SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
o QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2010
or
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
MoqiZone Holding Corporation.
(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.) |
7A-D Hong Kong Industrial Building
444-452 Des Voeux Road West,
Hong Kong,
(Address of principal executive offices, including zip code)
Registrant’s phone number, including area code +852 3443 4383
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer | o | Accelerated Filer | o | |
Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes o No x
MOQIZONE HOLDING CORPORATION.
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. Financial Statements | 3 | |
Consolidated Balance Sheets at March 31, 2010 (unaudited) and December 31, 2009 | 3 | |
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three ended March 31, 2010 and 2009 and from inception through March 31, 2010 | 4 | |
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 and from inception through March 31, 2010 | 5 | |
Unaudited notes to Consolidated Financial Statements | 6 | |
Item 2. Management’s Discussion and Analysis or Plan of Operation | 15 | |
Item 3. Quantitative and Qualitative Disclosure About Market Risk | 21 | |
Item 4T. Controls and Procedures | 21 | |
PART II – OTHER INFORMATION | ||
Item 1. Legal Proceedings | 22 | |
22 | ||
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds | 22 | |
Item 3. Defaults Upon Senior Securities | 22 | |
Item 4. Removed and Reserved | 22 | |
Item 5. Other Information | 22 | |
Item 6. Exhibits | 23 |
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ITEM I — 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 | ||||||
Liquidated 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 | ||||||
Beneficial 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
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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
4
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
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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.
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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 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 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:
· | 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. |
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· | 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.
(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.
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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.
(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.
NOTE 4. DUE FROM/TO RELATED PARTIES
The amounts that are due from/to the directors, officers of the Company and the companies being controlled by them, are non-interest bearing and are due on demand.
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:
l | all of the issued and outstanding Notes have been, by their terms be deemed cancelled; |
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l | 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; |
l | 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.
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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%. 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.
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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.
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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.
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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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. In addition, our consolidated financial statements and the financial data included in this interim report reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” in our Current Report on Form 10-K filed with SEC on April 15, 2010. Readers are cautioned not to place undue reliance on these forward-looking statements.
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, we provide internet cafes our existing product and services which include a content management software and WiMAX CEP installation. Our content management software, Netcafe Farmer, allows internet cafés to automatically update their client-end software on a real time basis for all their computers. Internet cafes installed with WiMAX CPE will form a wireless virtual proprietary network. 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 our business development and rollout of our services. To date, we have successfully deployed a few WiMAX test sites in Beijing, Suzhou and Shenzhen and have begun to align ourselves with local internet café associations in order to accelerate our business penetration. Although we commenced our WiMAX CPE build out program in Chengdu on December 15, 2009, our existing penetration of internet cafes is still low. As of March 31, 2010, over 30 internet cafés in Chengdu have been installed with our WiMAX CPE. Additionally, our gateway program to access our gaming content delivery platform (www.53mq.com) has been installed in approximately 100 internet cafes and approximately 700 Internet Cafés are installed with Netcafe Farmer.
Netcafe Farmer and 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, enabling profit sharing through the universal Moqizone Prepaid Card. We believe that this will effectively discourage price wars on prepaid game cards at retail, 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 POS 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.
As of March 31, 2010, we have not generated any revenue from selling prepaid cards and have only generated limited revenue from Netcafe Farmer. Although we launched more than 30 WiMAX connected internet cafes in our test cities in 2009, 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.
As of March 31, 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 with 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 recently established a 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 aiming to publish the game for beta testing in June and commence official commercial launch and issue the Tiger Tang 2 game package in www.53mq.com in August. We are also in the discussion with Win’s to develop online games for Win’s other movies as well as publishing those games.
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. We are also aiming at building a multiple gaming platform servicing other game users using other devices such as mobile phones. These business objectives will require the build out of our WiMAX Network, continuous technological development of our portals including but not limited to www.moqizone.com and www.53mq.com, and also aggregation of online game content. We will not be able to generate significant revenue until we have a basic foundation for all of these components.
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Liquidity and Financial Resources.
As at March 31, 2010, we had a cash balance of approximately $1,784,000. 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. These warrants, which if fully exercised, could have raised approximately an additional $434,710.
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.
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 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.
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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.
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 SASC 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.
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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.
Results of Operations
For the three months ended March 31, 2010 and 2009
Three months ended March 31, | 2010 | 2009 | ||||||
Revenues | $ | 1,585 | $ | - | ||||
Cost of revenues | $ | - | $ | - | ||||
Gross profit | $ | 1,585 | $ | - | ||||
Research & development expenses | $ | 95,698 | $ | - | ||||
Depreciation and amortization expense | $ | 43,032 | $ | |||||
Selling, general and administrative expenses | $ | 459,957 | $ | 405,289 | ||||
Other income (expense) | $ | 19,262,024 | $ | 176 | ||||
Income taxes | $ | - | $ | - | ||||
Net profit (Loss) | $ | 18,664,922 | $ | (405,113 | ) | |||
Foreign adjustment | $ | 30,970 | $ | - | ||||
Comprehensive income (Loss) | $ | 18,695,892 | $ | (405,113 | ) |
Revenues. Total revenues for the three months ended March 31, 2010 were $1,585, which was derived from Netcafe Farmer by Shanghai Moqizone. The Company is only in the initial stage of launching its business plan of providing its service to internet cafés. During the reporting period, the Company is aggregating content and expanding our infrastructure. There is no revenue from the sales of prepaid card yet and there is only little revenue generated from the provision of Netcafe Farmer. Management believes that as we expand our number of internet cafes and increase the amount of gaming contents, including the official launch of Tiger Tang 2 Game in approximately June 2010, we will be able to generate revenue from our prepaid game cards. Furthermore, 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.
