Attached files
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EX-5.1 - Balincan USA, Inc. | v199151_ex5-1.htm |
EX-23.1 - Balincan USA, Inc. | v199151_ex23-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
S-1
Pre
Effective Amendment No. 2
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
MOQIZONE
HOLDING CORPORATION
(Exact
name of Registrant as specified in its charter)
Delaware
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95-4217605
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|||
(State or Other Jurisdiction of
Incorporation or Organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer Identification
Number)
|
7A-D
Hong Kong Industrial Building
444-452
Des Voeux Road West
Hong
Kong
+852
34434384
(Address
and telephone number of principal executive offices
and
principal place of business)
Moqizone
Holding Corporation
7A-D
Hong Kong Industrial Building
444-452
Des Voeux Road West
Hong
Kong
+852
34434384
(Name,
address and telephone number of agent for service)
Copies
to:
Leser,
Hunter, Taubman & Taubman
17
State Street, Flr. 20
New
York, NY 10004
Tel:
(212) 732-7184
Approximate date of commencement of
proposed sale to the public: From time to time after this Registration
Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. ¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
|
¨
|
Accelerated
filer
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¨
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Non-accelerated
filer
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¨
|
Smaller
reporting company
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x
|
(Do
not check if a smaller reporting
company)
|
CALCULATION
OF REGISTRATION FEE
Title of each class of securities
to be registered
|
Amount to be
Registered (1)
|
Proposed
maximum
offering
price per
share (2)
|
Proposed
maximum
aggregate
offering
price
|
Amount of
registration fee (5)
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||||||||||||
Common
Stock, $0.001 par value
|
$ | $ | $ | |||||||||||||
Common
Stock underlying Series C preferred (3)
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869,422 | 9.50 | 8,259,509 | 588.90 | ||||||||||||
Common
Stock underlying Warrants (4)
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869,422 | 9.50 | 8,259,509 | 588.90 | ||||||||||||
Common
Stock underlying Placement Agent Warrants
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173,884 | 9.50 | 1,651,898 | 117.78 | ||||||||||||
Total
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1,912,728 | $ | 18,170,916 | $ | 1,295.58 |
(1)
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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.
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(2)
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Estimated solely for purposes of
calculating the registration fee in accordance with Rule 457(c) under the
Securities Act of 1933, as amended based upon the average of the bid and
asked price of the Registrant’s common stock as quoted on the
Over-the-Counter Bulletin Board on May 13, 2010. Accordingly, the
closing bid price on May 13, 2010 was $4.00 and the asked price was
$15.00.
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(3)
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The shares of common stock
registered hereunder are being registered for resale by selling
stockholders named in the prospectus upon conversion of 869,422 shares of
series C convertible preferred
stock.
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(4)
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The shares of common stock
registered hereunder are being registered for resale by selling
stockholders named in the prospectus upon exercise of outstanding warrants
to purchase common stock.
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(5)
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The registration fee has been
calculated in accordance with Rule
457(g).
|
The
registrant is filing a single prospectus in this Registration Statement on Form
S-1 pursuant to Rule 429 under the Securities Act of 1933, as amended, in order
to satisfy the requirements of the Securities Act and the rules and regulations
thereunder for this offering.
We are
filing this amendment to include our responses to the Securities & Exchange
Commission’s (“SEC”) Comment letter dated July 16, 2010 after its
review of the S-1 Amendment No. 1 filed on June 18, 2010, file number
333-166839. This amendment is also being filed to conform the
disclosure contained herein to our Quarterly Report on Form 10-Q for the quarter
ending June 30, 2010, which we filed on August 16, 2010.
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not
permitted.
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
1
TABLE
OF CONTENTS
Item
3. Summary
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3
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Item
4. Use of Proceeds
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19
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Item
5. Determination of Offering Price
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19
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Item
6. Dilution
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20
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Item
7. Selling Security Holders
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20
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Item
8. Plan of Distribution
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23
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Item
9. Description of Securities
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24
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Item
10. Interests of Named Experts and Counsel
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26
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Item
11. Information with respect to the Registrant
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27
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Item
11A. Material Changes
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64
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Item
12. Incorporation of Certain Information by Reference
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64
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Item
12A. Disclosure of Commission Position on Indemnification for Securities
Act Liabilities
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64
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Part
II
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65
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Item
13. Other Expenses of Issuances and Distribution
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65
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Item
14. Indemnification of Directors and Officers
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65
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Item
15. Recent Sales of Unregistered Securities
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65
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Item
16. Exhibits and Financial Statement Schedule
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66
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Item
17. Undertakings
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68
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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.
2
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).
3
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.
4
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.
5
(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.
6
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.
SUMMARY
FINANCIAL DATA
The
following table summarizes the relevant financial data for our business and
should be read in conjunction with our financial statements which are included elsewhere in
this prospectus. Our historical financial data reflect only the financial
statements of the Company which, as a result of the Share Exchange transaction,
is deemed for accounting purposes to have acquired Moqizone. The summary
set forth below should be read together with our consolidated financial
statements and the notes thereto, as well as “Selected Consolidated Financial
Data” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” included elsewhere in this prospectus.
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.
7
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;
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|
(d)
|
shutting down the servers or
blocking our or our operating company’s web
sites;
|
8
(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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
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.
15
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%.
16
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.
17
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.
18
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
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.
ITEM
5. DETERMINATION OF OFFERING PRICE
Not
applicable.
19
ITEM
6. DILUTION
Not
applicable.
ITEM
7. SELLING STOCKHOLDERS
SELLING
STOCKHOLDERS
We are registering for resale shares of
our Common Stock that are issued and outstanding, and shares of Common Stock
underlying our Preferred Stock and Warrants held by the Selling Stockholders
identified below. We are registering the shares to permit the Selling
Stockholders and their pledgees, donees, transferees and other
successors-in-interest that receive their shares from a Selling Stockholder as a
gift, partnership distribution or other non-sale related transfer after the date
of this prospectus to resell the shares when and as they deem appropriate in the
manner described in the “Plan of Distribution”. As of the date of this
prospectus there are 13, 695,724 shares of common stock issued and
outstanding.
The
following table sets forth:
o a.
|
the name of the Selling
Stockholders,
|
b.
|
the number of shares of our
Common Stock that the Selling Stockholders beneficially owned prior to the
offering for resale of the shares under this
prospectus,
|
c.
|
the maximum number of shares
of our Common Stock that may be offered for resale for the account of the
Selling Stockholders under this prospectus,
and
|
d.
|
the number and percentage of
shares of our Common Stock to be beneficially owned by the Selling
Stockholders after the offering of the shares (assuming all of the offered
shares are sold by the Selling
Stockholders).
|
Except
for MKM, none of the Selling Stockholders has been an officer or director of the
Company or any of its predecessors or affiliates within the last three years,
nor has any Selling Stockholder had a material relationship with the
Company.
Except
for TriPoint Global Equities, LLC (“TriPoint Global”), none of the Selling
Stockholders is a broker dealer or an affiliate of a broker dealer. None of the
Selling Stockholders including TriPoint Global has any agreement or
understanding to distribute any of the shares being registered.
John
Finley and Brian Corbman are employees of TriPoint Global.
We
entered into a placement agency agreement (the "Placement Agent Agreement
whereby the placement agent and its selected dealers received a (i) a cash fee
in the amount of approximately $195,620, equal to 10% of the gross proceeds
of the Financing; and (ii) warrants to purchase up to 173,884 shares of
Common Stock, equal to 10% of the aggregate number of units sold in the March
29, 2010 Financing.
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
shares offered for sale. A Selling Stockholder is under no obligation, however,
to sell any shares pursuant to this prospectus.
As of
October 14, 2010, there are 13,695,724 shares of our common stock outstanding,
assuming that all of the shares of common stock underlying the preferred shares
and all of the Warrants have been converted and exercised, respectively for the
purposes of computing the percentage of outstanding securities owned by the
Selling Shareholders. Unless otherwise indicated, the Selling Shareholders
have the sole power to direct the voting and investment over the shares owned by
them. We will not receive any proceeds from the resale of the common stock by
the Selling Shareholders.
Unless
otherwise indicated, all of the following Selling Shareholders received their
shares pursuant to the March 29, 2010 Financing, which is described above in
Recent Developments.
20
Number of
|
||||||||||||||||
Maximum
|
Shares of
|
|||||||||||||||
Shares of Common
|
Number of Shares
|
Common
|
Percentage
|
|||||||||||||
Stock
|
of
|
Stock
|
Ownership
|
|||||||||||||
Name
of Selling
|
Beneficially Owned
|
Common Stock to
|
Owned After
|
After
|
||||||||||||
Stockholder
|
Prior to Offering (1)
|
be Sold (2)
|
Offering (3)
|
Offering (4)
|
||||||||||||
Holders
of Common Stock Underlying Series C Convertible Preferred Stock and
Series C and Series D Warrants
|
||||||||||||||||
MKM
Opportunity Master Fund, Ltd (5)
|
1,272,286 | (6) | 222,200 | 1,050,086 | 7.38 | % | ||||||||||
Taylor
Fund (7)
|
400,000 | (8) | 400,000 | -0- | -0- | |||||||||||
BBS
(9)
|
150,000 | (10) | 150,000 | -0- | -0- | |||||||||||
Blue
Earth Fund LP (11)
|
222,200 | (12) | 222,200 | -0- | -0- | |||||||||||
Lee
Pereira'
|
500,000 | (13) | 500,000 | -0- | -0- | |||||||||||
Steve
Taylor
|
200,000 | (14) | 200,000 | -0- | -0- | |||||||||||
Barry
Honig
|
44,444 | (15) | 44,444 | -0- | -0- | |||||||||||
Placement
Agent Warrants
|
||||||||||||||||
TriPoint
Global Equities (16)
|
275,171 | (17) | 106,803 | 168,368 | 1.22 | % | ||||||||||
John
Finley (18)
|
10,893 | 3,281 | 7,612 | 0.06 | % | |||||||||||
Brian
Corbman (19)
|
216,677 | 63,800 | 152,877 | 1.11 | % |
21
(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.
|
22
(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.
23
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.
24
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”);
|
25
(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.
26
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:-
27
|
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:
28
|
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
|
29
|
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.
30
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.
|
31
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.
32
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.
33
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.
|
34
¨
|
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.
35
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.
36
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.
37
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.
38
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
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
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
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
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
|
-
|
889
|
(317,051
|
)
|
(159
|
)
|
||||||||||||||||||||||
Capital
contribution
|
166,011
|
166,011
|
||||||||||||||||||||||||||||||
Capital
issued for directors’ fees
|
32,013
|
32,013
|
||||||||||||||||||||||||||||||
Net
loss
|
(913,482
|
)
|
(913,482
|
)
|
||||||||||||||||||||||||||||
Foreign
exchange translation difference
|
(5,577
|
)
|
(5,577
|
)
|
||||||||||||||||||||||||||||
Balance
as of December 31, 2008
|
-
|
-
|
-
|
514,027
|
-
|
(4,688
|
)
|
(1,230,533
|
)
|
(721,194
|
)
|
|||||||||||||||||||||
Recapitalization
of Trestle Holdings, Inc.
|
179,115,573
|
179,116
|
(514,027
|
)
|
334,911
|
-
|
||||||||||||||||||||||||||
Reverse
split
|
(178,411,779
|
)
|
(178,412
|
)
|
178,412
|
-
|
||||||||||||||||||||||||||
Conversion
of series B preferred stock
|
10,743,000
|
10,743
|
(10,743
|
)
|
-
|
|||||||||||||||||||||||||||
Capital
issued for directors’ fees
|
771,563
|
771,563
|
||||||||||||||||||||||||||||||
Amortized
placement agent fee
|
(436,385
|
)
|
(436,385
|
)
|
||||||||||||||||||||||||||||
Conversion
of loan to preferred shares
|
5
|
4,944,995
|
4,945,000
|
|||||||||||||||||||||||||||||
Initial
take-up of warrant liability
|
-
|
(5,447,575
|
)
|
(5,447,575
|
)
|
|||||||||||||||||||||||||||
Conversion
of preferred shares to common shares
|
2,111,111
|
2,111
|
(4
|
)
|
2,107
|
|||||||||||||||||||||||||||
Net
loss
|
(23,553,522
|
)
|
(23,553,522
|
)
|
||||||||||||||||||||||||||||
Foreign
exchange translation difference
|
3,723
|
3,723
|
||||||||||||||||||||||||||||||
Common
stock issued for dividends
|
62,355
|
62
|
112,177
|
-
|
112,239
|
|||||||||||||||||||||||||||
Balance
as of December 31, 2009
|
13,620,260
|
13,620
|
1
|
0
|
447,355
|
(965
|
)
|
(24,784,055
|
)
|
(24,324,044
|
)
|
See notes
to financial statements
F-5
MOQIZONE
HOLDING CORPORATION
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the years ended December 31,
|
From inception
(August 29, 2007)
to
|
|||||||||||
|
2009
|
2008
|
December 31, 2009
|
|||||||||
Operating
activities:
|
||||||||||||
Net
loss
|
$
|
(23,441,283
|
)
|
$
|
(913,482
|
)
|
$
|
(24,671,816
|
)
|
|||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Capital
issued for directors’ fees and officers’ salaries
|
-
|
32,013
|
292,883
|
|||||||||
Depreciation
and amortization
|
53,902
|
-
|
53,902
|
|||||||||
Amortization
of placement fees of convertible notes
|
58,115
|
-
|
58,115
|
|||||||||
Interest
expenses
|
79,670
|
-
|
79,670
|
|||||||||
Warrant
liabilities
|
19,867,901
|
-
|
19,867,901
|
|||||||||
Change
in operating assets and liabilities:
|
||||||||||||
Other
receivables
|
(80,180
|
)
|
-
|
(80,180
|
)
|
|||||||
Accounts
payable
|
(7,898
|
)
|
30,137
|
58,339
|
||||||||
Other
payables and accruals
|
195,492
|
780,383
|
979,925
|
|||||||||
Accrued
payroll
|
228,901
|
-
|
228,901
|
|||||||||
Due
from/to related parties
|
(21,387
|
)
|
-
|
21,387
|
||||||||
Net
cash used in operating activities
|
(3,066,767
|
)
|
(70,949
|
)
|
(3,153,747
|
)
|
||||||
Investing
activities:
|
||||||||||||
Acquisition
of property and equipment
|
(752,183
|
)
|
(158,417
|
)
|
(950,900
|
)
|
||||||
Net
cash used in investing activities
|
(752,183
|
)
|
(158,417
|
)
|
(950,900
|
)
|
||||||
Financial
activities:
|
||||||||||||
Loan
receivable
|
249,284
|
(249,284
|
)
|
-
|
||||||||
Borrowing
of convertible notes payable
|
4,450,500
|
316,437
|
4,766,937
|
|||||||||
Repayment
of convertible notes
|
(316,437
|
)
|
-
|
(316,437
|
)
|
|||||||
Payments
to owners and officers
|
-
|
(22,851
|
)
|
20,374
|
||||||||
Capital
contribution
|
-
|
166,011
|
221,144
|
|||||||||
Net
cash provided by financing activities
|
4,383,347
|
210,313
|
4,692,018
|
|||||||||
Effect
of exchange rate on cash
|
1,617
|
(5,311
|
)
|
(3,071
|
)
|
|||||||
Net
increase in cash
|
566,014
|
(24,364
|
)
|
584,300
|
||||||||
Cash,
beginning of year
|
18,286
|
42,650
|
-
|
|||||||||
Cash,
end of year
|
$
|
584,300
|
$
|
18,286
|
$
|
584,300
|
||||||
Supplement
disclosure of cash flow information
|
||||||||||||
Interest
paid
|
21,008
|
-
|
21,008
|
|||||||||
Supplement
disclosure of non cash transactions
|
||||||||||||
Issuance
of stock for dividends
|
$
|
112,239
|
$
|
-
|
$
|
112,239
|
||||||
Warrant
liability incurred in connection with convertible note
|
25,313,369
|
-
|
25,313,369
|
|||||||||
Forgiveness
of director’s fee
|
771,563
|
(0
|
)
|
See notes
to financial statements
F-6
MOQIZONE
HOLDING CORPORATION
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1. ORGANIZATION AND NATURE OF OPERATIONS
The
accompanying consolidated financial statements include the financial statements
of MoqiZone Holding Corporation (the “Company”), its subsidiaries of MoqiZone
Holdings Limited, a Cayman Island corporation (“MoqiZone Cayman”), MobiZone
Holdings Limited, a Hong Kong corporation (“MobiZone Hong Kong”), MoqiZone
(Shanghai) Information Technology Company Limited (“Shanghai MoqiZone”) and a
variable interest entity (“VIE”), Shenzhen Alar Technology Company Limited
(“Shenzhen Alar”). The Company, its subsidiaries and VIE are collectively
referred to as the “Group”. MobiZone Hong Kong operates a Chinese
online game content delivery platform company that delivers online game contents
of our participating games to internet cafes installed with our WiMAX equipment
and which have joined into our MoqiZone WiMAX Network.
The
Share Exchange Agreement, Reverse Merger and Reorganization
On March
15, 2009, Trestle Holdings, Inc. (the “Trestle”) entered into a Share Exchange
Agreement with MoqiZone Cayman, Cheung Chor Kiu Lawrence, the principal
shareholder of MoqiZone Cayman (“Cheung”), and MKM Capital Opportunity Fund Ltd.
(“MKM”), our principal stockholder (the “Agreement”). MoqiZone Cayman is
the record and beneficial owner of 100% of the share capital of MobiZone Hong
Kong and MobiZone 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 $4,345,000 in gross proceeds from the financing described below, we
acquired all of the issued and outstanding capital stock of MoqiZone Cayman in
exchange for the issuance to Cheung and the other shareholders of MoqiZone
Cayman of 10,743 shares of our sought to be created Series B convertible
preferred stock. The transaction was regarded as a reverse merger whereby
MoqiZone Cayman was considered to be the accounting acquirer as it retained
control of Trestle after the exchange and Trestle is the legal acquirer.
The share exchange was treated as a recapitalization and, accordingly, Trestle
reclassified its common stock and additional paid-in-capital accounts for
the year ended December 31, 2008. The Financial Statements have been
prepared as if MoqiZone had always been the reporting company and then on the
share exchange date, had changed its name and reorganized its capital
stock.
As of
August 28, 2009, our corporate name changed to from Trestle Holdings, Inc. to
MoqiZone Holding Corporation and our authorized capital increased by 10,000,000
shares of preferred stock. Pursuant to the additional financings we closed
in August 2009 and the authority vested in our Board of Directors, we also filed
a certificate of designation of Series A preferred stock and certificate of
designation of Series B preferred stock with Delaware’s Secretary of State to
designate 15,000 of the 15,000,000 shares of preferred stock as Series A
preferred stock and 10,743 of the 15,000,000 shares of preferred stock as Series
B preferred stock.
On
August, 31, 2009, a one-for-254.5 reverse stock split became effective and
reduced outstanding shares of our common stock to 703,794 shares.
Following the reverse stock split described and per the terms and conditions of
our share exchange, the Series B Preferred Stock automatically (and
without any action on the part of the holders) 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).
As a
result of these transactions, our authorized capital now consists of 40,000,000
shares of common stock, 14,974,257 shares of undesignated 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, and 10,743 shares Series B preferred
stock.
Note
2. PRINCIPAL ACCOUNTING POLICIES
(1) FASB
Establishes Accounting Standards Codification ™
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions
on the changes to the Codification.
F-7
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In
order to ease the transition to the Codification, we are providing the
Codification cross-reference alongside the references to the standards issued
and adopted prior to the adoption of the Codification.
(2)
Basis of Presentation
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of expenses during the
reporting period. On an ongoing basis, we evaluate our estimates which are
based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The result of
these evaluations forms the basis for making judgments about the carrying values
of assets and liabilities and the reported amount of expenses that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions
(3) Development
Stage Company
MoqiZone
Group (the “Company”) has be en obtaining the requisite approvals from the
Chinese government and since inception, has not earned any revenue from
operations. Accordingly, MoqiZone Group’s activities have been accounted
for as those of a “Development Stage Enterprise.” Among the
disclosures required are that the financial statements be identified as
those of a development stage company, and that the statements of operations and
other comprehensive income (loss), owner’s equity and cash flows disclose
activity since the date of inception.
(4) Consolidation
The
consolidated financial statements include the financial statements of the
Company, its subsidiaries and VIE subsidiary for which the Company is the
primary beneficiary. All transaction and balances among the Company, its
subsidiaries and VIE subsidiary have been eliminated upon
consolidation.
The Group
has adopted “ Consolidation of Variabl
e Interest Entities
. This interpretation requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties.
To comply
with PRC laws and regulations that restrict foreign ownership of companies that
operate online games, the Company operates its online games mainly through
Shenzhen Alar, which is wholly owned by certain PRC citizens. Shenzhen
Alar holds the licenses and approvals to operation line games in the
PRC.
Pursuant
to the contractual arrangements with Shenzhen Alar, MoqiZone Shanghai mainly
provides the following intra-group services to Shenzhen Alar.
o
|
Gaming related licensing
service;
|
o
|
Software licensing
service;
|
o
|
Equipment and maintenance
service;
|
o
|
Strategic consulting
service;
|
o
|
Licensing of billing technology;
and
|
o
|
Billing
service.
|
F-8
In
addition, MoqiZone Shanghai has entered into agreements with Shenzhen Alar and
its equity owners with respects to certain shareholder rights and corporate
governance matters that provide the Company with the substantial ability to
control Shenzhen Alar. Pursuant to these contractual
arrangements:
o
|
The equity owners of Shenzhen
Alar have granted an irrevocable proxy to individuals designated by
MoqiZone Shanghai to exercise the right to appoint directors, general
manager and other senior management of Shenzhen
Alar;
|
o
|
Shenzhen Alar will not enter into
any transaction that may materially affect its assets, liabilities, equity
or operations without the prior written consent of MoqiZone
Shanghai.
|
o
|
Shenzhen Alar will not distribute
any dividend;
|
o
|
The equity owners of Shenzhen
Alar have pledged their equity interest in Shenzhen Alar to MoqiZone
Shanghai to secure the payment obligations of Shenzhen Alar under all the
agreements between Shenzhen Alar and MoqiZone Shanghai;
and
|
o
|
The equity owners of Shenzhen
Alar will not transfer, sell, pledge or dispose of their equity interest
in Shenzhen Alar without any prior written consent of MoqiZone
Shanghai.
|
As a
result of these agreements, the Company is considered the primary beneficiary of
Shenzhen Alar and accordingly Shenzhen Alar’s results are consolidated in the
Company’s financial statements.
(5) Cash
and cash equivalents
Cash and
cash equivalents represent cash on hand and highly liquid investment placed with
banks, which have original maturities less than three months. Cash and
cash equivalents kept with financial institutions in the People’s Republic of
China (“PRC”) are not insured or otherwise protected. Should any of those
insinuations holding the Company’s cash become insolvent, or the Company is
unable to withdraw funds for any reason, the Company could lose the cash on
deposit on that institution.
(6) Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Network
equipment
|
3
years
|
Computer
equipment
|
3
years
|
Leasehold
improvements
|
Lesser
of the term of the lease or the estimated useful lives of the
assets
|
Furniture
and fixtures
|
3
years
|
(7) Computer
software
Purchased
computer software for internal use is capitalized and amortized over its
estimated useful live starting when it is placed in service.
(8) Impairment
of long-lived assets and intangible assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be held
and used, impairment is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their carrying
value. If impairment exists, an adjustment is made to write the asset down
to its fair value, and a loss is recorded as the difference between the carrying
value and fair value. Fair values are determined based on quoted market
values, discounted cash flows or internal and external appraisals, as
applicable. Assets to be disposed of are carried at the lower of carrying
value or estimated net realizable value. No impairment was recognized
during the year ended December 31, 2009 and 2008.
(9)
Derivative Financial
Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.
F-9
Derivative
financial instruments are recorded as liabilities in the consolidated balance
sheet, measured at fair value. When available, quoted market prices are
used in determining fair value. However, if quoted market prices are not
available, we estimate fair value using either quoted market prices of financial
instruments with similar characteristics or other valuation
techniques.
The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative
financial instruments that are not designated as hedges or that do not meet the
criteria for hedge accounting under ASC Topic 815 “Derivatives and Hedging”
(formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”) are recorded at fair value, with gains or losses reported currently
in earnings. All derivative financial instruments we held as of December 31,
2009, were not designated as hedges.
(10)
Policy Revenue Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is probable.
We license a client-end software to internet cafes for them to
automatically update their client-end software on a real time basis.
Revenue for such licensing fee is recognized on a straight-line basis over the
license period.
(11) Deferred
income taxes
Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. In addition, ASC Topic 740 (formerly
SFAS 109, “Accounting for income taxes”) requires recognition of future tax
benefits, such as carryforwards, to the extent that realization of such benefits
is more likely than not and that a valuation allowance be provided when it is
more likely than not that some portion of the deferred tax asset will not be
realized.
(12) Foreign
currency translation
Since the
Group operates solely in Hong Kong and the PRC, the Group’s functional currency
is the Hong Kong Dollar (“HKD”) and the Renminbi (“RMB”). Assets and
liabilities are translated into U.S. Dollars at the exchange rates at the
end of each reporting period and records the related translation adjustments as
a component of other comprehensive income (loss). Revenue and expenses are
translated using average exchange rates prevailing during the period.
Foreign currency transaction gains and losses are included in current
operations.
(13) Comprehensive
income (loss)
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by shareholders and distributions to shareholders. Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. Comprehensive income includes net income and
the foreign currency translation gain, net of tax.
(14) Recent
accounting pronouncements
The
Company adopted FASB ASC 820-10 (formerly FSP FAS 157-2, “Effective
Date of FASB Statement 157”), which deferred the provisions of previously issued
fair value guidance for nonfinancial assets and liabilities to the first
fiscal period beginning after November 15, 2008. Deferred nonfinancial assets
and liabilities include items such as goodwill and other non-amortizable
intangibles. Effective January 1, 2009, the Company adopted the fair value
guidance for nonfinancial assets and liabilities. The adoption of this ASC did
not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS No.
141R, “Business Combinations”), which establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in an acquiree and the goodwill acquired. In addition, the
provisions in this ASC require that any additional reversal of deferred tax
asset valuation allowance established in connection with fresh start
reporting on January 7, 1998 be recorded as a component of income tax
expense rather than as a reduction to the goodwill established in
connection with the fresh start reporting. The Company will apply ASC
805-10 to any business combinations subsequent to adoption.
Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS
141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”), which amends ASC 805-10 to require
that an acquirer recognize at fair value, at the acquisition date, an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If the acquisition-date fair value of
such an asset acquired or liability assumed cannot be determined, the acquirer
should apply the provisions of ASC Topic 450, Contingences, to determine whether
the contingency should be recognized at the acquisition date or after such date.
The adoption of ASC 805-20 did not have a material impact on the
Company’s Consolidated Financial Statements.
F-10
Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51), which amends previously issued guidance to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as equity. Among other requirements, this Statement requires
that the consolidated net income attributable to the parent and the
non-controlling interest be clearly identified and presented on the face of the
consolidated income statement. The adoption of the provisions in this
ASC did not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities”), which
amends and expands previously existing guidance on derivative instruments to
require tabular disclosure of the fair value of derivative instruments and their
gains and losses. This ASC also requires disclosure regarding the credit-risk
related contingent features in derivative agreements, counterparty credit risk,
and strategies and objectives for using derivative instruments. The adoption of
this ASC did not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets:), which
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company will
apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired
subsequent to the adoption date. The adoption of these revised provisions did
not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and
Accounting Principles Board 28-1, Interim Disclosures about Fair Value of
Financial Instruments), which amends previous guidance to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. The
adoption of FASB ASC 825-10-65 did not have a material impact on the Company’s
Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments).
