UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2009
	OR
o	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from              to

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Our History

Moqizone Holding Corporation, formerly called Trestle Holdings, Inc., was previously a non-operating public company which was seeking out suitable candidates for a business combination with a private company.  Trestle originally developed and sold digital tissue imaging and telemedicine applications linking dispersed users and data primarily in the healthcare and pharmaceutical markets.

The common stock of MoqiZone currently trades on the OTCBB under the symbol “MOQZ.”

Acquisition of our Operating Business

On March 15, 2009, Trestle entered into a Share Exchange Agreement with MoqiZone Cayman, Mr. Lawrence Cheung, the principal shareholder of MoqiZone Cayman, and, MKM Capital Opportunity Fund Ltd., our former principal stockholder (the “Agreement”).  MoqiZone Cayman is the record and beneficial owner of 100% of the share capital of MoqiZone Hong Kong and MoqiZone Hong Kong is the record and beneficial owner of 100% of the share capital of Shanghai MoqiZone.  On June 1, 2009, pursuant to the Agreement, and as a result of MoqiZone Hong Kong’s receipt of approximately $4,345,000 in gross proceeds from our private financing, Trestle became the record and beneficial owner of 100% of the share capital of MoqiZone Cayman and therefore own 100% of the share capital of MoqiZone Hong Kong directly and Shanghai MoqiZone indirectly in exchange for the issuance to Lawrence Cheung and the other shareholders of MoqiZone Cayman of 10,743 shares of our Series B convertible preferred stock, which Series B preferred stock was automatically converted (on the basis of 1,000 shares of common stock for each share of Series B preferred stock) into an aggregate of 10,743,000 shares of our common stock, representing approximately 95% of our issued and outstanding shares of common stock  at the time of conversion (but prior to the conversion of any of the shares our Series A preferred stock ). The remaining 5% of the then outstanding shares of the Company’s common stock are publicly traded and are owned by approximately 83 shareholders on record (see Reverse Stock Split below at Page 3).

 

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Pursuant to the terms of the Agreement, Eric Stoppenhagen resigned as our Interim President, effective at the time of the transaction. Additionally, each of our former directors tendered their resignation as directors on June 19, 2009, to our stockholders.  Our Board of Directors appointed Lawrence Cheung to serve as our Chief Executive Officer and director, effective June 19, 2009.  Additionally, commencing on that same date, Benjamin Chan was elected to serve as a director as well.

Recent developments

Name Change

On July 16, 2009, a majority of our shareholders, via written consent, approved changing our corporate name from “Trestle Holdings, Inc.” to “MoqiZone Holding Corporation”. In connection with our name change, we received a new trading symbol and cusipnumber.  Effective August 31, 2009, we began trading on the Over the Counter Bulletin Board under the symbol “MOQZ”; and our new cusip number is 616348108.

Preferred Stock

On July 8, 2009, a majority of our shareholders approved, via written consent, the issuance of an additional 10,000,000 shares of preferred stock with a par value of $0.001. As a result of the issuance, we have a total amount of 15,000,000 shares of preferred stock authorized.  These shares are made up of three classes:

(a)

14,974,257 shares of preferred stock (“Blank Check preferred stock”);

(b)

15,000 shares of Series A preferred stock;

(c)

10,743 shares of Series B preferred stock.

Additionally, we filed a Definitive Schedule 14C regarding the name change and increase in preferred stock on August 24, 2009 and mailed such notice to our shareholders on August 28, 2009.

The Reverse Stock Split

On July 8, 2009, a majority of our shareholders approved a one-for-254.5 reverse stock split (the “Reverse Stock Split”), via written consent. We were seeking via reverse split to reduce the number of outstanding shares of our common stock by reclassifying and converting all outstanding shares of our common stock into a proportionately fewer number of shares of common stock.  On August 31, 2009, the Reverse Stock Split occurred thereby reducing 179,115,573 shares of common stock to 703,974.  Simultaneous with the reverse split, the Series B Preferred Stock automatically converted into 10,743,000 shares of common stock.  As a result, this left us with 11,446,974 shares of common stock issued and outstanding as of August 31, 2009.  

