Prospectus Filed Pursuant to Rule 424

Filed Pursuant to Rule 424b(4)
Registration No. 333-170707

 

7,250,000 American Depositary Shares

Representing

58,000,000 Common Shares

 

Sky-mobi Limited

 

 

 

 

 

This is Sky-mobi Limited’s initial public offering. We are offering 6,125,000 American depositary shares, or ADSs, and the selling shareholders named in this prospectus are offering an additional 1,125,000 ADSs. Each ADS represents eight common shares of par value $0.00005 per share of Sky-mobi Limited. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

Prior to this offering, there has been no public market for our ADSs or common shares. The initial public offering price of our ADSs is $8.00 per ADS.

 

We have received approval for listing the ADSs on the NASDAQ Global Market under the symbol “MOBI.”

 

 

 

 

 

Investing in our ADSs involves risks.  See “Risk Factors” beginning on page 15.

 

Neither the United States Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

 

 

 

The underwriters have an option to purchase up to 918,750 additional ADSs from us and an additional 168,750 ADSs from the selling shareholders at the initial public offering price less the underwriting discount to cover over-allotments of ADSs.

 

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on December 15, 2010.

 

 

 

 

Citi

 

 

The date of this prospectus is December 9, 2010

 

TABLE OF CONTENTS

 

 

 

 

You should rely only on the information contained in this prospectus or any free writing prospectus filed with the Securities and Exchange Commission in connection with this offering. We and the selling shareholder have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus or any filed free writing prospectus. We and the selling shareholders are offering to sell, and seeking offers to buy, our ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or any filed free writing prospectus is accurate only as of its date, regardless of the time of its delivery or any sale of our ADSs.

 

We have not taken any action to permit a public offering of our ADSs outside the United States or to permit the possession or distribution of this prospectus or any filed free writing prospectus outside the United States. Persons outside the United States who came into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of our ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

 

Until January 3, 2011 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

PROSPECTUS SUMMARY

	•	users , especially those of younger age with modest income, who constitute the majority of China’s mobile phone user base. Maopao enables our users, who have a strong desire for social interaction, acceptance and entertainment, to enjoy handsets with more entertainment functions, social networking, mobile social games and a wider selection and higher quality of applications and content at attractive price points, often after a free trial;
	•	handset companies , including handset manufacturers and independent design houses. These handset companies pre-install Maopao, which provides users with a standardized interface to download and use mobile applications and content. We work closely with handset companies to optimize the performance of Maopao on each of their handset models and enhance user experience. As of September 30, 2010, we had entered into cooperation agreements with over 440 handset companies to pre-install Maopao;
	•	content providers , including application developers and content title owners. Through Maopao, their applications and content can be delivered to thousands of handset models without extensive customization reaching hundreds of millions of potential users. We had entered into agreements with over 230 content providers as of September 30, 2010 to provide a variety of applications and content, ranging from single-user applications and popular mobile social games to social network applications that appeal to Chinese users. We provide our standard software development kits free of charge to content providers and provide technological support to simplify their development process and accelerate their time-to-market; and
	•	payment service providers , including mobile service providers and other payment processing agents. We primarily collect sales proceeds from mobile service providers who utilize mobile network operators’ billing channels to collect payment for users’ purchases from our Maopao application store and other mobile services that are recorded on a user’s phone bills. We also work with independent payment processing agents to collect sales proceeds through a variety of payment channels, including pre-paid phone cards, pre-paid game cards, bank debit cards, wire-transfers, Alipay and others. As of September 30, 2010, we had entered into agreements with approximately 100 mobile service providers in China and overseas and 10 independent payment processing agents.

	•	leading mobile application store and fast-growing mobile community in China;
	•	innovative business model and a central position in the mobile application ecosystem;
	•	diverse portfolio of popular and high-quality content;
	•	differentiated user-oriented operations enabling outstanding user experience;
	•	strong technological expertise and research and development capabilities; and
	•	experienced management team with proven track record.

	•	establish a strong consumer brand among handset users;
	•	further increase user activity and monetize our large user base;
	•	capitalize on the growth of smart phone market;
	•	increase usage of third-party payment and collection system;
	•	maintain and extend technological leadership;
	•	further increase the installed base of Maopao; and
	•	expand overseas user base to strengthen our business and revenues.

	•	our limited operating history;
	•	measures introduced by the PRC government and mobile network operators aimed at mobile applications-related services;

	•	our ability to maintain cooperation relationships with handset companies, content providers and payment service providers;
	•	our dependence on mobile service providers, and ultimately mobile network operators, for the collection of a substantial majority of our revenues;
	•	billing and transmission failures, which are often beyond our control;
	•	our ability to compete effectively; and
	•	our ability to capture opportunities in the expected growth of the smart phone market.

(1)		Sequoia Capital China II, L.P., Sequoia Capital China Principals Fund II, L.P. and Sequoia Capital China Partners Fund II, L.P., together, the Sequoia Funds, collectively own 50,000,000 Series A preferred shares and 5,000,000 common shares.
(2)		Hangzhou Mijia Technologies Co., Ltd., or Mijia, is one of our SPEs in China and is currently 46.4% owned by Mr. Michael Tao Song, our founder, chairman and chief executive officer, 23.2% owned by Mr. Li Ou, our chief technology officer, 9.28% owned by Mr. Yan Tang, our terminal technology director, 0.87% owned by Mr. Qing Yan, our vice president, and the remaining 20.25% owned by seven of our employees.
(3)		Hangzhou Sky Network Technologies Co., Ltd., or Hangzhou Sky, is one of our SPEs in China and is currently 80% owned by Mijia and 20% owned by Ms. Qinyi Zhu, wife of Mr. Michael Tao Song.
(4)		Hangzhou Fanyi Technologies Co., Ltd., or Fanyi, is one of our SPEs in China and is currently 75% owned by Mr. Michael Tao Song and 25% owned by Mr. Tao Yang, an employee of an affiliate of the Sequoia Funds.
(5)		Shenzhen Heisha Technologies Co., Ltd. is currently 65% owned by Fanyi and 35% owned by an independent third party.

	•	“we,” “us,” “our company,” “our” or “Sky-mobi” refers to Sky-mobi Limited, a Cayman Islands company, its predecessor entities, subsidiaries and consolidated special purpose entities, or SPEs, controlled by Sky-mobi Limited;
	•	“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong and Macau;
	•	“shares” or “common shares” refers to our common shares, par value $0.00005 per share;
	•	“preferred shares,” “convertible redeemable preferred shares,” or “Series A preferred shares” refers to our Series A convertible and redeemable preferred shares, par value $0.00005 per share;
	•	“ADRs” refers to the American depositary receipts, which, if issued, evidence our ADSs;
	•	“ADSs” refers to our American depositary shares, each of which represents eight common shares;
	•	all references to “RMB” or “Renminbi” are to the legal currency of China; and all references to “$,” “US$” and “U.S. dollars” are to the legal currency of the United States;
	•	mobile application store is a platform that allows users of mobile phones to browse and download applications and content. The mobile application store can either be pre-installed or downloaded over-the-air from a website. Applications and content provided by the mobile application store can be developed either in-house or by third-party developers. The mobile application store generates revenues by selling applications and content to mobile phone users, who pay through mobile network operators or other third-party payment providers for the usage.
	•	mobile service providers are payment service providers who utilize mobile network operators’ billing channels pursuant to their agreements with mobile network operators;
	•	the number of user visits to Maopao refers to the number of visits to our servers for browsing content on the menu of the Maopao application store;
	•	the number of downloads of application and content titles on Maopao refers to the number of requests made by our mobile users for downloading a particular application or a content title, or for authorization to access to a specified feature of a particular application or a content title from Maopao. There may be multiple download requests made by a user for an application depending on the complexity of the application and whether interruptions occurred during the downloading process;
	•	when calculating number of users of Maopao, we count an individual who uses a particular handset with a particular SIM card to access Maopao as one user. Therefore, an individual who accesses Maopao through one handset with two SIM cards separately will be counted as two users, while an individual who accesses Maopao through two handsets using the same SIM card will also be counted as two users; and
	•	the number of active members of the Maopao Community refers to the number of registered members who logged on to the Maopao Community at least twice during a month for the relevant quarter.

		We intend to use the net proceeds we will receive from this offering as follows:
		• approximately $20 million for the enhancement and expansion of the Maopao application store to support further development of our Maopao Community and community-based applications and other content;
		• approximately $5 million for sales and marketing activities, including the promotion of our brand among users; and
		• the balance for general corporate purposes, including overseas expansions and research and development activities.
		See “Use of Proceeds” for additional information.
		We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
Lock-up		We, our directors and executive officers, and all of our existing shareholders as well as certain of our option holders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of, and not to announce an intention to sell, transfer or otherwise dispose of any ADSs, common shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting” for more information.
Listing		We have received approval for listing our ADSs on the NASDAQ Global Market under the symbol “MOBI.” The ADSs and shares will not be listed on any other exchange or traded on any other automated quotation system.
Depositary		Citibank, N.A.
Risk factors		See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our ADSs.

Consolidated Statements of Comprehensive Income Data

 

																		For the Six-Month Period
		For the Fiscal Year Ended March 31,																Ended September 30,
		2008				2009				2010								2009				2010
		(RMB)				(RMB)				(RMB)				($)				(RMB)				(RMB)				($)
		(In thousands)
Revenues:
Application store revenues			14,799				196,308				515,768				77,090				223,670				312,790				46,751
Maopao Community revenues through K Currency			—				—				3,578				535				—				19,549				2,922
Other revenues			3,795				10,931				24,912				3,723				16,469				4,342				649
Total revenues			18,594				207,239				544,258				81,348				240,139				336,681				50,322
Cost of revenues (1)			(9,681	)			(134,687	)			(354,351	)			(52,963	)			(150,242	)			(236,221	)			(35,307	)
Gross profit			8,913				72,552				189,907				28,385				89,897				100,460				15,015
Operating expenses:
Research and development expenses (1)			(1,283	)			(12,902	)			(26,900	)			(4,021	)			(11,103	)			(24,831	)			(3,711	)
Sales and marketing expenses (1)			(800	)			(5,293	)			(21,511	)			(3,215	)			(7,433	)			(19,677	)			(2,941	)
General and administration expenses (1)			(12,123	)			(16,725	)			(17,507	)			(2,617	)			(6,110	)			(43,142	)			(6,448	)
Total operating expenses			(14,206	)			(34,920	)			(65,918	)			(9,852	)			(24,646	)			(87,650	)			(13,100	)
Profit (loss) from operations			(5,293	)			37,632				123,989				18,532				65,251				12,810				1,915
Other gains			417				857				3,531				528				804				10,180				1,522
Finance costs			(1,329	)			—				(5,417	)			(810	)			—				(4,333	)			(648	)
Share of results of associates			—				(83	)			(1,255	)			(188	)			—				(2,735	)			(409	)
Loss on changes in fair value of convertible redeemable preferred shares			(4,156	)			(134,616	)			(290,135	)			(43,365	)			(160,913	)			(59,620	)			(8,911	)
Gain (loss) on changes in fair value of warrants			(239	)			(18,423	)			(7,548	)			(1,128	)			1,176				(4,051	)			(605	)
Loss on modification of convertible redeemable preferred shares			—				—				(44,439	)			(6,642	)			—				—				—
Loss before tax			(10,600	)			(114,633	)			(221,274	)			(33,073	)			(93,682	)			(47,749	)			(7,136	)
Income tax benefit (expense)			—				1,180				(8,528	)			(1,275	)			1,722				(5,817	)			(869	)