Under ASC 320-10-65, an other-than-temporary impairment must be recognized
if the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, ASC 320-10-65 requires impairments related to
credit loss, which is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis for each security, to be
recognized in earnings while impairments related to all other factors to be
recognized in other comprehensive income. The adoption of ASC 320-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly), which provides guidance on how to determine the fair
value of assets and liabilities when the volume and level of activity for the
asset or liability has significantly decreased when compared with normal market
activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. The adoption of ASC
820-10-65 did not have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS No. 165,
“Subsequent Events”), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Adoption of ASC
855-10 did not have a material impact on the Company’s Consolidated Financial
Statements.
In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets”), which expands the disclosure requirements about plan
assets for defined benefit pension plans and postretirement plans. The adoption
of these disclosure requirements did not have any material effect on the
Company’s Consolidated Financial Statements.
In
August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on
measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS No.
157, “Fair Value Measurements”). The adoption of this Update did not have
any material effect on the Company’s Consolidated Financial
Statements
Note
3. GOING CONCERN
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has sustained a loss since
inception of approximately $24,671,816 and has generated little revenues from
operations since inception. In addition, the Company has a stockholders’ deficit
of approximately $24,324,000 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.
F-11
Note
4. DUE FROM/TO RELATED PARTIES
The
amounts are due from/to the directors, officers of MoqiZone Group and the
companies being controlled by them, are non-interest bearing and are due on
demand.
The
Company purchased computer software in the amount of $157,000 from a related
party for our platform technology development. Management has adopted FASB ASC
850-10-50-5 to determine whether the transaction was not carried out on an
arms-length basis. According to FASB ASC 850-10-50-5, transactions involving
related parties cannot be presumed to be carried out on an arm's-length basis,
as the requisite conditions of competitive, free-market dealings may not exist
and representations about transactions with related parties, if made, shall not
imply that the related party transactions were consummated on terms equivalent
to those that prevail in arm's-length transactions unless such representations
can be substantiated. Therefore, the transaction from the Company’s point of
view was not carried out on an arms-length basis.
Note
5. ACQUISTION OF NETCAFE FARMER
Netcafe
Farmer
On
December 21, 2009, we acquired a client-end software called Netcafe Farmer. This
acquisition was accounted for under the acquisition method of accounting.
The cost of the acquisition was approximately US$95,000 (or RMB650,000) and is
being amortized over its estimated useful life. Proforma results of operations
as if the acquisitions occurred at the beginning of the periods included in the
financial statements are not presented as they would be immaterial. By acquiring
Netcafe Farmer, the Company also recruited Mr. Liu Qian and his development team
of 4 people. Their incremental salary is approximately US$75,500 (or RMB516,000)
per annum. We shall submit the Netcafe Farmer audit in an amended
8-K
Note
6. LOAN RECEIVABLE
The loan
receivable is non-interest bearing and has been received in 2009.
Note
7. PROPERTIES AND EQUIPMENT
Property
and equipment and its related accumulated depreciation as of December 31, 2009
and 2008 are as follows:
2009
|
2008
|
|||||||
Computers
and related equipment
|
601,387
|
40,969
|
||||||
Office
equipment
|
40,639
|
368
|
||||||
Software
|
291,514
|
157,380
|
||||||
Furniture
and fixtures
|
17,360
|
-
|
||||||
950,900
|
198,717
|
|||||||
Less:
accumulated depreciation
|
(51,653
|
)
|
-
|
|||||
Net
book value
|
899,247
|
198,717
|
Note
8. CONVERSION OF CONVERTIBLE NOTES
Upon
effectiveness of the Reverse Split on August 31, 2009, each $1,000 principal
amount of Notes (see Note 1) was automatically cancelled and exchanged for one
share of Series A Preferred Stock. Since we sold a total of 494.5 Units,
upon exchange of the Notes, a total of 4,945 shares of Series A Preferred
Stock were issued, which were convertible into an aggregate of 2,747,222 shares
of common stock, subject to anti-dilution and other adjustments as provided
in the Series A Preferred Stock Certificate of Designations.
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. 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.
For a
more complete description of the terms of the Notes, the Class A Warrants, Class
B Warrants, and the Series A Preferred Stock, please see the section entitled
“ Description of Securities
” in our June 1, 2009 Current Report on Form 8-K.
Following
the Reverse Stock Split and the automatic conversion of the Series B preferred
stock issued under the Share Exchange Agreement to the MoqiZone Cayman
shareholders into Series B Conversion Shares:
o
|
all of the issued and outstanding
Notes have been, by their terms be deemed
cancelled;
|
F-12
o
|
all interest accrued on the Notes
(at the rate of 8% per annum) from the date of issuance to the date of
cancellation will be paid, at the Company’s option, in cash or in a shares
of Trestle common stock valued at $1.80 per
share;
|
o
|
each $1,000 principal amount of
cancelled MobiZone Hong Kong Note has been exchanged for one share of
Series A Preferred Stock, $0.001 par value per share. The
Series A Preferred Stock (i) a liquidation value of $1,000 per share, (ii)
vote, together with the Trestle common stock, on an “as converted basis”,
and (iii) are convertible, at any time after issuance, at the option of
the holder, into shares of the Company’s common stock at a conversion
price of $1.80 per share, subject to customary adjustments, including
weighted average anti-dilution
protection.
|
Pursuant
to the terms of the Financing, the Company has agreed to cause (i) the maximum
number of shares of Moqizone common stock issuable upon conversion of all shares
of Series A Preferred Stock and (ii) the maximum number of Class A Warrant
Shares and Class B Warrant Shares to be registered for resale under the
Securities Act of 1933, as amended, pursuant to a registration rights agreement,
which provides inter
alia that Moqizone shall file a registration statement for the
Registrable Shares within 30 days after the completion of the Reverse Stock
Split and cause the registration statement to become effective within 150 days
after the completion of the Reverse Stock Split or 180 days in the event of a
full review by the SEC. If Moqizone does not comply with the foregoing
obligations under the registration rights agreement, it will be required to pay
cash liquidated damages to Investors, at the rate of 2% of the $10,000 offering
price of each Unit sold in the offering ($200.00) for each 30 day period after
the Registration Date that such Registrable Shares have not be registered for
resale under the Securities Act of 1933, as amended; provided that, such
liquidated damages shall not exceed $1,000 per Unit sold in the offering (a
minimum of $400,000 and a maximum of $800,000); provided, however, that
such liquidated damages shall not apply to any Registrable Shares that are
subject to an SEC comment with respect to Rule 415 promulgated under the
Securities Act of 1933, as amended
In
addition, in the event the Company’s revenues for the year ending December 31,
2010 shall equal or exceed $21,560,000, the management shareholders of MoqiZone
Cayman shall be issued warrants to purchase up to 900,000 additional shares of
the Company’s common stock at an exercise price of $1.80 per share, exercisable
for a period of three years.
Under the
terms of the Share Exchange Agreement, all of the shareholders of MoqiZone
Cayman who are members of our senior management have deposited in an escrow
account an aggregate of 900,000 shares of the Company’s common stock.
These shares (the “Performance Shares”) will be delivered to the management
group shareholders only in the event that the Company achieves certain
performance targets over the twelve consecutive months commencing July 1, 2009
and ending June 30, 2010 (the “Measuring Period”). If $6,000,000 or more
raised in the Financing, then: (i) in the event that we realize at least
$19,171,000 (the “Target Revenue”) of revenues by the end of the Measuring
Period, all of the Performance Shares will be released to the management
group, and (ii) in the event that less than the Target Revenue is realized by
the end of the Measuring Period, a pro-rata portion of the Performance Shares
shall be distributed to the purchasers of the Units offered hereby, based upon
0.2347 Performance Shares for each USD $1.00 that the actual revenues achieved
by the end of the Measuring Period shall be less than the Target Revenue, or
45,000 Performance Shares for each 1% of $19,171,000 ($191,710) by which the
actual revenues shall be less than the Target Revenue. If less than $6,000,000
is raised in the Financing, then: (i) in the event that we realize at least
$10,450,000 (the “Lower Target Revenue”) in reported revenues by the end of
the Measuring Period, all of the Performance Shares will be released to the
management group and (ii) in the event that less than $10,450,000 of reported
revenues are realized by the end of the twelve month Measuring Period, a
pro-rata portion of the Performance Shares shall be distributed to the
purchasers based upon 0.4306 Performance Shares for each USD $1.00 that the
actual revenues achieved by the end of the Measuring Period shall be less
than the Lower Target Revenue, or 45,000 Performance Shares for each 1% of
$10,450,000 ($104,500) by which the actual revenues shall be less than the Lower
Target Revenue. As we only raised $5,245,000 which is less than $6,000,000
from our Financings, the Lower Target Revenue scenario will be
applicable.
The
Performance Warrants
Certain
of the members of our senior management will be, under the terms of the Share
Exchange Agreement, entitled to receive three year warrants to purchase 900,000
shares of Trestle common stock, exercisable at $1.80 per share (the “Performance
Warrants”) in the event that our audited net income as of the date that is 24
months after the Final Closing of the Financings shall equal or exceed
$21,560,000, assuming that we complete this Offering with the sale of at least
600 Units for $6,000,000. If however, we complete the Offering for an
aggregate amount less than $6,000,000, than such persons shall only be entitled
to receive the Performance Warrants in the event that our audited net income as
of the date that is 24 months after the Final Closing of the Financing equals or
exceeds $5,000,000.
Note
9. WARRANT LIABILITY
As
described in Note 8 (Conversion of Convertible Notes), 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 Class A warrants have an exercise price of $2.50 per share
with a three year term and the Class B warrants have an exercise price of $3.00
per share with a three year term.
F-13
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 and have exercise prices of between $1.80 and $3.00 per
share.
The Class
A, Class B and Placement Agent warrants (“Warrants”) have an initial exercise
price which is subject to adjustments in certain circumstances for stock splits,
combinations, dividends and distributions, reclassification, exchange or
substitution, reorganization, merger, consolidation or sales of assets, issuance
of additional shares of common stock or equivalents.
Accounting
for Warrants
The
Warrants are entitled to a price adjustment provision 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, The Company determined that the Warrants meet the definition of a
derivative under ASC Topic 815, Derivatives and Hedging
“ASC Topic 815”). In determining whether the Warrants were eligible for a scope
exception from ASC Topic 815, the Company considered the provisions of ASC Topic
815-40 ( Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity ’ s Own Stock ).
The Company determined that the Warrants do not meet a scope exception because
they are not deemed indexed to the Company’s own stock. Pursuant to
ASC Topic 815, derivatives should be measured at fair value and re-measured at
fair value with changes in fair value recorded in earnings at each reporting
period.
Fair
Value
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments.
Warrant
Liability
The
warrants that each investor received as a result of our Financing and conversion
of the convertible notes (see Note 10 for additional details)
contained a down round protection if the company sells or issue shares at a
price per share less that 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. The
Company determined the fair value of the warrants as follows as of August 31,
2009 (effective issuance date).
The
Company used the Black-Scholes option-pricing model with the following
assumptions: an expected life equal to the contractual term of the warrants
(three years), underlying stock price of $5.09 (as at August 31, 2009 –
effective date of conversion), no dividends; a risk free rate of 1.49% which
equals three -year yield on Treasury bonds at constant (or fixed) maturity (for
those warrants with an effective issue date of August 31); and volatility of
55.24%. Although the Company’s common stock (as a result of the recent reverse
merger) had been publicly traded since March 2009, Management also considered
liquidity, financial condition and the recent conversion of its convertible
notes in Series A preferred stock when determining the fair value of its common
stock. After reviewing these factors, Management believed that the quoted
market price of its securities provided the most reliable evidence of its fair
value and should be used since it was available and deemed to be most
relevant. As the Company’s stock had only a short trading history,
historical volatility information was not available. In accordance with the
guidance in ASC 718-10-30-2, the Company identified three similar public
entities and considered the historical volatilities of those public entities in
calculating the expected volatility appropriate to the company (the calculated
value). Under the assumptions, the Black-Scholes option pricing model yielded an
aggregate value of approximately $9,968,597.
The
Company performed the same calculations as of December 31, 2009, to revalue the
warrants as of that date. In using the Black Scholes option-pricing model,
the Company used an underlying stock price of $10.00 per share; no dividends; a
risk free rate of 1.7% which equals three-year yield on Treasury bonds at
constant (or fixed) maturity (for those warrants with an effective issue date of
August 31); and volatility of 57.77% The resulting aggregate allocated value of
the warrants as of December 31, 2009 equaled approximately $25,313,000.
The change in fair value of approximately $19,868,000 was recorded for the
year ended December 31, 2009.
Upon the
earlier of the warrant exercise or the expiration date, the warrant liability
will be reclassified into shareholders’ equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights
agreement will be expensed as incurred and will be included in operating
expenses.
Note
10. ACCOUNTING FOR SERIES A PREFERRED STOCK
The
management has adopted FASB ASC 480-10, “S99 SEC Materials”. Under this rule,
ASR 268 requires equity instruments with redemption features that are not solely
within the control of the issuer to be classified outside of permanent equity.
As there was no redemption provision attached to Series A Preferred Stock, it
has been classified as permanent equity.
F-14
The
management has also adopted FASB ASC 815-15-25-1. It requires that an embedded
derivative shall be separated from the host contract and accounted for as a
derivative if and only if all of the following three criteria are met: a. the
economics characteristics and risks of the embedded derivative are not clearly
and closely related to the economics characteristics and risks of the host
contract. b. The hybrid instrument is not remeasured at fair value under
otherwise applicable GAAP with changes in fair value reported in earnings as
they occur. c. A separate instrument with the same terms as the embedded
derivative would be a derivative instrument subject to the requirements of
section 815-10-15. Additionally, under FASB ASC 815-15-25-16 through FASB ASC
815-15-25-18, if the host contract encompasses a residual interest in an entity,
then its economic characteristics and risks shall be considered that of an
equity instrument and an embedded derivative would need to possess principally
equity characteristics (related to the same entity) to be considered
clearly and closely related to the host contract. Given the fact that the Series
A Preferred Stock encompasses a residual interest in the company and it is
related to the company itself, the conversion feature is clearly and
closely related to the host instrument. Thus, the embedded conversion
feature in Series A preferred stock should not be account as a derivative
instrument.
Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to
the value received. The beneficial conversion amount is recorded as a
reduction on the carrying value of the equity instrument and an increase to
additional paid-in-capital.
In the
case the conversion of the convertible note, the fair market value of the
warrant liability exceeded the cash raised in the financings and therefore the
residual value assigned to the Preferred Stock was nil. As such, the
financing was not deemed to have beneficial conversion feature and any value
assigned to a beneficial conversion was deemed to be zero.
Note
11. PREFERRED STOCK DIVIDENDS
On
December 31, 2009, the board of directors passed a resolution to issue 62,355
shares of our common stock as dividends to the holders of our Series A
Convertible Preferred Stock. The number of shares issued was calculated at
a rate of 8% per annum (subject to a pro rata adjustment) of the liquidation
preference amount payable in shares equal to (i) the dividend payment divided by
(ii) $1.80. As such, the shares were valued at approximately $112,239 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.
Preferred
Stock Dividends Issued on December 31, 2009
Date
|
Preferred Stock
|
Common Shares Issued
|
Dividend Value
|
|||||||
12/31/2009
|
Series
A
|
62,355
|
$
|
112,239
|
Note
12. INCOME TAX/SALES TAX
Under the
current laws of the Cayman Islands, we are not subject to tax on income or
capital gains. In addition, payment of dividends by us is not subject to
withholding tax in the Cayman Islands.
Under the
current Hong Kong Inland Revenue Ordinance, MobiZone Hong Kong is subject to
16.5% income tax on its taxable income generated from operations in Hong
Kong. Additionally, payments of dividends by MobiZone Hong Kong to us are
not subject to any Hong Kong withholding tax.
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). As Mobizone Hong Kong
is the sole shareholder of Shanghai MoqiZone, the dividends from Shanghai
MoqiZone may be taxed at a reduced withholding tax rate of 5% per the Double Tax
Avoidance Arrangement between Hong Kong and Mainland China.
Our PRC
companies are subject to PRC business tax. We primarily pay business tax on
gross revenues generated from online game operations, rentals, service fees and
license fees. Our PRC operating companies pay business tax on their gross
revenues derived from online game operations at a rate ranging from 3% to 5%,
and this business tax is deducted from total revenues. In addition, our
PRC subsidiaries pay a 5% business tax on the gross revenues derived from their
contractual arrangements with our PRC operating companies, and these taxes
are primarily recorded in operating expenses in accordance with our accounting
policy.
As of
December 31, 2009, we have a deferred tax asset of approximately US$721,000,
resulting from available net operating loss carryforwards on a financial
reporting basis for which a 100% valuation has been applied.
Note
13. CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Group to significant concentrations of
credit risk consist primarily of cash and cash equivalents and prepayments and
other current assets. As of December 31, 2009 and 2008 substantially
all of the Group’s cash and cash equivalents were held by major financial
institutions located in the PRC and in Hong Kong, which management believes
are of high credit quality.
F-15
Note
14. COMMITMENTS AND CONTIGENCIES
Operating
lease agreements
The
Company has entered into leasing arrangements relating to office premise and
computer equipment that are classified as operating lease. Future
minimum lease payments for non-cancelable operating leases as of December 31,
2009 are as follows:
2010
|
66,016
|
Legal
Contingencies
In
January 2009, Shanghai Moqizone entered into an Exclusive Business Cooperation
Agreement and certain ancillary agreements, including an Equity Pledge
Agreement, Exclusive Option Agreement, Loan Agreement and Irrevocable Power of
Attorney with SZ Mellow. 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.
Management’s
position is 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), certain
computer 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.
Note
15. NET LOSS PER SHARE – BASIC AND DILUTED
On March
15, 2009, we completed a reverse acquisition of MoqiZone Holding Corporation
("MoqiZone"). Prior to the acquisition, Trestle Holdings, Inc. (“Trestle”),
was a public shell company, as that term is defined in Rule 12b-2 of the
Exchange Act, established under the laws of Delaware. To accomplish the share
exchange we issued 10,743 shares of our sought to be created Series B
convertible preferred stock for a 100% equity interest in MoqiZone
Cayman. Per the terms of the Share Exchange, Trestle Holdings, Inc. was
delivered with zero assets and zero liabilities at time of closing. Following
the reverse acquisition, we changed the name of Trestle Holdings, Inc. to
MoqiZone Holding Corporation (“MoqiZone”). The transaction was regarded as a
reverse merger whereby Moqizone was considered to be the accounting acquirer as
it retained control of Trestle after the exchange. Although Trestle is the legal
survivor, Moqizone is the continuing entity for financial reporting
purposes. The Financial Statements contained herein have been prepared as
if Moqizone had always been the reporting company and then on the share exchange
date, had changed its name and reorganized its capital stock.
Pursuant
to SEC Manual Item 2.6.5.4 Reverse acquisitions, the Company believes the
statement of stockholders’ equity should be revised to disclose the effect of
the reverse merger on a retroactive basis. The SEC guidance requires that
“in a reverse acquisition the historical shareholder’s equity of the accounting
acquirer prior to the merger is retroactively restated (a recapitalization) for
the equivalent number of shares received in the merger after giving effect to
any difference in par value of the registrant’s and the accounting acquirer’s
stock by an offset in paid in capital.” Based on this statement, the Company
believes the statement of stockholders’ equity should disclose the effects of
the reverse merger by retroactively restating the 10,743,000 common shares
given to Moqizone (accounting acquirer in the reverse merger with Trestle),
which is converted from the Series B Preferred Stock on August 31, 2009. In
addition, per reverse acquisition guidance, 179,115,573 share of Trestle were
outstanding at the time of merger should be shown as a recapitalization (or
reorganization of its capital stock) on the share exchange date.
The
management has adopted FASB ASC 260 55-2 when they determined weighted-average
number of shares outstanding for each period presented. It requires an
arithmetical mean average of shares outstanding and assumed to be outstanding
for the EPS computation. In addition, the management has adopted FASB ASC 260
when they considered the convertible notes, preferred stock issuances and
warrants in calculating earnings per share for each period presented. Under rule
FASB ASC 260 45-40, the dilutive effect of convertible securities shall be
reflected in diluted EPS by application of the if-converted method, and Under
rule FASB ASC 260 45-22, the dilutive effect of outstanding warrants shall be
reflected in diluted EPS by application of the treasury stock method, however,
because both Series A Preferred Stock, converted from convertible notes, Class A
Warrants and Class B Warrants are subject to weighted average and other
anti-dilution adjustments, they are anti-dilutive securities. Under FASB ASC
260, anti-dilutive securities are ignored when calculating both basic and
diluted EPS. Therefore, Series A Preferred Stock, Class A Warrants and Class B
Warrants are ignored when calculating both basic and diluted EPS. Series B
convertible preferred stock is reflected in diluted EPS using if-converted
method.
F-16
Note
16. SUBSEQUENT EVENTS
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 approximately $196,000. We also 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.
We have
evaluated events after the date of these financial statements through April 14,
2010, the date that these financial statements were issued. There were no
other material subsequent events as of that date.
F-17
Interim
Financial Statements
MOQIZONE
HOLDING CORPORATION
(A
Development Stage Company)
Consolidated
Balance Sheets
March 31,
2010
|
December 31,
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
|
$
|
1,784,456
|
$
|
584,300
|
||||
Prepayments,
deposits and other receivables
|
104,422
|
80,180
|
||||||
Due
from related parties
|
-
|
1,071
|
||||||
Total
current assets
|
1,888,878
|
665,551
|
||||||
Property
and equipment, net
|
852,127
|
899,247
|
||||||
Total
assets
|
$
|
2,741,005
|
$
|
1,564,798
|
||||
LIABILITIES
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
87,078
|
$
|
58,339
|
||||
Other
payables and accruals
|
153,567
|
202,468
|
||||||
Accrued
directors’ fee
|
235,715
|
228,901
|
||||||
Due
to related parties
|
58
|
58
|
||||||
Interest
payable
|
-
|
85,707
|
||||||
Preferred
stock dividend payable
|
23,872
|
-
|
||||||
Warrant
liabilities
|
6,001,029
|
25,313,369
|
||||||
Liqu
i dated damages payable
|
45,800
|
-
|
||||||
Total
current liabilities
|
6,547,119
|
25,888,842
|
||||||
Shareholders’
deficit
|
||||||||
Common
stock, 40,000,000 share authorized, $0.001 par value, 13,667,764 and
13,620,260 issued and outstanding as of March 31, 2010 and December 31,
2009, respectively
|
13,668
|
13,620
|
||||||
Series
A preferred stock, 15,000 share authorized, $0.001 par value, 1,145 issued
and outstanding as of March 31, 2010 and December 31, 2009,
respectively
|
1
|
1
|
||||||
Series
C preferred stock, 1,000,000 share authorized, $0.001 par value, 869,422
and 0 issued and outstanding as of March 31, 2010 and December 31, 2009,
respectively
|
869
|
0
|
||||||
Benefic
i al Conversion Feature – Deemed Dividend
|
1,097,379
|
0
|
||||||
Warrants
|
546,298
|
0
|
||||||
Placement
Agent Warrants
|
115,854
|
0
|
||||||
Additional
paid in capital
|
532,817
|
447,355
|
||||||
Deficit
accumulated during development stage
|
(6,143,005
|
)
|
(24,784,055
|
)
|
||||
Accumulated
other comprehensive income/(loss) - foreign exchange
adjustment
|
30,005
|
(965
|
)
|
|||||
Total
shareholders’ deficit
|
(3,806,114
|
)
|
(24,324,044
|
)
|
||||
Total
liabilities and shareholders’ deficit
|
$
|
2,741,005
|
$
|
1,564,798
|
See notes
to financial statements
F-18
MOQIZONE
HOLDING CORPORATION
(A
Development Stage Company)
Consolidated
Statements of Operations and Comprehensive Income (Loss)
Three months ended March 31,
|
From inception
August 29,
2007 to
March 31,
|
|||||||||||
2010
|
2009
|
2010
|
||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
Revenue,
net
|
1,585
|
-
|
2,957
|
|||||||||
Costs
and expenses
|
||||||||||||
Research
& development expenses
|
(95,698
|
)
|
-
|
(126,145
|
)
|
|||||||
Depreciation
and amortization expense
|
(43,032
|
)
|
-
|
(96,934
|
)
|
|||||||
Selling,
general and administrative expenses
|
(459,957
|
)
|
(405,289
|
)
|
(5,008,095
|
)
|
||||||
Loss
from operations
|
(597,102
|
)
|
(405,289
|
)
|
(5,228,217
|
)
|
||||||
Other
(expenses)/income
|
||||||||||||
Interest
expenses, net of interest income
|
124
|
176
|
(99,711
|
)
|
||||||||
Gain/(Loss)
on foreign currency transaction
|
(4,640
|
)
|
-
|
(19,490
|
)
|
|||||||
Amortization
of placing fees of convertible notes
|
-
|
-
|
(58,115
|
)
|
||||||||
Change
in fair value of warrants
|
19,312,340
|
-
|
(555,561
|
)
|
||||||||
Liquidated
damages for ineffective registration statement
|
(45,800
|
)
|
-
|
(45,800
|
)
|
|||||||
Total
other expenses
|
19,262,024
|
176
|
(778,677
|
)
|
||||||||
Net
income (loss)
|
18,664,922
|
(405,113
|
)
|
(6,006,894
|
)
|
|||||||
Dividend
of Series A convertible preferred stock
|
23,872
|
-
|
136,111
|
|||||||||
Beneficial
conversion feature related to Issuance of series C convertible preferred
stock
|
1,097,379
|
-
|
1,097,379
|
|||||||||
Net
income (loss) applicable to common stockholders
|
17,543,671
|
(405,113
|
)
|
(7,240,384
|
)
|
|||||||
Other
comprehensive income
|
||||||||||||
Foreign
currency translation adjustment
|
30,970
|
30,005
|
||||||||||
Comprehensive
income (loss)
|
18,695,892
|
(405,113
|
)
|
(5,976,889
|
)
|
|||||||
Net
income per share:
|
||||||||||||
Basic
|
1.28
|
(0.58
|
)
|
|||||||||
Diluted
|
1.28
|
(0.58
|
)
|
|||||||||
Weighted
average number of shares used in computation:
|
||||||||||||
Basic
|
13,664,597
|
703,794
|
||||||||||
Diluted
|
13,664,597
|
703,794
|
See notes
to financial statements
F-19
MOQIZONE
HOLDING CORPORATION
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
Three months ended March 31,
|
From inception
August 29,
2007 to March
31, 2010
|
|||||||||||
2010
|
2009
|
|||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
Operating
activities
|
||||||||||||
Net
income (loss)
|
18,664,922
|
(405,113
|
)
|
(6,006,894
|
)
|
|||||||
Adjustments:
|
||||||||||||
Capital
issued for directors’ fees and officer’s salaries
|
292,883
|
|||||||||||
Common
stock issued for interest due on conversion of convertible debt into
Series A preferred stock
|
85,510
|
85,510
|
||||||||||
Depreciation
and amortization
|
43,032
|
96,934
|
||||||||||
Amortization
of placement fees of convertible notes
|
0
|
58,115
|
||||||||||
Interest
expenses
|
(85,707
|
)
|
(6,037
|
)
|
||||||||
Warrant
liabilities
|
(19,312,340
|
)
|
555,561
|
|||||||||
Other
receivables
|
(24,242
|
)
|
(8,821
|
)
|
(104,422
|
)
|
||||||
Accounts
payables
|
28,739
|
(78
|
)
|
87,078
|
||||||||
Other
payables and accruals
|
(48,901
|
)
|
283,933
|
888,250
|
||||||||
Accrued
directors’ fees
|
6,814
|
235,715
|
||||||||||
Liquidated
damages payable
|
45,800
|
45,800
|
||||||||||
Due
from/to related parties
|
1,071
|
22,458
|
||||||||||
Net
cash used in operating activities
|
(595,302
|
)
|
(130,079
|
)
|
(3,749,049
|
)
|
||||||
Investing
activities
|
||||||||||||
Cash
acquired from acquisition
|
148,148
|
0
|
||||||||||
Acquisition
of property and equipment
|
-
|
(950,900
|
)
|
|||||||||
Net
cash provided by (used in) investing activities
|
-
|
148,148
|
(950,900
|
)
|
||||||||
Financing
activities
|
||||||||||||
Sale
of Series C Preferred shares and Series C and Series D
Warrants
|
1,760,400
|
6,527,337
|
||||||||||
Repayment
of convertible notes
|
-
|
(316,437
|
)
|
|||||||||
Loan
from owners and officers
|
-
|
17,330
|
20,374
|
|||||||||
Capital
contribution
|
-
|
221,144
|
||||||||||
Net
cash provided by financing activities
|
1,760,400
|
17,330
|
6,452,418
|
|||||||||
Effect
of exchange rate on cash
|
35,058
|
(197
|
)
|
31,987
|
||||||||
Increase
in cash
|
1,200,156
|
35,202
|
1,784,456
|
|||||||||
Cash,
beginning of period
|
584,300
|
18,286
|
-
|
|||||||||
|
|
|
||||||||||
Cash,
end of period
|
1,784,456
|
53,488
|
1,784,456
|
|||||||||
Supplement
disclosure of cash flow information
|
||||||||||||
Interest
paid
|
-
|
-
|
21,008
|
|||||||||
Supplement
disclosure of non-cash transactions
|
||||||||||||
Issuance
of shares for dividends
|
85,510
|
-
|
197,749
|
|||||||||
Preferred
stock dividend payable
|
23,872
|
23,872
|
||||||||||
Warrant
liability incurred in connection with convertible notes
|
(19,312,340
|
)
|
-
|
6,001,029
|
||||||||
Forgiveness
of directors’ fee
|
-
|
-
|
771,563
|
See notes
to financial statements
F-20
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
1. INTERIM FINANCIAL STATEMENTS
The
accompanying unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission, and should be
read in conjunction with the audited consolidated financial statements and notes
thereto contained in the Company’s Form 10K filed on April 15,
2010. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for the interim
periods are not necessarily indicative of the result to be expected for the full
year.