Research and Development Expenses. The research and development expenses were approximately $96,000 for the three months ended March 31, 2010 as compared to no research and development expenses during the three months ended March 31, 2009. This is an increase of roughly $96,000. This increase was mainly attributable to the development of the Tiger Tang 2 Game. As of March 31, 2010, we had approximately 10 technical staff working on the development of Tiger Tang 2 and are also outsourcing certain development to third party developers.
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Selling, General and Administrative Expenses. The Selling, General and Administrative expenses were approximately $460,000 and $405,000 for the three months ending March 31, 2010 and 2009, respectively. This is an increase of approximately $55,000 or 13.6%. Our general and administrative expenses for the three months ended March 31, 2010 and 2009 were attributable to costs associated with establishing, building, and supporting our infrastructure and included various consulting costs, legal and accounting fees and other professional fees related to establishing our business. As of March 31, 2010, we have had approximately 5 technical related staff in charge of base station build out, network deployment, software development, and data centre management. We also have a team of approximately 5 people specialized in product evaluation and product integration. We have around 8 people on sales and marketing. Our Finance and Administrative department has 4 people. Senior management now consists of 10 people. Our Chengdu office has 6 staff and MobiZone Hong Kong has 3 staff in its Hong Kong office. We anticipate that these costs will rise as we continue to expand our operations. However, we believe that any increase will begin to be offset by our expected revenue growth.
Interest income/expense. Interest income for the three months ended March 31, 2010 was approximately $120 as compared to interest income of approximately $180 for the same period in 2009. This decrease of roughly $60 was mainly due to the foreign exchange translation.
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, the Company recognized a gain of approximately $19,300,000 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 at March 31, 2009. No such loss was recorded for the three months ended March 31, 2009.
Liquidated damages for ineffective registration statement. On June 1 and August 11, 2009, the Company entered into Registration Rights Agreement with the 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 March 31, 2010, the company had accrued $45,800 of liquated damages. The company is currently planning to speak with the Series A shareholders concerning an adjustment and/or cancelation of these damages. No such loss was recorded for the three months ended March 31, 2009.
Gain/Loss on foreign currency translation. Loss on foreign currency transactions was roughly $5,000 for the three months ended March 31, 2010. No such loss was recorded for the three months ended March 31, 2009.
As a result, other income for the three months ended March 31, 2009 was approximately $19,200,000 as compared to other income of approximately $180 for the three months ended March 31, 2009. This increase was primarily attributed to gain associated with the change in fair value of the recently issued warrants.
Net income. Net income for the three months ended March 31, 2010, was approximately $18,665,000. This net income was substantially due to the gain of approximately $19,300,000 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. Without this non-cash gain, the company would have had a net loss of roughly $635,000 for the period. Aside from gains or losses associated with changes in the fair value of our warrants, , Management believes that our net income may actually decrease until we begin to gain traction and start producing revenue from our prepaid gaming cards and the delivery of digital entertainment via our network. Net loss was roughly $405,000 for the three months ended March 31, 2009. This net loss was substantially due to the Selling, General and Administrative expenses described above. The net loss was also mainly attributable to the consolidation of company operation in January 2009 and to the increase of staffing.
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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 in the consolidated statement of shareholders’ equity and amounted to a gain of approximately $31,000 at March 31, 2010 and nil for the three months ended march 31, 2009.
Comprehensive Gain/Loss. As a result of the above, the comprehensive gain, which adds the currency adjustment to Net Income, was roughly $18,696,000 for the three months ended March 31, 2010. For the three months ended March 31, 2009, the comprehensive loss was roughly $405,000.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarter ended March 31, 2010, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective in giving us reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
Management has identified a significant deficiency; a significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. Currently we do not have sufficient in-house expertise in US GAAP reporting. Instead, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that no such material errors or weaknesses exist. To remediate this situation, we are seeking to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. We plan to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.
We believe that the remediation measures we are taking, if effectively implemented and maintained, will remediate the significant deficiency discussed above.
Except as described above, there have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
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Item 1. Legal Proceedings
We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us other than those that have been disclosed here. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
Item 1A. Risk Factors
Based on our status as a smaller reporting company, we are not required to provide this information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 (“Unit”). Each Unit consists of (i) one (1) share of the Company’s Series C Convertible Preferred Stock, par value $0.001 per share , convertible into one share of the Company’s common stock, par value $0.001 per share (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 3 years.
In connection with this financing, we paid cash compensation to Tripoint Global Equities, the 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.
The net proceeds of the 2010 financing will be mainly used as general working capital and for the WiMAX Network deployment.
For a more complete description of the terms of the Units, the Series C Preferred Stock, Series C Warrants and Series D Warrant, please see the Form 8-K that we filed on March 31, 2010.
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 there under.
Item 3. Defaults Upon Senior Securities
Item 4. Removed and Reserved
Item 5. Other Information
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report.
Exhibit No. | Document | |
31.1 | Certification of Chief Executive Officer required by Rule 13a-14/15d-14(a) under the Exchange Act | |
31.2 | Certification of Acting Chief Accounting Officer required by Rule 13a-14/15d-14(a) under the Exchange Act | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Acting Chief Accounting 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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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.
MOQIZONE HOLDING CORPORATION. | ||
Date: May 14, 2010 | /s/ Lawrence Cheung | |
Name: Lawrence Cheung | ||
Title: Chief Executive Officer | ||
And Acting Chief Accounting Officer |
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