																		For the Six-Month Period
		For the Fiscal Year Ended March 31,																Ended September 30,
		2008				2009				2010								2009				2010
		(RMB)				(RMB)				(RMB)				($)				(RMB)				(RMB)				($)
		(In thousands)
Loss for the year/period			(10,600	)			(113,453	)			(229,802	)			(34,348	)			(91,960	)			(53,566	)			(8,005	)
Total comprehensive loss for the year/period			(10,600	)			(113,453	)			(229,802	)			(34,348	)			(91,960	)			(53,566	)			(8,005	)

(1)		Includes share-based compensation expenses as follows:

		For the Fiscal Year Ended March 31,																For the Six-Month Period Ended September 30,
		2008				2009				2010								2009				2010
		(RMB)				(RMB)				(RMB)				($)				(RMB)				(RMB)				($)
		(In thousands)
Cost of revenues			—				—				143				21				—				920				137
Research and development expenses			—				—				539				81				—				4,222				631
Sales and marketing expenses			—				—				576				86				—				2,094				313
General and administration expenses			8,964				5,421				2,348				351				1,272				16,553				2,474
Total			8,964				5,421				3,606				539				1,272				23,789				3,555

Non-IFRS Financial Data

 

The following table sets forth the reconciliation of adjusted profit for the year/period, a non-IFRS financial measure, from loss for the year/period, our most directly comparable financial measure presented in accordance with IFRS, for the periods indicated.

 

		For the Fiscal Year Ended March 31,																For the Six-Month Period Ended September 30,
		2008				2009				2010								2009				2010
		(RMB)				(RMB)				(RMB)				($)				(RMB)				(RMB)				($)
		(In thousands)
Loss for the year/period			(10,600	)			(113,453	)			(229,802	)			(34,348	)			(91,960	)			(53,566	)			(8,005	)
Share-based compensation expenses			8,964				5,421				3,606				539				1,272				23,789				3,555
Loss on changes in fair value of convertible redeemable preferred shares			4,156				134,616				290,135				43,365				160,913				59,620				8,911
Loss (gain) on changes in fair value of warrants			239				18,423				7,548				1,128				(1,176	)			4,051				605
Loss on modification of convertible redeemable preferred shares			—				—				44,439				6,642				—				—				—
Foreign exchange (gain) loss relating to loss on changes in fair value of convertible redeemable preferred shares and warrants			(1,943	)			(755	)			(256	)			(38	)			(194	)			(9,766	)			(1,460	)
Adjusted profit for the year/period (1)			816				44,252				115,670				17,288				68,855				24,128				3,606

(1)		We define adjusted profit for the period, a non-IFRS financial measure, as loss for the year/period excluding share-based compensation expenses, loss (gain) on changes in fair value of Series A preferred shares and warrants, loss on modification of convertible redeemable preferred shares and foreign exchange gain relating thereto. We review adjusted profit for the period together with loss for the year/period to obtain a better understanding of our operating performance. We also believe it is useful supplemental information for investors and analysts to assess our operating performance without the effect of non-cash share-based compensation expenses, loss (gain) on changes in fair value of Series A preferred shares and warrants, loss on modification of convertible redeemable preferred shares and foreign exchange gain relating thereto. However, the use of adjusted profit for the period has material limitations as an analytical tool. One of the limitations of using non-IFRS adjusted profit for the period is that it does not include all items that impact our profit (loss) for the period. In addition,

		because adjusted profit for the period is not calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted profit for the period in isolation from or as an alternative to profit (loss) or other financial measures prepared in accordance with IFRS.

Consolidated Statement of Financial Position Data

 

																										Pro Forma
		As of March 31,																As of September 30,								as of September 30,
		2008				2009				2010								2010								2010 (1)
		(RMB)				(RMB)				(RMB)				($)				(RMB)				($)				(RMB)				($)
		(In thousands)
Cash and cash equivalents			23,825				27,618				75,105				11,226				158,123				23,634				158,123				23,634
Total assets			30,419				102,324				292,491				43,717				348,706				52,119				348,706				52,119
Convertible redeemable preferred shares			27,690				161,584				451,491				67,482				501,903				75,017				—				—
Total liabilities			31,892				211,829				600,003				89,679				697,943				104,318				196,040				29,301
Total equity (deficit)			(1,473	)			(109,505	)			(307,512	)			(45,962	)			(349,237	)			(52,199	)			152,666				22,818
Total equity and liabilities			30,419				102,324				292,491				43,717				348,706				52,119				348,706				52,119

(1)		Pro forma consolidated statement of financial position data takes into account the automatic conversion of the 50,000,000 Series A preferred shares into 50,000,000 common shares at a conversion rate of one-to-one upon the completion of this offering.

		For the Fiscal Year Ended March 31,												For the Six-Month Period Ended September 30,
		2008				2009				2010				2009				2010
		(In millions)
New users added			10.2				75.9				220.5				88.4				172.3

		As of
		December 31,				March 31,				June 30,				September 30,
		2009				2010				2010				2010
		(In millions)
Number of registered members			12.5				20.4				31.4				44.6

		For the Fiscal Year Ended March 31,												For the Six-Month Period Ended September 30,
		2008				2009				2010				2009				2010
		(In millions)
Single-user application and content downloads
Single-player games			21.0				230.0				851.0				279.7				712.2
Multimedia applications and content titles			10.0				84.8				341.7				121.5				315.0
Other single-user applications			1.3				62.4				397.5				149.6				491.4
Total			32.3				377.2				1,590.2				550.8				1,518.6

		For the Three-Month Period Ended
		December 31,				March 31,				June 30,				September 30,
		2009				2010				2010				2010
		(In millions)
Application Store
User visits			1,384.3				1,721.9				2,204.2				3,319.6
Single-user application and content title downloads
Single-player games			261.2				310.2				351.1				361.1
Multimedia applications and content titles			91.7				128.4				153.0				162.0
Other single-user applications			109.4				138.5				215.0				276.4
Total single-user application and content title downloads			462.3				577.1				719.1				799.5
Maopao Community
Number of active members			3.4				5.5				7.7				9.4
Number of member log-ins			264.4				380.6				447.9				622.5

 

You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business and Our Industry

 

We have a limited operating history and the long-term potential of our business model is unproven, which makes it difficult to evaluate our business.

 

We commenced our business in 2005 and launched Maopao in December 2006. As such, we have a limited relevant operating history for you to evaluate our business, financial performance and prospects. Our business model is relatively new in China. We may not be able to achieve similar results or growth in future periods. Our business model may become obsolete due to development of other business models or technologies, such as mobile browser technologies. It is also difficult to evaluate our prospects, because we may not have sufficient experience to address the risks frequently encountered by early stage companies entering new and rapidly evolving markets, such as the mobile application store market. Although we generated gross profit in recent periods, we incurred losses for the fiscal years ended March 31, 2008, 2009 and 2010 and the six-month periods ended September 30, 2009 and 2010, and we may incur losses in the future. Our ability to achieve and maintain profitability depends on, among other factors, the growth of the mobile applications industry, the continued acceptance of Maopao and applications and content thereon by our users, our ability to provide new applications and other content to meet the demands of our users, our ability to maintain good relationships with industry participants and our ability to control our costs and expenses. We may not be able to achieve or sustain gross profitability on a quarterly or annual basis. Accordingly, you should not rely on our results of operations for any prior periods as an indication of our future performance.

 

Significant changes in the policies, guidelines or practice of mobile network operators with respect to mobile applications and other content may result in lower revenues or additional costs for us and materially and adversely affect our business operations, financial condition and results of operations.

 

PRC mobile network operators may from time to time issue new policies or guidelines or change their business practices, requesting or stating their preferences for certain actions to be taken by all mobile service providers using their networks. Due to our reliance on mobile service providers, who in turn rely on their relationships with mobile network operators, a significant change in mobile network operators’ policies or guidelines may cause our revenues to decrease or operating costs to increase. We cannot assure you that our financial condition and results of operations will not be materially adversely affected by policy or guideline changes by PRC mobile network operators.

 

For example, in November 2009, China Mobile implemented a series of measures targeted at eliminating offensive or unauthorized content, including pornographic content, on PRC-based WAP sites. As a result, China Mobile and other PRC mobile network operators suspended billing for their users for all WAP and G+ mobile gaming platform services, including those services that do not contain offensive or unauthorized content, on behalf of third-party mobile service providers of such services. In January 2010, China Mobile began implementing an additional series of measures targeted at further improving the user experience from mobile handset embedded services. Under these measures, mobile applications and other content that are embedded in handsets will be required to introduce additional notices and confirmations to users during the purchase of such mobile applications and content. In addition, services based on SMS short codes will be required to be more tailored to the specific mobile applications and content offerings or service providers. Such measures make it more burdensome for users to purchase applications and content through our application store. As a result, some users purchased fewer applications and less content through Maopao or even ceased purchasing. In addition, when more SMSs need to be transmitted to effect the same volume of transactions, we face more billing and transmission failures. All these adversely affected our revenues. In addition, in September 2010, China Mobile began implementing another set of new measures which require users to send triple confirmation SMSs before a transaction can be effected.

Furthermore, in the third and fourth quarters of 2010, we noted users of one mobile network had difficulty in accessing to our servers which were hosted by a competing telecommunication network operator, which adversely affected our revenues. We are in the process of moving our servers to a new hosting company to resolve this issue. Primarily due to this issue and the above-mentioned triple-confirmation-SMS measures adopted by China Mobile, we expect our revenues to be lower and our non-IFRS adjusted profit for the period to be significantly lower in the three months ending December 31, 2010 as compared to the three months ended September 30, 2010. If similar or more stringent measures are imposed by the government or mobile network operators in the future, our results of operations may be materially adversely affected.

 

We cannot assure you that PRC mobile network operators or the PRC government will not introduce additional requirements with respect to the procedures for ordering monthly subscriptions or single-transaction downloads of applications and other content offered through Maopao, notifications to users, the billing of users or other consumer-protection measures or adopt other policies that may require significant changes in the way we promote and sell the applications and content on Maopao, any of which could have a material adverse effect on our financial condition and results of operations.

 

Our failure to maintain cooperation relationships with handset companies to pre-install our application store onto mobile handsets or to establish cooperation with additional handset companies would result in a decrease in our market share.

 

We rely on handset companies to pre-install our mobile application store onto their mobile phones, which is the primary way to develop our large user base. We have entered into cooperation agreements with over 440 handset companies as of September 30, 2010 to pre-install Maopao onto their products. Our agreements with handset companies are generally for terms of two years and usually contain automatic renewal provisions.

 

Due to our reliance on handset companies to pre-install Maopao, any loss or deterioration of our existing relationship with handset companies, or our failure to establish cooperation with additional handset companies, particularly those with a substantial market share or growth potential, would result in a decrease in the number of our users and our market share. In addition, the amount paid to handset companies under sales proceeds sharing arrangements constituted a significant portion of our total cost of revenues in recent years. Unfavorable changes to our sharing arrangements with handset companies could adversely affect our results of operations.

