SUBJECT TO COMPLETION, DATED

PROSPECTUS

MOQIZONE HOLDING CORPORATION.

1,912,728  Shares

Common Stock

This prospectus relates to the resale of up to 1,912,728 shares of our common stock, $0.001 par value. The selling stockholders named herein may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price, at prices related to such prevailing market price, in negotiated transactions or a combination of such methods of sale. We will not receive any proceeds from the sales by the selling stockholders.

Our shares of common stock are quoted on OTC Bulletin Board under the symbol “MOQZ.”  The closing bid price and asked price of our common stock on October 13, 2010 was $0.55 and $2.25 respectively.

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.  YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.  SEE “RISK FACTORS” BEGINNING ON PAGE 8 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is October 14, 2010

 

 

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TABLE OF CONTENTS

Item 3. Summary		3
Item 4. Use of Proceeds		19
Item 5. Determination of Offering Price		19
Item 6. Dilution		20
Item 7. Selling Security Holders		20
Item 8. Plan of Distribution		23
Item 9. Description of Securities		24
Item 10. Interests of Named Experts and Counsel		26
Item 11. Information with respect to the Registrant		27
Item 11A. Material Changes		64
Item 12. Incorporation of Certain Information by Reference		64
Item 12A. Disclosure of Commission Position on Indemnification for Securities Act Liabilities		64
Part II		65
Item 13. Other Expenses of Issuances and Distribution		65
Item 14. Indemnification of Directors and Officers		65
Item 15. Recent Sales of Unregistered Securities		65
Item 16. Exhibits and Financial Statement Schedule		66
Item 17. Undertakings		68

We have not authorized any person to give you any supplemental information or to make any representations for us. You should not rely upon any information about us that is not contained in this prospectus or in one of our public reports filed with the Securities and Exchange Commission (“SEC”) and incorporated into this prospectus. Information contained in this prospectus or in our public reports may become stale. You should not assume that the information contained in this prospectus, any prospectus supplement or the documents incorporated by reference are accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus or of any sale of the shares. Our business, financial condition, results of operations and prospects may have changed since those dates. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted.

In this prospectus the “company,” “we,” “us,” and “our” refer to MOQIZONE HOLDING CORPORATION, a Delaware corporation and its subsidiaries.

Until [  ], all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters.

 

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ITEM 3. SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED CHANGES

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, especially the risks of investing in our common stock, which we discuss later in “Risk Factors,” and our financial statements and related notes beginning on page s 8, F-1 and F-7,   respectively . Unless the context requires otherwise, the words “we,” “us” and “our” refer to MOQIZONE HOLDING CORPORATION and our subsidiaries.

Our Company

 

Through our Shanghai MoqiZone subsidiary, our primary business focus is to provide an online game delivery platform delivering contents of online games that are hosted by us to internet cafes which have installed Netcafe Farmer and/or our WiMAX equipment in China via our Netcafe Farmer software or our proprietary MoqiZone WiMAX Network. Our MoqiZone WiMAX Network is a wireless virtual proprietary network. Netcafe Farmer is an online game client software auto-update distribution system which enables internet cafés to automatically update their game client software on real time basis for all the PCs in their cafés. The combination of MoqiZone WiMAX Network and Netcafe Farmer form the backbone of our distribution channel for our online games to our targeted market, which are licensed Internet cafes in cities where the internet cafés business is more developed. Please see further discussion at page 47 under “Business – Key Corporate Objectives”. Since November 2009, we have connected approximately 30 Internet cafes in Chengdu and 3 Internet cafes in Suzhou. We have not generated any revenue from MoqiZone WiMAX Network and little revenue was generated from the license fee of Netcafe Farmer as of December 31, 2009 as we are providing our WiMAX installation to the internet cafes free of charge. Once a substantial number of WiMAX installed internet cafes are participating in our business (expected to be approximately 700 internet cafes), we plan to commence our charged services to the internet cafes.

 

Netcafe Farmer is currently servicing approximately 700 internet cafés mainly in Henan, Hebei, Zhejiang, and Northeast of China with a nominal annual subscription fees and has also established a strong network with major content suppliers to help them to promote games in internet cafés.

Our key business development objectives over the next two years are to grow and expand our business penetration servicing Internet cafes throughout selected targeted cities in China. These business objectives will require the build out of our MoqiZone WiMAX Network, continuous technological development of our portals including but not limited to  www.moqizone.com  and www.53mq.com (“53MQ”), and also aggregation of online digital entertainment contents (meaning online gaming, videos, movies, music and other online contents). We will not be able to generate significant revenue until we have a basic foundation of all these components. Please see further discussion at page (44) under “Business – Key Operating Objectives”.

Our principal executive offices are located at Hong Kong and Shanghai, and our telephone number is +852 34434383.

Our Independent Auditors Have Expressed Their Concern As To Our Ability to Continue As A Going Concern

Our independent auditors, Paritz & Company, P.A., have expressed substantial doubt concerning our ability to continue as a going concern. As of March 31, 2010, we had a stockholders’ deficiency of approximately $3,800,000 and a accumulated deficit of roughly $6,100,000. 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.

 

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, Lawrence Cheung, the principal shareholder of MoqiZone Cayman, and, MKM, 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 sought to be created Series B convertible preferred stock. and such Series B preferred stock will be 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, on a fully-diluted basis, as at the time of conversion (but prior to the issuance of any other equity or equity type securities). 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 6).

 

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

Recent Developments

Appointment of New Director

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

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 available in the market 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. Under the guidance in FASB ASC 805, the purchase price was allocated to intangible assets and amortized over its estimated life. No liability was assumed in this acquisition. “Netcafe Farmer” has operated for approximately 18 months and earned less than 20,000 RMB (or approximately US$3,000) per month. The total income in the most recentfiscal year was approximately US$36,000. Mr. Liu Qian has the obligation to transfer all the intellectual property, including source codes of Netcafe Farmer to the Company.

 

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 them to promote 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 internet café s, which due to physical limitation cannot install our WiMAX equipment, via fixed line network. Internet cafe s installed with Netcafe Farmer will be able to enjoy the same products and services as those that are installed with WiMAX equipment except the revenue sharing would be different. For Netcafe Farmer connected internet cafés, they will be sharing less revenue because the company will have to subcontract fixed line connectivity from major Telco providers and as a result the cost to the company to deploy such system will be higher.

 

Management has adopted FASB ASC 805-10-25-1 to determine which accounting method should be used for this acquisition. According to FASB ASC 805-10-25-1, entity shall determine whether a transaction or other event is a business combination by applying the definition, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. An entity shall account for each business combination by applying the acquisition method. Management has also adopted FASB ASC 805-10-55-4, which declares that a business consists of inputs and processes applied to those inputs that have the ability to create outputs. Since Netcafe Farmer has all three elements, management believes that it constitutes a business and we accounted for it under the acquisition method.

According to rule 11-01 of Regulation S-X, financial information and pro forma financial information of an acquired business may be required depending on the level of significance in accordance with Rule 1-02(w) of Regulation S-X. Pursuant to Rule 11-01(b) and Rule 1-02(w), the significance test, (1) The total net income of Netcafe Farmer in the most resent fiscal year was approximately US$36,000, which didn’t exceed 20 percent of the net loss of the company and its subsidiaries consolidated for the most recently completed fiscal year, which was approximately US$913,000 for the year ended December 31, 2008;  (2) the company’s investment in “Netcafe Farmer” was approximately US$95,000 which was about 20 percent of the total assets of the company and its subsidiaries consolidated as of the end of the most recently completed fiscal year and we believe the effect is immaterial; and (3) the total asset of “Netcafe Farmer” didn’t exceed 20 percent of the total assets of the company as of the end of the most recently completed fiscal year. As a result, the business combination was not considered to be significant and we were not required to file pro forma financial information.

Agreements with Win’s Entertainment Ltd.

We have recently established partnership with Win’s Entertainment Limited (“Win’s”), a major motion picture producing 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.

 

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The 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 are 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 (the “Preferred Shares”), convertible into one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and (ii) a Series C Warrant (the “Series C Warrant”) and Series D Warrant (the “Series D Warrant”), collectively the “Warrants”), 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 MobiZone Hong Kong Financing

On June 1, 2009, we completed a private financing of $4,345,000, with 10 accredited investors (the “June 1 Financing”), which initially included $300,000 that we received in October 2008 pursuant to a Convertible Loan Agreement with two accredited investors (the “Convertible Notes”), however, in accordance with the terms of the Convertible Notes, on August 20, 2009, the holders of the Convertible Notes elected to be repaid the principal of the Notes rather than convert the Convertible Notes into the same securities issued to the investors pursuant to the June 1 Financing. The net proceeds from the June 1 Financing were approximately $3,337,000 after taking into account the fees and expenses of the Offering as well as the repayment of the Convertible Notes.  Consummation of the June 1 Financing was a condition to the completion of the Share Exchange.  The securities offered in the June 1 Financing was sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company, MoqiZone Cayman, Cheung, MKM and each of the purchasers thereto (the “Investors”).  Pursuant to the Purchase Agreement, we issued a total of approximately 405 Units of securities consisting of (a) $10,000 of 8% exchangeable convertible notes of MobiZone Hong Kong due March 31, 2011 (the “Notes”), (b) three year Class A callable warrants (the “Class A Warrants”) to purchase 2,778 shares of common stock of Trestle, at an exercise price of $2.50 per share, and (c) three year Class B non-callable warrants (the “Class B Warrants”) to purchase 2,778 shares of common stock of the Company at an exercise price of $3.00 per share.  The exercise prices of the Warrants are subject to weighted average and other anti-dilution adjustments.  Pursuant to the sale of approximately 405 Units, we issued an aggregate of approximately $4,045,000 of Notes, Class A Warrants to purchase up to 1,123,614 shares of common stock and Class B Warrants to purchase up to 1,123,614 shares of common stock will be issued.  The Notes were and will be issued by MobiZone Hong Kong and the Warrants will be issued by Trestle (now Moqizone Holding Corporation).

On August 11, 2009, we completed a further private equity financing of $900,000 with 3 accredited investors (the “August 11 Financing”).  Net proceeds from the August 11 Financing are approximately $800,000.  Pursuant to the August 11 Financing, we issued a total of approximately 90 Units of securities each consisting of (a) $10,000 of 8% exchangeable convertible notes of MobiZone Hong Kong due March 31, 2011 (the “Notes”), (b) three year Class A callable warrants (the “Class A Warrants”) to purchase 2,778 shares of common stock of Moqizone, at an exercise price of $2.50 per share, and (c) three year Class B non-callable warrants (the “Class B Warrants”) to purchase 2,778 shares of common stock of Moqizone at an exercise price of $3.00 per share.  The exercise prices of the Warrants are subject to weighted average and other anti-dilution adjustments.  Pursuant to the sale of approximately 90 Units, we issued an aggregate of approximately $900,000 of Notes, Class A Warrants to purchase up to 250,000 shares of common stock and Class B Warrants to purchase up to 250,000 shares of common stock will be issued.  All of the securities issued in the August 11 Financing contain the same terms and conditions as the securities issued to the investors of the June 1 Financing (the “August 11 Financing”; and together with the June 1 Financing, the “Financings”).

We raised a total of $4,945,000 from 11 accredited investors from the Financings after repayment of the Convertible Notes.  As a result of the Financings, we issued a total of approximately 494.5 Units of securities each consisting of (a) the Notes, (b) the Class A Warrants, and (c) the Class B Warrants.  Pursuant to the sale of approximately 494.5 Units, we issued an aggregate of approximately $4,945,000 of Notes, Class A Warrants to purchase up to 1,373,614 shares of common stock and Class B Warrants to purchase up to 1,373,614 of common stock will be issued.  The net proceeds from the Financings are to be used for working capital and general corporate purposes.  We are obligated to file a registration statement within 150 days of the second closing, providing for the resale of the shares of common stock underlying the securities issued pursuant to the Financings.

In connection with the June 1 Financing and August 11 Financing, we granted warrants to purchase up to 582,779 shares of common stock respectively to Tripoint Global Equities, LLC, the placement agent or its designees.  These warrants have the same terms as the warrants issued to Investors and included in the Units.  The placement agent received a total of 582,779 warrants to purchase up to 582,779 shares of our common stock from the Financing. These warrants have the same terms as the warrants issued to Investors and included in the Units.

