SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2009
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23000
Trestle Holdings, Inc.
(Exact name of registrant issuer as specified in its charter)
Delaware | 95-4217605 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
PO Box 4198, Newport Beach, California 92661 | ||
(Address of principal executive offices, including zip code) | ||
Registrant’s phone number, including area code (949) 903-0468 | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ý NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer o Smaller reporting company ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at May 12, 2009 | |
Common Stock, $.001 par value | 143,257,214 |
TRESTLE HOLDINGS, INC.
INDEX
PART I | FINANCIAL INFORMATION | |
ITEM 1. | FINANCIAL STATEMENTS: | |
Balance Sheets — March 31, 2009 (Unaudited) and December 31, 2008 | ||
Statements of Operations (Unaudited) — Quarters ended March 31, 2009 and 2008 | ||
Statements of Cash Flows (Unaudited) — Quarters ended March 31, 2009 and 2008 | ||
Notes to Financial Statements | ||
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
ITEM 4. | CONTROLS AND PROCEDURES | |
PART II | OTHER INFORMATION | |
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PART I - FINANCIAL INFORMATION
TRESTLE HOLDINGS, INC.
March 31 | December 31 | |||||||
2009 | 2008 | |||||||
ASSETS | (Unaudited) | |||||||
CURRENT ASSETS | ||||||||
Cash | $ | — | $ | 1,000 | ||||
Prepaid expenses and other current assets | 4,000 | 4,000 | ||||||
TOTAL CURRENT ASSETS | 4,000 | 5,000 | ||||||
TOTAL ASSETS | $ | 4,000 | $ | 5,000 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 23,000 | $ | 7,000 | ||||
Note payable | 126,000 | 82,000 | ||||||
TOTAL CURRENT LIABILITIES | 149,000 | 89,000 | ||||||
STOCKHOLDERS' DEFICIT: | ||||||||
Preferred stock, 5,000,000 shares authorized, zero shares issued and outstanding at March 31, 2008 and December 31, 2008 | — | — | ||||||
Common stock, $.001 par value, 1,500,000,000 shares authorized, 143,257,214 issued and outstanding at March 31, 2009 and December 31, 2008 | 143,000 | 143,000 | ||||||
Additional paid in capital | 52,382,000 | 52,382,000 | ||||||
Accumulated deficit | (52,670,000 | ) | (52,609,000 | ) | ||||
Total stockholders' deficit | -145,000 | -84,000 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 4,000 | $ | 5,000 |
See accompanying notes to the financial statements.
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TRESTLE HOLDINGS, INC.
(UNAUDITED)
Quarter Ended March 31, | ||||||||
2009 | 2008 | |||||||
REVENUES | $ | — | $ | — | ||||
COST OF SALES | — | — | ||||||
GROSS PROFIT | — | — | ||||||
OPERATING EXPENSES | ||||||||
Selling, general and administrative expenses | 59,000 | 34,000 | ||||||
Total operating expenses | 59,000 | 34,000 | ||||||
LOSS FROM OPERATIONS | (59,000 | ) | (34,000 | ) | ||||
Interest expense and other, net | (2,000 | ) | — | |||||
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | (61,000 | ) | $ | (34,000 | ) | ||
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted | 143,257,214 | 143,257,214 | ||||||
See accompanying notes to the financial statements.
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TRESTLE HOLDINGS, INC.
(UNAUDITED)
Three months Ended March 31, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Loss from operations | $ | (61,000 | ) | $ | (34,000 | ) | ||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses and other assets | — | 1,000 | ||||||
Accounts payable | 16,000 | 5,000 | ||||||
Net cash used in operating activities | (45,000 | ) | (28,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net proceeds from issuance of note payable | 44,000 | — | ||||||
Net cash provided by financing activities | 44,000 | — | ||||||
NET (DECREASE) IN CASH | (1,000 | ) | (28,000 | ) | ||||
CASH, Beginning of period | 1,000 | 31,000 | ||||||
CASH, End of period | $ | — | $ | 3,000 |
Three months Ended March 31, | ||||||||
2009 | 2008 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash received/(paid) during the period for: | ||||||||
Interest | $ | — | $ | — | ||||
Income taxes | $ | — | $ | — | ||||
See accompanying notes to the financial statements.