 

Handset companies often pre-install other mobile application stores in addition to Maopao, which could adversely affect purchases of applications and content on Maopao, resulting in a decrease in our revenues. In addition, certain handset companies may consider entering the mobile application store market, and our relationships with such handset companies may be adversely affected as a result.

 

Our failure to increase the installed base of Maopao among feature phones would adversely affect our market share and results of operations.

 

Currently Maopao is pre-installed primarily on feature phones. Our ability to increase the installed base of Maopao depends on many factors, some of which are not within our control. Feature phones may no longer account for a majority of the installed base of handsets in China. China’s handset market is rapidly evolving, and there are continually new entrants in this market. Sales of handsets, particularily feature phones, are affected by changing consumer tastes, market trend and other factors. Therefore, handset companies and design houses occupying leading market positions in one year may lose a substantial portion of their market share the next year. Although we currently work with feature phone handset companies having a large aggregate market share in China, there is no assurance that these handset companies may continue to maintain such market share. In addition, mobile carrier-subsidized handsets historically had a relatively large market share in China, and they may regain consumer acceptance and a larger market share in China in the future, which may adversely affect our ability to pre-install Maopao onto handsets, particularly feature phones. Our failure to increase the installed base of Maopao among feature phones would adversely affect our market share and results of operations.

We may face increasing competition, which could reduce our market share and materially and adversely affect our results of operations.

 

The mobile application store market in China is highly competitive. The market is characterized by the frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in performance characteristics, rapid adoption of technological and product advancements, as well as price sensitivity on the part of users. We compete directly with:

 

 

We may also face alliances between our existing and new competitors. New competitors may also emerge. For example, mobile service providers, handset companies or other parties may introduce a mobile application store or other business model to compete with us. In addition, some wireless communication chip manufacturers have launched or plan to launch their own application stores. With more entrants into the industry, aggressive price cutting by competitors may result in downward pressure on our gross margins in the future. Some of our existing and potential competitors have significantly greater financial, technological and marketing resources, stronger relationships with industry participants and a larger portfolio of content offerings than we do. Some of our competitors or potential competitors, especially major foreign mobile application store providers, have greater development experience and resources than we have. If there are new entrants in the market or intensified competition among existing competitors, we may have to provide more favorable revenue sharing arrangements to industry participants working with us, which could adversely affect our profitability. If we fail to compete effectively, our market share would reduce and our results of operations would be materially and adversely affected.

 

We depend on mobile service providers, and ultimately mobile network operators for the collection of a substantial majority of our revenues, and any loss or deterioration of our relationship with mobile service providers or mobile service providers’ relationship with mobile network operators may result in severe disruptions to our business operations and the loss of revenues.

 

For the three fiscal years ended March 31, 2010 and the six-month periods ended September 30, 2009 and 2010, a substantial majority of our revenues were collected through mobile service providers, who utilize mobile network operators’ billing channels pursuant to their agreements with mobile network operators. As of September 30, 2010, we have entered into agreements with approximately 100 mobile service providers, such as Tom.com, Kongzhong and Sina. Our agreements with mobile service providers are generally for terms of one to three years and they do not all have automatic renewal provisions. We usually renew these agreements or enter into new ones when the prior agreements expire, but on occasion the renewals or new contracts can be delayed for periods of one month or more.

 

We rely primarily on mobile service providers for collection of sales proceeds from users and they in turn depend on mobile network operators to provide billing and collection services for them. Three mobile network operators, namely China Mobile, China Unicom and China Telecom, dominate the wireless telecommunication sector in China. As China Mobile has the largest subscriber base in China, a significant majority of our sales proceeds have been collected through China Mobile. Because of these large mobile network operators, particularly China Mobile’s

dominant position in China’s mobile market, mobile service providers face significant risks with respect to their arrangements with mobile network operators, and such risks could in turn impact our business and results of operations. For example, in late 2009 and early 2010, these mobile network operators unilaterally terminated services provided by some mobile service providers due to these mobile service providers’ alleged provision of inappropriate content in violation of regulatory requirements or due to their charging users service fees without consent. Although we may switch to another mobile service provider if a service provider’s payment channel becomes unavailable or its collection performance deteriorates, we may experience delays associated with such a switch, which may result in a loss of revenues. Also, due to our reliance on the mobile service providers to collect sales proceeds from our users, any loss or deterioration of our relationships with mobile service providers or disruption of our mobile service providers’ relationship with mobile network operators may result in severe disruptions to our business operations, the loss of our revenues and a material and adverse effect on our financial condition and results of operations.

 

We depend on the billing and collection systems of mobile network operators and mobile service providers. The inaccuracy of these systems and the financial soundness of mobile network operators and mobile service providers could affect our business and results of operations.

 

We depend indirectly on mobile network operators to maintain accurate records of payments of sales proceeds by users and collect such payments. Our mobile service providers usually receive periodic statements from the mobile network operators confirming the value of our mobile applications and content that the mobile network operators billed to users. We in turn receive periodic statements from mobile service providers, which indicate the aggregate amount of fees that were charged to users for purchases of applications and content through Maopao. While we conduct independent sampling tests to verify information provided to us, our sampling is on a relatively small scale compared to the total transaction volume and the inaccuracies found are usually resolved through negotiations with mobile service providers. Our business and results of operations could be adversely affected if the mobile network operators or mobile service providers miscalculate the revenues generated from the sales of our mobile applications and content.

 

We generally offer our mobile service providers credit terms ranging from 60 to 90 days. Receivables from our top ten mobile service providers in terms of accounts receivable balances accounted for approximately 86% and 84.2% of our total trade receivable as of March 31, 2010 and September 30, 2010, respectively. Failure to timely collect our receivables from mobile service providers may adversely affect our cash flows. Our mobile service providers may from time to time experience cash flow difficulties. Consequently, they may delay their payments to us. Any inability of current or potential mobile service providers to pay us may adversely affect our earnings and cash flow.

 

Our revenues and cost of revenues are affected by billing and transmission failures which are often beyond our control. If we fail to implement a new system to correctly record billing and transmission failures in a timely manner, the credibility of our system may be harmed and our relationships with industry participants may be adversely affected.

 

After a mobile user confirms a purchase of mobile applications or other content, the mobile service provider will send the user a confirmation SMS with transaction details and also send a simultaneous message to the mobile network operator, which we refer to as message original, or MO. We also record such transactions on Maopao. Upon receiving the MO data, the mobile network operator will verify if a transaction has finally been effected. If the transaction has been effected, the mobile network operator usually will receive, from the user’s mobile phone, a confirmation message, which we refer to as message received, or MR. Based on MR data, mobile network operators record the transactions and bill the user.

 

The MR data are usually lower than the MO data due to various reasons, including:

 

 

 

These situations are known in the industry as billing and transmission failures. In the fiscal year ended March 31, 2010 and the six-month period ended September 30, 2010, the monthly MR amounts we received from mobile network operators were approximately 20% to 30% lower than the monthly MO amounts recorded on Maopao.

 

We recognize our revenues based on MR data. In line with industry practice, we make payments to content providers and handset companies based on our MO data rather than MR data, because MR data generally does not contain sufficient information to enable us to identify which application or content title is purchased through which handset model. Recognizing the difference between MO and MR data, we apply discount ratios to our MO data to account for billing and transmission failures. Consequently, share of sales proceeds based on MO data may not accurately reflect content providers, and handset companies’ contribution to a particular effected transaction.

 

These failures may from time to time be augumented by policy changes made by PRC government authorities and mobile network operators. Due to a change in China Mobile’s practices, since January 2010, we have not been able to match the data of an individual download with a particular content and handset model. Therefore, we have since then calculated the sales proceeds payable to individual content providers and handset companies based on the number of application and content downloads recorded by our servers attributable to the relevant content and handset models as a percentage of the aggregate number of downloads recorded by our servers during the relevant periods. Our relationship with a content provider or a handset company may be adversely affected if it takes the view that the amount we pay to it for its products or services during any period since China Mobile’s practice change in January 2010 did not accurately reflect the amount it is entitled to receive from us pursuant to the terms of its contract with us.

 

We are in the process of implementing a new system, which should provide a more reliable estimate on matching the MO data provided by the mobile service providers and mobile network operators with individual user transactions recorded by our transaction clearing system. However, if we fail to successfully implement such system in a timely manner, we may not be able to accurately reward third-party content providers and handset companies, which could harm the credibility of our system and adversely affect our relationships with them.

 

We currently focus on the feature phone market and do not have a track record of successfully pre-installing Maopao on smart phones. If we fail to capture opportunities in the expected growth of the smart phone market, our growth prospects may be materially and adversely affected.

 

We primarily work with handset companies designing and manufacturing feature phones, which currently have a substantially larger market share in China compared with smart phones. Smart phones are already very popular in developed countries and may gain more popularity in China. Smart phones are higher-priced, technologically advanced devices with personal computer-level versatility that operate advanced operating systems such as Android, Apple’s iOS, BlackBerry OS, Linux, Palm WebOS, Symbian and Windows Mobile. Smart phones are usually characterized by more powerful processors, larger screens and higher data storage capacity than feature phones, and are able to easily install and run high performance multimedia applications. We have designed versions of our Maopao application store which can be easily downloaded over the air to smart phones with operating systems such as Symbian. However, downloading and installing these customized versions is not as convenient to users as accessing Maopao pre-installed on their handsets. As smart phones are gaining market share in China and around the world, some of our users may migrate to smart phones, which can operate applications with better functionalities than feature phones. We plan to actively pursue pre-installation of Maopao onto smart phones, in particular Android-based smart phones, which we believe will be one of the major smart phone operating systems in China. However, there is no assurance that we can successfully establish relationships with smart phone companies and enhance or maintain the volume and/or market share of mobile handsets with Maopao pre-installed. In addition, many smart phone companies have developed their own application stores. Even if Maopao is installed on smart phones, we will compete with the application stores operated by these smart phone companies and cannot guarantee that users of smart phones will use the applications and content on Maopao at the same level as feature phone users.

As community-based applications and other content offered through Maopao are expected to account for an increasing portion of our revenues in the future, any adverse developments relating to such content may adversely affect our results of operations.