 

We completed the initial closing of a private equity financing of approximately $247,000 on August 27, 2010 with 2 accredited investors pursuant to a Securities Purchase Agreement.  Net proceeds from the offering, are approximately $207,000.  Pursuant to the financing, we issued a total of 11 units of our securities at $22,500 per unit.  Each Unit consists of (i) an 8% Convertible Note, convertible into shares of the Common Stock, (ii) a Series E Warrant, and (iii) a Series F Warrant, each such warrant gives the holder the right to purchase up to that number of shares of our common stock as shall be equal to fifty percent (50%) of the number of shares of common stock underlying the Convertible Note.  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 $24,650.  We also issued, to the placement agent or its designees, in connection with this financing, warrants to purchase up to that number of shares of our common stock as shall be equal to ten percent (10%) of the total number of shares underlying the Units.  These warrants have the same terms as the warrants issued to Investors that are included in the Units.

 

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(a)

all of the issued and outstanding Notes were cancelled;

 

(b)

all interest accrued on the Notes (at the rate of 8% per annum) from the date of issuance to the date of cancellation was paid, at the Company’s option, in shares of Trestle common stock valued at $1.80 per share;

 

(c)

each $1,000 principal amount of cancelled MoqiZone Hong Kong Note was exchanged for one share of Series A Preferred Stock, $0.001 par value per share.  The Series A Preferred Stock (i) has a liquidation value of $1,000 per share, (ii) votes, together with the Trestle common stock, on an “as converted basis”, and (iii) is convertible, at any time after issuance, at the option of the holder, into shares of Trestle common stock at a conversion price of $1.80 per share, subject to customary adjustments, including weighted average anti-dilution protection.

 

Our Corporate Structure

The following table sets forth our corporate structure, after giving effect to consummation of the transactions contemplated by the Share Exchange Agreement described below, assuming the termination of the SZ Mellow Agreements.

 

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THE OFFERING

Common stock being offered by Selling Stockholders		Up to  1,912,728 shares of common stock  (1)
OTCBB Symbol		MOQZ
Risk Factors		The securities offered by this prospectus are speculative and involve a high degree of risk and investors purchasing securities should not purchase the securities unless they can afford the loss of their entire investment. See “Risk Factors” beginning on page 13.

(1)  Pursuant to Rule 416 of the Securities Act of 1933, as amended, the shares of common stock offered hereby also include such presently indeterminate number of shares of our common stock as shall be issued by us to the selling shareholders as a result of stock splits, stock dividends or similar transactions.

Consolidated Statement of Operations Data :

 

Consolidated Statement of Operations Data (in Thousands):

  

		Three months ended June 30,								Years ended December 31,
		2010				2009				2009				2008
Revenues		$	58			$	-			$	1			$	-
Gross profit			5				-				1				-
Net profit (Loss)			1,217				(598	)			(23,441	)			(913	)
Foreign adjustment			58				2				4				(6	)
Comprehensive income (Loss)			1,275				(596	)			(23,550	)			(919	)

 

		Six months ended June 30,								Years ended December 31,
		2010				2009				2009				2008
Revenues		$	59			$	-			$	1			$	-
Gross profit			7				-				1				-
Net profit (Loss)			19,882				(1,003	)			(23,441	)			(913	)
Foreign adjustment			89				(3	)			4				(6	)
Comprehensive income (Loss)			19,971				(1,006	)			(23,550	)			(919	)

Consolidated Balance Sheet Data :

 

		As of June 30,				As of December 31,
		2010				2009				2008
Balance Sheet Data:
Current Assets		$	1,106			$	666			$	18
Total assets			1,926				1,565				466
Total Current Liabilities			4,478				25,889				1,187
Total Liabilities			4,478				25,889				1,187
Total Stockholders’ Deficiency		$	(2,552	)		$	(24,324	)		$	(721	)

RISK FACTORS

Investment in our securities involves risk. You should carefully consider the risks we describe below before deciding to invest. The market price of our securities could decline due to any of these risks, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information included in this Memorandum. You should pay particular attention to the fact that a substantial amount of our operations in China are subject to legal and regulatory environments that in many respects differ from that of the United States. Our business, financial condition or results of operations could be affected materially and adversely by any of the risks discussed below and any others not foreseen. This discussion contains forward-looking statements.

 

 

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Risks Related to Our Business and Industry

 

We depend on the People’s Liberation Army’s or PLA’s s approval and our cooperation relationship with Tai Ji as low cost WiMAX network provider.  The termination or alteration of the PLA’s approval or the termination of our cooperation relationship with Tai Ji would materially and adversely impact our business operations and financial conditions.

 

Tai Ji was authorized to exclusively use the 3.5GHz radio frequency resources by an approval letter issued by the PLA Resource Office dated October 31, 2007 (“PLA Approval Letter”).  However, we cannot assure you that (i) the PLA Resource Office or its higher authority will not revoke their approval by issuing another letter; (ii) whether the PLA Resource Office has the authority to grant an “exclusive” right to Tai Ji to use the 3.5GHz radio frequency resources; (iii) whether the 3.5GHz radio frequency resources authorized by the PLA Approval Letter can be widely used for commercial purpose. If the PLA Approval Letter is revoked, the Company may be forced to purchase T1 ADSL bandwidth from the incumbent telecom carriers, which will increase our operational cost and materially and adversely impact our business operations and financial conditions.

Notwithstanding the Cooperation Agreement (see further below the discussion of “VIE” at Page 44) among Tai Ji, SZ Alar and Shanghai MoqiZone and the fact that there are common members among the management teams of the Company and Tai Ji, we cannot assure you that (i) the cooperation relationship between Shanghai MoqiZone and Tai Ji will be maintained, and (ii) the Cooperation Agreement will be fully performed.  In the event that Tai Ji breaches the Cooperation Agreement, or we cannot get a renewal of the cooperation relationship after it expires, we will not be able to use the 3.5GHz radio frequency resources, which could cause significant disruptions to our business operations or may materially adversely affect our business, financial condition and results of operations.

Significant changes in policies or guidelines of the PLA may result in lower revenue or additional costs for us and materially adversely affect our financial condition or results of operations.

It is possible that the PLA will from time to time issue policies or guidelines, requesting or stating its preference for certain actions to be taken by Tai Ji using its networks, including changing the usable frequency from 3400-3430 MHz and 3500-3530 MHz to other range. Due to our reliance on the PLA as low-cost network resources provider, a significant change in its policies or guidelines may have a material effect on us. Such change in policies or guidelines may result in lower revenues or additional operating costs for us, and we cannot assure you that our financial condition and results of operation will not be materially adversely affected by any policy or guideline change by the PLA in the future.

If the PRC government believes that the agreements that establish the structure for operating our business do not comply with PRC government restrictions on foreign investment in the value-added telecommunications industry, we could be subject to severe penalties.

In December 2001, in order to comply with China’s commitments with respect to its entry into the World Trade Organization, or WTO, the State Council promulgated the Administrative Rules for Foreign Investments in Telecommunications Enterprises, or the Telecom FIE Rules. The Telecom FIE Rules set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecommunications enterprise. Pursuant to the Telecom FIE Rules, the ultimate ownership interest of a foreign investor in a foreign-funded telecommunications enterprise that provides value-added telecommunication services, shall not exceed 50%.

We (including Shanghai MoqiZone), are considered as foreign persons or foreign-invested enterprises under PRC laws. As a result, we operate our wireless value-added services in China through the VIE, which is owned by PRC citizens. We do not have any direct equity interest in the operating company but instead, the Company will only share its economic benefits derived through contractual arrangements, including agreements on provision of services, license of intellectual property, and certain corporate governance and shareholder rights matters. The VIE conducts portion of our operations and generates portion of our revenues. It also holds the licenses (including the Content Provider License) and approvals that are essential to our business.

There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including but not limited to the laws and regulations governing the validity and enforcement of our contractual arrangements. Accordingly, we cannot assure you that PRC regulatory authorities will not determine that our contractual arrangements with the VIE violate PRC laws or regulations.

If we or our operating company were found to violate any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including, without limitation, the following:

(a)

levying fines;

 

(b)

confiscating our or our operating company’s income;

 

(c)

revoking our or our operating company’s business licenses and other operating licenses;

 

(d)

shutting down the servers or blocking our or our operating company’s web sites;

 

 

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(e)

restricting or prohibiting our use of the proceeds from this offering to finance our business and operations in China;

 

(f)

requiring us to restructure our ownership structure or operations; and/or

 

(g)

requiring us or our operating company to discontinue our wireless value-added services business.

 

Any of these or similar actions could cause significant disruptions to our business operations or render us unable to conduct our business operations and may materially adversely affect our business, financial condition and results of operations.

Our contractual arrangement with the VIE and their shareholders may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce. We were not able to establish operations control of SZ Mellow under prior agreements.

PRC laws and regulations currently restrict foreign ownership of companies that provide value-added telecommunication services, which include wireless value-added services and Internet content services. As a result, we conduct a portion of our operations and could generate revenues through the VIE pursuant to a series of contractual arrangements with it and its respective shareholders. These agreements may not be as effective in providing control over our operations as direct ownership of these businesses. Direct ownership would allow us, for example, to directly exercise our rights as a shareholder to effect changes in the board of the VIE, which, in turn, could affect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legal matter, if the VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce those arrangements, and rely on legal remedies under PRC law. These remedies may include seeking specific performance or injunctive relief, and claiming damages, any of which may not be effective. For example, if the VIE’s shareholders refuse to transfer their equity interest in the VIE to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if any of those individuals otherwise act in bad faith towards us, we may have to take legal action to compel them to fulfill their contractual obligations.  This was the case with regard to the shareholders of SZ Mellow.  When these persons refused to cooperate with our management with regard to the use and operation of SZ Mellow’s ISP license, we were forced to hire PRC litigation counsel to terminate the agreements with SZ Mellow.  Additionally, we were forced to seek out a new VIE company in order to continue to operate our business as planned.  Although we were able to enter into new agreements with SZ Alar and, as a result, our dispute with the owners of SZ Mellow did not materially disrupt our business, we cannot guarantee that we will not have similar problems with SZ Alar in the future or that we will be able to prevent further disruption to our business and operations as a result.

Additionally, all of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, which relate to critical aspects of our operations, we may be unable to exert effective control over the VIE and our ability to conduct our business may be negatively affected.

If we are unable to get additional online games that are attractive to players and result in overall revenue growth, our business, financial condition and results of operations may be materia lly and adversely affected and our ability to recover related costs may become limited   .

In order to maintain our long-term profitability and financial and operational success, we must continually get new online games that are attractive to players. To date, we have signed up 4 online game companies with approximately 30 games. These games may or may not attract players away from other games companies and may or may not be profitable or popular among the online game players in China. If these games fail to attract new players and fail to drive our online game revenues, our business, financial condition and results of operations may be materially and adversely affected.

Our ability to purchase or license successful online games will depend on their availability at acceptable terms, including price, our ability to compete effectively against other potential purchasers or licensees to attract the developers of these games, and our ability to obtain government approvals required for the purchase or licensing and operation of these games.

The games that we purchase or license may not be attractive to players, may be viewed by the regulatory authorities as not complying with content restrictions, may not be launched as scheduled or may not compete effectively with our competitors’ games. Additionally, new technologies in our competitors’ online game programming or operations could render our games obsolete or unattractive to players, thereby limiting our ability to recover related product development costs, purchase costs and licensing fees. If we are not able to develop, purchase or license successfully online games appealing to players, our future profitability and growth prospects will decline.

 

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Our operating results may be impacted materially by the valuation of our warrants.

 

The warrants that each investor received as a result of our June 1 and August 11 Financings and the conversion of the convertible notes contained a down round protection that allows the price of the Warrants to be reduced in the event the Company issues any additional shares of common stock at a price per share less than the then-applicable warrant price. As such and in accordance with the accounting guidelines, we valued the warrants as a derivative financial instrument and the corresponding liabilities were entered onto our consolidated balance sheet, measured at fair value (at issuance date) and re-measured at fair value (at each reporting period) with changes in fair value recorded in earnings at each reporting period.  The Company used a Black-Scholes option pricing model, which uses the underlying price of our common stock as one of the inputs, to determine the fair value at issuance date and each subsequent reporting period.  As a result, the fair value of the warrants is impacted by changes in the market price of our common stock.  The market price of our Common Stock can be volatile and is subject to factors beyond our control.  These factors include, but are not limited to, changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate, the market of OTC Bulletin Board quoted stocks in general and/or sales of our common stock.  As a result, the value of our common stock may change from measurement date to measurement date thereby resulting in fluctuations in the fair value of the warrants that can materially impact our operating results.

Our limited operating history and the unproven long-term potential of our business model make evaluating our business and prospects difficult.