Additionally, as of August 28, 2009, our corporate name changed to MoqiZone Holding Corporation and our authorized capital increased by 10,000,000 shares of preferred stock.  Pursuant to the additional financings we closed in August 2009 and the authority vested in our Board of Directors, we also filed a certificate of designation of Series A preferred stock and certificate of designation of Series B preferred stock with Delaware’s Secretary of State to designate 15,000 of the 15,000,000 shares of preferred stock as Series A preferred stock and 10,743 of the 15,000,000 shares of preferred stock as Series B preferred stock. Upon effectiveness of the Reverse Split on August 31, 2009, each $1,000 principal amount of Notes was automatically cancelled and exchanged for one share of Series A Preferred Stock.  Since we sold a total of 494.5 Units, upon exchange of the Notes, a total of 4,945 shares of Series A Preferred Stock were issued, which are convertible into an aggregate of 2,747,222 shares of common stock, subject to anti-dilution and other adjustments as provided in the Series A Preferred Stock Certificate of Designations.  Additionally, upon effectiveness of the Reverse Split, the 10,743 shares of Series B preferred stock were automatically converted into 10,743,000 shares of our common stock.

New VIE Agreements

In January 2009, Shanghai Moqizone entered into an Exclusive Business Cooperation Agreement and certain ancillary agreements, including an Equity Pledge Agreement, Exclusive Option Agreement, Loan Agreement and Irrevocable Power of Attorney with SZ Mellow. However, as a result of disputes with the shareholders of SZ Mellow, on September 21, 2009, in accordance with the terms of the SZ Mellow Agreements, we sent out a 30-day prior written notice to SZ Mellow stating our intention of terminating the SZ Mellow Agreements. The SZ Mellow Agreements was terminated at the expiry of the 30-day notice on October 20, 2009.

In order to continue our business and operations as planned, on September 25, 2009, Shanghai MoqiZone entered into an Exclusive Business Cooperation and certain ancillary agreements, including an Equity Pledge Agreement, Exclusive Option Agreement, Loan Agreement and Irrevocable Power of Attorney with SZ Alar, effectively gaining indirect control over SZ Alar. Also on September 25, 2009, Tai Ji agreed to grant the PLA authorization sub-license to SZ Alar and terminate its current sub-license with SZ Mellow. As a result of the SZ Alar Agreements between Shanghai MoqiZone and SZ Alar, we do not anticipate any significant interruption in our business or operations as a result of our terminating the agreements with SZ Mellow.

Appointment of New Director

On November 3, 2009, we announced that Mr. Paul Lu has been appointed as a director of our board.

 

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Acquisition of Netcafe Farmer

On December 21, 2009, we acquired a client-end software called “Netcafe Farmer” which was originally developed by Mr. Liu Qian in 2006. It is a client-end software solution that provides an automatic content update distribution system in internet cafés allowing internet cafés to automatically update their client-end software on a real time basis for all their computers. Pursuant to the Agreement, we acquired the ownership of the software “Netcafe Farmer” from Mr. Liu Qian, including all the intellectual property and all its existing business has been transferred to Shanghai MoqiZone. The total consideration paid was RMB650,000 (or approximately US$95,000). By acquiring Netcafe Farmer, the Company also recruited Mr. Liu Qian and his development team of 4 people. The incremental salary is approximately $75,500 (RMB516,000) per annum. It is expected that the income generated from existing Netcafe Farmer business will substantially subsidize the monthly additional salary expenses.

Netcafe Farmer is currently servicing approximately 700 internet cafés mainly in Henan, Hebei, Zhejiang, and Northeast of China and has also established a strong network with major content suppliers to help promote their games in internet cafés. As a result of the foregoing, we will be able to bring tremendous synergy to the MoqiZone online game platform business and improve our services to internet café operators. The existing brand name “Netcafe Farmer” will be retained and a new version will be developed to support the MoqiZone WiMAX Network. The acquisition of Netcafe Farmer will also allow us to cover the internet cafés, which cannot be installed with our WiMAX equipment due to physical limitation, via fixed line network. Internet cafes installed with Netcafe Farmer will be able to enjoy the same products and services as those that are installed with WiMAX equipment, although the revenue sharing will be different.

 

Agreements with Win’s Entertainment Ltd.