NOTE
2. ORGANIZATION AND NATURE OF OPERATIONS
The
accompanying consolidated financial statements include the financial statements
of MoqiZone Holding Corporation (the “Company”), its subsidiaries of MoqiZone
Holdings Limited, a Cayman Island corporation (“MoqiZone Cayman”), MobiZone
Holdings Limited, a Hong Kong corporation (“MobiZone Hong Kong”), MoqiZone
(Shanghai) Information Technology Company Limited (“Shanghai MoqiZone”) and a
variable interest entity (“VIE”), Shenzhen Alar Technology Company Limited
(“Shenzhen Alar”). The Company, its subsidiaries and VIE are
collectively referred to as the “Group”. MobiZone Hong Kong operates
a Chinese online game content delivery platform company that delivers last mile
connectivity to internet cafes installed with our WiMAX equipment and which have
joined into our MoqiZone WiMAX Network.
The
Share Exchange Agreement, Reverse Merger and Reorganization
On March
15, 2009, Trestle Holdings, Inc. (the “Trestle”) entered into a Share Exchange
Agreement with MoqiZone Cayman, Cheung Chor Kiu Lawrence, the principal
shareholder of MoqiZone Cayman (“Cheung”), and MKM Capital Opportunity Fund Ltd.
(“MKM”), our principal stockholder (the “Agreement”). MoqiZone Cayman
is the record and beneficial owner of 100% of the share capital of MobiZone Hong
Kong and MobiZone 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 $4,345,000 in gross proceeds from the financing described below, we
acquired all of the issued and outstanding capital stock of MoqiZone Cayman in
exchange for the issuance to Cheung and the other shareholders of MoqiZone
Cayman of 10,743 shares of our sought to be created Series B convertible
preferred stock. The transaction was regarded as a reverse merger
whereby MoqiZone Cayman was considered to be the accounting acquirer as it
retained control of Trestle after the exchange and Trestle is the legal
acquirer. The share exchange was treated as a recapitalization and,
accordingly, Trestle reclassified its common stock and additional
paid-in-capital accounts for the year ended December 31, 2008. The
Financial Statements have been prepared as if MoqiZone had always been the
reporting company and then on the share exchange date, had changed its name and
reorganized its capital stock.
As of
August 28, 2009, our corporate name changed to from Trestle Holdings, Inc. to
MoqiZone Holding Corporation and our authorized capital increased by 10,000,000
shares of preferred stock. Pursuant to the additional financings we
closed in August 2009 and the authority vested in our Board of Directors, we
also filed a certificate of designation of Series A preferred stock and
certificate of designation of Series B preferred stock with Delaware’s Secretary
of State to designate 15,000 of the 15,000,000 shares of preferred stock as
Series A preferred stock and 10,743 of the 15,000,000 shares of preferred stock
as Series B preferred stock.
On
August, 31, 2009, a one-for-254.5 reverse stock split became effective and
reduced outstanding shares of our common stock to 703,794
shares. Following the reverse stock split described and per the terms
and conditions of our share exchange, the Series B Preferred Stock
automatically (and without any action on the part of the holders) 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).
As a
result of these transactions, our authorized capital now consists of 40,000,000
shares of common stock, 14,974,257 shares of undesignated 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, and 10,743 shares Series B preferred
stock.
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1)
|
FASB
Establishes Accounting Standards Codification
™
|
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
F-21
Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In
order to ease the transition to the Codification, we are providing the
Codification cross-reference alongside the references to the standards issued
and adopted prior to the adoption of the Codification.
(2)
|
Basis
of Presentation
|
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of expenses during the
reporting period. On an ongoing basis, we evaluate our estimates
which are based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances. The result of
these evaluations forms the basis for making judgments about the carrying values
of assets and liabilities and the reported amount of expenses that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions
(3)
|
Development
Stage Company
|
The
Company has been obtaining the requisite approvals from the Chinese government
and since inception, has not earned any revenue from
operations. Accordingly, the Company’s activities have
been accounted for as those of a “Development Stage
Enterprise.” Among the disclosures required are that the financial
statements be identified as those of a development stage company, and that the
statements of operations and other comprehensive income (loss), owner’s equity
and cash flows disclose activity since the date of inception.
(4)
|
Consolidation
|
The
consolidated financial statements include the financial statements of the
Company, its subsidiaries and VIE subsidiary for which the Company is the
primary beneficiary. All transaction and balances among the Company,
its subsidiaries and VIE subsidiary have been eliminated upon
consolidation.
The Group
has adopted “ Consolidation of Variable In
terest Entities
. This interpretation requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity investors
in the entity do have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties.
To comply
with PRC laws and regulations that restrict foreign ownership of companies that
operate online games, the Company operates its online games mainly through
Shenzhen Alar, which is wholly owned by certain PRC
citizens. Shenzhen Alar holds the licenses and approvals to
operate line games in the PRC.
Pursuant
to the contractual arrangements with Shenzhen Alar, MoqiZone Shanghai
mainly provides the following intra-group services to Shenzhen
Alar:
ooo
|
Gaming
related licensing service;
|
o
|
|
ooo
|
Software
licensing service;
|
o
|
ooo
|
Equipment
and maintenance service;
|
o
|
ooo
|
Strategic
consulting service;
|
o
|
ooo
|
Licensing
of billing technology; and
|
o
|
ooo
|
Billing
service.
|
o
|
In
addition, MoqiZone Shanghai has entered into agreements with Shenzhen Alar and
its equity owners with respect to certain shareholder rights and corporate
governance matters that provide the Company with the substantial ability to
control Shenzhen Alar. Pursuant to these contractual
arrangements:
ooo
|
The
equity owners of Shenzhen Alar have granted an irrevocable proxy to
individuals designated by MoqiZone Shanghai to exercise the right to
appoint directors, general manager and other senior management of Shenzhen
Alar;
|
o
|
ooo
|
Shenzhen
Alar will not enter into any transaction that may materially affect its
assets, liabilities, equity or operations without the prior written
consent of MoqiZone Shanghai.
|
o
|
F-22
ooo
|
Shenzhen
Alar will not distribute any dividend;
|
o
|
ooo
|
The
equity owners of Shenzhen Alar have pledged their equity interest in
Shenzhen Alar to MoqiZone Shanghai to secure the payment obligations of
Shenzhen Alar under all the agreements between Shenzhen Alar and MoqiZone
Shanghai; and
|
o
|
ooo
|
The
equity owners of Shenzhen Alar will not transfer, sell, pledge or dispose
of their equity interest in Shenzhen Alar without any prior written
consent of MoqiZone Shanghai.
|
o
|
As a
result of these agreements, the Company is considered the primary beneficiary of
Shenzhen Alar and accordingly Shenzhen Alar’s results are consolidated in the
Company’s financial statements.
(5)
|
Cash
and cash equivalents
|
Cash and
cash equivalents represent cash on hand and highly liquid investment placed with
banks, which have original maturities less than three months. Cash
and cash equivalents kept with financial institutions in the People’s Republic
of China (“PRC”) are not insured or otherwise protected. Should any
of those institutions holding the Company’s cash become insolvent, or the
Company is unable to withdraw funds for any reason, the Company could lose the
cash on deposit at that institution.
(6)
|
Property
and equipment
|
Property
and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the following estimated useful lives:
Network
equipment
|
3
years
|
|
Computer
equipment
|
3
years
|
|
Leasehold
improvements
|
Lesser
of the term of the lease or the estimated useful lives of the
assets
|
|
Furniture
and fixtures
|
3
years
|
(7)
|
Computer
software
|
Purchased
computer software for internal use is capitalized and amortized over its
estimated useful live starting when it is placed in service.
(8)
|
Impairment
of long-lived assets and intangible
assets
|
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be
held and used, impairment is recognized when the estimated undiscounted cash
flows associated with the asset or group of assets is less than their carrying
value. If impairment exists, an adjustment is made to write the asset
down to its fair value, and a loss is recorded as the difference between the
carrying value and fair value. Fair values are determined based on
quoted market values, discounted cash flows or internal and external appraisals,
as applicable. Assets to be disposed of are carried at the lower of
carrying value or estimated net realizable value. No impairment was
recognized during the year ended December 31, 2009 and 2008.
(9)
|
Derivative
Financial Instruments
|
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.
Derivative
financial instruments are recorded as liabilities in the consolidated balance
sheet, measured at fair value. When available, quoted market prices
are used in determining fair value. However, if quoted market prices
are not available, we estimate fair value using either quoted market prices of
financial instruments with similar characteristics or other valuation
techniques.
The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions
related to the remaining term of the instruments and risk-free rates of return,
our current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
F-23
Derivative
financial instruments that are not designated as hedges or that do not meet the
criteria for hedge accounting under ASC topic 815 “Derivatives and Hedging” are
recorded at fair value, with gains or losses reported currently in
earnings. All derivative financial instruments we held as of March
31, 2010, were not designated as hedges.
(10)
|
Policy
Revenue Recognition
|
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is probable.
We license a client-end software to internet cafes for them to
automatically update their client-end software on a real time basis.
Revenue for such licensing fee is recognized on a straight-line basis over the
license period.
(11)
|
Deferred
income taxes
|
Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, ASC topic 740 “Income Taxes” requires recognition of future tax
benefits, such as carryforwards, to the extent that realization of such benefits
is more likely than not and that a valuation allowance be provided when it is
more likely than not that some portion of the deferred tax asset will not be
realized.
(12)
|
Foreign
currency translation
|
Since the
Group operates solely in Hong Kong and the PRC, the Group’s functional currency
is the Hong Kong Dollar (“HKD”) and the Renminbi (“RMB”). Assets and
liabilities are translated into U.S. Dollars at the exchange rates at the
end of each reporting period and records the related translation adjustments as
a component of other comprehensive income (loss). Revenue and
expenses are translated using average exchange rates prevailing during the
period. Foreign currency transaction gains and losses are included in
current operations.
Comprehensive
income (loss)
|
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by shareholders and distributions to shareholders. Among
other disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. Comprehensive income includes net income
and the foreign currency translation gain, net of tax.
NOTE
4. DUE FROM/TO RELATED PARTIES
The
amounts are due from/to the directors, officers of MoqiZone Group and the
companies being controlled by them, are non-interest bearing and are due on
demand.
The
Company purchased computer software in the amount of $157,000 from a related
party for our platform technology development. Management has adopted FASB ASC
850-10-50-5 to determine whether the transaction was not carried out on an
arms-length basis. According to FASB ASC 850-10-50-5, transactions involving
related parties cannot be presumed to be carried out on an arm's-length basis,
as the requisite conditions of competitive, free-market dealings may not exist
and representations about transactions with related parties, if made, shall not
imply that the related party transactions were consummated on terms equivalent
to those that prevail in arm's-length transactions unless such representations
can be substantiated. Therefore, the transaction from the Company’s point of
view was not carried out on an arms-length basis.
NOTE
5. CONVERSION OF CONVERTIBLE NOTES
Upon
effectiveness of the Reverse Split on August 31, 2009, each $1,000 principal
amount of Notes (see Note 1) was automatically cancelled and exchanged for one
share of Series A Preferred Stock. Since we sold a total of 494.5
Units, upon exchange of the Notes, a total of 4,945 shares of Series A Preferred
Stock were issued, which were convertible into an aggregate of 2,747,222 shares
of common stock, subject to anti-dilution and other adjustments as provided in
the Series A Preferred Stock Certificate of Designations.
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. 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.
For a
more complete description of the terms of the Notes, the Class A Warrants, Class
B Warrants, and the Series A Preferred Stock, please see the section entitled
“ Description of Securities ” in
our June 1, 2009 Current Report on Form 8-K.
Following
the Reverse Stock Split and the automatic conversion of the Series B preferred
stock issued under the Share Exchange Agreement to the MoqiZone Cayman
shareholders into Series B Conversion Shares:
oo
o
o
|
all
of the issued and outstanding Notes have been, by their terms be deemed
cancelled;
|
F-24
oo
o
o
|
all
interest accrued on the Notes (at the rate of 8% per annum) from the date
of issuance to the date of cancellation will be paid, at the Company’s
option, in cash or in a shares of Trestle common stock valued at $1.80 per
share;
|
oo
o
o
|
each
$1,000 principal amount of cancelled MobiZone Hong Kong Note has been
exchanged for one share of Series A Preferred Stock, $0.001 par value per
share. The Series A Preferred Stock (i) a liquidation value of
$1,000 per share, (ii) vote, together with the Trestle common stock, on an
“as converted basis”, and (iii) are convertible, at any time after
issuance, at the option of the holder, into shares of the Company’s common
stock at a conversion price of $1.80 per share, subject to customary
adjustments, including weighted average anti-dilution
protection.
|
Pursuant
to the terms of the Financing, the Company has agreed to cause (i) the maximum
number of shares of Moqizone common stock issuable upon conversion of all shares
of Series A Preferred Stock and (ii) the maximum number of Class A Warrant
Shares and Class B Warrant Shares to be registered for resale under the
Securities Act of 1933, as amended, pursuant to a registration rights agreement,
which provides inter
alia that Moqizone shall file a registration statement for the
Registrable Shares within 30 days after the completion of the Reverse Stock
Split and cause the registration statement to become effective within 150 days
after the completion of the Reverse Stock Split or 180 days in the event of a
full review by the SEC. If Moqizone does not comply with the
foregoing obligations under the registration rights agreement, it will be
required to pay cash liquidated damages to Investors, at the rate of 2% of the
$10,000 offering price of each Unit sold in the offering ($200.00) for each 30
day period after the Registration Date that such Registrable Shares have not be
registered for resale under the Securities Act of 1933, as amended; provided
that, such liquidated damages shall not exceed $1,000 per Unit sold in the
offering (a minimum of $400,000 and a maximum of $800,000); provided, however,
that such liquidated damages shall not apply to any Registrable Shares that are
subject to an SEC comment with respect to Rule 415 promulgated under the
Securities Act of 1933, as amended
In
addition, in the event the Company’s revenues for the year ending December 31,
2010 shall equal or exceed $21,560,000, the management shareholders of MoqiZone
Cayman shall be issued warrants to purchase up to 900,000 additional shares of
the Company’s common stock at an exercise price of $1.80 per share, exercisable
for a period of three years.
Under the
terms of the Share Exchange Agreement, all of the shareholders of MoqiZone
Cayman who are members of our senior management have deposited in an escrow
account an aggregate of 900,000 shares of the Company’s common
stock. These shares (the “Performance Shares”) will be delivered to
the management group shareholders only in the event that the Company achieves
certain performance targets over the twelve consecutive months commencing July
1, 2009 and ending June 30, 2010 (the “Measuring Period”). If
$6,000,000 or more raised in the Financing, then: (i) in the event that we
realize at least $19,171,000 (the “Target Revenue”) of revenues by the end of
the Measuring Period, all of the Performance Shares will be released to the
management group, and (ii) in the event that less than the Target Revenue is
realized by the end of the Measuring Period, a pro-rata portion of the
Performance Shares shall be distributed to the purchasers of the Units offered
hereby, based upon 0.2347 Performance Shares for each USD $1.00 that the actual
revenues achieved by the end of the Measuring Period shall be less than the
Target Revenue, or 45,000 Performance Shares for each 1% of $19,171,000
($191,710) by which the actual revenues shall be less than the Target Revenue.
If less than $6,000,000 is raised in the Financing, then: (i) in the event that
we realize at least $10,450,000 (the “Lower Target Revenue”) in reported
revenues by the end of the Measuring Period, all of the Performance Shares will
be released to the management group and (ii) in the event that less than
$10,450,000 of reported revenues are realized by the end of the twelve month
Measuring Period, a pro-rata portion of the Performance Shares shall be
distributed to the purchasers based upon 0.4306 Performance Shares for each USD
$1.00 that the actual revenues achieved by the end of the Measuring Period shall
be less than the Lower Target Revenue, or 45,000 Performance Shares for each 1%
of $10,450,000 ($104,500) by which the actual revenues shall be less than the
Lower Target Revenue. As we only raised $5,245,000 which is less than $6,000,000
from our Financings, the Lower Target Revenue scenario will be
applicable.
The
Performance Warrants
Certain
of the members of our senior management will be, under the terms of the Share
Exchange Agreement, entitled to receive three year warrants to purchase 900,000
shares of Moqizone common stock, exercisable at $1.80 per share (the
“Performance Warrants”) in the event that our audited net income as of the date
that is 24 months after the Final Closing of the Financings shall equal or
exceed $21,560,000, assuming that we complete this Offering with the sale of at
least 600 Units for $6,000,000. If however, we complete the Offering
for an aggregate amount less than $6,000,000, than such persons shall only be
entitled to receive the Performance Warrants in the event that our audited net
income as of the date that is 24 months after the Final Closing of the Financing
equals or exceeds $5,000,000.
NOTE
6. WARRANT LIABILITY
As
described in Note 5 (Conversion of Convertible Notes), 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 Class A warrants have an exercise price of $2.50
per share with a three year term and the Class B warrants have an exercise price
of $3.00 per share with a three year term.
F-25
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 and have exercise prices of between $1.80
and $3.00 per share.
The Class
A, Class B and Placement Agent warrants (“Warrants”) have an initial exercise
price which is subject to adjustments in certain circumstances for stock splits,
combinations, dividends and distributions, reclassification, exchange or
substitution, reorganization, merger, consolidation or sales of assets, issuance
of additional shares of common stock or equivalents.
Accounting for
Warrants
The
Warrants are entitled to a price adjustment provision 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, The Company determined that the Warrants meet the definition of a
derivative under ASC Topic 815, Derivatives and Hedging “ASC
Topic 815”). In determining whether the Warrants were eligible for a scope
exception from ASC Topic 815, the Company considered the provisions of ASC Topic
815-40 ( Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity ’ s Own Stock ). The Company
determined that the Warrants do not meet a scope exception because they are not
deemed indexed to the Company’s own stock. Pursuant to ASC
Topic 815, derivatives should be measured at fair value and re-measured at fair
value with changes in fair value recorded in earnings at each reporting
period.
Fair
Value
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments.
Warrant
Liability
The
warrants that each investor received as a result of our Financings and
conversion of the convertible notes (see Note 10 for additional details)
contained a down round protection if the company sells or issue shares at a
price per share less that 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. The
Company determined the fair value of the warrants as follows as of August 31,
2009 (effective issuance date).
The
Company used the Black-Scholes option-pricing model with the following
assumptions: an expected life equal to the contractual term of the warrants
(three years), underlying stock price of $5.09 (as at August 31, 2009 –
effective date of conversion), no dividends; a risk free rate of 1.49% which
equals three -year yield on Treasury bonds at constant (or fixed) maturity (for
those warrants with an effective issue date of August 31); and volatility of
55.24%. Although the Company’s common stock (as a result of the recent reverse
merger) had been publicly traded since March 2009, Management also considered
liquidity, financial condition and the recent conversion of its convertible
notes in Series A preferred stock when determining the fair value of its common
stock. After reviewing these factors, Management believed that the quoted
market price of its securities provided the most reliable evidence of its fair
value and should be used since it was available and deemed to be most
relevant. As the Company’s stock had only a short trading history,
historical volatility information was not available. In accordance with the
guidance in ASC 718-10-30-2, the Company identified three similar public
entities and considered the historical volatilities of those public entities in
calculating the expected volatility appropriate to the company (the calculated
value). Under the assumptions, the Black-Scholes option pricing model yielded an
aggregate value of approximately $9,968,597.
The
Company performed the same calculations as of December 31, 2009 and March 31,
2010, to revalue the warrants as of those respective dates. In using
the Black Scholes option-pricing model at December 31, 2009, the Company used an
underlying stock price of $10.00 per share; no dividends; a risk free rate of
1.7% which equals three-year yield on Treasury bonds at constant (or fixed)
maturity (for those warrants with an effective issue date of August 31); and
volatility of 57.77%. At March 31, 2010, the company used the Black
Scholes option-pricing model with an underlying stock price of $3.77 per share;
no dividends; a risk free rate of 1.6% which equals three-year yield on Treasury
bonds at constant (or fixed) maturity (for those warrants with an effective
issue date of August 31); and volatility of 57.77%. The resulting aggregate
allocated value of the warrants as of December 31, 2009 equaled approximately
$25,313,000 and $6,001,029 as of March 31, 2010. As a result a change in
fair value of approximately $19,868,000 was recorded for the year ended December
31, 2009and a change in fair value of approximately $19,312,340 was recorded for
the three months ended March 31, 2010.
Upon the
earlier of the warrant exercise or the expiration date, the warrant liability
will be reclassified into shareholders’ equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights
agreement will be expensed as incurred and will be included in operating
expenses.
NOTE
7. ACCOUNTING FOR SERIES A PREFERRED STOCK
The
management has adopted ASC 480-10, “S99 SEC Materials”. Under this rule, ASR 268
requires equity instruments with redemption features that are not solely within
the control of the issuer to be classified outside of permanent equity. As there
was no redemption provision attached to Series A Preferred Stock, it has been
classified as permanent equity.
F-26
The
management has also adopted ASC 815-15-25-1. It requires that an embedded
derivative shall be separated from the host contract and accounted for as a
derivative if and only if all of the following three criteria are met: (a) the
economics characteristics and risks of the embedded derivative are not clearly
and closely related to the economics characteristics and risks of the host
contract; (b) the hybrid instrument is not re-measured at fair value under
otherwise applicable GAAP with changes in fair value reported in earnings as
they occur; and (c) a separate instrument with the same terms as the embedded
derivative would be a derivative instrument subject to the requirements of
section 815-10-15. Additionally, under ASC 815-15-25-16 through ASC
815-15-25-18, if the host contract encompasses a residual interest in an entity,
then its economic characteristics and risks shall be considered that of an
equity instrument and an embedded derivative would need to possess principally
equity characteristics (related to the same entity) to be considered clearly and
closely related to the host contract. Given the fact that the Series A Preferred
Stock encompasses a residual interest in the company and it is related to the
company itself, the conversion feature is clearly and closely related to the
host instrument. Thus, the embedded conversion feature in Series A preferred
stock should not be account as a derivative instrument.
Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to
the value received. The beneficial conversion amount is recorded as a
reduction on the carrying value of the equity instrument and an increase to
additional paid-in-capital.
In the
case of conversion of the convertible note, the fair market value of the warrant
liability exceeded the cash raised in the financings and therefore the residual
value assigned to the Preferred Stock was nil. As such, the financing
was not deemed to have a beneficial conversion feature and any value assigned to
a beneficial conversion was deemed to be zero.
NOTE
8. SERIES C 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 approximately $196,000. We also 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.
Pursuant
to the March 29, 2010 financing, 869,422 of the 1,000,000 shares of preferred
stock were designated as Series C Preferred Stock, which maintain the following
basic rights:
|
(a)
|
pays an annual dividend of 8%,
payable quarterly, at Moqizone’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
Moqizone common stock or any other Junior Stock on liquidation and
the liquidation value is $2.25 per
share;
|
|
(d)
|
converts at any time after
issuance, at the option of the holder, into shares of Moqizone common
stock, at a conversion price of $2.25 per share (each Series C preferred
share will convert into 1 common share);
and,
|
|
(e)
|
votes together with the
Moqizone common stock on an “as converted
basis.”
|
NOTE
9. ACCOUNTING FOR SERIES C PREFERRED STOCK
The
management has adopted ASC 480-10, “S99 SEC Materials.” Under this rule, ASR 268
requires equity instruments with redemption features that are not solely within
the control of the issuer to be classified outside of permanent equity. As there
was no redemption provision attached to Series C Preferred Stock, it has been
classified as permanent equity.
The
management has also adopted ASC 815-15-25-1. It requires that an embedded
derivative shall be separated from the host contract and accounted for as a
derivative if and only if all of the following three criteria are met: (a) the
economics characteristics and risks of the embedded derivative are not clearly
and closely related to the economics characteristics and risks of the host
contract; (b) the hybrid instrument is not re-measured at fair value under
otherwise applicable GAAP with changes in fair value reported in earnings as
they occur; and (c) a separate instrument with the same terms as the embedded
derivative would be a derivative instrument subject to the requirements of
section 815-10-15. Additionally, under ASC 815-15-25-16 through ASC
815-15-25-18, if the host contract encompasses a residual interest in an entity,
then its economic characteristics and risks shall be considered that of an
equity instrument and an embedded derivative would need to possess principally
equity characteristics (related to the same entity) to be considered clearly and
closely related to the host contract. Given the fact that the Series C Preferred
Stock encompasses a residual interest in the company and it is related to the
company itself, the conversion feature is clearly and closely related to the
host instrument. Thus, the embedded conversion feature in Series C preferred
stock should not be accounted as a derivative instrument.
F-27
Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to
the value received. The beneficial conversion amount is recorded as a
reduction on the carrying value of the equity instrument and an increase to
additional paid-in-capital.