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TRESTLE HOLDINGS, INC.
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Current Operations and Background — Trestle Holdings, Inc. ("Trestle Holdings", "Company", “We” or “Our”) seeks suitable candidates for a business combination with a private company. We previously developed and sold digital tissue imaging and telemedicine applications linking dispersed users and data primarily in the healthcare and pharmaceutical markets.
On March 23, 2009, we entered into a share exchange agreement with Moqizone Holdings Limited, a Cayman Island corporation, the shareholders of Moqizone Cayman (the “Moqizone Shareholder”), and our principal stockholders. Pursuant to the Agreement, we will acquire all of the issued and outstanding capital stock of Moqizone Cayman in exchange for the issuance of 10,743 shares of our series B convertible preferred stock to the Moqizone Shareholders. Each share of Series B Preferred Stock has a liquidation preference of $1,000 per share and upon consummation of a one-for-203.55 reverse stock split of our common stock, all 10,743 shares of Series B Preferred Stock will convert into that number of shares of our common stock equals 95% of our fully diluted common stock (issued as of the closing of the Agreement, prior to the issuance of any other securities).
900 of the 10,743 shares of Series B Preferred Stock to be issued to the Moqizone Shareholders, shall be held in escrow. Depending upon whether we raise at least $6,000,000 from a new financing transaction or less than $6,000,000 from a new financing transaction, all of the shares held in escrow shall be released to the owners thereof if Moqizone Cayman achieves a target revenue of at least $19,171,000 or $10,450,000, respectively, for the twelve month measuring period ending March 31, 2010 If Moqizone Cayman achieves revenue less than the applicable Target Revenue for the Measuring Period, a pro rata portion of the Escrowed Shares will be released to certain investors of the financing transaction at the rate based upon 0.2347 Escrowed Shares for each $1.00 that actual revenues for the Measuring Period shall be less than the applicable Target Revenue. If we raise less than $6,000,000 from a new financing transaction and Moqizone Cayman achieves revenue less than the applicable Target Revenue for the Measuring Period, a pro rata portion of the Escrowed Shares will be released to certain investors of the financing transaction at the rate based upon 0.4306 Escrowed Shares for each $1.00 that actual revenues for the Measuring Period shall be less than the applicable Target Revenue. Escrowed Shares which are not delivered to investors will be returned to the original owners of the Escrowed Shares.
The closing of the transactions contemplated by the Agreement, is conditioned upon the satisfaction of customary conditions, as well as:
· | the delivery of audited financial statement of Moqizone Cayman for the two years ended December 31, 2008; |
· | the resignation of our current officer and directors and the appointment of officers and directors designated by Moqizone Cayman; and |
· | our receipt of at least $4,000,000 from a new financing transaction. |
Accordingly, the closing of the Share Exchange has not yet occurred. If the conditions to be satisfied are not fully met in a timely fashion, the Share Exchange may not occur.
Promptly following the closing of our contemplated financing transaction, we have agreed to take all actions necessary to (i) effectuate the Reverse Stock Split described above, (ii) amend our certificate of incorporation to authorize 100,000,000 shares of common stock and 10,000,000 shares of preferred stock (including the Series B Preferred Stock), (iii) provide for indemnification of the officers and directors of the Company and Moqizone Cayman and its subsidiaries, and (iv) change our corporate name to Moqizone Holding Corporation.
As a result of the Reverse Stock Split and the conversion of the Series B Preferred Stock, we will have an aggregate of 11,446,794 shares of common stock outstanding, prior to the issuance of any shares sold in financing transactions. In addition, if our consolidated 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 our common stock at an exercise price of $1.80 per share, exercisable for a period of three years. Further, we intend to establish a stock incentive plan which authorizes the issuance of up to 1,500,000 additional shares of common stock, as authorized by a compensation committee of the board of directors.
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The private equity financing described herein shall be made 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 and Rule 506 of Regulation D promulgated thereunder. The securities to be issued will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The foregoing information has been disclosed herein as it is material to the Share Exchange Agreement and should not be construed as an offer to sell or solicitation of an offer to buy our securities.