We were incorporated in August 29, 2007. As our operating history is limited, the revenue and income potential of our business and markets are yet to be fully proven. In addition, we are exposed to risks, uncertainties, expenses and difficulties frequently encountered by companies at an early stage of development. Some of these risks and uncertainties relate to our ability to:

 

a.

maintain our current, and develop new, cooperation arrangements;

 

b.

increase the number of our users by expanding the type, scope and technical sophistication of the content and services we offer;

 

c.

respond effectively to competitive pressures;

 

d.

respond in a timely manner to technological changes or resolve unexpected network interruptions;

 

e.

comply with changes to regulatory requirements;

 

f.

maintain adequate control of our costs and expenses;

 

g.

increase awareness of our brand and continue to build user loyalty; and

 

h.

attract and retain qualified management and employees.

 

We cannot predict whether we will meet internal or external expectations of our future performance. If we are not successful in addressing these risks and uncertainties, our business, financial condition and results of operations may be materially adversely affected.

Our success depends on attracting and retaining qualified personnel.

We depend on a core management and key executives.  In particular, we rely on the expertise and experience of our founders and senior officers, in our business operations, and their personal relationships with our other significant shareholders, employees, the regulatory authorities, our clients, our suppliers and the PLA. If any of them, become unable or unwilling to continue in their present positions, or if they join a competitor or form a competing company in contravention of their employment agreements, we may not be able to identify a replacement easily, our business may be significantly disrupted and our financial condition and results of operations may be materially adversely affected. We do not currently maintain key-man life insurance for any of our key personnel.

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 approximately US$4,947,000 and, as of June 30, 2010, have 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$901,000 as of June 30, 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. Although we expect that the net proceeds of the private placement described above, together with our available funds and funds generated from our operations will be sufficient to meet our anticipated needs for 12 months, we will need to obtain additional capital to continue to grow our business. We currently estimate that we will need an additional $12,000,000 in order to completely deploy our online game delivery platform in our targeted cities by 2013. Our cash requirements may vary materially from those currently anticipated due to changes in our operations, including our marketing and distribution activities, product development, and expansion of our personnel and the timing of our receipt of revenues. Our ability to obtain additional financing in the future will depend in part upon the prevailing capital market conditions, as well as our business performance. There can be no assurance that we will be successful in our efforts to arrange additional financing on terms satisfactory to us or at all.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 June 30, 2010, we had a stockholders’ deficiency of approximately $2,552,000. 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.

 

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We may not be able to continue to operate our business if we are unable to attract additional operating capital.

 

On March 29, 2010, we completed a private equity financing whereby the net proceeds were approximately $1,760,400.00. In addition to this financing, we estimate that we will need  at least $1.5 million of general working capital to fund our basic operations until October 2011.  Based on our current business development plans and in addition to our general working capital needs, we estimate that we will need approximately US$2 million of additional financing to fund our WiMAX deployment to the point where our cash flow from operating activities will be positive, a further US$1 million to aggregate and license contents and $1 million to develop the Viva Red mobile game platform. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Although we expect that the net proceeds of the private placement together with approximately $5.5 million of additional funding as described above will be sufficient to fund our working capital needs, develop Viva Red and allow deployment of WiMAX until it becomes cash flow positive, we will need to obtain additional capital to execute our overall business. We currently estimate that we will need an additional US$10 million in order to completely deploy our online game delivery platform in all targeted cities by 2014. Our cash requirements may vary materially from those currently anticipated due to changes in our operations, including our marketing and distribution activities, product development, and expansion of our personnel and the timing of our receipt of revenues.

 

Although we expect that the net proceeds of the private placement together with $3 million of additional funding as described above will be sufficient to fund our WiMAX deployment until it becomes cash flow positive, we will need to obtain additional capital to execute overall business. We currently estimate that we will need an additional $9,000,000 in order to completely deploy our online game delivery platform in all targeted cities by 2013. Our cash requirements may vary materially from those currently anticipated due to changes in our operations, including our marketing and distribution activities, product development, and expansion of our personnel and the timing of our receipt of revenues. Our ability to obtain additional financing in the future will depend in part upon the prevailing capital market conditions, as well as our business performance. There can be no assurance that we will be successful in our efforts to arrange additional financing on terms satisfactory to us or at all 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 prior to December 2010, we may have to restrict or discontinue our business. Our success is dependent on future financings.

 

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. Our ability to obtain additional financing in the future will depend in part upon the prevailing capital market conditions, as well as our business performance. There can be no assurance that we will be successful in our efforts to arrange additional financing on terms satisfactory to us or at all. If we do not receive additional financing prior to December 2010, we may have to restrict or discontinue our business, including reducing the name of target internet cafes, eliminating some proposed online gaming software and /or reducing staffing. Our success is dependent on future financings.

 

We may not be able to adequately protect our intellectual property, and we may be exposed to infringement claims by third parties.

We believe the copyrights, service marks, trademarks, trade secrets and other intellectual property we use are important to our business, and any unauthorized use of such intellectual property by third parties may adversely affect our business and reputation. We rely on the intellectual property laws and contractual arrangements with our employees, clients, business partners and others to protect such intellectual property rights. Third parties may be able to obtain and use such intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in the Internet and wireless value-added related industries in China is uncertain and still evolving, and these laws may not protect intellectual property rights to the same extent as the laws of some other jurisdictions, such as the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources, and have a material adverse effect on our business, financial condition and results of operations.

The laws and regulations governing the value-added telecommunications and Internet industry in China are developing and subject to future changes. Substantial uncertainties exist as to the interpretation and implementation of those laws and regulations.

Our digital entertainment services are subject to general regulation regarding telecommunication services. In recent years, the PRC government has begun to promulgate laws and regulations applicable to Internet-related services and activities, many of which are relatively new and untested and subject to future changes. In addition, various regulatory authorities of the central PRC government, such as the State Council, the MIIT (formerly known as the Ministry of Information Industry, or MII), the State Administration of Industry and Commerce, or SAIC, and the Ministry of Public Security, are empowered to issue and implement rules to regulate certain aspects of Internet-related services and activities. Furthermore, some local governments have also promulgated local rules applicable to Internet companies operating within their respective jurisdictions. As the Internet industry itself is at an early stage of development in China, there will likely be new laws and regulations promulgated in the future to address issues that may arise from time to time. As a result, uncertainties exist regarding the interpretation and implementation of current and future PRC Internet laws and regulations.

The VIE has obtained various value-added telecommunication service licenses from the MIIT or its local branches, and Tai Ji has obtained PLA Authorization, for the provisions of their services in relation to the usage of 3.5GHz. Tai Ji will apply for licenses for each and all WiMAX base stations when they are built up. These licenses will be held by Tai Ji and Tai Ji will license these stations to the VIE. We cannot assure you that we will be able to obtain or maintain these licenses or that the regulatory authorities will not take any action against us if we fail to obtain or maintain them. If the VIE and/or Tai Ji fails to obtain or maintain any of the required licenses or permits respectively, it may be subject to various penalties, including redressing the violations, confiscation of income, imposition of fines or even suspension of its operations. Any of these measures could materially disrupt our operations and materially and adversely affect our financial condition and results of operations.

The MIIT issued regulations that regulate and limit ownership and investment in internet and other value-added telecommunications businesses in the PRC which may limit the type of businesses we will be able to acquire.

On July 13, 2006, the MII issued a notice with the purpose of increasing the regulation of foreign investment in and operations of value added telecom services which include internet and telecommunication businesses in the PRC. The regulations require Chinese entities to own and control the following: (i) internet domain names, (ii) registered trademarks, and (iii) servers and other infrastructure equipment used to host and operate web-sites and conduct businesses. The ownership requirements functionally limit foreign direct and indirect ownership and control of the intellectual property of these businesses even when attempted through various parallel control, licensing, use and management agreements. It is anticipated that these regulations will be strictly enforced, and the government has provided that the new regulations apply retroactively and provide for audit procedures. The failure to comply may cause the MIIT to terminate a telecommunication license or otherwise modify existing agreements or require the disposition of the assets by the foreign entity. Any anticipated foreign investment in such businesses will be subject to prior approval by the MIIT, and it is expected that approval for investment may not be easily obtained for foreign investment in these businesses unless in strict compliance. Therefore, investment by us in this sector may not be actively pursued because certain assets may not be acquirable and accounting consolidation may be restricted or not permitted as a result of an unfavorable but permitted transaction structure.

 

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The PRC government may prevent us from distributing, and we may be subject to liability for content that any of them believes is inappropriate.

China has promulgated regulations governing telecommunication service providers, Internet access and the distribution of online games and other information. In the past, the PRC government has stopped the distribution of information over the Internet that it believes to violate Chinese law, including content that is obscene, incites violence, endangers national security, is contrary to the national interest or is defamatory.

The growth of our business may be adversely affected due to public concerns over the security and privacy of confidential user information.

The growth of our business may be inhibited if the public concern over the security and privacy of confidential user information transmitted over the Internet and wireless networks is not adequately addressed. Our service quality may decline and our business may be adversely affected if significant breaches of network security or user privacy occur.

We could be liable for breaches of security of our website and third-party online payment system, which may have a material adverse effect on our reputation and business.

Secure transmission of confidential information, such as customers’ debit and credit card numbers and expiration dates, personal information and billing addresses, over public networks, including our official game website, is essential for maintaining consumer confidence. We currently provide password protection, IP address verification and hardware verification for all of player accounts. While we have not experienced any breach of our security measures to date, such current security measures may be inadequate. In addition, we expect that an increasing number of our sales will be conducted over the Internet as result of the growing use of online payment systems. We also expect that associated online crime will likely increase accordingly. We must therefore be prepared to increase our security measures and efforts so that our customers have confidence in the reliability of the online payment system that we use. We do not have control over the security measures of our third-party online payment operator, and its security measures may not be adequate at present or may not be adequate with the expected increased usage of online payment systems. We could be exposed to litigation and possible liability if we fail to secure confidential customer information, which could harm our reputation, ability to attract customers and ability to encourage players to purchase our game points.

Unexpected network interruptions, security breaches or computer virus attacks could have a material adverse effect on our business, financial condition and results of operations.

Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain players. All our game servers and all of the servers which handle log-in, billing and data back-up matters are hosted and maintained by third party service providers. Major risks involved in such network infrastructure include any break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.

Our network systems are also vulnerable to damage from fire, flood, power loss, telecommunications failures, computer viruses, hacking and similar events. Any network interruption, virus or other inadequacy that causes interruptions in the availability of the online games or deterioration in the quality of access to the online games could reduce our players’ satisfaction and ultimately harm our business, financial condition and results of operations. In addition, any security breach caused by hackings, which involve efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our network systems and we do not have business interruption insurance.

Future acquisitions may have an adverse effect on our ability to manage our business.

Selective acquisitions form part of our strategy to expand our business. We do not, however, have any prior experience integrating any new companies into ours, and we believe that integration of a new company’s operation and personnel will require significant management attention. The diversion of our management’s attention from our business and any difficulties encountered in the integration process could have an adverse effect on our ability to manage our business.

We may pursue acquisitions of companies, technologies and personnel that are complementary to our existing business. However, our ability to grow through future acquisitions or investments or hiring will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates, and the availability of financing to complete larger acquisitions. We may face significant competition in executing our growth strategy. Future acquisitions or investments could result in potential dilutive issuances of equity securities or incurrence of debt, contingent liabilities or impairment of goodwill and other intangible assets, any of which could adversely affect our financial condition and results of operations. The benefits of an acquisition or investment may also take considerable time to develop and any particular acquisition or investment may not produce the intended benefits.

 

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Future acquisitions would also expose us to potential risks, including risks associated with the assimilation of new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, our relationships with employees, customers, licensors and other suppliers as a result of the integration of new businesses.

We may be subject to infringement and misappropriation claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services or technologies.

Our success depends, in part, on our ability to carry out our business without infringing the intellectual property rights of third parties. We may be subject to litigation involving claims of patent, copyright or trademark infringement, or other violations of intellectual property rights of third parties. Future litigation may cause us to incur significant expenses, and third-party claims, if successfully asserted against us, may cause us to pay substantial damages, seek licenses from third parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

The successful operation of our business depends upon the performance and reliability of the Internet infrastructure and fixed telecommunication networks in China.

Our business depends, in part, on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. In addition, the national networks in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways are the only channels through which a domestic user can connect to the Internet. A more sophisticated Internet infrastructure may not be developed in China. We or the players of online games may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure.  As one of our important business partners are Internet cafés in China, intensified government regulation of Internet cafés could limit our ability to maintain or increase our net revenues and expand our customer base.