We have recently established partnership with Win’s Entertainment Limited (“Win’s”), a major motion picture production company in Hong Kong through a series of proprietary content agreements. In November 2009, we were contracted to develop the online game for Win’s movie, Tiger Tang 2 (“Tiger Tang 2 Game”) and we also acquired the exclusive rights from Win’s for publishing Tiger Tang 2 Game. We are also currently in discussion with Win’s to develop online games for Win’s other movies as well as publish those games.

The March 2010 Financing

We completed a private equity financing of $1,956,200 on March 29, 2010, with 7 accredited investors. Net proceeds from the offering, were approximately $1,760,400. Pursuant to the financing, we issued a total of 869,422 units of our securities at $2.25 per unit. Each Unit consists of (i) one (1) share of the Company’s Series C Convertible preferred stock, par value $0.001 per share, convertible into one share of the Company’s common stock, par value $0.001 per share , and (ii) a Series C Warrant and Series D Warrant, with the total amount of Warrants of each Series exercisable to purchase that number of shares of common stock as shall be equal to fifty percent (50%) of the number of Units purchased in the Offering. Each of the Warrants has a term of three (3) years.

In connection with this financing, we paid cash compensation to a placement agent in the amount of $195,620. Additionally, in connection with this financing, we granted warrants to purchase up to 86,942 shares of common stock, Series C Warrants to purchase up to 43,471 shares of common stock and Series D Warrants to purchase 43,471 shares of common stock to the placement agent or its designees. These warrants have the same terms as the warrants issued to Investors that are included in the Units.

The Securities in the Offering were issued pursuant to the exemption from the registration provisions of the Securities Act of 1933 provided by Section 4(2), therein, for issuances not involving a public offering.

Our Corporate Structure

 

The following table sets forth our current corporate structure.

 

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Key Corporate Objectives

 

i.

build out our MoqiZone WiMAX Network, which involves the construction of a WiMAX base station covering our targeted internet cafes at each city;

ii.

install CPE at each internet café;

iii.

set up server farm in IDC;

iv.

develop and deploy a online game content delivery platform; and

v.

develop and deploy a centralized prepaid card clearing center as well as a accounting systems for internet cafes revenue distribution system.

 

So far, we have already signed up over 100 internet cafés in Chengdu of which 30 internet cafes are connected to our MoqiZone WiMAX Network. We have also deployed our game delivery platform as well as our prepaid card clearing center which is www.53mq.com and www.moqizone.com respectively.

We are also aiming to service the non-WiMAX internet café by providing them a peer to peer content updating engine “Netcafe Farmer” which the Company has recently acquired. Netcafe Farmer can be easily deployed to each internet café for content updating and we now have approximately 700 internet café subscribed to the Netcafe Farmer services. Revenue to be generated from Netcafe Farmer has not been forecasted and projected in our financial budget. As of March 31, 2010, we are testing the 2nd generation of Netcafe Farmer which will further enhance stability and the peer to peer connectivity between each PC as well as allowing a virtual storage for games updating.

 

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Our business objectives will be required to execute through Shanghai Moqizone and SZ Alar by implementing the structure portal arrangements described below in order to allow MoqiZone Hong Kong to have control. Neither our Company nor our Shanghai MoqiZone subsidiary owns any equity interests in SZ Alar.  Our business relationship withSZ Alar is based on contractual arrangements which are commonly known as the “Sina Structure Portal Arrangement” agreements.  These agreements may be summarized, as follows:

Exclusive Business Cooperation Agreement.   Pursuant to the exclusive ten year business cooperation agreement between the SZ Alar and Shanghai MoqiZone, Shanghai MoqiZone has the exclusive right to provide to SZ Alar comprehensive technology and consulting services related to the business of SZ Alar.  In consideration for such services, Shanghai MoqiZone is entitled to receive 100% of the net income of SZ Alar.

Equity Pledge Agreement.   Under the equity pledge agreement among SZ Alar, the shareholders of t SZ Alar and Shanghai MoqiZone, the shareholders of SZ Alar pledged all of their equity interests in SZ Alar to Shanghai MoqiZone to guarantee SZ Alar’s performance of its obligations under the exclusive business cooperation agreement. In the event that  SZ Alar were to breach its contractual obligations, Shanghai MoqiZone, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The equity pledge agreement will expire only after SZ Alar and its shareholders have fully performed their respective obligations under the exclusive business cooperation agreement.