On May 5, 2007, W-Net, Inc., a California corporation (“W-Net”), purchased 135,000,000 shares of our Common Stock, par value $0.001 per share (the “Common Shares”), for an aggregate purchase price of $350,000, or $0.00259 per share.
On September 22, 2006, we consummated the sale of substantially all of its assets to Clarient, Inc. for $3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the cancellation of the loans from Clarient and assumption of approximately $154,000 of liabilities.
Going Concern — The accompanying financial statements have been prepared assuming that we will continue as a going concern. We have suffered recurring losses from operations since our inception and have an accumulated deficit of $52,670,000 at March 31, 2009. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should we be unable to continue our existence. The recovery of our assets is dependent upon continued operations of the Company.
In addition, our recovery is dependent upon future events, the outcome of which is undetermined. We intend to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful.
Basis of Presentation — The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
The unaudited financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2008 included in our Annual Report on Form 10-K. The results of the three month ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.
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Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents — We consider investments with original maturities of 90 days or less to be cash equivalents.
Income Taxes —We record income taxes in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” The standard requires, among other provisions, an asset and liability approach to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Stock-Based Compensation— On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which was issued in December 2004. SFAS 123(R) revises SFAS No. 123, “Accounting for Stock Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. SFAS 123(R) requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award. SFAS 123(R) also requires measurement of the cost of employee services received in exchange for an award. SFAS 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” to require the excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows. The Company adopted SFAS 123(R) using the modified prospective method. Accordingly, prior period amounts have not been restated. Under this application, the Company recorded the cumulative effect of compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption and recorded compensation expense for all awards granted after the date of adoption.
SFAS 123(R) provides that income tax effects of share-based payments are recognized in the financial statements for those awards that will normally result in tax deduction under existing law. Under current U.S. federal tax law, the Company would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement. The Company does not recognize a tax benefit for compensation expense related to incentive stock options unless the underlying shares are disposed in a disqualifying disposition.
Net Income (Loss) Per Share — The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Common equivalent shares related to stock options and warrants have been excluded from the computation of basic and diluted earnings per share for the quarters ended March 31, 2009 and 2008 because their effect is anti-dilutive.
Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company maintains its cash with high credit quality financial institutions; at times, such balances with any one financial institution may exceed FDIC insured limits.
Financial Instruments — Our financial instruments consist of cash, accounts payable, and notes payable. The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities.
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Recently Issued Accounting Pronouncements —
In March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows.
FASB Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important. The adoption of SFAS 161 has not had a significant impact on our results of operations or financial position.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 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”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP 142-3 has not had a significant impact on our financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard did not have a material impact on our financial position and results of operations.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 has not had a significant impact on our financial position and results of operations.
In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-5 has not had a significant impact on our financial position and results of operations.
In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 08-3 has not had a significant impact on our financial position and results of operations.
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NOTE 2 – NOTE PAYABLE.
On March 26, 2008, we entered into a Revolving Promissory Note (the “Note”) with W-Net, Inc., a California corporation (“W-Net”). Under the terms of the Note, W-Net agreed to advance to the Company, from time to time and at the request of the Company, amounts up to $100,000. Interest shall accrue from the date of any advances on any principal amount withdrawn, and on accrued and unpaid interest thereon, at the rate of six percent (6%) per annum, compounded annually.
On August 20, 2008, W-Net, Inc. assigned to MKM all of its right, privilege, benefit and remedies in, to and under that certain Revolving Promissory Note dated March 26, 2008 and expiring on June 30, 2009, executed and issued by the Registrant for the benefit of W-Net, Inc. As of March 31, 2009 we have accrued $1,395 of interest.
On September 8, 2008, we entered into a Note with MKM. Under the terms of the Note, MKM agreed to advance to the Company, from time to time and at the request of the Company, amounts up to an aggregate of $100,000 until June 30, 2009. All advances shall be paid on or before June 30, 2009 and interest shall accrue from the date of any advances on any principal amount withdrawn, and on accrued and unpaid interest thereon, at the rate of six percent (6%) per annum, compounded annually. As of March 31, 2009 we have accrued $1,016 of interest.