 

We anticipate that community-based applications with social network functions, such as mobile social games, will generate an increasing percentage of our revenues in the foreseeable future. However, we began operating pilot test mobile social games in 2008 and only have limited experience in this area. In addition, community-based applications require a substantial number of users to reach critical mass and may result in the concentration of users in certain applications or titles. For example, in the six-month period ended September 30, 2010, we estimate that Fantasy of the Three Kingdoms accounted for a substantial majority of our Maopao Community revenues through K Currency. We are also enhancing our efforts in marketing mobile applications and content with social network functions, though our experience in that field is also limited. Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

 

 

The laws and regulations regulating mobile social games in China are developing and subject to future changes. If we fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

 

To operate mobile social games in China, a series of permits and approvals are required. For example, we have obtained a license from the Ministry of Culture with respect to the operation of mobile social games. In addition, the Internet publication of mobile social games should be pre-approved by the General Administration of Press and Publication, or the GAPP. We operate a substantial majority of our mobile social games in collaboration with third parties such as content providers, and such third parties are in charge of obtaining the approvals from the GAPP. For the remaining mobile social games we operate, we are responsible for obtaining the approvals from the GAPP. Because the requirement for GAPP approval of mobile social games was imposed in late 2009 and the approval process is lengthy, none of the mobile social games that we operate has been approved by the GAPP yet. With respect to the games that we operate alone, we have not submitted applications for GAPP approval of any of these games yet as we are required to obtain an online publication license from the GAPP first and we have started the process of obtaining such license. We cannot assure you that we can obtain an online publication license in a timely manner or at all. With respect to the games that we operate in collaboration with third parties, the applications for GAPP approval of some of the games have been submitted by third parties. We have requested other third parties to submit applications to GAPP for approval of the other games as soon as possible. In case we or such third parties cannot obtain the GAPP approval, we may be subject to various penalties, including fines and discontinuation of operation of the relevant games. As mobile social games are at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and to address new issues that arise. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the operation of

mobile social games. We cannot assure you that we will be able to timely obtain required licenses or any other new license required in the future, or at all. We cannot assure you that we will not be found in violation of any current or future PRC laws and regulations.

 

The PRC government has introduced various measures aimed at regulating online games, the provision of virtual currency and other related content. If we are deemed to have violated any of the rules and regulations, we may be subject to penalties and our results of operations may be materially and adversely affected.

 

On June 3, 2010, the PRC Ministry of Culture, or the MOC, issued the Tentative Rule on Administration of Online Games, or the Rule on Online Games, effective as of August 1, 2010. According to the Rule on Online Games, companies which plan to engage in the operation of online games, issuance of virtual currency and provision of virtual currency transaction services shall obtain a license from the provincial counterpart of the MOC. This rule also regulates content review and other aspects of operation of online games as well as virtual currency transaction services. See “Regulation.” In addition, the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games, or the Internet Cafés Notice, issued by the Ministry of Culture in February 2007, directs the People’s Bank of China, or PBOC, to strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items.

 

Our mobile games, including both single-player games and mobile social games, may be subject to government approval before placement on Maopao. All of our revenues from mobile social games are collected through the sale of our virtual currency, the K Currency. Our item-based revenue model may cause additional concerns with PRC regulators who have been implementing regulations intended to limit the total amount of virtual currency issued by online game operators and the amount of purchase by an individual game player. The restrictions imposed by the above rules may result in lower sales of our virtual currency, and could have an adverse effect on our revenues from games. If our operations or the applications and content on Maopao are deemed to have violated any of these rules and regulations, we may be subject to penalties and our results of operations may be materially and adversely affected.

 

We may not be successful in effectively promoting or developing our brand.

 

Enhancing the awareness of our “Maopao” brand among users and establishing it as a consumer brand with high recognition forms an integral part of our growth strategy. We believe our future success therefore depends on, among other things, market recognition and acceptance of our “Maopao” brand. We lack experience in promoting or developing our brand among users. To effectively promote our brand, we would have to be able to build and maintain the brand image by focusing on a variety of promotional and marketing activities to promote brand awareness. There is no assurance that we will be able to effectively promote or develop our brand and if we fail to do so, our growth may be adversely affected. In addition, negative publicity or disputes regarding our brand, offerings, company or management could materially and adversely affect public perception of our brand. Many of the factors that affect our brand may be outside our control, such as industry participants, including handset companies and content providers working with us, tainting our brand because of the concern over the quality of such industry participants’ products and services. Any impact on our ability to effectively promote our brand or any significant damage to our brand’s image could materially and adversely affect our sales, profits and prospects.

 

Our ability to generate revenues could suffer if the PRC market for mobile application stores and advanced applications and content does not develop as anticipated.

 

The mobile application store market in China has evolved rapidly in recent years over the last decade, with the introduction of new business models, development of user preferences, launch of new service and product offerings, market entry by new competitors and adaptation of new strategies by existing competitors. We expect each of these trends to continue, and we must continue to adapt our strategy to successfully compete in our market.

In particular, we are currently focused on operating a mobile application store which provides a wide range of applications and other content for feature phone handsets using 2G and 2.5G technologies, through our cooperation with various industry participants, including content providers, mobile service providers and handset companies. There can be no assurance, however, that our technologies, business model and offerings will be accepted by users or sufficiently promoted by us and industry participants working with us. Moreover, there are numerous other technologies and business models in varying stages of development, such as mobile tablets, netbooks or other mobile Internet devices involving fourth generation mobile technologies, which could render certain current technologies or applications obsolete.

 

Accordingly, it is extremely difficult to accurately predict user acceptance and demand for our various existing and potential new offerings, and the future size, composition and growth of this market. Furthermore, given the limited history and rapidly evolving nature of our market, we cannot predict the price that users will be willing to pay for offerings provided through our mobile application store or whether users will have concerns over security, reliability, cost and quality of service associated with our offerings. If acceptance of our mobile application store is different than anticipated, our ability to maintain or increase our revenues and profits could be materially and adversely affected.

 

Regulation and censorship of information disseminated over the Internet and wireless telecommunication networks in China may adversely affect our business, and we may be liable for information displayed on, retrieved from, or linked to our Maopao application store.

 

China has enacted regulations governing telecommunication mobile service providers, Internet and wireless access and the distribution of news and other information over the Internet and wireless telecommunication networks. Under these regulations, Internet content providers and Internet publishers like us are prohibited from posting or displaying over the Internet or wireless networks content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. Meanwhile, when Internet content providers and Internet publishers find that information falling within the above scope is transmitted on their website or platform, they shall terminate the transmission of such information or delete such information immediately and keep records and report to relevant authorities. Failure to comply with these requirements could result in the revocation of required licenses and the closure of the concerned websites or platforms. The website or platform operator may also be held liable for such prohibited information displayed on, retrieved from or linked to such website or platform. Mobile network operators like China Mobile also have their own policies prohibiting or restricting the distribution of inappropriate content. Since December 2009, Chinese government has been tightening up its efforts on cracking down inappropriate content disseminated over the Internet and wireless networks.

 

On December 15, 2009, the MIIT issued the Notice Regarding Plan for Further Regulating Obscene Materials on Mobile Phones, or Circular 672. Under Circular 672, mobile network operators are required to examine their business, promotional channels, as well as the business of their partners, and must immediately terminate such business if any obscene material is involved. Mobile service providers involved in distributing or publishing such obscene materials on mobile handsets are subject to immediate suspension or termination of cooperation with mobile network operators, and a violation will be reported to relevant authorities. Mobile network operators and mobile service providers must examine all websites accessed through mobile handsets and conduct full daily inspection of such websites. If any obscene material is found, access and transmission must cease and be reported to authorities. On June 3, 2010, the MOC issued the Rule on Online Games, according to which companies that plan to engage in the operation of online games, issuance of virtual currency and provision of virtual currency transaction services shall obtain a license from the provincial counterpart of the MOC. The MOC is responsible for content review of online games. Online game operators are also required to establish a self-censorship mechanism and ensure the lawfulness of the content of their games and corporate operations.

 

As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a mobile application store operator. Even though we may determine that the mobile applications and content provided on Maopao complies with regulatory requirements, regulatory authorities may hold a different view. In addition, we may not be able to control or restrict the content of other Internet content providers linked to or accessible through Maopao,

despite our attempt to monitor such content. For example, many of the industry participants we work with, such as handset companies and content providers, have access to the technology used to develop applications for Maopao. Personnel who have access to our technology may develop malware and other inappropriate content. Although we are able to control the content displayed on Maopao, a distributor of malware or other inappropriate content developed in our proprietary format could disseminate such content directly through the Internet without accessing our Maopao server and such content may be downloaded by individual users onto their mobile handsets. To the extent that regulatory authorities find any portion of the applications and content on Maopao objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise curtail the nature of such content on Maopao, which may reduce our user traffic.

 

We may be subject to significant penalties for violations of those regulations arising from information displayed on, retrieved from or linked to Maopao, including a suspension or shutdown of our operations. Any violation, or perceived violation, of such regulations may subject us to claims of contractual breaches from the industry participants we work with including mobile service providers and handset companies, and we may face suspensions or termination of the cooperative relationships and/or claims for monetary damage, and our financial condition and results of operations would be materially and adversely affected.

 

Potential problems encountered when we implement a new system to record user data may lead to user dissatisfaction and loss of revenues, which may adversely affect our results of operations.

 

In August 2010, we began to implement a new system on a trial basis to record user data and match most MO data provided by the mobile service providers and mobile network operators with individual user transactions recorded by our transaction clearing system. The new data record system will allow us to verify the accuracy of records provided to us by the mobile service providers and more accurately calculate the fees payable to industry participants such as handset companies and content providers. Since we began to implement this new data record system, however, we have noticed that in connection with over 5% of transactions, users may not be able to access the applications or contents they chose after they confirm purchase, which results in a failed purchase and lost revenues to us. If we are unable to implement the new data record system successfully, our business may suffer from user dissatisfaction and continuous loss of revenues, and our results of operations may be adversely affected.

 

We rely on third-party content providers for a majority of applications and content available on Maopao. If we are not able to license or otherwise obtain applications or content that meet user interest, it would materially and adversely affect our business.

 

We contract with third-party content providers to offer their mobile applications and other content through our mobile application store. A majority of our licensing arrangements with these third parties are short-term and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Most licensing arrangements, particularly those for simple applications and single-player games, only have a short exclusivity period of three to six months, if any. Some third-party content providers currently or in the future may offer competing mobile applications and content, and could take actions to make it more difficult or impossible for us to license their content in the future. Other content owners, providers or distributors may seek to limit our access to, or increase the total cost of, such content. There is no assurance that content providers will continue to develop and maintain applications and other content for our mobile application store on a timely basis or at all. If we are unable to continue to offer a wide variety of mobile content at reasonable prices with acceptable usage rules, our financial condition and operating results may be materially and adversely affected. If content licensed to us is also available to other application store operators or other competitors due to no exclusivity period for our licenses or the expiration of exclusivity period, the popularity of Maopao and our ability to monetize such content may be adversely affected. For example, the three-month exclusivity period for the mobile social game, Fantasy of the Three Kingdoms, expired recently and we face competition with other application stores that offer the same game.

 

Furthermore, we develop certain applications and content available on Maopao in-house. Such development may negatively affect the decisions of content providers to develop, maintain and upgrade similar or competitive applications for Maopao. If content providers focus their efforts on competing mobile application stores, the availability and quality of applications for Maopao may suffer.

If we are unable to successfully develop, license, launch and/or operate additional mobile applications and other attractive content that grow our user base and increase our revenues, our future results of operations will be adversely affected.

 

We will need to continually develop, license, launch and operate mobile games and other popular content to replace our existing mobile games and other content as they reach the end of their useful economic lives, and to meet our growth strategy of operating a larger number of diversified content that expands our overall user base and increases our revenues.

 

We are currently in the process of developing applications and other content in-house as well as licensing new mobile applications and other content from third parties. The success of our mobile application store will largely depend on our ability to anticipate and effectively respond to changing user tastes and preferences and technological advances in a timely manner. We cannot assure you that we can identify and license from third parties appropriate mobile games and other applications and content at reasonable terms or at all, nor can we assure you that the mobile applications and other content we license or develop will be launched as scheduled, viewed by the regulatory authorities as complying with content restrictions, attractive to users, able to compete with mobile applications and other content offered by our competitors, or commercially successful. In addition, as we introduce content, some of our existing users may switch to the new content. If this transfer of users from our existing mobile applications and other content does not grow our overall user base and revenues, our growth and profitability may be materially and adversely affected. If we are not able to develop, license or acquire mobile applications and other content that are commercially successful and have continuing appeal to users, our future profitability and growth prospects will decline.