Allocation of Proceeds and
calculation of beneficial conversion feature
The
following table summarizes the initial allocation of proceeds to the Series C
preferred stock and the warrants:
Proceeds
from Series C Financing
|
$
|
1,956,200
|
||
Financing
Commissions from Series S Preferred Stock
|
$
|
195,200
|
||
Proceeds
from Series C Financing After Commission
|
$
|
1,760,400
|
||
Value
of Series C Preferred Stock
|
$
|
1,097,379
|
||
Value
of Investor Warrants
|
$
|
546,298
|
||
Value
of Placement Agent Warrants
|
$
|
115,854
|
The
Company then evaluated whether a beneficial conversion feature exists by
comparing the operable conversion price of Series C preferred stock with the
fair value of the common stock at the commitment date. The Company
concluded that the fair value of common stock was greater than the operable
conversion price of Series C preferred stock at the commitment date and the
intrinsic value ($1,321,521) of the beneficial conversion feature is
greater than the proceeds allocated to the Series A preferred stock
($1,097,379). In accordance to ASC Topic 470 subtopic 20, if the
intrinsic value of beneficial conversion feature is greater than the proceeds
allocated to the Series C preferred stock, the amount of the discount assigned
to the beneficial conversion feature is limited to the amount of the proceeds
allocated to the Series C preferred stock. Accordingly, the total
proceeds allocated to Series C preferred stock were allocated to the beneficial
conversion feature with a credit to Additional paid-in capital upon the issuance
of the Series C preferred stock. Since the Series C preferred stock
may convert to the Company’s common stock at any time on or after the initial
issue date, all discounts were immediately recognized as a deemed dividend and a
reduction to net income attributable to common shareholders in the period the
preferred stock was issued.
As such,
the following table summarizes the final allocation of proceeds to the Series C
preferred stock and the warrants:
Proceeds
from Series C Financing
|
$
|
1,956,200
|
||
Financing
Commissions from Series S Preferred Stock
|
$
|
195,200
|
||
Proceeds
from Series C Financing After Commission
|
$
|
1,760,400
|
||
Beneficial
Conversion Feature – Deemed Dividend
|
$
|
1,097,379
|
||
Value
of Series C Preferred Stock
|
$
|
-
|
||
Value
of Investor Warrants
|
$
|
546,298
|
||
Value
of Placement Agent Warrants
|
$
|
115,854
|
NOTE
10. INTEREST ON CONVERSION TO SERIES A PREFERRED
STOCK
On
January 6, 2010, the board of directors passed a resolution to issue 47,504
shares of our common stock that was due as interest as a result of the
conversion of the $4,945,000 convertible notes (see note 5 for additional
details) into 4,945 of our Series A Convertible Preferred Stock. The
number of shares issued was calculated at a rate of 8% per annum (subject to a
pro rata adjustment) of the liquidation preference amount payable in shares
equal to (i) the interest payment divided by (ii) $1.80. As such, the
shares were valued at approximately $85,510 and the total aggregate value of the
transaction was recorded as a interest payment.
F-28
NOTE.
11. LIQUIDATED DAMAGES FOR INEFFECTIVE REGISTRATION
STATEMENT
On June 1
and August 9, 2009, the Company entered into Registration Rights Agreement with
the Investors (the “Investor RRA”). Under the Investor RRA, the
Company was required to prepare and file a registration statement for sale of
the Common stock issuable to the investors and holders of the Series A Preferred
Stock no later than thirty (30) days after the completion of the Trestle Reverse
Split (effective on August 31, 2009 as described in Note 5), the Company shall
file with the SEC a Registration Statement (the “Resale Registration Statement”)
registering for resale at prevailing market prices all of the Registrable
Securities. The Company shall use its best efforts to obtain effectiveness
of the Registration Statement with respect to all Registrable Securities no
later than one hundred and fifty (150) days after the completion of the Trestle
Reverse Split, and shall respond to all oral and written comments from the staff
of the SEC.
The
Company filed the initial registration statement to fulfill the Company’s
obligations under the RRA on September 30, 2009. Per the terms of the
agreement, the Company is subject to certain monetary obligations if, the
registration statement was not declared effective by the SEC by January 28,
2010. The obligations are payments in an amount equal to two percent (2%)
of the aggregate principal amount of the Notes or aggregate Stated Value of the
Series A Preferred Stock (as applicable) for each month (or part thereof)
following the Required Filing Date that the Resale Registration Statement shall
not have been duly filed with the SEC, and/or for each month (or part thereof)
following the Required Effective Date that the Resale Registration Statement
shall not have been declared effective by the SEC, up to a maximum amount of
10%.
Since the
registration statement was not declared effective by the SEC by January 28,
2010, the Company began accruing liquidated damages for $22,900 (or 2 percent of
$1,145,000 of the stated value of the outstanding Series A Preferred Stock
outstanding as of January 28, 2010) for each month that the registration
statement was not declared effective by the SEC. As of March 31,
2010, the company had accrued $45,800 of liquated damages. The
company is currently planning to speak with the Series A shareholder concerning
an adjustment and/or cancelation of these damages.
NOTE
12. SUBSEQUENT EVENTS
We have
evaluated events after the date of these financial statements through May 14,
2010, the date that these financial statements were issued (or available to be
issued to be issued if this applies). There were no material subsequent
events as of that date .
F-29
(A
Development Stage Company)
Consolidated
Balance Sheets
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
|
$
|
901,316
|
$
|
584,300
|
||||
Account
receivable
|
54,119
|
|||||||
Prepayments,
deposits and other receivables
|
131,983
|
80,180
|
||||||
Inventory
|
9,702
|
|||||||
Due
from related parties
|
9,363
|
1,071
|
||||||
Total
current assets
|
1,106,483
|
665,551
|
||||||
Property
and equipment, net
|
819,642
|
899,247
|
||||||
Total
assets
|
$
|
1,926,125
|
$
|
1, 564,798
|
||||
LIABILITIES
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
85,737
|
$
|
58,339
|
||||
Other
payables and accruals
|
170,416
|
202,468
|
||||||
Accrued
directors’ fee
|
221,483
|
228,901
|
||||||
Due
to related parties
|
-
|
58
|
||||||
Interest
payable
|
40,299
|
85,707
|
||||||
Preferred
stock dividend payable
|
45,095
|
-
|
||||||
Warrant
liabilities
|
3,801,967
|
25,313,369
|
||||||
Liquidated
damages payable
|
113,500
|
-
|
||||||
Total
current liabilities
|
4,478,497
|
25,888,842
|
||||||
Shareholders’
deficit
|
||||||||
Common
stock, 1,500,000,000 share authorized, $0.001 par value, 13,695,542 and
13,620,260 issued and outstanding as of June 30, 2010 and December 31,
2009, respectively
|
13,696
|
13,620
|
||||||
Series
A preferred stock
|
1
|
1
|
||||||
Series
C preferred stock
|
869
|
-
|
||||||
Series
C preferred stock - Intrinsic Value
|
1,097,379
|
-
|
||||||
Warrants
|
546,298
|
-
|
||||||
Placement
Agent Warrants
|
115,854
|
-
|
||||||
Additional
paid in capital
|
532,789
|
447,355
|
||||||
Deficit
accumulated during development stage
|
(4,947,214
|
)
|
(24,784,055
|
)
|
||||
Accumulated
other comprehensive income/(loss) - foreign exchange
adjustment
|
87,956
|
(965
|
)
|
|||||
Total
shareholders’ deficit
|
(2,552,372
|
)
|
(24,324,044
|
)
|
||||
Total
liabilities and shareholders’ deficit
|
$
|
1,926,125
|
$
|
1,564,798
|
See
notes to financial statements
F-30
MOQIZONE
HOLDING CORPORATION
(A
Development Stage Company)
Consolidated
Statements of Operations and Comprehensive Income (Loss)
Three months ended June 30,
|
Six months ended June 30,
|
From
inception
August 29,
2007 to
|
||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
June 30, 2010
|
||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||
REVENUES,
NET
|
$
|
57,632
|
$
|
-
|
$
|
59,217
|
$
|
-
|
$
|
60,589
|
||||||||||
COSTS
AND EXPENSES:
|
||||||||||||||||||||
Cost
of revenues
|
(52,654
|
)
|
-
|
(52,654
|
)
|
-
|
(52,654
|
)
|
||||||||||||
Research
& development expenses
|
(116,430
|
)
|
-
|
(212,128
|
)
|
-
|
(242,575
|
)
|
||||||||||||
Depreciation
and amortization expense
|
(50,691
|
)
|
(2,079
|
)
|
(93,723
|
)
|
(2,079
|
)
|
(147,625
|
)
|
||||||||||
Selling,
general and administrative expenses
|
(700,098
|
)
|
(573,646
|
)
|
(1,160,055
|
)
|
(972,854
|
)
|
(5,708,193
|
)
|
||||||||||
LOSS
FROM OPERATIONS
|
(862,241
|
)
|
(575,725
|
)
|
(1,459,343
|
)
|
(974,933
|
)
|
(6,090,458
|
)
|
||||||||||
OTHER
(EXPENSES)/INCOMES:
|
||||||||||||||||||||
Interest
expenses, net of interest income
|
(40,257
|
)
|
(24,226
|
)
|
(40,133
|
)
|
(30,131
|
)
|
(139,968
|
)
|
||||||||||
Gain/(Loss)
on foreign currency transaction
|
(11,850
|
)
|
20,455
|
(16,490
|
)
|
20,455
|
(31,340
|
)
|
||||||||||||
Amortization
of placing fees of convertible notes
|
-
|
(18,386
|
)
|
-
|
(18,386
|
)
|
(58,115
|
)
|
||||||||||||
Change
in fair value of warrants
|
2,199,062
|
-
|
21,511,402
|
-
|
1,643,501
|
|||||||||||||||
Liquidated
damages payable
|
(67,700
|
)
|
-
|
(113,500
|
)
|
-
|
(113,500
|
)
|
||||||||||||
TOTAL
OTHER INCOME/(EXPENSES)
|
2,079,255
|
(22,157
|
)
|
21,341,279
|
(28,062
|
)
|
1,300,578
|
|||||||||||||
NET
PROFIT/(LOSS)
|
$
|
1,217,014
|
$
|
(597,882
|
)
|
$
|
19,881,936
|
$
|
(1,002,995
|
)
|
$
|
(4,789,880
|
)
|
|||||||
Dividend
of Series A convertible preferred stock
|
(21,223
|
)
|
-
|
(45,095
|
)
|
-
|
(45,095
|
)
|
||||||||||||
Beneficial
conversion feature related to issuance of Series C convertible preferred
stock
|
1,0 97,379
|
-
|
-
|
-
|
-
|
|||||||||||||||
NET
INCOME/(LOSS) APPLICABLE TO COMMON STOCKHOLDERS
|
2,293,170
|
(597,882
|
)
|
19,836,841
|
(1,002,995
|
)
|
(4,834,975
|
)
|
||||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||||||
Foreign
currency translation adjustment
|
57,951
|
2,118
|
88,921
|
(2,819
|
)
|
89,886
|
||||||||||||||
COMPREHENSIVE
INCOME/(LOSS)
|
$
|
1,274,965
|
$
|
(595,764
|
)
|
$
|
19,970,857
|
$
|
(1,005,814
|
)
|
$
|
(4,699,994
|
)
|
|||||||
Net
income per share:
|
||||||||||||||||||||
Basic
|
$
|
0.17
|
$
|
(0.85
|
)
|
$
|
1.45
|
$
|
(1.43
|
)
|
$
|
(1.13
|
)
|
|||||||
Diluted
|
$
|
0.17
|
$
|
(0.85
|
)
|
$
|
1.45
|
$
|
(1.43
|
)
|
$
|
(1.13
|
)
|
|||||||
Weighted
average number of shares used in computation:
|
||||||||||||||||||||
Basic
|
13,676,922
|
703,794
|
13,675,638
|
703,794
|
4,276,578
|
|||||||||||||||
Diluted
|
1 3,676,922
|
703,794
|
13,675,638
|
703,794
|
4,276,578
|
See
notes to financial statements
F-31
MOQIZONE
HOLDING CORPORATION
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
Six months ended June 30,
|
From inception
August 29, 2007 to
|
|||||||||||
2010
|
2009
|
June 30, 2010
|
||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
Operating
activities
|
||||||||||||
Net
income/(loss)
|
$ | 19,881,936 | $ | (1,002,995 | ) | $ | (4,789,880 | ) | ||||
Adjustments:
|
||||||||||||
Capital
issued for directors’ fees and officer’s salaries
|
- | - | 292,883 | |||||||||
Depreciation
and amortization
|
93,723 | 2,079 | 147,625 | |||||||||
Amortization
of placement fees of convertible notes
|
- | 18,386 | 58,115 | |||||||||
Interest
expenses
|
40,299 | - | 119,969 | |||||||||
Warrant
liabilities
|
(21,511,402 | ) | - | (1,643,501 | ) | |||||||
Account
receivable
|
(54,119 | ) | - | (54,119 | ) | |||||||
Inventory
|
(9,702 | ) | - | (9,702 | ) | |||||||
Other
receivables
|
(51,803 | ) | (103,905 | ) | (131,983 | ) | ||||||
Accounts
payable
|
27,398 | (18,430 | ) | 85,737 | ||||||||
Other
payables and accruals
|
(32,249 | ) | 65,043 | 904,902 | ||||||||
Accrued
directors’ fees
|
(7,418 | ) | 232,835 | 221,483 | ||||||||
Liquidated
damages payable
|
113,500 | - | 113,500 | |||||||||
Due
from/to related parties
|
(8,350 | ) | - | 13,037 | ||||||||
Net
cash used in operating activities
|
(1,518,187 | ) | (806,987 | ) | (4,671,934 | ) | ||||||
Investing
activities
|
||||||||||||
Cash
acquired from acquisition
|
- | 148,148 | - | |||||||||
Acquisition
of property and equipment
|
(14,118 | ) | (24,413 | ) | (965,018 | ) | ||||||
Net
cash provided by (used in) investing activities
|
(14,118 | ) | 123,735 | (965,018 | ) | |||||||
Financing
activities
|
||||||||||||
Sale
of Series C Preferred shares and Series C and Series D
Warrants
|
1,760,400 | - | 6,527,337 | |||||||||
Convertible
loan payable
|
- | 4,045,059 | - | |||||||||
Repayment
of convertible notes
|
- | - | (316,437 | ) | ||||||||
Loan
from owners and officers
|
- | 502,908 | 20,374 | |||||||||
Loan
receivable
|
- | (348,484 | ) | - | ||||||||
Placement
agent fee for convertible notes
|
- | (404,500 | ) | - | ||||||||
Capital
contribution
|
- | 221,144 | ||||||||||
Net
cash provided by financing activities
|
1,760,400 | 3,794,983 | 6,452,418 | |||||||||
Effect
of exchange rate on cash
|
88,921 | (2,819 | ) | 85,850 | ||||||||
Increase
in cash
|
317,016 | 3,108,912 | 901,316 | |||||||||
Cash,
beginning of period
|
584,300 | 18,286 | - | |||||||||
Cash,
end of period
|
$ | 901,316 | $ | 3,127,198 | $ | 901,316 | ||||||
Supplement
disclosure of cash flow information
|
||||||||||||
Interest
paid
|
- | - | 21,008 | |||||||||
Supplement
disclosure of non-cash transactions
|
||||||||||||
Issuance
of shares for dividends
|
$ | 85,510 | $ | - | $ | 197,749 | ||||||
Preferred
stock dividend payable
|
45,095 | - | 45,095 | |||||||||
Warrant
liability incurred in connection with convertible
notes
|
(21,511,402 | ) | - | 3,801,967 | ||||||||
Forgiveness
of directors’ fee
|
- | - | 771,563 |
See
notes to financial statements
F-32
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
1. INTERIM FINANCIAL STATEMENTS
The
accompanying unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission, and should be
read in conjunction with the audited consolidated financial statements and notes
thereto contained in the Company’s Form 10K filed on April 15, 2010. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for the interim periods are not necessarily
indicative of the result to be expected for the full year.
NOTE
2. ORGANIZATION AND NATURE OF OPERATIONS
The
accompanying consolidated financial statements include the financial statements
of MoqiZone Holding Corporation (the “Company”), its subsidiaries of MoqiZone
Holdings Limited, a Cayman Island corporation (“MoqiZone Cayman”), MobiZone
Holdings Limited, a Hong Kong corporation (“MobiZone Hong Kong”), MoqiZone
(Shanghai) Information Technology Company Limited (“Shanghai MoqiZone”) and a
variable interest entity (“VIE”), Shenzhen Alar Technology Company Limited
(“Shenzhen Alar”). The Company, its subsidiaries and VIE are collectively
referred to as the “Group”. MobiZone Hong Kong operates a Chinese online game
content delivery platform company that delivers last mile connectivity to
internet cafes installed with our WiMAX equipment and which have joined into our
MoqiZone WiMAX Network.
The
Share Exchange Agreement, Reverse Merger and Reorganization
On
March 15, 2009, Trestle Holdings, Inc. (the “Trestle”) entered into a Share
Exchange Agreement with MoqiZone Cayman, Cheung Chor Kiu Lawrence, the principal
shareholder of MoqiZone Cayman (“Cheung”), and MKM Capital Opportunity Fund Ltd.
(“MKM”), our principal stockholder (the “Agreement”). MoqiZone Cayman is the
record and beneficial owner of 100% of the share capital of MobiZone Hong Kong
and MobiZone 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 $4,345,000 in gross proceeds from the financing described below, we
acquired all of the issued and outstanding capital stock of MoqiZone Cayman in
exchange for the issuance to Cheung and the other shareholders of MoqiZone
Cayman of 10,743 shares of our sought to be created Series B convertible
preferred stock. The transaction was regarded as a reverse merger whereby
MoqiZone Cayman was considered to be the accounting acquirer as it retained
control of Trestle after the exchange and Trestle is the legal acquirer.
The share exchange was treated as a recapitalization and, accordingly, Trestle
reclassified its common stock and additional paid-in-capital accounts for the
year ended December 31, 2008. The Financial Statements have been prepared as if
MoqiZone had always been the reporting company and then on the share exchange
date, had changed its name and reorganized its capital stock.
As of
August 28, 2009, our corporate name changed from Trestle Holdings, Inc. to
MoqiZone Holding Corporation and our authorized capital increased by 10,000,000
shares of preferred stock. Pursuant to the additional financings we closed in
August 2009 and the authority vested in our Board of Directors, we also filed a
certificate of designation of Series A preferred stock and certificate of
designation of Series B preferred stock with Delaware’s Secretary of State to
designate 15,000 of the 15,000,000 shares of preferred stock as Series A
preferred stock and 10,743 of the 15,000,000 shares of preferred stock as Series
B preferred stock.
On
August, 31, 2009, a one-for-254.5 reverse stock split became effective and
reduced outstanding shares of our common stock to 703,794 shares. Following the
reverse stock split described and per the terms and conditions of our share
exchange, the Series B Preferred Stock automatically (and without any action on
the part of the holders) 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).
F-33
As a
result of these transactions, our authorized capital now consists of 40,000,000
shares of common stock, 14,974,257 shares of undesignated 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, and 10,743 shares Series B preferred
stock.
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In
June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.
(2) Basis
of Presentation
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of expenses during the
reporting period. On an ongoing basis, we evaluate our estimates which are based
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. The result of these evaluations forms the
basis for making judgments about the carrying values of assets and liabilities
and the reported amount of expenses that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions
(3) Development
Stage Company
The
Company has been obtaining the requisite approvals from the Chinese government
and since inception, has not earned any revenue from operations. Accordingly,
the Company’s activities have been accounted for as those of a “Development
Stage Enterprise.” Among the disclosures required are that the financial
statements be identified as those of a development stage company, and that the
statements of operations and other comprehensive income (loss), owner’s
equity and cash flows disclose activity since the date of
inception.
F-34
(4) Consolidation
The
consolidated financial statements include the financial statements of the
Company, its subsidiaries and VIE subsidiary for which the Company is the
primary beneficiary. All transaction and balances among the Company, its
subsidiaries and VIE subsidiary have been eliminated upon
consolidation.
The
Group has adopted “
Consolidation of Variable
Interest Entit ies . This interpretation
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties.
To
comply with PRC laws and regulations that restrict foreign ownership of
companies that operate online games, the Company operates its online games
mainly through Shenzhen Alar, which is wholly owned by certain PRC citizens.
Shenzhen Alar holds the licenses and approvals to operate line games in the
PRC.
Pursuant
to the contractual arrangements with Shenzhen Alar, MoqiZone Shanghai
mainly provides the following intra-group services to Shenzhen
Alar:
Gaming
related licensing service;
Software
licensing service;
Equipment
and maintenance service;
Strategic
consulting service;
Licensing
of billing technology; and
Billing
service.
In
addition, MoqiZone Shanghai has entered into agreements with Shenzhen Alar and
its equity owners with respect to certain shareholder rights and corporate
governance matters that provide the Company with the substantial ability to
control Shenzhen Alar. Pursuant to these contractual
arrangements:
F-35
The
equity owners of Shenzhen Alar have granted an irrevocable proxy to individuals
designated by MoqiZone Shanghai to exercise the right to appoint directors,
general manager and other senior management of Shenzhen Alar;
Shenzhen
Alar will not enter into any transaction that may materially affect its assets,
liabilities, equity or operations without the prior written consent of MoqiZone
Shanghai.
Shenzhen
Alar will not distribute any dividend;
The
equity owners of Shenzhen Alar have pledged their equity interest in Shenzhen
Alar to MoqiZone Shanghai to secure the payment obligations of Shenzhen Alar
under all the agreements between Shenzhen Alar and MoqiZone Shanghai;
and
The
equity owners of Shenzhen Alar will not transfer, sell, pledge or dispose of
their equity interest in Shenzhen Alar without any prior written consent of
MoqiZone Shanghai.
As a
result of these agreements, the Company is considered the primary beneficiary of
Shenzhen Alar and accordingly Shenzhen Alar’s results are consolidated in the
Company’s financial statements.
(5) Cash
and cash equivalents
Cash
and cash equivalents represent cash on hand and highly liquid investment placed
with banks, which have original maturities less than three months. Cash and cash
equivalents kept with financial institutions in the People’s Republic of China
(“PRC”) are not insured or otherwise protected. Should any of those institutions
holding the Company’s cash become insolvent, or the Company is unable to
withdraw funds for any reason, the Company could lose the cash on deposit at
that institution.
(6) Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the following estimated useful
lives:
Network
equipment
|
3
years
|
|
Computer
equipment
|
3
years
|
|
Leasehold
improvements
|
Lesser
of the term of the lease or the estimated useful lives of the
assets
|
|
Furniture
and fixtures
|
3
years
|
(7) Computer
software
Purchased
computer software for internal use is capitalized and amortized over its
estimated useful live starting when it is placed in service.
(8) Impairment
of long-lived assets and intangible assets
Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be held and
used, impairment is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their carrying value.
If impairment exists, an adjustment is made to write the asset down to its fair
value, and a loss is recorded as the difference between the carrying value and
fair value. Fair values are determined based on quoted market values, discounted
cash flows or internal and external appraisals, as applicable. Assets to be
disposed of are carried at the lower of carrying value or estimated net
realizable value. No impairment was recognized during the year ended December
31, 2009 and 2008 and six months ended June 30, 2010.
(9) Derivative
Financial Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.
F-36
Derivative
financial instruments are recorded as liabilities in the consolidated balance
sheet, measured at fair value. When available, quoted market prices are used in
determining fair value. However, if quoted market prices are not available, we
estimate fair value using either quoted market prices of financial instruments
with similar characteristics or other valuation techniques.
The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions
related to the remaining term of the instruments and risk-free rates of return,
our current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative
financial instruments that are not designated as hedges or that do not meet the
criteria for hedge accounting under ASC topic 815 “Derivatives and Hedging” are
recorded at fair value, with gains or losses reported currently in earnings. All
derivative financial instruments we held as of June 30, 2010, were not
designated as hedges.
(10) Policy
Revenue Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is probable. We
license a client-end software to internet cafes for them to automatically update
their client-end software on a real time basis. Revenue for such licensing fee
is recognized on a straight-line basis over the license period.
(11) Deferred
income taxes
Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, ASC
topic 740 “Income Taxes” requires recognition of future tax benefits, such
as carry forwards, to the extent that realization of such benefits is more
likely than not and that a valuation allowance be provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized.
(12) Foreign
currency translation
Since
the Group operates solely in Hong Kong and the PRC, the Group’s functional
currency is the Hong Kong Dollar (“HKD”) and the Renminbi (“RMB”). Assets and
liabilities are translated into U.S. Dollars at the exchange rates at the
end of each reporting period and records the related translation adjustments as
a component of other comprehensive income (loss). Revenue and expenses are
translated using average exchange rates prevailing during the period. Foreign
currency transaction gains and losses are included in current
operations.
(13) Comprehensive
income (loss)
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by shareholders and distributions to shareholders. Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. Comprehensive income includes net income and the
foreign currency translation gain, net of tax.
F-37
NOTE
4. DUE FROM/TO RELATED PARTIES
The
amounts are due from/to the directors, officers of MoqiZone Group and the
companies being controlled by them, are non-interest bearing and are due on
demand.
The
Company purchased computer software in the amount of $157,000 from a related
party for our platform technology development. Management has adopted FASB ASC
850-10-50-5 to determine whether the transaction was not carried out on an
arms-length basis. According to FASB ASC 850-10-50-5, transactions involving
related parties cannot be presumed to be carried out on an arm's-length basis,
as the requisite conditions of competitive, free-market dealings may not exist
and representations about transactions with related parties, if made, shall not
imply that the related party transactions were consummated on terms equivalent
to those that prevail in arm's-length transactions unless such representations
can be substantiated. Therefore, the transaction from the Company’s point of
view was not carried out on an arms-length basis.
NOTE
5. ACQUISTION OF NETCAFE FARMER
On
December 21, 2009, we acquired a client-end software called Netcafe Farmer. This
acquisition was accounted for under the acquisition method of accounting. The
cost of the acquisition was approximately US$95,000 (or RMB650,000) and is being
amortized over its estimated useful life. Pro forma results of operations as if
the acquisitions occurred at the beginning of the periods included in the
financial statements are not presented as they would be immaterial. By acquiring
Netcafe Farmer, the Company also recruited Mr. Liu Qian and his development team
of 4 people. Their incremental salary is approximately US$75,500 (or RMB516,000)
per annum.
NOTE
6. CONVERSION OF CONVERTIBLE NOTES
Upon
effectiveness of the Reverse Split on August 31, 2009, each $1,000 principal
amount of Notes (see Note 1) was automatically cancelled and exchanged for one
share of Series A Preferred Stock. Since we sold a total of 494.5 Units, upon
exchange of the Notes, a total of 4,945 shares of Series A Preferred Stock were
issued, which were convertible into an aggregate of 2,747,222 shares of common
stock, subject to anti-dilution and other adjustments as provided in the Series
A Preferred Stock Certificate of Designations.
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.
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.
F-38
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.
For a
more complete description of the terms of the Notes, the Class A Warrants, Class
B Warrants, and the Series A Preferred Stock, please see the section entitled
“ Description of Securities ” in
our June 1, 2009 Current Report on Form 8-K.
Following
the Reverse Stock Split and the automatic conversion of the Series B preferred
stock issued under the Share Exchange Agreement to the MoqiZone Cayman
shareholders into Series B Conversion Shares:
all of
the issued and outstanding Notes have been, by their terms be deemed
cancelled;
all
interest accrued on the Notes (at the rate of 8% per annum) from the date of
issuance to the date of cancellation will be paid, at the Company’s option, in
cash or in a shares of Trestle common stock valued at $1.80 per
share;
each
$1,000 principal amount of cancelled MobiZone Hong Kong Note has been exchanged
for one share of Series A Preferred Stock, $0.001 par value per share. The
Series A Preferred Stock (i) a liquidation value of $1,000 per share, (ii) vote,
together with the Trestle common stock, on an “as converted basis”, and (iii)
are convertible, at any time after issuance, at the option of the holder, into
shares of the Company’s common stock at a conversion price of $1.80 per share,
subject to customary adjustments, including weighted average anti-dilution
protection.