NOTE 3 - WARRANTS
During the quarter ended March 31, 2009, we did not issue any warrants and 9,300 warrants expired. We have 102,500 warrants issued and outstanding.
Balance at December 31, 2008 | 111,800 | |||
Expired | 9,300 | |||
Balance at March 31, 2009 | 102,500 |
NOTE 4 - STOCK OPTION PLANS
The Company's employee stock option plans (the "Plans") provide for the grant of non-statutory or incentive stock options to the Company's employees, officers, directors or consultants. The Compensation Committee of our board of directors administers the Plans, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option. Stock options granted pursuant to the terms of the Plans 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). The term of the options granted under the Plans cannot be greater than 10 years; 5 years for a 10% or more stockholder. Options vest at varying rates generally over five years. An aggregate of 1,855,000 shares were reserved under the Plans, of which 1,815,000 shares were available for future grant at March 31, 2009.
The Company elected to adopt the detailed method provided in SFAS No. 123(R) for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the income tax effects of employee stock-based compensation awards that are outstanding upon the adoption of SFAS No. 123(R).
The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a 7-year constant maturity. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. The expected life of an option grant is based on management’s estimate. The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
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The following summarizes pricing and term information for options issued to employees and directors which are outstanding as of March 31, 2009:
Options Outstanding | Options Exercisable | ||||||||||||||
Range of Exercise Prices | Number Outstanding at March 31, 2009 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable at March 31, 2009 | Weighted Average Exercise Price | ||||||||||
$67.50 | 10,000 | 0.50 | $67.50 | 10,000 | 67.50 |
NOTE 5 – EARNINGS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for the quarters ended March 31, 2009 and 2008 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
2009 | 2008 | |||||||
Weighted average common stock equivalents: | ||||||||
Stock options | 10,000 | 10,000 | ||||||
Warrants | 102,500 | 112,000 |
NOTE 6 – CONCENTRATION OF CREDIT RISK
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ITEM 2 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2008 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements included elsewhere in this Form 10-Q.
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this report.
Overview
We seek suitable candidates for a business combination with a private company. We previously developed and sold digital tissue imaging and telemedicine applications linking dispersed users and data primarily in the healthcare and pharmaceutical markets.
On March 23, 2009, we entered into a share exchange agreement with Moqizone Holdings Limited, a Cayman Island corporation, Moqizone’s Shareholders, and our principal stockholders. Pursuant to the Agreement, we will acquire all of the issued and outstanding capital stock of Moqizone Cayman in exchange for the issuance of 10,743 shares of our series B convertible preferred stockto the Moqizone Shareholders. Each share of Series B Preferred Stock has a liquidation preference of $1,000 per share and upon consummation of a one-for-203.55 reverse stock split of our common stock, all 10,743 shares of Series B Preferred Stock will automatically convert into that number of shares of our common stock that equals 95% of our fully diluted common stock (issued as of the closing of the Agreement, prior to the issuance of any other securities) .
900 of the 10,743 shares of Series B Preferred Stock to be issued to the Moqizone Shareholders, shall be held in escrow. Depending upon whether we raise at least $6,000,000 from a new financing transaction or less than $6,000,000 from a new financing transaction, all of the shares held in escrow shall be released to the owners thereof if Moqizone Cayman achieves a target revenue of at least $19,171,000 or $10,450,000, respectively, for the twelve month measuring period ending March 31, 2010 If Moqizone Cayman achieves revenue less than the applicable Target Revenue for the Measuring Period, a pro rata portion of the Escrowed Shares will be released to certain investors of the financing transaction at the rate based upon 0.2347 Escrowed Shares for each $1.00 that actual revenues for the Measuring Period shall be less than the applicable Target Revenue. If we raise less than $6,000,000 from a new financing transaction and Moqizone Cayman achieves revenue less than the applicable Target Revenue for the Measuring Period, a pro rata portion of the Escrowed Shares will be released to certain investors of the financing transaction at the rate based upon 0.4306 Escrowed Shares for each $1.00 that actual revenues for the Measuring Period shall be less than the applicable Target Revenue. Escrowed Shares which are not delivered to investors will be returned to the original owners of the Escrowed Shares.