Exclusive Option Agreement.   Under an exclusive ten (10) year option agreement between SZ Alar, the shareholders of SZ Alar and Shanghai MoqiZone, the shareholders of SZ Alar have irrevocably granted to Shanghai MoqiZone or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in SZ Alar for RMB10 or the evaluation amount of consideration permitted by applicable PRC law.  Shanghai MoqiZone or its designated person has sole discretion to decide when to exercise the option, whether in part or in full.

Loan Agreement.   Under the loan agreement between the shareholders of the SZ Alar and MoqiZone Hong Kong, the parties confirmed that MoqiZone Hong Kong has made an interest-free loan to the shareholders of the SZ Alar solely to enable the shareholders of the SZ Alar to fund the initial capitalization of SZ Alar. The loan can be repaid only by sale of the shareholder’s equity interest in SZ Alar to MoqiZone Hong Kong. The term of the loan agreement is ten years from the date thereof.

Irrevocable Power of Attorney.   The shareholders of SZ Alar have each executed an irrevocable power of attorney to appoint Shanghai MoqiZone as their exclusive attorneys-in-fact to vote on their behalf on all SZ Alar matters requiring shareholder approval.  The term of each power of attorney is valid so long as such shareholder is a shareholder of SZ Alar.

 

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As abovementioned in Page 5, we have entered into partnership agreement with Win’s and we are going to publish our own games on our gaming delivery platforms. We aim to partnership with more movie production companies and replicate the business model of publishing our own games on our platform.

Proprietary Prepaid Card

Traditionally online game revenues are collected through the sale of pre-paid cards issued by each individual game publishing company, which they sell in both virtual and physical form, to third party distributors and retailers, including Internet cafes, as well as, to a lesser extent, through direct online payment systems. In most cases, game publishers receive cash pre-payments from these parties in exchange for delivery of the pre-paid cards.  Online game companies do not provide refunds to these distributors or retailers with respect to unsold inventories of pre-paid cards.

Most online game companies, especially new games, will encounter the problem that they need to build “trust” with these distributors before their game is launched.  As a result, online game companies usually have difficulties introducing their new products to distribution channels effectively and efficiently.  With our business model, these new game publishers can join our payment system without being exposed to the risk of cash collection from their distributers.  At the same time, since our prepaid cards can be used on other game, distributors have less financial risk exposure stocking our cards.

For the pay-to-play subscription-based model, both prepaid cards and prepaid online points provide customers with a pre-specified length of game playing time within a specified period. All prepaid fees received from distributors and end customers are initially recognized as deposits. Revenue is recognized upon activation of the prepaid game cards or online points based on the actual consumption of the game playing time by end customers.

For the item-billing revenue model, the customers can play the game for free with limited basic functions. There are also in-game items and premium features sold in the game by consuming online game points, commonly known as “Virtual Items”, which are regarded as value-added services and are rendered over a pre-specified period or throughout the whole game life. The revenue from these Virtual Items is recognized ratably over the estimated practical usage period or throughout the whole game life as appropriate. Future usage patterns may differ from the historical usage patterns on which the item-billing revenue model revenue recognition is based.

Virtual item trading between gamers will also become more secure by using our card together with an online payment system as we are operating under a “close” network environment. Under the traditional web-based Internet gaming environment, virtual item trading can become insecure as there could be “pirated” gaming servers co-exist with the authenticated gaming servers and such “pirated” server will disturb the regular gaming economies and induce unfairness to players. Also, theft and virtual item robbery or disappearance is not uncommon due to the existence of such “fake” and “pirated” servers. With our MoqiZone WiMAX Network, we are hosting all gaming servers in CERNET IDC and as our network is physically a private proprietary network, illegal hackers and “pirated” server operators will find to more difficult to interfere our server system, as a result of which providing a more secure environment to the participants in the gaming value chain.

Research and Development

Our recent research and development efforts have focused on the development of an online e-payment system to manage profit sharing information among content providers, internet cafés, and promoters.  Game players also have “pre-paid” accounts with MoqiZone.  MoqiZone has total ownership over the payment system.  Although we do not have any proprietary technology for WiMAX, we will integrate existing technology to manage our network as required.