We rely on Internet cafes as our business partners in China to provide our services to the final users. Starting in 2001, the Chinese government began tightening its supervision of Internet cafés, closing unlicensed Internet cafés, requiring those remaining open to install software to prevent access to sites deemed subversive and requiring web portals to sign a pledge not to host subversive sites. In February 2007, 14 PRC national government authorities, including the MIIT, the Ministry of Culture and the General Administration of Press and Publication, jointly issued a notice suspending nationwide approval for the establishment of new Internet cafés in 2007 and enhancing the punishment for Internet cafés admitting minors. This suspension may continue indefinitely. Furthermore, the Chinese government’s policy, which encourages the development of a limited number of national and regional Internet café chains and discourages the establishment of independent Internet cafés, may slow down the growth of Internet cafés.

As Internet cafés are the primary venue for users to use our service, any reduction in the number, or any slowdown in the growth, of Internet cafés in China will limit our ability to maintain or increase our net revenues and expand our customer base, which will in turn materially and adversely affect our business and results of operations.

Our business may be adversely affected by public opinion and government policies in China.

Internet cafés, which are currently the most important outlets for online games, have been criticized by the general public in China for having exerted a negative influence on young people. Due primarily to such adverse public reaction, regulators in China have tightened their regulation of Internet café operations through, among other things, suspending the issuance of new operating licenses and further reducing the hours during which the Internet cafés are permitted to remain open for business. Also, local and higher-level governmental authorities may from time to time decide to more strictly enforce age limits and other requirements relating to Internet cafés as a result of the occurrence of, and the media attention on, gang fights, arson and other incidents in or related to Internet cafés. As most of our customers access online games from Internet cafés, any restrictions on Internet café operations could result in a reduction of the amount of time the customers spend on online games or a reduction in or slowdown in the growth of the player base. Moreover, any adverse public reaction to the online game industry may discourage players from spending too much time playing online games, which could limit the growth of or reduce our net revenues. In addition, it is also possible that the Chinese government authorities may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction or otherwise. Any such restrictions on online game playing would adversely affect our business and results of operations.

 

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Our operations may be adversely affected by implementation of new addiction-related regulations.

The Chinese government may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction to perceived addiction to online games, particularly by minors. On April 15, 2007, eight PRC government authorities, including the State Press and Publication Administration, the Ministry of Education and the Ministry of Information Industry issued a Notice on the Implementation of Online Game Anti-Addiction System to Protect the Physical and Psychological Health of Minors (the “Anti-Addiction Notice”), requiring all Chinese game operators to adopt an “anti-addiction system” in an effort to curb addiction to online games by minors. Under the anti-addiction system, three hours or less of continuous play is defined to be “healthy,” three to five hours is defined to be “fatiguing,” and five hours or more is defined to be “unhealthy.” Game operators are required to reduce the value of game benefits for minor players by half when those players reach the “fatigue” level, and to zero when they reach the “unhealthy” level. In addition, online game players in China are now required to register their identity card numbers before they can play an online game. This system allows game operators to identify which players are minors. Failure to comply with the requirements under the Anti-Addiction Notice may subject us to penalties, including but not limited to suspension of the operation of online games, revocation of the licenses and approvals for Internet cafes’ operations, rejection or suspension of the application for approvals, licenses, or filings for any new games, or prohibiting Internet cafes from operating any new game.

Internet cafes currently do not allow the admission of juvenile players. If these restrictions are expanded to apply to adult players in the future, it could have a material and adverse effect on our business, financial condition and operating results.

Risks Related to International Operations

Substantially all of our assets may be located in the PRC and substantially all of our revenue may be derived from our operations in the PRC. Accordingly, our results of operations and prospects will be subject, to a significant extent, to the economic, political and legal policies, developments and conditions in such country.

The PRC economic, political and social conditions, as well as government policies, could affect our business. For instance, the PRC economy differs from the economies of most developed countries in many respects. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely curtailed which could materially and adversely impact our profitability.

While the economy of the PRC has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the supply of money and rising inflation. In order to control inflation in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Imposition of similar restrictions may lead to a slowing of economic growth and decrease the interest in the services or products we may ultimately offer leading to a material and adverse impact on our profitability.

Any devaluation of currencies used in the PRC could negatively impact our business’ results of operations and any appreciation thereof could cause the cost of our business as measured in dollars to increase.

Because substantially all revenues and income would be received in a foreign currency such as RMB, the national currency in the PRC, the dollar equivalent of our net assets and distributions, if any, would be adversely affected by fluctuations in the value of the RMB. The value of foreign currency fluctuates and is affected by, among other things, changes in political and economic conditions. To the extent that we need to convert U.S. dollars into Chinese currency for our operations, appreciation of this currency against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert RMB into U.S. dollars for other business purposes and the U.S. dollar appreciates against this currency, the U.S. dollar equivalent of such currency we convert would be reduced.

The conversion of RMB into foreign currencies such as the U.S. dollar has been generally based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Historically, the PRC “pegged” its currency to the U.S. dollar. This meant that each unit of Chinese currency had a set ratio for which it could be exchanged for United States currency, as opposed to having a floating value like other countries’ currencies. Many countries argued that this system of keeping the Chinese currency low when compared to other countries gave Chinese companies an unfair price advantage over foreign companies. Due to mounting pressure from other countries, the PRC recently reformed its economic policies to establish a floating value for its currency. Since July 21, 2005, RMB has been pegged to a basket of currencies, and permitted to fluctuate within a managed band. As of July 22, 2008 Beijing time, the exchange rate of the RMB was 6.8219:1 against the US dollar. This floating exchange rate, and any appreciation of the RMB that may result from such rate, could cause the cost of our business as measured in dollars to increase. Further, our business may be adversely affected since the competitive advantages that existed as a result of the former policies will cease.

 

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Our corporate structure may limit our ability to receive dividends from, and transfer funds to, our PRC subsidiary, which could restrict our ability to act in response to changing market conditions.

Moqizone is a holding company. Shanghai MoqiZone, our indirectly wholly-owned subsidiary established in China has entered into contractual arrangements with the VIE through which we conduct our wireless value-added activities and receive substantially all of our revenues in the form of service fees. We rely on dividends and other distributions on equity paid by our subsidiary and service fees from the VIE for our cash requirements in excess of any cash raised from investors and retained by us. If our subsidiary incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

In addition, PRC law requires that payment of dividends by our subsidiary can only be made out of its net income, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, our subsidiary is also required to set aside no less than 10% of its after-tax net income each year to fund certain reserve funds unless such reserve funds have reached 50% of the registered capital of our subsidiary, and these reserves are not distributable as dividends. Any limitation on the payment of dividends by our subsidiary could materially adversely affect our ability to grow, fund investments, make acquisitions, pay dividends, and otherwise fund and conduct our business. Any transfer of funds from our company to our PRC subsidiary, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of Chinese governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. These limitations on the free flow of funds between us and our PRC subsidiary could restrict our ability to act in response to changing market conditions.

Recent regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that may limit or adversely affect our ability to acquire PRC companies.

Regulations were issued on January 24, 2005, on April 8, 2005 and on October 21, 2005, by the SAFE, that will require approvals from, and registration with, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. The Circular on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular 75, which were issued on October 21, 2005 and became effective as of November 1, 2005 repealed the previous January and April SAFE regulations. Circular 75 requires each Chinese domestic resident, whether a natural or legal person, to complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch, prior to establishing or assuming control of an offshore company for the purpose of acquiring assets or equity interests in the PRC and using these assets to seek overseas financing (known as “round-trip investment”). In addition, an amendment to the registration with the local SAFE branch is required to be filed by any Chinese domestic 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. An amendment to the registration is also required to be filed by such Chinese domestic resident when there is any material change involving a change in the capital of the offshore company. Moreover, Circular 75 applies retroactively. As a result, Chinese domestic residents who have established or acquired control of offshore companies that have made onshore investments in China in the past are required to complete the relevant overseas investment foreign exchange registration procedures. For purposes of SAFE registrations required under Circular 75, “Chinese domestic residents” shall include individuals without mainland China identity papers who have habitually lived in China due to economic interest. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in penalties under PRC foreign exchange administration regulations and liability under PRC law for foreign exchange evasion.

As a Hong Kong company, and therefore an offshore company for purpose of SAFE regulations, if we purchase the assets or equity interest of a Chinese company owned by Chinese domestic residents, including those which we will generate revenue from and exercise control over through agreements, such Chinese domestic residents who may become our shareholders will be subject to registration procedures described in the aforementioned SAFE notice. Moreover, Chinese domestic residents who are already our beneficial shareholders may be required to register with SAFE in connection with their shareholdings in us. Failure of any Chinese shareholders of us to register with SAFE may limit our Chinese subsidiary’s ability to distribute dividends to us.

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.

 

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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.

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%.

 

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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.

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.

 

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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.

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 October 14, 2010, the closing bid price of our common stock was $2.00 per share.  As of October 14, 2010, we had approximately 113 shareholders of record of our common stock, not including shares held in street name.  In addition, during the past two 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 from 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 4.  USE OF PROCEEDS

 

We will not receive any proceeds upon the conversion of the preferred shares into shares of our common stock; however, we received net proceeds of approximately $1,760,400 from the initial sale of all of the Preferred Stock issued in the 2010 Financing and we could receive net proceeds of up to approximately $2,560,000 from the exercise of the Warrants issued in connection with this financing, when and if exercised.  The net proceeds from the issuance of the Notes and any proceeds received from the exercise of the Warrants have been and will be used as set forth in the table below.

 

The following table represents estimates only.  The actual amounts may vary from these estimates.

 

		Net Funds Received from Sale of the Preferred Stock
		(in thousands)
Use of funds
Research & development		$	300,000
Platform Development including WiMAX and Netcafe Farmer Deployment		$	700,000
Working capital		$	1,560,000
Total		$	2,560,000

 

Securities Authorized for Issuance Under Equity Compensation Plans

ITEM 5.  DETERMINATION OF OFFERING PRICE

Not applicable.

 

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ITEM 6.  DILUTION

Not applicable.

 

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(1)

Unless otherwise noted, the Selling Stockholder became one of our shareholders pursuant to the Private Equity Financings we completed on March 29, 2010. Accordingly, prior to the Offering, the Selling Stockholder owned shares of common stock underlying the Preferred Stock and Warrants received in the Financing (the “Securities”); however, based upon the terms of the both the preferred stock and the Warrants, holders may not convert the preferred stock and/or exercise the warrants, if on any date, such holder would be deemed the beneficial owner of more than 4.99% or 9.9%, depending upon their agreement, of the then outstanding shares of our common stock; however, a holder may elect to waive the cap upon 61 days notice to us, except that during the 61 day period prior to the expiration date of their warrants, they can waive the cap at any time, but a waiver during such period will not be effective until the expiration date of the warrant. Therefore, unless otherwise noted, this number represents the number of Securities the Selling Stockholder received in the Financing that he/she can own based upon the ownership cap, assuming the ownership cap is not waived.  Additionally, the shares of preferred stock are subject to weighted average and other anti-dilution adjustments; See “Prospectus Summary – Recent Developments - Financing” and “Description of Securities”.

 

(2)

This number represents all of the Securities that the Selling Stockholder received in the March 29, 2010 Financing, which we agreed to register in this Registration Statement pursuant to the Registration Rights Agreement we entered into in connection with the Financing.

 

(3)

Since we do not have the ability to control how many, if any, of their shares each of the selling shareholders listed above will sell, we have assumed that the selling shareholders will sell all of the shares offered herein for purposes of determining how many shares they will own after the Offering and their percentage of ownership following the offering.

 

(4)

All Percentages have been rounded up to the nearest one hundredth of one percent.

 

(5)

The person having voting, dispositive or investment powers over MKM Opportunity Master Fund, Ltd. is David Skirloff.  The address for MKM is 1515 Broadway, 11 th Floor, NY, NY 10016.

 

(6)

Consists of 494,530 shares of Common Stock MKM held in Trestle prior the Share Exchange, assuming the Reverse Split is effected, 277,778 shares of common stock underlying 500 Series A Preferred Stock, 138,889 shares of common stock underlying 138,889 Series A, 138,889 share of common stock underlying 138,889 Series B Warrants, registered in our previous prospectus, 111,100 shares of common stock underlying 111,100 Series C Preferred Stock, 55,550 shares of common stock underlying the Series C Warrants and 55,550 shares of common stock underlying the Series D Warrants.

 

(7)

Robert J. Kirkland is the President of Taylor Fund and has voting, dispositive, or investment powers.  The address for Taylor Fund is 714 S. Dearborn, 2d floor, Chicago, IL 60605.

 

(8)

Consists of 200,000 shares of common stock converted from Series C Preferred Stock, 100,000 shares of common stock underlying 100,000 Series C and 100,000 share of common stock underlying 100,000 Series D Warrants.