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The closing of the transactions contemplated by the Agreement, is conditioned upon the satisfaction of customary conditions, as well as:
· | the delivery of audited financial statement of Moqizone Cayman for the two years ended December 31, 2008; |
· | the resignation of our current officer and directors and the appointment of officers and directors designated by Moqizone Cayman; and |
· | our receipt of at least $4,000,000 from a new financing transaction. |
Accordingly, the closing of the Share Exchange has not yet occurred. If the conditions to be satisfied are not fully met in a timely fashion, the Share Exchange may not occur.
Promptly following the closing of our contemplated financing transaction, we have agreed to take all actions necessary to (i) effectuate the Reverse Stock Split described above, (ii) amend our certificate of incorporation to authorize 100,000,000 shares of common stock and 10,000,000 shares of preferred stock (including the Series B Preferred Stock), (iii) provide for indemnification of the officers and directors of the Company and Moqizone Cayman and its subsidiaries, and (iv) change our corporate name to Moqizone Holding Corporation.
As a result of the Reverse Stock Split and the conversion of the Series B Preferred Stock, we will have an aggregate of 11,446,794 shares of common stock outstanding, prior to the issuance of any shares sold in financing transactions. In addition, if our consolidated 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 our common stock at an exercise price of $1.80 per share, exercisable for a period of three years. Further, we intend to establish a stock incentive plan which authorizes the issuance of up to 1,500,000 additional shares of common stock, as authorized by a compensation committee of the board of directors.
The private equity financing described herein shall be made 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 and Rule 506 of Regulation D promulgated thereunder. The securities to be issued will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The foregoing information has been disclosed herein as it is material to the Share Exchange Agreement and should not be construed as an offer to sell or solicitation of an offer to buy our securities.
On August 20, 2008, pursuant to a Share Purchase Agreement dated August 19, 2008, by and between Holdings, the Registrant’s former majority stockholder, and MKM, Holdings sold to MKM 114,605,772 shares of the Registrant’s common stock, for aggregate cash consideration equal to $475,000. Also on August 20, 2008, Holdings repurchased 33.33% of its Membership Interests from Strategic, in exchange for 20,394,228 shares of the Registrant’s common stock and cash consideration equal to $75,507. Also on August 20, 2008, W-Net, Inc. assigned to MKM all of its right, privilege, benefit and remedies in, to and under that certain Revolving Promissory Note dated March 26, 2008 and expiring on September 30, 2008, executed and issued by the Registrant for the benefit of W-Net, Inc. As a result of the foregoing transactions, Holdings no longer holds any shares of the Registrant. Also as a result of the foregoing transactions, Holdings became wholly-owned by W-Net, Inc., a company that is wholly-owned by David Weiner, a member of the Registrant’s Board of Directors. Pursuant to the terms of the Share Purchase Agreement and effective as of the closing of the transactions contemplated by the Share Purchase Agreement, MKM owns 114,605,772 shares of the Company’s common stock out of a total of 143,257,214 shares issued and outstanding, or approximately 80%.
On May 5, 2007, W-Net, purchased 135,000,000 shares of our Common Shares, for an aggregate purchase price of $350,000, or $0.00259 per share.
On September 22, 2006, we consummated the sale of substantially all of its assets to Clarient, Inc. for $3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the cancellation of the loans from Clarient and assumption of approximately $154,000 of liabilities.
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Critical Accounting Policies and Estimates
We account for our business acquisitions under the purchase method of accounting in accordance with SFAS 141, "Business Combinations." The total cost of acquisitions is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair value of the tangible net assets acquired is recorded as intangibles. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items.
We assess the potential impairment of long-lived assets and identifiable intangibles under the guidance of SFAS 144, "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.
We base out 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.
For the Quarters Ended March 31, 2009 and 2008
Results of Operations
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $59,000 and $34,000 for the quarters ended March 31, 2009 and 2008, respectively. The increased expenses in 2009 resulted from legal fees associated with our transaction with the contemplated transaction with Moqizone Holdings Limited.
