which have not been
detected.
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.
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NETWORK
CN INC.
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Date: October
10, 2008
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By:
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/s/ Daley Mok
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Daley
Mok
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Chief
Financial Officer
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