 

(9)

The address for BBS is 4975 Preston Park Blvd., Ste. 775, W. Plano, TX 75093.

 

(10)

Consists of 75,000 shares of common stock converted from Series C Preferred Stock, 37,500 shares of common stock underlying 37,500 Series C and 37,500 share of common stock underlying 37,500 Series D Warrants. Berke Bakay is the majority shareholder of BBS and has voting, dispositive, or investment powers.

 

(11)

Brett Conrad is the managing member of Blue Earth Fund LP and has voting, dispositive, or investment powers.  The address for Blue Earth Fund is 1312 Cedar Street, Santa Monica, CA 90405.

 

(12)

Consists of 111,100 shares of common stock converted from Series C Preferred Stock, 55,550 shares of common stock underlying 55,550 Series C and 55,550 share of common stock underlying 55,550 Series D Warrants.

 

(13)

Consists of 250,000 shares of common stock converted from Series C Preferred Stock, 125,000 shares of common stock underlying 125,000 Series C and 125,000 share of common stock underlying 125,000 Series D Warrants.

 

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(14)

Consists of 100,000 shares of common stock converted from Series C Preferred Stock, 50,000 shares of common stock underlying 50,000 Series C and 50,000 share of common stock underlying 50,000 Series D Warrants.

 

(15)

Consists of 22,222 shares of common stock converted from Series C Preferred Stock, 11,111 shares of common stock underlying 11,111 Series C and 11,111 share of common stock underlying 11,111 Series D Warrants.

 

(16)

Mark Elenowitz, CEO has voting and dispositive power over the shares held by TriPoint Global Equities, LLC.  Mr. Elenowitz may be deemed to beneficially own the shares of Common Stock held by TriPoint Global Equities, LLC. Mr. Elenowitz disclaims beneficial ownership of such shares. The address for TriPoint Global Equities, LLC. is 17 State Street, 20 th  Floor, New York, NY 10004.

 

(17)

Consists of 275,171shares of Common stock underlying Placement Agent Warrants to purchase up to 275,171shares of our Common Stock

 

(18)

Mr. Finley is an employee of TriPoint Global Equities, LLC, which was placement agent to the Company in the Financing.

 

(19)

Mr. Corbman is an employee of TriPoint Global Equities, LLC, which was placement agent to the Company in the Financing.

ITEM 8.  PLAN OF DISTRIBUTION

PLAN OF DISTRIBUTION

 

We are registering the shares of common stock on behalf of the Selling Shareholders. The selling security holders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions.  These sales may be at fixed or negotiated prices.  The selling security holders may use any one or more of the following methods when disposing of shares:

a.

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

b.

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

c.

purchases by a broker-dealer as principal and resales by the broker-dealer for its account;

d.

an exchange distribution in accordance with the rules of the applicable exchange;

e.

privately negotiated transactions;

f.

to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the Commission;

g.

broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;

h.

a combination of any of these methods of sale; and,

i.

any other method permitted pursuant to applicable law.

The shares may also be sold under Rule 144 under the Securities Act of 1933, as amended if available, rather than under this prospectus.  The selling security holders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements.  If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.

Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.

If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part.  In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.

 

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The selling security holders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales.  Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.  Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.

The selling security holders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M.  These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other person.  Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions.  All of these limitations may affect the marketability of the shares.

If any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders.  We offer no assurance as to whether any of the selling security holders will sell all or any portion of the shares offered under this prospectus.

We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus.  However, each selling security holder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.

We and the selling security holders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.

ITEM 9.  DESCRIPTION OF SECURITIES TO BE REGISTERED

Our current authorized capital now consists of 40,000,000 shares of common stock, 14,104,835 shares of Blank Check preferred stock, whose terms shall be determined by the board of directors at the time of issuance, 15,000 shares of Series A preferred stock, 10,743 shares Series B preferred stock and 869,422 shares Series C preferred stock.  As of October 14, 2010, there were 13,695,724 shares of our common stock outstanding; 1,145 shares of our Series A preferred stock outstanding; 0 shares of our Series B preferred stock outstanding; and, 869,422 shares of our Series C preferred stock outstanding.

Common Stock

We are authorized to issue up to 40,000,000 shares of Common Stock, par value US$.001 per share, of which 13,695,724 are currently issued and outstanding.

Each outstanding share of Common Stock entitles the holder thereof to one vote per share on matters submitted to a vote of shareholders.  Stockholders do not have preemptive rights to purchase shares in any future issuance of our Common Stock.

The holders of shares of our Common Stock are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend. Should we decide in the future to pay dividends, it will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including the company’s financial condition and the results of operations, capital requirements, contractual restrictions, business prospects, and other factors that the Board of Directors considers relevant.  Each share shall be entitled to the same dividend.  In the event of our liquidation, dissolution or winding up, holders of our Common Stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors.

All of the issued and outstanding shares of our Common Stock are duly authorized, validly issued, fully paid and non-assessable. To the extent that additional shares of our Common Stock are issued, the relative interests of existing stockholders will be diluted.

Blank Check Preferred Stock

Effective August 27, 2009, we amended our articles of incorporation to increase our authorized capital stock to include up to 15,000,000 shares of Blank Check preferred stock, to which our board of directors will have the power to issue in one or more series without stockholder approval. Our board of directors, and a majority of our shareholders, approved the amendment to our articles of incorporation via written consent.  Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from acquiring, a majority of our outstanding voting stock.  As of the date of this filing, the Board designated three classes of preferred stock: Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.  As a result, we have 14,104,835 shares of blank check preferred stock authorized and the board does not have any present intention of designating any other class of preferred stock.

 

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  Series C Preferred Stock

Pursuant to the March 29, 2010 financing, 869,422 of the 15,000,000 shares of preferred stock were designated as Series C Preferred Stock.

(a)

pays an annual dividend of 8%, payable quarterly, at Trestle’s option, in cash or in shares of common stock;

 

(b)

has a par value of $0.001 per share;

 

(c)

has a preference over the Trestle common stock or any other Junior Stock on liquidation and the liquidation value is $2.25 per share;

 

(d)

convertible at any time after issuance, at the option of the holder, into shares of Trestle common stock, at a conversion price of $2.25 per share (the “Conversion Price”).  Each Series C preferred share will convert into 1 common share

 

(e)

votes together with the Trestle common stock on an “as converted basis.”

The Class C Warrants

The Class C Warrants included in each Unit:

 

(a)

shall entitle the holder to purchase that number of shares of Trestle common stock (“Class C Warrant Shares”) as shall be equal to fifty percent (50%) of the number of the Units purchased in the offering.

 

(b)

shall be exercisable at any time after consummation of the March 29, 2010 financing and shall expire on March 28, 2013;

 

(c)

shall contain an exercise price which shall be equal to $2.50 per share of Trestle common stock (the “Class C Warrant Exercise Price”);

 

(d)

may be exercised only for cash;

 

(e)

shall provide that the Class C Warrant Exercise Price and the Class C Warrant Shares shall be subject to customary adjustment provisions, including weighted average anti-dilution protection;

The Class D Warrants

The Class D Warrants included in each Unit:

 

(a)

shall entitle the holder to purchase that number of shares of Trestle common stock (“Class D Warrant Shares”) as shall be equal to fifty percent (50%) of the number of the Units purchased in the offering.

 

(b)

shall be exercisable at any time after consummation of the March 29, 2010 financing and shall expire on March 28, 2013;

 

(c)

shall contain an exercise price which shall be equal to $3.00 per share of Trestle common stock (the “Class D Warrant Exercise Price”);

 

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(d)

may be exercised only for cash;

 

(e)

shall provide that the Class D Warrant Exercise Price and the Class D Warrant Shares shall be subject to customary adjustment provisions, including weighted average anti-dilution protection;

The Class E Warrants

The Class E Warrants included in each Unit:

(a)	shall entitle the holder to purchase that number of shares of Moqizone common stock (“Class E Warrant Shares”) as shall be equal to fifty percent (50%) of the number of the Units purchased in the offering;

(b)	shall be exercisable at any time after consummation of the August 27, 2010 financing and shall expire on August 27, 2013;

(c)	shall contain an exercise price which shall be equal to $2.50 per share of Moqizone common stock (the “Class E Warrant Exercise Price”);

(d)	may be exercised only for cash;

(e)	shall provide that the Class E Warrant Exercise Price and the Class E Warrant Shares shall be subject to customary adjustment provisions, including weighted average anti-dilution protection;

A copy of the Warrant is incorporated herein by reference and is filed as Exhibit 10.4 to the current report 8-K filed onSeptember 1, 2010. The description of the Class E Warrants set forth above does not purport to be complete and is qualified in its entirety by reference to the full text of the exhibit filed herewith and incorporated herein by reference.

The Class F Warrants

The Class F Warrants included in each Unit:

(a)	shall entitle the holder to purchase that number of shares of Moqizone common stock (“Class F Warrant Shares”) as shall be equal to fifty percent (50%) of the number of the Units purchased in the offering;

(b)	shall be exercisable at any time after consummation of the August 27, 2010 financing and shall expire on August 27, 2013;

(c)	shall contain an exercise price which shall be equal to $3.00 per share of Moqizone common stock (the “Class F Warrant Exercise Price”);

(d)	may be exercised only for cash;

(e)	shall provide that the Class F Warrant Exercise Price and the Class E Warrant Shares shall be subject to customary adjustment provisions, including weighted average anti-dilution protection;

A copy of the Warrant is incorporated herein by reference and is filed as Exhibit 10.5 to the current report 8-K filed on September 1, 2010. The description of the Class 5 Warrants set forth above does not purport to be complete and is qualified in its entirety by reference to the full text of the exhibit filed herewith and incorporated herein by reference.

Stock Incentive Plan

Prior to the Share Exchange, Trestle maintained an employee stock option plan that provided for the grant of non-statutory or incentive stock options to its employees, officers, directors or consultants.  Stock options granted pursuant to the terms of this plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant (110% for awards issued to a 10% or more stockholder) and the term of the options granted under the plan cannot be greater than 10 years, or 5 years for a stockholder who owns 10% or more of our equity.  Only 10,000 options were granted under the Plan, but they have expired.  Based upon the terms of the private financing we completed in June 2009, the Board shall re-examine the stock option plan. determine if they want to renew the plan or make any revisions that would be better suitable for the company post the Share Exchange.  

 

On July 22, 2010, the Board of Directors approved the 2010 Equity Incentive Plan, pursuant to which 1,500,000 shares of our common stock shall be reserved for issuance. Persons eligible for awards under the Plan will include current and prospective employees, non-employee directors, consultants or other persons who provide services to us that hold positions of responsibility and whose performance, in management’s – or other board appointed committee – judgment, can have a significant effect on our success. On July 22, 2010, the Company granted three-year options to each of 51 employees in the aggregate 1,455,000 shares of the Company’s common stock at an exercise price of US$2.25 per share, in consideration of their services to the Company. These options shall vest semi-annually in equal amounts over the three year life of the options. These options were valued at approximately US$1,548,000 which represents the grant date fair value of these options. Going forward the cost of these options will be expensed as they vest and will be recorded in general and administrative expenses as share-based compensation expenses. Pursuant to these options, we will incur approximately $258,000 of expenses on January 22, 2011 and incurring in equal amounts every six months with the last expense incurring on July 22, 2013.

 

The Company estimates the fair value of these options using the Black-Scholes option pricing model with the following assumptions: an expected life equal to the contractual term of the options (three), underlying stock price of $2.50 per share, no dividends; a risk free rate of 0.92%, which three-year yield on Treasury bonds at constant (or fixed) maturity and volatility of 58%. The expected volatility is calculated using historical data obtained from comparable public companies due to lack of liquidity of the Company’s underlying stock. Exercise price of the option is the contractual exercise price of the option.

Registration Rights

In connection with the issuance of the Preferred Stock and the Warrants in the 2010 Financing, we agreed to file this registration statement with the Securities and Exchange Commission to register for resale the shares of common stock issuable upon the exercise of the Warrants and conversion of the preferred stock.  We also agreed to register the shares of common stock underlying the placement agent warrants we issued pursuant to the financing.

Transfer Agent

The transfer agent for our common stock is American Stock Transfer & Trust Company, LLC, 6201 15th Ave, Brooklyn, NY 11219, tel (718) 921-8206. The transfer agent for our preferred stock is Empire Stock Transfer, Inc., 1859 Whitney Mesa Drive, Henderson, NV 89014, tel (712) 818-5898.

Item 10.  Interest of Named Experts and Counsel

Legal Matters

The validity of the securities offered hereby has been passed upon for us by Leser, Hunter, Taubman and Taubman, New York, New York.