 

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Customers and Market Potential

There are about 150,000 licensed internet café in China, with an average of 100 sets of PC in each café.  The top three applications in any internet café are: (a) online games, (b) Instant messaging and online chatting; and (c) online TV/Movie streaming.  Each set of PC is shared by three users each day in internet café, and this has covered 45 millions unique users per day.

On November 24, 2009, CNNIC published an analysis of the Chinese Online Gaming market, called “China Online Game Market Research Report 20091” The following is a summary of its major findings and the implications that we believe they have on our business development in China.-

	Report Findings		Implications and Importance to our business evaluation
l	China has 69.31 million online gamers, up 24.8% from 2008		Online game is still a growing business in China
l	Large-scale casual game and MMORPG (i.e. Massivs (Massivel) Multiplayer Online Role-Playing Game) users account for 67.9% and 61% of the total respectively, up 19.8% and 11% from the previous year, while 38.9% of total users are female		Causal game and MMORPG are still the major trend in China online games business. This influence the selection of our gaming contents
l	Students comprise 37.2% of online gamers, with 46.1% of the online gamers between the ages of 10-19, the report said		The demographic is important for marketing campaign planning execution.
l	By the end of June, 222 million of China's 338 million Internet users used online video sites, up 23.8% year-on-year		Our business intends to include other forms of digital entertainment contents other than online gaming in the near future and the trend of such contents is vital to our business planning
l	Home use and internet cafe remain to be the major venues for online gaming, the ratio of user is 79.7% and 59.6% respectively		Our major business revenue will be generated from internet café and therefore such statistic is important to our business evaluation.
l	The value of Internet café sales channel increases gradually. Internet café becomes the most important online game point cards selling point with 52.8% slightly higher than traditional convenience store.		Our major business revenue will be generated from prepaid sold in internet cafés and therefore such statistic is important to our valuation.
l	Ratio of internet café in Farming district is higher than those in major cities, internet café users ratio in farming district is 69.4% higher than 57.9% in major cities		Farming districts will be the next great leap to our business development strategy as the local GDP as the living standard gradually increases since the cost of WiMAX deployment will be lower versus fixed line. The developed cities in China will become saturated, although ARPU is still relatively higher in the developed cities.
l	Internet café monitor policy further strengthen, 46.4% teenage users choose internet café for internet gaming, with 25.7% choose internet café as the major online gaming location.		Our MoqiZone WiMAX Network is a closed virtual private network and therefore allows us to closely monitor any contents to be distributed to our internet cafes, as a result, we can provide necessary information to the relevant authorities on an as needed basis.

 

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1 Source: CNNIC, China Internet Network Information Centre,  http://www.cnnic.net.cn/uploadfiles/pdf/2009/11/24/110832.pdf

 

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The Growing Chinese Internet and Internet Café market

  

According the New York Times2, the number of Internet users in the China reached about 253 million in June 2008, thereby, putting it ahead of the United States as the world’s biggest Internet market. Reports from the government-controlled Chinese Academy of Sciences indicated that the number of Internet users jumped more than 50 percent, or by about 90 million people, during 2007. This new estimate represents only about 19 percent of China’s population, underscoring the potential for growth. The survey found that nearly 70 percent of China’s Internet users were 30 or younger, and that in the first half of this year, high school students were, by far, the fastest-growing segment of new users, accounting for 39 million of the 43 million users during the period.  According to the extract summary of Niko Partners’ report on China ’ s Internet Café s Study 2008, there are estimated 185,000 Internet cafés nationwide in China, 71,000 of which are unlicensed with approximately 22 million PCs installed throughout China. (http://www.nikopartners.com/press-release-china-internet-cafe-2008.asp)

  

In addition, on October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies (“Notice 75”), which became effective as of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January and April 2005.

 

According to Notice 75:

 

(a)

prior to establishing or assuming control of an offshore company for the purpose of obtaining overseas equity financing with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;

(b)

an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and

(c)

an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change in the capital of the offshore company that does not involve any return investment, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests.

Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.

 

In addition, SAFE issued updated internal implementing rules (“Implementing Rules”) in relation to Notice 75. The Implementing Rules were promulgated and became effective on May 29, 2007. Such Implementing Rules provide more detailed provisions and requirements regarding the overseas investment foreign exchange registration procedures. However, even after the promulgation of Implementing Rules there still exist uncertainties regarding the SAFE registration for PRC residents’ interests in overseas companies. 