Interest Expense and Other
Interest expense and other, net was $2,000 and zero for the quarters ended March 31, 2009 and 2008, respectively, an increase in expense of $2,000. The increase is principally due to increased debt.
Liquidity and Capital Resources
Net cash used in operating activities was $45,000 and $28,000 in the three months ended March 31, 2009 and 2008, respectively.
Net cash provided by financing activities was $44,000 and zero in the three months ended March 31, 2009 and 2008, respectively. The increase of $44,000 in cash provided by financing activities was primarily due to the Note of $44,000 from MKM.
We suffered recurring losses from operations and have an accumulated deficit of $52,670,000 at March 31, 2009. Currently, we are a non-operating public company. We seek suitable candidates for a business combination with a private company. In the event we use all of our cash resources, MKM has indicated the willingness to loan us funds at the prevailing market rate until such business combination is consummated.
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Inflation and Seasonality
Inflation has not been material to us during the past five years. Seasonality has not been material to us.
Recent Accounting Pronouncements
In March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows.
FASB Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important. The adoption of SFAS 161 has not had a significant impact on our results of operations or financial position.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 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”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP 142-3 has not had a significant impact on our financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard did not have a material impact on our financial position and results of operations.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 has not had a significant impact on our financial position and results of operations.
In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-5 has not had a significant impact on our financial position and results of operations.
In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 08-3 has not had a significant impact on our financial position and results of operations.
Off-Balance Sheet Arrangements – We have no off-balance sheet arrangements.
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Risk Factors
The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.
We have a history of net losses and may never achieve or maintain profitability.
We have a history of incurring losses from operations. As of March 31, 2009, we had an accumulated deficit of approximately $52,670,000, of which approximately $52,193,000 was incurred prior to the sale of our tissue imaging and telemedicine business lines to Clarient. We anticipate that our existing cash and cash equivalents will be sufficient to fund our business needs. Our ability to continue may prove more expensive than we currently anticipate and we may incur significant additional costs and expenses in connection with seeking a suitable transaction. In the event we use all of our cash resources, MKM has indicated the willingness to loan us funds at the prevailing market rate until such business combination is consummated.
We are a non-operating company seeking a suitable transaction and may not find a suitable candidate or transaction.
Since the sale of substantially all of our assets to Clarient, we are a non-operating company and are seeking a suitable transaction with a private company; however, we may not find a suitable candidate or transaction. If we are unable to consummate a suitable transaction we will be forced to liquidate and dissolve which will take three years to complete and may result in our distributing less cash to our shareholders. Additionally, we will be spending cash during the winding down and may not have enough cash to distribute to our shareholders.
We cannot assure you of the exact amount or timing of any future distribution to our stockholders.
The precise nature, amount and timing of any future distribution to our stockholders will depend on and could be delayed by, among other things, the opportunities for a private company transaction, administrative and tax filings during or associated with our seeking a private company transaction or any subsequent dissolution, potential claim settlements with creditors, and unexpected or greater than expected operating costs associated with any potential private company transaction or any subsequent liquidation. Furthermore, we cannot provide any assurances that we will actually make any distributions. Any amounts we actually distribute to our stockholders may be less than the price or prices at which our common stock has recently traded or may trade in the future.
We will continue to incur claims, liabilities and expenses that will reduce the amount available for distribution to stockholders.
Claims, liabilities and expenses incurred while seeking a private company transaction or any subsequent dissolution, such as legal, accounting and consulting fees and miscellaneous office expenses, will reduce the amount of assets available for future distribution to stockholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash at all, to our stockholders.
We will continue to incur the expenses of complying with public company reporting requirements.
We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome.
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In the event of liquidation, our Board of Directors may at any time turn management of the liquidation over to a third party, and our directors may resign from our board at that time.
If we are unable to find or consummate a suitable private company transaction, our directors may at any time turn our management over to a third party to commence or complete the liquidation of our remaining assets and distribute the available proceeds to our stockholders, and our directors may resign from our board at that time. If management is turned over to a third party and our directors resign from our board, the third party would have sole control over the liquidation process, including the sale or distribution of any remaining assets.
If we are deemed to be an investment company, we may be subject to substantial regulation that would cause us to incur additional expenses and reduce the amount of assets available for distribution.