Experts

The financial statements as of and for the years ended December 31, 2009 and 2008, included in this prospectus and in the registration statement have been audited by Paritz &Company, an independent registered public accounting firm, as stated in their report appearing herein.

 

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Item 11.  Information with Respect to the Registrant

Business Overview

Through our Shanghai MoqiZone subsidiary, we provide an online game delivery platform delivering contents of online games that are hosted by us to internet cafes which have installed Netcafe Farmer and/or our WiMAX equipment in China via our Netcafe Farmer software or our proprietary MoqiZone WiMAX Network. Our primary business focus is to provide content delivery of online games that are hosted by us to the internet cafés which have installed Netcafe Farmer and/or installed our WiMAX equipment. Our MoqiZone WiMAX Network is a wireless virtual proprietary network. Netcafe Farmer is an online game auto-update distribution system which enables internet cafés to automatically update the client-end gaming software with patches on a real time basis for all their personal computers or PCs in their cafes. The combination of MoqiZone WiMAX Network and Netcafe Farmer form the backbone of our distribution channel for our online games to our targeted market, which are licensed Internet cafes in cities where the internet cafés business is more developed.

Our targeted market is licensed internet cafes in cities where the internet cafés business is more developed. Our existing penetration to internet cafes is low; however, we have already successfully deployed a few WiMax test sites in Beijing, Suzhou and Shenzhen in Fall 2009 and have aligned ourselves with local internet café associations in order to accelerate our business penetration. We have also launched test sites in Chengdu on December 15, 2009. As of December 31, 2009, in Chengdu there are over 30internet cafés installed with our CPE and 15 of which are utilizing our Moqizone WiMAX Network, and approximately 100 internet cafés are connected to the Moqizone gaming delivery platform to access the games on 53MQ In addition, we have 293 CPE and 43 Base Stations in the inventory for immediate deployment. These cafes were open only for testing purposes and were not revenue producing. We have not generated any revenue from MoqiZone WiMAX Network and little revenue from Netcafe Farmer as of December 31, 2009 as we are providing our WiMAX installation to the internet cafes free of charge. Once a substantial number of WiMAX installed internet cafes are participating in our business, we plan to initiate our charged services to the internet cafes. Please see further discussion at page 47 under “Business – Key Corporate Objectives”

Our business projected revenue will be generated from cash collected from game players through issuing prepaid game cards. We provide internet cafes, game providers and ourselves with real time reporting and customer tracking via www.moqizone.com; and aims to fine tune the conventional value chain by offering more revenue sharing with internet cafés, online game providers and marketing promotion companies.  Ourgoal is to deploy our digital entertainment delivery platform on the MoqiZone WiMAX Network in various targeted cities in China, commencing initially from Suzhou, Chengdu, Zhengzhou, Beijing, and Guizhou.

3.5GMHz Spectrum License

On October 31, 2007, the Communications Resource Management Office of the General Staff Department of Communication of the People’s Liberation Army, renewed its exclusive grant to Tai Ji the People’s Liberation Army Authorization for the usage right of the 3.5GHz radio frequencies throughout China.  On September 25, 2009, Tai Ji agreed to authorize SZ Alar to use the People’s Liberation Army Authorization exclusively in the PRC for Internet café network deployment purposes subject to payment of certain licensing fees.  With the 3.5GHz, we can roll out our MoqiZone WiMAX Network to provide online game contents of our participating games to those internet cafes which are installed with our WiMAX equipment and have joint into our MoqiZone WiMAX Network for consuming gaming content of our participating games at  www.53mq.com  which is our gaming platform designated to service the internet café customers.  The MoqiZone WiMAX Network enables direct access between the internet cafes and the content providers hosted by us at ICDs. 

As a result of the exclusivity granted by the People’s Liberation Army to Tai Ji and as a result of Tai Ji granting us the exclusive usage of the 3.5GMHz radio frequency for Internet café business, we believe that the Company is the only Chinese WiMAX carrier with permitted national coverage license granted indirectly by the People’s Liberation Army to deploy a network similar to the MoqiZone WiMAX Network. Such exclusivity, however, does not extend to other potential competitors who may obtain WiMAX radio spectrum via the MIIT as we are aware of other carriers who may have been granted similar licenses by the MIIT.  Nevertheless, we believe that the People’s Liberation Army Authorization is the only national WiMAX license for the use of 3.5GMHz radio frequencies granted by the People’s Liberation Army (“PLA”) using the WiMAX technology.  

We are not aware, however, that any of our potential competitors has any plans to utilize a WiMAX platform to specifically target the Internet Café business, as is our current plan. As a result, under our current arrangements, and as long as the PLA Authorization granted to Tai Ji and its authorization to SZ Alar is retained, we believe that no existing or potential competitor can foreclose our access to any market in China for Internet cafés.  Accordingly, we believe that the Company has access to the necessary business and operating licenses to deploy China’s first national WiMAX network for Internet cafés.

Tai Ji is one of our key cooperative partners and has obtained the permission to use the 3.5GHz radio frequency resources to the Company and its affiliates in China.  The advantages and disadvantages of People’s Liberation Army Authorization versus MIIT are summarized as follows:-

 

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a)

The license fees for 2009 were RMB3 million (approximately $439,000) and the maximum annual license fees are RMB7 million (approximately $1.024 million) per annum. This is substantially less costly than the WiMAX license fees secured by other telecom companies via MIIT, and as a result, the upfront capital requirements are  less than MITT WiMAX ;

 

b)

The PLA Authorization allows national coverage subject to acknowledgement by local provincial military zone. The tendering of MIIT WiMAX license is provincial and each province will only allow up to 3 companies to participate;

 

c)

There was official documentation regarding the tendering of China WiMAX frequency with the MIIT.  With this, the public or potential investor would be able to verify the substance and approval information of the licenses.

 

d)

The PLA has the right to control the use of WiMAX frequency when there are threats to the country or national crises and in such times this may cause the MoqiZone WiMAX Network to not function properly.

 

e)

PLA Authorization allows automatic annual renewal but the MIIT WiMAX is only valid for 2 years from the date of issuance. The risks of using the PLA Authorization are further discussed above in the section entitled “Risk Factors.”

The VIE

In July 2007, MoqiZone Hong Kong signed a Memorandum of Cooperation with Tai Ji and SZ Mellow which also included a draft of Cooperation Agreement to be entered into among Tai Ji, a WFOE to be established by MoqiZone and SZ Mellow. A WFOE or Wholly Foreign Owned Enterprise is an enterprise in China which is 100% owned by foreign legal entities or persons. Establishment as a WFOE allows the foreign company to retain complete control and direction of the operation. It also tends to maximize return as a second party investor is not involved. According to this Memorandum of Cooperation, the major terms are:

a.

Tai Ji agreed that the MoqiZone Hong Kong can authorize its cooperative partners or subsidiaries in China ("MoqiZone's Representatives") to use the 3.5GMHz radio frequency resources;

 

b.

Tai Ji will collect an annual license fees of RMB 2,500,000 for Year 2008, RMB 3,000,000 for Year 2009 and thereafter, each year annual license fee shall be increased by RMB 500,000 per year based on the previous year annual license fee to a maximum of RMB 7,000,000 per year until the license expires; and

 

c.

Tai Ji will further collect a usage fee of RMB 20,000 per year per radio base station.

On January 25, 2009 Shanghai MoqiZone was incorporated, and on January 26, 2009, Shanghai MoqiZone, Tai Ji and SZ Mellow executed the formal Cooperation Agreement, under which Tai Ji will provide SZ Mellow and Shanghai MoqiZone the exclusive use of the 3.5GHz on Internet Cafes gaming business.

As a result of disputes with the shareholders of Shenzhen Mellow (see below “Legal Proceeding” for further information), on September 21, 2009, in accordance with the terms of the SZ Mellow Agreements, we sent out a 30 days' 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, Tai Ji and SZ Alar executed another Cooperation Agreement, under which Tai Ji will provide SZ Alar and Shanghai MoqiZone the exclusive use of the 3.5GHz on Internet cafes gaming business. Certain of our principal shareholders and executive officers are also affiliated with Tai Ji and the SZ Alar.

Key Advantages to the Moqizone WiMAX Network

We believe that the MoqiZone WiMAX Network provides a cheaper data transmission alternative than those provided by incumbent telecoms and internet data centers.  The MoqiZone Network provides direct access between the Internet cafés and the content providers.

 

China Internet Network Information Center (CNNIC) in July 2009 published the “24th Statistical Report on Internet Development in China”. The following are extract of the summary of finding of the report which the Company believes are relevant to our business:-

l

By June 30, 2009, the number of Chinese Internet users and the Penetration rate of the Internet had reached 338 million and 25.5% respectively. The number of Internet users increased by 40 million compared with late 2008, up 13.4% within six months, and the increase in the number of Chinese Internet users remains robust.

 

l	The number of broadband users had reached 320 million, accounting for 94.3% of all Internet users. In spite of the high Penetration rate of broadband, China is far behind the countries developed in the Internet in terms of broadband access speed.

 

l

The number of Chinese Internet mobile Internet users was 155 million, accounting for 45.9% of all Internet users, and the number of mobile Internet users exceeded 37 million within six months. 28% of the existing mobile Internet users said they would access the Internet by 3G mobile phone in the coming six months; 7.25% of the users that have not accessed the Internet by mobile phone said they would probably access the Internet by 3G mobile phone in the coming six months.

 

l	The number of rural Internet users had reached 95.65 million, 14.8% of whom visited rural or agricultural websites over the past six months. Farming, forestry, animal husbandry and fishery laborers using rural or agricultural websites accounted for 42.7% of all Internet users.

 

l

The proportion of Internet users accessing the Internet for entertainment, information and communication purposes was high. Except for forum/BBS, the penetration rate of all the three Internet applications by Internet users was over 50%, and the utilization rate of transaction-type Internet applications like online shipping and online payment was relatively low.

 

l

Entertainment application tended towards stability after fast growth, and all sub-divisional applications differed in use rate. The number of online game players increased by 30 million within six months with a use rate of 64.2%, up 1.4%. Online music application remained ahead within six months, with an increase of 16.1% in the number of users and an increase of 1.8% in use rate. The number of Internet video users continued increasing to 10% within six months with a decrease of 1.9% in Penetration rate.

 

l

The number of communication application grew continuously, with use rate dropping lightly. The use rate of email and instant messaging stood at 55.4% and 72.2% respectively, down 1.4% and 3.1% from late 2008. The number of blog users reached 181 million with a use rate of 53.8%, down 0.5% from late 2008.

 

l

The use of transaction application was of low level and relatively backward. The number of online shoppers picked up from 74 million to 87.88 million with an increase of nearly 14 million amid the current economic situation; affected by the economic actuality, the number of users reserving travel online slipped slightly from late last year; the number of users making payment online climbed to 23.7 million within six month with an increase of 4.8% in use rate.

 

l	The Internet plays a prominently positive role in information acquisition, interpersonal communication, social participation, practical life convenience and other respects, but is prone to isolating Internet users away from the reality to probably cause some mental problems.

 

We believe that our competitive advantages include:

 

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a.

WiMAX First Mover Advantage .   Through the Peopple’s Liberation Army Authorization, we are able to invest in WiMAX base station and CPE and install them more cost-effectively on roof tops of buildings in a way similar to GSM radio stations.  WiMAX is in particularly cost effective for delivering online game contents of our participating games to those internet cafes installed with our WiMAX equipment and which have joined into our MoqiZone WiMAX Network.

 

b.

Reallocation of Online Gaming Value Chain .   The MoqiZone WiMAX Network increases the net economic benefit to the content providers and the Internet cafés and eliminates the prepaid card distributors.

 

c.

Other Benefits to In ternet Café s .  The MoqiZone WiMAX Network also benefits the Internet Café’s by eliminating certain duplicative resources and costs and providing incentives.

 

d.

Benefits to Content Providers .  The MoqiZone WiMAX Network benefits the Content Provider by eliminating server storage and bandwidth hosting fees, and also protects their IP from piracy and hackers, via a closed network.

 

e.

Benefits to Game Publishers.   With our Moqizone business model, game companies can have one stop shopping with Moqizone and can assess all the Internet cafés at one location.

 

f.

Benefits of MoqiZone Prepaid Card .   Our platform uses a proprietary prepaid game card that is game publisher agnostic (i.e. accessible for all games), thereby reducing game card inventory costs for Internet café’s, as well as reducing black marketed discounted prepaid cards and content theft for the Content Provider.

 

g.