As a result, we cannot predict how they will affect our business operations following a business combination. For example, our ability to conduct foreign exchange activities following a business combination, such as remittance of dividends and foreign-currency-denominated borrowings, may be subject to compliance with the SAFE registration requirements by such PRC residents, over whom we have no control. In addition, we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. We will require all our shareholders, following a business combination, who are PRC residents to comply with any SAFE registration requirements, if required by Notice 75, Implementing Rules or other applicable PRC laws and regulations, although we have no control over either our shareholders or the outcome of such registration procedures. Such uncertainties may restrict our ability to implement our business combination strategy and adversely affect our business and prospects following a business combination.

The PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate, including our ability to pay dividends.

On August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the State-Owned Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission (“CSRC”) and SAFE, amended and released the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises, which took effect as of September 8, 2006.  This new regulation, among other things, has certain provisions that require SPVs formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. However, the new regulation does not expressly provide that approval from the CSRC is required for the offshore listing of a SPV which acquires, directly or indirectly, equity interest or shares of domestic PRC entities held by domestic companies or individuals by cash payment, nor does it expressly provide that approval from CSRC is not required for the offshore listing of a SPV which has fully completed its acquisition of equity interest of domestic PRC equity prior to September 8, 2006. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.

It is not clear whether the provisions in the new regulation regarding the offshore listing and trading of the securities of a SPV applies to an offshore company such as us which owns controlling contractual interest in the VIE. We believe that the new M&A regulation and the CSRC approval are not required in the context of the share exchange because (i) the Share Exchange is a purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are not a special purpose vehicle formed or controlled by PRC companies or PRC individuals, (iii) we are owned or substantively controlled by foreigners.  However, we cannot assure that the relevant PRC government agencies, including the CSRC, would reach the same conclusion, and we still cannot rule out the possibility that CSRC may deem that the transactions effected by the Share Exchange circumvented the new M&A rules, the PRC Securities Law and other rules and notices, especially when taking into consideration of the performance-based incentive option arrangement by way of the share transfer between Mr. Cheung and other management.

 

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If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval is required for this Offering, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel this offering before settlement and delivery of the shares being offered by us.

The new M&A rules, along with foreign exchange regulations discussed in the above subsection, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example, our prospective partner’s ability to remit dividends to us, or to engage in foreign-currency-denominated borrowings, may be conditioned upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control. In addition, such Chinese domestic residents may be unable to complete the necessary approval and registration procedures required by the SAFE regulations. Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.

Because Chinese law will govern almost all of our business’ material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital.

The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in the PRC over the past 25 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the court rooms, interpretation and enforcement of PRC laws and regulations involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our business, prospects, financial condition, and results of operations. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.

We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, some of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. It would also be difficult for investors to bring an original lawsuit against us or our directors or executive officers before a Chinese court based on U.S. federal securities laws or otherwise. Moreover, China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

 

New PRC enterprise income tax law could adversely affect our business and our net income.

On March 16, 2007, the National People’s Congress of the PRC passed the new Enterprise Income Tax Law (or “EIT Law”), which took effect on of January 1, 2008. The new EIT Law imposes a unified income tax rate of 25.0% on all companies established in China. Under the new EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered as a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25.0% on its global income. If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate of 25.0%.

With the introduction of the EIT Law, China has resumed imposition of a withholding tax (10.0% in the absence of a bilateral tax treaty or new domestic regulation reducing such withholding tax rate to a lower rate).  Per the Double Tax Avoidance Arrangement between Hong Kong and Mainland China, a Hong Kong company as the investor, which is considered a “non-resident enterprise” under the EIT Law, may enjoy the reduced withholding tax rate of 5% if it holds more than 25% equity interest in its PRC subsidiary.  As MoqiZone Hong Kong is the sole shareholder of Shanghai MoqiZone, substantially all of our income will be derive from dividends we receive from Shanghai MoqiZone through MoqiZone Hong Kong.  When we declare dividends from the income in the PRC, we cannot assure whether such dividends may be taxed at a reduced withholding tax rate of 5% per the Double Tax Avoidance Arrangement between Hong Kong and Mainland China as the PRC tax authorities may regard our MoqiZone Hong Kong as a shell company only for tax purpose and still deem Shanghai MoqiZone in the PRC as the subsidiary directly owned by the Company. Based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009 by the State Administration of Taxation, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.