Pursuant
to the terms of the Financing, the Company has agreed to cause (i) the maximum
number of shares of Moqizone common stock issuable upon conversion of all shares
of Series A Preferred Stock and (ii) the maximum number of Class A Warrant
Shares and Class B Warrant Shares to be registered for resale under the
Securities Act of 1933, as amended, pursuant to a registration rights agreement,
which provides inter
alia that Moqizone shall file a registration statement for the
Registrable Shares within 30 days after the completion of the Reverse Stock
Split and cause the registration statement to become effective within 150 days
after the completion of the Reverse Stock Split or 180 days in the event of a
full review by the SEC. If Moqizone does not comply with the foregoing
obligations under the registration rights agreement, it will be required to pay
cash liquidated damages to Investors, at the rate of 2% of the $10,000 offering
price of each Unit sold in the offering ($200.00) for each 30 day period after
the Registration Date that such Registrable Shares have not be registered for
resale under the Securities Act of 1933, as amended; provided that, such
liquidated damages shall not exceed $1,000 per Unit sold in the offering (a
minimum of $400,000 and a maximum of $800,000); provided, however, that
such liquidated damages shall not apply to any Registrable Shares that are
subject to an SEC comment with respect to Rule 415 promulgated under the
Securities Act of 1933, as amended
In
addition, in the event the Company’s revenues for the year ending December 31,
2010 shall equal or exceed $21,560,000, the management shareholders of MoqiZone
Cayman shall be issued warrants to purchase up to 900,000 additional shares of
the Company’s common stock at an exercise price of $1.80 per share, exercisable
for a period of three years.
Under
the terms of the Share Exchange Agreement, all of the shareholders of MoqiZone
Cayman who are members of our senior management have deposited in an escrow
account an aggregate of 900,000 shares of the Company’s common stock. These
shares (the “Performance Shares”) will be delivered to the management group
shareholders only in the event that the Company achieves certain performance
targets over the twelve consecutive months commencing July 1, 2009 and ending
June 30, 2010 (the “Measuring Period”). If $6,000,000 or more raised in the
Financing, then: (i) in the event that we realize at least $19,171,000 (the
“Target Revenue”) of revenues by the end of the Measuring Period, all of
the Performance Shares will be released to the management group, and (ii)
in the event that less than the Target Revenue is realized by the end of the
Measuring Period, a pro-rata portion of the Performance Shares shall be
distributed to the purchasers of the Units offered hereby, based upon
0.2347 Performance Shares for each USD $1.00 that the actual revenues achieved
by the end of the Measuring Period shall be less than the Target Revenue, or
45,000 Performance Shares for each 1% of $19,171,000 ($191,710) by which
the actual revenues shall be less than the Target Revenue. If less than
$6,000,000 is raised in the Financing, then: (i) in the event that we realize at
least $10,450,000 (the “Lower Target Revenue”) in reported revenues by the end
of the Measuring Period, all of the Performance Shares will be released to the
management group and (ii) in the event that less than $10,450,000 of reported
revenues are realized by the end of the twelve month Measuring Period, a
pro-rata portion of the Performance Shares shall be distributed to the
purchasers based upon 0.4306 Performance Shares for each USD $1.00 that the
actual revenues achieved by the end of the Measuring Period shall be less than
the Lower Target Revenue, or 45,000 Performance Shares for each 1% of
$10,450,000 ($104,500) by which the actual revenues shall be less than the Lower
Target Revenue. As we only raised $5,245,000 which is less than $6,000,000 from
our Financings, the Lower Target Revenue scenario will be
applicable.
F-39
The
Performance Warrants
Certain
of the members of our senior management will be, under the terms of the Share
Exchange Agreement, entitled to receive three year warrants to purchase 900,000
shares of Moqizone common stock, exercisable at $1.80 per share (the
“Performance Warrants”) in the event that our audited net income as of the date
that is 24 months after the Final Closing of the Financings shall equal or
exceed $21,560,000, assuming that we complete this Offering with the sale of at
least 600 Units for $6,000,000. If however, we complete the Offering for an
aggregate amount less than $6,000,000, than such persons shall only be entitled
to receive the Performance Warrants in the event that our audited net income as
of the date that is 24 months after the Final Closing of the Financing equals or
exceeds $5,000,000.
F-40
NOTE
7. WARRANT LIABILITY
As
described in Note 5 (Conversion of Convertible Notes), 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
Class A warrants have an exercise price of $2.50 per share with a three year
term and the Class B warrants have an exercise price of $3.00 per share with a
three year term.
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 and have exercise prices of between $1.80 and $3.00 per
share.
The
Class A, Class B and Placement Agent warrants (“Warrants”) have an initial
exercise price which is subject to adjustments in certain circumstances for
stock splits, combinations, dividends and distributions, reclassification,
exchange or substitution, reorganization, merger, consolidation or sales of
assets, issuance of additional shares of common stock or
equivalents.
Accounting
for Warrants
The
Warrants are entitled to a price adjustment provision 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, The Company determined that the Warrants meet the definition of a
derivative under ASC Topic 815, Derivatives and Hedging “ASC
Topic 815”). In determining whether the Warrants were eligible for a scope
exception from ASC Topic 815, the Company considered the provisions of ASC Topic
815-40 ( Determining Wh
ether an Instrument (or
Embedded Feature) Is Indexed to an Entity ’ s Own Stock ). The Company
determined that the Warrants do not meet a scope exception because they are not
deemed indexed to the Company’s own stock. Pursuant to ASC Topic 815,
derivatives should be measured at fair value and re-measured at fair value with
changes in fair value recorded in earnings at each reporting
period.
Fair
Value
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A Preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the
financial condition, operating results and credit ratings of the issuer or
underlying company, the quoted market price of similar traded securities, and
other factors generally pertinent to the valuation of financial
instruments.
Warrant
Liability
The
warrants that each investor received as a result of our Financings and
conversion of the convertible notes (see Note 10 for additional details)
contained a down round protection if the company sells or issue shares at a
price per share less that 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. The Company
determined the fair value of the warrants as follows as of August 31, 2009
(effective issuance date).
F-41
The
Company used the Black-Scholes option-pricing model with the following
assumptions: an expected life equal to the contractual term of the warrants
(three years), underlying stock price of $5.09 (as at August 31, 2009 –
effective date of conversion), no dividends; a risk free rate of 1.49% which
equals three -year yield on Treasury bonds at constant (or fixed) maturity (for
those warrants with an effective issue date of August 31); and volatility of
55.24%. Although the Company’s common stock (as a result of the recent reverse
merger) had been publicly traded since March 2009, Management also considered
liquidity, financial condition and the recent conversion of its convertible
notes in Series A preferred stock when determining the fair value of its common
stock. After reviewing these factors, Management believed that the quoted
market price of its securities provided the most reliable evidence of its fair
value and should be used since it was available and deemed to be most
relevant. As the Company’s stock had only a short trading history,
historical volatility information was not available. In accordance with the
guidance in ASC 718-10-30-2, the Company identified three similar public
entities and considered the historical volatilities of those public entities in
calculating the expected volatility appropriate to the company (the calculated
value). Under the assumptions, the Black-Scholes option pricing model
yielded an aggregate value of approximately $9,968,597.
The
Company performed the same calculations as of December 31, 2009 and March 31,
2010, to revalue the warrants as of those respective dates. In using the Black
Scholes option-pricing model at December 31, 2009, the Company used an
underlying stock price of $10.00 per share; no dividends; a risk free rate of
1.7% which equals three-year yield on Treasury bonds at constant (or fixed)
maturity (for those warrants with an effective issue date of August 31); and
volatility of 57.77%. At June 30, 2010, the Company used the Black Scholes
option-pricing model with an underlying stock price of $3.00 per share; no
dividends; a risk free rate of 1.0% which equals three-year yield on Treasury
bonds at constant (or fixed) maturity (for those warrants with an effective
issue date of August 31); and volatility of 57.77%. The resulting aggregate
allocated value of the warrants as of December 31, 2009 equaled approximately
$25,313,000 and $3,801,967 as of June 30, 2010. As a result a change in fair
value of approximately $19,868,000 was recorded for the year ended December 31,
2009 and a change in fair value of approximately $21,511,402 was recorded for
the six months ended June 30, 2010.
Upon
the earlier of the warrant exercise or the expiration date, the warrant
liability will be reclassified into shareholders’ equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above.
NOTE
8. ACCOUNTING FOR SERIES A PREFERRED STOCK
The
management has adopted ASC 480-10, “S99 SEC Materials”. Under this rule, ASR 268
requires equity instruments with redemption features that are not solely within
the control of the issuer to be classified outside of permanent equity. As there
was no redemption provision attached to Series A Preferred Stock, it has been
classified as permanent equity.
The
management has also adopted ASC 815-15-25-1. It requires that an embedded
derivative shall be separated from the host contract and accounted for as a
derivative if and only if all of the following three criteria are met: (a) the
economics characteristics and risks of the embedded derivative are not clearly
and closely related to the economics characteristics and risks of the host
contract; (b) the hybrid instrument is not re-measured at fair value under
otherwise applicable GAAP with changes in fair value reported in earnings as
they occur; and (c) a separate instrument with the same terms as the embedded
derivative would be a derivative instrument subject to the requirements of
section 815-10-15. Additionally, under ASC 815-15-25-16 through ASC
815-15-25-18, if the host contract encompasses a residual interest in an entity,
then its economic characteristics and risks shall be considered that of an
equity instrument and an embedded derivative would need to possess principally
equity characteristics (related to the same entity) to be considered clearly and
closely related to the host contract. Given the fact that the Series A Preferred
Stock encompasses a residual interest in the company and it is related to the
company itself, the conversion feature is clearly and closely related to the
host instrument. Thus, the embedded conversion feature in Series A preferred
stock should not be account as a derivative instrument.
Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to
the value received. The beneficial conversion amount is recorded as a
reduction on the carrying value of the equity instrument and an increase to
additional paid-in-capital.
In the
case of conversion of the convertible note, the fair market value of the warrant
liability exceeded the cash raised in the financings and therefore the residual
value assigned to the Preferred Stock was nil. As such, the financing was not
deemed to have a beneficial conversion feature and any value assigned to a
beneficial conversion was deemed to be zero.
F-42
NOTE
9. SERIES C 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. Series
C Warrant has an exercise price of $2.50 and Series D Warrant has an exercise
price of $3.00. Each of the Warrants have a term of three (3)
years.
In
connection with this financing, we paid cash compensation to a placement agent
in the amount of approximately $196,000. We also granted warrants to purchase up
to 869,422 shares of common stock consisting of Series C Warrants to purchase up
to 434,711 shares of common stock at a price of $2.50 per share and Series D
Warrants to purchase 434,711 shares of common stock at a price of $3.00 per
share. Additionally, in connection with this financing, we granted
warrants to purchase up to 86,942 shares of common stock at a price of $2.25 per
share, Series C Warrants to purchase up to 43,471 shares of common stock at a
price of $2.50 per share and Series D Warrants to purchase 43,471 shares of
common stock at a price of $3.00 per share 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.
Pursuant
to the March 29, 2010 financing, 869,422 of the 1,000,000 shares of preferred
stock were designated as Series C Preferred Stock, which maintain the following
basic rights:
(a)
|
pays
an annual dividend of 8%, payable quarterly, at Moqizone’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 Moqizone common stock or any other Junior Stock
on liquidation and the liquidation value is $2.25 per
share;
|
(d)
|
converts at
any time after issuance, at the option of the holder, into shares of
Moqizone common stock, at a conversion price of $2.25 per share (each
Series C preferred share will convert into 1 common share);
and,
|
(e)
|
votes
together with the Moqizone common stock on an “as converted
basis.”
|
NOTE
10. ACCOUNTING FOR SERIES C PREFERRED STOCK
The
management has adopted ASC 480-10, “S99 SEC Materials.” Under this rule, ASR 268
requires equity instruments with redemption features that are not solely within
the control of the issuer to be classified outside of permanent equity. As there
was no redemption provision attached to Series C Preferred Stock, it has been
classified as permanent equity.
The
management has also adopted ASC 815-15-25-1. It requires that an embedded
derivative shall be separated from the host contract and accounted for as a
derivative if and only if all of the following three criteria are met: (a) the
economics characteristics and risks of the embedded derivative are not clearly
and closely related to the economics characteristics and risks of the host
contract; (b) the hybrid instrument is not re-measured at fair value under
otherwise applicable GAAP with changes in fair value reported in earnings as
they occur; and (c) a separate instrument with the same terms as the
embedded derivative would be a derivative instrument subject to the requirements
of section 815-10-15. Additionally, under ASC 815-15-25-16 through ASC
815-15-25-18, if the host contract encompasses a residual interest in an
entity, then its economic characteristics and risks shall be considered that of
an equity instrument and an embedded derivative would need to possess
principally equity characteristics (related to the same entity) to be considered
clearly and closely related to the host contract. Given the fact that the Series
C Preferred Stock encompasses a residual interest in the company and it is
related to the company itself, the conversion feature is clearly and closely
related to the host instrument. Thus, the embedded conversion feature in Series
C preferred stock should not be accounted as a derivative
instrument.
F-43
Equity
instruments that contain a beneficial conversion feature are recorded as a
deemed dividend to the holders of the convertible equity instruments. The deemed
dividend associated with the beneficial conversion is calculated as the
difference between the fair value of the underlying common stock less the
proceeds that have been received for the equity instrument limited to
the value received. The beneficial conversion amount is recorded as a
reduction on the carrying value of the equity instrument and an increase to
additional paid-in-capital.
Allocation
of Proceeds and calculation of beneficial conversion feature
The
following table summarizes the initial allocation of proceeds to the Series C
preferred stock and the warrants:
Proceeds
from Series C Financing
|
$
|
1,956,200
|
||
Financing
Commissions from Series C Preferred Stock
|
$
|
195,800
|
||
Proceeds
from Series C Financing After Commission
|
$
|
1,760,400
|
||
Value
of Series C Preferred Stock
|
$
|
1,098,248
|
||
Value
of Investor Warrants
|
$
|
546,298
|
||
Value
of Placement Agent Warrants
|
$
|
115,854
|
The
Company then evaluated whether a beneficial conversion feature exists by
comparing the operable conversion price of Series C preferred stock with the
fair value of the common stock at the commitment date. The Company concluded
that the fair value of common stock was greater than the operable conversion
price of Series C preferred stock at the commitment date and the intrinsic value
($1,321,521) of the beneficial conversion feature is greater than the
proceeds allocated to the Series A preferred stock ($1,097,379). In accordance
to ASC Topic 470 subtopic 20, if the intrinsic value of beneficial conversion
feature is greater than the proceeds allocated to the Series C preferred stock,
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the Series C preferred stock.
Accordingly, the total proceeds allocated to Series C preferred stock were
allocated to the beneficial conversion feature with a credit to Additional
paid-in capital upon the issuance of the Series C preferred stock. Since the
Series C preferred stock may convert to the Company’s common stock at any time
on or after the initial issue date, all discounts were immediately recognized as
a deemed dividend and a reduction to net income attributable to common
shareholders in the period the preferred stock was issued.
As
such, the following table summarizes the final allocation of proceeds to the
Series C preferred stock and the warrants:
Proceeds
from Series C Financing
|
$
|
1,956,200
|
||
Financing
Commissions from Series C Preferred Stock
|
$
|
195, 800
|
||
Proceeds
from Series C Financing After Commission
|
$
|
1,760,400
|
||
Beneficial
Conversion Feature – Deemed Dividend
|
$
|
1,098,248
|
||
Value
of Series C Preferred Stock
|
$
|
-
|
||
Value
of Investor Warrants
|
$
|
546,298
|
||
Value
of Placement Agent Warrants
|
$
|
115,854
|
NOTE
11. INTEREST ON CONVERSION TO SERIES A PREFERRED STOCK
On
January 6, 2010, the board of directors passed a resolution to issue 47,504
shares of our common stock that was due as interest as a result of the
conversion of the $4,945,000 convertible notes (see note 5 for additional
details) into 4,945 of our Series A Convertible Preferred Stock. The number of
shares issued was calculated at a rate of 8% per annum (subject to a pro rata
adjustment) of the liquidation preference amount payable in shares equal to (i)
the interest payment divided by (ii) $1.80. As such, the shares were valued at
approximately $85,510 and the total aggregate value of the transaction was
recorded as an interest payment.
F-44
NOTE
12. SERIES A PREFERRED STOCK DIVIDEND
On
January 30, 2010, we issued an aggregate of 62,355 shares of common stock, as
dividends, to the holders our Series A Convertible Preferred Stock as shown in
the table below. The number of shares issued was calculated at a rate of 8% for
the Series C Preferred Stock, per annum (subject to a pro rata adjustment) of
the liquidation preference amount payable in shares which, when multiplied by
$1.80 would equal the amount of such quarterly dividend not paid in cash. As
such, the shares were valued at approximately $112,200 and the total aggregate
value of the transaction was recorded as a preferred stock
dividend.
Preferred
Stock Dividends Issued on July 30, 2010
Date
|
Preferred Stock
|
Common Shares
Issued
|
Dividend Value
|
|||||||
1/30/2010
|
Series
C
|
62,355
|
$
|
112,200
|
NOTE
13. LIQUIDATED DAMAGES FOR INEFFECTIVE REGISTRATION STATEMENT
On
June 1 and August 9, 2009, the Company entered into Registration Rights
Agreement with the Investors (the “Investor RRA”). Under the Investor RRA, the
Company was required to prepare and file a registration statement for sale of
the Common stock issuable to the investors and holders of the Series A Preferred
Stock no later than thirty (30) days after the completion of the Trestle Reverse
Split (effective on August 31, 2009 as described in Note 5), the Company shall
file with the SEC a Registration Statement (the “Resale Registration
Statement”) registering for resale at prevailing market prices all of the
Registrable Securities. The Company shall use its best efforts to obtain
effectiveness of the Registration Statement with respect to all Registrable
Securities no later than one hundred and fifty (150) days after the completion
of the Trestle Reverse Split, and shall respond to all oral and written comments
from the staff of the SEC.
The
Company filed the initial registration statement to fulfill the Company’s
obligations under the RRA on September 30, 2009. Per the terms of the
agreement, the Company is subject to certain monetary obligations if, the
registration statement was not declared effective by the SEC by January 28,
2010. The obligations are payments in an amount equal to two percent (2%)
of the aggregate principal amount of the Notes or aggregate Stated Value of the
Series A Preferred Stock (as applicable) for each month (or part thereof)
following the Required Filing Date that the Resale Registration Statement shall
not have been duly filed with the SEC, and/or for each month (or part thereof)
following the Required Effective Date that the Resale Registration Statement
shall not have been declared effective by the SEC, up to a maximum amount of
10%.
Since
the registration statement was not declared effective by the SEC by January 28,
2010, the Company began accruing liquidated damages for $22,900 (or 2 percent of
$1,145,000 of the stated value of the outstanding Series A Preferred Stock
outstanding as of January 28, 2010) for each month that the registration
statement was not declared effective by the SEC. As of June 30, 2010, the
company had accrued $113,500 of liquidated damages. The company is currently
planning to speak with the Series A shareholder concerning an adjustment and/or
cancelation of these damages.
NOTE
14 SERIES A PREFERRED STOCK CONVERSION
On
June 1, 2010 we issued 27,778 shares of our common stock pursuant to a
shareholders conversion of 50 shares of our Series A Preferred Stock that he
owned. We did not receive any proceeds from this conversion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving any public
offering.
F-45
NOTE
15. COMMITMENTS AND CONTIGENCIES
Legal
Contingencies
In
January 2009, Shanghai Moqizone entered into an Exclusive Business Cooperation
Agreement and certain ancillary agreements, including an Equity Pledge
Agreement, Exclusive Option Agreement, Loan Agreement and Irrevocable Power of
Attorney with SZ Mellow. 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.
Management
2009, Shanghai Moqizone entered into an Exclusive Business Cooperation Agreement
and certain ancillary agreements, including an Equity Pledge Agreement, Equity
Pledge Agreement, Exclusive Option Agreement, Loan Agreement and Irrevocable
Power of Attorney 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.
Management’s
position is 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), certain computer equipment and
also provided a 30 day notice to terminate VIE agreement. As of June 30, 2010,
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.
NOTE
16. SUBSEQUENT EVENTS
Viva
Red Acquisition
On
July 7, 2010, we entered into a Share Transfer Agreement with Smart Lead
Enterprises, Inc., a British Virgin Island, whereby we agreed to acquire 51%
shares of Viva Red Limited (“Viva Red”). Viva Red is a company that
acquires various licenses of mobile phone game and entertainment products and
conducts a value-add telecommunication business regarding mobile phones in
Mainland China. Viva Red is a wholly owned subsidiary of Smart Lead. They
recently entered into a Business Transfer Agreement whereby two contracts with
Hunan Telecom will be transferred from Smart Lead to Viva Red; these Hunan
contracts will enable Viva Red to conduct mobile game value-added
business.
The
terms of the Share Transfer Agreement between us and Smart Lead are as
follows:
(i)
|
RMB1,000,000
(approximately US$147,059) as cash deposit paid upon
execution;
|
(ii)
|
US$490,000
as first cash payment paid after completion of share transfer; this
payment will be remitted directly to Viva Red as a loan extended by Smart
Lead to Moqizone for working capital of Viva Red for a term of 2
years;
|
(iii)
|
US$510,000
less the approximately US$147,059 (RMB1,000,000) as second cash payment
paid as of closing, after the revenue of first quarter of 2010 under Hunan
Contracts has been paid to account of Viva
Red;
|
F-46
(iv)
|
Stock
Consideration payable in 1,200,000 ordinary shares of Moqizone Holding
Corporation, within 3 months of closing. The shares will be subject to a 2
year lock-up and the parties have agreed that if the business is not
successful within such 2 years, the shares will be returned and the 51%
shares of Viva Red will also be returned to Smart Lead although no formal
agreement has yet been drafted regarding such a
return.
|
(v)
|
Viva
Red, after obtaining the business under the Hunan Telecom contract, will
operate the business covered by the Hunan contracts through the Company’s
VIE company, Shenzhen Alar or another VIE established to operate the
business, as the contracts cannot be performed in China by a foreign owned
company.
|
JFS
Investment Inc and Garden State Securities Consultancy services
On
July 12, 2010, the Company engaged JFS Investments Inc. (“JFS”) to provide
consulting services. The initial term of the agreement is for one year. As
compensation, the Company agreed to issue JFS 225,000 shares of the Company’s
common stock that vest as follows: 70,000 upon execution of the agreement and
17,222 shares at the beginning of each month from the fourth month through the
12 th months.
The shares were issued in accordance with the exemption from the registration
provisions of the Securities Act of 1933, as amended, provided by Section 4(2)
of such Act for issuances not involving any public offering. The 225,000 shares
were valued at $2.50 per share, the closing bid of the Company’s common stock on
July 12, 2010, the date of the agreement. Therefore, total aggregate value
of the shares granted to JFS is approximately $563,000. Going forward the cost
of these shares will be expensed as they vest. As such, the Company will
recognize $175,000, which will be recorded in general, and
administrative expenses as share-based compensation expenses, on July 12, 2010
and roughly $43,000 per month beginning on November 12, 2010 and continuing
through July 12, 2011.
As
additional compensation, the Company also granted JFS three-year options in the
aggregate 150,000 shares of the Company’s common stock at an exercise price of
US$2.25 per share. Of these options, 37,500 of the Options shall vest
immediately and the balance will vest 12,500 per month beginning with the fourth
month through the 12 th month.
These options were valued at roughly US$160,000 which represents the grant date
fair value of these options. The related compensation expenses will be
recognized over its vesting period. 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 $40,000 of expenses on July 12, 2010 and roughly
$13,000 per month beginning on November 12, 2010 and continuing through July 12,
2011.
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 1.06%, 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.
On
July 12, 2010, the Company engaged Garden State Securities (“GSS”) to provide
consulting services. The initial term of the agreement is for one year. As
compensation, the Company agreed to issue GSS 225,000 shares of the Company’s
common stock that vest as follows: 70,000 upon execution of the agreement and
17,222 shares at the beginning of each month from the fourth month through the
12 th months.
The shares were issued in accordance with the exemption from the registration
provisions of the Securities Act of 1933, as amended, provided by Section 4(2)
of such Act for issuances not involving any public offering. The 225,000 shares
were valued at $2.50 per share, the closing bid of the Company’s common stock on
July 12, 2010, the date of the agreement. Therefore, total aggregate value
of the shares granted to JFS is approximately $563,000. Going forward the cost
of these shares will be expenses as they vest. As such, the Company will be
recognized $175,000, which were recorded in general, and administrative expenses
as share-based compensation expenses, on July 12, 2010 and roughly $43,000 per
month beginning on November 12, 2010 and continuing through July 12,
2011.
F-47
As
additional compensation, the Company also granted GSS three-year warrants in the
aggregate 150,000 shares of the Company’s common stock at an exercise price of
US$2.25 per share. Of these warrants, 37,500 shall vest immediately and the
balance will vest 12,500 per month beginning with the fourth month through the
12 th month.
These warrants were valued at roughly US$160,000 which represents the grant date
fair value of these warrants. Going forward the cost of these warrants will be
expensed as they vest and will be recorded in general and administrative
expenses as share-based compensation expenses. Pursuant to these warrants, we
will incur approximately $40,000 of expenses on July 12, 2010 and roughly
$13,000 per month beginning on 2010 and continuing through July 12,
2011.
The
Company estimates the fair value of these warrants using the Black-Scholes
option pricing model with the following assumptions: an expected life equal to
the contractual term of the warrants (three), underlying stock price of $2.50
per share, no dividends; a risk free rate of 1.06%, 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 warrant is the contractual exercise price of the
warrant.
Employee
Share Option Plan
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.
Series
C Preferred Stock Dividend
On
July 30, 2010, we issued an aggregate of 17,913 shares of common stock, as
dividends, to the holders our Series C Convertible Preferred Stock as shown in
the table below. The number of shares issued was calculated at a rate of 8% for
the Series C Preferred Stock, per annum (subject to a pro rata adjustment) of
the liquidation preference amount payable in shares which, when multiplied by
$2.25 would equal the amount of such quarterly dividend not paid in cash. As
such, the shares were valued at $40,300 and the total aggregate value of the
transaction will be recorded as a preferred stock dividend.
Preferred
Stock Dividends Issued on July 30, 2010
Date
|
Preferred Stock
|
Common Shares
Issued
|
Dividend Value
|
|||||||
7/30/2010
|
Series
C
|
17,913
|
$
|
40,300
|
F-48
We
have further evaluated events after the date of these financial statements
through August 14, 2010, the date that these financial statements were issued
(or available to be issued to be issued if this applies). There were no other
material subsequent events except the above as of that date.
MANAGEMENT
DISCUSSION AND ANALYSIS
Except
for the historical information contained herein, the matters discussed in this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and elsewhere in this prospectus are forward-looking statements
that involve risks and uncertainties. The factors listed in the section
captioned “Risk Factors,” as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from those projected. Except as may be required by
law, we undertake no obligation to update any forward-looking statement to
reflect events after the date of this prospectus.
The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
financial statements of Moqizone for the fiscal years ended December 31, 2009
and 2008 and quarter ended June 30, 2010 and 2009, and should be read
in conjunction with such financial statements and related notes included in this
prospectus..
Overview
We are
a Chinese online game delivery platform company that offers digital
infrastructure solutions to China’s online game industry. Through our subsidiary
Shanghai MoqiZone and VIE SZ Alar, we provide the following product solutions
and services:
|
o
|
Installation
of WiMAX CPE (Customer Premises Equipment) at internet cafes with
connection to our proprietary Moqizone WiMAX Network;
and
|
|
o
|
Access
to digital entertainment content such as online games, movies, and video
hosted by the Company via the Moqizone WiMAX Network;
and
|
|
o
|
Installation
of Netcafe Farmer which is a peer-to-peer program allowing real time
gaming content updates for all the PCs within the internet
cafes; and
|
|
o
|
Publishing
online gaming content and issuing prepaid cards for
players.
|
As our
business develops, we believe our business model could eliminate unnecessary
cost associated with traditional digital media content delivery value chain. We
are still in the preliminary stages of rolling out our WiMAX CPE installation.