 

Our failure to anticipate or successfully implement new technologies could render Maopao uncompetitive or obsolete, and reduce our revenues and market share.

 

Our proprietary Maopao application store and related technologies, including standard software development kits and tool suites, are critical to our success. The mobile applications industry is subject to rapid technological change. We need to anticipate the emergence of new technologies and assess their market acceptance. We also need to invest significant financial resources in research and development to keep pace with technological advances in order to make our technologies, product offerings and development capabilities competitive in the market. However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our development results. Our significant expenditures on research and development may not generate corresponding benefits. Given the fast pace with which mobile application store technology has been and will continue to be developed, we may not be able to timely improve Maopao and related technologies in an efficient and cost-effective manner, or at all. New technologies in our industry could render the technologies and product offerings that we are developing or expect to develop in the future obsolete or uncompetitive, thereby potentially resulting in a decline in our revenues and market share.

 

Undetected programming errors or flaws in our mobile application store or applications available thereon could harm our reputation or decrease market acceptance of Maopao.

 

Mobile application store and applications available through our store, such as mobile social games, which are subject to frequent improvement and update, may contain errors or flaws that may only become apparent when the updated application stores and applications are accessed by mobile users, particularly as we launch new features and updates under tight time constraints. We mostly rely on our users to inform us of programming flaws affecting their experience, and we are generally able to resolve such flaws promptly. However, if for any reason, programming errors or flaws are not resolved in a timely fashion, we may lose some of our users and our revenues will be affected negatively, and our reputation and market acceptance of Maopao may also be harmed. In addition, Chinese government authorities have promulgated rules and regulations targeting mobile service providers that charge for applications and other content without user consent. If a programming error or flaw in Maopao inadvertently charges users without consent, we may be subject to administrative penalties and fines.

Failure to maintain effective customer service could harm our reputation or decrease market acceptance of Maopao, which would materially and adversely affect out results of operations.

 

Customer service is critical to retaining current users and attracting potential users, and we may not be able to maintain and continuously improve the quality of our customer service to meet mobile users’ expectations. If Maopao or the mobile applications and other content offered through Maopao contains errors or other flaws, or if we otherwise fail to provide effective customer service, our users may be less inclined to use Maopao or recommend Maopao to other potential users, and may switch to our competitors’ mobile application stores. Some China-based Internet companies have experienced group complaints, sometimes organized by their competitors or people attempting to profit from such complaints. If we face similar group complaints in a short time frame, we may not be able to effectively handle customer service requests from our other users. Unsatisfactory customer service can disrupt our operations, adversely affect the user experience, harm our reputation, cause our users to stop using Maopao, and delay market acceptance of Maopao and/or the mobile applications and other content offered through Maopao, any of which could materially and adversely affect our results of operations.

 

Unexpected network interruptions, data loss, security breaches, computer virus attacks or other risks relating to the operation of applications on Maopao could have a material adverse effect on our business, financial condition and results of operations.

 

Any failure to maintain the satisfactory performance, reliability, security and availability of applications and content available on Maopao may cause significant harm to our reputation and our ability to attract and maintain users. Major risks involved in our operation of these applications include, among others, any breakdowns or system failures of our network infrastructure resulting in a prolonged shutdown of all or a material portion of our servers, including failures which may be attributable to sustained power outages, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.

 

Our critical servers and backup servers are both located in Hangzhou, though not in the same building. As a result, our network systems are vulnerable to damage from natural disasters or accidents affecting the region where these servers or our other network equipment are located, such as fire, flood, power loss, telecommunications failures, computer viruses, hackings and other similar events. Any network interruption or inadequacy that causes interruptions in the availability of our offerings or deterioration in the quality of access to our offerings could reduce our user satisfaction and our competitiveness. In addition, any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance.

 

The growth of our business may be adversely affected due to our failure to ensure the security and privacy of confidential user information.

 

A significant barrier to the development of wireless business is the secure transmission of confidential information over the wireless network. We have implemented an account management system for users of our community-based applications and content and plan to expand such system to all of our users. We rely on proprietary encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential user information, such as user name and password. While we have not experienced any material breach of our security measures to date, there can be no assurance that advances in technology capabilities, new discoveries in the field of cryptography, or other events or developments will not result in a compromise or breach of the algorithms used by us to protect user information. A party who is able to circumvent these security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Concerns over the security and privacy of user information may inhibit the wireless business generally, and our mobile application store in particular. To the extent that our activities involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. There can be no assurance that our

security measures will prevent security breaches, and failure to prevent such security breaches may have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We could be liable for breaches of security of payment processing agents, which may have a material adverse effect on our reputation and business.

 

In addition to collection through mobile service providers, currently a small portion of our revenues is collected through payment processing agents, who help us collect sales proceeds through third-party payment channels such as game cards of third-party companies, other prepaid cards, bank remittance, China Post, and virtual money, among others. Although our payment processing agents have not historically collected a significant volume of sales proceeds, going forward, we plan to increasingly utilize these payment processing agents. In the transactions utilizing third-party payment channels, secured transmission of confidential information, such as customers’ card numbers and expiration dates, personal information and billing addresses, over wireless networks, the Internet and/or third-parties’ databases, is essential to maintain consumer confidence. We do not have control over the security measures of third-party payment channels and we cannot assure you that their security measures are adequate or will be adequate with the expected increased usage of their payment channels. Security breaches of these payment channels could expose us to litigation and possible liability for failure to secure customer transaction data and could harm our reputation, ability to attract users and encourage users to pay through these third-party payment channels.

 

Our business is increasingly subject to the risks of international operations.

 

International expansion forms an important component of our growth strategy. Expanding our business internationally exposes us to a number of risks, including:

 

 

Our financial condition and operating results also could be significantly affected by these and other risks associated with international activities. Furthermore, we have implemented policies and procedures designed to facilitate compliance with laws and regulations in foreign jurisdictions applicable to us, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies. Any such violations could individually or in the aggregate materially and adversely affect our financial condition or operating results.

 

Our business could suffer if we do not successfully manage our current growth and potential future growth.

 

We have experienced a period of rapid growth and expansion that has placed, and continues to place, strain on our management personnel, systems and resources. To accommodate our growth pursuant to our strategies, we anticipate that we may need to implement and maintain a variety of new and improved operational and financial systems, procedures and controls, and improve our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce, and manage our relationships with our users and other industry participants such as content providers, mobile service providers and mobile handset companies. All of these endeavors will require substantial management effort and skill and the incurrence of additional expenditures. We cannot assure you that we will be able to

efficiently or effectively implement our growth strategies and manage the growth of our operations, and any failure to do so may limit our future growth and hamper our business strategy.

 

We may not be able to adequately protect our intellectual property rights, and any failure to protect our intellectual property rights could harm our business and competitive position.

 

We believe that trademarks, trade secrets, copyrights, and other intellectual property we use are important to our business. We rely on a combination of trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. We have invested significant resources to develop our own intellectual property and acquire licenses to use and distribute the intellectual property of others for our business; failure to maintain or protect these rights could harm our business. In addition, any unauthorized use of our intellectual property by third parties may adversely affect our current and future revenues and our reputation.

 

The validity, enforceability and scope of protection available under intellectual property laws with respect to the mobile and Internet industries in China are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient, ineffective and hampered by corruption and local protectionism. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

Our results of operations, financial performance and business may be adversely affected by potential intellectual property rights infringement claims against us.

 

We could face claims by others that we are improperly using intellectual property owned by them or otherwise infringing upon their rights in intellectual property. A large portion of content available on Maopao, including most mobile music and book titles, is licensed to us by third parties. Although we take measures to ensure that licensors have the intellectual property rights with respect to the licensed content, there is no assurance that we will not be subject to infringement claims regarding such licensed content. Irrespective of the validity or the successful assertion of such claims, we could incur costs in either defending or settling any intellectual property disputes alleging infringement. Intellectual property litigation against us could potentially force us to, among other things, cease offering the challenged mobile application or content, develop non-infringing alternatives or obtain licenses from the owners of the infringed intellectual property. In such case, we may not be successful in developing such alternatives or in obtaining such licenses on reasonable terms or at all and our results of operations, financial performance and business could be materially and adversely affected.

 

Our business depends substantially on the continuing efforts of our management and other key personnel. If we lose their services, we could incur significant costs in finding suitable replacements and our business may be severely disrupted.

 

Our future success heavily depends upon the continued services of our management and other key personnel. In particular, we rely on the expertise and experience of Mr. Michael Tao Song, our chairman and chief executive officer, Mr. Li Ou, our chief technology officer, and Mr. Carl Yeung, our chief financial officer. If one or more of our senior management or key personnel were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. Our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain personnel. In addition, Mr. Carl Yeung is currently named as a co-defendant in securities class actions filed against China Natural Gas, Inc., a Delaware corporation whose common shares are listed on the Nasdaq Global Market. See “Management — Certain Legal Proceedings.” These actions and any future legal proceedings against any of our management members may divert their attention and harm their reputation regardless of the final results of the legal proceedings and thereby may have an adverse impact on our business and reputation. In addition, Mr. Yeung could potentially be held individually liable for civil damages.

If any of our management or key personnel joins a competitor or forms a competing company, we may lose collaborators, suppliers, know-how and key professionals and staff members. Each of our executive officers has entered into an employment agreement and certain confidentiality and non-competition clauses or agreement with us. However, if any dispute arises between our officers and us, the non-competition provisions contained in their confidentiality and non-competition clauses or agreements may not be enforceable, especially in China, where most of these executive officers and key employees reside, on the ground that we have not provided adequate compensation to these executive officers for their non-competition obligations, which is required under the relevant PRC regulations.

 

We may not be successful in attracting and retaining qualified personnel and our business and results of operations could be negatively impacted.

 

We will need to hire and retain additional qualified employees to support our existing operations and planned expansion. Since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to retain key personnel in the future, particularly considering our location in Hangzhou, a region less attractive to some industry talents compared to cities such as Beijing or Shanghai. We cannot assure you that we will be able to attract or retain qualified key personnel that we will need to achieve our business objectives. In addition, as our business has grown rapidly, our ability to train and integrate new employees into our operations may not meet the increasing demands of our business.

 

Our principal shareholder has substantial influence over our company and its interests may not be aligned with the interests of our other holders of our common shares and ADSs.

 

Our principal shareholder, Xplane Ltd., a British Virgin Islands company controlled by Mr. Michael Tao Song, our chairman and chief executive officer, and his wife, currently holds 72.0% of our outstanding share capital on an as-converted basis, and 58.3% of our outstanding share capital upon completion of this offering. See “Principal and Selling Shareholders.” Accordingly, Xplane Ltd. has substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. Alternatively, our principal shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by our other shareholders, including those who purchase shares in this offering.

 

We have a limited insurance coverage which could expose us to significant costs and business disruption.