Realtime Reporting .  Our solution shares valuable point of sale (POS) data throughout the network to allow for real-time reporting, customer and payment tracking, and targeted marketing; a service that was previously unavailable to game content providers and publishers and Internet cafés

 

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h.

Access to Extensive Game Content .  In addition to its current arrangements, we expect to execute content agreements with the major online gaming companies that represent more than 10 million unique concurrent users.

 

i.

Significant Management Experience .  Our management team has long term business relationship and experience in dealing with the gaming companies and also leading players in the entertainment industry, including movies producers, music publisher as well as distributors and we believe that we will be able to obtain the best online digital content in Asia.

 

Key Corporate Objectives

Our key business development objectives over the next two years are to build our game delivery platforms and expand our business penetration in Internet cafes in China.

Before we can achieve our business objectives, we will need to:-

a.

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

 

b.

install CPE at each internet café;

 

c.

set up server farm in IDC;

 

d.

develop and deploy a online game and digital entertainment platform; and

 

e.

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

On the other hand, we are also aiming to service the non-WiMAX internet cafés by providing them a peer to peer content updating engine “Netcafe Farmer.” We recently acquired the Netcafe Farmer product as well as the entire technical team of Netcafe Farmer. The Netcafe Farmer product can be easily deployed to each internet café for content updating and we have already sold the service to approximately 700 internet cafés. We have appointed resellers to distribute the Netcafe Farmer product to internet cafes. Pursuant to our agreements with the resellers, we will settle payment with them on an annual basis and the fees range from 0 to RMB200 ($50).

On the other hand, 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 the product as well as the entire technical term. Netcafe Farmer can be easily deployed to each internet café for content updating and we have now already had approximately 800 internet café joining us. Revenue to be generated from Netcafe Farmer has not been forecasted and projected in the financial budget.

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 with the holders of the People’s Liberation Army Authorization is based on contractual arrangements which is 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 VIE and Shanghai MoqiZone, Shanghai MoqiZone has the exclusive right to provide to the VIE comprehensive technology and consulting services related to the business of the VIE.  In consideration for such services, Shanghai MoqiZone is entitled to receive 100% of the net income of the VIE.

Equity Pledge Agreement.   Under the equity pledge agreement among the VIE, the shareholders of the VIE and Shanghai MoqiZone, the shareholders of the VIE pledged all of their equity interests in the VIE to Shanghai MoqiZone to guarantee the VIE’s performance of its obligations under the exclusive business cooperation agreement. In the event that the VIE 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 the VIE and its shareholders have fully performed their respective obligations under the exclusive business cooperation agreement.

 

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Exclusive Option Agreement.   Under an exclusive ten (10) year option agreement between the the VIE, the shareholders of the VIE and Shanghai MoqiZone, the shareholders of the VIE 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 the VIE 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 VIE and MoqiZone Hong Kong, the parties confirmed that MoqiZone Hong Kong has made an interest-free loan to the shareholders of the VIE solely to enable the shareholders of the VIE to fund the initial capitalization of the VIE. The loan can be repaid only by sale of the shareholder’s equity interest in the VIE to MoqiZone Hong Kong. The term of the loan agreement is ten years from the date thereof.

Irrevocable Power of Attorney .   The shareholders of the VIE 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 the VIE matters requiring shareholder approval.  The term of each power of attorney is valid so long as such shareholder is a shareholder of VIE.

Internet Café collaboration

We have renewed our Memorandum of Understanding with the Beijing Internet Café Association (“BICA”) on December 1, 2009. Our VP Mr. Sun Qi is the newly elected Chairman of the ICA in Beijing for the years 2009 - 2011. Our company advisor already is Madam Wu Yan, and she is also the immediately past Chairman of the Beijing Internet Café Association. The major terms of the Memorandum of Understanding are as follows:

a.

BICA has a membership base of approximately 1500 members

 

b.

BICA will support and promote the MoqiZone WiMAX Network and 53MQ to its member

 

c.

BICA will allow us to promote our services and products at meetings of BICA to its members

 

d.

The term of the MOU shall be 3 years from December 1, 2009

There is no financial obligation between both parties under the MOU which is non-binding.

We are also currently discussing various collaborations with the local internet café associations in Suzhou and Chengdu in order to accelerate our internet café business deployment.

Content Providers

As of December 24, 2009, we have entered into agreements to deploy 10 new games and non-binding memorandums of understanding with 10 more new game developers. The agreements and MOUs are signed with 20 different content providers. A typical game cooperation arrangement requires us to provide IDC server, and operate the game on our platform. The gamers play games in our membership system, and pay in our billing system. In return, we share income with the content providers. The percentage of income sharing varies among different content providers. And in some cases, a marketing budget will be agreed when the game is promoted. On October 28, 2009, the Company announced the launch of our business-to-customer or B2C website 53MQ. 53MQ is the online game platform through which we aggregate and integrate all our online game contents and will be the interface to interact with our WiMAX connected internet cafes as well as our online game players. The typical terms of the agreement between MoqiZone and content providers will include:

a.

Exclusivity of the publishing rights to the online game;

 

b.

Whether it is a sole operation by us or a co-operation with the game publisher;

 

c.

The percentage of revenue split or percentage discount on the face value of the gaming recharge card/prepaid card and payment terms;

 

d.

The territory that the publishing right covers;

 

e.

The term of the agreement;

 

f.

Any upfront license fees or minimum guarantee on the amount of recharge card/prepaid card; and

 

g.

Service and technical support from the game publisher.

 

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We have entered into partnership agreement with Win’s Entertainment Limited (“Win’s”), a major motion picture producing company in Hong Kong  and we are going to publish our own games on our gaming delivery platforms. In November 2009, we were contracted to develop the online game for Win’s movie, Flirting Scholars 2 (“Flirting Scholars 2 Game”).We also acquired the exclusive rights from Win’s for publishing Flirting Scholars 2 Game. We aim to partnership with more movie production companies and replicate the business model of publishing our own games on our platform.

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. 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.

The typical terms between Netcafe Farmers reseller and internet cafes are as follows:-

a.

Annual service fees upfront payment based on the number of PC of each Internet cafes

 

b.

Automatic annual renewal of the Service Contract

 

c.

Internet cafes to provide technical support  for the installation of Netcafe Farmers

 

d.

Internet cafes not to use other similar service provider in the Internet café during the term

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” to 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 exposing the risk of cash collection from their distributers.  At the same time, since our prepaid cards can be used on other games and therefore, distributors have less financial risk exposure stocking up 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 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.

 

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Our Business Model Economics

 

The following table compares the estimated and anticipated allocation of revenues paid by online game players at Internet cafés who purchase prepaid game playing cards under current arrangements in China and as expected commencing in 2009 and thereafter from the use of the MoqiZone Network.

		MoqiZone Network				Traditional Revenue Model
Allocation of Revenues		Revenue Share Percentage				Revenue Share Percentage
Online game software provider			25	%			20	%
Online game publisher			29	%			36	%
Telecom Internet data center			0	%			5	%
Regional prepay card distributor			0	%			8	%
Inner-city prepaid card distributor			0	%			8	%
Regional marketing and promotions			3	%			10	%
Internet café income			13	%			8	%
MoqiZone revenue retention			25	%			0	%
Taxes			5	%			5	%
Total			100	%			100	%

Our business will involve no charges to Internet cafés in China for all data transmission on the MoqiZone Network at the very beginning.  We believe that this will provide a significant direct benefit to internet café owners because Internet cafés currently pay internet data transmission charges of approximately RMB 20,000 to 40,000 per month to Telecom providers.  This is the single largest cost element for Internet café operators in China after their rental fee. China currently has content censoring policy.  Internet cafés are subject to attack by hackers and other political news groups.  Our MoqiZone Network is able to provide them all the necessary tools to meet government’s objectives. Also, as it is a close network, they are not as vulnerable as the Internet

The MoqiZone Network comes with a POS-alike system for all online games.  This system is similar to any internet bank system, so that each game player, content provider, and Internet café will be able to assess online for their billing and profit sharing detail similar to bank statements.  This way each party will have an accurate reporting on billing and profit sharing, and it is easy to manage.

Traditionally, a content publisher will be required to host their content at Internet Data Center (“IDC”) for server storage and bandwidth costs.  This is one of the highest expenses  for publishing online game.  The total cost per month can be as high as 20% of their gaming revenue. The MoqiZone Network eliminates the server and bandwidth costs for the content publishers as we will be paying the IDC for the hosting fees. The reason we are able to offer this business term to the content provider is that we do not have to bear the cost to assess the Internet as we have our own network to connect directly to all Internet cafés.  Also our MoqiZone Network infrastructure will allow us to use fewer IDC than the traditional Internet based online game environment.  Conventional IDC’s biggest cost is Internet bandwidth costs.  Therefore, we believe that we will be able to capture this extra 20% of gaming revenue and pays IDC hosting cost for less than 1% for physical floor area rental only.

One of the current challenges for online game companies is to be able to control the final retail price for their pre-pay cards and to prevent price variation from parallel trading, even between province and province.  As this product has no differentiation from whom a game player buys it from, price cut strategy is usually adopted by the “next-door” stores in order to sell as many cards as possible.  Therefore Internet café or grocery stores are currently both unable to earn their “theoretical” profit margin for selling these prepay cards in store.  Our system is different, we only reward high percentage when a user consume in the game at the café, then the café will get the commission regardless where the end user pay for the pre-paid cards. Under this system, better performing internet cafés are rewarded with bonuses so they have an incentive to make promotion of our system and encourage gamers to spend more to buy virtual items at the café on our system.

We also offer a profit sharing platform detailing all the transactions for game companies so that they know exactly when and where their users spend the money.  Such information will be crucial for online game companies to improve their service and marketing activity.  Currently no telecom company is able to provide such figure to online game companies. Game companies also will be able to know the performance for their sponsored Internet cafes.

 

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Research and Development

We have developed 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.

Customers and Market Potential

According to the “China Online Game Market Research Report 2009” published by CNNIC on November 24, 2009, the major findings are:-

	Report Findings		Implications and Importance to our business evaluation
¨	China has 69.31 million online gamers, up 24.8% from 2008		Online game is still a growing business in China
¨	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
¨	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.
¨	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
¨	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.
¨	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.

 

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¨	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.
¨	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 by virtue is a close virtual private network and therefore allows us to closer monitor any contents to be distributed to our internet cafes, as a result, we can provide necessary information to the relevant authorities on a need basis.

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

According the New York Times, “ China Surpasses U.S. in Number of Internet Users” , 7/26/08 by David Barboza

¨

China said the number of Internet users in the country reached about 253 million last month (June 2008), putting it ahead of the United States as the world’s biggest Internet market.

 

¨

The number of Internet users jumped more than 50 percent, or by about 90 million people, during 2007, said the government-controlled Chinese Academy of Sciences. The 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 summary page of the 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 PC installed throughout China.

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.

According to public information available from several NASDAQ and Hong Kong Stock Exchange listed online game companies in China, the Average revenue per user per month (ARPU per month) for each gamer in China is approximately in the range of USD 5 to USD 40 per game depending on the game.  Item-Billing business model often leads to a higher ARPU figures . This is an important parameter to our business evaluation and forecast as we can assume that the consumption power of most of gamers is between USD 5 to USD 40 for per month. We can use this as a reference in our pre-paid cards pricing strategy.

 

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Our MoqiZone Network Deployment Strategy

The following table sets forth our strategy for installing our MoqiZone WiMAX Network and Netcafe Farmer throughout China over the next three years.  Our ability to achieve these goals is subject to receipt of approximately $25.0 million in financing over such period, including the maximum proceeds of this Offering.

Year		Cities		Cumulative Internet Cafés				Cumulative Cities				MoqiZone Network coverage as a % of total Internet Cafés
2011		Beijing, Chengdu, Hangzhou, Nanjing, Suzhou, Chongqing, Yangzhou, Zhenjiang, Jinhua, Ningbo, Kunming, Fuzhou, Xiamen, Qingdao, Jinan			11,400				15				7.5	%
2012		Shanghai, Guangzhou, Shenzhen, Zhuhai, Dongguan, Nanning, Hefei, Wuhu, Wuhan, Changsha, Xian, Shijiazhuang, Shenyang, Dalian, Harbin, Guangzhou, Wenzhou, Wuxi, Changshou, Nanchang, Lanzhou, Zhengzhou, Luoyang, Datong, Hainan, etc.			20,206				40				13.5	%
2013		Seven cities per month			35,000				124				23.0	%

Our cost analysis indicates that it will cost approximately $400,000 to deploy our MoqiZone Network system to service 100 Internet cafés.  Estimated costs per 100 Internet cafés include establishment of approximately 10 base stations, installation of CPE receivers at each of the 100 Internet café locations, purchase and installation of five content servers, rental payment of Internet Data Center, implementation and maintenance expenses. Our deployment process includes obtaining letters of intent from the Internet cafés in any given city or area, GPS data collection, determination of the required number and installation of base stations and simultaneously setting up regional service centers, offices and IDCs.