We have already commenced our business with Netcafe Farmer. We have also
commenced reselling prepaid online game cards. We have successfully deployed a
few WiMAX test sites in Beijing, Suzhou and Shenzhen and are now building out
our MoqiZone WiMAX Network business in Chengdu. As of June 30, 2010, over 30
internet cafés in Chengdu have been installed with our WiMAX CPE and
approximately 700 Internet Cafés are installed with Netcafe
Farmer.
Netcafe
Farmer in conjunction with our WiMAX Network will provide the necessary backbone
infrastructure to allow us to roll out our gaming services and products. As our
business continues to develop, our revenue will mainly be generated from cash
collected from prepaid game cards. We will provide a profit sharing online
billing system for internet cafes, game providers, marketing promotion companies
and ourselves, via www.moqizone.com., This will allow profit sharing through the
universal Moqizone Prepaid Card. We believe that this will effectively
discourage price wars on prepaid game cards at retail locations, help internet
cafés avoid obsolete prepaid card inventory and provide a more user
friendly payment system by unifying prepaid game cards across different content
providers’ games. The universal prepaid game card will be distributed via
internet cafés and will be collected through our Point of Sales system. In
addition, our software provides real-time reporting, payment and customer
tracking via www.moqizone.com to internet cafés and content providers. As such,
Moqizone can data mine customer behavior for gaming community
management.
39
As of
June 30, 2010, we have commenced generating revenue from selling prepaid cards
and have generated limited revenue from Netcafe Farmer. Since the Fall of 2009
we have launched more than 30 WiMAX connected internet cafes in our test cities,
however, to date they currently are only utilizing our WiMAX Network free of
charge for testing purposes and not yet producing revenue. Our goal is to deploy
our online game content delivery platform on the WiMAX Network and via Netcafe
Farmer in various targeted cities in China. The first game content delivery
platform will be via MoqiZone WiMAX Network. We aim to begin charging our
customers when we reach approximately 700 internet cafes and we are aiming to
cover the following cities at the specified time frames. :-
Chengdu
|
4Q
2010
|
Chongqing
|
4Q
2010
|
Jinan
(Shandong)
|
1Q
2011
|
Nanjing
|
1Q
2011
|
Beijing
|
1Q
2011
|
Changsha
|
2Q
2011
|
Fuzhou
|
2Q
2011
|
We are
also aiming to expand and redevelop Netcafe Farmer which already has approximate
700 internet café customers and is already generating revenue. The target is to
expand the customer base of Netcafe Farmer to cover also large scale residential
development as well as school campuses.
As of
June 30, 2010, we have launched three websites: (a) www.moqz.com, our company’s
corporate website; (b) www.moqizone.com, a business-to-business or B2B portal
which supports Internet Café online billing and profit sharing between the
Group, Internet cafés and content providers; and (3) www.53mq.com, a
business-to-customer or B2C portal which delivers game contents. www.53mq.com
was launched on November 30, 2009. We are currently hosting 14 games from 2
online game companies through executed agreements.
We
entered into business 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. To date, we have developed one
online game - “Flirting Scholars II Online” which began open beta testing on
July 9, 2010 in parallel with road show of the original movie “Flirting Scholars
II”. We are working towards obtaining official approval from the Ministry
of Culture to publish the game in China by August 2010. After we are granted
approval, we plan to begin generating revenue via the sale of this game. We are
currently beginning work on a second game based on another of Win’s movies and
intend to have the beta version completed by the end of August
2010.
In
July 2010, we acquired Viva Red, a company that acquires various licenses of
mobile phone game and entertainment products and conducts value-added
telecommunication services for mobile phones in mainland China. We are planning
to leverage this acquisition to help us achieve our long-term goal of providing
mobile gaming platform and service all the China Telecom customers. We are
currently developing our mobile gaming delivery platform, configuring mobile
games for different mobile handsets and are discussing forming strategic
business partnership with various domestic and international content
providers. The plan is to roll out our delivery platform by the end of the third
quarter of 2010 and begin generating revenue in the fourth quarter of
2010
By
acquiring Viva Red, we are going to extend our game delivery platform to cover
mobile phone users. The plan is to roll out our delivery platform by the end of
the third quarter of 2010 and begin generating revenue in the fourth quarter of
2010.
Our
key business development objectives over the next two years are as
follows:
|
o
|
Growing
and expanding our business penetration that serves Internet cafes
throughout selected targeted cities in China;
and
|
40
|
o
|
Building
a diverse gaming platform that serves traditional professional gamers,
casual gamers, including mobile phone users;
and
|
|
o
|
Publishing
internally developed games for both PC gamers and Mobile
users.
|
These
business objectives will require the build out of our Moqizone WiMAX Network and
continuous research and development. We will not be able to generate significant
revenue until we have a basic foundation for all of these
components.
Liquidity
and Capital Resources
As at
June 30, 2010, we had a cash balance of approximately $901,306. We completed a
private equity financing of $1,956,200 on March 29, 2010, with 7 accredited
investors. Net proceeds from the offering, were approximately $1,760,400.
Pursuant to the financing, we issued a total of 869,422 units of our securities
at $2.25 per unit. Each Unit consists of (i) one (1) share of the Company’s
Series C Convertible Preferred Stock, par value $0.001 per share (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 approximately $196,000. We also 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. These
warrants, which if fully exercised, could have raised approximately an
additional $434,710.
The March 2010 financing
will allow us to continue operations and business development until December
2010 before additional capital is required to continue to execute our current
growth plans. Based on our current business development plans, 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 and
a further US$1 million to aggregate and license contents.
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 our overall business strategy. We currently
estimate that we will need an additional $10,000,000 in order to completely
deploy our online game delivery platform in all of our targeted cities by
2014. Our cash requirements may vary materially from those currently
anticipated due to changes in our operations, including engagement into new
businesses, our
marketing and distribution activities, product research and development,
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.
41
Critical
Accounting Policies and Estimates
Our
financial information has been prepared in accordance with generally accepted
accounting principles in the United States, which requires us to make judgments,
estimates and assumptions that affect (1) the reported amounts of our assets and
liabilities, (2) the disclosure of our contingent assets and liabilities at the
end of each fiscal period and (3) the reported amounts of revenues and expenses
during each fiscal period. We continually evaluate these estimates
based on our own historical experience, knowledge and assessment of current
business and other conditions, our expectations regarding the future based on
available information and reasonable assumptions, which together form our basis
for making judgments about matters that are not readily apparent from other
sources. Since the use of estimates is an integral component of the
financial reporting process, our actual results could differ from those
estimates. Some of our accounting policies require a higher degree of
judgment than others in their application.
When
reviewing our financial statements, you should consider (1) our selection of
critical accounting policies, (2) the judgment and other uncertainties affecting
the application of those policies, and (3) the sensitivity of reported results
to changes in conditions and assumptions. We believe the following
accounting policies involve the most significant judgment and estimates used in
the preparation of our financial statements.
Fair
Value.
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company may estimate the fair value of the
Warrants and Preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments. In
regards to the warrants issued in our financings, Management and the board of
directors consider market price quotations, recent stock offering prices and
other factors in determining fair market value for purposes of valuing the
common stock. The fair value of each warrant granted is estimated on
the date of grant using the Black-Scholes option-pricing model with the various
weighted average assumptions, including dividend yield, expected volatility,
average risk-free interest rate and expected lives.
Stock
Compensation.
We
account for stock-based employee compensation arrangements using the fair value
method in accordance with the provisions of the FASB ASC 718,
“Compensation-Stock Compensation”. It requires that the fair value of employees
awards issued, modified, repurchased or cancelled after implementation, under
share-based payment arrangements, be measured as of the date the award is
issued, modified, repurchased or cancelled. The resulting cost is then
recognized in the statement of earnings over the service period.
We
periodically issue common stock for acquisitions and services
rendered. Common stock issued is valued at the estimated fair market
value, as determined by our management and board of
directors. Management and the board of directors consider market
price quotations, recent stock offering prices and other factors in determining
fair market value for purposes of valuing the common stock. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the various weighted average
assumptions, including dividend yield, expected volatility, average risk-free
interest rate and expected lives.
FASB
Establishes Accounting Standards Codification ™
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In
order to ease the transition to the Codification, we are providing the
Codification cross-reference alongside the references to the standards issued
and adopted prior to the adoption of the Codification.
Basis
of Presentation - Development Stage Company
The
Company has been obtaining the requisite approvals from the Chinese government
and since inception, has not earned any revenue from
operations. Accordingly, the Company’s activities have been accounted
for as those of a “Development Stage Entities”, as set forth in ASC
205-915. Among the disclosures required by ASC 205-915 are that the
Company’s financial statements be identified as those of a development stage
company, and that the statements of operations and other comprehensive income
(loss), owner’s equity and cash flows disclose activity since the date of
the Company’s inception.
42
Use
of estimates in the preparation of financial statements
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of expenses during the
reporting period. On an ongoing basis, we evaluate our estimates which are based
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. The result of these evaluations forms the
basis for making judgments about the carrying values of assets and liabilities
and the reported amount of expenses that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions. The following accounting policies require significant management
judgments and estimates:
Impairment of
long-lived assets. We assess the potential impairment of
long-lived assets and identifiable intangibles under the guidance of ASC 360-15,
"Accounting for the Impairment or Disposal of Long-Lived Assets." which states
that a long-lived asset should be tested for recoverability whenever events or
changes in circumstances indicate that the carrying amount of the long-lived
asset exceeds its fair value. An impairment loss is recognized only if the
carrying amount of the long-lived asset exceeds its fair value and is not
recoverable.
Deferred income
taxes. The
Company accounts for income taxes in accordance with ASC 740 which requires that
deferred tax assets and liabilities be recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, ASC 740 requires recognition of future tax benefits, such as carry
forwards, to the extent that realization of such benefits is more likely than
not and that a valuation allowance be provided when it is more likely than not
that some portion of the deferred tax asset will not be realized.
Foreign
currency
translation. Our reporting currency is the US
dollar. Our functional currency is United States dollars (“US$”), and
the functional currency of our Hong Kong subsidiary is Hong Kong dollars
(“HK$”). The functional currency of our PRC operating entities is the
Renminbi (“RMB’), and PRC is the primary economic environment in which our
businesses operate. Assets and liabilities are translated into U.S. Dollars at
the year end exchange rates and records the related translation adjustments as a
component of other comprehensive income (loss). Revenue and expenses are
translated using average exchange rates prevailing during the period. Foreign
currency transaction gains and losses are included in current
operations.
We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. There can be no assurance that
actual results will not differ from these estimates.
Income
Taxes
Moqizone
Holdings Corporation, formerly Trestle Corporation, Inc., is a Delaware
corporation and conducts all of its business through our Shanghai MoqiZone
subsidiary. All business is conducted in PRC. As the Delaware holding company
has not recorded any income for the year ended December 31, 2009 and 2008, it is
not subject to any income taxes in the United States. Moqizone Holdings Limited
was incorporated in the Cayman Islands. Under the laws of Cayman Islands, the
Company is not subject to tax on income or capital gain. In addition, payment of
dividends by Moqizone Holdings Limited is not subject to withholding tax in the
Cayman Islands.
Under the
current Hong Kong Inland Revenue Ordinance, MoqiZone Hong Kong is subject to
16.5% income tax on its taxable income generated from operations in Hong Kong.
Additionally, payments of dividends by MoqiZone Hong Kong to us are not subject
to any Hong Kong withholding tax.
The new
Enterprise Income Tax Law (or EIT Law) imposes a unified income tax rate of
25.0% on all companies established in China. Shanghai MoqiZone and the VIE are
subject to 25% PRC income tax. 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. The new EIT
Law, however, does not define the term “de facto management bodies.” If the PRC
tax authorities subsequently determine that we should be classified as a
resident enterprise, then our global income will be subject to PRC income tax at
a tax rate of 25.0%.
With the
introduction of the EIT Law, China has resumed imposition of a withholding tax
(10.0% in the absence of a bilateral tax treaty or new domestic regulation
reducing such withholding tax rate to a lower rate). As MoqiZone Hong Kong
is the sole shareholder of Shanghai MoqiZone, the dividends from Shanghai
MoqiZone may be taxed at a reduced withholding tax rate of 5% per the Double Tax
Avoidance Arrangement between Hong Kong and Mainland China.
Our PRC
companies are subject to PRC business tax. We primarily pay business tax on
gross revenues generated from online game operations, rentals, service fees and
license fees. Our PRC operating companies pay business tax on their gross
revenues derived from online game operations at a rate ranging from 3% to 5%,
and this business tax is deducted from total revenues. In addition, our PRC
subsidiaries pay a 5% business tax on the gross revenues derived from their
contractual arrangements with our PRC operating companies, and these taxes are
primarily recorded in operating expenses in accordance with our accounting
policy.
43
Results
of Operations
The
following table shows the results of our business. All references to the
results of operations and financial condition are those of Moqizone Holdings
Corporation, formerly “Trestle Holdings, Inc.”
Comparison
of Fiscal Year Ended December 31, 2009 and 2008
Year Ended December
31
|
2009
|
2008
|
||||||
Revenues
|
US$ | 1,372 | US$ | 0 | ||||
Cost
of revenues
|
US$ | 0 | US$ | 0 | ||||
Gross
profit
|
US$ | 1,372 | US$ | 0 | ||||
Depreciation
and amortization expense
|
US$ | 53,902 | US$ | 0 | ||||
Selling,
general and administrative expenses
|
US$ | 3,317,913 | US$ | 913,157 | ||||
Other
income (expense)
|
US$ | (20,040,393 | ) | US$ | (325 | ) | ||
Income
taxes
|
US$ | 0 | US$ | 0 | ||||
Net
Loss
|
US$ | (23,441,283 | ) | US$ | (913,482 | ) | ||
Foreign
currency translation adjustment
|
US$ | 3,723 | US$ | (5,577 | ) | |||
Comprehensive
income (Loss)
|
US$ | (23,549,799 | ) | US$ | (919,059 | ) |
Revenues. Total revenues for
the year ended December 31, 2009 were US $1,372. This was generated
from the license fee of Netcafe Farmer during the fiscal year of 2009. Total
revenues for the year ended December 31, 2008 were US$0. We are only in the
initial stages of launching our business plan of providing online game contents
of our participating games to those internet cafes installed with our WiMAX
equipment and have joint into our MoqiZone WiMAX Network. In our 2009 fiscal
year, management also continued to place a greater emphasis on aggregating
content and building out our infrastructure. Management continued its
emphasis on working to provide an online game content delivery via our
platform. Management believes that our emphasis on development and
expansion of overall platform will yield increased revenues in our 2010 fiscal
year and beyond. Furthermore, management believes that over the next
two years as we work towards growing and expanding our business penetration in
Internet cafes throughout targeted cities in China, we will experience
significant revenue growth. However, until we recruit a substantial
number of WiMAX installed Internet cafes participating in our business, we will
not be able to commence marketing or begin generating significant
revenues.
The
increase was mainly due to our active expansion of operations, including
commercial deployment on December 15, 2009 in Chengdu, where we provided our
WiMAX installation to the internet cafes free of charge, the consolidation of
company operation in January 2009 and our increase of staffing as well as legal
expenses, due diligence expenses and other professional expenses in relation to
the Financings.
Since
January, 2009, we have gradually increased the number of staffing in various
departments including, without limitation, sales and marketing, software
programming, customer services as well as network deployment for site
visits. We have had approximately 10 technical related staff in charge of
base station build out, network deployment, game portal development, and data
centre management, as well as research and development. We also have a team of
approximately 5 people focusing on online games and other contents aggregation
and 5 people on sales and marketing. Senior management now constitutes of
approximately 10 people. The total amount of salaries and compulsory
welfare contributions was increased by US$467,000 as compared to
2008.
Our
office rental and administrative expenses was increased by U$52,000 from
2009 as compared to 2008. The increase was mainly due to that we have
established branch offices in Chengdu as well as in Shanghai We also incurred
additional IDC related expenses of US$45,000 in 2009 to host our websites
and game platform.
In
addition, the wimax spectrum license fee of US$808,000 (RMB5,500,000)
representing the license fees for 2008 and 2009 was incurred and paid in 2009
pursuant to the PLA Authorization.
Legal
expenses increased as we engaged our Chinese lawyers to assist with various
aspects of our reorganization and our corporate development. In addition, we
began to incur financial advisory, legal, and accounting and audit expenses in
maintaining our US public listing, including expenses related to our offering
and reverse merger. Such expenses were increased by US$166,000 compared to
2008.
Management
expects that general and administrative expenses will continue rise as we
continue to expand our operations. However, we believe that any increase will
begin to be offset by our expected revenue growth.”
44
Other expense. Interest
expense, net of interest income was approximately US$100,000 for the year ended
December 31, 2009, and the interest income for the year ended December 31, 2008
was US$240. Additionally, losses related to the amortization of certain
placement fee associated with our convertible note financing was roughly
US$58,000 for the year ended December 31, 2009 as compared to nil for the year
ended December 31, 2008. Loss on foreign currency transactions was roughly
US$14,000 for the year ended December 31, 2009, as compared to US$565 for the
year ended December 31, 2008. Non cash item includes a change in fair value of
warrants of approximately $19.87 million for the facial year of 2009.As a
result, other expenses for the year ended December 31, 2009 and 2008 were
approximately US$20.04 million and US$325 respectively.
Net loss. Net loss was
approximately US$23.44 million for the year ended December 31, 2009, as compared
to net loss of approximately US$913,000 for the year ended December 31, 2008, an
increase of US$ 22.53 million. This increase was substantially due to loss
associated with the change in fair value of the recently issued warrants and
other expenses related to our recent reverse merger and financing. In fact,
$19.87 million of this net loss was due to change in fair value of the
warrants from our recent financing. In addition, the net loss also increased due
to our commercial deployment in Chengdu on December 15, 2009, the consolidation
of company operation in January 2009 and the increase of staffing as
well as legal expenses, due diligence expenses, other professional expenses
in relation to the Financings and the change in the fair value of the warrants.
In the near term, Management believes that our net loss may actually increase
until we begin to gain traction and start producing revenue from the delivery of
online game content via our Network.
Foreign Currency Translation
Adjustment. Our reporting currency is the US dollar. Our local currency,
Renminbi (RMB), is our functional currency. Results of operations and cash flow
are translated at average exchange rates during the period, assets and
liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of the period and equity accounts are
translated at historical rate. Translation adjustments resulting from this
process are included in accumulated other comprehensive income in the statement
of shareholders’ equity. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as
incurred.
Currency
translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and amounted to a gain of US$3,723 and a loss of US$5,577 as of December 31,
2009, and 2008 respectively.
Comprehensive Loss. As a
result of the above, the comprehensive loss, which adds the currency and
dividend on preferred shares adjustments to Net Income, were roughly US$23.55
million for the year ended December 31, 2009, as compared to the comprehensive
loss of approximately US$919,000 for the year ended December 31, 2008, an
increase of US$22.63 million.
Off-Balance
Sheet Arrangements
We do
not have any off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
Results
of Operations
The
following table sets forth items from the consolidated statements of operations
as reported for each period
For
the three months ended June 30, 2010 and 2009
Three months e nded June
30,
|
2010
|
2009
|
||||||
Revenues
|
$
|
57,632
|
$
|
-
|
||||
Cost
of revenues
|
$
|
52,654
|
$
|
-
|
||||
Gross
profit
|
$
|
4,978
|
$
|
-
|
||||
Research
& development expenses
|
$
|
116,430
|
$
|
-
|
||||
Depreciation
and amortization expense
|
$
|
50,691
|
$
|
2,079
|
||||
Selling,
general and administrative expenses
|
$
|
700,098
|
$
|
573,646
|
||||
Other
income (expense)
|
$
|
2,079,255
|
$
|
(22,157
|
)
|
|||
Income
taxes
|
$
|
-
|
$
|
-
|
||||
Net
profit (Loss)
|
$
|
1,217,014
|
$
|
(597,882
|
)
|
|||
Foreign
adjustment
|
$
|
57,951
|
$
|
2,118
|
||||
Comprehensive
income (Loss)
|
$
|
1,274,965
|
$
|
(595,764
|
)
|
45
Revenues.
Total revenues
for the three months ended June 30, 2010 were approximately $58,000 as
compared to no revenue during the three months ended June 30, 2009. Total
revenues include approximately $54,000 revenue which was derived from
reselling prepaid game cards by MobiZone Hong Kong; and approximately $4,000
revenue which was derived from reselling Netcafe Farmer by Shanghai
Moqizone during the second quarter of 2010. The Company has just begun its
business in prepaid card reselling and is currently strengthening the business
of Netcafe Farmer. The Company is still at its the initial stage of
launching its Moqizone WiMAX Network business to service internet cafés and
therefore has not reported any revenue from this business unit. Management
believes that the reselling of the prepaid game card will continue to grow as we
expand and increase our digital entertainment contents. Management also expects
“Flirting Scholar II Online” will generate revenue once we obtain the official
approval from the Ministry of Culture in August 2010. Furthermore, Netcafe
Farmer is performing a version upgrade and is expected to expand its customer
demographic including residential complex and campus infrastructure in about 4
months. Management believes that over the next two years as we continue to grow
and expand our business penetration in Internet cafes throughout targeted cities
in China, we will begin to experience significant revenue
growth.
Cost of
Revenues Cost of Revenue during the reporting period represents only the
cost of prepaid card sold and was approximately $53,000 for the three months
ended June 30, 2010 as compared to no cost of revenue during the three months
ended June 30, 2009. The selling of prepaid card only began during the second
quarter of 2010. The business was conducted by MobiZone Hong Kong. The cost of
revenue represents approximately 91% of total revenue generated (or a gross
profit margin of 9%) and 97% of the prepaid card revenue generated. The Company
has just begun reselling prepaid game cards and the management believes that as
the sales increases, the Company will be able to increase it gross
profit margin.
Research and
Development Expenses. Research and development expenses were
approximately $116,000 for the three months ended June 30, 2010 as compared to
no research and development expenses during the three months ended June 30,
2009. The net increase of $116,000 was mainly attributable to the development of
“Flirting Scholars II Online” which commenced in November 2009. As of June 30,
2010, we had approximately 10 technical staff working on the development of
“Flirting Scholars II Online” and we also outsource certain development work to
third party developers.
Selling,
General and
Administrative Expenses. Selling, General and Administrative expenses was
approximately $700,000 for the three months ended June 30, 2010, as compare
with $574,000 during the same quarter in 2009. . This is an increase of
approximately $126,000 or 22%. SG&A expenses for the three months ended June
30, 2010 and 2009 were attributable to costs associated with establishing,
building, and supporting our infrastructure; and promoting our products and
services as well as our upcoming online games. SG&A expenses includes (a)
general salaries of all the staff; (b) consulting, legal and accounting and
other professional fees related to establishing our business; (c) sales and
marketing cost on promoting our products and services such as Netcafe Farmer and
“Flirting Scholars II Online”. As of June 30, 2010, our total staffing was
approximately 55 as compared with approximately 35 during the same period in
2009, representing an expansion of approximately 20 staff. Legal and accounting,
and other professional fees has also increased significantly during the
reporting period as compared with 2009. Sales and marketing expenses has
increased due to increased marketing activities to promote our own products and
services. We anticipate that these costs will rise significant when we start
promoting “Flirting Scholars II Online” in August and September 2010 and. as we
continue to expand our operations. However, we believe that any increase will
begin to be offset by our expected revenue growth.
Other income
(expense). Other income (expense) includes the following
items:-
Interest income/expense.
Interest
expenses for the three months ended June 30, 2010 was approximately $40,000 as
compared to interest expenses of approximately $24,000 for the same period in
2009. This increase of approximately $16,000 was mainly due to the interest
expense accrued from our Series A and Series C Preferred Stock for the three
months period ended June 30, 2010. .
46
Changes in Fair
Value of Warrants. We accounted for our warrants issued to investors and
placement agent as a result of our 2009 financing and conversion of the
convertible note as derivative liabilities under ASC Topic 815 “Derivatives and
Hedging” (formerly SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”), because it contains a “Down-round” protection that were
applicable if we were to issue new shares of common stock or common stock
equivalents at a price per share less than the exercise price of the Warrants.
the “Down-round protection” provision is not considered to be an input to the
fair value of a fixed-for-fixed option on equity shares which lead to the
Warrants to fail to be qualified as indexed to the Company’s own stock and then
fail to meet the scope exceptions of ASC Topic 815. Therefore, we accounted for
the Warrants as derivative liabilities under ASC Topic 815. Pursuant to ASC
Topic 815, derivative should be measured at fair value and re-measured at fair
value with changes in fair value recorded in earnings at each reporting
period.
As a
result, for the 6 months ended June 30, 2010, the Company
recognized a gain of approximately $2,200,000 which was related to the change in
the fair value of warrants issued in conjunction with our 2009 financing and the
conversion of the convertible note on August 31, 2009 preferred stock and the
market price of the common stock underlying such warrants. No such loss was
recorded for the three months ended June 30, 2009.
Liquidated
damages for ineffective registration statement. On June 1 and August 11,
2009, the Company entered into Registration Rights Agreement with investors (the
“Investor RRA”) of the private financings we closed on those same dates. Under
the Investor RRA, the Company was required to prepare and file a registration
statement for sale of the Common stock issuable to the investors and holders of
the Series A Preferred Stock no later than thirty (30) days after the completion
of the Trestle Reverse Split, which occurred on August 31, 2009. Additionally,
the Company was required to use its best efforts to obtain effectiveness of the
Registration Statement with respect to all Registrable Securities no later than
one hundred and fifty (150) days (January 28, 2010) after the completion of the
Reverse Split
Since
the registration statement was not declared effective by the SEC by January 28,
2010, the Company began accruing liquidated damages for $22,900 (or 2 percent of
$1,145,000 of the state value of the outstanding Series A Preferred Stock
outstanding as of January 28, 2010) for each month that the registration
statement was not declared effective by the SEC (up to a maximum of 10%). As of
June 30, 2010, the company had accrued $67,700 liquated damages during the
second quarter of 2010. There is no such expense in 2009 and therefore
no such loss was recorded for the three months ended June 30, 2009. The company
is currently planning to speak with the Series A shareholders concerning an
adjustment and/or cancelation of these damages.
Gain/
(
Loss
)
on foreign
currency translation. Loss on foreign currency transactions was roughly
$11,850 for the three months ended June 30, 2010 while $20,455 gain was
recorded for the three months ended June 30, 2009.
As a
result, other income of approximately $2,079,255 for the three months ended June
30, 2010 was recorded as compared to other loss of approximately
$22,157 for the three months ended June 30, 2009. This increase was
primarily attributed to gain associated with the change in fair value of the
recently issued warrants during the second quarter of 2010.
Net Profit/(Loss).
Net income for the three months ended June 30, 2010, was approximately
$1,217,014. This net income was substantially due to the gain of
approximately $2,199,062 related to the change in the fair value of warrants
issued in conjunction with our 2009 financing and the conversion of the
convertible note on August 31, 2009. Without this non-cash gain, the company
would have had a net loss of roughly $982,048 for the three months ended June
30, 2010 as compared with net loss of approximately $597,882 for the three
months ended June 30, 2009. The difference of $384,166 was mainly due to the
increase in R&D expenses and also the increase in SG&A Expenses due to
the development of “Flirting Scholars II Online”. Aside from gains or losses
associated with changes in the fair value of our warrants, Management believes
that our net loss will gradually decrease when we begin to gain
traction and start increasing revenue from our prepaid gaming cards and the
delivery of digital online entertainment content via various game delivery
platforms.