If we invest our cash and/or cash equivalents in investment securities, we may be subject to regulation under the Investment Company Act of 1940. If we are deemed to be an investment company under the Investment Company Act because of our investment securities holdings, we must register as an investment company under the Investment Company Act. As a registered investment company, we would be subject to the further regulatory oversight of the Division of Investment Management of the SEC, and our activities would be subject to substantial regulation under the Investment Company Act. Compliance with these regulations would cause us to incur additional expenses, which would reduce the amount of assets available for distribution to our stockholders. To avoid these compliance costs, we intend to invest our cash proceeds in money market funds and government securities, which are exempt from the Investment Company Act but which currently provide a very modest return.
If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, in the event of dissolution, our stockholders could be held liable for payment to our creditors of each such stockholder’s pro rata share of amounts owed to the creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.
In the event of dissolution or a distribution of substantially all our assets, pursuant to the Delaware General Corporation Law, we will continue to exist for three years after the dissolution became effective or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and defending suits against us and enabling us gradually to close our business, to dispose of our property, to discharge our liabilities and to distribute to our stockholders any remaining assets. Under the Delaware General Corporation Law, in the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities during this three-year period, each stockholder could be held liable for payment to our creditors of such stockholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such stockholder.
However, the liability of any stockholder would be limited to the amounts previously received by such stockholder from us (and from any liquidating trust or trusts) in the dissolution. Accordingly, in such event a stockholder could be required to return all distributions previously made to such stockholder. In such event, a stockholder could receive nothing from us under the plan of dissolution. Moreover, in the event a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. There can be no assurance that any contingency reserve established by us will be adequate to cover any expenses and liabilities.
Our auditors have expressed a going concern opinion.
Primarily as a result of our recurring losses and our lack of liquidity, we received a report from our independent auditors that includes an explanatory paragraph describing the substantial uncertainty as to our ability to continue as a going concern for the year ended December 31, 2008.
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Any future sale of a substantial number of shares of our common stock could depress the trading price of our common stock, lower our value and make it more difficult for us to pursue or consummate a private company transaction.
Any sale of a substantial number of shares of our common stock (or the prospect of sales) may have the effect of depressing the trading price of our common stock. In addition, these sales could lower our value and make it more difficult for us to engage in a private company transaction. Further, the timing of the sale of the shares of our common stock may occur at a time when we would otherwise be able to engage in a private company transaction on terms more favorable to us.
Our stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market's adverse reaction to volatility.
Other factors that could cause such volatility may include, among other things:
· | announcements concerning our strategy; |
· | litigation; and |
· | general market conditions. |
Because our common stock is considered a "penny stock" any investment in our common stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is currently traded on the OTC Bulletin Board and is considered a "penny stock." The OTC Bulletin Board is generally regarded as a less efficient trading market than the NASDAQ Capital Market.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market. There is no assurance our common stock will be quoted on NASDAQ or the NYSE or listed on any exchange, even if eligible.
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We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize the issuance of 1,500,000,000 shares of common stock and 5,000,000 shares of preferred stock. The common stock and the preferred stock can be issued by, and the terms of the preferred stock, including dividend rights, voting rights, liquidation preference and conversion rights can generally be determined by, our board of directors without stockholder approval. Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common stock and preferred stock, in the event that buyers can be found therefor. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of our Company held by the public stockholders.
A smaller reporting company is not required to provide the information required by this Item.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our interim President, who serves as our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our interim President reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rule 240.13a-15(e) or 15d-15(e)) of the Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon this evaluation, our interim President concluded that, as of the end of such period, our disclosure controls and procedures are effective as of the end of the quarter covered by this Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes in the Company’s internal control over financial reporting that occurred during the first quarter of the year ended December 31, 2009 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 6. | Exhibits | ||
31 | Certification of President pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | Certification of the Company’s Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRESTLE HOLDINGS, INC. | ||
Date: May 12, 2009 | /s/ ERIC STOPPENHAGEN | |
Name: Eric Stoppenhagen | ||
Title: Interim President | ||
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EXHIBIT INDEX
Exhibit | Description | |
31 | Certification of President pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of the Company’s Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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