Once our MoqiZone Internet WiMAX Network is established, a game player who purchases our prepaid card from the Internet café can clicks on our logo, inputs his password, logs in to his personal account and “clicks and plays.”

Competition

Although we have no direct competitor using our WiMAX Network model, we will be competing with some of the larger game providers in the PRC, most of which have substantially greater revenues and financial resources than our Company.

As some of the functions in the current online game industry chain can be replaced by our MoqiZone Network, we believe that certain parties who are currently fulfilling certain functions in the online game value chain might be affected in some ways.

Wholesale distributors: Due to the large physical area of China, most online game companies will appoint different levels of wholesale distributors to help them to distribute their pre-paid cards to retailers and internet café.  They are usually required to stock the prepaid card and make advance payments.  Our business model will eliminate some of these distributers and work directly with internet cafes.  These distributors will continue to exist have only limited influence to our business. Major wholesale distributors in China include: Junnet; www.untx.com; SIFANG TECHNOLOGY and Federal Soft.

 

Internet Data Center, or Server Farms : As we provide for “free of charge” services for online game companies to host their game servers in the MoqiZone Network, traditional IDC may lose some of their server hosting business from online game companies.  Currently most independent IDC are running at low profit as their bandwidth costs are controlled by the top 3 telecom providers in China.  For those IDC owned by Telecom companies, they only service to local broadband clients, they do not provide national services.

Last mile internet connection providers (ADSL/T1) :  Our MoqiZone WiMAX Network only connect internet cafés which are installed with our WiMAX equipment wirelessly to access our digital entertainment contents hosted in our CERNET IDC. We will divert some internet traffic for online games, and therefore internet cafés can reduce their bandwidth requirement from their current telecom providers.  Internet cafés will still require Internet bandwidth access for non-game functions such as Internet browsing, emails, other portal access, or other web based function such as online chats as we are providing a close network environment and do not access the Internet (or world wide web). The bandwidth demand, however, will become much lesser.  We assume that broadband service provision to internet café generate a very small business  income for local telecom companies, and, as a result, it is very unlikely that we will significantly affect their major revenue.

 

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Employees

As of October 14, 2010, we have 9 executive officers. We currently have a total of 55 paid employees comprising of the following:

Chief Executive Officer			1
Chief Technology Officer			1
Shanghai Office Manager and Financial Controller			1
Vice Presidents (Finance, Sales and Marketing, Technology Development and System Control, Business Development)			5
Product Development Department			5
Business Development Department			1
Marketing and Promotion Department			7
Internet café Channel Development Department			10
Software Development, Technology and R&D Department			12
Finance Department			3
Human Resources and Administration Department			1
Design Department			3
MIS Department			1
Customer Services			2
Consultant			2
TOTAL			55

Legal Proceedings

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 (the “SZ Mellow Agreements”) with SZ Mellow.  This arrangement was necessary as a foreign owned company, such as Moqizone, cannot directly hold an ISP license in China, As a result, similar VIE arrangements, whereby the ISP license is held by a domestically owned Chinese company but the operations are directed by the foreign owned entity, are common.  Pursuant to our agreement with SZ Mellow, we had a right to direct and control the management of SZ Mellow and an option to purchase the equity of SZ Mellow in the event that Chinese law permits such acquisition. Following our successful capital raise and entry to the U.S. capital markets, the Chinese shareholders of SZ Mellow, who are also parties to the VIE agreements between Moqizone and SZ Mellow refused to cooperate with management of Moqizone and demanded additional consideration beyond what was set forth in the existing agreements. MoqiZone considered that the shareholders were acting in contravention of the existing VIE agreements and consulted legal counsel with regard to potential remedies.  On September 21, 2009, we served SZ Mellow and their respective shareholders a demand letter pursuant to the VIE Agreement demanding, amongst other things, the return of approximately US$117,647 (RMB800,000) cash, capital equipment and also provided a 30 day notice  to terminate VIE agreement. As of December 31, 2009, we have not had any response from the shareholders of the SZ Mellow in relation to our demands. We have been advised that the serving of the 30 day notice is sufficient to terminate the VIE Agreement between the Company and SZ Mellow. Accordingly, The SZ Mellow Agreements were terminated at the expiry of the 30-day notice on October 20, 2009. The Company is considering taking legal action against the SZ Mellow and the shareholders of SZ Mellow in order to enforce our further demands.

On September 25, 2009 we have entered into new VIE agreements with SZ Alar, details of which please refer to our 8K of September 25, 2009. The shareholders of SZ Alar are Mr. Zheng Wei, Mr. Jiang Jin Kun and Mr. Xiong Ping Bo. Mr. Zheng Wei is also the Chairman of Tai Ji and also is acting as one of our consultant.

Other than the abovementioned litigation matters, neither we nor any of our direct or indirect subsidiaries is a party to, nor is any of our property the subject of, any legal proceedings other than ordinary routine litigation incidental to their respective businesses.  There are no proceedings pending in which any of our officers, directors or 5% shareholders are adverse to us or any of our subsidiaries or in which they are taking a position or have a material interest that is adverse to us or any of our subsidiaries.

Neither we nor any of our subsidiaries is a party to any administrative or judicial proceeding arising under federal, state or local environmental laws or their Chinese counterparts.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

 

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Property

We currently do not own any property and all of our offices are through rental agreements. Our rental cost in Hong Kong is approximately $2,000 per month (with 3 staff and as registered office for MobiZone Hong Kong), Shanghai is approximately $6,000 per month (with 45 staff and as register office of Shanghai MoqiZone) and Shenzhen is approximately $1,000 per month (with 1 staff and as registered office for SZ Alar). We also have a representative office in Chengdu and the rental is approximately $500 (with 5 staff).

 

MARKET FOR OUR COMMON STOCK, DIVIDENDS AND

RELATED STOCKHOLDER INFORMATION

 

The Common Stock is currently quoted on the over–the-counter (“OTC”) Bulletin Board under the symbol “MOQZ.”. Prior to August 27, 2009, shares of our common stock were quoted on the OTC Bulletin Board under the trading symbol “TLHO”. Prior to October 6, 2003, the Company’s common stock was traded on the OTC Bulletin Board under the symbol “SLDE” and prior to August 9, 2002, the Company’s common stock was traded on the OTC Bulletin Board under the symbol “SUN.”

Accordingly, the following table sets forth the quarterly high and low bid prices for the common stock since the quarter ended June 30, 2008.  The prices below have been adjusted for the recent reverse split and represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.

		High				Low
Quarter ended June 30, 2008		$	17.82			$	2.55
Quarter ended September 30, 2008		$	7.64			$	2.55
Quarter ended December 31, 2008		$	5.09			$	2.55
Quarter ended March 31, 2009		$	7.64			$	2.55
Quarter ended June 30, 2009		$	12.73			$	2.55
Quarter ended September 30, 2009		$	3.08			$	0.02
Quarter ended December 31, 2009		$	10.00			$	2.01
Quarter ended March 31, 2010		$	3.00			$	3.00
Quarter ended June 30, 2010		$	4.00			$	3.00

On October 14, 2010, the closing bid price of the Common Stock was $0.55 and we had approximately 83 record holders of our Common Stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

Dividend Policy

We have never declared or paid dividends on our Common Stock.  We intend to retain earnings, if any, to support the development of our business and therefore do not anticipate paying cash dividends for the foreseeable future.  Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.

 

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Financial Statements

 

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm			F-2
Financial Statements
Balance Sheets			F-3
Statements of Operations			F-4
Statement of Members' Equity			F-5
Statements of Cash Flows			F-6
Notes to Financial Statements			F-7

 

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Moqizone Holding Corporation (A Development Stage Company)

Hong Kong, China

We have audited the accompanying balance sheets of Moqizone Holding Corporation (A Development Stage Company) (the “Company”) as of December 31, 2009 and 2008 and the related statements of operations and comprehensive loss, changes in owners’ equity (deficiency) and cash flows for the periods from inception (August 29, 2007) to December 31, 2009 and for the years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in Note 3 to the accompanying financial statements, the Company has sustained a loss since inception of $24,671,816 and the Company has only earned revenues of US $1,372 for the year ended December 31, 2009. In addition, the Company has a working capital deficiency of $25,223,291 as of December 31, 2009. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Moqizone Holding Corporation (A Development Stage Company) as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the periods from inception (August 29, 2007) to December 31, 2009 and for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Paritz & Company, P.A.

Paritz & Company, P.A.

Hackensack, New Jersey

April 15, 2010

 

F-2

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MOQIZONE HOLDING CORPORATION

  (A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

 

		December 31,				December 31,
		2009				2008
ASSETS
Current assets :
Cash		$	584,300			$	18,286
Prepayments, deposits and advances			80,180				-
Due from related parties			1,071				-
Total current assets			665,551				18,286
Property and equipment, net			899,247				198,717
Loan receivable			-				249,284
Total assets		$	1,564,798			$	466,287
LIABILITIES
Current liabilities:
Accounts payable		$	58,339			$	66,237
Other payables and accruals			202,468				13,013
Accrued directors’ fees			228,901				771,420
Interest payable			85,707				-
Warrant liabilities			25,313,369				-
Convertible loan payable			-				316,437
Due to related parties			58				20,374
Total current liabilities		$	25,888,842			$	1,187,481
Shareholders’ deficit
Common stock , par value $0.001, 40,000,000 share authorized, 13,620,260 issued and outstanding at December 31 2009 and capital at 2008		$	13,620			$	514,027
Series A preferred shares, par value $0.001, 15,000 authorized, 1,145 and none issued and outstanding at December 31, 2009 and 2008, respectively			1				-
Additional paid-in capital			447,355				-
Deficit accumulated during development stage			(24,784,055	)			(1,230,533	)
Accumulated other comprehensive income/(loss) – foreign exchange adjustment			(965	)			(4,688	)
Total shareholders’ deficit			(24,324,044	)			(721,194	)
Total liabilities and shareholders’ deficit		$	1,564,798			$	466,287

 

See notes to financial statements

 

 

F-3

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MOQIZONE HOLDING CORPORATION

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

		For the years ended December 31,								From inception (August 29, 2007) to
		2009				2008				December 31, 2009
REVENUE		$	1,372			$	-			$	1,372
COSTS AND EXPENSES :
Research and development expense			(30,447	)			-				(30,447	)
Depreciation and amortization expense			(53,902	)			-				(53,902	)
Selling, general and administrative expense			(3,317,913	)			(913,157	)			(4,548,138	)
LOSS FROM OPERATIONS			(3,400,890	)			(913,1570				(4,631,115	)
OTHER (EXPENSES)/INCOME:
Interest expense, net of interest income			(100,092	)			240				(99,835	)
Change in fair value of warrants			(19,867,901	)			-				(19,867,901	)
Amortization of placing fees of convertible notes			(58,115	)			-				(58,115	)
Loss on foreign currency transactions			(14,285	)			(565	)			(14,850	)
TOTAL OTHER EXPENSES			(20,040,393	)			(325	)			(20,040,701	)
NET LOSS		$	(23,441,283	)		$	(913,482	)		$	(24,671,816	)
Dividend on preferred shares			(112,239	)			-				(112,239	)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS			(23,553,522	)			(913,482	)			(24,784,055	)
Foreign currency translation			3,723				(5,577	)			(965	)
COMPREHENSIVE LOSS			(23,549,799	)			(919,059	)			(24,785,020	)
Net income per share:
Basic		$	(5.31	)		$	(1.30	)		$	(10.81	)
Diluted		$	(5.31	)		$	(1.30	)		$	(10.81	)
Weighted average number of shares used in computation:
Basic			4,433,418				703,794				-
Diluted			4,433,418				703,794				-

See notes to financial statements

 

F-4

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MOQIZONE HOLDING CORPORATION

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

YEARS ENDED DECEMBER 31, 2009 and 2008

		Ordinary shares (US$0.001 par value)								Series A								Additional				Accumulated other				Deficit accumulated during				Total
		Number of shares				Par value				preferred shares				Paid-in Capital				paid-in capital				comprehensive income/(loss)				development stage				shareholders’ deficit
Balance as of August 29, 2007			-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Capital contribution															316,003																316,003
Net loss																											(317,051	)			(317,051	)
Foreign exchange translation difference																							889								889
Balance as of December 31, 2007			-				-				-				316,003				-