 

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Investors should note that the new EIT Law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified.  Any increase in our tax rate in the future could have a material adverse effect on our financial conditions and results of operations.

Under the new EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and holders of our securities.

Under the new EIT Law, an enterprise established outside of China with its “de facto management body” in China is considered a “resident enterprise,” meaning that it can be treated the same as a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law defines “de facto management body” as an organization that exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of an enterprise. Currently no interpretation or application of the new EIT Law and its implementing rules is available, therefore it is unclear how tax authorities will determine tax residency based on the facts of each case.

If the PRC tax authorities determine that our Hong Kong holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide income as well as PRC enterprise income tax reporting obligations. This would mean that income such as interest on offering proceeds and other non-China source income may be subject to PRC enterprise income tax at a rate of 25%. Second, although under the new EIT Law and its implementing rules dividends paid to us by our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, a 10% withholding tax may be imposed on dividends we pay to our non-PRC shareholders.

Related transactions in China may be subject to a high level of scrutiny by the PRC tax authorities. The contractual arrangements entered into among our PRC subsidiary, our affiliated entity and its shareholders may be subject to audit or challenge by the PRC tax authorities; a finding that our PRC subsidiary or our affiliated entity owes additional taxes could substantially reduce our net income and the value of your investment.

Under PRC tax law, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We may have related transactions that are not at arm’s length price. If any of the transactions we enter into with potential future PRC subsidiaries and affiliated PRC entities are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the authority to disallow any tax savings, adjust the profits and losses of such potential future PRC entities and assess late payment interest and penalties. A finding by the PRC tax authorities that we are ineligible for any such tax savings, or that any of our possible future affiliated entities are not eligible for tax exemptions, would substantially increase our possible future taxes and thus reduce our net income and the value of a shareholder’s investment. In particular, we could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our PRC subsidiary, the VIE, and the shareholders of the VIE do not represent arm’s-length prices and adjust any of their income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, a reduction of expense deductions recorded by our PRC subsidiary or the VIE or an increase in taxable income, all of which could in turn increase our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on our PRC subsidiary or the VIE for under-paid taxes.

Our Chinese operating company is obligated to withhold and pay PRC individual income tax in respect of the salaries and other income received by their employees who are subject to PRC individual income tax. If it fails to withhold or pay such individual income tax in accordance with applicable PRC regulations, it may be subject to certain sanctions and other penalties, which could have a material adverse impact on our business.

Under PRC laws, our Chinese operating company will be obligated to withhold and pay individual income tax in respect of the salaries and other income received by its employees who are subject to PRC individual income tax. Our Chinese operating company may be subject to certain sanctions and other liabilities under PRC laws in case of failure to withhold and pay individual income taxes for its employees in accordance with the applicable laws.

In addition, the PRC State Administration of Taxation has issued several circulars concerning employee stock options. Under these circulars, employees working in the PRC (which could include both PRC employees and expatriate employees subject to PRC individual income tax) are required to pay PRC individual income tax in respect of their income derived from exercising or otherwise disposing of their stock options. Our Chinese subsidiary will be obligated to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions.

 

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We may not be able to continue as a going concern because it’s not clear that they will be able to indefinitely raise enough resources to stay operational