47
Foreign Currency
Translation Adjustment. Our reporting currency is the US dollar. The
functional currency of our PRC operating entities including Shanghai Moqizone
and SZ Mellow is RMB. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in the statement of
shareholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
Currency
translation adjustments resulting from this process are included in accumulated
other comprehensive income amounted to a gain of approximately $57,951 for the
three months ended June 30, 2010 as compared to $2,118 for the three months
ended June 30, 2009.
Comprehensive
Income
/
(
Loss
)
. As
a result of the above, the comprehensive gain, which adds the currency
adjustment to Net Income, was roughly $1,274,965 for the three months ended
June 30, 2010 as compared with a loss of $595,764 during the same
period in 2009.
For
the six months ended June 30, 2010 and 2009
Six months ended June
30,
|
2010
|
2009
|
||||||
Revenues
|
$
|
59,217
|
$
|
-
|
||||
Cost
of revenues
|
$
|
52,654
|
$
|
-
|
||||
Gross
profit
|
$
|
6,563
|
$
|
-
|
||||
Research
& development expenses
|
$
|
212,128
|
$
|
-
|
||||
Depreciation
and amortization expense
|
$
|
93,723
|
$
|
2,079
|
||||
Selling,
general and administrative expenses
|
$
|
1,160,055
|
$
|
972,854
|
||||
Other
income (expense)
|
$
|
21,341,279
|
$
|
(28,062
|
)
|
|||
Income
taxes
|
$
|
-
|
$
|
-
|
||||
Net
profit (Loss)
|
$
|
19,881,936
|
$
|
(1,002,995
|
)
|
|||
Foreign
currency adjustment
|
$
|
88,921
|
$
|
(2,819
|
)
|
|||
Comprehensive
income (Loss)
|
$
|
19,970,857
|
$
|
(1,005,814
|
)
|
Revenues.
Total revenues
for the six months ended June 30, 2010 were $59,000 as compared to no
revenue during the six months ended June 30, 2009. Total revenues include
approximately $54,000 revenue whch was derived from reselling prepaid game cards
by MobiZone Hong Kong; and approximately $5,000 revenue which was derived
from reselling Netcafe Farmer by Shanghai Moqizone during the second
quarter of 2010. The Company has just begun its business in prepaid card
reselling in the second quarter of 2010 and is currently strengthening the
business of Netcafe Farmer. The Company is still at its the initial stage
of launching its Moqizone WiMAX Network business to service internet cafés and
therefore has not reported any revenue from this business unit. Management
believes that the reselling of the prepaid game card will continue to grow as we
expand and increase our digital entertainment contents. Management also expects
“Flirting Scholar II Online” will generate revenue once we obtain the official
approval from the Ministry of Culture in August 2010. Furthermore, Netcafe
Farmer is performing a version upgrade and is expected to expand its customer
demographic including residential complex and campus infrastructure in about 4
months. Management believes that over the next two years as we continue to grow
and expand our business penetration in Internet cafes throughout targeted cities
in China, we will begin to experience significant revenue
growth.
Cost of
Revenues Cost of Revenue during the six months ended June 30, 2010
represents only the cost of prepaid card sold and was approximately $53,000 for
the six months ended June 30, 2010 as compared to no cost of revenue during the
six months ended June 30, 2009. The selling of prepaid card only began during
the second quarter of 2010 and therefore no such cost was recorded in the first
quarter of 2010 and during the six months ended June 30, 2009. The business was
conducted by MobiZone Hong Kong. The cost of revenue represents approximately
89% of total revenue generated (or a gross profit margin of 11%) and 97% of the
prepaid card revenue generated during the first six months of 2010. The Company
has just begun reselling prepaid game cards and the management believes that as
the sales increases, the Company will be able to increase it gross profit
margin.
48
Research and
Development Expenses. Research and development expenses were
approximately $212,000 for the six months ended June 30, 2010 as compared to no
research and development expenses during the six months ended June 30, 2009. The
net increase of roughly $212,000 was mainly attributable to the development of
“Flirting Scholars II Online” which commenced in November 2009. As of June 30,
2010, we had approximately 10 technical staff working on the development of
“Flirting Scholars II Online” and we also outsource certain development work to
third party developers.
Selling, General
and Administrative Expenses. Selling, General and Administrative expenses
was approximately $1,160,000 for the six months ended June 30, 2010, as
compare with $973,000 during the same quarter in 2009. This is an increase
of approximately $187,000 or 19.2%. SG&A expenses for the three months ended
June 30, 2010 and 2009 were attributable to costs associated with establishing,
building, and supporting our infrastructure; and promoting our products and
services as well as our upcoming online games. SG&A expenses includes (a)
general salaries of all the staff; (b) consulting, legal and accounting and
other professional fees related to establishing our business; (c) sales and
marketing cost on promoting our products and services such as Netcafe Farmer and
“Flirting Scholars II Online”. As of June 30, 2010, our total staffing was
approximately 55 as compared with approximately 35 during the same period in
2009, representing an expansion of approximately 20 staff. Legal and accounting,
and other professional fees have also increased significantly during the
reporting period as compared with 2009. Sales and marketing expenses have
increased due to increased marketing activities to promote our own products and
services. We anticipate that these costs will rise significant when we start
promoting “Flirting Scholars II Online” in August and September 2010 and. as we
continue to expand our operations. However, we believe that any increase will
begin to be offset by our expected revenue growth.
Other income
(expense). Other income (expenses) includes the following
items:-
Interest income/expense.
Interest
expenses for the six months ended June 30, 2010 was approximately $40,000 as
compared to interest expenses of approximately $30,000 for the same period in
2009. This increase of approximately $10,00 0 was mainly due to the interest
expense accrued from our Series A and Series C Preferred Stock for the six
months period ended June 30, 2010..
Changes in
F air Value of
Warrants. We accounted for our warrants issued to investors and placement
agent as a result of our 2009 financing and conversion of the convertible note
as derivative liabilities under ASC Topic 815 “Derivatives and Hedging”
(formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”), because it contains a “Down-round” protection that were applicable
if we were to issue new shares of common stock or common stock equivalents at a
price per share less than the exercise price of the Warrants. the “Down-round
protection” provision is not considered to be an input to the fair value of a
fixed-for-fixed option on equity shares which lead to the Warrants to fail to be
qualified as indexed to the Company’s own stock and then fail to meet the
scope exceptions of ASC Topic 815. Therefore, we accounted for the Warrants as
derivative liabilities under ASC Topic 815. Pursuant to ASC Topic 815,
derivative should be measured at fair value and re-measured at fair value with
changes in fair value recorded in earnings at each reporting
period.
As a
result, for the six months ended 30 June, 2010, the Company recognized a
gain of approximately $21,511,000 which was related to the change in the fair
value of warrants issued in conjunction with our 2009 financing and the
conversion of the convertible note on August 31, 2009 preferred stock and the
market price of the common stock underlying such warrants. No such loss was
recorded for the six months ended June 30, 2009.
Liquidated
damages f or ineffective
registration statement. On June 1 and August 11, 2009, the Company
entered into Registration Rights Agreement with investors (the “Investor RRA”)
of the private financings we closed on those same dates. Under the Investor RRA,
the Company was required to prepare and file a registration statement for sale
of the Common stock issuable to the investors and holders of the Series A
Preferred Stock no later than thirty (30) days after the completion of the
Trestle Reverse Split, which occurred on August 31, 2009. Additionally, the
Company was required to use its best efforts to obtain effectiveness of the
Registration Statement with respect to all Registrable Securities no later than
one hundred and fifty (150) days (January 28, 2010) after the completion of the
Reverse Split
49
Since
the registration statement was not declared effective by the SEC by January 28,
2010, the Company began accruing liquidated damages for $22,900 (or 2 percent of
$1,145,000 of the state value of the outstanding Series A Preferred Stock
outstanding as of January 28, 2010) for each month that the registration
statement was not declared effective by the SEC (up to a maximum of 10%). As of
June 30, 2010, the company had incurred and accrued $113,500 liquated damages
for the six months ended June 30, 2010. There is no such expense in
2009 and therefore no such loss was recorded for the six months ended June
30, 2009. The company is currently planning to speak with the Series A
shareholders concerning an adjustment and/or cancelation of these
damages.
Gain/Loss on
foreign currency translation. Loss on foreign currency transactions was
roughly $16,490 for the six months ended June 30, 2010 while $20,455 gain
was recorded for the six months ended June 30, 2009.
As a
result, other income of approximately $21,341,000 for the six months ended June
30, 2010 was recorded as compared to other loss of approximately $28,000 for the
six months ended June 30, 2009. This increase was primarily attributed to gain
associated with the change in fair value of the recently issued warrants during
the six months ended June 30, 2010.
Net Profit/(Loss)
.
Net income for the six months ended June 30, 2010, was approximately
$19,882,000. This net income was substantially due to the gain of
approximately $21,511,000 related to the change in the fair value of
warrants issued in conjunction with our 2009 financing and the conversion of the
convertible note on August 31, 2009 as described above. Without this non-cash
gain, the company would have had a net loss of roughly $1,629,000 for the six
months ended June 30, 2010 as compared with net loss of approximately $1,003,000
for the six months ended June 30, 2009. The difference of $626,000 was mainly
due to the increase in R&D expenses and also the increase in SG&A
Expenses in relation to the development of “Flirting Scholars II Online”. Aside
from gains or losses associated with changes in the fair value of our warrants,
Management believes that our net loss will
gradually decrease when we begin to gain traction and start increasing
revenue from our prepaid gaming cards and the delivery of digital online
entertainment content via various game delivery platforms.
Foreign Currency
Translation Adjustment. Our reporting currency is the US dollar. The
functional currency of our PRC operating entities including Shanghai Moqizone
and SZ Mellow is RMB. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of
China at the end of the period. Translation adjustments resulting from this
process are included in accumulated other comprehensive income in the statement
of shareholders’ equity. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as
incurred.
Currency
translation adjustments resulting from this process are included in accumulated
other comprehensive income and amounted to a gain of $88,921 for the six
months ended June 30, 2010 as compared to a loss of approximately $2,819 for the
six months ended June 30, 2009.
Comprehensive
Income
/Loss. As
a result of the above, the comprehensive gain, which adds the currency
adjustment to Net Income, was approximately $19,971,000 for the six months
ended June 30, 2010 as compared with a loss of $1,006,000 during the
same period in 2009.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
50
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table and text set forth the names and ages of all directors and
executive officers as of May 13, 2010. The Board of Directors is comprised of
only one class. All of the directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. To date we have not had
an annual meeting. There are no family relationships among our directors
and executive officers, other than the sibling relationship between Lawrence
Cheung and Leo Cheung. Also provided herein are brief descriptions of the
business experience of each director, executive officer and advisor during
the past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the Federal
securities laws.
In
connection with the Share Exchange, Mr. Stoppenhagen resigned as our Interim
President as of June 5, 2009; each of our directors tendered their resignation
as one of our directors on that same day. Our Board of Directors appointed
Cheung Chor Kiu Lawrence (Lawrence Cheung) to serve as our Chief Executive
Officer. Messrs. Lawrence Cheung and Benjamin Chan were
nominated to serve as our directors with such appointment to be effective on
June 19, 2009. Mr. Paul Lu was appointed as our director on November 3,
2009.
Our
bylaws presently provide that our Board of Directors shall consist of such
number as may be determined by the Board of Directors. The Board of Directors is
currently set at and comprised of three directors. Our directors serve for a
term of one year and until the next annual meeting of stockholders and the
respective election and qualification of their successors. Pursuant to our
bylaws, our officers are selected by the Board of Directors for a term of [*]
year or until the executive officer’s successor is duly elected and qualified or
until such executive officer’s resignation or removal.
Name
|
Age
|
Position with the
Company
|
||
Lawrence
Cheung
|
43
|
Chief
Executive Officer, Chairman of the Board and
Director
|
||
Benjamin
Chan
|
37
|
Vice
President of Finance and Director
|
||
Paul
Lu
|
46
|
Director
|
||
Zhang,
Xin Hua
|
47
|
Shanghai
MoqiZone Director
|
||
Sam
Huang
|
58
|
Network
Director
|
||
Leo
Cheung
|
38
|
Vice
President of Sales and Marketing
|
||
Calvin
Ng
|
37
|
Vice
President of System and Information Control
|
||
Wu
Qing Quo
|
42
|
Vice
President of Government Relationships.
|
||
Vivian
Qian
|
39
|
Financial
Controller
|
||
Chris
Wong
|
38
|
Vice
President of Business Strategy
|
||
Calvin
Lam
|
42
|
Vice
President of Mobile Business & CEO of Viva Red
Ltd
|
Information
With Respect to Directors and Executive Officers
The
following information pertains to the directors, their principal occupations and
other public company directorships for at least the last five-years and
information regarding their specific experience, qualifications, attributes or
skills that led to the conclusion that each such person should serve as a
director in light of our business and structure. In addition to this
information, the Board of Directors also believes that each director has a
reputation for integrity, honesty and adherence to high ethical standards. Each
director has demonstrated business acumen and an ability to exercise sound
judgment, as well as a commitment of service to us and to the Board of
Directors.
Lawrence Cheung is our
Chief Executive Officer, Chairman of the Board and a director and was appointed
on June 19, 2009. Mr. Cheung has been an entrepreneur since 1998. Mr. Cheung
founded MobiZone Hong Kong in 2007 and since then has been acting as the
director of MobiZone Hong Kong. From 2002 to 2005, Mr. Cheung established
MobiTech Limited which focus in WiMAX Technology deployment. From 2002-2005.
Lawrence founded MobiChannel Limited, which was in the business of online game
marketing and promotion serving online game companies and internet cafes. During
2000 to 2002, Mr. Cheung acted as the Chief Operating Officer of Gamania Digital
Entertainment Ltd., a listed online game company in Taiwan and was appointed as
the Chief Operation Officer of Gamania Hong Kong Limited and NC Gamania Limited,
the latter is a joint venture between Gamania Group and Korean online game
company NCSoft, Corporation. Mr. Cheung established the first interactive TV
company in China in 1998 as well as operating a ISP company in Shanghai during
1998 to 2000. Prior to that, Mr. Cheung acted as the Finance Director of J
Walter Thompson Advertising Ltd from 1996-1998 and was the Audit Manager at KPMG
Shanghai from 1994-1996. Mr. Cheung holds a BSC with honors from University of
Bradford, England, and 3 years Chartered Accountants Training in England
(ICAEW). Mr. Cheung’s qualifications to serve as a member of the Board of
Directors include his significant strategic insight and business experience from
his previous works in the telecom, media and online game industry. Mr. Cheung
also possesses professional knowledge from his early experience in the
accounting and auditing profession.
Benjamin Chan is our Vice
President of Finance and a director and was appointed on June 19, 2009. Mr. Chan
was one of the founders of MobiZone Hong Kong and is
appointed as a director of MobiZone Hong Kong in June 2009.
Since 2002, Mr Chan has been overseeing legal, corporate finance as well as
investor relations operations in our Group, MobiTech and MobiChannel. From 2000
to 2003, Mr. Chan acted as a corporate consultant for various listed companies
in Hong Kong. Mr. Chan holds a Bachelor of Commerce Degree, majoring in finance
and account, and a Bachelor of Laws Degree from the University of Melbourne,
Victoria, Australia and he is a qualified Australian barrister and solicitor and
has practiced in the telecom media and technology sector. His professional
highlights include the successful tendering of the first pay television
broadcasting license in Hong Kong as well as involving into many other local
listing activities. Mr. Chan is also an entrepreneur and owns private companies
in Hong Kong in the business of IT equipment trading and medical device
manufacturing since 1998. Mr. Chan’s qualification to serve as a member of the
Board of Directors include his past involvement in the Company’s business as
well as his profession knowledge in the legal field, particularly in relation to
the telecom, media and online game industry.
51
Paul Lu is a director of our
Board and was appointed on Nov 3, 2009. Mr. Lu is the Managing director of Twin
Oaks Capital LLC since 2008. Mr. Lu is appointed as the Chairman and a
director of Green Power (Baoding) Limited, a private companies in the business
of renewable energy in China since 2005. Prior to that, Mr. Lu was the Vice
President of Operation of Woo A Mart Products Inc. a private Taiwanese company
in the business of sporting goods manufacturer and wholesaler and was
responsible for establishing its USA office and distribution center in Los
Angeles, California. Mr Lu, is a certified public accountant in the United
States. He also served as an independent director of Astro Corp. (a company
listed on the Taiwan Stock Exchange, stock code: 3064) from 2008 to 2009 and Bright
International Group Limited (a company listed on the Hong Kong Stock Exchange,
stock code: 1163) from 2008 to 2009. Mr. Lu had previously
worked as an audit manager in Koo Chow & Co, CPA in the United States of
America during 1993 to
1997. Mr. Lu holds a
Master in Business Administration degree from California State University at Los
Angeles. Mr. Lu’s qualifications to serve as a member of the Board of Directors
include his significant accounting, financial and business experience as well as
his experience serving as independent directors in various financial
markets.
Zhang, Xin Hua is a director
of Shanghai Moqizone and one of the founders of MobiZone Hong Kong. Mr. Zhang has
been involved in MobiTech and MobiZone Hong Kong since 2005 together with
Lawrence Cheung and Benjamin Chan. Mr. Zhang is currently also a Director of Tai
Ji Tong Gong. and is in charge of the MoqiZone WiMAX Network deployment. From
2000 to 2005, Mr. Zhang founded and operated Beijing Wei Wan Communication Ltd.,
a private company in China specialized in personal mobile data communication and
paging. His other previous employment includes as the General Manager of Network
Development Division of Jin Zhong Hua of the Xin Tai Group, Executive Manager of
Beijing Yitelian, and Communication Equipment Factory Manager at BJ
Electronics Development Ltd. Mr. Zhang graduated in 1984 from Beijing Postal and
Telecom University with a major in Computing and Communication.
Sam Huang was appointed as the
Network Director of our company. Mr. Huang has been involved in MobiTech and
MobiZone Hong Kong since 2005 together with Lawrence Cheung and Benjamin and is
currently in charge of our MoqiZone WiMAX Network deployment. Prior to that, Mr.
Huang was formerly CTO of Beijing Quantum in 3.5GHz WiMAX from 2000 to 2005. Mr.
Huang has over 10 years’ experience in network management and planning. He was
the Deputy General Manager of Wai Te Mobile Communication Ltd. Mr. Huang holds a
degree in Material Engineering.
Leo Cheung was appointed as
the Vice President of Sales & Marketing since May 2009 and is in charge of
our Sales and Marketing Department and Shanghai Moqizone operations. Mr. Cheung
was one of the co-founders of the 2 largest China Electronic Sports Tournament
Organization in the PRC in history, namely China Internet Gaming (CIG) and China
E-sports Games (CEG) and operated those tournaments from 2002 to
2004. From 2005 to 2006, Mr. Cheung was employed as Director of E-sports
department and Manager of Channel Development of the IPTV Division of Shanda
Interactive Entertainment (NASDAQ:SNDA). From 2007 to 2009, Mr. Cheung joined
another online game company Optic Communications, which is a subsidiary of CDC
Corporation (NASDAQ:CHINA) as Project Director of “The Lord of the Rings Online”
and Director of Marketing until May 2009. Mr. Cheung has rich experience in
E-sports industry and online game industry.
Calvin Ng is our Vice
President System and Information Control and is one of the founders of MobiZone Hong Kong. Mr. Ng is in
charge of all of our system and documents control, as well as corporate
information control. Mr. Lam has been participating the business of MobiTech and
MobiZone Hong Kong together with Lawrence Cheung and Benjamin Chan since 2005
and is responsible for promoting the company services to internet cafes. Prior
to that, Mr. Ng was the founder of and operated Green Digital from 2002 to 2005.
Mr. Ng has over 6 years in the internet café business in China and was involved
in the development of software which has been used in a large percentage of
internet cafés in China.
Vivian Qian is appointed as
the Shanghai Office Manager in November 2009 and Financial Controller in
September 2009 overseeing all the financial and administration of our China
operation. Prior to joining MoqiZone, Ms. Qian was at Glory Silicon where she
was responsible for financial operations of two solar wafer factories from
August 2008 to July 2009. From January 2002 to July 2008 Ms Qian worked in
the audit practice of KPMG’s Shanghai office, working with affiliates of US,
European and Asian public companies, as well as domestic Chinese companies
listed on the China and overseas markets and was an Audit Partner of KPMG
Shanghai since July 2005. Ms. Qian is a member of the Chinese Institute of
Certified Public Accountants. Ms Qian holds a Bachelor’s degree in International
Accounting from Shanghai University of Finance and Economics and is a member of
the Chinese Institute of Certified Public Accounts.
Wu Qing Quo is appointed
as our Vice President of Government Relationships since September
2009. Mr. Wu's responsibility is to overlook the internal and external
security affairs of the Company. Mr. Wu has been working with various government
departments for a long time and will be extremely valuable when the Company
expands its footprints to
unfamiliar provinces.
Chris Wong was appointed as
the Vice President of Commerce and is responsible for formulating business
strategies for the Company and to position our overall business development.
From May 2008 to August 2008, Mr. Wong was employed as the business analysis for
CY Foundation Group Ltd. (a company listed on the main board of the Hong Kong
Stock Exchange (SEHK.1182)). From June 2006 to May 2008, Mr. Wong was
employed as the General Manager of Jupiter Entertainment Asia
Limited and he built and lead Shanghai online game team to deploy causal game,
online community operations, marketing, promotion and sales. He also worked with
the CEO in formulating strategic direction of the company, including developing
and implementing long term plans and strategies that are in alignment with the
company's values and culture. During May 2004 to Feb 2006, Mr. Wong worked for
Shanda Interactive Entertainment (NASDAQ:SNDA) as the personal assistant to the
Chairman and CEO. He is a consultant in the “Society of Industry Leader”
for Vista Research, a business of Standard & Poor’s. He has an MBA from
University of Bradford, England and is a member of the Institute for the
Management of Information Systems since. Mr. Wong has extensive online gaming
experience in the Greater China.
52
Calvin Lam is appointed as our
Vice President of Mobile Business & CEO of Viva Red Ltd since May 2010. Mr.
Lam has extensive experience in the internet and gaming industry. In 2007, he
joined CITIC Group to operate and manage its Online Entertainment business, and
established an Online Betting Exchange in Macau in 2008. Prior to CITIC, Mr. Lam
founded his own mobile gaming company in Shanghai – SOLUTE which is in the
business of integrating mobile games with TV shows, movies and online
games. SOLUTE was the top 3 service providers in Shanghai Mobile. In 2003,
SOLUTE was acquired by Shanda Network (a subsidiary of Shanda Interactive
Entertainment (NASDAQ:SNDA)) and Mr. Lam was appointed as the Division Manager
of the Mobile Division of Shanda from 2003 to 2006. Prior to his venture in the
gaming industry, Mr. Lam worked at Microsoft, Silicon Graphics and Software.com
where he was able to establish his solid management and sales experience dealing
with Telco companies.
The Board is responsible for oversight of the
management of the Company and providing strategic direction. It monitors
operational and financial performance, human resources policies and practices
and approves the Company's budgets and business plans. Our Board of Directors
plays a significant role in our risk oversight and it is also responsible for
overseeing the Company's risk management, financial reporting and compliance
framework. The Board of Directors makes all relevant Company decisions. As such,
it is important for us to have our Chief Executive Officer, Mr. Lawrence Cheung,
serve on the Board as he plays a key role in the risk oversight of the Company.
Our Vice President of Finance, Mr. Benjamin Chan also serves as a member of the
Board. As a smaller reporting company with a small board of directors, we
believe it is appropriate to have the involvement and input of all of our
directors in risk oversight matters.
The
Company plans to establish the following committees consisting solely
independent directors to provide oversight in the near future:
l An
audit committee which will be responsible for overseeing the accounting and
financial reporting processes of our company and audits of the financial
statements of our company, including the appointment, compensation and oversight
of the work of our independent auditors.
l A
compensation committee of the board of directors which will be responsible for
reviewing and making recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also administers
our incentive compensation plans and equity-based plans.
l A
nominating committee of the board of directors which will be responsible for the
assessment of the performance of the board, considering and making
recommendations to the board with respect to the nominations or elections of
directors and other governance issues. The nominating committee considers
diversity of opinion and experience when nominating directors.
Currently,
the above functions of the proposed committees are fulfilled by the Board
entirely.
CORPORATE
GOVERNANCE
Presently,
we are not required to comply with the director independence requirements of any
securities exchange. In determining whether our directors are independent,
however, we intend to comply with the rules of the New York Stock Exchange
Alternext Exchange, or the AMEX. The board of directors also will consult with
counsel to ensure that the board of director’s determinations are
consistent with those rules and all relevant securities and other laws and
regulations regarding the independence of directors, including those adopted
under the Sarbanes-Oxley Act of 2002 with respect to the independence of future
audit committee members. The AMEX listing standards define an “independent
director” generally as a person, other than an officer of a company, who does
not have a relationship with the company that would interfere with the
director’s exercise of independent judgment.
Currently
we do not satisfy the “independent director” requirements of the American Stock
Exchange, which requires that a majority of a company’s directors be
independent. Our board of directors intends to appoint additional members, each
of whom will satisfy such independence requirements.
53
EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
We strive
to provide our named executive officers with a competitive base salary that is
in-line with their roles and responsibilities when compared to peer companies of
comparable size in the same or similar locality.
54
We plan
to implement a more comprehensive compensation program appropriate for
executives of a public company, which takes into account other elements of
compensation, including without limitation, short and long term compensation,
cash and non-cash, and other equity-based compensation such as stock
options. We expect that such compensation programs shall be
comparative to our competitors in the industry and aimed to retain and attract
talented individuals.
Executive
Compensation
Pursuant
to a consulting agreement that we maintained with Venor, Inc., a consulting
company over which Mr. Stoppenhagan is a principal, we paid Venor $61,000,
$36,000 and $12,000 in 2007, 2008 and 2009, respectively as cash compensation
for Mr. Stoppenhagen’s services as our Interim President and Secretary;
additionally, Mr. Stoppenhagen received a $500 allowance per month for office
expenses. Mr. Stoppenhagan did not receive any other compensation - not in the
form of stock awards, stock options, or any other form.
Our
directors did not receive any other compensation – not in the form of stock
awards, stock options, or any other form.
SUMMARY
COMPENSATION TABLE
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity Incentive
Plan Compensation
Earnings ($)
|
Non-
qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Eric
Stoppenhagen
Interim
President
|
2009
|
$ | 14,000 | - | - | - | - | - | - | $ | 14,000 | (1) | ||||||||||||||||||||||
Eric
Stoppenhagen
Interim
President
|
2008
|
$ | 42,000 | - | - | - | - | - | - | $ | 42,000 | (1) |
|
(1)
|
Mr.
Stoppenhagen received $3,000 per month as cash compensation for his
services as our Interim President and Secretary; additionally, Mr.
Stoppenhagen received a $500 allowance per month for office expenses. His
office allowance is included in his compensation
amounts.
|
MoqiZone
Executive and Director Compensation Information
55
DIRECTOR
COMPENSATION
Name
|
Fees
Earned or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity Incentive
Plan Compensation
Ear n ings ($)
|
Non-
qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
Paul
Lu
|
$ | 3,833 | $ | 3,833 |
As of
December 31 2008, the total salary accrued for Lawrence Cheung was $183,333. As
MobiZone Hong Kong was still not revenue generating and was seeking financing,
Lawrence Cheung agreed to waive all their accrued salary prior to the
Financings for the benefit of the Investors of the Financings. No salary or any
other compensation was accrued for Mr. Chan in 2008.