 

Other than insurance for some of our transportation vehicles, we have not purchased any insurance to cover our assets, property and business. If we were to incur substantial losses or liabilities due to fire, explosions, floods, a wide range of other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected.

 

If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our shares may, therefore, be adversely impacted.

 

We will be subject to reporting obligations under the U.S. securities laws. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Beginning with our annual report on Form 20-F for the fiscal year ending March 31, 2012, we will be required to prepare a management report on our internal controls over financial reporting containing our management’s assessment of the effectiveness of our internal controls over financial reporting. In addition, depending on our market capitalization, our independent registered public accounting firm may be required to attest to and report on our management’s assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report

that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.

 

Prior to this offering, we have been a private company with a limited number of accounting personnel and other resources with which to address our internal controls and procedures. In connection with the audit of our consolidated financial statements for the three fiscal years ended March 31, 2010, we noted two material weaknesses in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB. The material weaknesses identified are (i) lack of sufficient finance and accounting resources with adequate IFRS knowledge to analyze complex accounting transactions and (ii) design deficiencies with respect to our internal control over computer systems that could affect the integrity of transaction data and financial information. The material weaknesses in our internal control over financial reporting could result in a material misstatement of our financial statements that will not be prevented or detected. The significant deficiencies identified are (i) lack of established and documented financial accounting policies and procedures, and (ii) lack of audit committee or internal audit function. Following the identification of these material weaknesses and significant deficiencies, we have been implementing a number of measures to improve our internal control over financing reporting in order to obtain reasonable assurance regarding the reliability of our financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control Over Financial Reporting.” We , however, cannot assure you that any of those or other measures will be adaquate to remedy or rectify any of these material weaknesses or significant deficiencies.

 

We will continue to implement measures to remedy any significant deficiencies to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our common shares. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act.

 

We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful.

 

Our strategy includes plans to grow both organically and through acquisitions, joint ventures or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able to identify suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.

 

In addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by a number of factors. These factors include:

 

 

If we fail to integrate acquired companies efficiently, our earnings, revenues growth and business could be negatively affected.

 

Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the products in which the acquired companies specialize, and the loss of

key personnel and users. If we are not able to realize the benefits envisioned for such acquisitions, joint ventures or other strategic alliances, our overall profitability and growth plans may be adversely affected.

 

We may be unable to secure additional funding in the future or to obtain such funding on favorable terms.

 

We believe that our current cash and cash equivalents and the anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require additional cash resources to finance our continued growth or other future developments, including any investments or acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of new product or service launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or securities convertible into our common shares could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.

 

Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

 

 

Financing may not be available in amounts or on terms acceptable to us, if at all, especially if there is a recession or other events causing volatilities in the capital markets worldwide.

 

We may experience fluctuations in quarterly operating results.

 

Our quarterly operating results have experienced fluctuations and may continue to fluctuate in the future due to a variety of factors, including policy changes, the demand for our offerings and our competitors’ products and services, the launch of new mobile applications and content through Maopao, and our revenue sharing arrangements with industry participants. Although our revenue sharing arrangements with industry participants vary within a small range, such differences may result in fluctuation of gross margin from period to period. For example, our cost of revenues as a percentage of total revenues may increase in a particular period if a handset company that is entitled to a relatively higher percentage of sales proceeds introduces a new handset model through which we generate a substantial amount of revenues in that period. Therefore our cost of revenues as a percentage of total revenues may be higher compared to other periods when revenues are generated through handsets from handset companies that are entitled to a relatively lower percentage of sales proceeds. Also, changes in policy and practices by network operators, including China Mobile, may affect the availability of mobile service providers and user experience in a particular period, result in increased billing and transmission failure rate, cause delays associated with switching from certain service providers to others, and affect our quarterly results of operations.

 

Our revenues may be affected by seasonality, e.g., our revenues tend to be higher during holiday periods when users tend to make more purchases of applications and other content through our mobile application store. Such seasonality may appear less prominent in recent periods when we achieve significant revenue growth, but may become more prominent in the future. We believe that period-to-period comparisons of operating results are not necessarily indicative of our future results. If our operating results for any quarterly period fall below investor expectations or estimates by securities research analysts, the trading price of our ADSs may decline.

Risks Related to Doing Business in China

 

Changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

 

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. Due to the global financial crisis, the growth of the Chinese economy also slowed down in the second half of 2008 and early 2009. There is also uncertainty with respect to the Chinese economy for 2010 and beyond. Any prolonged slowdown in the Chinese economy, in particular the mobile applications industry, could have a negative impact on our business, operating results and financial condition in a number of ways. For example, our users may decrease spending on our offerings, while we may have difficulty expanding our user base fast enough, or at all, to offset the impact of decreased spending by our existing users.

 

Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or otherwise negatively affect our business, our growth rate or strategy, our results of operations could be adversely affected as a result.

 

If the PRC government determines that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

 

We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under Chinese laws, and our PRC subsidiaries, Hangzhou Dianneng Technologies Co., Ltd., or Dianneng, and Pusida (Beijing) Technologies Co., Ltd., or Pusida, are foreign-invested enterprises. Various regulations in China currently restrict foreign-invested entities from holding certain licenses required to operate mobile application store business, including telecommunications value-added services operation licenses. In light of these restrictions, we rely on our SPEs, Hangzhou Sky, Mijia and Fanyi, to hold and maintain the licenses necessary to operate our mobile application store business in China. We do not have any equity interest in Hangzhou Sky, Mijia or Fanyi, but receive their economic benefits through various contractual arrangements and certain corporate governance and shareholder rights arrangements. In addition, we have entered into agreements with Hangzhou Sky, Mijia, Fanyi and each of their shareholders which provide us with the ability to control Hangzhou Sky, Mijia and Fanyi. For a description of these contractual arrangements, see “Corporate History and Structure — Our Corporate Structure — Contractual Arrangements with Hangzhou Sky and its Shareholders, Contractual Arrangements with Mijia and its Shareholders, and Contractual Arrangements with Fanyi and its Shareholders.”

 

Under the equity pledge agreements of these contractual arrangements, the shareholders of these SPEs pledged their respective equity interests in the SPEs to Dianneng. According to PRC law, such pledge has to be registered with the relevant administration for industry and commerce. We are currently in process of applying for registration of the pledge of SPEs’ equity interests with Hangzhou Administration for Industry and Commerce. We cannot assure you that Dianneng will be able to effect the registration of the pledge in the near future.

 

The Circular regarding Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the Circular, issued by the MIIT, in July 2006, reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain a business operating license to conduct any value-added telecommunications business in China. Under the Circular, a domestic company that holds a telecommunications value-added services operation license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local license holder. The

Circular further requires each telecommunications value-added services operation license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications mobile service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulator, it is unclear what impact the Circular will have on us or the other Chinese telecommunications and Internet companies that have adopted the same or similar corporate and contractual structures as ours.

 

On September 28, 2009, the GAPP, together with the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening of the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games, or the GAPP Notice. The GAPP Notice provides, among others, that foreign investors are not permitted to invest in online game operating businesses in China via wholly-owned, equity joint venture or cooperative joint venture investments, and expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or contractual or technical arrangements. As advised by our PRC counsel, Jincheng Tongda & Neal Law Firm, the provision of the GAPP Notice discussed above with respect to regulation of online game operation does not apply to us or our subsidiaries or SPEs, nor does it affect our control over our subsidiaries and SPEs. There are, however, substantial uncertainties regarding the interpretation and application of the GAPP Notice. Accordingly, we cannot assure you that the GAPP will not ultimately take a view that is contrary to the opinion of our PRC legal counsel. In the event that we or any of our PRC operating companies are found to be in violation of the GAPP Notice in connection with the operation of online games, the GAPP in conjunction with the relevant regulatory authorities would have the power to investigate and deal with such violations, including in serious cases where relevant licenses and registrations would be refused or cancelled.

 

In the opinion of Jincheng Tongda & Neal Law Firm, our PRC counsel, (i) the ownership structure and the business and operation model of Hangzhou Sky, Mijia, Fanyi and Dianneng are in compliance with all existing PRC laws and regulations, and (ii) each contract under Dianneng’s contractual arrangements with Hangzhou Sky, Mijia, Fanyi and each of their shareholders is valid and binding and will not result in any violation of PRC laws or regulations currently in effect. However, we cannot assure you that we will not be found in violation of any current or future PRC laws and regulations. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Circular. Accordingly, we cannot assure you that the PRC regulatory authorities will ultimately take a view that is consistent with the opinion of our PRC counsel.

 

If we are found to be in violation of any existing or future PRC laws or regulations, including the Circular, or fail to obtain or maintain any of the required permits or approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking Dianneng’s business license or Hangzhou Sky, Mijia or Fanyi’s business or operating licenses, requiring us to restructure the relevant ownership structure or operations, and requiring us to discontinue all or any portion of our mobile application store business. Any of these actions could cause significant disruption to our business operations.

 

Our contractual arrangements with Hangzhou Sky, Mijia, Fanyi and their respective shareholders may not be as effective in providing control over Hangzhou Sky, Mijia and Fanyi as direct ownership of these companies.

 

We conduct our mobile application store business in China through Hangzhou Sky, Mijia and Fanyi. Our contractual arrangements with Hangzhou Sky, Mijia, Fanyi and their respective shareholders provide us with effective control over these companies. See “Corporate History and Structure — Our Corporate Structure — Contractual Arrangements with Hangzhou Sky and its Shareholders, Contractual Arrangements with Mijia and its Shareholders, and Contractual Arrangements with Fanyi and its Shareholders.” As a result of these contractual arrangements, we are considered to be the primary beneficiary of Hangzhou Sky, Mijia and Fanyi and accordingly, we consolidate the results of operations, assets and liabilities of Hangzhou Sky, Mijia and Fanyi in our financial statements.

Although we have been advised by Jincheng Tongda & Neal Law Firm, our PRC legal counsel, that each contract under these contractual arrangements is valid, binding and enforceable under current PRC laws and regulations, these contractual arrangements may not be as effective in providing us with control over Hangzhou Sky, Mijia or Fanyi as direct ownership of these companies. In addition, Hangzhou Sky, Mijia, Fanyi or their respective shareholders may breach the contractual arrangements. We cannot assure you that when conflicts of interest arise, Hangzhou Sky, Mijia, Fanyi and their respective shareholders will act completely in our interests or that conflicts of interests will be resolved in our favor. In any such event, we would have to rely on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. See “— Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could have a material adverse effect on us.”

 

Contractual arrangements we have entered into may be subject to scrutiny by the PRC tax authorities, and a finding that we or our SPEs owe additional taxes could reduce our net income and the value of your investment.

 

As required by applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our subsidiaries in China on the one hand, and Hangzhou Sky, Mijia and Fanyi on the other, do not represent an arm’s-length price and adjust Hangzhou Sky, Mijia or Fanyi’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Hangzhou Sky, Mijia or Fanyi, which could in turn increase their respective tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on our SPEs for underpaid taxes. Our net income may be adversely affected if our SPEs’ tax liabilities increase or if they are found to be subject to late payment fees or other penalties.

 

Our business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.