Our accompanying financial statements have been prepared assuming that the Company will continue as a going concern. We have sustained a loss since inception of US$24,671,816 and, as of December 31, 2009, has only generated a nominal amount of revenue from Netcafe Farmer software license fee. In addition, the Company had cash or cash equivalents of approximately US$584,000 as of December 31, 2009. This amount represents the balance of the approximately US$4.3 million of net proceeds from the recent Financings. We originally believed that these funds were sufficient to maintain current operations until March 2010. On March 29, 2010, we completed a private equity financing of $1,956,200, with 7 accredited investors. Net proceeds from the offering, are approximately $1,760,400. This financing will allow us to continue operations and business development until December 31, 2010 before additional capital is required to continue to execute our current growth plans. Accordingly, our current level of our revenues is not sufficient to finance all of our operations on a long-term basis. We continue to attempt to raise additional debt or equity financing as our operations do not produce sufficient cash to offset the cash drain of our general operating and administrative expenses. Accordingly, our business and operations are substantially dependent on our ability to raise additional capital to: (i) supply working capital for the expansion of sales and the costs of marketing of new and existing products; and (ii) fund ongoing selling, general and administrative expenses of our business. If we do not receive additional financing, we may have to restrict or discontinue our business. Our success is dependent on future financings. These factors, among others, raise substantial doubt about our ability to continue as a going concern. In addition, our independent auditors, Paritz & Company, P.A., have expressed substantial doubt concerning our ability to continue as a going concern. As of December 31, 2009, we had a stockholders’ deficiency of $24,324,044 and a net loss of $23,441,283 for the year ended December 31, 2009. We will continue incurring additional expenses as we implement our growth in the fiscal year of 2010, which will reduce our net income in 2010. If we are not able to achieve profit or continue to raise capital from additional financings to fund our operation, then we likely will be forced to cease operations and investors will likely lose their entire investment.

 

Risks Relating to Our Securities

Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.

Our executive officers, directors, and principal stockholders hold approximately 63.95% of our outstanding common stock.  Accordingly, these stockholders are able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.  This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.

 

There is currently only a limited public market for our common stock, which is listed on the Over-the-Counter Bulletin Board, and there can be no assurance that a trading market will develop further or be maintained in the future.  During the month of March 2010, our common stock traded an average of approximately 5 shares per day.  As of April 14, 2010, the closing bid price of our common stock was $3.77 per share.  As of April 14, 2010, we had approximately 114 shareholders of record of our common stock, not including shares held in street name.  In addition, during the past two fiscal years our common stock has had a trading range with a low price of $0.01 per share and a high price of $15.00 per share.

 

The market price of our common stock may be volatile.

The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock.  These factors may materially adversely affect the market price of our common stock, regardless of our performance.  In addition, the public stock markets have experienced extreme price and trading volume volatility.  This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies.  These broad market fluctuations may adversely affect the market price of our common stock.

Additionally, because our stock is thinly trading, there is a disparity between the bid and the asked price that may not be indicative of the stock’s true value.

The outstanding warrants may adversely affect us in the future and cause dilution to existing shareholders.

We currently have a total of 3,616,650 warrants issued and outstanding in the 2009 and 2010 Financings.  Associated with these financings, we also have 756,663 Placement Agent Warrants issued and outstanding. The exercise price of these warrants range from $1.80 to $3.00 per share, subject to adjustment in certain circumstances.  Exercise of the warrants may cause dilution in the interests of other shareholders as a result of the additional common stock that would be issued upon exercise.  In addition, sales of the shares of our common stock issuable upon exercise of the warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding increase in demand by purchasers of our common stock.  Further, the terms on which we may obtain additional financing during the period any of the warrants remain outstanding may be adversely affected by the existence of these warrants as well.

 

Our common stock is considered a “penny stock” and may be difficult to sell.

The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and, therefore, it is designated as a “penny stock” according to SEC rules.  This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.

 

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The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.

OTCBB securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTCBB reporting requirements are less stringent than those of the stock exchanges or NASDAQ.

Patterns of fraud and abuse include:

(a)

Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

(b)

Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

(c)

“Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;

(d)

Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

(e)

Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

Our management is aware of the abuses that have occurred historically in the penny stock market.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be limited to the value of our stock.  We plan to retain any future earnings to finance our business growth.

 

Item 2.  Properties.

 

We currently do not own any property and all of our offices are through rental agreements.  Our rental cost in Hong Kong is approximately $1,300 per month (with 3 staff and as registered office for MobiZone Hong Kong). Rental for Shanghai office is approximately $6,000 per month (with 25 staff and as registered office of Shanghai MoqiZone) and Shenzhen is approximately $1,000 per month (with 1 staff and as registered office for SZ Alar). We do not have an official Beijing office since we terminated our relationship with SZ Mellow.  We are using the office of Tai Ji Office as a temporary Beijing representative office (with 3 staff). We also have a representative office in Chengdu and the rental cost is approximately $500 per month (with 5 staff).