As of
December 31, 2009, Mr. Lawrence Cheung is entitled to approximately $111,262 for
2009 and Mr. Lawrence Cheung has received approximately $52,154 and $59,108
remains unpaid. Mr. Benjamin Chan is entitled to $83,447 for 2009 and has
received $42,593 and $40,854 remains unpaid. The amounts that Messrs Lawrence
Cheung and Benjamin Chan are entitled to represent their respective
executive officer role as Chief Executive Office and VP of Finance. Paul Lu will
be paid approximately $1,900 per month as his director fees
only.
Grants
of Plan-Based Awards and Outstanding Equity Awards at Fiscal
Year-End
We did
not grant any options or awards to any of our named executive officers during
our last two completed fiscal years nor did any of our executive officers
exercise any such options or awards during such period.
Employment
Agreements
We do
not currently have any employment agreements with our executive officers, but
intend to enter into employment agreements at market rates as determined by the
board of directors and confidentiality agreements with our executive
officers.
Retirement/Resignation
Plans
We do
not have any plans or arrangements in place regarding the payment to any of our
executive officers following such person’s retirement or
resignation.
Director
Compensation
We
have not paid our directors fees in the past for attending scheduled and special
meetings of our board of directors. In the future, we may adopt a policy of
paying independent directors a fee for their attendance at board and committee
meetings. We reimburse each director for reasonable travel expenses related to
such director's attendance at board of directors and committee
meetings.
56
SUMMARY
COMPENSATION TABLE
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity Incentive
Plan Compensation
Earnings ($)
|
Non-
qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Lawrence
Cheung, CEO
|
2009
|
$ | 111,262 | - | - | - | - | - | - | $ |
111,262
|
(1) | ||||||||||||||||||||||
Lawrence
Cheung, CEO
|
2008
|
$ | 0 | - | - | - | - | - | - | $ | 0 | (2) | ||||||||||||||||||||||
Benjamin
Chan
|
2009
|
$ | 83,447 | - | - | - | - | - | - | $ | 83,447 | (3) | ||||||||||||||||||||||
Benjamin
Chan
|
2008
|
$ | 0 | $ | 0 | (4) |
(1)
|
Mr.
Lawrence Cheung is entitled to approximately $111,262 for 2009,
approximately $52,154 of which has been received and $59,108 remains
unpaid; Mr. Cheung agrees that such salary will not be paid to him until
the Company’s cash position improves. The amount that Mr. Cheung is
entitled to represents his executive officer role as Chief Executive
Office.
|
(2)
|
No
salary was paid in cash to the CEO Lawrence Cheung or any of the officers
and directors in 2008. Lawrence Cheung had accrued salary of $183,333 for
the fiscal year ended December 31, 2008, but all such outstanding salary
was waived before the
Financings.
|
(3)
|
Mr.
Benjamin Chan is entitled to $83,447 for 2009, $42,593 of which has been
received and $40,854 remains unpaid. Mr. Chan agrees that such salary
will not be paid to him until the Company’s cash position improves. The
amount that Mr. Chan is entitled to represents his executive officer role
as VP of Finance.
|
(4)
|
Mr.
Chan did not receive any compensation for
2008.
|
Grants
of Plan-Based Awards and Outstanding Equity Awards at Fiscal
Year-End
We did
not grant any options or awards to any of our named executive officers during
our last two completed fiscal years nor did any of our executive officers
exercise any such options or awards during such period.
Employment
Agreements
We do
not currently have any employment agreements with our executive officers, but
intend to enter into employment agreements at market rates as determined by the
board of directors and confidentiality agreements with our executive
officers.
Retirement/Resignation
Plans
We do
not have any plans or arrangements in place regarding the payment to any of our
executive officers following such person’s retirement or
resignation.
Compensation
of Directors
Only
Paul Lu was paid approximately $1,900 per month ($23,000 per annum) as his
director fees only, since he was appointed as a director on November 3,
2009.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently,
we have only two directors who also serve as our executive officers. We have not
yet designated any committees for our board of directors.
57
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of
October 14, 2010, we had a total of 13,695,724 shares of Common
Stock.
The
following table sets forth, as of October 14, 2010: (a) the names and addresses
of each beneficial owner of more than five percent (5%) of our Common Stock
known to us, the number of shares of Common Stock beneficially owned by each
such person, and the percent of our Common Stock so owned currently; and (b) the
names and addresses of each director, executive officer and significant
employee, the number of shares our Common Stock beneficially owned, and the
percentage of our Common Stock so owned, by each such person, and by all of our
directors and executive officers as a group. Each person has sole voting and
investment power with respect to the shares of our Common Stock, except as
otherwise indicated. Beneficial ownership consists of a direct interest in the
shares of Common Stock, except as otherwise indicated. Individual beneficial
ownership also includes shares of Common Stock that a person has the right to
acquire within 60 days from October 16, 2010.
58
The
Company also appointed Paul Lu to be our director with such appointment being
effective on November 3, 2009.
Unless
otherwise noted, the principal address of each of the directors, officers and
director nominee listed below is 7A-D Hong Kong Industrial Building, 444-452 Des
Voeux Road West, Hong Kong.
Name
|
Current Amount and
Nature of Beneficial
Ownership (1)
|
Current Percentage of
Outstanding Shares (1)
|
||||||
MKM
Opportunity Master Fund, Ltd (2)
|
1,272,286 | (3) | 8.88 | % | ||||
JSDWay
Digital Technology (Samoa) Co., Ltd. (4)
|
704,008 | 5.15 | % | |||||
Cheung
Chor Kiu Lawrence (Lawrence Cheung)
|
8,556,092 | (5) | 62.47 | % | ||||
Benjamin
Chan
|
- | - | ||||||
All
Directors, Executive Officers and Director Nominees after the Share
Exchange and after the Effective Date of this Schedule, As a
Group
|
8,740,242 | 63.95 | % |
1.
|
The
numbers are based on 13,695,724 shares of common stock outstanding. All
Percentages have been rounded up to the nearest one hundredth of one
percent and such percentage is based upon the amount of outstanding our
common stock. All share ownership figures include shares of our Common
Stock issuable upon securities convertible or exchangeable into shares of
our Common Stock within sixty (60) days of May 20, 2010, which are deemed
outstanding and beneficially owned by such person for purposes of
computing his or her percentage ownership, but not for purposes of
computing the percentage ownership of any other
person.
|
2.
|
The
person having voting, dispositive or investment powers over MKM is David
Skirloff, Authorized Agent. The address of Strategic is c/o Trestle
Holdings, Inc., P.O. Box 4198, Newport Beach,
CA 92661-4198.
|
3.
|
This
number represents: (i) 507,559 shares of Common Stock consisting of
494,530 shares of Common Stock MKM held in Trestle prior the Share
Exchange after the effect of the Reverse Split,5,601 shares of common
stock paid as interest upon conversion of the note into Series A preferred
stock and 7,428 common shares paid as the December 31, 2009 series A
dividend payment; (ii) an aggregate of 277,778 shares of common stock
underlying the Series A Preferred Stock pursuant to the Financing; (iii)
an aggregate of 111,100 shares of common stock underlying the Series C
Preferred Stock that MKM shall receive upon conversion of the Series
C Preferred Stock pursuant to the Financing; (iv) 138,889 shares of common
stock underlying the Series A Warrants; (v) 138,889 shares of common stock
underlying the Series B Warrants; (vi) 55,550 shares of common stock
underlying the Series C Warrants; and (vii) 55,550 shares of common stock
underlying the Series D
Warrants.
|
4.
|
The
person having voting, dispositive or investment powers over JSDWay Digital
Technology (Samoa) Co., Ltd. is JSDWay Digital Technology Company Limited,
a Taiwan incorporated corporation. The address of JSDWay is c/o Equity
Trust (Samoa) Limited, Equity Trust Chambers, P.O. Box 3269, Apia,
Samoa.
|
JSDWAY
Digital Technology Co. LTD purchased a 36% interest in the Company for $166,011
with cash to maintain its percentage ownership at 43% after the capitalization
of $294,860 payable to Lawrence Cheung in 2007, described above. At the same
time, The Company purchased computer software for $157,000 from JSDWAY Digital
Technology Co. LTD for our platform technology development.LTD. The transaction
from the Company’s point of view was carried out on an arms-length
basis.
59
The
seller of the software has responsibilities to test the software and process
one-month maintenance. As there was no significant abnormal operation, the
company agreed to accept the purchase. The seller is also responsible for
providing the company with the after-sell service for 3 years and guaranteeing
that to its knowledge, none of the Licensee Licensed Intellectual Property
infringes upon or misappropriates the rights of any Third Party nor is
infringed upon or misappropriated by any Third Party or its
property.
5.
|
After
the Share Exchange, 900,000 of Mr. Cheung’s shares are subject to an
escrow agreement pursuant to which such shares are to be released back to
Mr. Cheung and/or to the Investors of the Financing, based upon certain
performance targets as set forth in the Share Exchange Agreement dated
March 15, 2009. In addition, Of the 8,556,092 shares that Mr. Cheung
currently owns, he plans to transfer 5,235,883 shares to the following
persons, subject to such persons achieving certain performance
requirements under agreements to be entered into during the 1st or 2nd
quarter of 2010. These proposed transfers and the prospective transferees
are as follows: approximately 656,646 shares to Goodstand Holdings, Ltd.,
a company currently owned by Mr. Cheung, the shares of which will be
transferred to Sam Huang – the Company’s Chief Technical Officer;
approximately 1,553,770 shares to Cheerman Investment Ltd., a company
currently owned by Mr. Cheung, the shares of which will be transferred to
Zhang Xin Hua – the Company’s General Manager; approximately 1,477,483
shares to Bright Clever Holdings Ltd., a company currently owned by Mr.
Cheung, the shares of which will be transferred to Zheng Wei;
approximately 1,147,984 shares to Zenia Limited, and these shares will be
transferred to Benjamin Chan – Vice President of Finance; approximately
400,000 shares to Calvin Ng– Vice President of System Control; After these
transfers, Mr. Cheung will continue to own approximately 2,420,209
shares.
|
60
Change
in the Control
As a
result of consummation of the transactions under the Share Exchange Agreement,
Trestle owns 100% of the capital stock of MoqiZone Cayman which, in turn owns
100% of the capital stock of MoqiZone Hong Kong and its wholly-owned Shanghai
MoqiZone subsidiary. The former stockholders of MoqiZone Cayman own an aggregate
of 10,743,000 shares of Trestle common stock or approximately 95% of its
outstanding Trestle common stock after giving effect to the transactions
under the Share Exchange Agreements but before giving effect to dilution
resulting from the conversion by investors of any of their shares of Series A
Preferred Stock or the exercise of any of the Warrants issued and to be issued
in the MoqiZone Hong Kong Unit offering.
We have
not entered into any transactions during the last two fiscal years with any
director, executive officer, director nominee, 5% or more shareholder, nor have
we entered into transactions with any member of the immediate families of the
foregoing person (include spouse, parents, children, siblings, and in-laws) nor
is any such transaction proposed, except as follows:
JSDWAY
Digital Technology Co. LTD purchased a 36% interest in the Company for $166,011
with cash to maintain its percentage ownership at 43% after the capitalization
of $294,860 payable to Lawrence Cheung in 2007, described above. At the same
time, The Company purchased computer software for $157,000 from JSDWAY Digital
Technology Co. LTD for our platform technology development.LTD. The
transaction from the Company’s point of view was carried out on an arms-length
basis.
The
seller of the software has responsibilities to test the software and process
one-month maintenance. As there was no significant abnormal operation, the
company agreed to accept the purchase. The seller is also responsible for
providing the company with the after-sell service for 3 years and guaranteeing
that to its knowledge, none of the Licensee Licensed Intellectual Property
infringes upon or misappropriates the rights of any Third Party nor is infringed
upon or misappropriated by any Third Party or its property.
The
Performance Shares
Under the
terms of the Share Exchange Agreement, all of the shareholders of MoqiZone
Cayman who are members of our senior management have deposited in an escrow
account an aggregate of 900 shares of the Series B Preferred Stock (which were
automatically converted into 900,000 shares of Trestle common
stock). These shares (the “Performance Shares”) will be delivered to
the management group shareholders only in the event that the Company achieves
certain performance targets over the twelve consecutive months commencing July
1, 2009 and ending June 30, 2010 (the “Measuring Period”). If
$6,000,000 or more raised in the Financing, then: (i) in the event that we
realize at least $19,171,000 of reported revenues by the end of the twelve
month Measuring Period, all of the Performance Shares will be released to the
management group, and (ii) in the event that less than $19,171,000 of reported
revenues are realized by the end of the twelve month Measuring Period, a
pro-rata portion of the Performance Shares shall be distributed to the
purchasers of the Units offered hereby, based upon 0.2347 Performance Shares for
each USD $1.00 that the actual revenues achieved by the end of the Measuring
Period shall be less than the $19,171,000 Target Revenue, or 45,000 Performance
Shares for each 1% of $19,171,000 ($191,710) by which the actual revenues shall
be less than the Target Revenue. If less than $6,000,000 is raised in the
Financing, then: (i) in the event that we realize at least $10,450,000 (the
“Lower Target Revenue”) in reported revenues by the end of the twelve month
Measuring Period, all of the Performance Shares will be released to the
management group and (ii) in the event that less than $10,450,000 of reported
revenues are realized by the end of the twelve month Measuring Period, a
pro-rata portion of the Performance Shares shall be distributed to the
purchasers of the Units offered hereby, based upon 0.4306 Performance Shares for
each USD $1.00 that the actual revenues achieved by the end of the Measuring
Period shall be less than the Lower Target Revenue, or 45,000 Performance Shares
for each 1% of $10,450,000 ($104,500) by which the actual revenues shall be less
than the Lower Target Revenue.
Any
Performance Shares distributable from the escrow will be made within ten
business days after the final calculations with respect to the distribution of
the Performance Shares are made, and will be distributed to investors in the
MoqiZone Hong Kong financing on a pro-rata basis by which the amount of
securities purchased by each investor bears to the total amount of securities
sold. Performance Shares not distributed to investors will be returned to the
management group at the end of the Measuring Period.
61
The
Performance Warrants
Certain
of the members of our senior management will be, under the terms of the Share
Exchange Agreement, entitled to receive three year warrants to purchase 900,000
shares of Trestle common stock, exercisable at $1.80 per share (the “Performance
Warrants”) in the event that our audited net income as of the date that is 24
months after the Final Closing of the Financing shall equal or exceed
$21,560,000, assuming that we complete this Offering with the sale of at least
600 Units for $6,000,000. If however, we complete the Offering for an
aggregate amount less than $6,000,000, than such persons shall only be entitled
to receive the Performance Warrants in the event that our audited net income as
of the date that is 24 months after the Final Closing of the Financing equals or
exceeds $5,000,000.
We are in
the process of creating a list of senior executive who will be entitled to the
Performance Warrants.
Lock
Up Agreements
All of
the Trestle shares of common stock to be owned by the management shareholders
will be restricted from public or private sale for a period of twelve months
following the effective date of the registration statement registering the
Series B Conversion Shares and Warrant Shares for resale under the Securities
Act of 1933, as amended; following such twelve month period, management
shall be allowed to sell up to 1/12 of their holdings each month for the next
twelve months.
Computer
Software Purchase
Prior to
the JSDWAY’s purchase of 36% interest for $ 166,011 and the capitalization of
$294,860 payable to Lawrence Cheng in 2007, Lawrence Cheng owned 57% interest of
MoqiZone Hong Kong, while JSDWAY Digital Technology Co. LTD owned 43% interest.
After the $294,860 payable to Lawrence Cheung was capitalized, the interest that
Lawrence Cheung held increased accordingly. In order to maintain the ownership
percentage at the same level, which was 43%, JSDWAY Digital Technology Co. LTD
put in additional paid-in capital for $166,011 with cash, which represents 36%
interest in the Company. This purchase of software was carried out on a cash
basis.
At the
same time of JSDWAY putting in additional paid-in capital, The Company purchased
computer software for $157,000 in cash from JSDWAY Digital Technology Co. LTD
for our platform technology development.
The
management has adopted FASB ASC 850-10-50-5 to determine whether the transaction
was not carried out on an arms-length basis. According to FASB ASC 850-10-50-5,
transactions involving related parties cannot be presumed to be carried out on
an arm's-length basis, as the requisite conditions of competitive, free-market
dealings may not exist and representations about transactions with related
parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm's-length
transactions unless such representations can be substantiated. Therefore, the
transaction from the Company’s point of view was not carried out on an
arms-length basis.
During
the reverse merger on June 1, 2009, JSDWay sold all of its 43% interest at
Mobizone Hong Kong to Lawrence at nominal value in exchange of Lawrence
transferring the Series B Preferred Shares to JSDWay. After further negotiation,
the parties have agreed that JSDWay will get 1 million common shares of the
total common shares converted from the Series B Preferred Stock, of which
704,008 shares have been issued to JSDWay, and the other 295,992 shares are
currently held under Mr. Cheung’s name and will be released to JSDWay, upon
JSDWay bringing in contents and supporting the gaming market development.
WiMAX
License Fee
Pursuant
to the Cooperation Agreement dated September 25, 2009 between Shanghai MoqiZone,
Tai Ji and SZ Alar, we are required to pay Tai Ji:-
(a)
|
an
annual license fees of RMB 2,500,000 for Year 2008, RMB 3,000,000 for Year
2009 and thereafter; and the 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
|
(b)
|
Tai
Ji will further collect a usage fee of RMB 20,000 per year per radio base
station.
|
Tai Ji
Chairman Zheng Wei and General Manager Zhang Xin Hua are co-founders of the
Company and Zheng Wei was one of the shareholders of SZ Alar whilst Zhang
Xin Hua is one of the directors of Shanghai MoqiZone, and as such they fall
within the definition of related party. MoqiZone is required to use the spectrum
in order to provide its MoqiZone WiMAX Network service. As of October 14, 2010,
the Company has already paid the 2008 and 2009 license fees. We are not required
to pay any usage fee for the radio base station as they are still on trial
stage.
62
Review,
Approval and Ratification of Related Party Transactions
Given our
small size and limited financial resources, we do not have formal policies and
procedures for the review, approval or ratification of transactions, such as
those described above, with our executive officers, directors and significant
shareholders. However, we intend that such transactions will, on a going-forward
basis, be subject to the review, approval or ratification of our board of
directors, or an appropriate committee thereof.
Director
Independence
Presently,
we are not required to comply with the director independence requirements of any
securities exchange. In determining whether our directors are
independent, however, we intend to comply with the rules of the NYSE
Amex. The board of directors also will consult with counsel to ensure
that the Board of Director’s determinations are consistent with those rules
and all relevant securities and other laws and regulations regarding the
independence of directors, including those adopted under the Sarbanes-Oxley Act
of 2002 with respect to the independence of future audit committee
members. The NYSE AMEX listing standards define an “independent
director” generally as a person, other than an officer of a company, who does
not have a relationship with the company that would interfere with the
director’s exercise of independent judgment.
Currently
we do not satisfy the “independent director” requirements of the NYSE Amex,
which requires that a majority of a company’s directors be
independent. Our board of directors intends to appoint additional
members, each of whom will satisfy such independence
requirements.
63
None.
ITEM
12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
None.
Item
12A. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, officers or controlling
persons in the successful defense of any action, suit or proceeding) is asserted
by that director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether that indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of that issue.
64
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other
Expenses of Issuance and Distribution.
The
following table sets forth estimated expenses we expect to incur in connection
with the sale of the shares being registered. All such expenses are estimated
except for the SEC and FINRA registration fees.
$
|
931
|
|||
FINRA
registration fee
|
$
|
6,450
|
||
Printing
expenses
|
$
|
5,000
|
||
Fees
and expenses of counsel for the Company
|
$
|
30,000
|
||
Fees
and expenses of accountants for Company
|
$
|
10,000
|
||
Blue
Sky fees and expenses
|
$
|
5,000
|
||
Miscellaneous
|
$
|
12,224
|
||
*Total
|
$
|
69,605
|
Item 14. Indemnification
of Directors and Officers.
Article
VIII of our Articles of Incorporation provide that no director or officer of the
corporation past, present or future, shall be personally liable to the
corporation or any of its shareholders for damages for breach of fiduciary duty
as a director or officer, except for liability (1) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (3) under Section 174 of the Delaware General
Corporation Law; or (4) for any transaction from which the director derived an
improper personal benefit.
Our
bylaws provide for the indemnification of our directors and officers, as to
those liabilities and on those terms and conditions as appropriate.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
On
June 1, 2009, we completed a private financing of $4,345,000, with 10 accredited
investors, which includes $300,000 that we received in October 2008 pursuant to
a Convertible Loan Agreement with two accredited investors (the “Convertible
Notes”); the Convertible Notes automatically convert into the same securities
issued to the investors pursuant to the June 1 Financing. The net
proceeds from the June 1 Financing were approximately $3,637,000.
The securities offered in this Financing were sold pursuant to a Securities
Purchase Agreement (the “Purchase Agreement”) by and among the Company, MoqiZone
Cayman, Lawrence Cheung, MKM Capital Opportunity Fund Ltd. and each of the
purchasers thereto (the “Investors”). Pursuant to the Purchase
Agreement, we issued a total of approximately 435 Units of securities
consisting of (a) $10,000 of 8% exchangeable convertible notes of MoqiZone 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
Trestle 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 435 Units, we
issued an aggregate of approximately $4,345,000 of Notes, Class A Warrants to
purchase up to 1,206,948 shares of common stock and Class B Warrants to purchase
up to 1,206,948 shares of common stock will be issued.
On August
11, 2009, we completed a private equity financing of $900,000 with 3accredited
investors (the “Second Financing”). Net proceeds from the Second
Financing are approximately $800,000. Pursuant to the Second
Financing, we issued a total of approximately 90 Units of securities consisting
of (a) $10,000 of 8% exchangeable convertible notes of MoqiZone 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
Trestle 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 Second Financing contain the same terms and conditions as the
securities issued to the Investors of the First Financing.
In
connection with the Financings, we granted warrants to purchase up to 582,779
warrants to purchase up to 582,779 shares of our common stock 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
65
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, for $1,956,000, 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
Financings were consummated pursuant to the exemption from the registration
provisions of the Securities Act of 1933, as amended, provided by Section 4(2)
of the Securities Act, Rule 506 of Regulation D and/or Regulation S promulgated
thereunder since the investors’ were either foreign or accredited.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
The
following exhibits are filed as part of this registration
statement:
Exhibit No.
|
Document
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference to Exhibit 3.1 of the
registration statement filed on May 21, 2010).
|
|
5.1
|
Opinion
of Counsel
|
|
10.1
|
Form
of Securities Purchase Agreement (Incorporated by reference to exhibit
10.1 of the Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.2
|
Form
of 8% Exchangeable Note issued under Securities Exchange Agreement
(Incorporated by reference to exhibit 10.2 of the Current Report on Form
8-K that we filed on June 3, 2009).
|
|
10.3
|
Form
of Registration Rights Agreement (Incorporated by reference to exhibit
10.3 of the Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.4
|
Form
of Certificate of Designation of the Relative Rights and Preferences of
the Series A Convertible Preferred Stock (Incorporated by reference to
exhibit 10.4 of the Current Report on Form 8-K that we filed on June 3,
2009).
|
|
|
||
10.5
|
Form
of Certificate of Designation of the Relative Rights and Preferences of
the Series B Convertible Preferred Stock (Incorporated by reference to
exhibit 10.5 of the Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.6
|
Form
of Series A Warrant (Incorporated by reference to exhibit 10.6 of the
Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.7
|
Form
of Series B Warrant (Incorporated by reference to exhibit 10.7 of the
Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.8
|
Form
of Pledge Agreement (Incorporated by reference to exhibit 10.8 of the
Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.9
|
Form
of Guaranty Agreement (Incorporated by reference to exhibit 10.9 of the
Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.10
|
Form
of Share Escrow Agreement (Incorporated by reference to exhibit 10.11 of
the Current Report on Form 8-K that we filed on June 3,
2009).
|
|
10.11
|
Form
of Exclusive Business Cooperation Agreement (Incorporated by reference to
exhibit 10.1 of the Current Report on Form 8-K that we filed on September
25, 2009).
|
|
10.12
|
Form
of Share Pledge Agreement among Shanghai MoqiZone,SZ Alar and the
Shareholder of SZ Alar (Incorporated by reference to Exhibit 10.2 of the
Current Report on form 8-K that we filed on September 25,
2009).
|
|
10.13
|
Form
of Exclusive Option Agreement among Shanghai MoqiZone, SZ Alar and the
Shareholder of SZ Alar (Incorporated by reference to Exhibit 10.3 of the
Current Report on form 8-K that we filed on September 25,
2009).
|
|
10.14
|
Form
of Loan Agreement among MobiZone Hong Kong,SZ Alar and Shareholder of SZ
Alar (Incorporated by reference to Exhibit 10.4 of the Current Report on
form 8-K that we filed on September 25, 2009).
|
|
10.15
|
Form
of Irrevocable Power of Attorney between Shanghai MoqiZone and the
Shareholder of SZ Alar (Incorporated by reference to Exhibit 10.4 of the
Current Report on form 8-K that we filed on September 25,
2009).
|
66
10.16
|
Netcafe
Aquisition Agreement, including English translation (Incorporated by
reference to Exhibit 10.12 of the Registration Statement filed on May
21,2010).
|
|
10.17
|
Form
of Form of Securities Purchase Agreement (Incorporated by reference to
Exhibit 10.1 of the current report on Form 8-K filed on September 1.
2010).
|
|
10.18
|
Form
of Registration Rights Agreement (Incorporated by reference to Exhibit
10.2 of the current report on Form 8-K filed on September 1.
2010).
|
|
10.19
|
Form
of Convertible Note (Incorporated by reference to Exhibit 10.3 of the
current report on Form 8-K filed on September 1.
2010).
|
|
10.20
|
Form
Series E Warrant (Incorporated by reference to Exhibit 10.4 of the current
report on Form 8-K filed on September 1. 2010).
|
|
10.21
|
Form
of Series F Warrant (Incorporated by reference to Exhibit 105 of the
current report on Form 8-K filed on September 1.
2010).
|
|
10.22
|
Copies
of the Company’s Shanghai, Shenzhen and Hong Kong Lease Agreements,
including the English translation of the Hong Kong Lease Incorporated
by Reference to Exhibit 10.22 of the Registration Statement Pre-Effective
Amendment 5 filed on October 15, 2010).
|
|
23.1
|
Consent
of Paritz & Paritz
|
|
21.1
|
List
of Subsidiaries of the Registrant – Moqizone Holding Corporation
(Incorporated by Reference to Exhibit 21.2 of the Registration Statement
Pre-Effective Amendment 5 filed on October 15,
2010).
|
|
99.1
|
Press
Release (Incorporated by Reference to Exhibit 99.1 on the Current Report
8-K that we filed on August 11,
2009).
|
67
ITEM
17. UNDERTAKINGS
The
undersigned registrant hereby undertakes to:
(1)
File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities Act if,
in the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement,
and
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3)
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4)
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
68
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has and authorized this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, on October 14,
2010.
Moqizone
Holding Corporation
|
||
By:
|
/s/
Lawrence Cheung
|
|
Lawrence
Cheung
Chief
Executive Officer
|
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 was signed by the following persons in the
capacities and on the dates stated.
/s/ Lawrence
Cheung
|
Dated: October
14, 2010
|
|
Lawrence
Cheung
|
||
Chief Executive Officer, Acting Chief Financial Officer,
|
||
Acting
Principal Accounting Officer and Chairman
|
||
/s/ Benjamin
Chan
|
Dated: October
14, 2010
|
|
Benjamin
Chan, Director
|
||
/s/ Paul
Lu
|
Dated: October
14, 2010
|
|
Paul
Lu, Director
|
69