 

Hangzhou Sky, as a “software enterprise”, enjoys a full exemption from enterprise income tax, or EIT, in 2008 and 2009 and a 50% reduced EIT rate from 2010 to 2012. The reduced applicable EIT rate of Hangzhou Sky would be 12.5% from 2010 to 2012. If Hangzhou Sky fails to maintain the qualification as a “software enterprise”, its effective EIT rate will increase, which could adversely affect our results of operations.

 

In addition, pursuant to relevant tax rules, each of Hangzhou Sky, Mijia and Fanyi is subject to a 3% business tax rate with respect to its business of the value-added telecommunications services that fall under the definition of value-added telecommunications services under the Catalog for Classifications of Telecommunications Businesses. See “Management’s Discussions and Analysis of Financial Condition and Results of Operations — Taxation.”

 

Various local governments in China have provided discretionary preferential tax treatments to us. However, these local governments may decide to reduce or eliminate these preferential tax treatments at any time. Furthermore, these local implementations of tax laws may be found to violate national laws or regulations and we may be subject to retroactive imposition of higher taxes as a result. Any expiration, reduction or discontinuation of, or changes to, these tax incentives will increase our tax burden and reduce our net income and thus have a material adverse effect on our operating results.

 

We principally rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business.

 

We are a holding company, and we rely principally on dividends and other distributions on equity from our subsidiaries in China for our cash requirements. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves

are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Most of our assets are held by, and substantially all of our earnings and cash flows are attributable to, our PRC subsidiaries. If earnings from our PRC subsidiaries were to decline, our earnings and cash flow would be materially and adversely affected. Our cash flows are principally derived from dividends paid to us by our PRC subsidiaries. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiaries and their ability to pay dividends out of those earnings. We cannot assure you that our PRC subsidiaries will generate sufficient earnings and cash flows in the near future to make up the historical accumulated losses and pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.

 

In addition, under the PRC Enterprise Income Tax Law and the Implementing Rules, both of which became effective on January 1, 2008, dividends generated from the business of our PRC subsidiaries after January 1, 2008 and payable to us may be subject to a withholding tax rate of 10% if the PRC tax authorities subsequently determine that we are a non-resident enterprise, unless there is a tax treaty with China that provides for a different withholding arrangement.

 

We may be classified as a “resident enterprise” for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax.

 

The PRC Enterprise Income Tax Law provides that enterprises established outside of China whose “effective management” is located in China are considered “resident enterprises” and will generally be subject to the uniform 25% EIT rate as to their global income. Under the implementation regulations, “effective management” is defined as substantial and overall management and control over such aspects as the production and business, personnel, accounts and properties of an enterprise.

 

In April 2009, the State Administration of Taxation released a circular that sets out the standards and procedures for recognizing the location of the “effective management” of an enterprise registered outside of the PRC and funded by Chinese enterprises as controlling investors, or a Chinese Funded Enterprise. Under the circular, a Chinese Funded Enterprise shall be considered a resident enterprise if all of the following applies: (i) a Chinese Funded Enterprise’s major management department and personnel who are responsible for carrying out daily operations are located in the PRC; (ii) the department or the personnel who have the right to decide or approve the Chinese Funded Enterprise’s financial and human resource matters are located in the PRC; (iii) the major assets, account book, company seal and meeting minutes of the Chinese Funded Enterprise are located or stored in the PRC; and (iv) the directors or management personnel holding no less than 50% voting rights of the Chinese Funded Enterprise habitually reside in the PRC. The circular explicitly provides that the above standards shall apply to the enterprises which are registered outside of the PRC and funded by Chinese enterprises as controlling investors, and therefore such standards may be cited for reference only and may not be directly adopted when considering whether our “effective management” is in the PRC or not. Accordingly, it is still uncertain whether we may be considered a resident enterprise under the PRC Enterprise Income Tax Law. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary such as income from our international operations, we will be subject to a 25% PRC income tax on our global income and such 25% PRC enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

 

If we are classified as a “resident enterprise” for PRC enterprise income tax purposes, you may be subject to PRC withholding tax on dividends from us or to PRC income tax on gain realized on the transfer of our ADSs or common shares.

 

Under the PRC Enterprise Income Tax Law and related implementation regulations, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business if the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC unless a

treaty otherwise provides. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our common shares or ADSs, or the gain you may realize from the transfer of our common shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the PRC Enterprise Income Tax Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises,” or if you are required to pay PRC income tax on the transfer of our common shares or ADSs, the value of your investment in our common shares or ADSs may be materially and adversely affected.

 

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, where a foreign investor transfers the equity interests of a PRC resident enterprise indirectly by way of the sale of equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor should report such Indirect Transfer to the competent tax authority of the PRC resident enterprise within 30 days of execution of the equity transfer agreement for such Indirect Transfer. The PRC tax authority will examine the true nature of the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement without reasonable commercial purposes and in order to avoid PRC tax, they will disregard the existence of the overseas holding company that is used for tax planning purposes and re-characterize the Indirect Transfer and as a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10%.

 

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

 

We conduct our business primarily through our subsidiaries and SPEs in China. Our operations in China are governed by PRC laws and regulations. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterpart. Capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

Governmental control of currency conversion may adversely affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividends and other payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

In addition, on August 29, 2008, the SAFE promulgated Circular 142 to regulate the conversion of foreign currency into Renminbi by a foreign-invested company by restricting the use of the converted Renminbi. Circular 142 requires that the registered capital of a foreign-invested company that has been settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without the SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer the net proceeds from this offering to our subsidiary in the PRC. We may not be able to convert the net proceeds into Renminbi to invest in or acquire any other PRC companies, or establish other SPEs in the PRC.

 

Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. For almost two years after reaching a high against the U.S. dollar in July 2008, the Renminbi traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the RMB has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would increase Renminbi exchange rate flexibility and since that time the Renminbi has gradually appreciated against the U.S. dollar. However, it remains unclear how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules.

 

SAFE issued a public notice in October 2005 requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or

equities of PRC companies, referred to in the notice as an “offshore special purpose vehicle.” PRC residents that are shareholders and/or beneficial owners of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. In addition, any PRC resident that is a shareholder of an offshore special purpose vehicle is required to amend its SAFE registration with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China or other material changes in share capital. In May 2007, SAFE issued relevant guidance to its local branches with respect to the operational process for SAFE registration, which standardized more specific and stringent supervision on the registration relating to the SAFE notice.

 

As of the date of this prospectus, all of our shareholders and beneficial owners who are subject to Circular 75 have obtained registration in accordance with its requirements, and they are now filing amendments on their SAFE registration with respect to the restructuring of our offshore holding companies as required under Circular 75.

 

We are committed to compliance with Circular 75 and have taken steps to ensure that our shareholders and beneficial owners who are subject to Circular 75 also comply with the relevant rules. However, we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other requirements required by the SAFE notice or other related rules. In case of any non-compliance on any of our PRC resident shareholders or beneficial owners, our PRC subsidiaries and such shareholders and beneficial owners may be subject to fines and other legal sanctions, including restriction on our ability to contribute additional capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute dividends to our offshore holding companies, which will adversely affect our business.

 

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under PRC regulations. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.

 

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule requires offshore special purpose vehicles that are controlled by PRC companies or residents and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials that special purpose vehicles are required to submit when seeking CSRC approval for their listings outside of China. The interpretation and application of the M&A Rule remain unclear, and this offering may ultimately require approval from the CSRC, and if it does, it is uncertain how long it will take us to obtain the approval. If CSRC approval is required for this offering, our failure to obtain or delay in obtaining the CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, results of operations and financial condition. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus.

 

Our PRC counsel, Jincheng Tongda & Neal Law Firm, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, because (i) we established our PRC subsidiaries by means of direct investment other than by merger or acquisition of the equity or assets of PRC domestic companies, and (ii) our contractual arrangements with Hangzhou Sky and Mijia do not constitute the acquisition of Hangzhou Sky and Mijia, we are not required to apply with the CSRC for the approval of the listing and trading of our ADSs on the NASDAQ Global Market.

 

The M&A Rule also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in

some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including approval from Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

If we or our SPEs fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

 

Our SPEs may be required to obtain applicable permits or approvals from relevant regulatory authorities in order to operate. For example, we began to offer mobile video through one of our SPEs in May 2010 but have not generated significant amount of revenues from such content. Pursuant to PRC regulations, to operate mobile video content offerings, the operating entity is required to obtain an online audio-visual broadcasting license. Further, the regulations only allow state-owned or state-controlled entities to apply for such license. One of our SPEs entered into a one-year cooperation agreement with an independent third party with an online audio-video broadcasting license in August 2010 pursuant to which we operate our mobile video content offerings jointly with such third party under such third party’s license. There is no assurance, however, that the cooperation agreement will not be terminated by such third party or that we will be able to renew such agreement on terms acceptable to us after such agreement expires in August 2011. In such case, we may not be able to find another third party with an online audio-video broadcasting license who is willing to enter into a similar cooperation agreement with us and we may not be able to continue operating mobile video content offerings. In addition, if our practice is later challenged by government authorities, we may also be subject to various penalties, including fines and the discontinuation of or restriction on our offering of mobile video subject to the regulations. Any such disruption in business operations would materially and adversely affect our financial condition and results of operations.

 

We face risks of health epidemics and other disasters, which could severely disrupt our business operations.

 

Our business could be materially and adversely affected by the outbreak of H1N1, or swine influenza, avian influenza, severe acute respiratory syndrome, or SARS, or another epidemic. In 2009 and early 2010, there were outbreaks of swine influenza in certain regions of the world, including China. In 2006 and 2007, there were reports on the occurrences of avian influenza in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of swine influenza, avian influenza, SARS or other adverse public health developments in China could adversely affect economic activities in China and require the temporary closure of our offices. Such closures could severely disrupt our business operations and adversely affect our results of operations.

 

Our operations are vulnerable to interruption and damage from man-made or natural disasters, including wars, acts of terrorism, snowstorms, earthquakes, fire, floods, environmental accidents, power loss, communications failures and similar events. If any man-made or natural disaster were to occur in the future, our ability to operate our business could be seriously impaired.

 

Labor laws in the PRC may adversely affect our results of operations.

 

China adopted a labor contract law effective on January 1, 2008, that establishes more restrictions and increases costs for employers to dismiss employees. For example, the labor contract law requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce in the PRC, the labor contract law could adversely affect our ability to effect such changes in a manner that is most advantageous to our circumstances or in a timely and cost effective manner, thus our results of operations could be adversely affected. In addition, the labor contract law requires employers pay compensation to their employees who agree to bear non-competition obligations on a monthly basis after the employees’ employments expire or terminate, which will increase employers’ operating expenses.

Risks Related to Our ADSs and This Offering

 

There has been no public market for our common shares or ADSs prior to this offering, and an active trading market for our ADSs may not develop after this offering so you may not be able to resell your ADSs at or above the price you paid, or at all.

 

Prior to this offering, there has been no public market for our common shares or ADSs. We have received approval to list our ADSs on the NASDAQ Global Market. Our common shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs would be materially and adversely affected.

 

The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after the offering. An active trading market for our ADSs may not develop and the market price of our ADSs may decline below the initial public offering price. You may lose parts or all of your investment in our ADSs.

 

The market price for our ADSs may be volatile, which could result in substantial losses to you.

 

The market price for our ADSs may be volatile and subject to wide fluctuations in response to factors such as actual or anticipated fluctuations in our quarterly results of operations, changes in financial estimates by securities research analysts, changes in the economic performance or market valuations of other companies operate in our industry, announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures or capital commitments, fluctuations of exchange rates between RMB and the U.S. dollar, intellectual property litigation, release of lock-up or other transfer restrictions on our outstanding shares or ADSs, and economic or political conditions in China. In addition, the performance, and fluctuation in market prices, of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes of our ADSs. Volatility in global capital markets, as was experienced during the global financial crisis, could also have an adverse effect on the market price of our ADSs. Furthermore, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

 

Since the initial public offering price is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.

 

If you purchase our ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their common shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $5.85 per ADS (assuming no exercise by the underwriters of their option to purchase additional ADSs), representing the difference between our net tangible book value per ADS as of September 30, 2010, after giving effect to the conversion of our Series A preferred shares, the exercise of our outstanding warrants and this offering, at the initial public offering price of $8.00 per ADS. In addition, you may experience further dilution to the extent that our common shares are issued upon the exercise of share options or other share-based awards. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

 

Substantial future sales or the perception of sales of our ADSs or common shares in the public market could cause the price of our ADSs to decline.

 

Sales of our ADSs or common shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining common shares outstanding after this offering will be available for sale, upon the expiration of the applicable lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. See “Shares Eligible for Future Sale” and “Underwriting” for a detailed description of the lock-up restrictions. Any or all of these shares may be

released prior to expiration of the lock-up period at the discretion of the lead underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

 

In addition, as disclosed under “Description of Share Capital — Registration Rights,” certain holders of our common and preferred shares have the right to cause us to register the sale of an aggregate of up to 49,389,800 shares under the Securities Act, subject to a 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the related registration statement. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

 

You may not have the same voting rights as the holders of our common shares and must act through the depositary to exercise your rights.

 

As an ADS holder, you may only exercise voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying common shares in accordance with these instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the common shares underlying your ADSs.

 

Pursuant to our amended and restated memorandum and articles of association, we may convene a shareholders’ meeting upon ten clear days’ notice. When a shareholder’s meeting is convened, you may not receive sufficient advance notice to withdraw the common shares underlying your ADSs to allow you to vote with respect to any specific matter. If we give timely notice, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the common shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the common shares underlying your ADSs are not voted as you requested.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

 

We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to you in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

In addition, the depositary has agreed to pay you the cash dividends or other distributions it or the custodian receives on our common shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of common shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.

 

You may be subject to limitations on transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In

addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are organized under Cayman Islands law, conduct substantially all of our operations in China and all of our directors and officers reside outside the United States.

 

We are organized in the Cayman Islands and substantially all of our assets are located outside of the United States. We conduct substantially all of our current operations in China through our subsidiaries and SPEs in China. All of our officers and directors reside outside the United States and a substantial portion of the assets of those persons are located outside of the United States. As a result, it may be difficult for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

 

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, because Cayman Islands law has no legislation specifically dedicated to the rights of investors in securities, and thus no statutorily defined private causes of action to investors in securities such as those found under the Securities Act or the Securities Exchange Act of 1934 in the United States, it provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation organized in a jurisdiction in the United States.

 

Our management will have considerable discretion as to the use of the net proceeds to be received by us from this offering and you may not agree with our management on these uses.

 

Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for general corporate purposes that do not improve our efforts to maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or lose value.

Our articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their shares, including common shares represented by our ADSs, at a premium.

 

We have adopted amended and restated articles of association effective upon the completion of this offering that contain provisions to limit the ability of others to acquire control of our company. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our common shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our common shares and ADSs may be materially and adversely affected. Furthermore, our amended and restated articles of association provide for a staggered board, which means that our directors are divided into three classes, with one-third of our board standing for election every year. This means that, with our staggered board, at least two annual shareholders’ meetings, instead of one, are generally required in order to effect a change in a majority of our directors. Our staggered board can discourage proxy contests for the election of our directors and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to take control of our board in a relatively short period of time. In addition, our shareholders holding, in aggregate, less than 25% of the paid up capital of our company do not have the ability to call general meetings or to propose special matters for consideration at such meetings.

 

We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or common shares.

 

Based on the current and anticipated valuation of our assets, including goodwill, and composition of our income and assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending March 31, 2011 or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that we will not be a PFIC for any taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs and common shares, fluctuations in the market price of the ADSs and common shares may cause us to become a PFIC. In addition, changes in the composition of our income or assets may cause us to become a PFIC. If we are a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation — United States Federal Income Taxation”) holds an ADS or common share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”

 

We will incur increased costs as a public company.

 

As a public company, we will incur a significantly higher level of legal, accounting and other expenses than we do as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NASDAQ Global Market, have required changes in the corporate governance practices of public companies.

When we become a public company, we will establish additional board committees and will adopt and implement additional policies regarding internal controls over financial reporting and disclosure controls and procedures. In particular, compliance with Section 404 of the Sarbanes-Oxley Act, which requires public companies to include a report of management on the effectiveness of their internal control over financial reporting, will increase our costs. In addition, we will incur costs associated with public company reporting requirements, such as the requirements to file an annual report and other reports with the SEC.

 

We are currently evaluating and monitoring developments with respect to these rules. We expect these rules and regulations will increase our legal and financial compliance costs, but we cannot predict or estimate the additional costs or the timing of initially additional costs we may incur.

 

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

In some cases, you can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

 

This prospectus also contains data related to the mobile applications industry in China, including projections that are based on a number of assumptions. These market data include market data from the Analysys Report. The mobile applications industry in China may not grow at the rates projected by the market data, or at all. The failure of the markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the mobile applications industry in China subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, our actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual results in the future may be materially different from or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this prospectus include additional factors which could adversely affect our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

We estimate that we will receive net proceeds from this offering of approximately $41.4 million, or approximately $48.2 million if the underwriters exercise their option to purchase additional ADSs from us in full, after deducting the underwriting discounts and the estimated offering expenses payable by us.

 

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital. We intend to use the net proceeds we will receive from this offering as follows:

 

 

As of the date of this prospectus, we cannot specify with certainty the particular uses for the net proceeds we will receive upon the completion of this offering. The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

 

In utilizing the net proceeds of this offering, as an offshore holding company, we are permitted, under PRC laws and regulations, to provide funding to our PRC subsidiaries only through loans or capital contributions and to our SPEs only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our subsidiaries and SPEs in China or make additional capital contributions to our subsidiaries in China to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors — Risks Relating to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.

 

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

 

In March 2010, we declared and paid dividends in the amount of RMB16.3 million ($2.4 million) to our common shareholders, and we also approved a distribution payable to our preferred shareholders who have participating rights in the amount of RMB5.4 million ($0.8 million), which has been recorded as finance cost. In May 2010, we declared and paid dividends in the amount of RMB13.0 million ($1.9 million) to our common shareholders, and we also approved a distribution payable to our preferred shareholders who have participating rights in the amount of RMB4.3 million ($0.6 million). However, we do not have any present plan to declare and pay in the near future any dividends on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

 

Our board of directors has complete discretion as to whether to distribute dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our common shares, if any, will be paid in U.S. dollars.

 

The following table sets forth our capitalization as of September 30, 2010:

 

 

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per common share is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares.

 

As of September 30, 2010, we had negative net tangible book value of $52.3 million, or negative $0.34 per common share, or negative $2.7 per ADS. Net tangible book value represents the amount of total tangible assets, minus the amount of total liabilities (including Series A preferred shares and warrants) and non-controlling interests. Our pro forma net tangible book value as of September 30, 2010 was approximately $22.7 million, or $0.11 per common share, or $0.89 per ADS. Pro forma net tangible book value adjusts net tangible book value to give effect to the automatic conversion of all our outstanding Series A preferred shares into 50,000,000 common shares upon the completion of this offering.

 

Without taking into account any other changes in net tangible book value after September 30, 2010, other than to give effect to (i) the automatic conversion of all of our outstanding Series A preferred shares into 50,000,000 common shares upon the completion of this offering; (ii) the full exercise of our outstanding warrants; and (iii) our sale of the 6,125,000 ADSs offered in this offering, at the initial public offering price of $8.00 per ADS, and after deduction of underwriting discounts and estimated offering expenses payable by us (assuming the over-allotment option is not exercised), our pro forma as adjusted net tangible book value at September 30, 2010 would have been $69.2 million, or $0.27 per common share, or $2.15 per ADS. This represents an immediate increase in pro forma as adjusted net tangible book value of $0.16 per common share, or $1.26 per ADS, to existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $0.73 per common share, or $5.85 per ADS, to purchasers of ADSs in this offering.

 

The following table illustrates this dilution:

 

 

The following table summarizes, on a pro forma as adjusted basis described above, as of September 30, 2010, the differences between our existing shareholders, including holders of our Series A preferred shares that will be automatically converted into common shares immediately upon the completion of this offering and the full exercise of our outstanding warrants and the new investors with respect to the number of common shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per common share paid (at the initial public offering price of $8.00 per ADS) before deducting underwriting discounts and estimated offering expenses. The total number of common shares does not include common shares underlying the ADSs issuable pursuant to the exercise of the over-allotment option granted to the underwriters.

 

The discussion and tables above also assume no exercise of any outstanding stock options. As of September 30, 2010, there were 11,149,400 common shares issuable upon exercise of outstanding options at a weighted average exercise price of $0.26 per share, and there were 3,850,600 common shares reserved for future issuance under our 2010 Share Incentive Plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

Our business is primarily conducted in China and substantially all of our revenues are denominated in RMB. This prospectus contains translations of RMB amounts into U.S. dollars at specified rates solely for the convenience of the reader. For all dates and periods through December 31, 2008, exchange rates of RMB into U.S. dollars are based on the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. For January 1, 2009 and all later dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise noted, all translations from RMB to U.S. dollars were made at a rate of RMB6.6905 to $1.00, the exchange rate set forth as of September 30, 2010. No representation is made that the RMB amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On December 3, 2010, the exchange rate was RMB6.6628 to $1.00.

 

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 

 

 

Source: Federal Reserve Statistical Release

 

 

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

 

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

 

 

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, among us, our officers, directors and shareholders, be arbitrated.

 

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. All of our officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

 

Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Jincheng Tongda & Neal Law Firm, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

 

Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation, provided that (i) such federal or state courts of the United States had proper jurisdiction over the parties subject to such judgment; (ii) such federal or state courts of the United States did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

Jincheng Tongda & Neal Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other agreements with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

 

You should read the following information in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

The following selected consolidated statement of comprehensive income data for fiscal years 2008, 2009 and 2010, and the selected consolidated statement of financial position data as of March 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with IFRS. The following summary consolidated statement of comprehensive income data for the six-month periods ended September 30, 2009 and 2010 and the summary consolidated statement of financial position data as of September 30, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments necessary, which include only normal recurring adjustments, for the fair statement of the financial information contained in those statements. The historical results are not necessarily indicative of results to be expected in any future period.

 

We have not included financial information for fiscal years 2006 and 2007, as such information is not available on a basis that is consistent with the consolidated financial information for fiscal years ended 2008, 2009 and 2010, and cannot be provided on an IFRS basis without unreasonable effort or expense.